R&D offshoring and home industry productivity

How does R&D offshoring affect industrial productivity in the home country?

We care because concerns regarding R&D offshoring often highlight the potential loss of high-value jobs and a decline in domestic technological capabilities. However, understanding the actual effects of R&D offshoring on home industry productivity is crucial, especially given recent evidence suggesting that domestic firms may benefit from accessing global technological advancements through their offshoring practices. This understanding can inform policies aimed at maintaining or enhancing domestic innovation capabilities amidst increasing globalization of R&D activities.

Using industry-level data from 18 OECD countries spanning 1981 to 2007, we investigated the impact of R&D offshoring on domestic productivity. To address potential simultaneity between productivity and R&D offshoring, we applied an instrumental-variable approach, using country-specific R&D tax policy as an instrument. The sample analyzed consisted of thousands of patent applications linked to two-digit manufacturing production data.

We find that R&D offshoring has a positive impact on productivity in the home country: a 10% increase in the share of technology generated from offshoring is associated with a 14.78% increase in productivity. We also find that market-seeking offshored R&D can potentially harm productivity, whereas technology-seeking offshored R&D brings significant benefits, aligning with findings from prior literature on the benefits of advanced R&D activities.

• Industry-level data for 18 OECD countries from 1981 to 2007, including 4 million priority patent applications resulting in approximately 182,000 (4%) identified as R&D offshoring

• The foreign tax policies are exogenously affecting domestic productivity and not influenced by it
• The relationship between productivity and R&D offshoring accounts for potential endogeneity
• R&D offshoring activities categorized as technology-seeking genuinely enhance productivity whereas market-seeking R&D does not