Firm-Specific, Industry-Specific, and Occupational Human Capital and the Sourcing of Knowledge Work by Mayer, K.J., Somaya, D., and Williamson, I.O. (2012) in Organization Science. Presented by Bradley Skousen 1

About the Authors Kyle J. Mayer: PhD at Berkeley (1999) and chaired by Oliver Williamson Deepak Somaya: PhD at Berkeley (2002) and chaired by David Mowery Ian O. Williamson: PhD at UNC (2000) in Organization Behavior. 2

Purpose and Key Definitions Purpose: To explore the relationship between knowledge based capabilities with prior make or buy decisions and buyer-supplier differences in the management of skilled employees. Knowledge Work: Consists of activities, tasks, or projects that require the application of knowledge to solve business problems. Firm-specific Human Capital (HC): Knowledge and skills that are unique to a firm. Industry Specific HC: Knowledge about the industry setting or domain in which a project is situated, and thus it is re-deployable across the (limited) set of firms with projects in the same industry domain. Occupational HC: Knowledge and skills required to perform work within a professional or functional area. 3

Data 1989 Survey of Fortune 500 Firms – Sample includes all 129 Publicly listed Firms – All firms are in technology-based industries – 5 industries included: Chemicals (39 firms) Computer Manufacturing (22 firms) Electronics (40 firms) Pharmaceuticals (12 firms) Scientific and Photographic Equipment (16 firms) – Patents from – Sample size included 59,590 patents 4

Model Specification Fixed Effects Logit Model for Outsourcing of Patent Legal Work DV: Probability of Outsourcing 5 IVs Industry Level Controls Patent- Level Controls

Hypothesis 1 H1: Firms are less likely to outsource knowledge projects the greater their relevant firm-specific human capital developed by performing prior related projects. Theory: Governance Inseparabilites (Argyres and Liebeskind,1999); Time Compression Diseconomies (Dierickx and Cool, 1989); among others. Operationalization: Firm-specific HC was measured as the number of backward citations to patents of the same company that were also processed in-house during the previous five years. Findings: H1 Supported. 6

Hypothesis 2 H2: Firms are less likely to outsource knowledge projects the greater the relevant industry-specific human capital developed by previously internalizing knowledge projects in the same domain. Theory: Mixture of KBV and TCE logic (e.g., Argote & Ingram, 2000; Hatch & Dyer, 2004; Parmigiani & Mitchell, 2009). Operationalization: Industry-specific HC was measured as the company’s previous in-house experience in the technical domain. Specifically, it was the logged number of prior patents processed internally by the firm in the same primary seven-digit International Patent Classification. Findings: H2 Supported. 7

Hypothesis 3 H3: The marginal impact of higher firm-specific or industry- specific human capital on the tendency of firms to internalize knowledge work is highest when the other type of human capital (firm specific or industry specific is low ). Theory: KBV. Focus on advantages of coordinating knowledge tasks (e.g., Kogut & Zander, 1992; Conner & Prahalad, 1996; Nickerson & Zenger, 2004). Operationalization: Interaction Term Findings: H3 Supported. 8

Hypothesis 4 H4: Firms are more likely to outsource knowledge projects situated in areas that are highly contested (and thus rely heavily on occupational human capital). Theory: Focuses on TCE logic (e.g., Williamson’s 1985 concept of selective intervention) to explain why firms develop in-house occupational human capital but the authors main question is not on why but when occupational human capital is outsourced. Operationalization: Dummy variable coded as 1 if the focal patent cited a patent that was litigated in the past (referred to as a high contested area). Findings: H4 Supported. 9

Hypothesis 5 H5: The larger the firm’s internal staff (in the focal occupational area), the weaker the (positive) effect of a project being in a highly contested area on the probability of outsourcing. Theory: KBV. The logic is that firms with more patent attorneys may use knowledge hierarchies to leverage skills and learning (e.g., Garicano, 2000). Operationalization: Interaction of highly contested area (see H4) with internal staff size, which measures the number of patent attorneys employed by the focal firm. Findings: H5 Supported. 10

Discussion Theoretical Contribution? - Provides strong links between KBV and TCE. Sample Issues? - Limited to big Fortune 500 firms. Measurement Issues? -Research design included interviews with managers to verify important measurement issues. Measurements are consistent with patent literature. Model Specification/Identification Issues? - Model does not include variables on firm capabilities other than patenting experience. Is the main-case causality that greater outsourcing leads to lower firm capabilities, or that lower firm capabilities lead to outsourcing? 11