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

In addition to the survey-based information collected from the ORN survey, we adopt
two additional data sources from IEF and WEF to capture the extent of IPR protection in
each country. Combining the IEF and WEF data with the ORN survey creates leeway to
mitigate the potential bias due to common method variance (Chang, van Witteloostuijn,

and Eden, 2010). Regarding the IEF, we use its index of Property Protection that includes
five components: physical property rights, intellectual property rights, strength of investor
protection, risk of expropriation, and quality of land administration. The index measures

the extent to which the legal systems and institutions of a given country allow people and
organizations to accumulate private property and intellectual property freely and securely
(Miller and Kim, 2017). We define a country with weak IPR protection when its IEF index
is below the average plus one standard deviation in an observed year.
Apart from the IEF index, we also use the WEF Executive Opinion Survey on

the protection of IPR in a country as a robustness check. The WEF index measures the
protection of IPR in a country by collecting executives’ opinions regarding how strong
the protection of intellectual property is in their countries (Schwab, 2017). Both indices

have been used to provide researchers with a qualified measure of the IPR protection at the
country level (Zhao, 2006).

3.2 Estimation
In this study, we investigate the probability of outsourcing an innovation activity in

weak IPR countries instead of strong IPR countries. We include all outsourcing innovation
activities and examine cross-activity variances when controlling for firm characteristics.
Since we observe the firms of offshoring innovation activities only for those that did

outsource offshore, there is the issue of sample selection in our analysis of the probability
of where to outsource. Endogeneity is another potential limitation given that not all firms
are completely free to engage in their outsourcing practices and location choices (Hamilton
and Nickerson, 2003; Wooldridge, 2012).
Following previous studies on the internationalization of innovation (Chen and

Hsiao, 2013; Lo and Hung, 2015), we use the two-stage Heckman model to correct for
the potential biases of sample selection and endogeneity. Following Heckman (1979), we
conduct a probit regression to estimate the probability that a focal firm adopts an offshore

outsourcing mode instead of a captive offshoring mode to conduct innovation activities

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