Why are companies offshoring innovation? The emerging global race for talent

Abstract

This paper empirically studies determinants of decision by companies to offshore innovation activities. It uses survey data from the international Offshoring Research Network project to estimate the impact of managerial intentionality, past experience, and environmental factors on the probability of offshoring innovation projects. The results show that the emerging shortage of highly skilled science and engineering talent in the US and, more generally, the need to access qualified personnel are important explanatory factors for offshoring innovation decisions. Moreover, contrary to drivers of many other functions, labor arbitrage is less important than other forms of cost savings. The paper concludes with a discussion of the changing dynamics underlying offshoring of innovation activities, suggesting that companies are entering a global race for talent.

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Notes

  1. 1.

    Our interpretation of the word “talent” throughout this paper is that of highly qualified individuals with advanced university degrees. Particularly relevant to this study is the concept of technical talent, referring to Master and PhD graduates in Science and Engineering (S&E), and experienced workers.

  2. 2.

    The H1B is a non-immigrant visa category for temporary (3+3 years) workers in specialty occupations requiring the theoretical and practical application of a body of specialized knowledge if a US citizen or resident is not available. H1B applicants must hold a bachelor's degree or the equivalent in the specific specialty (e.g., engineering, mathematics, physical sciences, computer sciences, medicine and health care, education, biotechnology, business specialties). Each fiscal year, the US Congress sets a cap on H1B admissions. The H1B visa is the main channel for US companies to employ foreign S&E workers in the US.

  3. 3.

    For a report on policy proposals intended to increase the supply of engineers and scientists in the US, and a discussion of the consequences of a continued shortage of engineering and science talent in the US, see Rising above the gathering storm: Energizing and employing America for a brighter economic future (Committee on Prospering in the Global Economy of the 21st Century, 2005).

  4. 4.

    The 2004 and 2005 surveys were supported by the Duke CIBER and Archstone Consulting LLC. In 2006 the ORN lead corporate sponsor was Booz Allen Hamilton, the global management consulting firm. As of 2007, The conference Board and PriceWaterhouseCooper are lead collaborators of the ORN Project.

  5. 5.

    Partner Universities include Copenhagen Business School (covering Scandinavian countries), Wissenschaftliche Hochschule für Unternehmensführung (Germany), RSM Erasmus University (Netherlands), IESE (Spain), Manchester Business School (UK), ULB – Solvay Brussels School of Economics and Management (Belgium), and Bocconi University (Italy).

  6. 6.

    Alternative measures were tested in the model, including rates of growth and discounting for GDP/pro capita GDP. We chose the operationalization that showed the best performance.

  7. 7.

    The survey question was: “For each function, please evaluate the importance of the following strategic drivers in your decision to offshore,” to be evaluated on a five-point Likert scale ranging from 1= not important at all to 5= very important.

  8. 8.

    Three correlation coefficients, between Speed and Global, between overall supply of S&E and D2003, and between Cost of labor and Other costs, present high values (respectively 0.43, 0.43, and 0.38) and are statistically significant at 1%. However, when we entered the two variables involved separately, the regression results differed only marginally, indicating these correlations do not affect the regression model.

  9. 9.

    We tested the models also for pre-2003 and post-2004 subsamples, and obtained very similar results. The correlation tables for the two subperiods are very similar to those of the whole period, and therefore are not reported. Results are available from the authors.

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Correspondence to Arie Y Lewin.

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Accepted by Martin Kenney and Silvia Massini, Guest Editors, 6 August 2008. This paper has been with the authors for three revisions.

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Lewin, A., Massini, S. & Peeters, C. Why are companies offshoring innovation? The emerging global race for talent. J Int Bus Stud 40, 901–925 (2009). https://doi.org/10.1057/jibs.2008.92

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Keywords

  • offshoring
  • innovation
  • product development
  • global talent
  • co-evolution
  • survey