Study on the nexus between production and innovation, and its effects on the firm's capabilities

Abstract

In the 1990s, industrial restructuring from the manufacturing industry to the service industry began to spread, led by developed countries such as the United States. As a result, offshoring occurred, and more production facilities were moved to developing countries with the aim of improving industrial performance through higher productivity and efficiency. Efforts were made to move production facilities that were losing their competitive edge to countries that can secure price competitiveness, and to improve the quality of the economy by reorganizing as a research and development base. However, as production facilities moved into developing countries, the basis for stable employment creation was shaken and the economy lost its vitality. Recently, problems of rising wages, logistics costs, and technology outflows have been raised in developing countries. In addition, the innovation of the industry, which is the basis for sustained economic growth, has begun to slow down. This is because the manufacturing base and the overseas transfer of production facilities have reduced the foundation for implementing new ideas. Despite the importance of production in creating innovation for sustained growth, most existing empirical studies merely focus on emphasizing the role of production in terms of industrial restructuring or job creation. Therefore, examining the effect of production on innovation is very important at this point in setting future directions for our industrial economic system. This study attempts to examine the role of production in innovation activity and the industrial structure that can continuously generate innovation. First, we emphasize the importance of technological learning that can strengthen the link between production and innovation, by reviewing existing research on the relationship between production and innovation. Next, we identify the correlation between production capacity and innovation performance by considering the case of the Korean manufacturing industry. Thereafter, we analyze the high-tech industry, the driving force of the future society. Finally, we offer suggestions for a desirable relationship between production and innovation for continuous innovation creation and growth. The results of the study are summarized as follows. First, the decline in the production capacity of the domestic manufacturing industry leads to a decline in the quality of innovation. This tendency was particularly evident in the case of overseas transfer of production facilities for the purpose of cost reduction. In the high-tech industry, it is also confirmed that the possession of production capacity is an important factor in the formation of innovation performance and knowledge network. However, possessing only the production capacity does not always lead to the improvement of innovation. Forming a cooperative relationship plays a key role, between the company with production and application capacity and universities and research institutes conducting basic knowledge research. Therefore, for a virtuous cycle between production and innovation, it is necessary to facilitate the smooth flow of knowledge accumulated through cooperation and network between the two.