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Diploma thesis International Business Administration
November 30th 2011
Michael Gusenbauer E-mail: [email protected]
Offshoring of Research & Development in the US Semiconductor Industry –
A Survey of Small and Medium Sized Enterprises
NETWORK FOR EUROPEAN AND UNITED STATES REGIONAL AND URBAN PLANNING
Vienna University of Economics and Business, Institute for Regional Development and Environment Primary advisor: ao.Univ.Prof. Doz. Dr. Franz Tödtling E-mail: [email protected]
University of Illinois at Urbana-Champaign, Department for Urban and Regional Planning Secondary advisor: Prof. Edward Feser, PhD E-mail: [email protected]
GUSENBAUER
II
Table of contents
1. Research background ............................................................................................................. 1
1.1. Research goal .............................................................................................................................................................. 2
1.2. Research questions ................................................................................................................................................... 3
2. Theoretical framework ............................................................................................................ 4
2.1. The evolution of offshoring ................................................................................................................................... 4
2.2. Offshoring of R&D ..................................................................................................................................................... 5
2.3. Offshoring of R&D by SMEs .................................................................................................................................... 7
2.4. Reasons for or against R&D offshoring: facilitators vs. obstacles ............................................................. 9
2.5. SME characteristics and the scale of current R&D offshoring ................................................................. 16
3. Definitions ............................................................................................................................. 19
3.1. The US semiconductor industry ......................................................................................................................... 19
3.2. Offshoring .................................................................................................................................................................. 21
3.3. Small and medium sized enterprises (SMEs) ................................................................................................. 24
3.4. Research and development (R&D) .................................................................................................................... 25
4. Research design: The SME survey of the US semiconductor industry ............................... 26
4.1. Detailed research questions ................................................................................................................................ 26
4.2. Data research ............................................................................................................................................................ 29
4.3. Data cleansing .......................................................................................................................................................... 31
4.4. Data analysis ............................................................................................................................................................. 32
5. Findings and validation ........................................................................................................ 33
5.1. Descriptive data examination ............................................................................................................................. 33
5.2. Evaluation of SMEs’ R&D offshoring concerning importance, mode and satisfaction ................... 35
5.3. Reasons for and against R&D offshoring ........................................................................................................ 42
5.4. Influence of experience on the reasoning behind R&D offshoring ...................................................... 49
5.5. Relation of company characteristics and R&D offshoring ........................................................................ 54
6. Discussion .............................................................................................................................. 60
7. Conclusion ............................................................................................................................. 72
References ..................................................................................................................................... 75
Appendices .................................................................................................................................... 80
GUSENBAUER
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List of figures
Figure 1: Importance of R&D in the US semiconductor industry ..................................................................... 34
Figure 2: Export orientation of SMEs in the US semiconductor industry ...................................................... 35
Figure 3: Regional distribution of R&D: United States vs. offshore ................................................................. 37
Figure 4: Current vs. planned R&D offshoring ....................................................................................................... 37
Figure 5: Choice of mode for R&D offshoring ......................................................................................................... 39
Figure 6: Future expansion / beginning of R&D offshoring ............................................................................... 40
Figure 7: Level of satisfaction with predominant source of foreign R&D ..................................................... 41
Figure 8: Ranked importance of facilitators in percent ....................................................................................... 43
Figure 9: Ranked importance of obstacles in percent ......................................................................................... 46
Figure 10: Comparison of means between offshoring and non-offshoring SMEs .................................... 50
Figure 11: Result of comparison of means ............................................................................................................... 53
List of tables
Table 1: Reasons for and against R&D offshoring.................................................................................................... 9
Table 2: Variables for RQ3 .............................................................................................................................................. 16
Table 3: The US semiconductor industry (2009) .................................................................................................... 20
Table 4: Offshoring defined by the OECD ................................................................................................................ 22
Table 5: Definition of offshoring used in this study .............................................................................................. 23
Table 6: SME definition used in this study ............................................................................................................... 24
Table 7: Overview of research question 1.1/1.2/1.3 ............................................................................................. 26
Table 8: Overview of research question 2.1/2.2 ..................................................................................................... 27
Table 9: Overview of research question 3 ................................................................................................................ 28
Table 10: US semiconductor industry size according to business information providers ...................... 30
Table 11: Comparison of population and sample, obtained by the SME survey on the US
semiconductor industry ................................................................................................................................................. 31
Table 12: Descriptive statistics – first part ................................................................................................................ 33
Table 13: Descriptive statistics – second part ......................................................................................................... 35
Table 14: Aggregated result of the One-Sample Kolmogorov-Smirnov test .............................................. 51
Table 15: Comparison of means between groups ................................................................................................ 55
Table 16: R&D importance vs. R&D offshoring ....................................................................................................... 57
Table 17: Ordinal regression output: Parameter Estimates for v14 ................................................................ 58
Table 18: Ordinal regression output: Parameter Estimates for v15 ................................................................ 59
GUSENBAUER
IV
List of abbreviations
BPO Business Process Offshoring
CEO Chief Executive Officer
CIBER Center for International Business Education and Research (at Duke University)
COO Chief Operating Officer
CTO Chief Technical Officer
ESIA European Semiconductor Industry Association
EU European Union
Fab Semiconductor fabrication plant
FDI Foreign direct investment
HQ Headquarters
ICB Industry Classification Benchmark
ICT Information and communication technology (see IT)
IMD Institute for Management Development
IP Intellectual property
IT Information technology (see ICT)
KET Key Enabling Technology
M&A Mergers & acquisitions
MNC Multinational corporation
NACE Nomenclature statistique des activités économiques dans la Communauté européenne
NAICS North American Industry Classification System
ODM Original Design Manufacturer
OECD Organisation for Economic Co-operation and Development
OEM Original Equipment Manufacturer
ORN Offshoring Research Network (at Duke University)
PR Public relations
RQ Research question
R&D Research and development
SBA Small Business Administration
SD Standard deviation
SIA Semiconductor Industry Association
SME Small and medium sized enterprise
UNCTAD United Nations Conference on Trade and Development
US United States (see USA)
USA United States of America (see US)
USD US Dollar Banking Code
VC Venture capital
Venture capitalist
GUSENBAUER
V
Abstract The semiconductor industry is one of the most innovative industries in the US and in the world. As
almost every fifth Dollar earned is spent on research and development (R&D), companies are very
keen on increasing efficiency and cutting costs wherever possible. As a consequence, many US
semiconductor companies start implementing foreign sourcing of R&D, also called R&D offshoring.
Researchers suggest that mainly big multinational corporations (MNCs) engage in R&D offshoring,
due to their larger scale. However, a lack of research on small and medium sized enterprises (SMEs)
leaves controversy among scientists about R&D offshoring capabilities of SMEs.
This study aims to fill this research gap and gives the first broad and empirically backed insight in
SMEs’ R&D offshoring. It is based on responses from 80 high-level managers working for US
semiconductor companies. The survey was conducted through a standardized web-based
questionnaire, followed up by an expert interview with an experienced Silicon Valley CEO
managing a small sized semiconductor company who put the preliminary results into perspective.
This method allows for an in-depth understanding of: the importance of R&D offshoring (1), the
forces shaping decisions in R&D offshoring (2) and typical characteristics of SMEs that offshore R&D
(3).
