Explaining the Current Innovative R&D Outsourcing to Developing Countries

  • Zachary Cohle


While multinational firms from developed countries have used researchers from emerging areas to assist in the adaption of an existing product, few multinational firms have carried out innovative R&D, or R&D for the creation of a new product, in these areas. Using the threat of imitation and wage differences of researchers across regions, this study proposes a partial equilibrium model to explain the lack of innovative R&D in developing countries. I build a North-South model examining a single firm’s choice of research locations. The model predicts that weak IPR-protection in developing countries does not necessarily explain the lack of Southern research. In some situations, reduced IPR-protection can even increase Southern research. Harsh competition resulting from information leaks coupled with weak IPR-protection can explain much of the lack of innovative research investment in the developing world. My model also predicts that firms with low research needs, or firms in low-tech industries, locate their R&D in the North. Firms with medium research need locate in both countries while the firms with the largest research needs, or firms in high-tech industries, locate research in just the South.


R&D Innovation IPR-protection Multinational Employee mobility 

JEL Classification

F2 J3 L1 L2 O3 


  1. Alacer J, Zhao M (2012) Local R&D strategies and multilocation firms: the role of internal linkages. Manag Sci 58(4):734–753CrossRefGoogle Scholar
  2. Antras P, Helpman E (2004) Global sourcing. J Polit Econ 112(3):552–580CrossRefGoogle Scholar
  3. Arvanitis S, Hollenstein H (2011) How do different drivers of R&D investment in foreign locations affect domestic firm performance? An analysis based on Swiss Panel micro data. Ind Corp Chang 20(2):605–640CrossRefGoogle Scholar
  4. Baik K H (1994) Effort levels in contests with two asymmetric players. South Econ J 61(2):367–378CrossRefGoogle Scholar
  5. Baye MR, Hoppe HC (2003) The strategic equivalence of rent-seeking, innovation, and patent-race games. Games Econom Behav 44:217–226CrossRefGoogle Scholar
  6. Branstetter L, et al. (2007) Intellectual property rights, imitation, and foreign investment: theory and evidence. National Bureau of Economic ResearchGoogle Scholar
  7. Canals C, Sener F (2014) Offshoring and intellectual property rights reform. J Dev Econ 108:17–31CrossRefGoogle Scholar
  8. Carnahan S, Agarwal R, Campbell BA (2012) Heterogeneity in turnover: the effect of relative compensation dispersion of firms on the mobility and entrepreneurship of extreme performers. Strateg Manag J 33:1411–1430CrossRefGoogle Scholar
  9. Chowdhury SM, Sheremeta RM (2011) A generalized Tullock contest. Public Choice 147(3):413–420CrossRefGoogle Scholar
  10. Colombo L, et al. (2017) Does easy start-up formation hamper incumbents’ R&D investment? Small Bus Econ 49(3):513–531CrossRefGoogle Scholar
  11. Connolly M (2003) The dual nature of trade: measuring its impact on imitation and growth. J Dev Econ 72(1):31–55CrossRefGoogle Scholar
  12. d’Aspremont C, Jacquemin A (1988) Cooperative and noncooperative R&D in Duopoly with spillovers. Am Econ Rev 78(5):1133–1137Google Scholar
  13. Demirbag M, Glaister KW (2010) Factors determining offshore location choice for R&D projects: a comparative study of developed and emerging regions. J Manag Stud 47 (8):1534–1560CrossRefGoogle Scholar
  14. Dinopoulos E, Segerstrom P (2007) North-South trade and economic growth. Stockholm School of EconomicsGoogle Scholar
  15. Dinopoulos E, Segerstrom P (2010) Intellectual property rights, multinational firms, and economic growth. J Dev Econ 92:13–27CrossRefGoogle Scholar
  16. Ekholm K, Hakkala K (2007) Location of R&D and high-tech production by vertically integrated multinationals. Econ J 117:512–543CrossRefGoogle Scholar
  17. Fonseca MA (2009) An experimental investigation of asymmetric contests. Int J Ind Organ 27:582–591CrossRefGoogle Scholar
  18. Gambardella A, Ganco M, Honoré F (2014) Using what you know: patented knowledge in incumbent firms and employee entrepreneurship. Organ Sci 26(2):456–474CrossRefGoogle Scholar
