Industrial and Corporate Change - recent issues

Is the division of labor limited by the extent of the market?: evidence from the chemical industry

Arora, A., Vogt, W. B., Yoon, J. W. — Fri, 25 Sep 2009 07:51:06 PDT

In the age of outsourcing, it is easy to forget that outsourcing is simply one manifestation of the division of labor. Adam Smith's dictum that the division of labor is limited by the extent of the market has created difficulties when applied to a division of labor among firms (rather than within a firm). The problems are both for analytical attempts to formalize it and for empirical attempts to test it. Bresnahan and Gambardella show that the Smith–Stigler theorem holds when the extent of the market is defined in terms of the number of users instead of simply the total size of demand; therefore, division of labor is increasing in the number of users and decreasing in the average size of users. This article provides an empirical test of Bresnahan and Gambardella's theoretical argument, using data from the chemical industry. The chemical industry shows systematic variation across technologies and countries in the extent of the division of labor in plant design and engineering. We develop an empirical model in which large firms decide whether to build plants using in-house resources or to contract out, and small chemical firms also decide whether to invest in a plant. The number of specialized suppliers of plant design and engineering services (SEFs) vary with the demand for their services. The empirical results support the predictions of Bresnahan and Gambardella. We find that the number of SEFs increases when the market expands through an increase in the number of potential buyers but not when the market expansion is due to an increase in the average size of buyers. Moreover, an increase in the share of large-firm investment decreases small-firm investment, which decreases the number of SEFs. In turn, this further depresses small firm investment.

Sunk costs, uncertainty and market exit: A real options perspective

O'Brien, J., Folta, T. — Fri, 25 Sep 2009 07:51:07 PDT

In this article, we examine whether the option value of keeping an operation alive will deter firms from exiting an industry. We find that uncertainty dissuades firms from exiting an industry, but only when the sunk costs of entering and exiting that industry are sizeable. Moreover, we argue and find that sunk costs can be influenced by the technological intensity of an industry, by the extent to which a firm competes on the basis of innovation, and by the firm's diversification strategy.

Aligning branding strategies and governance of vertical transactions in agri-food chains

Raynaud, E., Sauvee, L., Valceschini, E. — Fri, 25 Sep 2009 07:51:07 PDT

This article looks at the i\nteractions between branding strategies and governance of vertical transactions. Branding strategy refers to the choice of information provided to consumers through a brand name. Governance refers to contractual agreements organizing transactions in vertical chains. We build on the logic of transaction costs economics to analyze these interactions. We provide an empirical analysis based on case studies to illustrate how governance structures are aligned with branding strategies. We show that the governance will depend on the salience of transactions. Critical or quality-relevant transactions are more tightly controlled than the others. We also explore the consequences of our results for the alignment principle described in Oliver Williamson's work.

Inter-firm reverse technology transfer: the home country effect of R&D internationalization

Criscuolo, P. — Fri, 25 Sep 2009 07:51:07 PDT

One consequence of the internationalization of R&D may be the transfer of foreign technology from the multinational to other firms in its home country. This phenomenon, which can be termed inter-firm reverse technology transfer and which has not been directly analyzed by either the international management or foreign direct investment literature, may have significant implications for policy—particularly in Europe. This article is a first attempt in this direction. Patent citation analysis on a database of EPO patents granted to 17 European chemical and pharmaceutical multinationals over the period 1985–2005 shows that they act as a channel for the transmission of knowledge developed in the United States, to other home country firms; these results are robust to the exclusion of examiner citations. We find that this technology transfer process is explained by the degree of home country embeddedness of the multinational firm, the US subsidiaries’ engagement in asset-augmenting activities, and the presence of a technology gap between the United States and the home country. These results point to an alternative understanding of foreign direct R&D investment and its implications for the home country's technological activity and general competitive performance.

Macroeconomic effects of ownership structure in OECD countries

Gatti, D. — Fri, 25 Sep 2009 07:51:07 PDT

The article investigates the impact of ownership concentration (OC) on GDP growth, for a sample of 18 OECD countries over the period 1980–2004. The econometric analysis shows that more concentrated ownership can speed up growth, for countries approaching the technological frontier, provided that labor market regulation is sufficiently tight. In the absence of employment regulation, the logic of financial markets discipline applies and dispersed ownership appears as more favorable for growth. Based on econometric results, I calculate impact coefficients that allow to evaluate the growth points gained/lost following given variations in OC. This exercise reveals that a reform in the domain of ownership structure would have yielded, over the investigated period, sizeable effects in terms of growth. Importantly, these effects would have been unequally distributed across countries: Anglo-Saxon countries would have taken more advantage of deregulation (i.e. increased dispersion of ownership in a context of deregulated labor markets) while continental European countries would have benefited more from increased concentration of ownership in a context of reinforced labor regulation.

