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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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Global Competitors as Next-Door Neighbors: Competition and Geographic Co-location in the Semiconductor Industry

Learning by SupplyingJuan AlcacerJoanne OxleyKITESMarch 22nd 2012 Our paper is related to Rahuls in that we are looking at an industry that has been disintegrating during the last decade but were going to be looking at the issues from a different perspective, namely that of the suppliers

But first, recap some of the major contours of the debate1Outsourcing & competitivenessDebate 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 Shihs 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 outsourcingMost prior studies at country/region levelFirm-level evidence based on cases / small-scale surveys

Cohen & Zysman, (1987) Manufacturing matters: The myth of the postindustrial economy, Basic booksHamel (1991) Competition for competence and interpartner learning within strategic alliances, SMJBartlett & Ghoshal (2000) Going global: Lessons from late movers, HBRArrunada and Vazquez (2006) When your contract manufacturer becomes your competitor, HBRPisano and Shih (2009) Restoring American competitiveness HBR

Country/region-level studies in economics tend to focus on impact of offshore outsourcing on wages and employment (e.g. Jacobson, et al 1993, Liu & Trefler, 2005, Brainard & Litton, 2004; Morisette & Johnson, 2005) ;

Case/survey research includes e.g. above HBR articles and efforts such as DUKEs Offshoring Research Network (surveys and reports in collaboration with Booz Allen Hamilton) 2Todays focus: firm levelForgetting 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?At the macro levelTwo papers with Haris Tabakovic (HBS)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?Analysis of evolution of semiconductor clusters across the world from 1950 to 2010Clusters characterized at basic science (academic publications), innovation (patents) and production (plants) levelsQualitative research based on cases

At the micro level:Paper with Mercedes Delgado (Temple University)The influence of internal and external economies on firm location strategiesHow do firms expand functions geographically at very early stages?Empirical setting: Bio-pharma industry in the US 1980-2011, Census data

At the firm levelTwo papers with Joanne Oxley (Rotman- U of Toronto)Forgetting by outsourcing: Do firms that outsource lose their competitive edge?Learning by supplying: Do suppliers move up on the value chain? Increase technological capabilities? Introduce more products?Empirical setting: Wireless handsets manufacturers 1985-2011Study the phenomenon from many perspectives:Examine changes in both producer and supplier capabilities / advantage over timeQuantitative and qualitative researchNumerous interviewsHBS cases: HTC, Nokia, Vodafone, America MvilEffect on technology (patents) and products (sophistication, speed of introduction)

3Building on prior findings: Learning by doingCosts 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 industrySteepness 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

Not explicit difference in benefits from cumulative production for yourself vs. cumulative production for someone else

4Building on prior findings: Learning by tradingInternational 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 onTechnical 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

Customers in this literature are proxied by location, traits of a representative customer in a given country5Building on prior findings: Learning from alliancesLearning 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)

Suppliers 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

Customers in this literature are proxied by location, traits of a representative customer in a given country6Building on prior findings: Outsourcing at the macro levelAnecdotal 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

Customers in this literature are proxied by location, traits of a representative customer in a given country7Empirical ImplicationsDimensions 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 LongevityODM versus OEM++Empirical context: the mobile telecom handset industryExponential growth from early 1990s

Demand outpaced supply in mid 90sHeavy investment in plants (Telecom boom in late 90s)Operators entered handset production to satisfy demand for new subscribers (Telital, SK Telecom)Very low levels of outsourcing relative to other electronics industry products (2.1% in 2001)Deepening supply base, 2000-todayMany new suppliers have emerged, particularly in AsiaOutsourcing increased 10X from 2001 to 2010Few suppliers became branded producersExplosive demand growth, particularly in developing countries for low-cost handsets;

9Global market shares of leading producers

Source: Dataquest10What 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:LeadersNokia, Samsung, Motorola, Sony-Ericsson, etc.RestI-mate, Audiovox, BenQ, Dopod, etc.Mobile operatorsVodafone, Orange, O2, Telefonica, China Mobile, etc.

Analysis: Dependent variablesTechnological capabilities: # of patent familiesSource: 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: multipleFirm not in sample after brand was introducedSalesSource: IDCUnits sold globally under supplier own brands

Patents log(# of patent families) based on 3-year moving average patent families better than raw count accounts for differences in scope of claims here similar numbers results same with either3-year moving average smooths sometimes noisy application series here same results with simple annual countDid the supplier launch its own brand? Dummy variable, switches to 1 for all years after own brand is detected in future work, will try to identify brand exits and also product sophistication, geographic coverage for more fine-grained measureDoes supplier produce for another firm in year t Active SupplierIs that firm a market leader? based on market share data market leaders are Nokia, Motorola, Samsung, Sony-Ericsson, LG together account for 80% market share in 2010Is it an operator? e.g. of operators, AT&T, Bell, Cingular, NTT Docomo, O2

Does the supplier also design the handset? distinguish between OEM (manufacture only) and ODM (design)How many firms does the supplier supply to? In year tHow technologically advanced is the buyer? Based on patenting in year tHow technologically advanced is the supplier? Initial tech endowment, based on patenting in 1995 measure of absorptive capacity

Firm-fixed effects examining WITHIN FIRM differences as indicator of learningTime trend just time