7. Innovation, Development, and Outsourcing Across National Borders

This chapter investigates innovation by outsourcing firms. The motivations for this topic choice are twofold. First, innovation is a critical factor determining productivity, specifically Total Factor Productivity. As innovative firms tend to be productive, they are likely to have ample capacity to be active in global activities, including foreign outsourcing. Second, innovativeness of firms is likely to determine barriers to foreign outsourcing. Firms may find it unsafe or difficult to outsource technologically complex tasks across national borders. The study of R&D by Japanese firms is useful even from a global perspective, as Japan is the third largest country in the world in terms of R&D expenditure following the U.S. and China, and records large surplus of trade in technology only next to the U.S., according to the annual report of the Survey of Research and Development by Statistics Bureau, Japan’s Ministry of Internal Affairs. Bearing in mind these issues, we discuss how foreign outsourcing firms differ in their innovativeness from non-outsourcing and domestic outsourcing firms. Third, as firms in developed countries normally outsource production to developing countries, cross-border outsourcing is intrinsically connected to development stage differences across countries in the world. The main issue in the third context includes whether innovative firms outsource their production to developing countries. While firms can outsource any activities including R&D activities, outsourcing of R&D is rare possibly due to the fact that output of R&D is inherently hard to measure or be verifiable. Therefore, we do not discuss the outsourcing of innovation itself, as less than 4% of the firms in the RIETI survey outsource R&D across national borders.