Academic collaboration and organizational innovation: the development of research capabilities in the US pharmaceutical industry, 1927-1946

Furman, J. L., MacGarvie, M. — Fri, 25 Sep 2009 07:51:07 PDT

This article investigates the historical conditions that contributed to the birth of in-house research and development (R&D) capabilities in the early US pharmaceutical industry by examining qualitative and quantitative data on university–industry interaction between the 1920s and 1940s. This evidence suggests that labor markets, collaborative research, and contract research were the principal mechanisms by which early university science contributed to the development of in-house research capabilities in the emerging US pharmaceutical industry. This article further demonstrates a pattern in which firms with lesser R&D capabilities were generally constrained to work with local partners, while firms with greater internal R&D capabilities primarily engaged local partners for smaller-scale projects requiring generalist skills and distant partners for larger-scale efforts and extraordinary projects. We conclude by examining the implications of collaboration for those firms that did engage university academic partners. Our findings suggest that pharmaceutical firms that collaborated with universities during this period achieved higher rates of patenting and laboratory growth.

Information technology and mindfulness in organizations

Valorinta, M. — Fri, 25 Sep 2009 07:51:07 PDT

The concept of mindfulness has lately been applied to organizations that are increasingly attentive to their environment and adaptive to unanticipated events. This article analyzes how information technology impacts mindfulness in organizations. Information technology is proposed to promote mindfulness by engaging organizations in more extensive search processes and by fuelling organizational innovations with a repertoire of routines. However, information technology is also found to decrease mindfulness and impede organizational adoption by promoting cognitive inertia and making the enactment of change more challenging. The article also identifies the practices IT-intensive organizations apply to promote more mindful behavior.

Big causes and small events: QWERTY and the mechanization of office work

Reinstaller, A., Holzl, W. — Fri, 25 Sep 2009 07:51:07 PDT

This article studies the adoption of typewriters in the United States, France, and Germany in the period between 1870 and 1930. The aim of the article is to show how specific problem-solving heuristics and routines, which have been developed to solve technical and social problems on the shop floor, have also shaped the organization of work and complementary technologies at the administrative level. We argue that performance criteria other than pure typing speed were relevant to the adoption of typewriters and the QWERTY keyboard, and reconsider the debates on path dependence surrounding the QWERTY keyboard.

The practice of routines and representations in design and development

Hales, M., Tidd, J. — Mon, 13 Jul 2009 09:43:21 PDT

Using observational data from a longitudinal real-time field study, we contribute theoretically, empirically, and methodologically to the role of routines in new product design and development. We focus on the work being done by formal representations and formal routines in the design and development of a complex capital good. We find that, contrary to the emphasis in much of the literature, formal routines and representations, in particular those embodied in artifacts, while pervasive, play only a limited role. Rather, of greater influence are the various non-formal representations used to support interaction and communication: representations from routines (and elsewhere), instead of formal representation of routines. We propose a rebalancing of the relationships between routines and representations, a dialectical and mediating—in contrast to a linear and genetic—relationship.

Excess sensitivity of consumption to income growth: a model of Loss Aversion

Pasini, G. — Mon, 13 Jul 2009 09:43:21 PDT

The article provides an empirical test on micro-data of a model of individual behavior based on Loss Aversion: utility is S-shaped, i.e. concave above reference consumption and convex below it. As a consequence individuals do not reduce current consumption in response to an expected income decline as long as uncertainty is high enough. Such a behavior is consistent with excess sensitivity of consumption to income growth, an empirical regularity which is hard to explain within a standard Life Cycle model. Loss Aversion is tested on an Italian dataset (the Bank of Italy's; Survey on Households' Income and Wealth). The conclusion is that excess sensitivity could be explained by a model that do not assume individuals to be expected utility maximizers.

Ownership, size, and the formal structure of organizations: evidence from US public and private firms, 1992-2002

Wang, L. — Mon, 13 Jul 2009 09:43:21 PDT

This study considers the effects of (i) ownership structure, (ii) prior size dynamics of growth and decline, and (iii) organizational size on changes in the formal structure of organizations. Using a broad sample of almost 70,000 US public and private firms, I test the arguments by estimating conditional logistic regressions using as dependent variables two dimensions of organizational structural differentiation: the number of formal subunits and hierarchical levels. The findings show that public firms are more likely to elaborate structurally, but less likely to simplify their structural differentiation. As organizations grow/decline in size, they apparently tend to increase/decrease their degree of structural differentiation. However, for a given change in size, the level of structural differentiation is less likely to increase during growth than it is to decrease during decline, indicating an asymmetric pattern. I also find that organizational size can serve as a facilitator or inhibitor for structural change, depending on the direction of change. Finally, I find that the asymmetric pattern of growth and decline works differently for large and small firms. The same proportional increase in size is more likely to generate structural differentiation for larger firms than for smaller firms. But the same proportional decrease in size has a smaller likelihood of causing structural de-differentiation for larger firms than for smaller firms.

