Value Creation and Capture in Developing Countries: The Driver and Mechanism of Offshore Outsourcing Innovation

As firms have been increasingly outsourcing innovation activities in developing countries where the firms confront challenges of creating and capturing value due to weak protection of Intellectual Property Rights (IPR), the answers to why these firms still take the risk and how they manage it remain unclear. To bridge the knowledge gap, we adopt the Knowledge-based View (KBV) to conduct the research on offshore outsourcing innovation. We argue that the availability of human capital, in terms of low-cost and high-skilled talent, in a country with weak IPR protection increases the likelihood that a firm outsources an innovation activity to that country. In addition, we further propose that the main effect of human capital can be positively moderated by the designing of task specificity and project modularity which the firm uses to capture value and protect proprietary information from outsourcing innovation in developing countries. Using the data of Offshoring Research Network (ORN), Index of Economic Freedom (IEF), and World Economic Forum (WEF) to test these hypotheses, we find our premises supported.