ABSTRACT
This chapter examines the relationship between a firm's decision to integrate vertically and its research and development (R & D) strategy. The first hypothesis to be estimated is that a vertically integrated firm is more efficient in R & D than other firms. The second hypothesis to be estimated is that the more future innovation a firm expects to have, the more the firm vertically integrates today. While the first hypothesis is about the technological relationship between environmental factors and innovative output inside "black box" of knowledge production, the second hypothesis is about behavioral relationship that a firm vertically integrates because of the high level of expected future innovation. Based on this fact, the chapter uses two-equation system to explain the main hypothesis about the determinants of vertical integration. They are, VIt=f(Et(FIt+i)) and FIt+i=g(VIt). The Fl equation should be estimated before Vl equation, because Fl equation provides the technological relationship for a firm to form an expectation on future innovation.
