Outsourcing Innovation in Product Cycles

In this quality-ladder product-cycles model, a southern firm can undertake innovation by collaborating with a northern firm through R&D outsourcing. Generally, I find that the initial steady-state scale of R&D outsourcing and the fraction of innovative tasks undertaken by southern labor through R&D outsourcing critically affect the results of comparative statics. Particularly, the friendly policy to promote R&D outsourcing may be beneficial for both of the North and the South only if the scale of R&D outsourcing is small. 1. Introduction The Vernon-type product-cycles model generally consists of two countries, North and South. The North is distinguished from the South by its superior ability of innovation and higher wage rate. In addition, a production process in the model generally consists of two stages, R&D and manufacturing. Given the key character that the latest innovation through R&D replaces outdated products, various patterns of production process have been discussed in this Vernon-type product-cycles framework. Particularly, outsourcing part of the production process, which is consistent with the observation of global fragmentation in production and trading semifinished products [1, 2], has been investigated. (In addition, FDI (e.g., [3–5]) and licensing (e.g., [6]) have also been discussed in the product-cycles framework.) ？Glass and Saggi [7] divide the manufacturing stage into an advanced stage and a basic stage, where the basic stage can be outsourced to the South. Their framework is extended by Glass [8] with imitation, and by Sayek and Sener [9] with heterogenous labor. Sener and Zhao [10] push out the outsourcing frontier further outward by considering that the North is able to outsource domestically developed innovation directly to the South without manufacturing the innovation at home in advance. Although they all recognize the importance of international outsourcing to product cycles, no R&D outsourcing is discussed. (Lai et al. [11] model outsourcing innovation in a principal-agent framework. They mainly focus on optimal contracting. Innovation in the South actually has been discussed in product-cycles models by Chui et al. [12] and Chu [13]; however, neither of the two articles considers outsourcing.) If the South is also capable of undertaking innovation, it might stimulate the North to outsource at least a part of R&D stage to the South because of the lower wage rate in the South. In fact, some reports do point out that international outsourcing of innovation is rising. For example, Technology Forecasters Inc. reports that USA