Modularity Moderating between Governance and Competence Perspectives: The Effect of Knowledge Interdependence on Firms’ R&D Scope Decisions

Abstract:     
Uncertainty has long been understood as a stimulus for firms to manage their boundaries, i.e., to define the scope of their activities. However, two to some extent competing strategy perspectives, governance and competence, predict that firms faced with uncertainty would either increase or decrease their scope of activities, respectively. In an attempt to reconcile these conflicting positions, we propose a model in which the system-level property knowledge interdependence moderates the effect of technological uncertainty on firms. R&D scope decisions. To test our model empirically, we develop a new set of measures for knowledge interdependence and technological uncertainty, and collect 33 years of data (1967-2000) on patenting activity and firm boundary location in the automotive airbag industry. The results of our analysis generally support our model, and show that in case of knowledge-creating activities such as R&D, scope decisions under technological uncertainty are more driven by concerns about co-specialization effects than transaction efficiencies. We discuss implications of these findings for managerial practice and future research.

Number of Pages in PDF File: 43

Keywords: Knowledge interdependence, Modularity, Technological Uncertainty, Research and Development, Firm boundary, Complex Technological Products, Industry Emergence

JEL Classification: L22, L62, O31, O32

working papers series