Research Reveals Outsourcing R&D Abroad Boosts Innovation

Businesses that outsource research and development (R&D) overseas are more likely to innovate than those who outsource at home, says new research. IBM’s strategy of building research capability in places like Switzerland, China, and India mirrors that of GE, Intel and others. Ordinarily the purpose of outsourcing R&D was cost reduction, but many are now doing it to boost innovation as well.

Professor Michael Mol, of Warwick Business School, and Associate Professor Olivier Bertrand, of SKEMA Business School in France, analyzed a large database of 6,015 French businesses over a five-year period and found that the use of home R&D suppliers can have a largely negative effect on product and process innovation.

“Firms that go through the trouble of finding highly qualified foreign suppliers see a bigger pay-off than if they had outsourced at home,” said Professor Mol. “This is a very interesting finding, because typically we only associate outsourcing abroad with efforts to bring down costs, not to increase innovation.

“Home outsourcing occurs when firms lack innovative capabilities and is either trying to save costs or their own internal R&D department is lacking. By contrast, those that choose to outsource abroad do so to tap specialist sources of knowledge that complement and strengthen their own internal R&D.

“An interesting example of this is IBM’s strategy to build research labs in places like Switzerland, Japan, Israel, UK, China and India from which R&D is outsourced to various research institutes.”

Research and Development is a core part of many businesses, and companies are increasingly looking to external sources to increase innovation.
According to the 2012 Global Innovation 1000 the top three industries that spend the most on R&D are Computing and Electronics, Health (including pharmaceuticals) and Automotive.

Professor Mol’s study shows that a key factor in the decision-making process of outsourcing R&D is cognitive distance, which refers to the distance in knowledge and understanding between the business that outsources and its supplier. Suppliers in the home country are less attractive for innovation purposes because their knowledge is often too similar.

The research shows that while outsourcing at home is a sound option to fill short-term gaps, outsourcing abroad can be hugely beneficial if a company is looking to innovate.

“When firms are looking for capabilities which are relatively mundane, they can often find them in a wide variety of locations around the world,” said Professor Mol.

“If these capabilities can be outsourced at home, it generally makes little sense to source them from abroad given the costs involved. By contrast, R&D tapped from international markets provides firms with more opportunities and choices, and hence a greater potential for complementarities with the internal R&D function.”

And he explains that it is important for managers and business owners to have a clear understanding of the advantages of outsourcing abroad.

“Understanding the differences between outsourcing at home and abroad and the implications for innovation performance is important,” said Professor Mol. “From a managerial perspective, it is important to understand how outsourcing R&D contributes to innovation outcomes, and when offshore outsourcing is a viable strategy.

“Since R&D outsourcing, especially abroad, is a small yet rapidly growing phenomenon, academics and practitioners should continue to invest in understanding its implications.”

Read: https://wrap.warwick.ac.uk/42137/


MORE LIKE THIS

  • Get the CEO Briefing

    Sign up today to get weekly access to the latest issues affecting CEOs in every industry
  • upcoming events

    Roundtable

    Strategic Planning Workshop

    1:00 - 5:00 pm

    Over 70% of Executives Surveyed Agree: Many Strategic Planning Efforts Lack Systematic Approach Tips for Enhancing Your Strategic Planning Process

    Executives expressed frustration with their current strategic planning process. Issues include:

    1. Lack of systematic approach (70%)
    2. Laundry lists without prioritization (68%)
    3. Decisions based on personalities rather than facts and information (65%)

     

    Steve Rutan and Denise Harrison have put together an afternoon workshop that will provide the tools you need to address these concerns.  They have worked with hundreds of executives to develop a systematic approach that will enable your team to make better decisions during strategic planning.  Steve and Denise will walk you through exercises for prioritizing your lists and steps that will reset and reinvigorate your process.  This will be a hands-on workshop that will enable you to think about your business as you use the tools that are being presented.  If you are ready for a Strategic Planning tune-up, select this workshop in your registration form.  The additional fee of $695 will be added to your total.

    To sign up, select this option in your registration form. Additional fee of $695 will be added to your total.

    New York, NY: ​​​Chief Executive's Corporate Citizenship Awards 2017

    Women in Leadership Seminar and Peer Discussion

    2:00 - 5:00 pm

    Female leaders face the same issues all leaders do, but they often face additional challenges too. In this peer session, we will facilitate a discussion of best practices and how to overcome common barriers to help women leaders be more effective within and outside their organizations. 

    Limited space available.

    To sign up, select this option in your registration form. Additional fee of $495 will be added to your total.

    Golf Outing

    10:30 - 5:00 pm
    General’s Retreat at Hermitage Golf Course
    Sponsored by UBS

    General’s Retreat, built in 1986 with architect Gary Roger Baird, has been voted the “Best Golf Course in Nashville” and is a “must play” when visiting the Nashville, Tennessee area. With the beautiful setting along the Cumberland River, golfers of all capabilities will thoroughly enjoy the golf, scenery and hospitality.

    The golf outing fee includes transportation to and from the hotel, greens/cart fees, use of practice facilities, and boxed lunch. The bus will leave the hotel at 10:30 am for a noon shotgun start and return to the hotel after the cocktail reception following the completion of the round.

    To sign up, select this option in your registration form. Additional fee of $295 will be added to your total.