Managing Product Innovation in Global Value Chains: Why Co-Location Still Matters

Over the past two decades, integrated value chains fragmented globally as a result of several forces: trade liberalization and lowering transportation costs, diffusion of information technologies, and increased manufacturing capabilities in developing economies. Addressed by the global value chains (GVCs) framework (Gereffi et al. 2005), this model of industrial organization shed lights on the business models and financial performance of ‘’factory-less’’ goods producers (Bernard, Fort, 2013) like Nike and Apple. As this production logic spread and flourished, the co-location of tasks, and in particular of design and manufacturing, became less compelling. Sturgeon (2002) envisions a novel model of industrial organization –modular production networks– wherein lead firms «concentrate on the creation, penetration, and defence of markets for end products […] while manufacturing capacity is shifted to globally operating turn-key suppliers» (p. 451). This organizational arrangement allows brand-name firms to focus on intangible functions –and especially product innovation– while outsourcing production to low-cost foreign suppliers.

Yet recent studies suggest that the separation between production and R&D remarkably affects the innovation capabilities of firms. Indeed, Pisano and Shih (2009) document how the U.S. lost its pre-eminence in developing innovations in a variety of industries as a result of massive waves of offshoring and the spread "innovate here-produce there" model of organization (Bonvillian, 2012); similarly, Ketokivi and Ali‐Yrkkö (2009) define unbundling of production and innovation as a «post-industrial myth of sorts» and openly question the tenability of the unbundling of innovation and manufacturing in global value chains.

However, claiming that manufacturing matters for innovation does not seem to suffice in orienting policy-makers and practitioners' decision-making. Thus, we argue, the most prominent issue emerging from this debate is not whether manufacturing and innovation need to be co-located; rather which activities need to be co-located and how this geographical proximity contributes to foster product innovation. Acknowledging this matter, and striving to advance the understanding of the geography of innovation in global value chains, this papers addresses the following research questions: (i) which specific activities demand co-location to sustain product development? (ii) why do some activities need to remain anchored to specific locales to support global firms’ innovation capabilities?

This study aims at identifying patterns of interaction among activities, actors and competences in innovation processes in three distinct Italian manufacturing industries, namely furniture, bicycle and leather goods. Consistent with the literature on global value chains, our findings show that product development is indeed a global process entailing inputs from global designers and feedback from demand residing far from the headquarters of firms. Nonetheless, we identify a bundle of co-located activities –i.e. prototyping, product industrialization and sample creation– that is fundamental in translating exploratory ideas into detailed design and product specifications. We observe that this bundle of activities acts as a platform where designers and engineers find access to those manufacturing capabilities that are essential in sustaining product development. Furthermore, the case study discussion reveals that these discrete activities are still entrenched in specific locales and their underlying capabilities stem from, and are sustained by, wider manufacturing ecosystems.