Why Are Companies Offshoring Innovation?
The Emerging Global Race for Talent
A. Y. Lewin, S. Massini and C. Peeters
This paper empirically studies the determinants of firms’ decision to offshore
product development activities (i.e. R&D, product design and engineering
services). A logit model is estimated using survey data from the Offshoring
Research Network on offshore implementations initiated by US firms between
1990 and 2006. It relates the probability of offshoring product development to
differences in companies’ strategic objectives (managerial intentionality), past
experience (path dependence), and in environmental factors. The results show
that offshoring of product development is partially explained by the emerging
shortage of high skilled technical talent in the US, which drives the need to
access talent globally. The data also suggest that firms use offshore cost savings
opportunities to improve the efficiency of the innovation process, although not
through labor arbitrages. Finally, increasing speed to market is another major
reason underlying product development offshoring decisions.
JEL Classifications:
Keywords: offshoring, innovation, product development, global talent.
CEB Working Paper N° 08/009
March 2008
Université Libre de Bruxelles – Solvay Business School – Centre Emile Bernheim
ULB CP 145/01 50, avenue F.D. Roosevelt 1050 Brussels – BELGIUM
e-mail: ceb@admin.ulb.ac.be Tel. : +32 (0)2/650.48.64 Fax : +32 (0)2/650.41.88
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Why Are Companies Offshoring Innovation?
The Emerging Global Race for Talent
Arie Y. Lewin
Duke University – The Fuqua School of Business
1 Towerview Drive, Box 90120
Durham, NC 27708, USA
Tel. +1 919 660 7654
ayl3@duke.edu
Silvia Massini
Manchester Business School
University of Manchester
Booth Street West, Manchester M15 6PB, United Kingdom
Tel: +44 (0)161 306 8794
Email: silvia.massini@mbs.ac.uk
Carine Peeters
Université libre de Bruxelles – Solvay Business School
ECARES and Centre Emile Bernheim
50 Avenue F.D. Roosevelt CP 145/1
B – 1050 Bruxelles, BELGIUM
Tel: +32 2 650 4462 / 4870
Email: carine.peeters@ulb.ac.be
March 2008
Please do not quote or cite without written permission of authors
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Why Are Companies Offshoring Innovation?
The Emerging Global Race for Talent
Abstract
This paper empirically studies the determinants of firms’ decision to offshore product
development activities (i.e. R&D, product design and engineering services). A logit
model is estimated using survey data from the Offshoring Research Network on
offshore implementations initiated by US firms between 1990 and 2006. It relates the
probability of offshoring product development to differences in companies’ strategic
objectives (managerial intentionality), past experience (path dependence), and in
environmental factors. The results show that offshoring of product development is
partially explained by the emerging shortage of high skilled technical talent in the US,
which drives the need to access talent globally. The data also suggest that firms use
offshore cost savings opportunities to improve the efficiency of the innovation process,
although not through labor arbitrages. Finally, increasing speed to market is another
major reason underlying product development offshoring decisions.
Keywords: offshoring, innovation, product development, global talent.
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1. Introduction
Outsourcing of manufacturing activities to low cost countries is widely practiced and well
understood (e.g. Dunning, 1993; Lee, 1986; Vernon, 1966). In comparison, the
offshoring of high-value adding white collar activities – pioneered by a few companies in
the 1980s - is still a relatively undiffused practice (Amiti and Wei, 2005). However,
Dossani and Kenney (2007, p.779) conclude that “in less than six years, services
offshoring has evolved from an exotic and risky strategy to a routine business decision”.
Of particular interest to this paper are the actions of US companies that are increasingly
offshoring higher value added knowledge intensive processes and are restructuring and
reorganizing their innovation processes worldwide (Henley, 2006; Levy, 2005).
According to Apte et al. (2006) new product development is becoming the fastest
growing offshoring segment in India. Ernst (2006) suggests that this growth in
innovation offshoring is driven by increased globalization of markets for technology and
knowledge workers. However, the exact reasons that lead firms to decide to offshore
value-adding innovative activities close to their core business, which conventional
wisdom and existing literature (e.g., Patel and Pavitt, 1991) suggests should be kept
under tight control, remain to be empirically studied. The present paper contributes
towards this goal.
Offshoring refers to the process of sourcing and coordinating tasks and business
functions across national borders. Offshoring may include both in-house (captive, or
international in-sourcing) and outsourced activities, which are delivered by an external
provider – that is from outside the boundaries of the firm. Outsourcing, in turn, may
occur both domestically (onshore) and abroad (offshore). Further, offshoring refers to
sourcing rather than sales activities, and it supports global or domestic rather than local
operations. It is not primarily intended for entering a foreign market nor for supporting
the company’s local activities. For example, setting up HR (human resources)
departments in foreign subsidiaries in support of local operations (e.g. sales and
distribution) is not what we mean by offshoring. Only if HR services (e.g. payroll
services) are provided from offshore in support of global or home-based HR functions,
does the term ‘offshoring’ apply. Though it used to be limited to simple codified and
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repetitive tasks, companies are now offshoring increasingly complex and advanced
activities requiring more and more qualified workers (Lewin and Peeters, 2006). This
trend is enabled by trade liberalization policies, advances in information technologies
(Doh, 2005; Levy, 2005; Dossani and Kenney, 2006), and by the ability of companies to
dis-intermediate and modularize almost any process, including knowledge creating
processes (Sako, 2002; Takeishi, 2002). At the same time, however, according to
Farrell et al. (2006) and Mehta et al. (2006), the organizational structures and processes
necessary for coordinating globally dispersed business units and activities, managing
knowledge, selecting locations and managing talent offshore represent major
managerial challenges that could limit the growth in offshoring.
In this paper, we focus on the offshoring of innovation (both captive and outsourced)
and seek to study the factors underlying the evolution of offshoring practices towards
global sourcing of talent and rapidly rising trend of offshoring new product development
work (i.e. R&D, product design and engineering services). In the early 1980s several
leading edge companies such as Texas Instruments, Motorola, and General Electric
established technology centers in India and China to secure strategic advantages such
as favorable political treatment (Delios and Henisz, 2003) and access to talent. Twenty
years later, small entrepreneurial firms are increasingly offshoring new product
development because their ability to grow, need to increase speed to market, or simply
their survival depend on it (Dixit 2005; Shah 2005; Buchanan, 2006; Rangan and
Schumacher, 2006; Dossani and Kenney, 2007). Asia in particular is playing a central
role in the growing global innovation networks, as indicated, for example, by the growth
in US patents granted to companies in Asia between 1986 and 2003 (Ernst, 2002 and
2006). Major Asian countries in that respect include South Korea, Singapore, China,
Taiwan and India. However, Hirshfeld and Schmid’s (2005) argue that, although firms in
the US and Europe are increasingly attracted to and are exploring new science and
engineering clusters in emerging countries, advanced economies are likely to remain at
the forefront of innovation activities, at least in the foreseeable future (Manning et al.,
2008).