Intangibles at the heart of global value

chains and the COVID-19 recovery

Ari Van Assche

HEC Montréal and CIRANO

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Whither Intangibles?

• Firms in developed countries increasingly specialize in production of intangibles in GVCs.

• An explosion in ICT adoption has boosted the value capture of intangibles, disproportionately benefiting well-connected global cities.

• A key question is how COVID-19 has affected the heart of GVCs –intangibles – and the global cities in which they operate.

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What are intangibles?

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Intangibles are claims to future benefits that do not have a physical or

financial embodiment (Lev 2001).

Intangible are different than physical assets

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Intangibles production is concentrated

in developed countries

6Intangibles attracted by skill-abundance and more effective intellectual

property rights and capital markets.

Within developed countries, intangibles

are concentrated in large urban areas

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Source: Balland et al. (2020).

The importance of tacit knowledge exchanges in the production of intangibles

implies that there are significant agglomeration economies.

Agglomeration economies

• Glaeser (2011): Americans who live in big metropolitan

areas are more than 50% more productive than those who

live in smaller metros.

• Moretti (2019): top 10 US city-regions account for nearly

60% of inventors in biology, chemistry and medicine.

• Crescenzi et al. (2019): concentration patterns of skill-

intensive activities in large cities have increased over time.

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Urban areas rely on international

connectedness to produce intangibles

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Urban agglomerations are rarely self-sufficient in terms of the knowledge base they

draw upon. Many local firms deliberately establish linkages to other locations

to tap into pockets of complementary knowledge that is unavailable or

more expensive locally.

Source: Bathelt et al. (2004).

International connectedness

• Miguelez et al. (2019): The share of international co-

inventorship in total patents has more than doubled since

the 1980s.

• Adler & Florida (2019): location of firm headquarters is

influenced by a location’s airport connectivity.

• Turkina & Van Assche (2018): international

connectedness positively effects a cluster’s innovation

performance.

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Intangibles capture more than 30

percent of GVC income

• Lead smartphone companies

capture between 30 and 40

percent of total value added

(Dedrick & Kraemer 2017).

• Share of intangible income in

total GVC income exceeds 30

percent since 2004 (Chen et al.

2018). 11

The steepening smile of value creation

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New ICT-based industrial revolution

• New ICT technologies allow firms to unbundle ideas and

products, which allow them to specialize solely on the

development of intangibles (Teece, 2018).

• Emergence of factory-less goods production (Kamal 2018;

Fort et al. 2018)

• Growing market concentrations, mark-ups and profits in

sectors that intensively use digital technology, and

especially in services, wholesale and retail (Calligaris et al.

2018; Hsieh & Rossi-Hansberg 2019)

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The triumph of the global cities

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Policies to improve Attractiveness

• Develop policies to make a location more attractive to

produce intangibles:

– Boost human capital development (e.g. education and

migration policies);

– Strengthen intellectual property rights protection;

– Deepen capital markets;

– Combat tax avoidance by multinationals;

– Horizontal industrial policies to stimulate innovation.

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Policies to catalyze local Buzz

• Develop place-based policies that facilitate the local buzz by

(1) increasing the density of people and firms and (2)

strengthening the network connections among players, e.g.:

– Subsidies to newly established high-tech firms

– Programs to facilitate private-private, public-private and

public-public collaboration

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Policies to strengthen Connectedness

• Develop policies that strengthen a location’s

connectedness to the global knowledge network, e.g.:

– Facilitate the transmission of goods, capital, information

and people (e.g. airport connectivity);

– Service trade liberalization;

– Focus not only on FDI attraction, but also on international

business promotion.

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Reduced Attractiveness

• Human capital development in cities weakened due to disrupted education and limited immigration.

• Strained financial system limits funding opportunities.

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Diminished Buzz

• Gartner survey of 229 HR managers

showed that half of companies had

more than 80% of employees

working from home during early

stages of pandemic and estimated

substantial long-term increases for

remote work after the pandemic.

• Mass working from home reduces

serendipitous meeting and tacit

knowledge exchanges that feed

agglomeration economies (Allen et

al. 2015).20

Lowered Connectedness

• International aviation shrank

by 98.4% yoy in April, while

domestic aviation drop

86.9% (IATA, 2020).

• Protectionism stifles a firm’s

ability to collaborate with

foreign partners.

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Final remarks

• The question whether

“COVID-19 has broken the

GVC” depends on how it

affects its heart – intangibles.

• Key unknown is how social

distancing has affected work

productivity, creativity, and

innovation.

• More research needed on

how firms will reorganize

knowledge management in

times of social distancing.22

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