Collaborative Research: The Private and Social Returns to R&D in the Age of Offshoring

As firms' supply chains have become highly complex and geographically fragmented it has encouraged the offshoring of manufacturing activities previously carried out within the United States. What are the implications of the recent surge in offshoring for the rate to innovation? There are several reasons to expect that offshoring might affect it negatively. If formal Research & Development (R&D) efforts and informal knowledge generated through the use of technology are complements in innovation, the geographic separation of R&D and production will slow down innovation. Moreover, if knowledge spills over between physically proximate plants, one firm's production location and R&D decisions will affect the rate of innovation of other firms.

To assess the magnitude of these effects, this project uses microdata from the last 15 years collected in the Census of Manufactures and the Annual Survey of Manufacturing to examine firm responses to the reduction in costs of offshoring caused by China’s entry into the World Trade Organization (WTO). First, the impact of U.S. offshoring on firms' returns on R&D is quantified by contrasting the innovation trajectories of purely domestic U.S. firms with those that decided to offshore after China's entry into the World Trade Organization. Second, the effect of offshoring on the social return to innovation in the United States is analyzed. Geography constrains the movement of labor, goods, and knowledge, a fact that often leads to the clustering of production at particular locations. As a consequence, if one firm suddenly withdraws production from U.S. factories it could affect other U.S. firms; as these firms respond the effects may be magnified to economy-wide proportions. By going beyond the narrow private effects of offshoring, this work gets at the "offshoring multiplier", which captures the total impact on U.S. productivity and innovation caused by offshoring.

This research puts hard numbers to the claim that offshoring has weakened U.S. innovation by measuring directly the impact of offshoring on the private return to R&D. The results are essential for the formation of manufacturing and trade policies. In particular, if the impact of offshoring on the social returns to R&D is large, as many have claimed, it suggests the need to coordinate the incentives for R&D with incentives for local over foreign production in order to maximize the feedback effects from knowledge spillovers. The project will also contribute to scientific workforce development through the training of graduate research assistants who will gain first-hand knowledge of underutilized data sources and techniques and will help to support newly established Census Research Data Centers in State College, PA, and Boulder, CO.