Indeed, the survey found that R&D offshoring is widely spread and is becoming increasingly
important–especially for young companies and start-ups. Compared to general (R&D) offshoring
studies, the US semiconductor survey obtained substantially different results. In some cases, SMEs
prioritized facilitators and obstacles for R&D offshoring significantly differently. The results of SMEs’
R&D offshoring in the US semiconductor industry also provide a case for other high R&D-intense
industries. Furthermore, this study is a stepping stone for further in-depth research focusing on
specific sub-questions. Special attention should be paid to early-stage R&D offshoring in US
semiconductor start-ups.
Keywords: Offshoring, outsourcing, research and development, R&D, innovation, small and
medium sized enterprises, SME, start-up, semiconductor industry, United States, US
GUSENBAUER 1. Research background
1
1. Research background “[…] there are reasons to expect a longer-term erosion of the U.S.-leadership position [in innovation]. There is a real danger that Asia’s rise as an important location for innovation offshoring may challenge U.S. competitiveness in international trade and investment. It is thus time to accept that the United States no longer is preordained to lead the world in innovation.” (Ernst D. 2006: p. 29)
This rather dramatic statement deals with the implications of one specific form of corporate
internationalization - the offshoring of innovation or R&D 1 . When R&D gets offshored, US
companies shift the creation of innovation from domestic to foreign or overseas locations. The
process of R&D offshoring will reshape the world of innovation, greatly challenging the prosperity
of industrialized nations. This is especially due to the key role of innovation for wealth and
prosperity in modern societies. It forms an essential part of economies’ efforts to build a better
tomorrow: The OECD writes in its agenda for recovery after the global financial crisis starting in
2008: "Innovation, which involves the introduction of a new or significantly improved product, process
or method, will increasingly be needed to drive growth and employment and improve living standards.”
(OECD 2010b: p. 9) For the EU, innovation is a top priority in its newly introduced 2020 goals
(Commission of the European Communities 2009: pp. 3f.). Last but not least, the United States
heavily relies on its great innovativeness, as noted by Barack Obama in 2011 (Fox S. 2011). To sum
up, there are clouds chasing across the skies of western countries. Especially the United States,
proud of being the world’s premier innovator, has to increasingly worry about its technological
dominance. As a consequence, R&D offshoring will also impact economic growth and prosperity
(Ernst D. 2006: p. 28).
Importance of SMEs’ innovative capabilities
Emerging SMEs are, and will continue to be in the future, the spearhead of innovation in the
western world. Unlike the 20th century when big scale, structured organizations dominated the
innovative process, entrepreneurship is doing the job nowadays. However, the brilliant ideas do
not eke out a miserable existence in grubby garages for long. Good ones get the attention of big
corporations by which they are bought. The intellectual property and the innovative capabilities
become part of the corporation, where they are brought to a bigger scale. The importance of
emerging small and medium sized enterprises as a source of R&D and ultimately innovation is
unquestioned (OECD, 2010a: p. 25 f.). Therefore, offshoring of R&D at the smallest business units
may influence the innovative capabilities of nations at the very root.
Research gap for (SMEs’) R&D offshoring
However, researchers do not fully agree on SMEs’ capability to offshore R&D. Current business
literature provides ubiquitous information on global sourcing problems of multinational
1 R&D is the corporate function primarily responsible for creating new products and services, also called innovations. The term R&D is used instead of innovation due to better accountability and operationalizability.
GUSENBAUER 1. Research background
2
corporations. However, the specific situation of SMEs is mostly neglected. Further research on SMEs
is strongly needed.
In literature, offshoring of R&D is relatively new, being discussed extensively only in recent years.
The full scale of service and R&D offshoring may have been underestimated for the last decade, as
companies were reluctant to announce steps taken in order to avoid negative public relations (PR)
effects (Roland Berger Strategy Consultants and UNCTAD 2004: p. 2). Nowadays, researchers
broadly agree on the existence and the ever increasing importance of R&D offshoring. As a
consequence of the great dynamics and the increasing distribution of this business strategy, data
becomes outdated quickly. The necessity of up-to-date information on R&D offshoring was a
strong motivation for the creation of this study.
The semiconductor industry is one of the most innovative sectors measured in patents or R&D
intensity. In the US, it is the second most innovative sector after biotech; and in the EU it is leading
in terms of R&D intensity. Therefore, the US semiconductor industry seemed like a good case to
exemplify SMEs’ R&D offshoring. The specific case of SMEs in the US semiconductor industry,
therefore, also gives leads to current R&D offshoring practices in other high R&D-intense sectors
(European Commission 2010).
1.1. Research goal
This study gives a broad, quantitative and empirically proven overview of SMEs’ R&D
offshoring in the US semiconductor industry. Both descriptive and explanatory research
methods measure importance, motivation and company characteristics to draw a
comprehensive picture. It not only examines the status quo, but also future R&D offshoring
in one of the most successful and innovative industries in the United States.
Initially, the importance of R&D offshoring is measured to get evidence on its existence and scale.
The goal is not only to learn about current offshoring, but also to look into planned offshoring
operations of SMEs (RQ1.1). R&D offshoring modes are examined in RQ1.2 to point out the ones
most preferably used by SMEs. RQ1.3 measures SMEs’ satisfaction with R&D offshoring to evaluate
the success rate of R&D offshoring in the US semiconductor industry. A major focus of this study is
to understand the major reasons shaping SMEs’ R&D offshoring decision (RQ2.1). Literature,
including offshoring surveys, reflecting predominantly on large companies provides the specific
motivation factors. In a second step statistical tests show significant differences between
experienced and inexperienced SMEs using R&D offshoring (RQ2.2). Furthermore, this research
aims to find out whether company characteristics significantly predict the scale of SMEs’ R&D
offshoring (RQ3).
GUSENBAUER 1. Research background
3
1.2. Research questions
The deficit of empirical publications on offshoring of R&D in SMEs makes evident the need for
research. Additionally, already existing literature on offshoring lacks both quality and actuality
(Ernst D. 2006: p. 30; Engardio P. 2008). The specific case of the semiconductor industries SMEs, as
one of the most intensive investors in R&D, has not been studied enough. This raises the following
questions for SMEs’ R&D offshoring activities in the US semiconductor industry:
RQ1.1 How important is R&D offshoring for SMEs in the US semiconductor industry currently and in the next 5 years?
RQ1.2 Which mode of R&D offshoring do SMEs use currently and in the next 5 years? RQ1.3 How satisfied are SMEs with their predominant mode of R&D offshoring? RQ2.1 Which reasons have the greatest influence on the SMEs’ decision (not) to offshore
R&D? RQ2.2 Are the reasons for and against R&D offshoring perceived differently by SMEs with
R&D offshoring experience and those without? RQ3 Do certain company characteristics associate with the scale of current R&D
offshoring?
GUSENBAUER 2. Theoretical framework
4
2. Theoretical framework The theoretical framework provides the necessary background for this study. It describes the
evolution of offshoring and its conceptual position in broader internationalization literature. The
review of existing literature exposes different positions and prepares the ground for the research
questions. These, in turn, are tailored to provide empirical evidence on a controversial topic.
