Working Paper: CEPR ID: DP12782
Authors: Raffaele Conti; Alfonso Gambardella; Elena Novelli
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 (vs. keeping them tailored to a few markets), and whether to trade with downstream firms as an upstream supplier of intermediate products and services (vs. directly entering downstream markets). While 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 simultaneously. 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—an organizational configuration resulting from a strategy that we refer to as specialization in generality. Interestingly, the literature following the seminal work by Penrose (1959) and Nelson (1959) has mainly 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.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lack of prior downstream assets (G19) | complementarity between investing in general upstream resources and trading in intermediate markets (F12) |
| breadth of demand (R22) | likelihood of pursuing a specialization in generality strategy (L29) |
| regulatory shock (G18) | trading in intermediate markets (D40) |
| regulatory shock (G18) | investing in general upstream resources (L72) |