These firms mainly assemble products that are researched and developed at headquarters located elsewhere. The second group, high-tech firms, employs a larger percentage of scientists and engineers and focuses on new product development. Long-term, positive economic development in a region depends on developing or attracting firms from the second group. To design policies that help develop or attract these innovative high-tech firms, policymakers must understand the factors that affect innovations and increase competitiveness. Industrial Organizations and Innovations Firms organize their dealings with suppliers and customers based on either arm s length or network relationships.
Companies come to the market to buy from the lowest bidder.
In contrast, network relationships are based on long-term linkages between firms, a great deal of information exchange, joint problem solving, and governance by trust. Arm s length relationships offer competitive advantages in the innovative capacity of firms with large stable markets characterized by long product cycles. Networking relationships, on the other hand, produce competitive advantages in the innovative capacity of firms in constantly changing markets characterized by short product cycles. For high-tech firms, partnerships with both suppliers and customers are key elements in introducing products faster to the market. For instance, by involving suppliers early in product innovation, firms avoid the waste characterized by mismatches in the fitting of parts within a new product.