2.1. The evolution of offshoring
Contrary to outsourcing, where the emphasis lies on externalization of processes, offshoring
specifically looks at the physical location. Therefore the actual location of value creation is more
important than the functional organization within or outside the firm. For the detailed definition of
offshoring see chapter 3.2.
Among popular internationalization theories, offshoring can be seen as a new form of corporate
internationalization: Firstly, the transaction cost approach sees corporate activity as a reaction to
market failure. Profit-seeking corporations internalize markets internationally if it is advantageous
to exploit these imperfect markets (Williamson O. E. 1975). Secondly, the monopolistic advantage
theory (also market approach) argues that MNCs can profit internationally from superior
knowledge. These advantages can be exploited abroad due to exclusive access to knowledge,
giving MNCs an edge over foreign competitors (Hymer S. H. 1976). Thirdly, the OLI Paradigm, a
rather holistic concept, explains internationalization of MNCs with three main parameters:
ownership, location and internalization. The decision for or against offshoring depends on these
OLI advantages, as well as the match of company strategy and stakeholders (Dunning J. H. and
Lundan S. M. 2008: pp. 99-100; Lewin A. Y. et al. 2008: p. 6).
Offshoring in general, and R&D offshoring in particular, are rooted in the forces accelerating
globalization in the 20th century: Liberalization of trade and the diffusion of English as the common
business language have synchronized the world. The internet and the new means of
telecommunication and transportation let distances become less relevant and the world seem
smaller. Advances in ICT make real-time communication possible. These macro trends, with others,
determine the path of globalization; “an indeterminate set of processes operating very unevenly in
both time and space” (Dicken P. 2011: p. 8). Harvey D. (1996) argues that globalization manifests
itself in a time-space compression, where global trade and information exchange can be handled
instantly. In turn these globalization trends have increased the global geographical reach of
companies concerning markets, competition and investment (Levitt T. 1983). Globalization has
created new business opportunities, with offshoring as a famous example (Vahlne J-E. and
Nordström, K. A. 1990; Dunning J. H. 1995; Ruzzier M. et al. 2006).
In the 1960s MNCs started offshoring production to foreign locations. This was the starting point of
a business model which gained importance in both breadth and depth (Dicken P. 2011: p. 142).
First, companies operating in the industrial sector began to move parts of value creation abroad.
The focus has been on low-end functions with great labor intensity; tasks which were repetitive,
GUSENBAUER 2. Theoretical framework
5
did not require great human capital and could be performed almost everywhere on the globe
(Naghavi A. and Ottoviano G. 2006: p. 3; Lewin A. et al. 2008: pp. 3f.). Soon, what used to be a
demanding business strategy became common practice in certain industries. Businesses stepped
up to a global scale and spanned their value chains across the world, trying to profit from
locational advantages (Dossani R. and Kenney M. 2007: p. 779; Naghavi A. and Ottoviano G.
2006: p. 3).
Over the last three decades offshoring took a step further and spread from the industrial to the
service sector. From exclusive concentration on production, offshoring expanded to the provision
of services which no longer required physical presence. Call centers, investment tasks, etc. now can
be shifted to nearly any destination around the globe. Important destinations of offshoring are
found in developing countries like China and India, but also in industrialized countries like Ireland
(The World Bank/OECD 2009: p. 101). Until recently, the most important providers for IT service
offshoring were located in India and Ireland. With USD 12.2 Billion and USD 8.6 Billion respectively,
these two countries were the standout leaders of the IT offshore market in 2003 (McKinsey 2005: p.
13). However, other nations like the US, UK and China dominated offshoring in other sectors
(UNCTAD 2005: p. 13).
2.2. Offshoring of R&D2
In the last decade or two, corporations began to move from more or less simple tasks to more
elaborate functions; the character of offshoring evolved. They started to implement strategies
where global value chains envision the creation of innovation far away from home (Kenney M. and
Dossani R. 2005).
Business process offshoring (BPO) allows companies to push offshoring even further. With BPO
corporations look at processes along the value chain and fragment them into smaller pieces.
Companies have to make two essential decisions: First, the question of offshorability, which focuses
on the mere physical location of value creation: For each of the micro-functions, the company
analyzes whether it requires physical presence or might better source elsewhere (Aron R. and Singh
J. V. 2005). Second, companies have to decide between captive and non-captive offshoring: The
dissemination of processes allows the shift from vertical integration (captive) to modular
production networks (non-captive). Natural breakpoints along the value chain, where tacit
knowledge changes over to explicit knowledge, make this transition possible – even for high-value
functions. An inter-firm link allows the transfer of codifiable knowledge to the external contract
manufacturer (Dicken P. 2011: pp. 154f.). The offshoring decision grid used in this study can be
seen in Table 5.
2 Also called innovation offshoring. In this paper both terms are used synonymously.
GUSENBAUER 2. Theoretical framework
6
Recently, not only low-end tasks, but also high value-added functions are considered to be shifted.
These so-called core competencies ideally ensure a technological and economical edge over
competitors. They are crucial for company success and are treated with the greatest of care
(Chaminade C. and Vang J. 2008: p. 3; Contractor F. J. et al. 2011: p. 3). Typically R&D is seen as one
of these core competencies–as a function producing unique output distinguishing the company
from other competitors. R&D not only guarantees the flow of marketable products and services,
but also improves efficiency through improved processes. Nevertheless, R&D is no longer bound to
specific locations; foreign R&D sourcing is no longer a taboo (Contractor F. J. et al. 2011: p. 10).
Bardhan A. D. and Jaffee D. M. (2005: p. 5) support this finding: “Business media now report the
offshoring of R&D activity in sectors ranging from pharmaceuticals and bio-technology to computer
hardware and software.” The sectors offshoring R&D are predominantly characterized by high R&D
intensity, meaning they invest a high share of their turnover in research and development. Indeed,
companies in biotech, semiconductors, or software have an R&D intensity of around 20%, making
R&D offshoring worth considering (European Commission 2010: p. 12). The dissemination of
processes led companies to form not only networks for global production, but also for global R&D.
Powell W. W. and Grodal S. (2004: p. 57) underline the importance of these innovation networks:
“various forms of interorganizational partnerships are now core components of corporate [innovation]
strategy.”
Impact of offshoring on jobs in the service sector
Beginning in the 1960s offshoring eroded the industrial sector in developed countries shifting jobs
overseas. Recently the tertiary sector has also been getting more and more impacted by the
emergence of service offshoring (Dicken P. 2011: p. 494). McKinsey (2005: p. 22) found that around
11% of the worldwide jobs in the service sector could be performed from a remote location. A
different study on general offshoring found that 22% to 29% of all US jobs will be offshorable in the
next two centuries (Blinder A. S. 2007). Blinder A. S. (2006) considers service offshoring the third
industrial revolution. Like the two previous ones, where workers first lost jobs in agriculture and
then in the industrial sector, employees are now seeing the shift of service jobs to foreign locations.
Domestic employees in the tertiary sector will have to compete more and more with foreign
personnel. Upgrading through education as the simple one-size-fits-all recipe for higher
competitiveness is increasingly being questioned. The current levels of service offshoring,
including R&D offshoring, are only the tip of the iceberg. As technology advances, the possibilities
to offshore services will increase (Blinder A. S. 2006: pp. 116-118).
