Does Offshoring Production Reduce Innovation? Firm-Level Evidence from Taiwan

Does the offshoring of production degrade or enhance the innovative capabilities of manufacturing firms? We contribute to this debate with causal evidence that offshoring impacts both the level and nature of innovation. Exploiting a policy shock that differentially affected the ability of Taiwanese firms to offshore production of certain goods to China, we find a decline in innovation levels and a shift from product to process innovation in the technologies directly related to product categories that could be offshored more easily after the policy shock. However, we also find evidence that the policy shock led to a reallocation of research effort within the firm, raising innovative effort in product categories not directly impacted by the shock and shifting them toward product innovation. This paper was accepted by Alfonso Gambardella, business strategy. Funding: This work was supported by the Mack Institute for Innovation Management, Wharton School, University of Pennsylvania, and the National Science Foundation [Grant 1360170] and the Portuguese National Science Foundation. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.04944 .