  19. Ganco M (2013) Cutting the Gordian knot: the effect of knowledge complexity on employee mobility and entrepreneurship. Strateg Manag J 334:666–686CrossRefGoogle Scholar
  20. Glass A J, Wu X (2007) Intellectual property rights and quality improvement. J Dev Econ 82:393–415CrossRefGoogle Scholar
  21. Grossman GM, Helpman E (2002) Integration vs outsourcing in industry equilibrium. Q J Econ 117(1):85–120CrossRefGoogle Scholar
  22. Gustafsson P, Segerstrom P (2011) North-South trade with multinational firms and increasing product variety. Int Econ Rev 52(4):1123–1155CrossRefGoogle Scholar
  23. Hall BH, Jaffe AB, Trajtenberg M (2001) The NBER patent citation data file: lessons, insights and methodological tools. No. w8498. National Bureau of Economic ResearchGoogle Scholar
  24. Helpman E (1993) Innovation, imitation, and intellectual property rights. Econometrica 61(6):1247–1280CrossRefGoogle Scholar
  25. Hedge D, Hicks D (2008) The maturation of global corporate R&D: evidence from the activity of US foreign subsidiaries. Res Policy 37:390–406CrossRefGoogle Scholar
  26. Ito B, Wakasugi R (2007) What factors determine the mode of overseas R&D by multinationals? Empirical evidence. Res Policy 36:1275–1287CrossRefGoogle Scholar
  27. Jia H, Skaperdas S, Vaidya S (2013) Contest functions: theoretical foundations and issues in estimation. Int J Ind Organ 31(3):211–222CrossRefGoogle Scholar
  28. Kamien M I, Muller E, Zang I (1992) Research joint ventures and R&D Cartels. Am Econ Rev 82(5):1293–1306Google Scholar
  29. Keupp M M, Beckenbauer A, Gassmann O (2009) How managers protect intellectual property rights in China using de facto strategies. R&D Manag 39(2):211–224CrossRefGoogle Scholar
  30. Keupp M M, Friesike S, von Zedtwitz M (2012) How do foreign firms patent in emerging economies with weak appropriability regimes? Archetypes and motives. Res Policy 41(8):1422–1439CrossRefGoogle Scholar
  31. Lai EL-C, Riezman R, Wang P (2009) Outsourcing of innovation. Econ Theory 38(3):485–515CrossRefGoogle Scholar
  32. Leininger W (1993) More efficient rent-seeking: a Munchhausen solution. Public Choice 75(1):43–62CrossRefGoogle Scholar
  33. Lewin AY, Massini S, Peeters C (2009) Why are companies offshoring innovation? The emerging global race for talent. J Int Bus Stud 40(6):901–925CrossRefGoogle Scholar
  34. Lundin N, Serger S S (2007) Globalization of R&D and China: empirical observations and policy implications. No. 710. IFN Working Paper 710Google Scholar
  35. Melitz MJ (2003) The impact of trade on intra-industry reallocations and aggregate industry productivity. Econometrica 71(6):1695–1725CrossRefGoogle Scholar
  36. Moncada-Paterno-Castello P, Vivarelli M, Voigt P (2011) Drivers and impacts in the globalization of corporate R&D: an introduction based on the European experience. Ind Corp Chang 20(2):583–603CrossRefGoogle Scholar
  37. Simon HA (1962) The architecture of complexity. Proc Am Philos Soc 106 (6):467–482Google Scholar
  38. Skaperdas S (1996) Contest success functions. Econ Theory 7(2):283–290CrossRefGoogle Scholar
  39. Smith PJ (1999) Are weak patent rights a barrier to US exports? J Int Econ 48 (1):151–177CrossRefGoogle Scholar
  40. Sun Y, Du D, Huang L (2006) Foreign R&D in developing countries: empirical evidence from Shanghai, China. China Rev 6(1):67–91Google Scholar
  41. Taylor MS (1993) TRIPS, trade, and technology transfer. Can J Econ 26(2):625–637CrossRefGoogle Scholar
  42. Unesco Science Report 2010 Unesco (2011)Google Scholar
  43. US BEA (2018) U.S. Direct Investment Abroad, all majority-owned foreign affiliates (data for 2009 and forward), Research and Development Expenditures (accessed November 14)Google Scholar
  44. Yang Q, Jiang CX (2007) Location advantages and subsidiaries’ R&D activities in emerging economies: exploring the effect of employee mobility. Asia Pac J Manag 24 (3):341–358CrossRefGoogle Scholar
  45. Zhao M (2006) Conducting R&D in countries with weak intellectual property rights protection. Manag Sci 52(8):1185–1199CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of EconomicsQuinnipiac UniversityHamdenUSA

Personalised recommendations