What is the effect for manufacturers when access to key technology is disrupted?

Milthon Lujan Monja

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Outage and IR&D investment simulation analysis
Outage and IR&D investment simulation analysis

Under the new global model, due to the pandemic and the Russia-Ukraine war, the global industrial chain and supply chain are being restructured, and operations that were once considered secure and stable now face a multitude of risks and challenges.

In the current global situation, global industrial and supply chains are being reshaped, and their safe and stable operation faces numerous risks and challenges. An important driving factor for this restructuring is the development of key core technologies, which have become crucial in global economic competition.

Key technologies have become an integral part of global economic competition, as they are the internal driving force for the reconstruction of the global supply chain.

In this context, what should product manufacturers do to avoid the risk of disruption to key core technology in the context of international competition?

A recent study led by China’s Southeast University revealed the interdependencies in the global technology supply chain. The researchers have uncovered the profound effects of the risk of disruption to technology and research and development (R&D).

The research team from the School of Economics and Management at Southeast University conducted a study to address the question of how product manufacturers can mitigate the risk of losing access to these key technologies in the context of international competition.

Hotelling Duopoly Model

The research team employed a Hotelling duopoly model, which represents two competing products from two different countries. The study also incorporates game models that consider different scenarios, such as whether companies experiencing a disruption in key technology choose to conduct independent research and development (R&D) or not.

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“We examined four scenarios: the reference scenario without independent research and development before and after a technology cut, and the R&D scenario before and after the technology cut,” explained Lindu Zhao, the study’s author.

“Additionally, we assessed the disruption risk by comparing the impact of a disruption initiated by the government on changes in company profits in the initiating country and the company whose supply was interrupted.”

For companies that experienced a technology disruption and implemented R&D, the research team compared the magnitude of profit changes between companies from the two countries and analyzed the effectiveness of R&D investments made by companies in the country affected by the technology disruption in managing the associated risks.

Key Findings

“Our analysis reveals several key findings. First, initiating a disruption of key technology can result in greater profit loss for the country responsible for the disruption, while the country possessing the key technology may experience a greater profit change compared to the country investing in R&D,” Zhao shared.

“Business investments in R&D can create a strategic advantage and influence the dynamics of the game between countries.”

The research team published their findings in the journal Fundamental Research.

“By reducing technological disadvantages, the R&D strategy can mitigate the urgency associated with technological disruptions and weaken the absolute control exerted by the rival country responsible for the disruption. In other words, R&D investments empower the country to establish a certain level of control and influence over the situation,” Zhao added.

According to the researchers, understanding how to model and incorporate dynamic changes is a crucial challenge for the future of supply chain risk management. This aspect should be further explored to enhance our understanding and improve decision-making in this field.

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Conclusion

“Our analysis indicates that disruption can cause the country initiating the disruption of key technology to lose more profits, and the profit change of the country possessing the key technology may be greater than that of the country investing in R&D,” the researchers conclude.

They also highlight that company R&D investment can establish a certain space for maneuvering and rights for their country. “When the country can reduce technological disadvantages, the R&D strategy, to some extent, can reduce the urgency due to the technology cut risk and weaken the absolute control of the rival country initiating the technology cut.”

“There is an old Chinese saying that goes, ‘Kill a thousand enemies and defeat eight hundred by yourself,'” Zhao joked. “This saying emphasizes the idea that both countries face a critical decision when weighing the potential outcomes of R&D. It raises the question of whether the pursuit of such investment would lead to a ‘Pyrrhic victory,’ where the costs incurred outweigh the benefits obtained.”

The study was funded by the National Natural Science Foundation of China (Grant No. 72071039, Research on the capital control model of manufacturing servitization platform).

Reference (open access)
Xiaoxiao Chang, Guohao Sun, Junhe Zhou, Lindu Zhao. 2023. Technology outage risk and independent research and development investment decision in global supply chains, Fundamental Research, 2023, ISSN 2667-3258, https://doi.org/10.1016/j.fmre.2023.06.004.

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