Abstract
This paper studies the relationship between two decisions shaping the organizational configuration of a firm: whether to make the upstream resources more general and deployable to more markets (versus keeping them tailored to a few markets) and whether to trade with downstream firms as an upstream supplier of intermediate products and services (versus directly entering downstream markets). Although the literature has looked at these two decisions separately, we argue that they depend on each other. This has the important implication that they can generate organizational complementarities, inducing firms to implement them jointly. We are motivated in particular by the observation that an increasing number of firms invest in general upstream resources and exploit them as upstream suppliers of intermediate services or products—a strategy that we refer to as specialization in generality. Interestingly, prior literature has mostly highlighted the use of general upstream resources to enter new downstream markets. We identify the supply and demand conditions under which specialization in generality is instead more likely to emerge: lack of prior downstream assets on the supply side and a roughly equal distribution of buyers across intermediate markets (a “broad” demand) on the demand side. We test our predictions using a sample of firms in the U.S. laser industry between 1993 and 2001. A regulatory shock that increases the value of trading relative to downstream entry provides the setting for a quasi-natural experiment, which corroborates our theoretical predictions.
Highlights
Upstream resources, such as technological knowledge, are the essence of a firm’s opportunity set
This paper studies the relationship between two decisions shaping the organizational configuration of a firm: whether to make the upstream resources more general and deployable to more markets and whether to trade with downstream firms as an upstream supplier of intermediate products and services
We aim to identify the conditions that are conducive to complementarity between investment in the generality of upstream resources and vertical specialization via trading in intermediate markets
Summary
Upstream resources, such as technological knowledge, are the essence of a firm’s opportunity set These resources are typically scale-free and as such generate “excess” capacity that can be used at zero or low cost in multiple businesses (Levinthal and Wu 2010), extending “the productive possibilities that” the firm’s managers “see and take advantage of” Some are specific to certain applications, and others are more reconfigured for alternative uses, such that they produce higher excess capacity potentially deployable in multiple businesses (Helfat and Eisenhardt 2004) This characteristic is referred to as the generality, general-purpose nature (Bresnahan and Trajtenberg 1995), or fungibility (e.g., Kim and Bettis 2014) of an upstream resource. An emergent literature in economics and organizational theory emphasizes the increasing importance of vertical disintegration and the emergence of intermediate markets, whereby upstream suppliers provide intermediate products and services to downstream firms (e.g., Baldwin and Clark 2000, Arora et al 2001, Jacobides and Winter 2005, Kapoor and Adner 2012, Conti et al 2013, Dushnitsky and Klueter 2017, Moeen and Agarwal 2017)
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