Product Architecture and Corporate Behavior - Empirical analysis of business activities

Author Name OSHIKA Takashi  (Faculty Fellow, RIETI)
Creation Date/NO. October 2008 08-P-010
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This paper will analyze the relationships between corporate and management activities and the product architecture of products manufactured by companies using the integral architecture indicator of products assembled or processed. This theory was developed in a joint discussion paper of the Research Institute of Economy, Trade and Industry (RIETI) and the Ministry of Economy, Trade and Industry ("Empirical Analyses of Product Architecture Theory and International Trade Theory" (2006 revised version) written by Takashi Oshika and Takahiro Fujimoto; "RIETI Discussion Paper Series 06-J-015" (March 2006)). Specifically, the paper shows the results of a regression analysis of the estimated operating income rate by company and by product and the integral architecture indicator, based on surveys implemented jointly with the Ministry of Economy, Trade and Industry with 33 companies on 254 products. The results of this empirical analysis show that the higher the integral architecture indicator (or the higher the integral rate of a product), the higher the operating income rate. Further regression analysis of assembled or processed products, to which the investment-related indicator (investments in research and development and capital spending) is added as an explanatory variable, in addition to the explanatory variable of the integral architecture indicator, also shows statistically significant results. These results reveal that, with assembled products, the higher the integral rate, investments in research and development (R&D), and capital spending, the higher the operating income rate. In processed products, the higher the integral rate, investment in R&D, depreciation and amortization, the higher the operating income rate. In terms of policy implications, these results show that, first, investment in R&D plays a significant role in the above two products and, second, capital spending is very important for assembled products in bolstering the operating income rate of a company by product. This means that it is important to secure sales and profits by rapidly understanding the needs of users, carrying out capital spending, and developing, producing, and supplying products. Capital spending in processed products tends to be far larger than it is in assembled products. Consequently, the above results indicate that the development, production, and supply of products based on accumulated capital spending that differentiate competitors by executing the capital spending in a planned and phased manner (achieving depreciation and amortization as a result of accumulated capital spending) are key factors for companies in achieving long-term sales and profits.