Final Report Summary - INNOVATION-SOURCING (Short and Long-term Stock Market Returns from Innovation Outsourcing: A Comparative Analysis of Domestic versus Offshore High-Tech Markets)
Completion of the second, third and fourth phases resulted in two distinct papers. The relevant literature review, the objectives, the findings and the implications for research and practice are indicated below:
Offshore Innovation Alliances: Short- Or Long-Term Stock Returns Assessment
Marketing researchers strive to understand the marketing activities influence firm market value (e.g. Raassens, Wuyts and Geyskens 2012; Swaminathan and Moorman 2009). Studies in this area have primarily been event studies that are based on the premises of market efficiency, perfect information, and the rationality of investors. In these works, it is assumed that short-term stock returns reflect the true value of future firm performance, as current stock prices incorporate the discounted value of all future cash flows, reflecting all relevant information. However, researchers are increasingly questioning the validity of the analysis of short-term stock returns related to firm decisions, calling for instead for the examination of long-term stock returns (Barber and Lyon 2001; Lyon et al. 1999; Markovitch and Golder 2008). The importance of the call for the examination of long-term returns is most notable in relation to strategic decisions of which the effects occur in the long-term. It is argued that the entire effect of a decision cannot be incorporated by the stock market over the short-term. It is rather the period after an announcement of a decision that events unfold and information pertaining to the rationale underlying the decision is disseminated to the public. As such, the analysis of long-term stock returns directly questions the efficient market hypothesis (and more specifically, its broad application to all decision contexts). It is this issue that motivates the underlying research question of this study, i.e. is it more appropriate to model strategic marketing decisions over a short- or long-term horizon?
To examine this question, we build and test a theoretical model of offshore innovation alliance arrangements. In general, a firm’s reliance on alliance partners for innovation may put intellectual property in jeopardy, as well as casting doubt on how much intellectual property the firm owns. Weighing the benefits versus the risks/costs of offshore innovation alliances can be vital to the firm’s future competitive strengths. Theoretically, the decision to engage in an offshore innovation alliance arrangement is an issue of setting firm boundaries, which is a central aspect of governance research. Governance value analysis (GVA; Ghosh and John 1999, 2005; Kim et al. 2011) examines governance decisions as a function of both minimizing value claiming difficulties and maximizing value creation opportunities, through effectively managing path-dependent sources for firm heterogeneity. By developing and testing of a theory based model via short- and long-term stock return approaches, we provide insight into the appropriateness of how marketing researchers assess the stock returns of strategic marketing decisions.
The present work attempts to contribute to the literature in relation to method and theory. Methodologically, this works contributes by modeling short- and long-term stock returns in relation to a governance value analysis model of factors influencing the value creation and claiming (i.e. abnormal returns). We find, consistent with our GVA based hypotheses, that specific antecedent exchange conditions enhance long-term stock returns of offshore innovation alliance arrangements. We find that the market rewards alliance firms in the long-term; particularly those which provide updates to the market, but not the firms which fail to update the market. By contrast, the theoretical model is not supported in the short-term. These findings demonstrate that a short-term event study is limited in capturing the influence of the additional information related to strategic marketing decisions that becomes available to the public regarding the sourcing relationship and/or the innovation developed. These results provide compelling evidence for the appropriateness of modeling strategic marketing decisions under a long-term approach, particularly those that (1) are process oriented and as such have long-term firm performance implications (such as offshore innovation alliance arrangements), (2) when the outcome of the decision is uncertain for the firm and is unveiled through time, and (3) when the firm updates information to market as the process unfolds.
Theoretically, this work contributes to the literature in two ways. We provide the first empirical test the market value creation and claiming tenet of GVA. We also extend GVA by taking a longitudinal perspective in considering performance outcomes (i.e. examining long-term stock returns, capturing a broad time horizon). Together, these results imply the need for change in both the method of assessing stock returns to strategic marketing decisions, as well as the need for continued development of GVA (inclusive of segregating effects related to value creation and value claiming). Finally, these results assist marketers in the management of investor reaction to innovation outsourcing decisions.
