Offshoring Brains? Evidence on the Complementarity between Manufacturing and R&D in Danish Firms*

AuthorSvend Greniman Andersen
DOIhttp://doi.org/10.1111/sjoe.12388
Publication Date01 Oct 2020
Scand. J. of Economics 122(4), 1315–1342, 2020
DOI: 10.1111/sjoe.12388
Offshoring Brains? Evidence on the
Complementarity between Manufacturing
and R&D in Danish Firms*
Svend Greniman Andersen
University of Copenhagen, DK-1353 Copenhagen K, Denmark
greniman@gmail.com
Abstract
By employing a firm-level linked employer–employee dataset for Danish manufacturing firms,
this paper investigates whether offshoring is complementary to, or a substitute for,research and
development(R&D) activities. Offshoring is instrumented with world export supply to circumvent
the inherent endogenous nature of the firm’sdecision to offshore. Results suggest that firms with
increased offshoring do in fact tend to engage in further R&D activities at home. Moreover,they
also tend to reallocate R&D resources toward product R&D, possibly at the expense of process
R&D.
Keywords: Imports; innovation; intermediate inputs; offshoring; R&D
JEL classification:F10; F14; O30; O33
I. Introduction
“Over the past few decades it became conventional wisdom that
factory jobs could be done cheaply in some far-flung corner of
the world but more important innovation work should stay in-
house in high-cost countries. Manufacturing was seen as just
a cost centre, so it was often offshored. Now many companies
reckon that production makes a big contribution to the success
of research and development, and that innovation is more likely
to happen when R&D and manufacturing are in the same
place, so increasingly they want to bring manufacturing back
in-house.”1
Much concern has been raised recently by politicians and policymakers
in advanced economies as to whether domestic manufacturing activities are
*Viewsand conclusions expressed are my ownand do not necessarily represent those of Danmarks
Nationalbank. I would like to thank the EPRN for financial support and participants at DIEW
Aarhus, NOITS Oslo, UCPH seminars and colleagues at Danmarks Nationalbank for helpful
comments and encouragement.
Also affiliated with Danmarks Nationalbank.
1Quote taken from the article “Herd Instinct” in The Economist, 17 January 2013.
C
The editors of The Scandinavian Journal of Economics 2019.
1316 Complementarity between manufacturing and R&D in Danish firms
a prerequisite for more knowledge-based activities at home.2This is seen in
light of the rapid rise in offshoring3over the past two decades, coupled with
a substantial decline in domestic manufacturing jobs. Because knowledge-
based activities are often coupled with technological and technical advances,
this debate also concerns the determinants of long-run growth in general.
When concerned about domestic labor markets and their ability to sustain
high-skilled jobs, it therefore becomes of interest to assess whether globally
oriented firms take offshoring and high-skilled inputs as substitutes or
complements in the production process. In this paper, the focus is on
research and development (R&D) activities as an important high-skilled
input for domestic firms.
On the one hand, R&D and offshoring can be substitutes if the
development of new products and processes is performed with better
synergies when production is carried out at home next to the laboratory
instead of abroad. On the other hand, relocating production to a foreign
country might mean freeing up resources to increase R&D spending at
home where the comparative advantage is present, thus rendering R&D
and offshoring complements. The literature so far offers no clear, explicit
answer to this question.
This paper therefore seeks to fill this gap by asking the following
question. Is offshoring complementary to, or a substitute for, R&D at the
firm level? By employing a rich firm-level dataset on R&D activities and
intermediate imports, as well as looking at exogenous offshoring shocks, I
am able to focus on the channel running from offshoring to domestic R&D,
which is of considerable concern to public policy.
Focusing on the relationship between trade and innovation, a number
of papers offer useful theoretical frameworks. One example is Bloom etal.
(2013) where some production factors are assumed to be “trapped” within
firms in the shorter run. After a trade shock reduces the price for one
of the goods that the firm had been producing, the opportunity cost goes
down for inputs that are trapped within the firm. The firm carries out more
innovation, not because of an increase in the value of a newly designed
good, but rather because of a fall in the opportunity cost of the inputs used
to design and produce new goods.
Naghavi and Ottaviano (2009) suggest an endogenous growth model
with offshoring. The model features an R&D sector supplying blueprints
2The above quote is just one example of many related statements. For an example from the
business literature, see Pisano and Shih (2012).
3I shall refer to “offshoring” throughout the paper as the relocation of intermediate inputs from
domestic to foreign suppliers, those suppliers being either within or outside the boundaries of the
firm. In practice, I measure offshoring at the firm level as the total value of imports, and I do not
distinguish between imports from firms within the same business group and other foreign firms.
C
The editors of The Scandinavian Journal of Economics 2019.

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