Integrating the knowledge based view of the firm with transaction cost economics, this study conceptually explores and empirically examines two key ways that knowledge influences strategic integration or disintegration (i.e., outsourcing) decisions. The first arises from the need to protect valuable knowledge embedded in product innovations, while the second arises from the need for knowledge that may be accrued from outside industry sources. Using data from the semiconductor industry, we test hypotheses regarding the relationship between these two forms of knowledge (i.e., new product knowledge and industry knowledge) and the decision to organize production internally through vertical integration or externally through outsourcing.