The Internationalization of Industry Supply Chains and the Location of Innovation Activities

Abstract

Current policy discussions on offshoring mostly focus on its impact on lower skilled manufacturing and services jobs, assuming that higher-value-added jobs and, especially, the location of innovation activities are not affected by offshoring. Contrary to this view, we suggest that innovation mainly driven by R&D activities can also move abroad as a result of offshoring. We suggest that the movement of innovation abroad will be conditioned by the nature of technology innovation processes, in particular knowledge spillovers, causing some innovation activities to remain in the United States while driving other activities away. To explore this idea we conduct an in-depth study of the rare earth industry which provides critical raw materials for numerous technology based applications. This industry is pertinent because it has experienced significant supply chain relocation away from the United States and to developing countries. Using industry accounts and patent information, we examine the impact of the movement of rare earth production from the United States to China on the location of rare earth innovation over the past two decades. We find that, while supply chain offshoring has caused rare earth magnet innovation activities to move away from the United States, innovation activities in rare earth catalysts remains in the country. Direct observations and industry reports suggest this dichotomous response to supply chain internationalization is driven by the role of knowledge spillovers across value chain actors and the changing nature of technology innovation processes. We employ rare earth technology patents to perform regression analyses and develop a model that empirically validates these critical drivers in the co-location of production and innovation activities.