Plenary Panel Session: Revisiting the Geographic Space of Value Creation and Appropriate from the Complementary Assets Framework - SMS Paris

1. CAPTURING VALUE FROM INNOVATION:
THE ROLE OF GEOGRAPHY AND MARKET
ACCESS IN A MERCANTILIST WORLD
Plenary Panel Session: Revisiting the Geographic
Space of Value Creation and Appropriate from the
Complementary Assets Framework
SMS Paris
September 25, 2018
David J. Teece
Haas School of Business, University of California,
Berkeley

2. CAPTURING VALUE FROM INNOVATION:
THE ROLE OF GEOGRAPHY AND
MARKET ACCESS
1. Nonlinear but recognizable elements in innovation include:
1. Basic research
2. Problem-oriented (applied) research
3. Development and user-focused demonstration
4. Widespread use
2. National policies and corporate strategies and capabilities
impact 1 – 5 and interact to determine commercial
outcomes for pioneering firms and pioneering nations.
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1. Basic Research 4. Widespread use
2. Problem-oriented (applied)
research
5. Value capture and reinvestment
through product sales (which
requires market access)
3. Development and user-focused
demonstration

3. PROFITING FROM INNOVATION
IN A SEMI-GLOBALIZED
MERCANTILIST WORLD
• “Mercantilist” Countries: Look to capture spillovers,
usurp (leapfrog) the pioneer, and maximize value
capture at home.
• “Open” Countries: Look to maximize (short-term)
shareholder wealth.
• Short-term (US, UK, …)
• Longer-term (Germany, Japan, …)
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4. PROFITING FROM INNOVATION
IN A SEMI-GLOBALIZED
MERCANTILIST WORLD
• Trade theory does not recognize heterogeneity for
business enterprises. Nor does it incorporate any
notion of capabilities and learning.
• Technology leakage/theft issues are outside of
standard economics, and, to some extent the business
strategy research.
• Without value capture, reinvestment cannot occur, and
competitive advantage is impaired.
• Value capture for the nation state is different from
value capture for the enterprise.
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5. PROFITING FROM INNOVATION
IN A SEMI-GLOBALIZED
MERCANTILIST WORLD
• The PFI (capturing value) framework can incorporate
geography through various “handles:
• Location of critical co-specialized inputs
• Appropriability regimes
• Standards and timing
• Market access rules/constraints
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6. PROFITING FROM INNOVATION
IN A MERCANTILIST WORLD
PFI basic framework assumes open market access, but made a prescient statement:
“In regimes of weak appropriability, GOVERNMENTS CAN MOVE TO SHIFT THE
DISTRIBUTION OF THE GAINS FROM INNOVATION AWAY FROM FOREIGN INNOVATORS
AND TOWARDS DOMESTIC FIRMS BY DENYING INNOVATORS OWNERSHIP OF SPECIALIZED
ASSETS. The foreign firm, which by assumption is an innovator, will be left with the option of
selling its intangible assets in the market for knowhow if both trade and investment are
foreclosed by government policy... Licensing may then appear profitable, but only because
access to the complementary assets is blocked by government. Thus when an innovating firm
generating profits needs to access complementary assets abroad, host governments, by
limiting access, can sometimes milk the innovators for a share of the profits.”1
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1D. Teece, “Profiting from Innovation,” Research Policy, December 1986, p. 303

7. STATE ACTIONS THAT CORRODE
APPROPRIABILITY REGIMES
Variable PFI Rule
Corrosive State
Actions
Weak IP Pioneer integrates Block DFI, Steal trade
secrets
Co-Specialized Assets
Critical
Pioneer builds/owns/
obtains exclusive
access to
co-specialized assets
Block access to co-
specialized assets
(investment controls;
market access
controls)
Standards Pioneer takes
leadership
Challenge leadership
Timing Pioneers keeps
options open
Invest in all options
Market Access Denies or frustrates
market accessibility
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8. “FEARLESSLY SWIMMING
UPSTREAM TO RISKY WATERS”1
• Pioneers can create imitation barriers through creating
causal ambiguity
• Value chain locational decisions animated by “strategic
disassembly” to help blunt trade secret theft
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1Lampert, et. al., “Fearlessly Swimming Upstream to Risky Waters; The Role of
Geographic Entry in Innovation”, 2016

9. OBSERVATIONS
• Co-specialized bottleneck assets (not just
complements) framework is robust enough to allow
analysis of today’s corroded global order.
• Markets access is a legal construct:
• It can be thought of as a complementary asset
• It can also be thought of as a dimension of the
appropriability regime.
• I prefer the latter.
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10. OBSERVATIONS (CONT’D)
• “Strategic factor markets” concept ignores complements (unless
they can be redefined as ‘factors’) and ignores strategic denial of
market access by nation states.
• Profiting from innovation is a more robust framework – although
market access mentioned but not fully integrated into the
framework.
• Appropriability regime manipulation is commonplace outside of
North America and Europe:
• Mercantilist nations can strategically enforce and strategically
undermine appropriability of pioneers from abroad
• Are nationally and regionally specific (even US trade secret law is
state law) but patent law is now centralized (pre-1982 it was
circuit specific)
• Appropriability regimes can be selectively manipulated –they are
not just a feature of the business environment
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