The Role of Producer Service
Outsourcing in the Innovation
Performance of New York State
Manufacturing Firms
Alan MacPherson
Canada-United States T rade Center, Department of Geography, University at Buffalo
This paper asss the contribution of external technical rvices to the innovation initiatives of New York State manufacturing ªrms. The results of a spatially and ctorally stratiªed postal survey of more than 400 manufacturing ªrms are prented. A major ªnding of the paper is that specialized technical rvices can support the product development efforts of innovative ªrms. The empirical results also point to signiªcant spatial variations in technical rvice utilization. Some of the variations reºect different supply and accessibility conditions among the state’s major regions and urban centers. The survey results are discusd in the context of recent empirical and theoretical ªndings on the role of producer rvices in urban and regional development. Particular attention is given to the empirical con
nection between producer rvice accessibility and industrial innovation. Key Words: external technical rvices, new product development, New York State manufacturing ªrms, regional patterns of rvice consumption.
A substantial body of literature now high-
lights the importance of advanced pro-
ducer rvices to urban and regional de-velopment (e Harrington 1995). Specialist ªrms in this ctor of the economy typically sup-ply other business units with high-order infor-mational inputs (e.g., management advice or market intelligence). Signiªcantly, recent re-views by Daniels (1989), Goe (1993), Hann (1994), and Illeris (1994) suggest an interna-tional convergence of opinion regarding the contribution of the types of rvices to the operational efªciency and/or commercial per-formance of client ªrms—including manufac-turers.
In this regard, policy interest in the industrial role of producer rvices has expanded quickly over the last few years (Britton 1993; Kelley and Brooks 1991; National Rearch Council 1993). In the U.S., a general lack of product and/or process innovation has riously con-strained the international competitiveness of do-mestically owned ªrms (Shapira et al. 1995), many of which lack the in-hou
skills to keep pace with current rates of technological change (U.S. General Accounting Ofªce 1995). Re-cour to external assistance is a partial correc-tive to this problem (Feldman 1994), notably for small and medium-sized ªrms (SMFs). From a policy standpoint, growing attention has fo-cud upon the extent to which independent consultants can assist the commercial and/or technological efforts of SMFs (Shapira 1990). Evidence is mounting that we can trace part of the vitality of the SMF ctor to specialists that ll technical experti in such spheres as pro-duction engineering (O’Farrell 1995), contract R&D (Haour 1992), industrial design (O’Con-nor 1996), and management support (Sinkula 1990). Across most of the advanced market economies, innovative industrial ªrms have be-come important buyers of the types of inputs, suggesting a technological interface between goods production and producer rvice activity (Freeman 1991).
Although nonindustrial clients are the main buyers of high-order producer rvices (e Bey-ers and Lindahl 1994), recent work on indus-trial demand suggests that rvice-to-manufac-turing linkages are especially important in terms
Annals of the Association of American Geographers, 87(1), 1997, pp. 52–71
©1997 by Association of American Geographers
Published by Blackwell Publishers, 350 Main Street, Malden, MA 02148, and 108 Cowley Road, Oxford, OX4 1JF, UK.
of scientiªc and technical (S&T) interactions (Illeris 1994). According to Tyson (1993), the types of interactions can play a key role in the innovation performance of urs, notably with regard to new-product development. Simply stated, the evidence suggests that professionally qualiªed consultants can deliver strategic beneªts to industrial clients, often at remarkably low cost (Berman 1995; Smallbone et al. 1993). Keeping the points in mind, this paper ex-amines the role of technical outsourcing in the innovation performance of New York State (NYS) manufacturing ªrms. The results of a re-cent postal survey show that the propensity to successfully bring new products to the market-place is often contingent upon the u of differ-ent blends of external experti. The results also suggest that a ªrm’s regional context can inºuence the depth and nature of its outsour-cing activity. On balance, ªrms that reside in rvice-poor regions tend to be relatively weak performers in terms of successful product devel-opment. And, as we shall e later, part of the explanation for this pattern can be traced to sup-ply-side problems in terms of the local availabil-ity of external technical and/or management inputs.
