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How appropriate are the innovation returns from offshored information technology (IT) research and development (R&D)? In light of the emergence and spate of IT R&D offshoring, this paper aims to investigate the mechanics of governance in attracting IT R&D inflow in offshored hosts and, more importantly, whether R&D offshoring provides instrumental and legitimate IT innovation returns (intellectual property (IP)) to outsourcing countries as investors.

The authors combine the calculus of host‐country governance and IT R&D inflows with IT innovation returns to the US from its offshored IT R&D investments. They argue on the basis of the golden mean – a principle of moderation where too little or too stringent governance deters IT R&D investments; more importantly, too little and too much IT R&D investments fail to stimulate IT innovation returns to the investors.

An analysis of 81 World Trade Organization (WTO) countries underscores the authors' argument that the calculus between governance and IT innovation productivity is mediated by IT R&D investments. However, the relationship is non‐linear with diminishing marginal returns‐to‐scale.

The non‐linear relationships between governance, R&D foreign direct investments (FDI) and patent‐level returns show a threshold effect often overlooked by existing research. Together, this article points out the need for researchers to consider diminishing returns to scale from overarching emphases on governance or IT R&D over‐investments.

As multinational companies in developed countries increasingly offshore IT‐related R&D, this investigation is relevant, current, and disconcerting – implying the need for multinationals to revisit their IT R&D offshoring strategies and priorities.

These research findings do not support the “win‐win” pitch for IT R&D offshoring. Instead, this research points to the fact that, while there are some economic benefits derived from R&D FDI, there are inflection points beyond which innovations returns diminish. Where the inflection point lies depends on countries as well as specific firms and industries.

The fragmentation of the production process is a major theme of research in international business. Trade benefits arise from the “slicing up” of the aggregate value chain, as well as the entry of new countries bearing low labor costs. If, initially, multinational corporations (MNCs) relocated only standardized, low-value manufacturing activities in new emerging economies (exploitative offshoring), now they are also offshoring their knowledge-intensive activities (explorative offshoring). In the past, the literature on internationalization was mainly focused on the characterization of the MNC as a specific monolithic organization active in the international production. In the present, numerous analyses have discussed the international location of R&D activities, mainly in advanced countries. The foreign R&D subsidiaries are still tightly linked to the headquarters, maintaining a controlled position. Future research must address two orders of issues. The first is the progressive autonomy of the foreign subsidiaries, which are more and more developing new and independent lines of research. This process leads MNCs to mobilize and leverage untapped pools of knowledge scattered around the world. The second is the R&D offshoring toward emerging economies. This complex process can be characterized as a move from the smile model discussed extensively by Ram Mudambi (where emerging economies were considered as pools of low-cost labor tout court) to a new model, called here the λ (lambda) model (where emerging economies are also pools of skilled labor). This paper will explore these new trends using some illustrative cases: L'Oréal (FR), Pfizer (US), ST Microelectronics (CH), and Geox (I). The cases reveal the double orientation of MNCs toward emerging economies, where both explorative and exploitative offshoring takes place.

The purpose of this paper is to examine recent trends in R&D offshoring by US multinational enterprises (MNEs) against a well‐established conceptual framework derived from transaction cost and internalization theories, as well as challenges to it.

The paper develops and tests a parsimonious model of cross‐country variation in R&D performed by affiliates of MNEs based on a 31‐country, 15‐year dataset of US non‐bank majority‐owned foreign affiliates (MOFAs).

Consistent with the implications of transaction cost and internalization frameworks, the findings show that the location of R&D offshoring is significantly determined by ownership of physical assets by MNEs in the host country and host country technological capability.

R&D offshoring can enhance the quality and the quantity of knowledge flows between home country and host country R&D centers. The resulting positive knowledge spill‐over effects can increase the welfare and productivity of an MNE and its home country in the long run.

The paper provides a comprehensive explanation for MNEs' R&D offshoring based on transaction costs, internalization framework and technological factors.

The purpose of this paper is to advance the understanding of factors that affect offshoring performance results. To do so, this paper focuses on the access to location-specific advantages, rather than solely on the properties of the offshoring company, its strategy or environment. Assuming that different levels of synergy may exist between particular offshoring strategic decisions (choosing offshore outsourcing or captive offshoring and the type of function) and different offshoring advantages, this work advocates that the actual fact of realization of certain offshoring advantages (getting or not getting access to them) is a more reliable predictor of offshoring success.

A set of hypotheses derived from the extant literature is tested on the data from a quantitative survey of 1,143 Scandinavian firms.

The paper demonstrates that different governance modes and types of offshored function indeed provide different levels of access to different types of location-specific offshoring advantages. This difference may help to explain the ambiguity of offshoring initiatives performance results.

Limitations of the work include using only the offshoring strategy elements and only their limited variety as factors potentially influencing access to offshoring advantages. Also, the findings are limited to Scandinavian companies.

The paper introduces a new concept of access, which can help to more reliably predict performance outcomes of offshoring initiatives. Recommendations are also provided to practitioners dealing with offshoring initiatives.

This paper aims to serve as a response to the article “Innovation returns from offshored IT R&D”.

The paper highlights two aspects relating to captive centres and R&D offshoring: what R&D is offshored, and understanding foreign direct investment decisions in the context of captives.

Many captive centres have gone through a complex evolutionary path during which they have evolved from a cost centre to become a profit centre. WNS and Genpact are just two examples of such behaviour. Such an approach, and in many cases a reality, should change our approach as to how we assess the returns on offshoring investment by simply taking into account the strategic intent behind such an investment.

This article serves as a response to the research paper “Innovation returns from offshored IT R&D” by Datta and Bhattacharyya in this issue.

Purpose – The purpose of the chapter is to analyze the factors that lead firms to offshore advanced tasks.