However, the implications of R&D offshoring for the US job market are greatly debated. Against
contrary belief, a Duke University/Booz Allen Hamilton (2006: pp. 3-4) study concluded that R&D
offshoring does not lead to job losses, but in fact creates jobs. It found that the net job effect
majorly is a question of the function being offshored. High-value functions like R&D, generally
perceived as crucial for company success, are not affected. However, others strongly disagree: A
CEO of a small sized semiconductor company in Silicon Valley is sure about the tremendous job
GUSENBAUER 2. Theoretical framework
7
losses due to R&D offshoring in the specific case of semiconductors: “[…] the onshore industry is
gone. [Domestic sourcing] is not an option anymore. […] The jobs are going away!” The net effects of
offshoring still have to be researched, as great heterogeneities are to be expected among different
industries and functions (Blinder A. S. 2006: pp. 118ff.).
2.3. Offshoring of R&D by SMEs
Researchers do not fully agree on SMEs’ capability to offshore R&D. Vivek Wadhwa from Duke
University’s Global Engineering and Entrepreneurship group notes that “[…] midsize companies are
less likely to outsource and are more likely to keep innovation in the U.S.” (Wadhwa V. 2009). Indeed,
prominent examples of firms moving their research abroad are primarily found in MNCs employing
several thousand persons worldwide. Microsoft, General Electric, Texas Instruments, IBM, Intel,
Cisco and Motorola are the most famous to move labs to India (Egardio P. 2008; Wadhwa V. 2009).
However, before they started to think about R&D offshoring, their operations had already been
spanning the globe for decades. They had already built global expertise; a characteristic SME does
not share. Therefore, it is hard to imagine the increase of SMEs engaging in global R&D sourcing.
Company size left aside, businesses in general see the organizational structure and internal
problems as the biggest issue concerning offshoring (European Commission 2010). Often the
argument is that SMEs were simply not big enough to offshore. Unlike their big brothers, small and
medium sized companies are often not organized in departments and (offshorable) (micro-)
processes are poorly defined. Employees fulfill multiple overlapping tasks at the same time and
cannot be attributed to distinct processes or tasks (Duke University/Booz Allen Hamilton 2006: p.
8).
On the other hand, however, there is the contrary belief that SMEs are not only capable of R&D
offshoring, but rather need to source it externally. In-house R&D would be too expensive for smaller
companies. There is evidence that SMEs operate with significantly higher R&D intensity than their
larger counterparts. As the low turnover cannot make up for the high R&D expenditures, the ratio is
comparatively high (European Commission 2010). Giancarlo Migliori, owner and managing director
of MrgoodIDE3, a Milan based technology and IP provider, shares his European perspective:
“If large corporations contemplate outsourcing research and development despite having the means for internal R&D, imagine the urgency for SMEs to do the same since they do not have (or cannot afford) in-house R&D. Remember, most of European industry still produces low-tech goods.” (Migliori G. 2011)
The technological innovations of the late 20th century are now seen as the greatest enablers for
high-value offshoring. This is especially true for service offshoring in general, and R&D offshoring in
particular. Advances in information and communication technology (ICT) increasingly level the
playing field for SMEs and allow them to interact efficiently with partners around the globe (Roland
3 http://www.mrgoodidea.com/Home.html
GUSENBAUER 2. Theoretical framework
8
Berger Strategy Consultants and UNCTAD 2004: p. 2; Oshri I. et al. 2009: pp. 6f.; Contractor F. J. et al.
2011: p. 9; Lewin A. Y. et al. 2008: p. 9; Howells J. R. 1995).
According to Duke University’s 2007-2008 Offshoring Research Network (ORN) Survey Report,
especially small companies will in future implement offshore product development. It found that
44% of the small sized enterprises have aggressive plans to offshore innovation (Heijmen T. et al.
2008). Another publication from the same institution concludes that “many of these companies
[small and medium sized] find it difficult to compete for highly qualified talent domestically.” Therefore
they are pushed to look elsewhere for capability required for their operations (Duke
University/ORN 2009b).
To sum up, the importance of SMEs’ R&D offshoring is still highly controversial and lacks empirical
backing. The ambiguity of the significance of R&D offshoring in SMEs requires further
investigation–this study aims to provide this evidence. Furthermore there exists no good data on
the importance of SMEs’ R&D offshoring in the US semiconductor industry in particular. This study
also assesses the reasoning behind SMEs offshoring decisions, as well as the characteristics
describing organizations following this strategy. As one of the greatest investors in R&D, up-to-date
empirical evidence on the R&D offshoring trends seems more than worthwhile. The results of this
study will be compared with the findings of Duke University/ORN4 and other relevant literature to
provide an up-to-date benchmark for the US semiconductor industry:
RQ1.1: How important is R&D offshoring for SMEs in the US semiconductor industry currently
and in the next 5 years?
General internationalization literature distinguishes between three general modes of corporate
internationalization: wholly owned subsidiaries, joint ventures or partnerships and licensing
agreements or contracting.5 These forms are not only used for production of physical goods, but
also for the production of know-how. Therefore they all can be used to offshore R&D. The choice of
the offshoring mode is strongly influenced by the associated risks and opportunities.6 Aron R. and
Singh J. V. (2005) point out the importance to analyze these factors first and take adequate
measures later. To mitigate offshoring risk they suggest companies should make up their mind on
location and ownership of the process; i.e. whether the process should stay in-house and whether
it is best to source it externally. At the end of each route of the decision tree there is the
corresponding sourcing mode. The relevant decisions grid is described in chapter 3.2 in more
detail. RQ1.2 gives an impression of the importance of the different R&D offshoring choices:
RQ1.2: Which mode of R&D offshoring do SMEs use currently and in the next 5 years?
4 However, one has to keep in mind that the surveyed companies operate in different industries and the SMEs definition used is very broad: It defines small companies with a headcount of up to 500 employees, whereas this study uses the OECD definition of SMEs with a headcount of less than 250 employees. 5 See Table 5 for an overview of the different (R&D) offshoring modes. 6 Especially RQ3.1 and RQ3.2 deal with SMEs’ reasons for R&D offshoring.
GUSENBAUER 2. Theoretical framework
9
The satisfaction with current offshoring is generally relatively high. Roland Berger Strategy
Consultants and UNCTAD (2004: p. 1) concluded for a representative sample of the top 500
European companies that 80% were happy with their offshoring activities. This study tests for the
specific case of R&D offshoring in the US semiconductor industry. The goal is to learn about the
current level of satisfaction in order to draw a picture of future offshoring.
RQ1.3: How satisfied are SMEs with their predominant mode of R&D offshoring?
2.4. Reasons for or against R&D offshoring: facilitators vs.
obstacles
Having discussed the importance of R&D offshoring and the ex-post satisfaction, this subchapter
addresses reasons for and against offshoring. The central research question is the following:
RQ2.1: Which reasons have the greatest influence on the SMEs’ decision (not) to offshore
R&D?
