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How Does Outsourcing Affect Performance Dynamics? Evidence from the Automobile Industry

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  • Sharon Novak
  • Scott Stern
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    Abstract

    This paper examines the impact of vertical integration on the dynamics of performance over the automobile product development lifecycle. Building on recent work in organizational economics and strategy, we evaluate the relationship between vertical integration and different performance margins. Outsourcing facilitates access to cutting-edge technology and the use of high-powered performance contracts. Vertical integration allows firms to adapt to unforeseen contingencies and customer feedback, maintain more balanced incentives over the lifecycle, and develop firm-specific capabilities over time. Together, these effects highlight a crucial tradeoff: while outsourcing is associated with higher levels of initial performance, vertical integration will be associated with performance improvement over the product lifecycle. We test these ideas using detailed data from the luxury automobile segment, establishing three key results. First, initial performance is declining in the level of vertical integration. Second, the level of performance improvement is significantly increasing in the level of vertical integration. Finally, the impact of vertical integration on alternative performance margins is mediated by the level of pre-existing capabilities, by the salience of opportunities to access external technology leaders, and by the scope for learning over the product lifecycle. Together, the findings highlight a strategic governance tradeoff between short-term performance and the evolution of firm capabilities.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13235.

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    Date of creation: Jul 2007
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    Publication status: published as doi: 10.1287/mnsc.1080.0922 Management Science December 2008 vol. 54 no. 12 1963-1979
    Handle: RePEc:nbr:nberwo:13235

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    1. Luca Anderlini & Leonardo Felli, 1999. "Incomplete Contracts and Complexity Costs," Theory and Decision, Springer, vol. 46(1), pages 23-50, February.
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    9. Sharon Novak & Steven D. Eppinger, 2001. "Sourcing By Design: Product Complexity and the Supply Chain," Management Science, INFORMS, vol. 47(1), pages 189-204, January.
    10. Sharon Novak & Scott Stern, 2007. "Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development," NBER Working Papers 13232, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Jeremy T. Fox, 2008. "Estimating Matching Games with Transfers," NBER Working Papers 14382, National Bureau of Economic Research, Inc.
    2. Elisabetta Magnani, 2012. "Vertical disintegration and training: evidence from a matched employer–employee survey," Journal of Productivity Analysis, Springer, vol. 38(2), pages 199-217, October.
    3. Sharon Novak & Scott Stern, 2007. "Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development," NBER Working Papers 13232, National Bureau of Economic Research, Inc.

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    1. Studies on the automobile industry

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