Does Offshoring Production Reduce Innovation: Firm-Level Evidence from Taiwan
Does the offshoring of production degrade or enhance the innovative capabilities of manufacturing firms? We contribute to this debate by exploiting a policy shock that differentially affected the ability of Taiwanese firms to offshore some products to China. We find causal evidence that offshoring impacts both the level and nature of innovation. In the technologies directly related to product categories that could be offshored more easily after the policy shock, overall innovation levels decline and innovative effort shifts away from product innovation and towards process innovation. However, we also find evidence of a second-order positive effect of offshoring on the levels of innovation—particularly product innovation—in other parts of the firm’s portfolio. These results are consistent with the notion that offshoring production induces a complex reallocation of innovation effort within the firm, both across and within technology categories. Our paper examines this reallocation in the context of Taiwanese electronics firms, and introduces new methods that could be used to study post-offshoring reallocations of innovative effort in other contexts.
We gratefully acknowledge useful comments and feedback from Tain-Jy Chen, Erica Fuchs, Guangwei Li, Brian Kovak, Richard Freeman, John Van Reenen, Yanbo Wang, Steve Yeaple, participants of the 2017 NBER Innovation Summer Institute, seminar attendees at Washington University and London Business School, and financial support from the National Science Foundation (SciSIP grants 1360165 and 1360170) and the CMU-Portugal Program. We also thank Chih-Hai Yang of National Central University for his help in obtaining the customs data used in our earlier paper, Branstetter et al. (2015), upon which this current paper builds. Britta Glennon thanks National Central University of Taiwan for its hospitality and intellectual support during her two-month stay there. All errors and omissions remain our own responsibility. The views expressed in this paper are those of the authors and do not necessarily reflect those of the U.S. Census Bureau or of the National Bureau of Economic Research. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.