learning by supplying juan alcacer joanne oxley kites march 22 nd 2012
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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
Firm
• What happens to innovation when firms outsource manufacturing?
Forgetting by outsourcing • Do firms that outsource
lose their competitive edge?
• Decrease technological capabilities?
• Introduce less advanced products?
Learning by supplying
• Do suppliers move up on the value chain?
• Increase technological capabilities?
• Introduce own brand 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 Implications
Dimensions of outsourcing relationshipImpact on Learning-by-
Supplying?
Supplier characteristics• Technological sophistication • Age / size
++
Customer characteristics• Technological sophistication • Market leadership• Type (operator vs. producer)
+??
Supply relationship• Longevity•ODM versus OEM
++
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
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Empirical models Similar specifications across dependent variables
Dependent_variable = Sit + Cit + SCit + ζt + υi + εfict
Supplier traits
Firm (dyad) fixed effects
Error term
Year fixed effects
Supplying relationship
Different estimation technique: Patent countsit Negative Binomial overlapijt OLS Own-brand introductionit Logit Salesit OLS
Customer traits
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)
+ significant at 10%; * significant at 5%; ** significant at 1%
Patent countsit = Sit + Cit + SCit + ζt + υi + εit
(1) (2) (3) (4) (5) (6)
Supplier tech stock 0.002 0.002 0.002 0.002 0.002 0.002
[6.73]** [6.58]** [6.32]** [6.60]** [7.09]** [6.97]**
Years supplying -0.01 -0.03 -0.03 -0.03 0.00 0.04
[1.07] [2.13]* [2.15]* [1.89]+ [0.12] [2.12]*
Customers tech stock 0.0005 0.0004 0.0004 0.0004 0.0004 0.0004
[3.83]** [3.51]** [3.68]** [3.34]** [3.01]** [3.34]**
Customers 0.01
[2.48]*
Leader brand 0.02 -0.01
[1.77]+ [0.47]
No leader brand 0.00
[1.43]
Operator -0.01 -0.06
[1.91]+ [5.77]**
No operator 0.01
[3.88]**
OEM 0.005 0.004
[1.24] [0.74]
ODM 0.22 0.17
[1.54] [1.09]
OEM/ODM 0.01 0.04
[1.85]+ [6.13]**
+ significant at 10%; * significant at 5%; ** significant at 1%
overlapijt = Sit + Cit + SCit + ζt + υij + εit
(7) (8) (9) (10) (11)
Years supplying customer j 0.0035 0.0034 0.0037 0.0034
[2.02]* [1.99]* [2.14]* [1.99]*
Leader brand -0.0008 -0.0009
[0.11] [0.12]
OEM 0.0044 0.0044
[0.63] [0.63]
ODM 0.1092 0.1092
[1.00] [1.00]
OEM/ODM 0.0165 0.0165
[1.86]+ [1.86]+
+ significant at 10%; * significant at 5%; ** significant at 1%
Own-brand introductionit = Sit + Cit + SCit + ζt + υi + εit
(1) (2) (3) (4) (5) (6)
Supplier tech stock -0.0021 -0.0019 -0.0022 -0.0028 -0.0079 -0.009
[0.32] [0.30] [0.34] [0.40] [1.13] [1.19]
Years supplying -0.001 -0.001 -0.0009 -0.0004 -0.0006 -0.0005
[0.95] [0.96] [0.84] [0.38] [0.57] [0.47]
Customers tech stock 0.3466 0.3191 0.2738 0.4781 0.0352 0.1418
[1.58] [1.18] [1.01] [1.45] [0.13] [0.45]
Customers 0.0092
[0.17]
Leader brand -0.3168 -0.1272
[1.39] [0.50]
No leader brand 0.0402
[0.65]
Operator 1.1447 1.2637
[3.05]** [2.71]**
No operator 0.0037
[0.07]
OEM 0.002 0.0172
[0.04] [0.28]
ODM 0.1781 2.0566
[0.00] [0.00]
OEM/ODM 0.1487 -0.143
[1.14] [0.73]
+ significant at 10%; * significant at 5%; ** significant at 1%
Salesit = Sit + Cit + SCit + ζt + υi + εit
(7) (8) (9) (10) (11) (12)
Supplier tech stock 0.0016 0.0002 0.0004 0.0015 0.0011 0.0016
[0.60] [0.10] [0.15] [0.67] [0.43] [0.69]
Years supplying 0.0016 0.0024 0.0016 0.001 0.0022 0.0011
[1.45] [2.26]* [1.49] [1.01] [2.10]* [1.11]
Customers tech stock 0.0389 -0.104 -0.0107 -0.0185 -0.1016 -0.0466
[0.21] [0.59] [0.06] [0.12] [0.58] [0.28]
Customers 0.0422
[3.53]**
Leader brand -0.8366 -1.0603
[4.78]** [4.41]**
No leader brand 0.0921
[6.29]**
Operator 0.1101 -0.007
[2.92]** [0.07]
No operator -0.0342
[0.81]
OEM -0.1369 0.1799
[1.70]+ [1.74]+
ODM
OEM/ODM 0.1145 0.0718
[3.35]** [0.86]
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
Firm
• What happens to innovation when firms outsource manufacturing?
Forgetting by outsourcing • Do firms that outsource
lose their competitive edge?
• Decrease technological capabilities?
• Introduce less advanced products?
Learning by supplying
• Do suppliers move up on the value chain?
• Increase technological capabilities?
• Introduce more advanced products?
Multi-level research agenda
Cluster
• What happens to innovation in a cluster as manufacturing moves away to new locations?
• Do new clusters that are created when manufacturing moves overseas spark innovation? How?
Within firm
• What happens to productivity when firms disperse geographically their functional areas?
Firm
• What happens to innovation when firms outsource manufacturing?
Back up slides
Data examples: HTC records
OEM Customer :Palm Inc.
Product : Smartphones with built-in Bluetooth
Date : 9/2005
Receives orders from Palm to make the Treo 700w smartphone with Bluetooth capability and 1MP camera.
OEM Customer :Sony Ericsson Mobile Communications AB
Product : Smartphone handset
Date : 9/2007
Windows Mobile-based smartphones; to hit market 2H08. Shipments >1M units, or 10-20% of HTC's total shipments for 2008.
Empirical approach
Quantitative and qualitative analysis (5 HBS cases)
Test suppliers’ learning in two dimensions: Technological capabilities Marketing capabilities
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