This study distinguishes between two motivation types, affecting the companies’ decision whether
to source R&D from foreign locations or not: on the one hand facilitators make companies go
abroad; on the other hand obstacles make the strategy unviable. In similar studies these reasons are
also called drivers, enablers and risks (see e.g. Duke University/ORN 2009a: pp. 9f.). As this study
also uses more general reasons, rather universal terms were chosen. The specific reasons were
drawn from expert interviews, literature and surveys on offshoring, and general foreign direct
investment (FDI) motives, respectively. As literature or surveys on SMEs’ offshoring motives are
either hardly available and/or outdated, the survey was enriched with reasons not considered in
previous offshoring surveys. Every single reason has its equivalent variable (v22 to v54):
Table 1: Reasons for and against R&D offshoring
Facilitators (17+1other category) v22: Improved focus on core competencies v23: Improvement of R&D processes v24: Gain of flexibility in R&D capacity v25: Increase of depth and breadth of R&D v26: Good way to enter the foreign market v27: Pressure from proprietor to source R&D from outside the US v28: Pressures from competitors (follower strategy) v29: Extension of already existing cooperation v30: Strong psychological connections to foreign location (migration background, general sympathy for a country, etc.)
v31: Sourcing of highly available foreign know-how and skills v32: Low personnel costs v33: Low other costs (facilities, energy, licensing requirements, etc.) v34: Access to modern traditional infrastructure (roads, railway system, electricity, etc.) v35: Access to modern IT infrastructure v36: Access to research clusters and university collaborations v37: Governmental incentives (tax breaks, subsidies, grants, etc.) v38: Favorable administrative, institutional and legislative framework
GUSENBAUER 2. Theoretical framework
10
Obstacles (14+1 other category) v40: Loss of core business competencies v41: Reduction of control and flexibility over decisions, R&D process, cost, performance, etc. v42: Reduction of stock of company know-how v43: High transaction costs v44: Confidentiality issues and privacy concerns (data security, intellectual property theft, etc.) v45: Loss of intellectual property rights to supplier v46: Poor public relations and client acceptance v47: Cultural fit and corporate culture issues
v48: Lack of experience in foreign market and environment v49: High initial set-up cost (plant, training, etc.) v50: Insufficient skills and quality of foreign workforce (decreased productivity and quality of R&D) v51: Risk of unexpected cost increases (wage rises, exchange rate fluctuations, etc.) v52: Country specific risks (political, legal, property rights, etc.) v53: US policy legally requires domestic R&D
Single reasons were evaluated with the help of similar surveys conducted on offshoring in general.
Although similar studies have different foci only providing analogies, the hypotheses are aimed to
provide points of reference. Comparability between general offshoring trends and the specific case
of SMEs R&D offshoring in the US semiconductor industry is the goal. The different research
background is well reflected in the derivation of the hypotheses:
Hypotheses – grouping according to importance
This study classifies reasons in three different categories, grouped according to their expected
importance based on literature: extraordinarily important (1), important (2) and unclarified
importance (3). The qualitative nature of the screening process combined with the limited
comparability makes weighting of the single variables vague. The categories on the importance of
single reasons should not be understood to be exact; it is rather aimed to give a general
impression: First, the hypothesis is that, “extraordinarily important” reasons are ranked higher
relative to all other variables. Second, “important” factors are perceived relevant by at least 25% of
the SMEs. Third, reasons with “unclarified importance” were drawn from interviews and findings in
literature. As there is no survey data on offshoring available, the relevance still has to be tested in
order to put assumptions into perspective. No hypotheses are proposed.
Grouping according to function
The single variables are also grouped according to their function, to make literature screening
easier and the different facilitators and obstacles more tangible. On the next pages the variables
are both grouped according to their importance and according to their function:
GUSENBAUER 2. Theoretical framework
11
Facilitators: extraordinarily important
Improvement of R&D (v23, v24, v25)
The improvement of R&D processes is expected to play an important role for SMEs’ offshoring. In
2005, almost half of the US companies asked by Duke University/Archstone Consulting (2005: p. 7)
were sourcing products and services to redesign business processes. In a subsequent study,
“enhancing efficiency through business process redesign” was “important” or “very important” for
70%. In the same study, the increase of organizational flexibility and the enhancement of
innovative capacity were valued highly with 59% and 51% respectively (Duke University/ORN
2009a: p. 10).
Pressures from competitors (v28)
Competitive pressures are an increasing push-factor for SMEs offshoring operations. As this
practice has evolved from exotic to popular, companies can no longer neglect the opportunities
outside their home country. Moreover, businesses “born” in developing countries profit directly
from advantages found offshore. Therefore, two thirds of companies see pressures from
competitors as key facilitators of their R&D offshoring (Duke University/ORN 2009a: p. 10; Roland
Berger Strategy Consultants and UNCTAD 2004: p. 2).
Low cost of highly available know-how and skills (v31, v32)
In the future, the main focus of offshoring operations lies on the abundant quantity of highly
skilled human capital in industrializing countries. The race for lower cost becomes more and more
secondary, however still remaining an important factor. Dossani R. and Kenney M. (2004) describe
how businesses initially offshore services for cost and then stay for quality. The question is how
SMEs evaluate this relationship. The CTO of Global Electronics underlines the importance of know-
how: “Offshoring is a matter of global access to intellectual capital. In the end, companies will go to low-
cost countries for the people, not for the costs.” (Duke University/Booz Allen Hamilton 2006: p. 3)
Domestically, US companies find it hard to hire adequate staff, as supply is limited (Duke
University/Booz Allen Hamilton 2006: pp. 3ff.). Contributing to the situation, fewer immigrants are
allowed to work in the semiconductor industry’s highly paid positions. The US decreased the
number of annually available visas for qualified foreign workers (H1B) from 195,000 to 65,000 in
2003 (Peter G. Peterson Institute for International Economics 2007: p. 216). The need for adequate
personnel is also reflected in the relatively higher salaries of immigrant workers compared to the
average industry pay (see chapter 3.1). Therefore it is assumed that access to foreign human capital
is a crucial factor for R&D offshoring.
GUSENBAUER 2. Theoretical framework
12
Facilitators: important
Foreign market entry (v26)
“Access to new markets for products and services” has relatively low importance compared to
other key enablers. Nevertheless, it is still relevant for some companies. On the lowest rank of key
drivers, it played an important or very important role for 41% (Duke University/ORN 2009a: p. 10).
Pressure from proprietor to source R&D from outside the US (v27)
The Economist Intelligence Unit (2009: p. 16) found that especially start-ups were lacking financial
funding in recent years. Due to the financial crisis this problem got worse and SMEs had to cut
costs wherever possible. Therefore venture capitalists (VCs) more and more put pressure on SMEs
to offshore R&D in order to cut costs and reduce the funds required (Kenney M. and Dossani R.
2005: p. 9; Hira J. 2005: p. 25). In fact, VCs require start-ups to map out their offshoring strategy
before they are granted next-level funding (Ernst D. 2006: p. 10).
Cost savings (v33)
Roland Berger Strategy Consultants and UNCTAD (2004: p. 2) found that in Europe the main driver
for service offshoring still remains the cost advantage. Also for US companies cost savings were
seen as primary drivers for general offshoring (Duke University CIBER/Archstone Consulting 2005:
p. 8). In a different study focusing on outsourcing, 74% of the respondents stated that cost savings,
excluding personnel cost, are “important” or “very important”. Yet, the expected benefits vary by
business process; there are different goals for R&D offshoring or the offshoring of low-end
functions. R&D offshoring is assumed to be less cost sensitive than the offshoring of other
functions. Therefore general cost savings, excluding personnel cost, are assumed to be not among
the top drivers (Duke University/ORN 2009a: p. 10).