Set against this backdrop, the following analysis tackles three main questions. First, to what extent d
oes technical rvice demand by industrial ªrms vary across regions of different types? Second, to what degree is technical rv-ice consumption a positive factor in the innova-tion performance of buyers? And, third, does the geography of supply and demand affect the structure of rvice-to-industry linkages at the regional scale? Partial answers to the questions come from an empirical investigation of NYS industrial ªrms across a range of locational t-tings. Additional insights come from a ries of telephone interviews with a subsample of ªrms. Before reviewing the results, however, it is ap-propriate to sketch a brief theoretical context for the inquiry.
Theoretical Context
Three interlinked strands of theory inform the empirical thrust of the paper. First, internal diconomies of scope typically prohibit ªrms from achieving in-hou competence across a full range of S&T functions (Rothwell 1992). This idea ºows from the ongoing division of labor that has been taking place between and within business units since the advent of indus-trialization (Scott 1986; Walker 1985; Young 1928). As such, there is nothing new about the rising gmentation of tasks between different parts of the economy. Rajan and Pearson (1986) trace at least some of the post-1945 growth of specialized producer rvices to an efªciency-driven fragmentation of jobs between ªrms, fol-lowing the classical logic of structural change outlined by Adam Smith. A formal ec
onomic model propod by Lentnek et al. (1992) pre-nts this logic from a spatial standpoint. Ac-cording to this model, ªrms will choo external vendors whenever the relative costs of in-hou supply are higher. This model also implies that time lags in the delivery of key inputs will force vendors to optimize their location with respect to client demand, leaving peripheral buyers in a potentially disadvantaged position.
A cond line of theory comes from policy-oriented work on the technical links between innovative industrial ªrms and external consult-ants (Bessant and Rush 1995; Lefebvre et al. 1991). Evidence dating back to the 1950s shows that many ªrms can sharpen their technological edge by subcontracting specialized work to out-side experts (Carter and Williams 1957; Myers and Marquis 1969). This literature indicates that in-hou resources are best allocated toward core activities that match the ªrm’s existing skills, whereas esoteric or infrequently required jobs are better handled by independent vendors (Britton 1989). This body of theory differs from the question of scope economies in that outside talent is often solicited in respon to in-hou technical limitations (Haour 1992). Unlike the fragmentation thrust noted above, then, this cond strand of theory stems from the idea that technological factors may force certain types of ªrms to ek outside help in ªelds that go be-yond their in-hou competence (Feldman 1994).
A third body of theory comes from a number of spatially focud ideas that have cropped up in the recent work on producer rvices and re-gional economic change. Several authors have propod that regions with weak producer rv-ice endowment are unlikely to support major levels of new industrial expansion, innovation, and/or job growth (Coffey and Bailly 1993; Hitchens et al. 1994). An implication here is that certain types of ªrms may need quick access to a locally rooted supply of advanced rvices
Producer Service Outsourcing53
(Harrington and Lombard 1989). While certain types of inputs can be moved up or down the urban system via electronic means (or by mail), others require face-to-face meetings for proper delivery (Daniels 1989). For companies that de-pend upon a wide mix of rvices, then, the spatial implications that ºow from alternate de-livery options are partially analogous to a We-berian problem. In this ca, however, the raw materials consist of knowledge, information, or skills, rather than physical resources.
From a policy viewpoint, current interest in the locational relations between industrial and producer rvice establishments ºows from a suspicion that clo proximity between the ctors is a necess
ary condition for efªcient in-terplay (Porter 1990). We can trace empirical support for this idea to Ellwein and Bruder (1982), Feldman and Florida (1994), and Meyer-Krahmer (1985), while theoretical sup-port has come from Britton (1989), Daniels (1989), and Goddard (1978). Other things be-ing equal, manufacturers in rvice-poor regions are likely to exhibit weaker performance than comparable ªrms in large urban centers (O’Far-rell et al. 1995). Moreover, if we accept the bal-ance of technological evidence noted by Feld-man (1994), Malecki (1994), and Rothwell (1991), then a further possibility is that certain types of ªrms may be locationally dispod to-ward inferior performance. Although there is lit-tle doubt that successful SMFs can be found in a variety of regional ttings, including unfavor-able ones (Vaesn and Keeble 1995), few ana-lysts would deny that spatial proximity to the human capital resources of major metropolitan centers can offer strategic beneªts to potential innovators (Britton 1991; Feldman 1994; Malecki and T ootle 1996).
