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Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development

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Author Info

  • Sharon Novak

    ()
    (MIT Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142)

  • Scott Stern

    ()
    (Kellogg School of Management, Northwestern University, Evanston, Illinois 60208)

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    Abstract

    This paper examines complementarity among vertical integration decisions in automobile product development. Though most research assumes that contracting choices are independent of each other, contracting complementarity arises when the returns to a single vertical integration decision are increasing in the level of vertical integration associated with other contracting choices. First, effective coordination may depend on the level of (noncontractible) effort on the part of each agent; contracting complementarity results if coordination efforts are interdependent and vertical integration facilitates a higher level of noncontractible effort. Second, effective coordination may require the disclosure of proprietary trade secrets, and the potential for expropriation by external suppliers may induce complementarity among vertical integration choices. We provide evidence for complementarity in product development contracting by taking advantage of a detailed data set that includes the level of vertical integration and the contracting environment for individual automobile systems in the luxury automobile segment. Using an instrumental variables framework that distinguishes complementarity from unobserved firm-level factors, the evidence is consistent with the hypothesis that contracting complementarity is an important driver of vertical integration choices. The findings suggest that contracting complementarity may be particularly important when coordination is important to achieve but difficult to monitor.

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    File URL: http://dx.doi.org/10.1287/mnsc.1080.0924
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 55 (2009)
    Issue (Month): 2 (February)
    Pages: 311-332

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    Handle: RePEc:inm:ormnsc:v:55:y:2009:i:2:p:311-332

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    Related research

    Keywords: vertical integration; automobile industry; complementarity; outsourcing strategies; product development;

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    Cited by:
    1. Noriaki Matsushima & Tomomichi Mizuno, 2009. "Vertical Separation as a Defense against Strong Suppliers," ISER Discussion Paper 0755, Institute of Social and Economic Research, Osaka University.
    2. Moeen, Mahka & Somaya, Deepak & Mahoney, Joseph T., 2011. "Supply Portfolio Concentration in Outsourced Knowledge-Based Services," Working Papers 11-0106, University of Illinois at Urbana-Champaign, College of Business.
    3. Russell Thomson & Elizabeth Webster, 2011. "External Ventures: Why Firms Don't Develop All Their Inventions In-house," Melbourne Institute Working Paper Series wp2011n19, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    4. Brahm, Francisco & Tarziján, Jorge, 2012. "The impact of complexity and managerial diseconomies on hierarchical governance," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 586-599.
    5. Van Biesebroeck, Johannes & Zhang, Lijun, 2011. "Global Sourcing of a Complex Good," CEPR Discussion Papers 8614, C.E.P.R. Discussion Papers.

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