Innovation offshoring and outsourcing: what are the implications for industrial policy?

This paper examines how innovation offshoring through global innovation networks affects Industrial Upgrading (IU) policies in Asia's electronics industry. I argue that developing countries cannot build their innovative capabilities by solely relying on their national innovation systems. For quite some time, these countries will have to draw primarily on foreign sources of knowledge as a catalyst for learning and capability formation. The paper discusses generic policy issues that host countries need to address to maximise the benefits of innovation offshoring. To leverage the potential benefits from global network integration, host countries must have in place vigorous policies to reduce the potentially high costs that may result from 'brain drain' (both domestic and international) when Trans-National Corporations (TNCs) are crowding out the local market for scarce skills, from the acquisition by TNCs of innovative local companies and from a potential deterrence effect of TNC labs on local R&D. I emphasise the critical importance of policies to develop strong local companies that can act as countervailing forces.