BUSINESS HISTORY 2023, VOL. 65, NO. 6, 959–982 https://doi.org/10.1080/00076791.2020.1844666 The origins of the tools suppliers in the semiconductor industry Unni Pillai College of Nanoscale Science and Engineering, SUNY Polytechnic Institute, Albany, NY, USA ABSTRACT KEYWORDS Technological progress in semiconductor chips plays a central role in enabling the Information Technology revolution. Continual technological progress in semiconductor chips, which has become popular under the name of Moore’s Law, reduces the cost of storing and processing information. While the role of the semiconductor chip manufacturing companies in driving Moore’s Law is well known, less attention has been given to the equally important role played by upstream suppliers who produce the tools that are necessary to make the chips. In the early stages of the industry, the chip manufacturers made their own tools in-house. Using data at the initial stages of the industry and a wealth of publicly available information from interviews with industry pioneers conducted as part of oral history projects, this article examines how (i) market size (ii) heterogeneity in firm capabilities (iii) geographic proximity to manufacturing clusters, influenced the emergence of these semiconductor tools suppliers. Semiconductors; vertical specialisation; tools suppliers; firm capabilities; market size 1. Introduction An extensive literature spanning many decades has identified multiple factors that influence why a firm might buy an input or component from an outside supplier rather than make it in-house.1 Detailed historical studies at the industry level have been useful in improving our understanding of the factors that influence such make-or-buy decisions, and the resulting evolution of vertical market structure or vertical firm boundaries. One of the earliest of such studies is Rosenberg (1963), who documents the emergence of specialised suppliers of machine tools in the U.S in the 19th century. Macher and Mowery (2004) examine the emergence of specialised suppliers in the computer, semiconductor and chemical industries, and the differences in the pattern of vertical specialisation across different stages of the industry lifecycle.2 The current paper takes a similar approach as the above papers, and examines some key questions raised in the literature on vertical market structure, using historical information from the semiconductor industry.3 Two reasons make the semiconductor industry an ideal industry to study the factors affecting the emergence of specialised suppliers. First, production in the semiconductor CONTACT Unni Pillai upillai@sunypoly.edu © 2020 Informa UK Limited, trading as Taylor & Francis Group [page 961] Information from oral histories To examine the role of the above factors in the context of the two theories, this article exploits a wealth of anecdotal documentation on the origins of the various tools suppliers in the industry. Since the semiconductor industry has become the poster child for rapid technological progress, many institutions that were associated with the industry (including universities, trade associations and professional scientific associations) have put in a great deal of effort to document the industry’s history, and their roles in this history. [page 962] Semiconductors in the electronics industry Although the invention of the transistor in 1947 at AT&T/Bell Labs is often regarded as the event that led to the development of the semiconductor industry, the trends in the broader electronics industry at the time set the stage for the transistor.11 The principal electronics component before the invention of the transistor was the thermionic valve, also called the vacuum tube.12 The physical phenomena behind the vacuum tube, the Edison effect, was discovered by Thomas Edison in 1880, during his experiments with incandescent light bulbs. The Edison Effect lamp was the first electronic device (predating the discovery of the electron itself in 1897), and its improvements by John Fleming in 1904 and by Lee De Forest in 1906, led to the development of electronics. [page 976] Conclusion This article has put forward some observations on the emergence of a key component of the semiconductor supply chain, firms who supply tools that enable companies to manufacture semiconductor chips. The most salient observation is that this first level of vertical specialisation in the industry was midwifed by the chip manufacturers themselves, who supported the suppliers by providing them the technological know-how, and by working closely with them to develop and improve the early versions of the externally manufactured tools.