Offshoring innovation to emerging countries: the effects of ip protection and cultural differences on firms' decision to augment versus exploit home-base-knowledge

Abstract

Developed-country multinationals (DMNEs) have increasingly engaged in the practice of ofshoring innovation to emerging countries. In this article, we leverage and extend the institution-based view to further our understanding of this phenomenon. Specifcally, we examine the diferential efects of formal and informal institutions on DMNEs’ strategic decision to ofshore innovation activities aimed at augmenting (versus exploiting) home-base-knowledge to emerging countries. Concerning formal institutions, we argue that the stronger the emerging host country’s IP protection, the higher the likelihood that a DMNE ofshores innovation activities aimed at augmenting home-base-knowledge. Regarding informal institutions, we argue that the greater the cultural diferences between the developed home country and the emerging host country, the higher the likelihood that a DMNE ofshores innovation activities aimed at augmenting home-base-knowledge. Additionally, we propose a key contingency that attenuates the relationship involving IP protection while strengthening the one involving cultural diferences: the DMNE’s experience with ofshoring innovation. Analysis of 128 ofshoring innovation implementations by 78 DMNEs in ten emerging countries provides support for all our hypotheses except for the one focused on the moderation efect of experience on the relationship involving cultural diferences.