An empirical study of vertical integration in the semiconductor industry

Dramatic technological progress in the design and manufacturing of semiconductor chips has been accompanied by the emergence of vertically specialized manufacturers (known as foundries) complemented by vertically specialized design firms (known as fabless). Given the steady increase in the market share of vertically specialized firms, a critical question is how well this organizational form performs compared to its vertically integrated counterpart, known as the integrated device manufacturer (IDM) model. The purpose of this thesis is to explore whether, and under what conditions, investment in vertical integration provides firms with a competitive advantage in the empirical context of the semiconductor industry.;The empirical work was conducted at three levels of analysis. The broadest level of analysis consisted of examining annual financial performance according to firm type. This revealed that fabless firms were substantially underperforming IDMs even though they were achieving lower manufacturing costs. The next level of analysis consisted of examining the determinants of performance for individual IDMs and fabless firms. The results showed that the profitability of fabless firms and IDMs is approximately the same after controlling for scale and age, though there is also preliminary evidence that the performance of fabless firms deteriorates after approximately 15 years of age. Finally, the most detailed level of analysis involved design project data that showed fabless firms are more efficient in developing most types of chips, with the exception of chips that squeeze the most performance out of the newest manufacturing technology nodes.;Combining the results from each of the analyses and blending them with insights from field interviews shed light on how fabless firms and IDMs are generating value in different ways. Fabless firms are more efficient in pioneering new product areas, creating novel functionality, and developing superior algorithms. However as product markets grow and mature, dominant designs tend to emerge shifting the opportunity to create value towards the superior integration of design and manufacturing technology. IDMs possess superior capabilities in developing chips in this stage that require removing the technical buffers between design and manufacturing technology enabling them to produce cheaper and more power efficient chips with higher performing devices.