Supply Chain Contracting: R&D Investment sharing contracts

As motivated in Chapter 2, the developments and discussions of the last decades suggest a tendency to focus on core competencies, which involves outsourcing parts of production or logistics to specialized suppliers (Prahalad and Hamel, 1990; Javidan, 1998; Hafeez et al., 2002, 2007; Ulrich and Ellison, 2005; Vandaele et al., 2007). However, there are some exceptions. The following examples reveal that many successful and innovating companies nevertheless have exceptionally high in-house production depth. Novel or specific components needed for product innovations are often produced inhouse although their production is not one of the company’s core competencies. The ability to produce a component in-house usually requires high investments in production facilities, capacity, and skills. Such investments are expected to be much lower for a specialized supplier since specific machines and know-how are already available or can easily be adjusted. Additionally, the supplier may benefit from economies of scale. So why do many innovating companies behave counterintuitively and produce a large part of the required components in-house instead of sourcing them from specialized suppliers?