R&D, Value Chain Location and Firm Performance in the Global Electronics Industry

Namchul Shin,Kenneth L Kraemer,Jason Dedrick

doi:10.1080/13662710902923867

Namchul Shin, Kenneth L Kraemer + Show 1 more

Open Access

https://doi.org/10.1080/13662710902923867

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Abstract

In today's global electronics industry, innovation is carried out by various value chain participants, including brand-name manufacturers (sometimes called lead firms), contract manufacturers and component suppliers, but there is little understanding of who benefits most from innovation in such networks. This research examines empirically the relationship of R&D spending and location in the value chain (lead vs. non-lead firms) to firm performance in the global electronics industry by using the Electronic Business 300 data set for 2000–2005. Our results show that firms spending more on R&D have higher gross profits, but do not have higher return on equity (ROE) and return on assets (ROA). There is a strong positive relationship between lead firms and performance as measured by gross profit, ROE and ROA, but the relationship between lead firms and gross profit becomes insignificant when the interaction term of R&D and lead firm is included in the analysis. Finally, lead firm status has a positive interaction effect on the relationship between R&D and gross profit. These findings suggest that the relationship of R&D to performance is mixed, but that lead firms can capture higher value (gross profit) from R&D than contract manufacturers and component suppliers.

Highlights

Value chains in the electronics industry have steadily disintegrated across corporate and national boundaries since the early 1990s
In order to analyze the relationship of innovation and value chain location to firm performance, we conduct stepwise regression analysis of performance measures such as gross profit, return on equity (ROE), and return on assets (ROA), with R&D spending, a lead firm dummy variable, which indicates whether the firm is a lead firm or a non-lead firm, an interaction term for R&D spending and the lead firm dummy variable, and industry and region control variables
This indicates that lead firms have higher ROE and ROA than contract manufacturers (CMs) and original design manufacturers (ODMs), and component suppliers

Summary

Introduction

Value chains in the electronics industry have steadily disintegrated across corporate and national boundaries since the early 1990s. According to Baldwin and Clark (2006), the electronics industry has evolved to a modular structure in which firms keep a smaller set of activities in-house (a smaller footprint) by outsourcing the functions that do not constrain overall business performance. Today lead firms (brand name manufacturers) focus on core competencies, especially product innovation, marketing, and other activities related to brand development, while using specialized suppliers for non-core functions such as manufacturing (Sturgeon 2002; Yeung 2006). Lead firms can get more products faster, reap value from innovations before imitators enter the market, and all of these without making huge capital investments or idling in-house capital assets to meet rapid technological change and volatile market demand (Sturgeon 2002)

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