In recent decades, the global distribution of manufacturing has shifted dramatically, with many multinational firms moving their production to countries that pay workers lower wages while continuing skill-intensive activities in the home country. In a new study, researchers explored whether this offshoring degraded or enhanced Taiwanese electronics manufacturing firms' innovative capabilities. Their results suggest that the practice had mixed outcomes.
The study was conducted by researchers at Carnegie Mellon University, National Central University, National Taiwan University, the University of Pennsylvania, and the U.S. Census Bureau. It is published in Management Science.
"Experts have argued for decades about the impact of offshoring on firms' innovative capacity," explains Lee Branstetter, professor of public policy and economics at Carnegie Mellon's Heinz College, who led the study. "Some say offshoring enhances innovation by reallocating resources more efficiently, while others claim it weakens innovation by reducing learning by doing and creating barriers to knowledge transfer between research and development and production."
Researchers exploited a change in policy that differentially affected the ability of Taiwanese firms to move the production of certain goods to China. While production moved to China, activities such as marketing, strategy, and research and development (R&D) remained in Taiwan. The study matched multiple databases at both the product category and firm level to measure the impact of the offshoring of particular products by particular firms on the innovations in technologies directly associated with those products.
In the technologies directly related to product categories that could be moved offshore more easily after the policy change, innovation levels declined, the study found; in addition, innovation shifted from product to process. But the study also found evidence that the policy change led firms to reallocate research efforts, boosting innovation in categories of products that were not directly affected by the change and shifting them toward product innovation.
"This evidence suggests that Taiwanese firms are not suffering from a decline in R&D capability as a consequence of offshoring, but are instead adopting a new optimal mix of offshoring, product innovation, and investments in process innovation as a rational response to the opportunities generated by liberalization of Taiwan's former offshoring restrictions," notes Britta Glennon, associate professor at Wharton, who coauthored the study.
The study's authors urge caution in generalizing their results to other contexts. That said, they note that if large increases in offshoring did not undermine innovative capability in Taiwan, that outcome may not occur in a context like the United States, where the transition to innovation focused on advances in product design is better established and the leading IT firms (e.g., Apple, Nvidia) appear to have leveraged a move away from manufacturing into a new era of global technological leadership.
