An Empirical Assessment of the Effects of Trade in Innovative Tasks on Innovation Output

Multinational firms are increasingly sending their innovative tasks abroad. The R&D performed by American affiliates of European multinational firms, which accounts for 75% of the R&D off-shored to the US, reached 30 billion dollars in 2008, twice as much as the amount in 1998 (National Science Board, 2012). This paper examines whether trade in innovative tasks provides any gains in terms of firm-level innovation. The causal effects of trade in innovative tasks (i.e. off-shoring R&D or design and engineering activities) on the probability of firms being innovative and the share of innovative product sales in total turnover of firms are examined using an IV approach to address the potential for reverse causality. The data in use comes from the European Firms in a Global Economy survey, which provides cross-section observations for more than 14,750 firms in 7 European countries. The results suggest that those who off-shore their innovative activities are 60% more likely to successfully innovate as measured by disclosed innovation. Also, off-shoring innovative activities increases the share of innovative product sales in the total turnover of a firm up to 35%. Furthermore, the evidence suggests that multinational firms in this sample tend to gain from trade in innovative tasks when such trade is in product innovation, but not when such trade is in process innovation