In a globalized world where talent and knowledge are no longer limited to just a few economies, firms are increasingly offshoring R&D activities to foreign locations. Often firms do so to source foreign knowledge and to increase their R&D efficiency. Practitioners and scientific researchers alike heavily debate the drivers of R&D offshoring, but how does R&D offshoring affect firm’s innovativeness?

Our recent study published in Research Policy addresses this question by analyzing the impact of R&D offshoring on a firm’s innovativeness, specifically its new product performance in their home market. Our findings strongly recommend managers to consider potential effects on their firm’s innovation output when offshoring R&D. Focusing solely on cost and efficiency can be misleading.

Managers choose multiple modes to offshore R&D, i.e., internalizing the activity via foreign affiliates, or outsourcing to foreign firms. Also, managers have to decide how much of the overall R&D budget they will commit to offshore activities. Using data from Germany, we find that both decisions jointly determine whether R&D offshoring harms or promotes a firm’s innovativeness. At low levels of commitment, managers should prefer outsourcing of the offshore activities. R&D offshoring via affiliates is only beneficial after a certain minimum level of commitment has been reached. Moreover, excessive offshoring harms firm innovativeness, regardless of the chosen mode.

Lastly, we identify a firm’s technological position to be decisive in determining whether R&D offshoring is beneficial or not. Firms investing less in R&D than their industry’s average have difficulties in increasing their innovativeness through R&D offshoring (see Figure). Thus, managers should be very cautious about R&D offshoring, when their firm is a technological laggard.

Want to know more? Don’t hesitate to contact the author of this post: Philip Steinberg / p.j.steinberg@rug.nl

Further reading:

Steinberg, P. J., Procher, V. D., & Urbig, D. (2017). Too much or too little of R&D offshoring: The impact of captive offshoring and contract offshoring on innovation performance. Research Policy, 46(10), 1810-1823.