Distance is a Janus: an exploratory study of offshored innovation

A dilemma exists in that many view offshoring as a tradeoff between cost efficiency and innovation. The purpose of this paper is to reconcile this dilemma by showing how and why offshoring to institutionally distant host countries may result in innovation. The authors introduce an institutional lens in order to understand how offshoring to institutionally distant locales affects innovation outcomes of multinational enterprises. This lens is aimed to provide an analytical tool that is less coarse and less overwhelmingly focused on institutional distance (ID) as a harsh and certain harbinger of reduced innovation performance.

The authors use primary data from the Offshoring Research Network as well as secondary data from the Frasier Institute on Economic Freedom, and Hofstede’s cultural value survey to empirically assess the distinct effects of distance on innovation at the firm level.

The authors have developed a model of distance and innovation which goes beyond the traditional assumption of distance as overwhelmingly negative. Whereas in some cases, the positive effect of formal and informal distances outweigh the negative effects stimulating innovation; in other cases, the negative effects of distance hamper innovation. Finally, some elements of distance may not have an impact on innovation outcomes at all.

While previous research stresses the negative effects of distance in general, the authors provide an ID model which, in the context of offshoring, takes into account potential positive, negative, or no effects.

The study presents global supply chain managers with a reference framework for making strategic offshoring relationships decisions.

By unbundling the inherently confounding formative construction of distance measures, eschewing the reflexive assumption that distance is always negative, and mapping theories specific to the application of distinct institutional logics to specific value-enhancing business activities (i.e. innovation), this study offers a more accurate and complete institutional picture that helps reconcile institutional theory with an empirical record that often fails to find what it predicts.