Firms in technology markets often outsource the manufacture of core components—components that are central to product performance and comprise a substantial portion of product costs. Despite the strategic importance of core-component outsourcing, there is little empirical evidence (and many conflicting opinions) about its impact on consumer demand. The authors address this gap with an examination of panel data from the flat panel TV industry, across key regions globally. Results from their estimation indicate that core-component outsourcing reduces the firm’s ability to be on the technological frontier; this hurts demand, because the authors’ estimates suggest that consumers care about firms being on the frontier. However, such outsourcing also reduces costs. Finally, the authors find that outsourcing increases the intensity of competition in the marketplace. They assess these (often opposing) effects and conduct thought experiments to quantify the performance impact of core-component outsourcing.
AfuahAllan (2001), “Dynamic Boundaries of the Firm: Are Firms Better off Being Vertically Integrated in the Face of a Technological Change?” Academy of Management Journal, 44 (6), 1211–28.
2.
AndersonErinWeitzBarton A. (1986), “Make-or-Buy Decisions: Vertical Integration and Marketing Productivity,” MIT Sloan Management Review, 27 (3), 3–19.
3.
AndersonPhilipTushmanMichael L. (1990), “Technological Discontinuities and Dominant Designs: A Cyclical Model of Technological Change,” Administrative Science Quarterly, 35 (4), 604–33.
4.
BengstonLars (2008), “Outsourcing Manufacturing and its Effect on Engineering firm Performance,” International Journal of Technology Management, 44 (3/4), 373–90.
BettisRichard A.BradleyStephen P.HamelGary (1992), “Outsourcing and Industrial Decline,” The Executive, 6 (1), 7–22.
7.
BresnahanTimothy F. (1989), “Studies of Individual Industries,” in Handbook of Industrial Organization, SchmalenseeR.WilligR., eds. New York: North-Holland, 1012–55.
8.
BresnahanTimothy F.ReissPeter C. (1991), “Entry and Competition in Concentrated Markets,” Journal of Political Economy, 99 (5), 977–1009.
9.
ChesbroughHenry W.TeeceDavid J. (1996), “Organizing for Innovation: When Is Virtual Virtuous?” Harvard Business Review, 74 (1), 65–73.
10.
ChristensenClayton (1997), The Innovator’s Dilemma. Boston: Harvard Business School Press.
11.
CohenWesleyLevinthalDaniel (1990), “Absorptive Capacity: A New Perspective on Learning and Innovation,” Administrative Science Quarterly, 35 (1), 128–52.
12.
CrawfordGregory S.YurukugluAli (2012), “The Welfare Effects of Bundling in Multichannel Television Markets,” American Economic Review, 102 (2), 643–85.
13.
D’AveniRichard A.RavenscraftDavid J. (1994), “Economies of Integration Versus Bureaucracy Costs: Does Vertical Integration Improve Performance?” Academy of Management Journal, 37 (5), 1167–206.
14.
DacinPeter A.SmithDaniel C. (1994), “The Effect of Brand Portfolio Characteristics on Consumer Evaluations of Brand Extensions,” Journal of Marketing Research, 31 (2), 229–42.
15.
Del RioA. BelénVazquezRodolfoIglesiasVíctor (2001), “The Role of the Brand Name in Obtaining Differential Advantages,” Journal of Product and Brand Management, 10 (7), 452–65.
16.
DisplaySearch (2007), “Quarterly Global TV Shipment and Forecast Report,” Austin, Texas.
17.
DongMingHirshleiferDavidRichardsonScottTeohSiew Hong (2006), “Does Investor Misvaluation Drive the Takeover Market?” Journal of Finance, 61 (2), 725–61.
18.
EizenbergAlon (2014), “Upstream Innovation and Product Variety in the U.S. Home PC Market,” Review of Economic Studies, 81 (3), 1003–45.
