Complementary and Cost Reduction: Evidence from the Auto Supply Industry

Over the last 20 years, the success of Japanese manufacturing firms has broughtrenewed attention to the importance of cost reduction on existing products as a source ofproductivity growth. This paper uses survey data and field interviews from the auto supplyindustry to explore the determinants of average-cost reduction for a sample of 171 plants in theUnited States and Canada between 1988 and 1992. The main result is that the determinants ofcost reduction differ markedly between firms which had employee involvement programs in 1988and firms that did not. The two groups of firms achieved equal amounts of cost reduction. but didso in very different ways. Firms with employee involvement saw their costs fall more if they alsohad "voice" relationships with customers and workers. Firms without such involvement gained nocost-reduction benefit fkom these programs; instead, their cost reduction success was largely afiction of increases in volume. These results provide support for Milgrom and Roberts's conceptthat certain production practices exhibit complementary.