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Value Creation and Capture in Developing Countries: The Driver and Mechanism of Offshore Outsourcing
Innovation

The second stream is related to innovation outcomes and points out the benefits
of offshore innovation outsourcing to the outsourcing firms. Since a critical element of
offshore innovation outsourcing is the reverse transfer of knowledge from overseas actors
to a focal firm (Govindarajan and Ramamurti, 2011; Kotabe, Dunlap-Hinkler, Parente,

and Mishra, 2007), it can intensify a firm’s innovation outputs and benefits (Grimpe and
Kaiser, 2010). On the one hand, offshore innovation outsourcing creates the conditions
for a more extensive division of labor within a firm’s global network involved in the

generation and use of knowledge. That is, offshore innovation outsourcing enables firms
to tap into specialized knowledge and skills in foreign geographic knowledge clusters with
comparative advantages in certain industries (Cassiman and Veugelers, 2006; Lewin et
al., 2009). On the other hand, firms rely upon external knowledge providers to create new
knowledge and to innovate products, processes, and services. Since outsourcing innovation

is undertaken where doing so is cost-effective and does not threaten the competitive
advantage of a company (Narula, 2001), it can help firms to increase innovation output
and stay ahead of competition (Bertrand and Mol, 2013; Nieto and Rodríguez, 2011).

The third stream proposes that offshore innovation outsourcing depends on
institutional contexts such as the host-country environments where a focal firm is
outsourcing (Kshetri, 2007; Lam, 2003; Lu, Tsang, and Peng, 2008). As the host-country
environment plays an important role in a firm’s decision on choosing offshore outsourcing
locations (Sartor and Beamish, 2014), it can either facilitate or hinder knowledge transfer

from foreign sources to the focal firm. Among the host-country characteristics, the system
of IPR protection is the most important, because it can either strengthen or weaken firms’
ability to appropriate value created by their innovation activities (Brander et al., 2017;

Martínez-Noya and García-Canal, 2018). A strong IPR protection system is critical
for offshore innovation outsourcing because it enables firms to capture the innovation
outcomes and value. Without an effective system of IPR protection, firms confront the
extra cost of implementing offshore outsourcing. Nonetheless, the relationship between the
geographic location of outsourced innovation and the institutional context, in particular the

strength of IPR protection, remains unanalyzed (Bruno et al., 2021).
The fourth stream indicates that the success of offshore innovation outsourcing
depends on knowledge management. For example, firms develop their learning paths to

conduct offshore outsourcing from the stage of cost reduction to the stage of knowledge

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