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

Sharon Novak, Scott Stern

NBER Working Paper No. 13235
Issued in July 2007
NBER Program(s):Industrial Organization, Productivity, Innovation, and Entrepreneurship

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.

download in pdf format
   (175 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w13235

Published: doi: 10.1287/mnsc.1080.0922 Management Science December 2008 vol. 54 no. 12 1963-1979

Users who downloaded this paper also downloaded* these:
Novak and Stern w13232 Complementarity Among Vertical Integration Decisions: Evidence from Automobile Product Development
Holmes and Thornton Snider w14856 A Theory of Outsourcing and Wage Decline
Bergin, Feenstra, and Hanson w13144 Outsourcing and Volatility
Grossman and Helpman w8728 Outsourcing in a Global Economy
Mankiw and Swagel w12398 The Politics and Economics of Offshore Outsourcing
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us