Who captures value in a global innovation network?: the case of Apple's iPod

In novatIon Is often touted as a k ey drIv er o f economic growth.7, 11 However, when firms operate within production and innovation networks that span national and firm boundaries, the question arises as to who actually benefits from innovation. Is it the home country of the innovating firm, the country where the innovative product is manufactured, or the countries that supply the key high value components? This question recalls a debate in the early 1990s between Robert Reich and Laura Tyson. Reich 9 argued that the nationality of firms was less important than what activities they carried out in the U.S. or abroad; that is, a foreign company with a large U.S. workforce was more valuable to the U.S. than an American company whose workers were mostly abroad. Tyson12 responded that this case was actually quite rare, and that most companies retained a large share of high value activities in their home country; therefore ownership still mattered. The Reich-Tyson debate took place in an era when few had heard of the Internet or outsourcing, when vertically integrated multinational corporations still dominated most high-technology industries, and China and India were just taking their first tentative steps into the global hardware and software industries. Yet, while the world looks much different today, the core question debated then is just as relevant. For instance, an innovative product may be designed in one country, manufactured in another, with software developed in a third, and components sourced from several other countries. In such a case, how are the benefits distributed? To begin to unravel that question, we have moved away from macroeconomics and down to a micro-level analysis of one well-known innovative product, the Apple iPod. The iPod is designed and marketed by an American company, assembled by Taiwanese manufacturers in China, and includes key parts from Japanese, Korean and U.S. suppliers. So who captures the value generated by this hugely successful innovation? How much would the answer differ if the iPod were sold by Sony or Samsung instead of Apple, or if it were assembled in the U.S.? This paper develops a framework for analysis based on financial measures of value capture, and uses that framework to study one iPod model to provide one perspective on these questions.