Knowledge, uncertainty, and the boundaries of the firm. Evidence from a study of Formula One racing constructors. 1950-2000

We examine how different kinds of uncertainty affect a firm’s decision to develop critical technologies inside or outside its organizational boundaries. We develop three main arguments. First, firms are more likely to incorporate sources of uncertainty by vertically integrating when firm-specific uncertainty is high. Second, firms are less likely to incorporate sources of uncertainty when field-level uncertainty is high. Third, firms are more likely to imitate design solutions adopted by successful firms to reduce competitive interdependence. Using panel data covering the period 1950–2007, we model the probability that car racing constructors participating in the Formula One World Championship decide to control engine production processes by integrating the corresponding activities into their organizational structure. We report results that are generally supportive of our hypotheses.