So far, our blogs on offshoring have considered its domestic impact in terms of jobs and competitiveness. Today, I report on the first data I have seen to shed light on the link between production offshoring and domestic innovation. The question is: Do firms that offshore production innovate more or less than firms that do not offshore? This question has led to national debate on competitiveness. Here is some key data and a data-driven answer:…
The literature offers two contrasting theories on whether production offshoring stimulates or hurts domestic innovation:
- Offshoring production stimulates innovation because firms rebalance their division and specialization of labor. Bernhard Dachs, Bernd Ebersberger, Steffen Kinkel, Oliver Som, (7 September 2013) explain:
Conventional economic wisdom suggests that offshoring changes the internal division of labor between various parts of the firm and strengthens capital-, technology-, and skills-intensive types of economic activity in the home country, including headquarter services such as innovation and research and development.
- Offshoring production hurts innovation because reduced complementarity, meaning the link between manufacturing and product development is weaker:
Gary P Pisano and Willy C Shih (2012), for example, state that “mass migration [of manufacturing] has seriously eroded the domestic capabilities needed to turn inventions into high-quality, cost-competitive products”. Pisano and Shith argue that close linkages between production product development are main source for product innovation. This idea goes back to the notion of the ‘factory as a laboratory’ (Leonard-Barton 1992) and to interactive models of the innovation process (Kline and Rosenberg 1986), and has also been brought forward recently by Ketokivi and Ali-Yrkkö (2009) for Finland. Offshoring cuts these ties.
Any good theory must be refutable and only an empirical test can do that. It is hard to measure the relationship between innovation and production offshoring, but Bernhard Dachs and Bernd Ebersberger (June 2013) employed solid econometric analysis on the European Manufacturing Survey (EMS) survey, a firm-level data set on product, process, and organisational innovation in manufacturing firms. Together with Steffen Kinkel and Oliver Som, they summarize those results in some powerful facts:
1. Impact of production offshoring on innovation capabilities
Research and development and design personnel accounts for 13.7% of total employment in offshoring firms, compared to 11.9% in non-offshoring firms. This result supports the view that offshoring firms specialise on skill-intensive, non-routine tasks and rejects fears of a lower innovation performance due to offshoring.
2. Impact of production offshoring on product innovation
58.7% of the firms which have offshored production between 1999 and 2006 have introduced products new to the market between 2007 and mid-2009. The corresponding share for non-offshoring firms is 51.7%. The difference is significant at 10% error level. Thus, Offshoring firms are also more likely to introduce new products to the market, including market novelties.
3. Impact of production offshoring on process innovation
We calculate an overall involvement index, and sub-indices for production technologies, value chain integration technologies, and product development technologies. Results reveal a positive effect of offshoring on process innovation (see Figure below).
The authors conclude:
The data support a view on internationalisation of firms that regards offshoring as a strategy of international expansion, and not a passive reaction of firms to a loss of their competitiveness. With respect to policy, the analysis does not confirm fears of a weakening of national competitiveness due to offshoring.