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After adjusting for several other variables, the result was the inverted U-shaped curve below, suggesting that offshoring innovation can be beneficial, but only up to a point, after which it begins to hinder a firms adaptability:
(The Y-axis is looking at the probability that a company at any given level of offshoring doesnt score in the lowest category for adaptability. In other words, the odds that it has maintained some bare minimum level of adaptability.) The findings suggest that the optimal amount of offshoring differs depending on the activity, with much more leeway for shifting product design abroad than for core R&D or downstream activities including production of new products/services, introduction of new process technology, [and] marketing of new products/services. The takeaway, the authors write, is that offshoring too much of a firms innovation is likely to be costly: Our findings hence imply a trade-off between global knowledge sourcing and a firms ability to use this knowledge effectively. The empirical results suggest that off-shoring more than 15 to 30% (depending on the type of innovation) of a firms innovation activities becomes challenging for maintaining the effectiveness of the organization. And: The threshold level is lower for innovation activities that are more closely related to core functions of the firm, i.e. R&D and marketing of innovation. If a substantial part of these activities take place at firm locations abroad, coordination costs increase and organizational changes become more complex.
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In practice, most firms in the sample were at or below the optimal threshold for offshoring of innovation. But within the subset that did choose to offshore core R&D, nearly 40% had exceeded the optimal level. Interestingly, smaller firms seemed less adversely affected by the offshoring of innovation, which the authors suggest may be due to greater organizational flexibility. But for most firms, the papers findings are worth bearing in mind. As the authors conclude, Keeping most R&D activities at the home base is beneficial in a world where innovation cycles become shorter and developing new technologies more challenging.
More blog posts by Walter Frick More on: Global business, Innovation
WALTER FRICK Walter Frick is an associate editor at the Harvard Business Review. Follow him on Twitter @wfrick.
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