Does external knowledge sourcing matter for innovation? Evidence from the Spanish manufacturing industry

Vega-Jurado, J., Gutierrez-Gracia, A., Fernandez-de-Lucio, I. — Mon, 13 Jul 2009 09:43:21 PDT

This article presents empirical evidence on the effects of external knowledge-sourcing strategies on the development of both product and process innovations, and assesses the degree to which such effects are influenced by the firm's internal technological capacities. In our analysis, we consider two strategies for acquiring external knowledge (buying and cooperating) and two types of external sources (industrial agents and scientific agents). The analysis is based on a sample of 1329 manufacturing firms active in innovation activities taken from the Spanish Survey of Technological Innovation 2004. We find that the effects of the knowledge-sourcing strategies differ significantly across innovation types (product or process innovation). In addition, our results indicate that although internal R&D activities are associated with a greater use of external scientific knowledge sources (through cooperation), they do not seem to promote their exploitation for innovation development, that is, to say, they do not have synergistic effects.

Do scientists get fundamental research ideas by solving practical problems?

Franzoni, C. — Mon, 13 Jul 2009 09:43:21 PDT

We discuss the problem-solving nature of scientific activity and maintain that contributions made in the form of improved methodologies, new technologies, and instruments for research are, and will increasingly become, central in experimental sciences and in fields traditionally the realm of pure intellectual speculation. The contribution of scientists to the development of new technologies and techniques for research purposes largely exceeds their contribution to developing technologies for industrial purposes, although the former easily blurs into the latter. We verify the effect of both types of contributions on the productivity of a sample of American star physicists, and show that improving research technologies always boosts the productivity of scientists, whereas developing industrial technologies is beneficial only when the technology stems from a research instrument.

Knowledge management: does capture impede creation?

Jensen, P. H., Webster, E. — Mon, 13 Jul 2009 09:43:21 PDT

Economists and strategic management theorists interested in sustained competitive advantage often examine firms’ management of knowledge. Somewhat surprisingly, the interaction between knowledge creation and knowledge capture practices has received little attention. Using survey data from nearly 900 Australian firms we examine this issue, paying particular attention to whether knowledge capture impedes knowledge creation. We find that firms which favor closed-learning practices tend to rely more upon patents and secrecy, and eschew lead-time and brands as ways to capture profits. Firms that favor open styles of learning operate in the opposite manner.

Experimentation with strategy and the evolution of dynamic capability in the Indian pharmaceutical sector

Athreye, S., Kale, D., Ramani, S. V. — Mon, 13 Jul 2009 09:43:21 PDT

This article demonstrates that radical regulatory changes can be tantamount to technological revolutions by studying Indian pharmaceutical firms. It shows that radical regulatory changes such as the Indian Patent Act of 1970, the New Industrial Policy of 1991 and the signing of TRIPS (Trade Related Intellectual Property Rights System) in 1995 served to open up new economic opportunities and constraints in the wake of which the winners and losers were selected as a function of the dynamic firm capabilities most appropriate for the new market environment.

Technological effects of M&As in Spanish manufacturing

Marin, R., Alvarez, I. — Mon, 13 Jul 2009 09:43:21 PDT

This article explores whether mergers and acquisitions (M&As) generate differentiated impacts on the acquiring firms’ R&D expenditures, patents granted, and product innovations. Considering M&As as a way of foreign expansion, we examine whether the technological effects differ between domestic and foreign-owned acquirers, assuming that the effects on the technological efforts and performance may differ across industries. The availability of statistical information for a stable sample of manufacturing companies in Spain during the 1990s allows us to follow a dynamic approach to the issue. Our findings confirm the existence of differentiated effects on technological inputs and outputs across industries, as well as diversity between domestic and foreign-owned firms involved in M&As.

Inter-industry differences in profitability: the legacy of the structure-efficiency debate revisited

Lee, C.-Y., Mahmood, I. P. — Tue, 26 May 2009 07:59:28 PDT

This study presents a simple model on the sources of inter-industry variation in profitability and tests its empirical implications in order to shed new light on the long-lasting debate over industry profitability. The model identifies four key factors that jointly influence an industry's price–cost margin: (i) the intensity of strategic investment (e.g. R&D and advertising), (ii) the skewness of the distribution of market share or market concentration, (iii) the appropriability of strategic investment, and (iv) the extent to which firms’ market shares are determined by the intensity of their strategic investment. These factors are expected to be positively related to industry profitability, and our empirical analysis provides supportive evidence. The model also suggests that the conventional, single-dimensional hypotheses on profitability—the market-power (or market-structure) hypothesis and the efficiency hypothesis—are overly simplified. More importantly, existing empirical results allegedly supporting each of these hypotheses are spurious to the extent that the distribution of firm-specific strategic competence reflects firm heterogeneity in efficiency and, at the same time, underlies the distribution of market share or market concentration.