Modularity and the Coordination of Sourcing Relationships in Innovation Projects: A Moderated Mediation Study
Firms increasingly resort to external sourcing of components and design activities to more cost-effectively develop innovation capabilities while retaining strategic flexibility. The phenomenon of buyers cooperating with upstream suppliers for product innovation is prevalent across a spectrum of industries including consumer-electronics, computer software, automobiles, and pharmaceuticals. The study of sourcing relationships in technology-intensive (TI) markets has attracted significant research attention in marketing (e.g. Stremersch et al. 2003; Wuyts, Dutta, & Stremersch 2004). However, we lack a solid understanding of how firms operating in TI markets can cope with the strategic hazards of high-technology sourcing relationships. Two complicating factors prohibit a straightforward application of the extant theory of control mechanisms to sourcing relationships in TI markets. A first complicating factor in TI markets is that technological uncertainty reduces the effectiveness and therefore the likely deployment of contractually specified incentives. Contractually specified incentive schemes require predictability and are less effective in case of technical change. Similarly, ex ante partner selection is less effective as circumstances change, since it relies on the availability of clear pre-specified selection criteria. Hence, the two key control mechanisms at the disposal of buyer firms in technology markets are monitoring and socialization. Monitoring refers to formal, buyer-initiated mechanisms to incentivize the supplier to behave in line with the stated project objectives. Socialization refers to informal mechanisms, initiated by both or either party to establish goal congruity and minimize divergence of preferences, based on the idea that parties cooperate in the achievement of shared goals. The effectiveness of these two mechanisms in terms of coping with strategic hazards of sourcing relationships in TI markets requires more attention.
A second complication in TI markets is the fundamentally significant transformation from monolithic products to decomposable systems. System architectures in TI markets differ in terms of their modularity. The consequences of such differences in system architecture for the management of sourcing relationships have not been adequately examined in the prior literature. In our research, we aim to fill these gaps and investigate how modularity impacts the effectiveness of monitoring and socialization in coping with strategic hazards. Thus, our conceptualization blends governance theory (Eisenhardt 1985; Wathne and Heide 2000; Williamson 1975, 1991) with the literature on system modularity (Schilling and Steensma 2001; Stremersch et al., 2003).
The prior literature has identified three strategic hazards when sourcing knowledge from external suppliers: performance ambiguity, asset specificity, and knowledge leakage. First, performance ambiguity reflects the buyer firm’s difficulty to evaluate the supplier’s performance due to a lack of familiarity with externally sourced knowledge and/or supplier capabilities. Second, asset specificity results from proprietary investments in a specific relationship that cannot be redeployed in another relationship. Third, knowledge leakage refers to the unintended knowledge transfer from the buyer firm to other industry participants, through interactions with the supplier firm. Our key assertion is that the effectiveness of monitoring and socialization in coping with the three strategic hazards depends on system modularity. What sets modular systems apart is the standardization of interfaces between functional components and the greater reusability and substitutability of component variations into the product architecture without requiring changes in the designs of other components. Due to these features, modular systems enable feasible divisions of tasks in functional specification, and reduce the switching costs of replacing one supplier for another. At the same time, modular systems allow the autonomous completion of innovation development activities. Although some researchers argue that modular systems facilitate the effective coordination of loosely coupled geographically dispersed suppliers, the task division, reduced switching costs, and autonomous task completion may also hamper the parties’ efforts to nurture their supply relationships and ascertain long-term goal congruence. While the preceding arguments suggest that modularity has governance implications, the nature of these implications for supply relationships is unclear. Specifically, we intend to address the open question whether monitoring and socialization are more or less effective at mitigating strategic hazards as system modularity increases.
Integrating governance and modularity literatures is not only theoretically novel, it also allows us to derive concrete managerial recommendations. The developed theory and empirical test provide a roadmap for buyer firms as they select alternative control mechanisms in response to the strategic hazards of external sourcing. The findings indicate that buyer firms should select different control mechanisms as a function of the degree of system modularity. We specify moderated mediation hypotheses to examine the consequences of the strategic hazards (mediated by monitoring and socialization) on relationship performance (moderated by system modularity). An empirical test among 194 firms in technology intensive industries provides strong support for the developed theory. The findings may help managers to better cope with the hazards of external sourcing in TI markets.
