Is the pro-network bias justified? Outsourcers, small batch production, and advanced manufacturing technology

Abstract

The academic literature, policy makers, and international organizations often emphasize the value of networks that, allegedly, may contribute to subcontractor upgrading, innovation, and economic welfare. By contrast, it is difficult to assess whether engagement in production outsourcing networks also accrues some advantages to outsourcers (contractors). To research differences between these organizations and vertically integrated organizations, we analyzed a sample of 1,031 industrial plants, statistically representative of firms with more than 50 employees in Spain’s manufacturing industry. We used t-tests, nonparametric tests, and chi-square tests, and hypotheses were tested for three subsets of companies, classified by the R&D intensity of the industry. In each set of industries, subcontracting is systematically associated with small batch production. By contrast, vertically integrated plants are more inclined to use mass production. In every type of industry, subcontracting is a form of governance especially efficient for the diffusion of new technology. Plants that subcontract production are more likely than integrated plants to adopt advanced manufacturing technology, whatever the R&D intensity of the industry. We conclude that outsourcers seem better prepared than vertically integrated organizations to meet customers’ requirements but employment of subcontracting do not lower necessarily their technology needs—a widespread “pro-network” argument.