Offshoring Intermediate Manufacturing: Boost or Hindrance to Firm Innovation?

This paper analyses the possible effect that offshoring intermediate manufacturing activities may have on innovation. The theoretical arguments predict contrasting effects. While some of the characteristics of the process of transferring manufacturing activities abroad may induce innovation, others might have deleterious consequences. We aim to add to this debate by testing empirically if companies that offshore their parts and components manufacturing activities obtain better or worse innovation results. Using data from 989 Spanish manufacturing firms from 2006 to 2011, we find a positive association between the offshoring of intermediate manufacturing and ex post innovation output, proxied by the number of patent applications. Our results suggest that offshoring of intermediate production may be beneficial for innovation, allowing firms to gain access to greater knowledge, skills and experience, and to achieve sound organizational learning, all of which are key inputs in the innovation process.