Innovation, R&D and Offshoring

This paper analyzes the offshoring of innovative activity, and the circumstances and implications of the global spread of corporate R&D. Economists are largely in agreement on the importance of continued innovation as the primary way to create high-paying new jobs in the US, therefore offshoring's unrelenting upward climb on the value-chain is fueling concerns regarding future competitiveness of the US economy. While US R&D expenditures, patent generation and productivity growth have been consistently robust, both data at the national level and firm interviews raise concern for the cost-effectiveness of R&D spending, leading to firms looking for greater returns, sometimes through offshoring. The increasingly global sales of firms are forcing them to "design to market," and the complex, interdisciplinary nature of modern research and its skill requirements are compelling some of them to outsource and offshore their innovative activity and access global R&D talent. The paper traces the evolution of offshoring activity, analyzes the reasons that have led to the offshoring of R&D, as well as the global conditions that have facilitated this phenomenon. It also presents the results of a survey that suggest that mostly large firms resort to offshoring of R&D, primarily under the aegis of captive, affiliated operations. At the same time, it is the small firms (less than 500 employees) that are more innovative, and are more likely to carry out their R&D entirely in the US. It is possible that the future of R&D offshoring will include continued innovation and the creation of high value-added jobs in Silicon Valley, leading to a win-win situation where the US develops/markets the "new" good, and the now "routinized" goods and services are offshored. On the other hand, there exists the distinct possibility of major innovations originating abroad. The paper concludes with some discussion of policy issues.