The Value of Product Innovation in a Mature Industry: A Natural Experiment in the DRAM Industry

Chang, S (2015) The Value of Product Innovation in a Mature Industry: A Natural Experiment in the DRAM Industry. [Conference proceeding]

Abstract

How much do R&D units for product innovation affect performance in a mature industry? Industry evolution literature predicts that opportunities for product innovation deplete over time and process innovation (manufacturing capability) becomes more important as an industry reaches a maturity stage. However, the prediction of evolutionary economics and knowledge management literature is different; a seeming maturity stage will be punctuated by the introduction of new products (by product innovation of R&D units). The DRAM industry 2006-2012, which is known as a mature industry, offers an unusual setting to test these competing hypotheses. During this period, Taiwanese companies experimented a new business model, a DRAM foundry without an R&D unit. We exploit a natural experiment to examine how an exogenous reduction of R&D units during the 2007-2009 downturn of silicon cycle influences firm-level performance. Using the DRAM makers' profitability and technology data from iSuppli and SEMI databases, I find that reduction of the R&D units led to sharply lower profitability (-84%). The results suggest that the importance of product innovation may not decrease in a fast-changing technological environment.