Offshoring Innovation to Emerging Countries: The Effects of IP Protection and Cultural Differences on Firms' Decision to Augment Versus Exploit Home-Base-Knowledge.
| Verfasser | Pisani, Niccolo |
| Posten | RESEARCH ARTICLE - Intellectual property - Report |
1 Introduction
Developed-country multinational enterprises (DMNEs) have increasingly relocated innovation activities to foreign locations, thus engaging in the commonly termed practice of offshoring innovation (Cantwell and Mudambi 2005; Castellani et al. 2013; Granstrand 1999; Santangelo et al. 2016; Thomson 2013; UNCTAD 2005). Whereas initially offshoring innovation has almost exclusively interested other developed countries as host-country recipients, in the recent past DMNEs have increasingly offshored innovation to emerging countries (Bertrand and Mol 2013; Sartor and Beamish 2014; Thomson 2013). For instance, Unilever and Intel have created large research and development (R&D) centers in China and India. Similarly, the German automotive engineering firm MoTec has offshored some of its design activities to Romania and Hungary (Manning et al. 2013; Reddy 2011). This growing phenomenon has turned into a relevant aspect of today's global economy and a central theme in international business (IB) research (Aulakh et al. 2016; Lahiri 2010; Pisani and Ricart 2016; Siedschlag et al. 2013). (1)
Despite the surge of scholarly works focused on DMNEs' offshoring innovation, our understanding of this practice in the context of emerging countries remains underdeveloped for two main reasons. First, IB studies have traditionally considered DMNEs offshoring innovation to other developed countries as this has been the predominant practice until relatively recently (Ambos 2005; Ambos and Ambos 2011; Bartlett and Ghoshal 1990; Cantwell 1989; Kuemmerle 1999; Le Bas and Sierra 2002; Patel and Vega 1999; Rugman 1981; UNCTAD 2005; Vernon 1966). While some studies have broadened the scope of their analyses to include emerging host countries, these works have either maintained their primary focus on developed countries as the key recipients of offshoring innovation activities (e.g., Siedschlag et al. 2013) or mainly focused on emerging host countries but examined the offshoring of a wide range of activities beyond the ones related to innovation (e.g., Doh et al. 2009). This has limited our understanding of the many idiosyncrasies at play when DMNEs offshore innovation to emerging countries. Second, extensive research has corroborated the notion that competing within emerging countries requires DMNEs to take choices that differ from those prescribed in traditional IB models (Aulakh and Kotabe 2008; Aulakh et al. 2016; Contractor et al. 2007; Hoskisson et al. 2013; Luo and Tung 2007; Meyer et al. 2009). Yet, Aulakh et al. (2016, p. 655) have recently concluded that "how firms learn and manage knowledge as they compete in and out of emerging markets is yet to gain serious scrutiny in the contemporary IB research" and thus called for more scholarship that develops new theory and promotes novel empirical insights on knowledge-related issues in the particular context of emerging countries. In light of the above, we recognize the need for an in-depth assessment of DMNEs' practice of offshoring innovation to emerging countries that specifically focuses on their idiosyncratic traits.
