Academic journal article Innovation: Organization & Management

Technology Embeddedness, Innovation Differentiation Strategies and Firm Performance: Evidence from Chinese Manufacturing Firms

Academic journal article Innovation: Organization & Management

Technology Embeddedness, Innovation Differentiation Strategies and Firm Performance: Evidence from Chinese Manufacturing Firms

Article excerpt

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INTRODUCTION

After China's reforming and opening in late 1970s, lots of Chinese local manufacturing firms penetrated the global value chain by means of providing low-cost manufacturing for multinational corporations. The main comparative advantage that these firms relied on was low-cost resources such as China's surplus labors. To a certain extend, low-cost local resources had support rapid growth of local manufacturing firms in last over two decades. According to Porter's theory of classification of firm's strategy (Porter 1980), the kind of strategies that Chinese local manufacturing firms pursue can be categorized as overall cost leadership strategies, and most of them can be called cost leadership strategies based on low-cost local resources. However, nowadays Chinese local manufacturing firm's cost leadership strategies are being challenged. With the rapid development of China, a great deal of domestic resources is consumed by the growth of resource-intensive industries. As a result, shortage of labors can be seen in many industries in China, especially in labor intensive industries in southeast China, and the electricity power supply for industrial usage is often restricted by local governments in last several years because of increasing demands of electrical power. Accordingly, the prices of these factors of production rise significantly because of booming demand. In addition, the comparative advantage of China's low-cost local resources is also being challenged by new emerging economies such as Vietnam and Cambodia, where the prices of factors of production such as labors are even lower than that of China mainland. Consequently, with the globalization of economies, the traditional cost leadership strategies of Chinese local manufacturing firms are losing their competitive advantages that they used to rely on.

In order to create their new competitive advantages, some well-developed Chinese manufacturing firms are trying to upgrade their existing strategies, from the traditional cost leadership strategies depending on low-cost local resources to new competitive strategies: innovation differentiation strategies and marketing differentiation strategies (Miller 1986, 1988). That is to say Chinese local manufacturing firms are moving upward in the value chain in order to carry out more value-rich businesses such as product design and marketing services. Figure 1 shows how Chinese local manufacturing firms upgrade their strategies in the value chain. As many good examples of successful manufacturing firms show, these firms accumulate knowledge and capabilities from the network partners through collaboration in embedded networks, and then promote their innovation capabilities and gradually evolve their strategies from traditional cost leadership strategies to differentiation strategies, especially the innovation differentiation strategies (Ernst 2005). As a result, this kind of manufacturing firm can acquire and maintain their competitive advantages in the long run.

Specifically, in the process of firm's embedding itself into networks, the firm interacts with partners in its embedded networks, and exchanges the information and knowledge or other resources. The firm recognizes opportunities in environments through its interactions with network partners, and searches for differential strategic position in the environments. Then the firm transforms its strategies from cost leadership strategies depending on low-cost labors to innovation differentiation strategies, and moves their business to the high ends of value chain.

With that background, this paper tries to shed some light on the phenomenon of Chinese firm's strategic upgrading, and examine the association between characteristics of firm's technological embedded networks and its strategic upgrading, and its implication for firm performance. After a literature review of network embeddedness and differentiation strategies, this paper proposes a conceptual model that specifies the relationships amongst technology embeddedness, innovation differentiation strategies and firm performance. …

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