ABSTRACT
The terminology of "knowledge complementarity effect" means "informational economies" in knowledge production. This chapter focuses on the mechanisms inside black box of innovative activity and examines how vertical integration technologically provides a better environment for research and development (R & D). It explains the economic reason for the choice of vertical integration over external sources in the firms' expected future innovations. The chapter then explains the transaction costs of a technology transaction. The knowledge complementarity in vertical integration can be explained in two ways. First, "vertical" means the inter-industry dependency between upstream and downstream industries in R & D. Second, "integration" refers to the efficiency of firm's own R & D activity inside the firm. Knowledge complementarity is performed in process of communication between persons who require one another's knowledge in order to produce a new knowledge. The chapter explains why the integrated state of a firm is good for R & D with the veracity effect of employment relationship.
