Offshoring Technology Innovation: A Case Study of Rare-earth Technology

Many US firms are improving their individual competitiveness by offshoring manufacturing operations, services and, increasingly, knowledge work. Although research to date has maintained that these practices are beneficial to the offshoring firm and national economies, by reducing costs and expanding markets, little is known about the longer term effect of offshoring on the rate of innovation of home economies. This paper suggests that offshoring practices have adverse effects on innovation at the national home base. The analysis uses patents in the rare earth element industry, a high tech area which is among those that have evolved the furthest towards outsourcing and relocation away from the US and to developing countries. Looking at the rare earth industry can provide insights in identifying potential long term impacts of offshoring on innovation because many other US industries are likely to adopt similar offshoring strategies.