R&D offshoring in multinational enterprises : Relevance of transaction cost and internalization theories

Purpose – The purpose of this paper is to examine recent trends in R&D offshoring by US multinational enterprises (MNEs) against a well‐established conceptual framework derived from transaction cost and internalization theories, as well as challenges to it. Design/methodology/approach – The paper develops and tests a parsimonious model of cross‐country variation in R&D performed by affiliates of MNEs based on a 31‐country, 15‐year dataset of US non‐bank majority‐owned foreign affiliates (MOFAs). Findings – Consistent with the implications of transaction cost and internalization frameworks, the findings show that the location of R&D offshoring is significantly determined by ownership of physical assets by MNEs in the host country and host country technological capability. Practical implications – R&D offshoring can enhance the quality and the quantity of knowledge flows between home country and host country R&D centers. The resulting positive knowledge spill‐over effects can increase the welfare and productivity of an MNE and its home country in the long run. Originality/value – The paper provides a comprehensive explanation for MNEs' R&D offshoring based on transaction costs, internalization framework and technological factors.