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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
13235.
Length: Date of creation: Jul 2007 Date of revision: Handle: RePEc:nbr:nberwo:13235
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Find related papers by JEL classification: L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance L62 - Industrial Organization - - Industry Studies: Manufacturing - - - Automobiles; Other Transportation Equipment O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D
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Dye, Ronald A, 1985.
"Costly Contract Contingencies,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(1), pages 233-50, February.
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