On this note, four ts of empirical results from earlier studies offer a comparative context for the paper. First, Rothwell’s (1977, 1992) work shows that innovative ªrms usually obtain at least some of their S&T inputs from external sources. Signiªcantly, Rothwell’s data suggest an important role for such linkages, especially in spheres that pertain to technology development, product design, and/or management. Second, successful recour to outside help is often con-tingent upon a ªrms’s ability t
o identity, specify, and evaluate its internal weakness across key areas of production and marketing (Sinkula 1990). The evidence also shows that in-hou technical competence is a ªrst requirement for successful retrieval of outside help (Rothwell and Dodgson 1991). Third, the need for spe-cialized support varies by type of client. At one extreme, for example, plants that belong to mul-tinational ªrms can often bypass the external rvice environment by tapping the internal re-sources of the corporation as a whole (Malecki 1991). Fourth, the types of outside inputs that manufacturers ek vary considerably in terms of function, cost, and impact (Chandra 1992). Here the evidence implies that a ªrm’s position along the product life-cycle (PLC) can inºuence the structure of external input demand. In terms of innovation support, for instance, ªrms in ma-ture markets typically want rvices that relate to process improvement (new production meth-ods), whereas ªrms in younger markets more often demand inputs that assist product devel-opment (Britton 1989). This is not to deny the existence of intermediate positions among ªrms of different types, nor is it to suggest that a focus upon one mode of outside help is better than another. Rather, the suggestion is that a ªrm’s PLC position may inºuence the balance of in-puts demanded (Utterback and Abernathy 1975).
灰指甲偏方Taken together, the ªndings imply that sin-gle-plant ªrms in peripheral regions are less likely to enj
oy good access to high-order rvices than comparable ªrms in more central places. While ªrms can trade almost all types of ad-vanced producer rvices between regions, the option to import is far from universally applied (Malecki 1994). A limiting factor is that strate-gic rvices often require face-to-face interac-tions for efªcient delivery. According to O’hUallachaín (1991), for instance, the need for face-to-face discussions varies directly with the potential ambiguity of the information sought. For peripheral ªrms that need external help in complex areas, then, human skills must often be imported—either by nding in-hou people to the supply-source or by bringing the vendor’s bofªns to the production site. Signiªcantly, there is evidence that the types of contact re-quirements can limit the external options of pe-ripheral ªrms, especially tho operating with restricted ªnancial resources (Gertler 1995). Today, of cour, the distance parating ven-dors from buyers might em rather trivial as far as interaction potential is concerned. After all, modern telecommunications technologies have surely rendered some aspects of relative location less crucial than before (Hepworth 1989). Lest
54MacPherson
we get too cozy with the notion of a wired world, however, recent work on producer rvice delivery suggests a continuing role for face-to-face meetings at the consumption point (Goe 1991). Contemp
orary rearch on technology diffusion also points to a major role for physical and/or cultural proximity between buyers and llers (Cornish 1997). For detailed examples of the transactional problems that can hinder pe-ripheral ªrms, e Gertler (1995) in the context of after-sales-rvicing contracts for Canadian urs of advanced machinery; for more general examples, e Lundvall (1988), Sabel et al. (1987), and Porter (1990). Additional evidence from Canada shows that more than 40 percent of the technical rvices consumed by goods-producing ªrms in Montreal come from inde-pendent producer rvice establishments (Cof-fey et al. 1994). The authors also show that face-to-face interaction is the main mode of in-put delivery, with about half of all such contacts taking place at the client’s production site. On balance, then, the recent literature implies that rvice accessibility has a potentially impor-tant bearing upon innovation success. In addi-tion, rvice accessibility would also appear to play a role in the inclination of industrial ªrms to ek external help in the ªrst place (Chandra 1992). If the types of connections have valid-ity beyond the regional contexts covered by he studies cited thus far, then a logical conjecture is that peripheral ªrms must expend more effort on competitive positioning than their metro-politan counterparts. Is this the ca?
