Global value chains and innovation

This chapter provides an overview of how the globalization of value chains affects a firm’s innovation capabilities. It is highlighted that global value chains can stimulate innovation in a number of ways. They can help firms reduce production costs through offshoring, which allows them to free up resources that in turn can be invested in research and development. Furthermore, global value chains permit firms to tap into foreign pockets of knowledge, which lets them strengthen their knowledge base and innovation capabilities. The chapter warns, however, that one should be careful of drawing links between global value chains and innovation in an overly positive way. Firms face important challenges and costs when setting up global value chains, and if not managed correctly these “hidden costs” may overturn the positive link between global value chains and innovation. A particularly important hidden cost is the fallacy of fixed technology. Often ignored by firms, technology is not necessarily fixed, and changes in the organizational structure can thus push firms toward inferior technological paths. In some circumstances, offshoring can thus negatively affect a firm’s innovation performance. These nuances point out that more research is needed on the dynamic relationships between technology and global value chain governance.