Technical dialog as an incentive for vertical integration in the semiconductor industry

A curious structural change observed in the American semiconductor industry (the appearance of a class of ''fabless'' firms) is examined within a general transaction costs framework. The framework is refined for empirical application with the introduction of the construct ''unstructured technical dialog.'' The necessary level of this form of interpersonal communication between engineers in the design and fabrication stages of production is hypothesized to be positively related to the efficiency of a vertically integrated structure in which both stages are organized under a single hierarchy. ''Fablessness'' (i.e., the organizational separation of the design and fabrication stages) is argued to be efficient for only these firms whose particular product portfolios have only a minimal requirement for such unstructured technical dialog. The hypothesis is tested upon a set of relatively young semiconductor firms. Support is found for the theoretically derived relationship even after controlling for rival explanations found in the literature.