Access to infrastructure and collaborations (v34, v35, v36)
One of the most important factors for the competitiveness of nations is the provision of
technological infrastructure such as cheap and efficient (mobile) telecommunication and
broadband internet. On the other hand, access to traditional infrastructure like roads, railway,
harbor facilities, electricity, etc. is still needed. The Institute for Management Development (IMD),
one of the world’s leading research centers for competition among countries, suggests investment
in infrastructure as key to a country’s competitiveness. This also includes social infrastructure, like
health and education or quality of life in general. These factors all have substantial influence on
business decisions and R&D offshoring in particular (Institute for Management Development 2011:
pp. 498ff.). Along these lines, A. T. Kearney (2004: p. 5) also lists the availability of good
infrastructure as key in its Offshore Location Attractiveness Index. This also includes the access to
research clusters and university collaborations, which it subsumes in “cumulative business process
experience and skills”. The Duke University/ORN (2009a: p. 10) study underlines the importance of
infrastructure; more than every second company finds location-specific advantages relevant.
GUSENBAUER 2. Theoretical framework
13
Governmental incentives and offshoring-friendly framework (v37, v38)
Incentives such as tax breaks, subsidies or grants given by foreign governments pull US companies
offshore; however, only to a limited degree. For only 23% of companies that offshored in 2006 this
factor was important; even less than 10% thought governmental incentives mattered (Duke
University/Booz Allen Hamilton 2007: p. 54). Nevertheless, the relevance of an offshoring-friendly
administrative, institutional and legislative framework is not to be underestimated. The lack thereof
significantly increases total offshoring cost; especially in the form of captive offshoring (Sarkar S.
and Reddy S. 2006: p. 54).
Facilitators: unclarified importance
Improved focus on core competencies (v22)
The focus on core competencies is a main factor for the emergence of outsourcing and offshoring.
Companies concentrate on central elements of value creation and externalize functions which are
not perceived relevant. The motivation is that third party suppliers can more efficiently provide
these services. This in turn has positive effects on performance (Contractor F. J. et al. 2011: p. 8). In
this study two contrary factors were questioned: on the one hand, the obstacle “loss of core
business competencies” (v40), and on the other the facilitator “improved focus on core
competencies” (v22). The goal was to find out whether core competencies play a role for SMEs’
offshoring decisions, and which effect R&D offshoring has on core competencies. In the analysis
both variables were contrasted.
Existing ties to foreign location (v29, v30)
Besides strict economic factors, there is a relationship side of R&D offshoring as well. On the one
hand, many immigrants start US companies; they have become an integral part of business: A
report from Partnership for a new American Economy (2011) concluded that in 2010 more than
40% of Americas Fortune 500 companies were founded by immigrants or their children. On the
other hand, motivated foreign (PhD) students graduate from top US universities and return to their
home countries to start businesses there. In the last decades there have been many examples of
highly successful ventures started by temporary US residents returning to their home countries. In
fact, this is exactly how the story of the extraordinary rise of the Taiwanese semiconductor industry
in the 1980s unfolded. In addition, there are numerous similar stories involving cultural proximity
and familiarity (Saxenian A. 2006: pp. 1ff.). Cases like these show that immigrants and their
relationship to their home countries have an important effect on business and R&D offshoring.
Although the existence of brain drain and cultural factors on global business decisions seem
evident, there is still a lack of empirical proof. This is especially true for the impact of heritage and
migration on R&D.
GUSENBAUER 2. Theoretical framework
14
Obstacles: extraordinarily important
Intellectual property issues (v42, v44, v45)
Data and intellectual property (IP) security poses a great risk for current and future offshore
operations (A. T. Kearney 2004: p. 10). In fact, 54% of all respondents asked by Duke University
(2006: p. 8) stated that poor data security is a substantial risk. Two years before this number was
still down to approximately 40%–an indication of the increasing importance of data security.
Concerns over the loss of IP also increased significantly to 41% in 2006. Unlike other business
processes, R&D is greatly connected to the creation of know-how and IP. It is the basic component
for improved processes and new products which in turn impact the bottom line. Not surprisingly,
lacking IP laws and data security pose a crucial obstacle for foreign R&D sourcing (Bardhan A. D.
and Jaffee D. M. 2005: p. 9). Additionally, offshoring, especially outsourced offshoring (non-captive),
reduces the organization’s communicational and coordination skills, involving a loss of know-how
(Hendry J. 1995: pp. 196f.). The importance of IP issues is expected to increase further, as R&D
offshoring is very IP sensitive. Therefore the outdated data on this risk demands up-to-date
research.
Obstacles: important
Reduced control and flexibility (v41)
The question on whether offshoring decreases control and flexibility over decisions, R&D
processes, cost, performance, etc. depends greatly on the mode of offshoring. In other words, a
wholly owned subsidiary provides a significantly higher level of control than contracting or a joint
venture. In 2005 for 46% of the companies asked by Duke University CIBER/Archstone Consulting
(2005: pp. 7ff.) the loss of control posed a substantial risk. Companies with little offshoring
experience consider this risk significantly higher than their “battle-scarred” counterparts.
Experienced companies know better how to manage processes and make smarter choices
concerning the offshoring mode (Lewin, A. Y. and Peeters C. 2006: pp. 227f.).
Poor public relations and client acceptance (v46)
Between 2004 and 2006 the lack of offshoring acceptance by customers and internal clients has
been increasingly seen as a threat. In this period the amount of companies sensing this risk rose by
more than 5% to about 45% (Duke University/Booz Allen Hamilton 2006: p. 8). A similar study
found that it even reached 49% in late 2004. It also found that two thirds of rather inexperienced
companies rate the lack of client acceptance as a substantial risk. Experienced companies are
significantly more optimistic; 44% of the companies with more than 18 months of offshoring
engagement think it is relevant. However, not only experience plays into this evaluation, but also
the a priori offshoring attitude of the client. A good communication strategy could resolve issues
and reduce misunderstandings (Lewin A. Y. and Peeters C. 2006: pp. 227f.).
GUSENBAUER 2. Theoretical framework
15
PR is presumably not as important as client acceptance. In 2004 UNCTAD found that 29% of the
European companies surveyed had problems with negative PR effects due to offshoring
(Plankenhorn S. 2008: p. 11).
Company vs. host country issues (v47, v48)
A factor that ought not to be underestimated is the cultural difference and the cultural diversity of
offshoring locations. India, as the premier offshoring destination provides a plurality of cultures,
spanning from traditional-rural to western-modern. A western company has to take into account
that common business practices cannot be transferred one-to-one. Sarkar S. and Reddy S. (2006:
pp. 49ff.) provide a multiple page description of typical Indian business practices that have to be
kept in mind. The question is whether these values are compatible with US practices and if the
headquarters (HQ) is willing to adapt the current corporate culture (Sarkar S. and Reddy S. 2006: pp.
