Offshoring Innovation to Emerging Countries: The Effects of IP Protection and Cultural Differences on Firms’ Decision to Augment Versus Exploit Home-Base-Knowledge

Developed-country multinationals (DMNEs) have increasingly engaged in the practice of offshoring innovation to emerging countries. In this article, we leverage and extend the institution-based view to further our understanding of this phenomenon. Specifically, we examine the differential effects of formal and informal institutions on DMNEs’ strategic decision to offshore innovation activities aimed at augmenting (versus exploiting) home-base-knowledge to emerging countries. Concerning formal institutions, we argue that the stronger the emerging host country’s IP protection, the higher the likelihood that a DMNE offshores innovation activities aimed at augmenting home-base-knowledge. Regarding informal institutions, we argue that the greater the cultural differences between the developed home country and the emerging host country, the higher the likelihood that a DMNE offshores innovation activities aimed at augmenting home-base-knowledge. Additionally, we propose a key contingency that attenuates the relationship involving IP protection while strengthening the one involving cultural differences: the DMNE’s experience with offshoring innovation. Analysis of 128 offshoring innovation implementations by 78 DMNEs in ten emerging countries provides support for all our hypotheses except for the one focused on the moderation effect of experience on the relationship involving cultural differences.