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

On the whole, outsourcing firms play the role in integrating different modules into a
whole system. They invest in the architectural knowledge on the basis of understanding
the interdependencies between modules and the activities surrounding the system so as to
access to the specific and distinct knowledge owned by the contract providers (Henderson

and Clark, 1990; von Hippel, 1990). Outsourcing firms can also use project modularity
to hide knowledge, lower the need of communication among contract providers, and
set up barriers to imitation when they outsource innovation activities offshore. As such,

the design of project modularity for an outsourcing innovation activity can be another
mechanism to capture value and to prevent the knowledge leakage from outsourcing
innovation activities in the developing countries with weak IPR protection. Therefore, we
propose the following hypothesis:
Hypothesis 3: The developing countries with the greater availability of low-cost,

high-talented human capital have more likelihood to be selected for outsourcing high-
project-modularity innovation activities than for outsourcing low-project-modularity
innovation activities.

3. Methods

3.1 Data and Sample
To test our premises and hypotheses, we collect the primary data from the ORN

survey. Having been used in many studies (e.g., Elia et al., 2019; Gooris and Peeters, 2016;
Larsen et al., 2013; Lewin et al., 2009; Massini et al., 2010), the ORN survey contains the
adoption of different offshoring governance modes and the location choice of different
offshoring projects by firms, an important feature allowing us to observe the decisions on

outsourcing innovation activities. Specifically, the ORN survey covers questions including
why firms offshored, with what projects and what governance modes (e.g., offshore
outsourcing or captive offshoring), in which year, and where. Based on the survey, we
construct the dataset consisting of 336 firms that conducted 914 offshore innovation

activities, defined as software development, product design, engineering, IT, analytical and
knowledge service, and R&D, across 74 countries from 1990 to 2009. Since we focus on
the firms’ decisions about offshore outsourcing, we finally define 202 firms that outsourced
465 innovation activities.

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