Why Are Companies Offshoring Innovation? The Emerging Global Race for Talent

This paper empirically studies the determinants of firms’ decision to offshore product development activities (i.e. R&D, product design and engineering services). A logit model is estimated using survey data from the Offshoring Research Network on offshore implementations initiated by US firms between 1990 and 2006. It relates the probability of offshoring product development to differences in companies’ strategic objectives (managerial intentionality), past experience (path dependence), and in environmental factors. The results show that offshoring of product development is partially explained by the emerging shortage of high skilled technical talent in the US, which drives the need to access talent globally. The data also suggest that firms use offshore cost savings opportunities to improve the efficiency of the innovation process, although not through labor arbitrages. Finally, increasing speed to market is another major reason underlying product development offshoring decisions.