Economic Value Capture - A Primer
Economic Value Capture is a complicated topic that has been debated vigorously over the years but is not yet fully understood. This post is an attempt at that.
It is one of the most important topics to understand if you wish to understand how economies around the world grow, flourish and ultimately fulfill the basic wishes of their citizens.
As an example, let us take a reasonably complex product - the iphone .
Selling an iphone to an end consumer takes a lot of effort - both intellectual and physical.
You spend billions in R&D to ideate the product, create digital prototypes and figure out the most optimized plan for bringing it to reality in a lab in California.
After that part is done, manufacturing is distributed to most cost effective geographies - various parts of Asia - Semiconductor Manufacturers in Taiwan, assembling and manufacture of components in South Korea, China and increasingly India resulting in a finished product.
This is then exported to continents across the globe where sales/marketing and logistics teams work to ensure delivery to the end consumer to garner revenue for Apple.
Most of the labour intensive activity is assembling and dispatching the iphone, however the development and ideation part of the product takes away most of the economic value. This is why Apple is regarded as an American Company and U.S. Intellectual Property and not that of any other geography.
This thought process seems logical since developing and ideating the iphone is a much harder and rewarding task in terms of human progress than following a sequence of steps to manufacture it at scale even though both of them are necessary to make the product a reality and is reflected in the distribution of value across the chain.
An interesting corollary and perhaps the point of this article is how it relates to global GDP Distribution. The more intellectually complex a nation's economic activities are - the better its economic prospects in aggregate. Most of the nations which export commodities - extract something from the ground and sell as is - for instance Cobalt used in EV Manufacturing will derive a lower economic benefit compared to the country where the EV Manufacturer develops its IP - Process to transform this cobalt into a useful component in the end product - the Electric Car.
It can therefore be argued that nations and a subset level corporations should focus on economically complex activities which involve a lot of thinking and assembling of moving parts to control most of the economic value generated in the process which is likely to return greater value to their respective shareholders.