This paper studies how inter-firm collaboration influences product performance. Specifically, we posit that vertical collaboration between an integrated firm and an upstream focused firm will tend to improve the market performance of knowledge-based products. We note that focused firms can utilize performance-based contracts free of social comparison costs more effectively than integrated firms, triggering employee mobility across firms or talent sorting in the market, and thus can obtain, retain, and utilize top knowledge workers better than integrated firms. Vertical collaboration then becomes a strategic response by integrated firms in accessing top knowledge workers to increase creativity in exchange for other benefits that integrated firms may be able to offer to upstream focused firms, such as providing large-scale distribution. However, inter-firm collaboration imposes coordination costs that need to be balanced with creativity benefits. Using data from the Korean TV drama industry, supplemented with qualitative interviews with practitioners, we find that, consistent with our theoretical argument, collaborative development between networks and independent production companies systematically improved the viewership ratings of TV dramas. In addition, top creative talent who started their careers at network companies moved to independent production companies once they became a star performer due to significant wage dispersion between the networks and independent production companies. By elucidating a novel mechanism between inter-firm collaboration and product development, this study contributes to the stream of literature on governance mode and performance.