Measurement of the market power of firms: the Japanese case in the 1990s

Kiyota, K., Nakajima, T., Nishimura, K. G. — Tue, 26 May 2009 07:59:28 PDT

This article presents a new simple econometric framework for the estimation of individual firms’ markup over their marginal cost, taking account of firm heterogeneity, demand-driven cyclical price changes, and the limited availability of firm-level information. The framework is applied to study markup of Japanese firms in manufacturing and wholesale/retail trade for 1994–2002. The results indicate that, on average, the Japanese markets become more competitive in the 1990s than before even in non-manufacturing industries. We also find sizable heterogeneity and non-negligible pro-cyclicality in the markup of the Japanese firms.

Modeling the diffusion of strategies: an application to exporting

Clerides, S., Kassinis, G. — Tue, 26 May 2009 07:59:28 PDT

We examine whether the spread of an exporting strategy can be characterized as a diffusion process using a general framework that accounts for attrition and changes in the pool of potential adopters and allows the diffusion rate to vary according to firm and market characteristics. Our findings indicate that the diffusion of exporting is described well by the internal model of diffusion. Thus, this framework may be useful in modeling the spread of other strategies. The diffusion rate is found to be strongly related both to firm characteristics and to past adopter performance.

Champions of revealing--the role of open source developers in commercial firms

Henkel, J. — Tue, 26 May 2009 07:59:28 PDT

The link between firms engaging in open source software (OSS) development and the OSS community is established by individual developers. This linkage might entail a principal-agent issue due to the developer's double allegiance to firm and OSS community, and expose the firm to the risk of losing intellectual property. Using both interviews and a large-scale survey, I substantiate the importance of the developer's role. However, neither interview data nor regression analysis show indications of commercially harmful revealing behavior induced by "Free Software ideology." Management, on the other hand, sometimes seems to be overly concerned about openness. I conclude that a more positive stance towards openness will allow firms to better share in the benefits of open innovation processes.

The nature of local knowledge and new firm formation

Bae, J., Koo, J. — Tue, 26 May 2009 07:59:28 PDT

Knowledge spillovers in a region often co-vary with the size of knowledge created in the region, i.e. local knowledge. Local knowledge is, however, open to competition between incumbents and new entrants. Given this competition, the size of local knowledge is not always conductive to new entrants. This study examines which types of local knowledge may increase the potential for knowledge spillovers, and eventually entrepreneurial activities.

Routinization of innovation in German manufacturing: the David-Goliath symbiosis revisited

Falck, O. — Tue, 26 May 2009 07:59:28 PDT

Small and medium-sized firms frequently are viewed as the drivers of radical innovation. However, they often do not have the focus and commitment necessary for improving and extending the innovation, tasks better accomplished by routinized large firms. Using a uniquely rich industry-level data set for German manufacturing industries during 1991–2004, this article finds evidence for this David–Goliath symbiosis. Although small and medium-sized firm innovation rates can explain the within-industry variation of productivity growth, it is the large firm process innovation rate that explains differences in the level of productivity growth between industries, i.e. differences in the degree of routinization of innovation.

The dynamics of rapid industrial growth: evidence from Sweden's information technology industry, 1990-2004

Zaring, O., Eriksson, C. M. — Tue, 26 May 2009 07:59:28 PDT

Sweden's information technology (IT) industry expanded through an inflow of new entrants during the 1990s. Its evolution was analyzed using ecological models of organizational founding and disbanding. Controlling for the effects of economic conditions, this study analyzed the effects of density dependence, age, imprinting, rate dependence, and the origin of new entrants on the industry. The results indicate that the inflow was comprised of start-ups that proved to be relatively short-lived. In contrast, new entrants that originated as part of incumbent firms that were diversifying in IT stabilized the industry by depressing its disbanding rate and facilitating the entry of new firms. In explaining the dynamics of the industry, the analysis supports the established models of density dependence, age dependence, imprinting, and organizational origin.

Inter-firm technology transfer: partnership-embedded licensing or standard licensing agreements?

Hagedoorn, J., Lorenz-Orlean, S., van Kranenburg, H. — Tue, 26 May 2009 07:59:28 PDT

When companies decide to engage in technology transfer through exclusive licensing to other firms, they have two basic options: to use standard licensing contracts or to set-up more elaborate partnership-embedded licensing agreements. We find that broader partnership-embedded licensing agreements are preferred with higher levels of technological sophistication of industries, with greater perceived effectiveness of secrecy as a means of appropriability, and when licensors are smaller than their licensees. Innovative differential between companies, innovative supremacy of the licensor and market and technological overlap between partners appear to have no effect on the preference for a particular form of licensing.