First, nationality matters. While the iPod is manufactured offshore and has a global roster of suppliers, the greatest benefits from this innovation go to Apple, an American company, with predominantly American employees and stockholders who reap the benefits… Apple keeps its product design, software development, product management, marketing and other high value functions in the U.S. This is not necessarily because the U.S. work force has superior capabilities in all of these areas, but because Apple has developed very specialized knowledge and ways of doing things that reside within the company and would be difficult to transfer to external locations.
Second, innovation matters. The producers of high value, critical components capture a large share of the value of an innovative product… For the 30GB Video iPod, the highest-value components are the hard drive and the display, both supplied by Japanese companies. Thus Japan captures the next largest share of the value of the iPod, thanks to its companies’ strengths in those technologies. US chip makers such as Broadcom and PortalPlayer [one might also add Wolfson of Edinburgh which provides the audio codex chip] provide less costly inputs, but earn high margins and thus bring additional value to the U.S. By contrast, Inventec, which was actually responsible for assembly of this iPod (the activity that most people think of as “making” a product), earns a relatively modest share of its value. So in general, the greatest value from providing inputs to an innovative product goes to the countries whose firms provide critical, differentiated technologies.
Third, trade statistics can mislead as much as inform. For every $299 iPod sold in the U.S., the politically volatile U.S. trade deficit with China increased by about $150 (the factory cost) plus the cost of shipping. Yet the value added to the product through assembly in China is at most a few dollars. Even if we included the direct labor involved in making various parts and components in China, it would still add only marginally to China’s share of the value.