FarrellJosephPautlerPaul A.VitaMichael G. (2009), “Economics at the FTC: Retrospective Merger Analysis with a Focus on Hospitals,” Review of Industrial Organization, 35 (4), 369–85.
FichmanRobert G.KemererChris F. (1997), “The Assimilation of Software Process Innovations: An Organizational Learning Perspective,” Management Science, 43 (10), 1345–63.
23.
GentzkowMatthewShapiroJesse M. (2010), “What Drives Media Slant? Evidence from US Daily Newspapers,” Econometrica, 78 (1), 35–71.
24.
GilleyK. MatthewRasheedAbdul (2000), “Making More by Doing Less: An Analysis of Outsourcing and Its Effects on Firm Performance,” Journal of Management, 26 (4) 763–90.
25.
Global Industry Analysts (2020), “Global Flat Panel Displays (FPDs) Industry Report, research report, ID: 862285.
26.
HarfordJarrodHumphery-JennerMarkPowellRonan (2012), “The Sources of Value Destruction in Acquisitions by Entrenched Managers,” Journal of Financial Economics, 106 (2), 247–61.
27.
HartJeffrey A. (2008), Flat Panel Displays. Washington, DC: National Academies Press.
28.
HausmanJeffrey A. (1997), “Valuation of New Goods Under Perfect and Imperfect Competition,” in The Economics of New Goods, BresnahanTimothy F.GordonRobert J., eds. Chicago: University of Chicago Press, 207–48.
29.
HelperSusanSakoMaki (1995), “Supplier Relations in Japan and in the United States: Are They Converging?” MIT Sloan Management Review, 36 (3), 77–84.
30.
HoKatherineHoJustinMortimerJulie Holland (2012), “The Use of Full-line Forcing Contracts in the Video Rental Industry,” American Economic Review, 102 (2), 686–719.
31.
HusseyDavid (1999), “Some Thoughts on Acquisition and Merger,” Strategic Change, 8 (1), 51–60.
32.
IhlwanMoon (2005), “War of the Screens.” Bloomberg Businessweek(September 11).
JacobyJacobOlsenJerryHaddockRafael A. (1971), “Price, Brand Name and Product Composition Characteristics as Determinants of Perceived Quality,” Journal of Applied Psychology, 56 (6), 570–79.
35.
JensenMichael C. (2005), “Agency Costs of Overvalued Equity,” Financial Management, 34 (1), 5–19.
36.
JiangBinFrazierGreg V.PraterEdmund L. (2008), “Outsourcing Effects on Firms’ Operational Performance: An Empirical Study,” International Journal of Operations & Production Management, 26 (12), 1280–300.
37.
KellerKevin Lane (1998), Strategic Brand Management: Building, Measuring and Managing Brand Equity. Upper Saddle River, NJ: Prentice Hall.
LeeRobin (2013), “Vertical Integration and Exclusivity in Platform and Two-Sided Markets,” American Economic Review, 103 (7), 2960–3000.
40.
LeibleinMichael J.ReuerJeffreyDalsaceFrédéric (2002), “Do Make or Buy Decisions Matter? The Influence of Organizational Governance on Technological Performance,” Strategic Management Journal, 23 (9), 817–33.
41.
LevinthalDaniel A. (1998), “The Slow Pace of Rapid Technological Change: Gradualism and Punctuation in Technological Change,” Industrial and Corporate Change, 7 (2), 217–47.
42.
MoellerSara B.SchlingemannFrederik P.StultzRéné M. (2005), “Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave,” Journal of Finance, 60 (2), 757–82.
43.
MonteverdeKirk (1995), “Technical Dialog as an Incentive for Vertical Integration in the Semiconductor Industry,” Management Science, 41 (10), 1624–38.
44.
MurrayMichael P. (2006), “Avoiding Invalid Instruments and Coping with Weak Instruments,” Journal of Economic Perspectives, 20 (4), 111–32.
45.
NevoAviv (2001), “Measuring Market Power in the Ready to Eat Cereal Industry,” Econometrica, 69 (2), 307–42.