In this paper, we build on previous research (Ambos 2005; Ambos and Ambos 2011; Kuemmerle 1999; Le Bas and Sierra 2002) showing that offshoring innovation can be of two types--either home-base-knowledge augmenting (HBKA), when the main purpose is to increase the pool of knowledge already possessed at home," or home-base-knowledge exploiting (HBKE), when the primary purpose is to adapt products and services to the specific requirements of the local host market (3)--and examine how host-country contextual factors influence DMNEs' strategic decision to undertake a HBKA (versus HBKE) implementation when offshoring innovation to an emerging country. To do so, we leverage and extend the institution-based view, which has become the dominant theoretical framework to explain emerging economy business phenomena (Meyer and Peng 2016). Its application in the context of emerging countries is particularly valuable in view of the greater variation in institutions in such countries which makes them far more pertinent than in developed economies (Meyer and Peng 2005; Peng 2003; Peng et al. 2008, 2009). Specifically, we focus on the distinction between formal and informal institutions (Dikova et al. 2010; Liou et al. 2016; Meyer and Peng 2016; North 1990) and examine their differential effects on DMNEs' likelihood to undertake a HBKA implementation. With respect to formal institutions--which refer to the regulatory environment, e.g., a country's political and judicial regulations, economic rules, and third-party enforcement (Liou et al. 2016)--we examine the role of intellectual property (IP) protection because of its salience in emerging countries (Zhao 2006). In relation to informal institutions--which instead refer to the normative and cultural-cognitive environments and are generally contextualized as the unwritten rules and norms of behavior (Dikova et al. 2010)--we examine the role of cultural differences between the developed home country and the emerging host country because of their relevance when studying business phenomena in emerging countries (Meyer and Peng 2016). (4)
Our first expectation is that the stronger the emerging host country's IP protection, the higher the likelihood that a DMNE undertakes a HBKA implementation in such country. This is because the weaker the IP protection, the more inadequate the institutional safeguards a DMNE can count on to protect the proprietary knowledge held in the host environment, increasing the risk of appropriation by rival firms (Acemoglu and Johnson 2005; Berry 2006, 2017; Henisz 2000). Given that a HBKA implementation aims at creating new knowledge, a DMNE is less likely to be willing to generate new knowledge in an emerging host country characterized by a weak IP protection. Our second expectation is that the greater the cultural differences between the developed home country and the emerging host country, the more likely a DMNE undertakes a HBKA implementation. This is because cultural differences promote creativity and stimulate learning opportunities (Lisak et al. 2016; Nurmi and Hinds 2016; Stahl et al. 2010; Stahl and Tung 2015) and can therefore trigger the exploratory activities and the generation of new knowledge that are the key objectives of a HBKA implementation. Additionally, we focus on a key firm-level contingency--a DMNE's experience in offshoring innovation--and argue that it attenuates the positive effect of IP protection on the likelihood to undertake a HBKA implementation. With growing experience, a DMNE is more likely to have created organizational practices that can provide important internal safeguards to the risks associated with the country-level institutional deficits related to a weak IP protection. Finally, we argue that a DMNE's experience strengthens the positive effect of cultural differences on the likelihood to undertake a HBKA implementation. With growing experience, a DMNE is more likely to have created organizational practices that can enhance the positive effects associated with cultural differences in its offshore innovation sites, thus further facilitating the generation of new knowledge in an emerging host country characterized by greater cultural differences.
We tested our hypotheses on a fine-grained sample of 128 offshoring innovation implementations undertaken by 78 DMNEs (based in the US and Western Europe) in ten emerging countries. Our empirical analysis provided support for the positive relationship between IP protection in the emerging host country and the likelihood to undertake a HBKA implementation. We also found support for our second hypothesis according to which cultural differences are positively related to the likelihood to undertake a HBKA implementation. While we found evidence that a DMNE's experience with offshoring innovation weakens the positive effect of IP protection, we failed to empirically validate the positive moderation effect on the relationship involving cultural differences. Building on the notion that the psychic distance construct identifies a broad array of factors related to culture (Dow and Karunaratna 2006; Johanson and Vahlne 1977), we also offered a nuanced assessment of the effects of psychic distance stimuli closely associated with cultural differences and of particular salience in emerging countries and thus tested the individual effects of language distance and religion distance. Our results showed that while the former is positively related to the likelihood of a HBKA implementation, the latter is negatively related. Further model specifications and a number of other robustness tests lend additional support to our conclusions.
In so doing, this study makes three important contributions to IB scholarship. First, we leverage and extend the institution-based view to add novel insights to our understanding of the recent phenomenon of offshoring innovation to emerging countries. By arguing and empirically showing that both IP protection and cultural differences increase the likelihood of a HBKA implementation, we explicate the differential effects of formal and informal institutions on DMNEs' strategic decision to offshore innovation activities aimed at generating new knowledge in the specific context of emerging countries. Second, we showed that a DMNE's experience in offshoring innovation attenuates the positive effect of IP protection on the likelihood to undertake a HBKA implementation, thus shedding light on the role of this important firm-level contingency in assuaging the risks associated with country-level institutional deficits in the context of emerging countries. Third, our study responds to the pressing call for more research that theorizes and produces new insights on knowledge-related issues in emerging countries. Specifically, our exclusive focus on these countries as recipients of offshoring innovation...
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