How diversification affects vertical integration through experience in pharmaceuticals

The objective of this study is to analyze the choice between internal and external supplier at the manufacturing stage in the Brazilian pharmaceutical industry. We developed a structural equation model with hypotheses on experience, diversification, asset specificity, and vertical integration. We collected data for 1566 drugs registry, including its pharmaceutical form, therapeutic class and operation time of the firm and group. We found that the higher the experience, the lower the vertical integration in the manufacturing stage and a clear mediating effect of experience on the relationship between diversification and vertical integration. As firms advance in experience and the spread of the capabilities throughout the industry, agents concentrate activities on the relevant stages in value creation and strategically outsource the manufacturing. As the firm increases the diversification in the product portfolio, the experience favours the building of capabilities to manage the production lines and strategies for outsourcing. This result suggests a low risk for strategic alliances at the manufacturing stage.