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

2002). Project modularity is also based on a unique technology or knowledge which
requires investment in a significant amount of human capital. To complete the modularized
project, specifically, the contract provider is responsible for the investment in human
capital consisting of scientists and technicians with the proper experience, knowledge,

and skill. The low-cost and high-talented human capital in the developing countries
just support the offshore contract providers to provide knowledge sourcing services and
activities, especially considering the high investment costs in skilled and experienced

workers and also the increasing shortage of talent in developed countries (Lewin et al.,
2009). As outsourcing firms delegate the responsibilities of investment to external contract
providers by the designing of project modularity, they can further access the specific
and distinct knowledge owned by the contract providers (Zirpoli and Becker, 2011). In
addition, a modularized project could be switched quickly from one location to another.

This implies that firms can take advantage of sourcing opportunities and benefits from
agglomeration economies (Albertoni, Elia, Massini, and Piscitello, 2017). In addition,
by outsourcing different modularized projects, the firm also increases its opportunities to

interact with different contract providers who have specific knowledge and to integrate
their knowledge into the whole modular system (Elia, Massini, and Narula, 2019;
McDermott, Mudambi, and Parente, 2013).
By designing project modularity, outsourcing firms may also worry less about the
leakage of knowledge. Firstly, since a modular system integrates independent modules,

it creates a black box to hide knowledge by putting a different part of knowledge to each
module (Baldwin and Henkel, 2015), which makes imitation more difficult. When a
firm outsources several projects with a modular project design and to different contract

providers, the contract providers are prevented from accessing, not to mention imitating
the whole system (Fleming and Sorenson, 2001). Designing project modularity also
involves firms employing several contract providers for different and independent
modularized projects. This means that providers can all participate without the need to
work as a team with any others or even without the awareness of what the other providers

are doing (Kumar et al., 2009). Given that project modularity minimizes the need for
communication and interdependence between contract providers, it decreases the risk of
information leakage among those providers (Martínez-Noya and García-Canal, 2011) and

the exposure of propriety information to third parties (Albertoni et al., 2017).

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