Supply Chains and the Transfer of Intangible Assets

For the new year, think about this question: What is the purpose of a supply chain?  Clearly a supply chain is like a conveyor belt which moves goods and services from supplier nations to the ultimate buyers, usually in developed countries.

But a supply chain does a lot more.  I recently wrote a piece entitled  “Innovation and the strength of the dollar”  for McKinsey’s “What Matters” site.  In that piece I pointed out that:

in fact, the conveyor belt moves in both directions: in order to get the cheap goods and services, the multinational has to transfer some knowledge or technology to the supplier countries. This is the knowledge necessary for the supplier to create a product or provide a service. It might be the knowledge required for making the wing of an aircraft, a computer chip, or a living room table. Or the multinational might provide knowledge that enables an overseas call center to respond to questions.

This trade—intangible assets for access to lower-priced goods and services—is not a one-time deal. Technologies advance, products evolve, and fashions change. That means the multinational must continually provide new knowledge to the supplier to stay current with the market. If the supplier ceases to get new knowledge from the multinational, the ties of the supply chain weaken and, in fact, the supplier may become a competitor.

It’s important to realize that this transfer of intangible assets is not picked up by the conventional trade statistics. No one tracks the flow of information from US purchasing executives to the Chinese factories that make shirts for American department stores or the rudder for the Boeing 787. But this information has real value.¹

These flows of intangible assets—technology, business knowledge, and market knowledge—are tremendously valuable to supplier countries such as China and India. Intangible assets can greatly accelerate the process of economic development. In fact, it’s clear that without supply chains and offshoring acting as conduits of knowledge from overseas, growth would have been a lot slower in these countries.

This reverse flow of intangible assets helps explain why the export-driven development strategy is such a powerful one. And it also helps explain why China, in particular, has been so focused on holding down the value of the yuan, and so reluctant to switch to domestic-driven growth.