49ff.). In 2005 more than half of the companies surveyed by Duke University/ORN (2005: p. 9) stated
that corporate culture buy-in poses a substantial risk to offshore operations. Moreover, Lewin A. Y.
and Peeters C. (2006: p. 227) found that a lack of cultural fit can not only lead to bad results, but
trigger internal resistance. According to a study by Duke University/Booz Allen Hamilton (2006:
p. 8) the impact of cultural differences decreased substantially between 2004 and 2006 to
less than 30%.
High cost (v43, v49, v51)
Especially for smaller enterprises high cost is an important factor for sourcing decisions. Set-up,
operation and transaction cost pose significant expenditures for R&D offshoring and offshoring in
general. On the other hand, intermediaries make offshoring easier and more accessible to SMEs
(Bardhan A. D. and Jaffee D. M. 2005: pp. 9f.). Compared to large companies, SMEs find it harder to
mitigate transaction costs; the average cost is therefore higher due to the limited scale (Carmel E.
and Nicholson B. 2005: pp. 50f.). As noted in A.T. Kearney’s Offshore Location Attractiveness Index
(2004: p. 5) unexpected cost increases, due to exchange rate fluctuations, corruption or tax
increases, might hold off foreign investors. Duke University/ORN (2009a: p. 11) found that 38% of
companies engaging in offshoring perceived currency fluctuations on Dollar denominated
contracts as a substantial risk. Wage inflation, however, is relevant for only 27% of the firms
surveyed.
Insufficient skills and quality of foreign workforce (v50)
“After 10 years, the concerns we had about offshoring quality are gone, and the offshore personnel are outcompeting us with similar or better quality, significantly more availability, and lower cost.” – Director of Technology, Major Canadian Manufacturer (Duke University/Booz Allen Hamilton 2006)
Not only the quantity but also the quality of foreign highly skilled workers is improving steadily.
Offshore destinations like China or India are doing well and threaten to exceed western countries.
Therefore, one can assume that insufficient skills or quality of the foreign workforce are only
GUSENBAUER 2. Theoretical framework
16
playing a minor role for R&D offshoring. However, there still might be a bias between companies
that offshore and others that do not. As the quality of the foreign talent was considerably inferior
previously, some prejudices among inexperienced companies might be tenacious (Duke
University/ORN 2006: pp. 5ff.).
Country specific risks (v52)
The risk of political backlash was decreasingly important for companies’ offshoring activities
between 2004 and 2006. Just somewhat more than 20% of the respondents perceived this risk as
significant (Duke University/Booz Allen Hamilton 2006: p. 8). In 2005 political instability was
considered slightly more important than political backlash; nevertheless, on a low level (Duke
University CIBER/Archstone Consulting 2005: p. 9). Political instability and political backlash are
found at the bottom end of perceived offshoring risks (Lewin A. Y. and Peeters C. 2006: p. 227).
Obstacles: unclarified importance
Loss of core business competencies (v40)
In recent years literature indicated that outsourcing has advanced to core business functions.
Different industries begin to outsource what once had been their Holy Grail (Duke University/Booz
Allen Hamilton 2006: pp. 1ff.). This study wants to test whether the loss of core business
competences is explicitly considered an obstacle for SMEs when deciding on R&D offshoring. For
comparison, the corresponding driver is ‘improved focus on core competencies” (v22). The relation
of both variables to R&D offshoring was not examined sufficiently in the past.
Legal requirement to keep R&D in the US (v53)
Legal restrictions were addressed by an expert in the field who suggested an explicit examination
of this variable. The question is whether legal restrictions play a significant role for SMEs’ sourcing
decisions.
2.5. SME characteristics and the scale of current R&D offshoring
Research question 3 tests whether certain SME characteristics predict the scale of their R&D
offshoring operations. The goal is to find factors that predict R&D offshoring in SMEs:
RQ3: Do certain company characteristics associate with the scale of current R&D offshoring?
The independent variables, explaining the scale of current R&D offshoring, were drawn from
studies that tested company characteristics and general offshoring practices. Additionally,
literature focusing on R&D offshoring provided more variables which might predict the scale of
current R&D offshoring. The independent and dependent variables used for this research question
are shown in Table 2.
GUSENBAUER 2. Theoretical framework
17
Table 2: Variables for RQ3
Variable Description
Independent variables
v2.1: Company age Current year - v2: year of foundationv3: Company size Number of employeesv6: Fab Operation of a semiconductor fabrication plant (fab)
Importance of R&Dv7: R&D function Importance of R&D within the company v8: R&D department Operation of a distinct R&D department v9: R&D personnel Number of R&D personnel in the entire corporation v11: R&D intensity Total R&D expenditures over sales
International focusv12: Sales outside US Share of sales outside the US
Dependent
variables
v14: Foreign R&D personnel
Foreign R&D personnel as a share of total R&D personnel
v15: Foreign R&D expenditures
Foreign R&D expenditures as a share of total R&D expenditures
Description of variables
Company age (v2.1)
The EU Industrial R&D Investment Scoreboard evaluated the data of the top 1000 companies
worldwide and found that 69.2% of the semiconductor industry are young companies7. Moreover,
young companies invest comparatively more in R&D. This is partly due to their smaller revenue
base compared to older corporations. Interestingly, young semiconductor companies were
performing significantly worse in terms of profitability. Whereas old companies accounted for a
profitability of 12.3%, the young counterparts had one of -6.3% (European Commission 2010: pp.
50ff.). As profitability is low and R&D intensity is high with young companies, steps have to be
taken to mitigate these shortcomings. It seems reasonable to assume that younger companies are
more likely to offshore R&D in order to get better access to know-how and cheaper R&D. To
increase profitability, offshoring makes sense and might be suggested by VCs (see RQ2.1 and
RQ2.2). On the other hand, however, company age indicates learning over time. Therefore older
companies might be more experienced and therefore more likely to offshore R&D.
Company size (v3)
As previously indicated, smaller companies invest significantly more in R&D than large companies;
they cannot generate as much sales over R&D resulting in a higher R&D intensity (European
Commission 2010: pp. 35f.). Roza M. et al. (2011: pp. 320f.) found that SMEs indeed do engage in
offshoring. Like medium and large enterprises, they seek for foreign cost advantages to improve
competitiveness. The question is whether size is a linear factor, or if companies have to mature first
in order to offshore R&D. 7 A “young company” is defined as a firm created after 1975, but was not acquired by other companies.
GUSENBAUER 2. Theoretical framework
18
Fab (v6)
The operation of a semiconductor fabrication plant (fab) indicates a certain orientation towards
manufacturing. Some SMEs possess facilities to produce semiconductor wafers. Nevertheless, these
facilities are not comparable with large, multi-billion Dollar investments by large corporations.
(Sanvido V. E. and Mace B. K. 1999). This variable tests whether the operation of a fab relates to R&D
offshoring.
Importance of R&D (v7, v8, v9, v11)
The importance of R&D within an organization substantially influences the decision of R&D
offshoring. Bardhan A. D. and Jaffee, D. M. (2005: p. 10) found that the more innovative firms would
rather offshore R&D. In this study, the importance of R&D within a company comprises a set of
variables: R&D function (v7), R&D department (v8), R&D personnel (v9) and R&D intensity (v11).