In attempting to answer this question, how-ever, I should note that the taxonomy of pro-ducer rvices employed in this paper is a narrow one (Table 1). For instance, the ªnancial, insur-ance, rea
l estate, and legal subctors of the pro-ducer rvices have been ignored, becau the original goal of the project was to examine only tho rvices known to contribute directly to-ward the scientiªc, technical, and/or manage-ment dimensions of the production/innovation efforts of individual plants. While lawyers and bankers are important from an enabling point of view (try launching a new product without a good line of credit or a patent arch), they rarely contribute to the hands-on work of prob-lem solving on the shopºoor. In employment
Table 1.Class of External Producer Services for the New York State Survey a
Service Category Selected Studies Examples of Ur Impact Private rvices
Industrial design Chandra (1992), O’Connor (1994)New or better products
Contract R&D Haour (1992), Lawton-Smith (1993)New products or procedures Management consulting Berman (1995), O’Farrell et al (1995)Better ways of doing business Marketing Sinkula (1990), Coffey et al (1994)Improved sales performance Advertising Beyers and Lindahl (1994)Finding new customers
Export counling Berman (1995), Britton (1989)Finding new export markets Equipment repair Lentn
ek et al. (1992)Reduced downtime/lower costs Data processing Hepworth (1989), Phillips (1995)Lower costs/professional quality Business software Phillips (1995), Yap et al. (1992)Improved management efªciency Laboratory testing Feldman and Florida (1994)Esntial product information Production engineering Rothwell (1992), Britton (1993)New or better production methods Public rvices
Government agencies Chrisman and Katrishen (1995)Market data and business planning Hospital rearch units Chandra (1992), MacPherson (1995)Clinical trials and rearch
T echnical colleges Lawton-Smith (1993)Applied R&D, engineering help Universities Haour (1992), Rothwell (1991)Basic and applied rearch Informal/nonmarket rvices
Other manufacturing ªrms Lipparini and Sobrero (1994)New ideas and engineering advice Informal business networks Malecki and Veldhoen (1993), Malecki (1994)Market leads, business information Suppliers Gertler (1995), Soni et al. (1993)Innovative inputs, new ideas Customers Von Hippell (1978, 1988)Feedback on design ºaws Distributors Glasmeier (1990)Hints on customer/market needs
a This table is not designed to supply a comprehensive or reprentative summary of the recent em
pirical or theoretical contribu-tions by scholars in this ªeld. Instead, the intent is simply to provide a snapshot of the types of inquiries conducted, along with some of the general impacts identiªed either explicitly or implicitly.
Producer Service Outsourcing55
terms, then, the taxonomy shown in this paper captures only a small part of the producer rv-ices—not the whole ctor.
Methodology
重阳节画In order to asss the rvice-to-industry rela-tionship at the ªrm level, I mailed lf-adminis-tered questionnaires to more than 1,700 New York State manufacturers across four ctors (furniture, scientiªc instruments, fabricated metals, and electrical industrial products). The ctors were chon for veral reasons: ªrst, to obtain a technological cross ction of ªrms, no-tably in terms of R&D effort, market focus, and export activity; cond, to ªnd a ctor-mix that would cloly mirror the structure of industrial employment across the state as a whole; and third, to focus on ctors in which SMFs1 enjoy a prominent economic role. Earlier studies have shown that SMFs are potentially prime targets for external support, if only becau this size-class often lacks a full range o
f in-hou skills (Shapira 1990). In sum, the sample was de-signed to reºect the typical scale and ctor-mix of manufacturing activity within the state’s main regions.
The survey consisted of two rounds, spread over a period of fourteen months. In the ªrst pha of the project (September/October 1994), questionnaires were mailed to a systematic sam-ple of 1,700 ªrms (covering roughly half of the total population across the four ctors). This pha was designed to obtain detailed informa-tion on rvice spending, geographical sourcing, delivery methods, and ur impact (among other things). Of the 1,700 ªrms in the sam-pling frame, 326 were subquently eliminated as a result of either incorrect SIC listings (n = 75), recent business failure (n = 62), or job-shop status (n = 189), bringing the N-size down to 1,374. A total of 472 valid returns were received, giving a 34 percent respon rate. A cond sur-vey was mailed in the autumn of 1995, covering the other half of the population. This pha comprid an abbreviated and categorically structured version of the original questionnaire (focusing upon key areas of variation gleaned from the earlier survey). Becau this pha of the project remains as a work-in-progress (to be reported upon at a later date), the discussion which follows conªnes itlf to the results of the ªrst survey. Additional data come from the re-sults of 255 telephone interviews with business executives from a range of ctors and locations. In a preliminary effort to asss regional pat-terns of rvice demand, I divide
d New York State into a variety of areal groupings to test for scale and zoning effects. Here the goal was to ªnd a t of regional boundaries that would best reºect the underlying spatial features of the data. While the resulting regionalization (Figure 1) does not provide a perfect delineation as far as aggregation problems are concerned, the three divisions provide acceptable delineations for the purpos of this paper (for a discussion of the regionalization process and its attendant meth-odological problems, e Curtis and MacPher-son 1996).
