Location, Control and Innovation

Journal of Economic Geography 8 (2008) pp. 699–725 Advance Access Published on 24 July 2008


Location, control and innovation in knowledgeintensive industries
Ram Mudambi*

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 microlevel, 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. Keywords: innovation, value chains, intangibles, vertical integration, specialization, knowledge-intensive industries JEL classifications: F23, O33, O32, F02 Date submitted: 15 September 2007 Date accepted: 28 May 2008

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1. Introduction
The first industrial revolution of the 18th and 19th century moved value creation from the direct application of human labor to tangible assets like industrial plants and machinery. Countries that grew wealthy in this revolution transferred their productive resources out of agriculture and craft manufacture into...