The Role of R&D Offshoring in Knowledge Diffusion : New Evidence from China

While R&D offshoring to emerging economies creates new opportunities for knowledge creation and acquisition, it may also increase the risk of losing critical technological knowledge to indigenous competitors in the host country. Nearly every prior empirical study has shown that the establishment of foreign R&D centers increases knowledge flows to local firms. Business leaders and policymakers have expressed particular concern about this outcome in China, where multinational corporations (MNCs) are rapidly increasing their R&D offshoring, and legal protection for intellectual property rights remains a work in progress. This paper uses new empirical analyses and field interviews to demonstrate that multinational R&D offshoring in China appears to reduce knowledge flows to local firms, not increase them. First, following the literature, I use a matching procedure to construct a sample consisting of focal and control patents, and a t-test to compare citation rates received by focal and control patents from Chinese organizations. Next, I adapt a Difference-in-Differences (DD) approach to address the endogeneity problems of the t-test. Both the t-test and DD estimation suggest R&D offshoring is associated with a lower probability of knowledge flow from the foreign multinational to Chinese organizations. This is surprising because it contradicts not only the existing findings in the literature, but also the perceptions widely held by business leaders and policymakers. Using insights obtained from field interviews, I argue that as multinationals expand R&D in China they also enhance their ability to monitor the learning and invention of their indigenous competitors. By combining this monitoring capacity with other strategic tools, multinationals can limit the ability of indigenous Chinese firms and other organizations to build on MNC R&D. Taking advantage of social network analysis tools, I empirically test this hypothesis and find that a higher monitoring capacity due to offshoring is associated with a lower probability of knowledge diffusion to Chinese organizations. This study calls for a reconsideration of the implications, both for corporate strategy and public policy, of the current trend of multinational R&D offshoring in emerging markets