Location, control and innovation in knowledge-intensive industries

TLDR

The growing importance of intangibles has made knowledge‑intensive and creative industries central to wealth creation, driving intense global competition and the geographic dispersion of value chains as firms from emerging economies seek to catch up with advanced economies. The authors contrast a vertical‑integration strategy that exploits linkage economies by controlling multiple value‑chain activities with a specialization strategy that concentrates on the creative core while outsourcing other functions, illustrated through the global mobile‑handset industry.

Abstract

The rising share of intangibles in economies worldwide highlights the crucial role of knowledge-intensive and creative industries in current and future wealth generation. The recognition of this trend has led to intense competition in these industries. At the micro-level, firms from both advanced and emerging economies are globally dispersing their value chains to control costs and leverage capabilities. The geography of innovation is the outcome of a dynamic process whereby firms from emerging economies strive to catch-up with advanced economy competitors, creating strong pressures for continued innovation. However, two distinct strategies can be discerned with regard to the control of the value chain. A vertical integration strategy emphasizes taking advantage of 'linkage economies' whereby controlling multiple value chain activities enhances the efficiency and effectiveness of each one of them. In contrast, a specialization strategy focuses on identifying and controlling the creative heart of the value chain, while outsourcing all other activities. The global mobile handset industry is used as the template to illustrate the theory.