Design Complexity, Vertical Disintegration and knowledge organization in the semiconductor industry

This article examines the advantages and drawbacks of internal knowledge integration versus collaborative outsourcing as two polar modes of governance in the design of application-specific integrated circuits (ASICs). Increasing technological complexity, miniaturization and the generalization of markets for technology have induced higher integration constraints for designers. The pace of innovation and frequent changes in design rules require a tightly controlled design process. As a consequence, knowledge integrators must develop expertise beyond the scope of their domain of activity if they are to ascertain the overall efficiency of systems. We find that although internalization of knowledge integration reduces coordination and agency-related costs, the involvement of partner firms in upstream design phases facilitates knowledge sharing and improves the coordination of innovation in modules. The analysis of the evolution of the ASICs industry shows that while large system integrators remain the dominant players, specialist firms are gaining market shares and do not hesitate to embark on the design of leading-edge systems. This result may simply reveal the increasing value of component knowledge in a disaggregated value chain. However, relying on a comparative case study of two similar development processes (one with each of the knowledge integration approaches) we confirm the strength of decentralized modes of governance on the condition that partner firms engage in a long-term relationship.