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Presented by Bradley Skousen

This article explores the relationship between knowledge-based capabilities and outsourcing decisions in skilled labor contexts. It presents findings from a study of Fortune 500 firms in technology sectors, examining how firm-specific and industry-specific human capital affect the likelihood of outsourcing knowledge work. The study supports various hypotheses connecting previous project experiences and the propensity to internalize or outsource knowledge projects, highlighting the importance of human capital in strategic decision-making.

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Presented by Bradley Skousen

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  1. Firm-Specific, Industry-Specific, and OccupationalHuman Capital and the Sourcing of Knowledge Workby Mayer, K.J., Somaya, D., and Williamson, I.O. (2012) in Organization Science. Presented by Bradley Skousen

  2. About the Authors • Kyle J. Mayer: PhD at Berkeley (1999) and chaired by Oliver Williamson • Deepak Somaya: PhD at Berkeley (2002) and chaired by David Mowery • Ian O. Williamson: PhD at UNC (2000) in Organization Behavior.

  3. Purpose and Key Definitions Purpose: To explore the relationship between knowledge based capabilities with prior make or buy decisions and buyer-supplier differences in the management of skilled employees. Knowledge Work: Consists of activities, tasks, or projects that require the application of knowledge to solve business problems. Firm-specific Human Capital (HC): Knowledge and skills that are unique to a firm. Industry Specific HC: Knowledge about the industry setting or domain in which a project is situated, and thus it is re-deployable across the (limited) set of firms with projects in the same industry domain. Occupational HC: Knowledge and skills required to perform work within a professional or functional area.

  4. Data • 1989 Survey of Fortune 500 Firms • Sample includes all 129 Publicly listed Firms • All firms are in technology-based industries • 5 industries included: • Chemicals (39 firms) • Computer Manufacturing (22 firms) • Electronics (40 firms) • Pharmaceuticals (12 firms) • Scientific and Photographic Equipment (16 firms) • Patents from 1990-1995 • Sample size included 59,590 patents

  5. Model Specification IVs Patent-Level Controls Industry Level Controls Fixed Effects Logit Model for Outsourcing of Patent Legal Work DV: Probability of Outsourcing

  6. Hypothesis 1 H1: Firms are less likely to outsource knowledge projects the greater their relevant firm-specific human capital developed by performing prior related projects. Theory: Governance Inseparabilites (Argyres and Liebeskind,1999); Time Compression Diseconomies (Dierickx and Cool, 1989); among others. Operationalization: Firm-specific HC was measured as the number of backward citations to patents of the same company that were also processed in-house during the previous five years. Findings: H1 Supported.

  7. Hypothesis 2 H2: Firms are less likely to outsource knowledge projects the greater the relevant industry-specific human capital developed by previously internalizing knowledge projects in the same domain. Theory: Mixture of KBV and TCE logic (e.g., Argote & Ingram, 2000; Hatch & Dyer, 2004; Parmigiani & Mitchell, 2009). Operationalization: Industry-specific HC was measured as the company’s previous in-house experience in the technical domain. Specifically, it was the logged number of prior patents processed internally by the firm in the same primary seven-digit International Patent Classification. Findings: H2 Supported.

  8. Hypothesis 3 H3: The marginal impact of higher firm-specific or industry-specific human capital on the tendency of firms to internalize knowledge work is highest when the other type of human capital (firm specific or industry specific is low ). Theory: KBV. Focus on advantages of coordinating knowledge tasks(e.g., Kogut & Zander, 1992; Conner & Prahalad, 1996; Nickerson & Zenger, 2004). Operationalization: Interaction Term Findings: H3 Supported.

  9. Hypothesis 4 H4: Firms are more likely to outsource knowledge projects situated in areas that are highly contested (and thus rely heavily on occupational human capital). Theory: Focuses on TCE logic (e.g., Williamson’s 1985 concept of selective intervention) to explain why firms develop in-house occupational human capital but the authors main question is not on why but when occupational human capital is outsourced. Operationalization: Dummy variable coded as 1 if the focal patent cited a patent that was litigated in the past (referred to as a high contested area). Findings: H4 Supported.

  10. Hypothesis 5 H5: The larger the firm’s internal staff (in the focal occupational area), the weaker the (positive) effect of a project being in a highly contested area on the probability of outsourcing. Theory: KBV. The logic is that firms with more patent attorneys may use knowledge hierarchies to leverage skills and learning (e.g., Garicano, 2000). Operationalization: Interaction of highly contested area (see H4) with internal staff size, which measures the number of patent attorneys employed by the focal firm. Findings: H5 Supported.

  11. Discussion • Theoretical Contribution? - Provides strong links between KBV and TCE. • Sample Issues? - Limited to big Fortune 500 firms. • Measurement Issues? -Research design included interviews with managers to verify important measurement issues. Measurements are consistent with patent literature. • Model Specification/Identification Issues? - Model does not include variables on firm capabilities other than patenting experience. Is the main-case causality that greater outsourcing leads to lower firm capabilities, or that lower firm capabilities lead to outsourcing?

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