Innovative R&D offshoring in North-South trade: Theory and evidence

This study proposes a general equilibrium model to describe innovative R&D location decisions by multinational firms. Using two countries, a developed North and a developing South, the model examines Northern firms employing researchers in the South in order to produce new varieties of a good. The Northern firms risk their product being imitated when offshoring research. Southern researchers may take information learned while employed by the Northern firm and start their own competing firm. The model's main predictions are supported empirically by a data set constructed with U.S. patent data. For high-tech industries, stronger IPR protection in the South increases both industry-level and firm-level offshoring at a rate faster than low-tech industries. Southern import tariffs do not affect firm-level innovative R&D offshoring.