Offshoring of Production Activities & Innovation in the Home Country

Today the study “The Effects of Production Offshoring on R&D and Innovation in the Home Country” by Bernhard Dachs of the Austrian Institute of Technology and myself was published online.

A strong innovation performance based on R&D, product development and the implementation of advanced production technologies is key for the long-term competitiveness of European economies. This study investigates the effects of production offshoring on research and development (R&D) and innovation activities of the firm in the home country. The analysis is based on a dataset of more than 3000 manufacturing firms from seven European countries taken from the magnificent  European Manufacturing Survey.

We employ propensity score matching to compare R&D and innovation activities of firms which have offshored production activities in a previous period to a control group of non-offshoring firms.

The analysis finds no negative effect of production offshoring on innovation and technological capabilities of firms in the home country. On contrary, offshoring firms spend significantly more on R&D or product design, and invest more in process innovation than non-offshoring firms. These results support a view on internationalization of firms that regards offshoring as a strategy of international expansion, and not a passive reaction of firms to a loss of their competitiveness.

Our results indicate that this expansion goes hand in hand with innovation and process modernization at home.



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