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

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. We hypothesize that lead firms capture more value from innovation (R&D), compared to contract manufacturers and component suppliers, because they are positioned close to customers in the global value chain and build capabilities complementary to R&D by focusing on product design, brand, and sales and marketing. To examine the hypothesis, we conduct an empirical study examining the relationship of R&D spending and location in the value chain to firm performance in the global electronics industry using the Electronic Business 300 data set for 2000-2005 and conduct stepwise regression analysis of performance measures with R&D spending, a “lead firm” dummy variable, an interaction term for R&D and the lead firm dummy variable, and industry and region control variables. Our analysis of secondary data is complemented by extensive field research. Our results show that firms spending more on R&D have higher gross profits, but do not have higher ROE and 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.