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Learning by Supplying. Juan Alcacer Joanne Oxley KITES March 22 nd 2012 . Outsourcing & competitiveness. Debate about effect of production outsourcing on technological development and national competitiveness goes back a long way: 1980s : “Hollowing Out” (e.g.. Cohen & Zysman, 1987)
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Learning by Supplying Juan Alcacer Joanne Oxley KITES March 22nd 2012
Outsourcing & competitiveness • Debate about effect of production outsourcing on technological development and national competitiveness goes back a long way: • 1980s: “Hollowing Out” (e.g.. Cohen & Zysman, 1987) • 1990s: Dark side of ‘learning alliances’ (e.g. Hamel, 1991); Stan Shih’s ‘smile curve (Bartlett & Ghoshal, 2000). • 2000s: The debate continues… (Arrunada and Vazquez, 2006; Pisano and Shih, 2009) • Debate has generated copious passionate rhetoric, but limited systematic empirical study at firm level • Dearth of empirical research due to lack of extensive firm-level data on outsourcing • Most prior studies at country/region level • Firm-level evidence based on cases / small-scale surveys
Today’s focus: firm level • Learning by supplying • Do suppliers move up on the value chain? • Increase technological capabilities? • Introduce own brand products? • Forgetting by outsourcing • Do firms that outsource lose their competitive edge? • Decrease technological capabilities? • Introduce less advanced products?
Building on prior findings: Learning by doing • Costs tend to decline as cumulative production increases (learning curves) (Arrow, 1962; Rapping, 1965; Argote & Epple, 1990) • Industry-level learning curves (Lieberman, 1984; Irwin & Klenow, 1996) → learning-by-doing spillovers within industry • Steepness of learning curve depends on firm traits (organizational design, product positioning and geographic location) (Baum & Ingram, 1998; Darr, Argote & Epple, 1995; Ingram & Baum, 1997) • Learning-by-doing manifests not only in cost reduction but also in survival and innovation Producing for somebody may generate also learning
Building on prior findings: Learning by trading • International trade exposes firms to new sources of knowledge, inducing innovation (Romer, 1990; Grossman & Helpman, 1993) • Empirical evidence of learning by exporting (Salomon & Shaver, 2005; Cassiman, Golovko & Martinez-Ros, 2010; Golovko & Valentini, 2011) • ..and by importing (MacGarvie,2006) • Particularly, Salomon & Shaver 2005) talks about the role of exporting on • Technical innovation (increase on patent applications) • Product innovation (new product introductions) • Suggests that identity of customers matters, since exporting firms posited to gain exposure to buyers’ technical expertise and/or information about consumer product preferences and competing products To whom you supply matters: suppliers may learn more from sophisticated / advanced customers
Building on prior findings: Learning from alliances • Learning in alliances is larger when firms have absorptive capacity, a capacity that is partner specific (Mowery, Oxley & Silverman. 1996, 2002; Lane & Lubatkin, 1998; Oxley & Wada, 2007) Supplier’s absorptive capacity (accumulated capabilities) may increase learning by supplying • Firms pay attention to competitive effects of learning and may limit scope of alliances (Oxley & Sampson, 2004) Customers may actively restrict learning by suppliers if perceived competitive threat is high
Building on prior findings: Outsourcing at the macro level • Anecdotal evidence (cases studies) of firms from emerging markets that move-up in value chain (Khanna & Palepu 2006; Duysters, Jacob, Lemmens & Jintian, 2009, Pisano & Shih, 2009) • Scattered evidence suggesting that technical capabilities are easier to develop than marketing capabilities Supply relationships that incorporate significant design responsibilities may enhance learning by supplying
Empirical context: the mobile telecom handset industry • Exponential growth from early 1990s
Global market shares of leading producers Source: Dataquest
What do we mean by outsourcing? • Outsourcing in our empirical context refers to manufacturing and/or design of complete handsets (not just components) • Two types of customers in outsourcing: • Major branded producers: • Leaders • Nokia, Samsung, Motorola, Sony-Ericsson, etc. • Rest • I-mate, Audiovox, BenQ, Dopod, etc. • Mobile operators • Vodafone, Orange, O2, Telefonica, China Mobile, etc.
