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

developing countries not only have cost advantages but also can provide an abundance of
human capital that influences firms’ innovation and value creation. This is because firms
need both cost savings to generate advantages and talented labor to invent new products
and processes (Holmes et al., 2016; Papanastassiou, Pearce, and Zanfei, 2020). Simply

put, the low-wage and highly skilled knowledge workers in developing countries attracts
the firms seeking cost advantages as well as human capital to make offshore investments.
The access to local talent pools and human capital then becomes a critical driver for firms

to create value when outsourcing innovation activities in developing countries even with
weak IPR protection. Accordingly, we propose the baseline hypothesis:
Hypothesis 1: Developing countries have a greater likelihood to be selected for
outsourcing innovation activities when they have the greater availability of low-cost, high-
talented human capital.

2.4 Capture the Value of Outsourcing Innovation Activities in Developing Countries
Although developing countries might offer low-cost and high-talented human capital,

firms normally confront the issue of value capture and misappropriation particularly when
outsourcing innovation activities to the countries with weak IPR protection. As developing
counties have been characterized by relatively weak IPR protection and ineffective legal
systems, the latter can increase the cost of enforcing contracts in developing countries
(Xie et al., 2013). The lack of legal protection can further cause severe problems of IPR

infringement (Schotter and Teagarden, 2014). For instance, firms’ proprietary information
and intellectual knowledge can be easily stolen by suppliers or third parties when there is
no strongly legal IPR protection (Zhao, 2006). Moreover, firms will be at risk particularly

when the weak IPR protection facilitates the leakage of proprietary information and
intellectual knowledge, which can be obtained and leveraged by their competitors (Holmes
et al., 2016; Huang and Chiu, 2020; Nandkumar and Srikanth, 2016; Weng and Tseng,
1995). This means that firms might lose some tacit knowledge to other firms. This also
poses the risk that firms might lose their competitive advantage. Therefore, the use of

managing mechanisms to capture the value and protect the IPR of outsourcing innovation
activities in developing countries has become an important issue (Berry, 2017; Gooris and
Peeters, 2016; Papanastassiou et al., 2020).

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