Working paper Series

Vertical Linkages and Innovation
by Gamal Atallah and Hong Ding.

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Abstract

It has long been suspected that the organization and ownership of firms could affect the innovation performance of industries in Canada by influencing economic incentives to generate new products and processes. This paper provides a general overview of the theoretical and empirical literature on the relationship between the organization of firms and industries and their performance in terms of innovation. To this end, the paper examines the evidence of vertical linkages across the supply chain from the points of view of innovation, research and development collaboration, and knowledge flows. In doing so, the paper reviews the evidence on the effects of ownership and concentration, the importance of the nature of the vertical relationship between upstream and downstream firms, and the role played by appropriability and knowledge spillovers in the organization for the performance of innovation activities, among others. The paper also looks at the role of multinationals and the extent to which this type of organization benefits host countries in terms of innovation activities. Although no unifying policy conclusions emerge from this literature, the paper offers broad micro-economic policy recommendations such as the importance of good micro-economic policy for innovation activities, a sound micro-economic environment for research and skills development, and the importance of facilitating collaborative arrangements between firms in innovation related activities. Finally, the paper indicates that institutional differences between countries should be taken into consideration for the identification of comparative technological, organizational, and institutional advantages.

Key words: innovation, research and development, industry organization, supply chains, vertical arrangements, firm ownership