On this note, Table 2 shows that the spatial and ctoral pattern of respons broadly matches the population distribution for each re-gion. While this implies an element of repre-ntativeness in terms of regional and ctoral coverage, the data mask a number of distortions. For one, the sample exhibits a size-mix that is biad toward SMFs (Table 3). Although this is not too surprising, especially in light of the ris-ing prominence of SMFs in the state’s industrial ba, the relatively low respon rate for larger ªrms is troublesome.
A cond caveat is that this SMF bias is strongest for the electrical products ctor, no-tably within the Buffalo and New York City metropolitan areas (for further details, e MacPherson 1997). This is problematic becau the two areas contain the lion’s share of the state’s largest electrical products ªrms. Although veral efforts were made to mitigate the微信二维码
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Figure 1.New York: the study regions and main
urban centers.
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56MacPherson
bias, the discussion that follows should be treated with caution. In particular, I should note that the results pertain mainly to business units with 500 or fewer workers (Table 3), most of which (84 percent) are single-plant ªrms as op-pod to branches of multilocational companies (16 percent). While veral distinctions emerged between the two groups (i.e., single vs. multi-plant units), plant status did not turn out to be a signiªcant variable in regard to the key factors discusd later.2 Keeping the caveats in mind, then, I will summarize some of the main results of the survey below.
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Survey Results
Table 4 shows the regional pattern of external rvice spending by ctor (annual averages for the period 1989–1993), aggregated for the full range of private input class listed in Table 1.3 At least three notable patterns can be discerned here. First, aggregate levels of spending vary ap-preciably across the state. A locational rank-size effect can be en, in that the largest region in terms of economic activity (the New York City metropolitan area) exhibits the highest spending estimates overall, whereas the smallest region (Upstate/Central) exhibits the lowest estimates. The differenc
es are statistically signiªcant at p = <0.05 for all regional combinations (one-tailed t-tests). At the county level, moreover, a positive correlation (r = 0.5952; p = 0.05) was found between the external rvice expenditures of the survey ªrms (scaled as a proportion of their 1993 sales) and the regional distribution of business rvice employment (scaled as a per-centage of total county employment). Although veral important outliers emerged from this ex-erci, it is fair to say that the geography of ex-ternal spending cloly matches the distribution of business rvice supply at the county level. In short, external spending is generally higher in supply-rich locations.
A cond aspect of the data is that the rank-orders for ctoral spending also vary by region. For example, the scientiªc instruments ctor emerged as the biggest spender in the NYC re-gion (US$68,000 per annum/per ªrm). In con-trast, the biggest spenders from the Up-state/Central region (UC) were metal fabrica-tors (US$33,000), whereas the dominant
Table 2.Respon Rates by Sector and Location
Sector
New York City Upstate/Central Western New York All Regions
N n%N n%N n%N n%
天全之窗Metal159 5635.2128 4134.1188 5227.6 47514931.3 Electrical206 7134.4144 4128.4122 4940.1 47216134.1 Instruments106 3835.8 39 1538.4 89 2831.4 234 8134.6 Furniture 78 2430.7 64 2945.3 51 2854.9 193 8141.9 Total54918934.437512633.645015734.8137447234.3 N = sampling frame population; n = number of valid respons; % = respon rate.
Table 3.Size-Class, Respon Rates, and Plant Status of the Survey Respondents
好吹牛Employment Range a Sampling Frame
Population Valid Respons b Single-Plant Firms
Respon
Rates c N%n%n%%
1–49 689 50.1254 53.823291.336.8 50–99 274 19.9103 21.8 8784.437.5 100–199 217 15.8 67 14.2 5480.530.8 200–499 116 8.5 31 6.6 1961.226.7 500+ 78 5.7 17 3.6 317.621.7 Total1374100.0472100.039583.634.3
a Full-time jo
b counts (ranges taken from the Commerce Register [1994] databa).
b Purged of incorrect listings.
c Respon by size-class.
Producer Service Outsourcing57
