Does stronger intellectual property rights protection matter in developing local R&D outsourcing strategy?^*

Abstract

This study examines whether the intellectual property rights (IPR) protection in the host countries has a significant moderating effect on the relationship between local R&D outsourcing strategy and subsidiary productivity. Due to the subsidiary mandate in the host country being categorized as exploitation-orientation or exploration-orientation, we further examine whether there is a different moderating effect for different types of a subsidiary mandate. This analysis takes advantage of the data-set on Taiwan-based subsidiaries and the IPR indices by the World Economic Forum over the 2006–2009 period. The empirical results show that a stronger degree of IPR protection is, on average, found to play a significant moderating role in the influence of R&D outsourcing strategy based on local collaboration relationships. Interestingly, the moderating effects are found to differ between exploitation-orientation and exploration-orientation.

Keywords:

• R&D outsourcing
• IPR protection
• Subsidiary productivity

JEL:

• F23
• O34
• O32

Notes

^* Accepted by Yin-Wong Cheung.

1. The distinction between exploration and exploitation has been used in strategic management, technology sourcing and organizational design (Belderbos et al. 2010; Cantwell, Dunning, and Lundan 2010). In essence, exploitative activities refer to the leveraging of existing capabilities and resources, while explorative activities refer to the creation of new knowledge and technology assets.

2. Due to the difficulty of obtaining the detailed data on the collaborative relationships between subsidiaries and the different kinds of local counterparts, we focus here only on the influence of R&D outsourcing strategy, without comparing the influence on various kinds of the local counterparts that provide the R&D services in the host country.

3. For example, most Taiwan-based firms serve as subcontractors for Western global firms and develop closed relationships with local counterparts to raise their technological capabilities in relation to product design and manufacturing services (e.g. Chen and Chen 2002, 2003).

4. Many empirical studies adopt the productivity such as total factor productivity (TFP) and labor productivity to assess the contributions of technological knowledge (e.g. Cantwell, Dunning, and Lundan 2010; Huang, Hou, and Yang 2013). In particular, TFP is a better index to examine the productivity than labor productivity. The TFP is calculated as the difference in logs between the value added and the sum of labor and physical capital weighted by the productivity elasticity of labor and capital, which are estimated from Cobb–Douglas production function. However, owing to the difficulty of obtaining reliable capital data on individual firm, the subsidiary productivity in this study is defined by labor productivity.

5. The Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement was adopted at the Uruguay Round of the General Agreement in 1994 to harmonize the patent protection systems across member countries in World Intellectual Property Organization and the World Trade Organization. TRIPs defines minimum standards of patent rights protection for copyright, trademarks, patents, trade secrets, and contracts. It requires member countries, especially developing countries, to raise their intellectual property protection level to the standard in force in industrialized countries at the time of negotiation. It also set up an administrative framework regarding the standards for enforcement procedures, remedies, and dispute resolution procedures (WIPO 2009).

6. Papageorgiadis, Cross, and Alexiou (2013) found that both the de jure and de facto protection and enforcement levels of IPR play a significant role on the decision regarding the selection of internal or external counterparts by using the Papageorgiadis index that is based on the institutional theory to measure the key elements of the patents rights system.

7. Due to the difficulty of obtaining detailed capital data, we assume that K/L is constant across firms in the same industry for 2006–2009 and industry dummies capture the influence of K/L in empirical model.

8. Two specification tests proposed by Arellano and Bover (1995) are used to test the validity of the instruments and serial correlation in our estimation. First, the Arellano–Bond test for serial correlation is applied to test whether there is a second-order serial correlation in the first-differenced residuals. Hence, we need to test for autocorrelation in the error terms, which is also a test for the validity of instruments. In particular, the GMM estimator requires that there is first-order serial correlation, but no second-order serial correlation, in the residuals. Second, the Hansen J-test is applied to test the null hypothesis of overidentifying restrictions for the system GMM approach. It is also important to test the validity of the subsets of instruments (i.e. levels, differenced, and standard IV instruments). It estimates the system GMM with and without a subset of suspect instruments, enabling investigation of the validity (i.e. exogeneity) of any subset of instruments. The null hypothesis is that the specified variables are proper instruments, that is. The set of examined instruments is exogenous.

9. Ministry of Economic Affairs (MOEA) asks Taiwan-based firms to provide a variety of detailed questions concerning overseas activities and characteristics for the most prominent subsidiary as well as parent company’s characteristics each year. In particular, we do not ask the foreign subsidiary of Taiwan-based firms directly. At the same time, respondents are asked to select her most prominent subsidiary according to the importance to the firm.

10. Cantwell and Mudambi (2005) distinguished the firm’s mandate based on their output mandate: a competence-creating is operationalized as one whose output mandate consists of product development and international strategy, while the output mandate of competence-exploiting is either sales and service, assembly, or manufacturing in local markets.

11. The word ‘cooperation’ in Chinese reflects a long-term and stable relationship has been formed and that can create new market values together and mutual trust rather than pure transactions (Chiao, Yang, and Yu 2006). The manufacturing advantages of global value chain activities offer Taiwan-based manufacturing firms the opportunities to build the cooperative relationships in the host countries. Moreover, Taiwan-based manufacturing firms’ network integration has moved up from very simple original equipment manufacturing (OEM) arrangements that focus on cost saving to increasingly complex original design manufacturing (ODM) arrangements that involve product development (Chen and Chen 2002, 2003). In addition, the term of business partners includes the important suppliers, customers and other business partners.

12. The terms of DCs and LDCs represent developed countries and less developed countries, respectively. Following Makino, Lau, and Yeh (2002), we placed countries in North America (USA and Canada), Western Europe, Hong Kong, Singapore and Japan in the DCs group, while placing Central/South America, Africa and ASEAN countries except Singapore into the LDCs group.

13. Parent R&D and subsidiary R&D are defined as the ratio of total R&D stock to labor in this study, of which the total R&D stock has a constant depreciation rate of 15% per year, reflecting that the influence on technology capability is not only affected by current R&D expenditure, but also by previous efforts.

14. The terms IPR, PRD, SRD and ORD represent the IPR protection in the host countries, parent R&D, subsidiary R&D and R&D outsourcing strategy, respectively.

15. The industry dummy includes the following industries: electrical and electronic machinery and machinery; chemicals and chemical products; rubber and plastic products; primary metal and metal products; textile, apparel, leather and related products; food and beverages; pulp, paper, and paper products; lumber, wood products, and furniture; and miscellaneous.

16. The statistics in Table 2 has shown that exploration-orientation subsidiaries are significantly different in terms of basic characteristics from exploitation-orientation subsidiaries. We thus exogenously use two subsamples in empirical model to compare the effect for different types of mandate in the host countries in this analysis. Many thanks for the reviewer’s reminding.

17. The one-year lagged dependent variable and all independent variables are treated as endogenous variables to control endogeneity problem in system GMM. One and more year lagged variables (up to two or three lags depending on the length of time periods in model specification) of the endogenous variables are used as instruments in the difference equation, while the current and one-year lagged differences are used in the level equations.