Talent, Geography, and Offshore R&D

Abstract

I model and quantify the impact of a new dimension of global integration: offshore R&D. In the model, firms match with heterogeneous researchers to develop new product blueprints, and then engage in offshore production and exporting. Cross-country differences in the distributions of firm efficiency and researcher talent generate a “talent-acquisition” motive for offshore R&D, while trade costs and the frictions impeding separation of R&D from production lead to a “market-access” motive. I find evidence for the premise of both motives using a new firm-country level data of R&D and production. Counterfactuals using the calibrated model show that international differences in endowment distributions and the market access motive collectively account for most of the observed offshore R&D. Increasing offshore production to emerging countries might or might not lead to a large increase in offshore R&D, depending on the fundamental force driving the offshore production increase. In terms of welfare, incorporating offshore R&D amplifies the gains from global integration by a factor of 1.2, and has important implications for the welfare gains from traditional forms of global integration, namely trade and offshore production.