An Empirical Assessment of the Effects of Trade in Innovative Tasks on Innovation Output

Multinational firms are increasingly sending their innovative tasks abroad. This paper examines whether off-shoring research and development, design, and engineering activities provides any gains in terms of firm-level innovation output. The effects of trade in innovative tasks on the probability of firms being innovative and the share of innovative product sales in total turnover are examined using an instrumental variable approach. The data in use come from a recent survey, which provides cross-section observations for more than 14,750 firms in 7 European countries. The results suggest that those firms that off-shore their innovative activities are 60% more likely to successfully innovate. Also, off-shoring innovative activities increases the share of innovative product sales in total turnover up to 35%. Furthermore, firms in this sample appear to gain from trade in innovative tasks when such trade is in product innovation, but not when such trade is in process innovation.