Who captures value from science-based innovation? The distribution of benefits from GMR in the hard disk drive industryby Jason Dedrick, Kenneth L. Kraemer

Research Policy

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Research Policy 44 (2015) 1615–1628

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Who captures value from science-based innovation? The distribution of benefits from GMR in the hard disk drive industry

Jason Dedricka, Kenneth L. Kraemerb,∗ a School of Information Studies, Syracuse University, 324 Hinds Hall, Syracuse, NY 13244-4100, United States b The Paul Merage School of Business, University of California Irvine, Irvine, CA 92697, United States a r t i c l e i n f o

Article history:

Received 14 January 2014

Received in revised form 23 June 2015

Accepted 23 June 2015

Available online 17 July 2015

Keywords:

European paradox

Absorptive capacity

Technological innovation

Value capture

National innovation policy

Hard disk drive industry a b s t r a c t

Weanalyze thediscoveryof giantmagneto-resistance (GMR) and its development and commercialization by the global disk drive industry to answer the question of “Who captures the benefits from innovation in a global innovation system?” We assess the returns to the scientists, firms, and countries associated with GMR. We find that the French and German scientists that discovered GMR and their labs benefited by receiving the Nobel Prize and small licensing fees. The firm that first commercialized the technology,

IBM, captured profits from selling hard disk drives andmagnetic heads using GMR. Other hard disk drive and head manufacturers based in the U.S. and Japan were able to quickly assimilate the technology and catch up with IBM. France and Germany reaped limited returns due to the lack of domestic firms with the absorptive capacity to commercialize GMR. The U.S. and Japan benefited from the success of their firms in commercializing GMR, as did other countries which were part of the global value chains of those companies. Consumers and firms that incorporated hard drives in their products ultimately benefited from cheaper hard drives with greater capacity. These findings illustrate the importance of absorptive capacity at the firm and national level in capturing benefits from innovation. They also show that the benefits to firstmover firms can be short-lived in a competitive industrywith open transfer of knowledge and limited appropriability regimes. Finally, they show that the location of jobs and wages associated with innovative products depends on the structure of the global value chains of leading firms. © 2015 Elsevier B.V. All rights reserved. 1. Introduction

There has been a great deal of research attempting to quantify the benefits of R&D in fields such as economics, public policy and management (Nelson, 1959; Arrow, 1962; Rosenberg, 1982;

Teece, 1986; Dasgupta and David, 1994; Mansfield, 1996; Dosi et al., 2006). Yet, questions remain about the relationship of R&D to economic performance. Although there is evidence of economic benefits from R&D at the firm and country level (Griliches, 1992;

Jones andWilliams, 1998), the level of contribution has been questioned (Comin, 2004), and causality is not always clear (Hall and

Kramarz, 1998). The relationship is even more tenuous in the case of basic research, which may or may not have any commercial application.

Even when basic research leads to commercially successful innovations, there is still a question about who benefits from this ∗ Corresponding author.

E-mail addresses: jdedrick@syr.edu (J. Dedrick), kkraemer@uci.edu (K.L. Kraemer). success. In a global economy, countries that invest in basic research may see the outputs of that research commercialized in other countries that do not contribute to the research effort (Pavitt, 2001). In the words of Mansfield (1996: 136): “The contribution of research to a nation’s economic performance depends on how well the nation’s firms can utilize and commercialize research to bring about profitable new products and processes.”

This issue has been a concern of the European Union since the 1990s. As put by the European Commission (1995) in its Green

Paper on Innovation: “. . . Europe suffers from a paradox. Compared with the scientific performance of its principal competitors, that of the EU is excellent, but over the last fifteen years its technological and commercial performance in high-technology sectors such as electronics and information technologies has deteriorated.”

In this paper, we look at a case of a very successful European scientific effort, the discovery of giant magneto-resistance (GMR), which had significant commercial value in the hard disk drive http://dx.doi.org/10.1016/j.respol.2015.06.011 0048-7333/© 2015 Elsevier B.V. All rights reserved. 1616 J. Dedrick, K.L. Kraemer / Research Policy 44 (2015) 1615–1628 (HDD) industry. The GMR principle was discovered independently in the late 1980s by physicists Albert Fert of France and Peter Grunberg of Germany, who shared the Nobel Prize in 2007 for their discovery. This research enabled manufacturers to make significant improvements in the “heads” which read data from spinning disks in HDDs, and along with previous and concurrent innovations, paved the way for smaller drives with dramatically greater capacity.

The company that first commercialized GMR in 1997 was IBM, which transformed GMR from a scientific principle into a working product. Other firms followed IBM quickly in adopting GMR. After a round of acquisitions, including IBM’s sale of its HDD business to

Hitachi, the U.S. HDD industry consisted of Seagate and Western

Digital, both of which made most of their own heads. Japan was left with four HDDmakers and two independent headmanufacturers. European firmswere unable to translate GMR into commercial products, even though several tried.

Why were no European companies able to participate in the success of GMR, even though Europewas home to large electronics manufacturers? How was IBM able to successfully commercialize

GMR technology but unable to achieve a sustainable competitive advantage? Who captured the greatest value from GMR and why?