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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 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) - PowerPoint PPT Presentation

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Page 1: Learning by Supplying

Learning by Supplying

Juan AlcacerJoanne Oxley

KITESMarch 22nd 2012

Page 2: Learning by Supplying

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

Page 3: Learning by Supplying

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?

Page 4: Learning by Supplying

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

Page 5: Learning by Supplying

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

Page 6: Learning by Supplying

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

Page 7: Learning by Supplying

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

Page 8: Learning by Supplying

Empirical Implications

Dimensions of outsourcing relationship Impact 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

++

Page 9: Learning by Supplying

Empirical context: the mobile telecom handset industry

Exponential growth from early 1990s

Page 10: Learning by Supplying

Global market shares of leading producers

Source: Dataquest

Page 11: Learning by Supplying

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.

Page 12: Learning by Supplying

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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Page 13: Learning by Supplying

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

Page 14: Learning by Supplying

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

Page 15: Learning by Supplying

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)

Page 16: Learning by Supplying

+ 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]**

Page 17: Learning by Supplying

+ 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]+

Page 18: Learning by Supplying

+ 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]

Page 19: Learning by Supplying

+ 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]

Page 20: Learning by Supplying

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

Page 21: Learning by Supplying

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)

Page 22: Learning by Supplying

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

Page 23: Learning by Supplying

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?

Page 24: Learning by Supplying

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?

Page 25: Learning by Supplying

Back up slides

Page 26: Learning by Supplying

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.

Page 27: Learning by Supplying

Empirical approach

Quantitative and qualitative analysis (5 HBS cases)

Test suppliers’ learning in two dimensions: Technological capabilities Marketing capabilities