Methodology/approach – The study uses a 1,500-firm survey from Denmark to investigate the offshoring of 12 tradable manufacturing, technical, and service activities across different industries.

Findings – Findings indicate that offshoring of advanced tasks is driven by a different set of strategic motives than previous waves of offshoring, which predominantly included simple and standardized routine tasks. While the lower cost of unskilled, labor-intensive processes is the incentive for firms that offshore less advanced tasks, a desire to broaden and deepen global networks of new knowledge spurs highly knowledge-intensive companies to offshore more advanced tasks.

Originality/value of chapter – We propose that offshoring should be analyzed on a more disaggregated level of analysis than is the norm in mainstream offshoring literature. To reflect the trend whereby firms are “slicing” their value chain in finer and finer parts and locate these in various locations around the world, offshoring should be analyzed at the task level, since this paves the way for a richer understanding of offshoring strategies and processes.

This study aims to examine the effect of exploratory innovation offshoring on the level of hierarchical control and how this effect is moderated by transnational and dynamic environments.

This study draws on a sample of 148 Taiwanese multinational enterprises to examine their governance decisions on foreign investments.

Findings show that the more innovation offshoring is exploratory, the higher the level of hierarchical control will be used by multinational enterprises (MNEs) and that transnational and dynamic environments have different moderation effects on the positive exploratory innovation offshoring-hierarchical control relationship.

This study has two theoretical implications. First, this study extends the concept of complexity from a transaction attribute level (problem) to an environmental level (transnational environment) and finds that exploratory innovation offshoring and transnational environments interactively impact governance choices. Second, this study distinguishes between two sources of technological uncertainty – uncertainty due to transaction-level attributes (exploratory innovation offshoring) and external environments (dynamic environments) and finds that exploratory innovation offshoring and dynamic environments interactively impact governance choices.

The practical implication of this study lies in the simultaneous consideration of exploratory innovation offshoring and transnational/dynamic environments, which will allow international decision-makers to adjust/select the governance forms most appropriate for speedy responding to and handling environmental changes.

This study employs the theoretical perspectives of transaction cost economics (TCE) and resource-based view (RBV) to analyze and discuss the impact of operational environments – transnational and dynamic environments – on MNEs’ decisions on the governance structure for a given innovation offshoring.

The purpose of this paper is to assess whether offshoring strategies are able to substantially enhance firms’ international competitiveness in terms of productivity, innovativeness and skill composition for a panel of Italian manufacturing firms.

A set of hypotheses derived from the extant literature is tested on data from balance sheets and qualitative surveys of about 4,000 Italian firms. The methodology used is a propensity score matching estimator and difference in differences method that allowed the authors to detect the causal effect of the offshoring status of the firms on some performance measures.

Results demonstrate that offshoring increases the propensity to innovate and the skill ratio of workers but does not show a significant association with productivity growth. The estimates are robust in all the specifications.

The results are applicable to Italian firms. The magnitude and timing of the effects may vary across firms and countries.

This paper contributes to the empirical literature on offshoring by exploring its impact on a variety of firms’ performance measures by using matching techniques that allow us to investigate more in depth the causality link of the relationship and to control for the self-selection effect (more productive firms self-select to offshore).

The purpose of this paper is to present recent empirical results concerning offshoring and backshoring of manufacturing from and to Sweden, to increase the understanding of manufacturing relocation in an international context. In particular, extent, geographies, type of production, drivers, and benefits of moving manufacturing in both directions are investigated.

The study is based on survey data from 373 manufacturing plants. The same set of questions is used for both offshoring and backshoring between 2010 and 2015, which allows similarities and differences in decision-making and results between the two relocation directions to be identified.

There are many significant differences between offshoring and backshoring projects. Labour cost is the dominating factor in offshoring, as driver and benefit, while backshoring is related to many drivers and benefits, such as quality, lead-time, flexibility, access to skills and knowledge, access to technology, and proximity to R&D. This is also reflected in the type of production that is relocated; labour-intensive production is offshored and complex production is backshored.

Plants that have both offshored and backshored think and act differently than plants that have only offshored or backshored, which is why it is important to distinguish between these plant types in the context of manufacturing relocations.

The experience of Swedish manufacturing plants reported here can be used as a point of reference for internal manufacturing operations.

The survey design allows a unique comparison between offshoring and backshoring activity. Since Swedish firms in general have been quite active in rearranging their manufacturing footprint and have experience from movements in both directions, it is an appropriate geographical area to study in this context.

This paper aims to explore the effect of subsidiary autonomy on knowledge transfers during captive offshoring to emerging markets.

Five longitudinal cases of captive R&D and manufacturing offshoring to emerging markets.

The propositions entail the dual effect of operational subsidiary autonomy on primary knowledge transfer and reverse knowledge transfer. For newly established subsidiaries, operational subsidiary autonomy has a mainly negative effect on primary knowledge transfer and a mainly positive effect on reverse knowledge transfer and local collaboration activities increase this effect. Strategic subsidiary autonomy is mainly negative for primary and reverse knowledge transfer.

Limitations concerning the applied exploratory case study approach suggest that further research should test the identified relationships using surveys, after the initial pilot study.

A gradual increase of operational subsidiary autonomy as the subsidiary capability level increases is beneficial to ensure primary knowledge transfer. Allowing subsidiaries to collaborate locally within the confines of their mandates benefits reverse knowledge transfer.

This paper extends the secondary knowledge transfer concept to include knowledge flows with local collaboration partners, not only other subsidiaries and clarifies the distinction between operational and strategic autonomy concerning local collaboration. A subsidiary asserts operational autonomy when its collaboration with local partners relates to its existing mandate. A subsidiary asserts strategic autonomy when it collaborates with local partners beyond this mandate.