R&D Offshoring: a win-win for home and host countries

In brief

• R&D offshoring has become integral to the innovation chain of many organizations.
• The offshoring of R&D raises legitimate questions about the impact of that offshoring on productivity, technology capabilities, and economic growth, in the home country.
• Until now there has been little empirical evidence to gauge the existence or size of any impact.
• Using a novel technique incorporating patent application data, new research demonstrates that offshoring R&D is a win-win for both the home country and the country where offshored R&D work is located.
• The benefit for the home country is considerable - 10% growth in offshored R&D in a particular industry, leads to a 5% growth in productivity within that industry in the home country.
• One caveat was that the finding was true for a specific type of offshored R&D - technology seeking R&D.
• The research suggests that organizations should be free to decide where they want to locate their R&D resources and that policymakers should not attempt to restrict the mobility of R&D, the employees involved, or the investments in that R&D.

Research and development (R&D) offshoring has become integral to the innovation value chain. By 2016, US-owned manufacturing companies performed nearly 20% of their total R&D outside the United States. The extent of R&D offshoring by several European countries including Switzerland, Sweden, and Germany appears to be even greater.

The extent of R&D offshoring has given rise to some concerns, however. These include fears that the offshoring of R&D leads to the hollowing out of technological capabilities in the home country (the country from which R&D is offshored – as opposed to the host county where the R&D is offshored to), through the removal of high-value jobs, for example. Or that the loss of the "scientist-to-scientist" knowledge spillovers that take place around the location where R&D is performed deprives the home county of benefits.

In turn this fits into an anti-globalization narrative that has gained traction in some quarters. It is legitimate, therefore, to ask questions about R&D offshoring in terms of its impact on productivity, technology capabilities and economic growth in the home country. This is the issue that Gaétan de Rassenfosse and Russell Thomson investigate in their paper 'R&D Offshoring and Home Industry Productivity'.

Establishing the extent of R&D offshoring

In order to assess the impact the researchers needed to be able to gauge the extent of R&D offshoring from any particular country and gauge the impact of that offshoring on the productivity of the home country. In the absence of official statistics on R&D offshoring the researchers used a novel method to establish the extent of R&D offshoring - patent data. When a patent is filed both the address of the residence of the inventor, and address of the residence of the applicant or assignee of the patent - the entity that filed the patent -are recorded.

Therefore, using a patent database covering the period from 1981 to 2007, de Rassenfosse and Thomson were able to observe differences in location between the inventor and the applicant of a patent. They could discover, for example, whether a German company had invented something in India. If a patent applicant is in country A, and the inventor in country B, this was counted as offshoring the R&D from country A to country B. For the purposes of mapping offshore R&D against productivity effect the research focused on OECD countries, primarily because these are the countries that offshore the most.

Having established the extent of R&D offshoring for 18 OECD countries, de Rassenfosse and Thomson then investigated the effect of that offshoring on productivity in the home country, as measured by output per worker, at an industry level, across a range of industries. It might be argued that R&D tends to be offshored by companies that are highly productive, making it difficult to separate out the distinct impact of offshoring on productivity. Therefore, to be sure that the results reflected a causal effect of offshored R&D on productivity, the authors also took steps to disentangle the relationship productivity and offshoring.

The results should dispel fears that offshoring R&D has a negative impact on home country productivity. Instead, the opposite is true. The greater the extent of offshored R&D, the more that a country offshores its R&D to other countries, the more productive the industries in the home country become that are associated with that offshoring. This is true across all countries studied, irrespective of the R&D offshoring host. (Some previous research had suggested that there might only be a benefit for countries that were offshoring R&D to the US.)

And the effect is considerable. A 10% increase in the share of R&D offshoring increases productivity by about 5%. So every time you get 10% growth in offshored R&D in a particular industry, it leads to a 5% growth in productivity within that industry in the home country.

There was one caveat. The findings were true for a specific type of offshored R&D - technology seeking R&D - where a firm wants to establish an R&D center in a particular country in order to access new technologies. This type of offshored R&D can be differentiated from a more applied type of R&D – market seeking offshored R&D - which is where a company has technology it invents at home and, wanting to find new applications for that technology, establishes research centers in other markets abroad, then tries to adapt that technology for the local market conditions.

A win-win for offshored R&D

The researchers did not look at the specific mechanisms involved in creating the productivity boost. However, as de Rassenfosse notes, access to knowledge and technology is central to any mechanism. There is no reason to suspect that the best technology resides in a single country. Therefore it makes sense for firms to seek technologies wherever they are, to learn and acquire new knowledge by establishing research centers in other countries. That way they can access not only the technology per se, but benefit from knowledge spillovers and spot opportunities early on because they will be at the heart of where research in a given field happens. They will be able to access more qualified personnel. And, given sufficient capability and capacity at home to absorb the knowledge generated overseas, that knowledge will translate, one way or another, into economic performance.

The main message then is that R&D offshoring is not a zero-sum game. Combined with findings from previous research on the benefits of offshored R&D in the host country, this research shows that both host and home country benefit from the globalization of R&D. As de Rassenfosse says, the implication is that, while it is important to have R&D capacity in the home country, firms should be free to decide where they want to locate their R&D resources. We should not attempt to restrict the mobility of R&D, the employees involved, or the investment in that R&D.

It is an important finding that supports the argument for globalized knowledge and R&D and runs contrary to the growing anti-globalization narrative.