Systemic innovation and outsourcing: the case of the mobile data services in Korea

This paper investigates the decision that the mobile operators in Korea outsourced the development and manufacture of handsets which are co-specialized with their proprietary data service offerings. This choice of a contractual approach through the market is contradict to what the conventional literature argues. The paper explores the resolution of this contradiction and concludes that operators' contracts were facilitated by handset producers' willingness to supply co-specialized assets due to their new strategy and, more importantly, the greater power of operators relative to handset producers, which made it easier to push handset producers to develop the products to support the services. These two factors reduced the cost of contracting and limited the potential risk of opportunism. The manufacturers' new strategy to facilitate cooperation and the sources of unusual operators' power are also discussed.