Academic journal article Innovation: Organization & Management

Outsourcing and Innovation: Evidence for a Local Production System of Emilia-Romagna

Academic journal article Innovation: Organization & Management

Outsourcing and Innovation: Evidence for a Local Production System of Emilia-Romagna

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. INTRODUCTION

The relationship between outsourcing, on the one side, and firm's innovativeness, on the other side, has emerged to be a truly 'complex' one, whose direction and sign is hard to establish a priori.

At the outset, firms can be claimed to innovate more or less depending on the vertical integration degree of their organization, and of the outsourcing strategies which contribute to determine it:1 the now popular 'core competences' business argument, according to which the firm's innovation capabilities increase by focusing on the 'area of specialized expertise' and by externalizing noncore activities (Hamel and Prahalad, 1990: 164) is an example. On the other hand, it is also claimed that firms integrate and outsource to different extents depending on their innovative profile. The idea that the firm's distance from the technological frontier makes vertically integrated and disintegrated organizational structures more and less suitable in solving the trade-off between the managerial overload of the owners and their rent loss due to the suppliers' hold-up (Acemoglu, Aghion and Zilibotti, 2002), exemplifies the latter argument.

Out of these two interpretations, the paper focuses on the latter, that is on how the innovative strategies of the firm, and the relative innovative outcomes, might affect its outsourcing strategies: that is, on how the innovative profile of the firm might induce it to look for more or less vertically integrated organizational structures. Accordingly, outsourcing is the dependent variable in the empirical models below specified, while different variables related to the firm's innovation process are our main independent ones. However, it should be emphasised that this does not amount to assuming any causality from innovation to outsourcing, or vice-versa. The two phenomena are rather correlated and our empirical model just one point of view from which it is possible to detect such a correlation.

Also the sign of the relationship between outsourcing and innovation is far from unambiguous. The 'standard' view, which retains vertically integrated firms generally superior to disintegrated ones in dealing with innovation - either for the advantages in managing complementary assets (Teece, 1986) or in coordinating new and unrelated information bits (Silver, 1984) - has been recently questioned. Langlois and Robertson, for example, in a series of papers (e.g. Langlois and Robertson, 1996; Robertson and Langlois, 1995) have shown that the sign of the relationship between the firm's vertical scope and innovation crucially depends on both the kind of technological change the firm faces and the institutional and economic context it is based in (for example, an industrial district).

On the basis of this argument, how outsourcing actually relates to innovation should be established pragmatically, by looking at which mechanisms, out of those identified by both standard and non-standard theoretical perspectives, are at work when the firm is 'embedded' in the context it operates (Mazzanti, Montresor and Pini, 2006).

In the paper, this will be done by drawing 'outsourcing arguments' on both the theoretical and the empirical literature on innovation (Section 2), and translating them into 'expected' correlations. These correlations will be then tested with respect to the firms of the local production system of Reggio Emilia (in Emilia-Romagna), using a large dataset and an empirical model described in Section 3. Section 4 will present the main results of the application and Section 5 will conclude.

2. OUTSOURCING AND INNOVATION: AN AMBIGUOUS RELATIONSHIP?

Outsourcing is nowadays a strategic choice firms undertake pervasively and for different reasons. In broad terms, it can be defined as the 'turning over of all or part of an organizational activity to an outside vendor' (Barthélemy, 2003: 87) or, more rigorously, as 'the procurement of products or services from sources that are external to the organization' (Lankford and Parsa, 1999: 310). …

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