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

3.3 Measurement
3.3.1 The First-Stage Estimation (Selection Model)
Dependent variable The dependent variable “Entry mode” is a binary variable
indicating that a firm either uses the governance mode of offshore outsourcing or the

captive offshoring mode to conduct its innovation activity in a host country (Lewin et
al., 2009). Specifically, the value of the dependent variable equals 1 if a firm chose the
offshore outsourcing mode; otherwise, 0.

Instrument variables Based on the ORN survey on the drivers of offshoring, we use
three items as the instrumental variables: “Enhancing capacity for innovation,” “Increasing
organizational flexibility” and “Part of a larger global strategy”. While these three
items are good predictors of the governance mode which firms use to conduct offshore
innovation activities, they do not necessarily predict the location choice (Lo and Hung,

2015).

3.3.2 The Second-Stage Estimation (Main Model)

Dependent variable The dependent variable “Location choice” is a binary variable
indicating whether a firm outsources its innovation activity to either a host country with
weak IPR protection or a host country with strong IPR protection. Following previous
research (e.g., Zhao, 2006), we define a country as a weak IPR location when its value
of IEF index is below the average plus one standard deviation in the observed year.

Specifically, the value of the dependent variable takes 1 if a firm chose to outsource an
innovation activity to a country with weak IPR protection; otherwise, 0.
Independent variables The independent variable is “Low-cost talent” used in

estimating location advantages with respect to the stock of human capital perceived by
a focal firm. We use two items of the ORN survey— “Low cost of labor” and “Talent
pool available”— to capture the concept of low-cost and high-skilled talent (Lewin et al.,
2009; Massini et al., 2010). According to the ORN survey, both items are measured using
a Likert 5-point scale. We apply the geometric average of these two items to measure the

availability of low-cost high-talented human capital in a given country as perceived by
a focal firm. Simply put, the higher the value of this measure, the more human capital a
focal firm could access in the offshore location.

Moderating variables Two moderating variables are “task specificity” and “project

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