Abstract
The success of an innovating firm often depends on the efforts of other innovators in its environment. How does such external innovation uncertainty affect the focal firm's outcomes? To address this question we first characterize the external environment according to the structure of interdependence. We follow the flow of inputs and outputs to distinguish between upstream components that are to be bundled by the focal firm, and downstream complements that are to be bundled by the firm's customers. We argue that the effect of external innovation uncertainty depends not only on its magnitude, but also on its location relative to the focal firm: greater uncertainty regarding components enhances the benefits that accrue to technology leaders, while greater uncertainty in complements erodes these benefits. We then examine the effectiveness of vertical integration as a strategy to manage external interdependence, and argue that the benefits from vertical integration increase over the course of the technology life cycle. We explore these arguments in the context of the global semiconductor lithography industry from its emergence in 1962 to 2005. We find strong support for our arguments, suggesting that the strategic analysis of technological change needs to be extended beyond its traditional firm-centered focus to include a systematic treatment of the broader innovation environment.