46.
NishiguchiToshihiro (1994), Strategic Industrial Sourcing: The Japanese Advantage. New York: Oxford University Press.
47.
PakesA.PorterJ.HoKateIshiiJoy (2015), “Moment Inequalities and Their Application,” Econometrica, 83 (1), 315–34.
48.
PrahaladC.K.HamelGary (1990), “The Core Competence of the Corporation,” Harvard Business Review, 68 (3), 79–91.
49.
QuinnJames B. (1992), Intelligent Enterprise: A Knowledge and Service Based Paradigm for Industry. New York: The Free Press.
50.
QuinnJames B.HilmerFrederik G. (1994), “Strategic Outsourcing,” MIT Sloan Management Review, 35 (4), 43.
51.
RamstadEvan (2004), “Taiwan’s LCD Industry Faces Growing Consolidation Pressure,” The Wall Street Journal(September 2).
52.
ReissPeter C. (2011), “Descriptive, Structural, and Experimental Empirical Methods in Marketing Research,” Marketing Science, 30 (6), 950–64.
53.
RollRichard (1986), “The Hubris Hypothesis of Corporate Takeovers,” Journal of Business, 59 (2), 197–216.
54.
RoodhooftFilipWarlopLuk (1999), “On the Role of Sunk Costs and Asset Specificity in Outsourcing Decisions: A Research Note,” Accounting, Organizations and Society, 24 (4), 363–69.
55.
RossiPeter E. (2014), “Even the Rich Can Make Themselves Poor: A Critical Examination of the Use of IV Methods in Marketing,” Marketing Science, 33 (5), 655–72.
56.
SchmidtDennis R.FowlerKaren L. (1990), “Post Acquisition Financial Performance and Executive Compensation,” Strategic Management Journal, 11 (7), 559–69.
57.
SeimKatja (2006), “An Empirical Model of Firm Entry with Endogenous Product-type Choices,” RANDJournal of Economics, 37 (3), 619–40.
StockJames H.WrightJonathan H.YogoMotohiro (2002), “A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments,” Journal of Business and Economic Statistics, 20 (4), 518–29.
60.
StockJames H.YogoMotohiro (2005), “Testing for Weak Instruments in IV Regression,” in Identification and Inference for Econometric Models: A Festschrift in Honor of Thomas Rothenberg, AndrewsDonald W.K.StockJames H., eds. Cambridge, UK: Cambridge University Press, 80–108.
61.
SullivanMary (1990), “Measuring Image Spillovers in Umbrella-Branded Products,” Journal of Business, 63 (3), 309–29.
62.
SunBaohongShiboLi (2011), “Learning and Acting on Customer Information: A Simulation-Based Demonstration on Service Allocations with Offshore Centers,” Journal of Marketing Research, 48 (1), 72–86.
63.
TaubEric A. (2004), “Signs of a Glut and Lower Prices on Thin TV’s,” The New York Times(November 29).
64.
TeeceDavid J. (1987), “Capturing Value from Knowledge Assets: The New Economy, Markets for Know-How and Intangible Assets,” California Management Review, 40 (3), 55–79.
65.
TeeceDavid J. (1996), “Firm Organization, Industrial Structure, and Technological Innovation,” Journal of Economic Behavior & Organization, 31 (2) 193–224.
66.
TofelKevin C. (2005), “LG Plasma Plant Opens Thursday,” Engadget(August 30).
67.
TullyS. (1994), “You’ll Never Guess Who Really Makes in a Growing Number of Major Industries, Famous Manufacturers Are Making Less of What They Sell. Just What Is an Industrial Company, Anyway?” Fortune(October 3).
VaradarajanRajan (2009), “Outsourcing: Think More Expansively,” Journal of Business Research, 62 (11), 1165–72.
70.
Villas-BoasSofia B. (2007), “Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data,” Review of Economic Studies, 74 (2), 625–52.
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