Offshore Innovation Alliances: Short- Or Long-Term Stock Returns Assessment
Marketing researchers strive to understand the marketing activities influence firm market value (e.g. Raassens, Wuyts and Geyskens 2012; Swaminathan and Moorman 2009). Studies in this area have primarily been event studies that are based on the premises of market efficiency, perfect information, and the rationality of investors. In these works, it is assumed that short-term stock returns reflect the true value of future firm performance, as current stock prices incorporate the discounted value of all future cash flows, reflecting all relevant information. However, researchers are increasingly questioning the validity of the analysis of short-term stock returns related to firm decisions, calling for instead for the examination of long-term stock returns (Barber and Lyon 2001; Lyon et al. 1999; Markovitch and Golder 2008). The importance of the call for the examination of long-term returns is most notable in relation to strategic decisions of which the effects occur in the long-term. It is argued that the entire effect of a decision cannot be incorporated by the stock market over the short-term. It is rather the period after an announcement of a decision that events unfold and information pertaining to the rationale underlying the decision is disseminated to the public. As such, the analysis of long-term stock returns directly questions the efficient market hypothesis (and more specifically, its broad application to all decision contexts). It is this issue that motivates the underlying research question of this study, i.e. is it more appropriate to model strategic marketing decisions over a short- or long-term horizon?
To examine this question, we build and test a theoretical model of offshore innovation alliance arrangements. In general, a firm’s reliance on alliance partners for innovation may put intellectual property in jeopardy, as well as casting doubt on how much intellectual property the firm owns. Weighing the benefits versus the risks/costs of offshore innovation alliances can be vital to the firm’s future competitive strengths. Theoretically, the decision to engage in an offshore innovation alliance arrangement is an issue of setting firm boundaries, which is a central aspect of governance research. Governance value analysis (GVA; Ghosh and John 1999, 2005; Kim et al. 2011) examines governance decisions as a function of both minimizing value claiming difficulties and maximizing value creation opportunities, through effectively managing path-dependent sources for firm heterogeneity. By developing and testing of a theory based model via short- and long-term stock return approaches, we provide insight into the appropriateness of how marketing researchers assess the stock returns of strategic marketing decisions.
The present work attempts to contribute to the literature in relation to method and theory. Methodologically, this works contributes by modeling short- and long-term stock returns in relation to a governance value analysis model of factors influencing the value creation and claiming (i.e. abnormal returns). We find, consistent with our GVA based hypotheses, that specific antecedent exchange conditions enhance long-term stock returns of offshore innovation alliance arrangements. We find that the market rewards alliance firms in the long-term; particularly those which provide updates to the market, but not the firms which fail to update the market. By contrast, the theoretical model is not supported in the short-term. These findings demonstrate that a short-term event study is limited in capturing the influence of the additional information related to strategic marketing decisions that becomes available to the public regarding the sourcing relationship and/or the innovation developed. These results provide compelling evidence for the appropriateness of modeling strategic marketing decisions under a long-term approach, particularly those that (1) are process oriented and as such have long-term firm performance implications (such as offshore innovation alliance arrangements), (2) when the outcome of the decision is uncertain for the firm and is unveiled through time, and (3) when the firm updates information to market as the process unfolds.
Theoretically, this work contributes to the literature in two ways. We provide the first empirical test the market value creation and claiming tenet of GVA. We also extend GVA by taking a longitudinal perspective in considering performance outcomes (i.e. examining long-term stock returns, capturing a broad time horizon). Together, these results imply the need for change in both the method of assessing stock returns to strategic marketing decisions, as well as the need for continued development of GVA (inclusive of segregating effects related to value creation and value claiming). Finally, these results assist marketers in the management of investor reaction to innovation outsourcing decisions.
