Research On Knowledge Spillover-Based Decision-making On Vertical Integration

Vertical integration decision-making is an important research topic in the field of strategic management and organizational theory. It relates to whether a company needs to be integration of the value of activities carried out by the upstream and downstream enterprises, or whether part of the value activity should be deconstructed. These decisions decide the strategy of integration, outsourcing and strategic alliances. And thus there is a major impact on competitive strategy and competitive advantage of enterprises.In the extant literature, the most vertically integrated decision-making researches are form the transaction cost economics, the industry life cycle, division of labor or the core competitiveness. But they ignore a lot of knowledge spillover when the enterprises engage in each the value activity. Therefore, there are few studies on that knowledge spillover affect the decision-making of integration. If it does, then what is its mechanism?So, On the basis of a brief review and summary of comments the theory of vertical integration we establish a dynamic game model to analyze how knowledge spillovers, the degree of product differentiation and R & D investment affect the vertical integration decision-making. we get the following conclusions:Firstly, when the knowledge spillover level lower than the degree of product differentiation, R&D investment in other enterprises will not pose a threat to the vertically integrated company. And it will continue to adopt a strategy of vertical integration. When the level of knowledge spillover is greater than the degree of product differentiation, the vertical integration is feasible that R&D investment must be higher than a certain level. Secondly, the growth of knowledge spillover promotes the disintegration of enterprises. When knowledge spillovers exceed a certain level, the enterprise will take the strategy of vertical deconstruction. Conversely, if the knowledge spillover is below that level, the enterprise will adopt the strategy of vertical integration to pursuit the higher profits.Finally, the degree of product differentiation is greater, the production of vertically integrated companies are higher. The enterprises will carry out the deconstruction of the industry chain, when the degree of product differentiation below a certain level.In this paper, it may be a new reference of theory for vertical integration decision-making of enterprise because the knowledge spillover, R&D investment and the degree of product differentiation are its influencing factors. At the same time it provides practical guidance role for the enterprise whether to implement the strategy of vertical integration.