Complementarity, Capabilities, and the Boundaries of the Firm: The Impact of Within-Firm and Inter-Firm Expertise on Concurrent Sourcing of Complementary Components

Abstract

Theories of the firm raise conflicting arguments about how complementarities between two or more components affect firms' knowledge and production boundaries. Traditional arguments in the boundaries of the firm literature suggest that firms will tend to produce sets of complementary components internally, while more recent modularity studies argue that firms can outsource to gain flexibility. We resolve these views by examining concurrent sourcing, which arises when firms both make and buy the same components. We argue that concurrent sourcing of complementary components becomes more common in two cases: first, when firms have relevant knowledge about the components both in conjunction with suppliers (inter-firm expertise) and second, perhaps more surprisingly, within the firm (within-firm shared expertise). The results suggest that firms often need to make in order to know, but can partially outsource if they possess sufficient expertise.

Keywords: Complementarity, sourcing, firm capabilities, vertical integration, knowledge

JEL Classification: D23