Transcript Global Competitors as Next-Door Neighbors: Competition and

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
• What happens to innovation when
firms outsource manufacturing?
Firm
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 Implications
Dimensions of outsourcing
relationship
Impact on Learning-bySupplying?
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
Dij 
vi v j '
vi vi 'v j v j '
 0,1
(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 countsit
 overlapijt
 Own-brand introductionit
 Salesit
Negative Binomial
OLS
Logit
OLS
Analysis: independent variables (sources)

Significant outsourcing relationships, 1995-2010

THT Business Research (consulting company)


Federal Communications Commission (FTC)


Digitimes (Greater China), Gartner group (South Korea)
Handset databases


Equipment Authorization System
Region specific OEM/ODM data:


Web data + customized report of outsourcing form top
branded firms 2000-2010
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
(1)
Supplier tech stock
Years supplying
Customers tech stock
Customers
(2)
(3)
(4)
(5)
(6)
0.002
[6.73]**
-0.01
[1.07]
0.002
[6.58]**
-0.03
[2.13]*
0.002
[6.32]**
-0.03
[2.15]*
0.002
[6.60]**
-0.03
[1.89]+
0.002
[7.09]**
0.00
[0.12]
0.002
[6.97]**
0.04
[2.12]*
0.0005
[3.83]**
0.0004
[3.51]**
0.01
[2.48]*
0.0004
[3.68]**
0.0004
[3.34]**
0.0004
[3.01]**
0.0004
[3.34]**
Leader brand
0.02
[1.77]+
0.00
[1.43]
No leader brand
Operator
-0.01
[1.91]+
0.01
[3.88]**
No operator
OEM
ODM
OEM/ODM
+ significant at 10%; * significant at 5%; ** significant at 1%
-0.01
[0.47]
0.005
[1.24]
0.22
[1.54]
0.01
[1.85]+
-0.06
[5.77]**
0.004
[0.74]
0.17
[1.09]
0.04
[6.13]**
overlapijt = Sit + Cit + SCit + ζt + υij + εit
(7)
Years supplying customer j
(8)
(9)
ODM
OEM/ODM
+ significant at 10%; * significant at 5%; ** significant at 1%
(11)
0.0035
0.0034
0.0037
0.0034
[2.02]*
[1.99]*
[2.14]*
[1.99]*
-0.0008
-0.0009
[0.11]
[0.12]
Leader brand
OEM
(10)
0.0044
0.0044
[0.63]
[0.63]
0.1092
0.1092
[1.00]
[1.00]
0.0165
0.0165
[1.86]+
[1.86]+
Own-brand introductionit = Sit + Cit + SCit + ζt + υi + εit
(1)
Supplier tech stock
Years supplying
Customers tech stock
Customers
Leader brand
No leader brand
Operator
No operator
OEM
ODM
OEM/ODM
(2)
(3)
(4)
(5)
(6)
-0.0021
-0.0019
-0.0022
-0.0028
-0.0079
-0.009
[0.32]
[0.30]
[0.34]
[0.40]
[1.13]
[1.19]
-0.001
-0.001
-0.0009
-0.0004
-0.0006
-0.0005
[0.95]
[0.96]
[0.84]
[0.38]
[0.57]
[0.47]
0.3466
0.3191
0.2738
0.4781
0.0352
0.1418
[1.58]
[1.18]
[1.01]
[1.45]
[0.13]
[0.45]
0.0092
[0.17]
-0.3168
-0.1272
[1.39]
[0.50]
0.0402
[0.65]
1.1447
1.2637
[3.05]**
[2.71]**
0.0037
[0.07]
0.002
0.0172
[0.04]
[0.28]
0.1781
2.0566
[0.00]
[0.00]
0.1487
-0.143
[1.14]
[0.73]
+ significant at 10%; * significant at 5%; ** significant at 1%
Salesit = Sit + Cit + SCit + ζt + υi + εit
Supplier tech stock
(7)
(8)
(9)
(10)
(11)
(12)
0.0016
0.0002
0.0004
0.0015
0.0011
0.0016
[0.60]
Years supplying
Customers tech stock
Customers
Leader brand
No leader brand
Operator
No operator
OEM
[0.10]
[0.15]
[0.67]
[0.43]
[0.69]
0.0016
0.0024
0.0016
0.001
0.0022
0.0011
[1.45]
[2.26]*
[1.49]
[1.01]
[2.10]*
[1.11]
0.0389
-0.104
-0.0107
-0.0185
-0.1016
-0.0466
[0.21]
[0.59]
[0.06]
[0.12]
[0.58]
[0.28]
0.0422
[3.53]**
-0.8366
-1.0603
[4.78]**
[4.41]**
0.0921
[6.29]**
0.1101
-0.007
[2.92]**
[0.07]
-0.0342
[0.81]
-0.1369
0.1799
[1.70]+
[1.74]+
ODM
OEM/ODM
+ significant at 10%; * significant at 5%; ** significant at 1%
0.1145
[3.35]**
0.0718
[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


Examine link between outsourcing and changes in supplier
capabilities:



Provide contextual background on outsourcing in the industry
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
• What happens to innovation when
firms outsource manufacturing?
Firm
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?
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?
• What happens to innovation when
firms outsource manufacturing?
Firm
Within firm
• What happens to productivity when firms
disperse geographically their functional
areas?
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