We examine the incentives for firms to vertically integrate through acquisitions and production. We develop a new firm-specific measure of vertical integration using 10-K product text to identify the extent to which a firm’s products span vertically related product markets. We find that firms in high R&D industries are less likely to vertically integrate or become targets in vertical acquisitions, and are more likely to initiate customer or supplier relationships outside of the firm. These findings are consistent with firms with unrealized innovation avoiding integration to maintain ex ante incentives to make relationship-specific investments and maintain residual rights of control as in Grossman and Hart (1986). In contrast, firms in high patenting industries with mature product markets are more likely to be vertically integrated consistent with control rights being obtained by firms to facilitate commercialization of already realized innovation and to limit potential ex post holdup. Joint with: Gerard Hoberg and Gordon Phillips.