Offshoring of R&D Activities by Multinational Corporations
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MANAGEMENT SCHOOL THE UNIVERSITY OF SHEFFIELD Offshoring of R&D activities by Multinational Corporations Assylbek Nurgabdeshov Thesis submitted to The University of Sheffield in partial fulfilment of the requirement of the degree of Doctor of Philosophy 09/07/2015 DEDICATION To my wife Bahtinur Hediye and my son Nur-Ali You encouraged me to dream and gave me the courage to pursue those dreams. 1 ACKNOWLEDGEMENT I owe my deepest gratitude to my supervisors Dr. Shlomo Tarba, Dr. Peter Rodgers and Prof. Mehmet Demirbag for their continued guidance and patience during my PhD years. They always encouraged me to work on research questions that interested me but at the same time gave me excellent support to help me improve further. I want to express my gratitude to my father and mother, Rymbek and Nurgul Nurgabdeshov who have always been there for me when I needed them. Their belief in me was a constant source of inspiration that kept me going in this journey. I am also thankful to my brother and sister, Aidos and Akerke Nurgabdeshov. Their loving support has been instrumental in my completing this program. A special thanks to my father-in-law and mother-in law, Aygun and Hanife Kazbek, for all of the sacrifices that they have made on my behalf. Their prayer for me was what has sustained me thus far. I thank many of my colleagues, not only for their friendship and encouragement but also for their feedback on my research. Thanks to Mustafa Doruk Mutlu, Ahmad Qammar and Murat Inan for their help with this dissertation. 2 ABSTRACT Offshoring of high value activities is a comparatively recent phenomenon that has become increasingly significant in the last two decades (Manning et al. 2008). According to international business theories, companies must keep control of their high value activities, such as research and development (R&D) and information technology (IT), that give them competitive advantage over other firms (Blinder, 2006; Farrell, 2005a). However, these high value activities have become more geographically dispersed in recent decades (Contractor, Kumar, Kundu, & Pedersen, 2010). Cross-fertilization of technologies across disciplines and recent technological diversification of companies, which are accepted as the latest shift in the technological revolution and techno-economic paradigm, have stimulated the process of R&D offshoring (Narula, 2001). Improvement in the institutional environments and government policies in emerging countries, fierce competition in the global market, and increase in costs and risks of doing R&D in developed countries are a few factors that have influenced the offshoring of R&D activities. According to Contractor et al. (2010), the determinants that have led to the increase in offshoring of R&D activities are improvements in information communication technologies (ICT) as well as in social and economic resources, which have provided better infrastructure in host countries. Increased uniformity in international patenting has also played an important role in offshoring of R&D activities. This thesis attempts to extend the current understanding of the R&D offshoring process with specific focus on determinants of location choice for R&D activities. The literature dealing with the determinants of location choice is largely fragmented and hence this thesis attempts to integrate the different prevailing perspectives. Based on transactional cost economics, resource-based view and eclectic paradigm, this thesis adopts a multi-level approach to 3 examine country, firm and project level factors of location choice decision. Moreover, this study investigates the difference between the degree of innovativeness and routineness of R&D activities offshored to developed and emerging countries. Furthermore, it also looks at the difference between the degree of innovativeness and routineness of R&D activities offshored to foreign affiliate and non-integrated suppliers. In order to attain the objectives of thesis self-administered questionnaire was distributed to 941 Multinational Corporation located in UK and 126 responses were collected. Furthermore, Multinomial Logistic Regression was adopted for the analysis which was also supplemented with PLS modeling to validate the measurement and structural models separately. The analysis indicates that country level determinants such as cost, human capital, national innovation system (NIS), country risk and cultural difference significantly affect the location choice decision of R&D offshoring. While the company level factors such as experience and reputation of the firm show the significant effect on location choice decision, the results of the analysis do not support the hypothesis which suggests that the capability of the host firm has an influence on location choice decision. The analysis also demonstrates that the characteristics of projects, such as speed, quality, interactivity, innovativeness, and routineness, also affect the location choice decision. Only the hypothesis relating to the classification of R&D projects was not supported by the analysis of data. The study also shows that the degree of innovativeness of R&D activities offshored to developed countries and foreign affiliates is higher than the degree of innovativeness of R&D activities offshored to emerging countries and non-integrated suppliers. However, the degree of routineness of R&D activities offshored to developed countries and foreign affiliates is lower than that to emerging countries and non-integrated suppliers. 4 Table of Contents CHAPTER 1 – INTRODUCTION ................................................................................................... 11 Research background ................................................................................................................... 11 Research problem ........................................................................................................................ 14 The importance of the research .................................................................................................... 15 Research aims and objectives....................................................................................................... 18 Research Contributions ................................................................................................................ 20 Summary and Thesis Outline ....................................................................................................... 21 CHAPTER 2 – LITERATURE REVIEW ........................................................................................ 24 Defining R&D and offshoring...................................................................................................... 24 Theories in offshoring.................................................................................................................. 30 Transaction cost economics...................................................................................................... 31 Resource-based view ............................................................................................................... 35 The eclectic paradigm .............................................................................................................. 38 Determinants and drivers of offshoring ........................................................................................ 40 Cost Saving ............................................................................................................................. 45 Human Capital ......................................................................................................................... 49 Knowledge Infrastructure......................................................................................................... 51 Country risk and firm experience ............................................................................................. 53 Cultural Difference .................................................................................................................. 55 Offshoring as a strategy ........................................................................................................... 58 Firm Performance ........................................................................................................................ 59 Knowledge Transfer .................................................................................................................... 62 Knowledge attributes ............................................................................................................... 67 Social Capital .......................................................................................................................... 69 CHAPTER 3 – HYPOTHESIS DEVELOPMENT AND CONCEPTUAL MODEL ......................... 72 Background ................................................................................................................................. 72 Country Level Factors ................................................................................................................. 76 Cost ......................................................................................................................................... 77 Human Capital ......................................................................................................................... 78 National Innovation System ....................................................................................................