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NTU Management Review Vol. 33 No. 1 Apr. 2023

include lower labor costs and high-quality infrastructures, leading firms to not only enter
but also operate in the developing countries (Demirbag and Glaister, 2010). Moreover,
Yang and Jiang (2007) show that some developing countries provide other cost advantages
stemming from cheap access to minerals and high labor productivity. From the KBV

position, we further assert that the reasons why firms outsource innovation to developing
countries, even in those with weak IPR protection, actually go beyond labor costs, high-
quality infrastructures, and cheap minerals to pursue human capital.

On the one hand, firms have a strong need of human capital for conducting innovation
activities. These activities include Information and Technology (IT) and software
development, R&D, product design, and engineering services, which are knowledge-
intensive and require skilled labor and human capital. For example, the IT companies’
decisions on outsourcing location choices are bound by their specific needs for skilled

technicians worldwide (Graf and Mudambi, 2005). Also considered is the specialized
knowledge, capabilities, and skills of contract providers. For instance, the computer
system manufacturers such as Dell and Lenovo have relied on their East Asia contract

providers that specialize in different knowledge areas such as optics, storage, monitors, and
vocal technology (Saxenian, 2002); some pharmaceutical companies often source to and
work with contract providers who specialize in biotechnology and genomic knowledge,
which entails the specific training of employees to effectively run the drug development
process (Howells et al., 2008). Moreover, outsourcing parts of clinical trials requires that

skilled scientists perform time-consuming codifiable tasks in the drug discovery portion of
pharmaceutical R&D (Kapler and Puhala, 2011). In other words, firms depend on human
capital which refers to the specialized knowledge, capabilities, and skills performed by the

employees of offshore contract providers.
On the other hand, developing countries provide low-cost and high-skilled human
capital. For instance, MNCs make R&D investment in developing counties, such as China,
in order to enjoy the abundant supply of a cheap workforce and talented labor (Li and
Scullion, 2006). Lewin et al. (2009) also find that the firm’s decisions about offshoring

innovation in developing countries are driven by the need to access qualified engineers.
Since talented labor and qualified employees can be associated with higher levels of R&D
investment, education, and training, the abundant supply of human capital is crucial for

firms to outsource innovation in developing countries. Compared with developed countries,

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