Learning by Supplying

1. Learning by Supplying Juan Alcacer Joanne Oxley KITES March 22nd 2012

2. 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

3. 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?

4. 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

5. 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

6. 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

7. 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

8. Empirical Implications

9. Empirical context: the mobile telecom handset industry • Exponential growth from early 1990s

10. Global market shares of leading producers Source: Dataquest

11. 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.

12. 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

13. 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

14. 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

15. 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)

16. Patent countsit= Sit + Cit + SCit + ζt + υi + εit + significant at 10%; * significant at 5%; ** significant at 1%

17. overlapijt= Sit + Cit + SCit + ζt + υij+ εit + significant at 10%; * significant at 5%; ** significant at 1%

18. Own-brand introductionit = Sit + Cit + SCit + ζt + υi + εit + significant at 10%; * significant at 5%; ** significant at 1%

19. Salesit= Sit + Cit + SCit + ζt + υi + εit + significant at 10%; * significant at 5%; ** significant at 1%

20. 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

21. 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)

22. 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

23. 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?

24. Multi-level research agenda

25. Back up slides

26. Data examples: HTC records

27. Empirical approach • Quantitative and qualitative analysis (5 HBS cases) • Test suppliers’ learning in two dimensions: • Technological capabilities • Marketing capabilities