Analysis: Dependent variables • Technological capabilities: • # of patent families • Source: Thomson Innovation • Firm-specific, time-variant, 3 year forward window, earliest priority year, multiple PTOs, only telecom patent (W01, W02) • Technological Overlap (Jafee, 1986) calculated from technological vectors of DWPI manual codes • Marketing capabilities: • Has own brand: • Source: multiple • Firm not in sample after brand was introduced • Sales • Source: IDC • Units sold globally under supplier own brands
Empirical models • Similar specifications across dependent variables Dependent_variable =Sit + Cit + SCit + ζt + υi + εfict Supplier traits Customer traits Supplying relationship Year fixed effects Firm (dyad) fixed effects Error term • Different estimation technique: • Patent countsitNegative Binomial • overlapijt OLS • Own-brand introductionit Logit • SalesitOLS
Analysis: independent variables (sources) • Significant outsourcing relationships, 1995-2010 • THT Business Research (consulting company) • Web data + customized report of outsourcing form top branded firms 2000-2010 • Federal Communications Commission (FTC) • Equipment Authorization System • Region specific OEM/ODM data: • Digitimes (Greater China), Gartner group (South Korea) • Handset databases • World Cellular Information Service (WCIS), World Cellular Handset Tracker (WCHT), PDAdb.net, Phone scoop, GSM arena, Detect Insight…and another 5 websites • Financial data • Capital IQ, Orbis, Annual reports
Analysis: Independent variables • Supplier traits (Sit ) • Technological stock (3-year backward patent stock) • Years as supplier • Financial information: assets, sales & R&D expenditure • Customer traits (Cit ) • Cumulative relationship with market leaders (5 top producers in terms of market share, Source Gartner) • Cumulative relationship with operators • Technological stock (3-year backward patent stock, max across customers) • Supplying relationship (SCit) • Scope of outsourcing agreement (OEM, ODM, OEM/ODM) • Years supplying a given customer (for dyadic analysis) • Controls • Supplier-fixed effects • Year fixed effect (for robustness we use also time trend)
Patent countsit= Sit + Cit + SCit + ζt + υi + εit + significant at 10%; * significant at 5%; ** significant at 1%
overlapijt= Sit + Cit + SCit + ζt + υij+ εit + significant at 10%; * significant at 5%; ** significant at 1%
Own-brand introductionit = Sit + Cit + SCit + ζt + υi + εit + significant at 10%; * significant at 5%; ** significant at 1%
Salesit= Sit + Cit + SCit + ζt + υi + εit + significant at 10%; * significant at 5%; ** significant at 1%
Summary of findings • Evidence of learning by supplying • Cumulative engagement with customer(s) is positive and significant across specifications • More customers → more patents, more sales • Longer relationship with customer → closer in technology positions • Effect when supplier designs AND produces (OEM/ODM) • It matters to whom you supply, but not always in ways one would expect • Supplying market leaders is not conducive to upgrade capabilities (small or no effect on patenting, overlap or introduction of new products) and seems to inhibit marketing learning (lower supplier’s sales) • Supplying operators has a slight negative (less technological learning) and positive aspects (more likely to introduce own brand, higher sales after introduction) • Supplying to technologically-sophisticated customers increases technological learning, as well as suppliers’ prior patenting experience
Is this just a selection story? • What if branded manufacturers simply choose “most capable” potential suppliers, who are then also most likely to patent and/or introduce their own brand? • Evidence that this is not the case (or is not the whole story…) • Choice models based on conditional logit show that only supplier patent stock and regional proximity drive choice decision • Analysis using variable to instrument for choice (congestion due to capacity constraints when the relationship is established) provides similar results • On-going matching analysis (Fox, 2010)
Contributions • Document changes in supplier capabilities as outsourcing emerged in mobile telecom handset industry in the late 1990s and evolved during subsequent decade • Provide contextual background on outsourcing in the industry • Examine link between outsourcing and changes in supplier capabilities: • Technological capabilities (patents and technological overlap) • Marketing capabilities: introducing own-brand, sales. • Do some suppliers learn more than others? • Customer characteristics • Suppliers’ initial endowments • Outsourcing agreement scope
Today’s focus: firm level • Learning by supplying • Do suppliers move up on the value chain? • Increase technological capabilities? • Introduce more advanced products? • Forgetting by outsourcing • Do firms that outsource lose their competitive edge? • Decrease technological capabilities? • Introduce less advanced products?
Empirical approach • Quantitative and qualitative analysis (5 HBS cases) • Test suppliers’ learning in two dimensions: • Technological capabilities • Marketing capabilities