Modularity and the Coordination of Sourcing Relationships in Innovation Projects: A Moderated Mediation Study
Firms increasingly resort to external sourcing of components and design activities to more cost-effectively develop innovation capabilities while retaining strategic flexibility. The phenomenon of buyers cooperating with upstream suppliers for product innovation is prevalent across a spectrum of industries including consumer-electronics, computer software, automobiles, and pharmaceuticals. The study of sourcing relationships in technology-intensive (TI) markets has attracted significant research attention in marketing (e.g. Stremersch et al. 2003; Wuyts, Dutta, & Stremersch 2004). However, we lack a solid understanding of how firms operating in TI markets can cope with the strategic hazards of high-technology sourcing relationships. Two complicating factors prohibit a straightforward application of the extant theory of control mechanisms to sourcing relationships in TI markets. A first complicating factor in TI markets is that technological uncertainty reduces the effectiveness and therefore the likely deployment of contractually specified incentives. Contractually specified incentive schemes require predictability and are less effective in case of technical change. Similarly, ex ante partner selection is less effective as circumstances change, since it relies on the availability of clear pre-specified selection criteria. Hence, the two key control mechanisms at the disposal of buyer firms in technology markets are monitoring and socialization. Monitoring refers to formal, buyer-initiated mechanisms to incentivize the supplier to behave in line with the stated project objectives. Socialization refers to informal mechanisms, initiated by both or either party to establish goal congruity and minimize divergence of preferences, based on the idea that parties cooperate in the achievement of shared goals. The effectiveness of these two mechanisms in terms of coping with strategic hazards of sourcing relationships in TI markets requires more attention.
A second complication in TI markets is the fundamentally significant transformation from monolithic products to decomposable systems. System architectures in TI markets differ in terms of their modularity. The consequences of such differences in system architecture for the management of sourcing relationships have not been adequately examined in the prior literature. In our research, we aim to fill these gaps and investigate how modularity impacts the effectiveness of monitoring and socialization in coping with strategic hazards. Thus, our conceptualization blends governance theory (Eisenhardt 1985; Wathne and Heide 2000; Williamson 1975, 1991) with the literature on system modularity (Schilling and Steensma 2001; Stremersch et al., 2003).
The prior literature has identified three strategic hazards when sourcing knowledge from external suppliers: performance ambiguity, asset specificity, and knowledge leakage. First, performance ambiguity reflects the buyer firm’s difficulty to evaluate the supplier’s performance due to a lack of familiarity with externally sourced knowledge and/or supplier capabilities. Second, asset specificity results from proprietary investments in a specific relationship that cannot be redeployed in another relationship. Third, knowledge leakage refers to the unintended knowledge transfer from the buyer firm to other industry participants, through interactions with the supplier firm. Our key assertion is that the effectiveness of monitoring and socialization in coping with the three strategic hazards depends on system modularity. What sets modular systems apart is the standardization of interfaces between functional components and the greater reusability and substitutability of component variations into the product architecture without requiring changes in the designs of other components. Due to these features, modular systems enable feasible divisions of tasks in functional specification, and reduce the switching costs of replacing one supplier for another. At the same time, modular systems allow the autonomous completion of innovation development activities. Although some researchers argue that modular systems facilitate the effective coordination of loosely coupled geographically dispersed suppliers, the task division, reduced switching costs, and autonomous task completion may also hamper the parties’ efforts to nurture their supply relationships and ascertain long-term goal congruence. While the preceding arguments suggest that modularity has governance implications, the nature of these implications for supply relationships is unclear. Specifically, we intend to address the open question whether monitoring and socialization are more or less effective at mitigating strategic hazards as system modularity increases.
Integrating governance and modularity literatures is not only theoretically novel, it also allows us to derive concrete managerial recommendations. The developed theory and empirical test provide a roadmap for buyer firms as they select alternative control mechanisms in response to the strategic hazards of external sourcing. The findings indicate that buyer firms should select different control mechanisms as a function of the degree of system modularity. We specify moderated mediation hypotheses to examine the consequences of the strategic hazards (mediated by monitoring and socialization) on relationship performance (moderated by system modularity). An empirical test among 194 firms in technology intensive industries provides strong support for the developed theory. The findings may help managers to better cope with the hazards of external sourcing in TI markets.