Every one of these variables measures different characteristics indicating the orientation towards
R&D. In this study the actual innovativeness is captured by two factors: the number of R&D
personnel (v9) and R&D intensity (v11). Bardhan A. D. and Jaffee D. M. (2005: p. 15) found that
offshoring has stepped up the value chain and advanced processes considered core competencies.
Contractor F. J. et al. (2011: p. 11) found that even functions like R&D–the creation of innovation,
get split up in micro-functions. These functions, once seen as core competencies, are more
frequently offshored to more favorable foreign locations. The definition of core competencies has
become narrower; functions formerly considered high-value are nowadays offshored. The
distinction between relevant and less relevant processes can be a tightrope walk. In a constant
endeavor of optimal R&D capabilities paired with lowest cost, start-ups and young companies
especially push offshore: sometimes the trade-off between streamlining and internal value creation
uncovers unexpected downsides (Contractor F. J. et al. 2011: pp. 11ff.). Therefore, it is important to
understand how offshoring companies think of their corporate R&D function. This is measured by
v7: R&D function and v8: R&D department.
International focus (v12)
The international focus of an SME, measured by the company’s share of international sales over
total company sales is suggested to have a significant impact on offshoring. Agarwal S. and
Ramaswami S. N. (1992: pp. 15ff.) found that larger and more MNCs were more keen to enter
foreign markets. Therefore, a greater international focus is assumed to also have a positive effect
on the scale of current R&D offshoring.
GUSENBAUER 3. Definitions
19
3. Definitions In this chapter, the definitions of the most crucial terms lay the cornerstone for both an accurate
sample selection and empirical data collection. Sharp terminology reduced ambiguity and set a
clear focus. This chapter therefore allows for comparability of this survey to similar studies.
3.1. The US semiconductor industry
The semiconductor industry is one of the most innovative sectors measured in patents or R&D
intensity. In the US, semiconductor companies conduct the second most R&D over sales after
Biotech. Almost every fifth Dollar earned goes directly into new processes or products. In absolute
terms, US R&D expenditures are five times the ones of European companies (European Commission
2010: pp. 12ff.). The total output of IP in the semiconductor industry is one of the highest
compared to other industries. Although US companies were significant contributors of IP between
2003 and 2007, the Japanese led with more than double the amount. South Korean companies
ranked second with 18% more output than US companies. Within 5 years, US enterprises filed
nearly 10,000 patents resulting in the third place worldwide (WIPO 2010: pp. 59f.). The US
Semiconductor Industry Association (SIA) underlines the sector’s importance for America and its
key role for other industries down the value chain:
“U.S. semiconductor industry, America's number-one export industry over the last five years and a bellwether measurement of the U.S. economy. Semiconductor innovations form the foundation for America's $1.1 trillion technology industry affecting a U.S. workforce of nearly 6 million.” (SIA 2011)
Classification
According to the SIA, the semiconductor industry can be classified under the North American
Industry Classification System (NAICS) Code 334413 (SIA 2004). The very same classification is also
used throughout this study. The SIA, as the “voice of the US semiconductor industry”, technically
defines semiconductors as:
“[…] materials which have a conductivity between conductors (general metals) and nonconductors or insulators (such as ceramics). Semiconductors are made from pure elements, typically silicon or geranium, or compounds such as gallium arsenide. In a process called doping, small amounts of impurities are added to pure semiconductors causing large changes in the conductivity of the material.”(SIA 2011)
The US Census Bureau’s definition for companies working in the field of “Semiconductor and Related
Device Manufacturing” (NAICS 334413) is the following:
“[…] comprises establishments primarily engaged in manufacturing semiconductors and related solid state devices. Examples of products made by these establishments are integrated circuits, memory chips, microprocessors, diodes, transistors, solar cells and other optoelectronic devices.” (US Census Bureau 2007)
A more detailed list of sub-categories can be found in Appendix A: Semiconductor industry
classification, which also lists classifications used by other international organizations.
GUSENBAUER 3. Definitions
20
Industry size
According to the US Census Bureau the US semiconductor industry, with the NAICS code 334413,
consisted of 904 establishments in 2009. As it provides the most reliable and current data available,
the study bases all further calculations on this source. SMEs make up for the biggest share of
semiconductor companies in the US. A total of 802 businesses are included in this category; that is
89% of all US semiconductor companies. In 2009 a total of 108,050 persons worked in the industry,
whereas only 23,696 (22%) were employed in SMEs. Table 3 shows the size and composition of the
industry.
Table 3: The US semiconductor industry (2009)
Company size (Number of employees)
Micro 1-9
10-19
20-49
50-99
100-249
SMEs 1-249
Large≥ 250
Total
Number of enterprises 402 (44%)
110(12%)
146(16%)
71(8%)
73(8%)
802 (89%)
102 (11%)
904 (100%)
Number of employees 1,320 (1%)
1,588(1%)
4,680(4%)
5,160(5%)
10,948(10%)
23,696 (22%)
84,354(78%)
108,050(100%)
Source: US Census Bureau 2009
Employment
The US semiconductor industry has a hunger for fresh human capital; also foreign workers. With
1,902 newly filed or renewed H1B visa petitions, the semiconductor industry ranked 10th in 2010.
Excluding public sectors like education and hospitals, it even ranks 7th. Intel followed by Broadcom
and Texas Instruments ranks on top of the visa applications. Although these numbers do not reflect
the availability of domestic talent directly, the visa petitions indeed show a substantial need for
bright engineers. The industry lacks qualified staff; therefore it also looks at job markets outside the
United States. On average an immigrant worker received USD 93,274 in 2010 (Myvisajobs.com
2010)8. In 2009 the total payroll in the US semiconductor industry accounted for more than USD 8
billion. Per employee this amounts to USD 74,275 on average (US Census Bureau 2009). An
immigrant worker therefore earns more than the average. Qualification left aside, this pay gap
contradicts a commonly used assumption that immigrant personnel are hired because of cost
savings. Kirkegaard J. F. (2005: pp. 22f.) argues that the wage premium paid for immigrant workers
is an indicator that the global market for the brightest talent has already emerged; with cost
increasingly becoming secondary. For analysis of the importance of personnel cost for SMEs
offshoring activities see RQ2.1 and RQ2.2.
8 Myvisajobs.com bases its calculations on data from different US institutions, including US Department of Labor, US Census Bureau, Internal Revenue Service, Federal Bureau of Investigation and local police departments and municipalities, National Oceanic and Atmospheric Administration, etc.
GUSENBAUER 3. Definitions
21
R&D intensity – A comparison between the USA and the EU
Among the top 1000 companies the semiconductor industry with 16.8% has the second highest
R&D intensity worldwide; only biotech invests more of its turnover in R&D. Although not all
semiconductor companies are represented in this statistic, they make up for approximately 95% of
total R&D (European Commission 2010: pp. 34f.). The remainder consists of mainly SMEs, operating
on a smaller scale.
The situation at the country level is diverse. In absolute terms US companies invest five times more
in R&D compared to their European counterparts. In relative terms the European semiconductor
companies’ R&D intensity is with 21.8% higher than the American R&D intensity (19.1%). The
European semiconductor industry, as a Key Enabling Technology (KET), shows the highest R&D
intensity compared to any other sector in Europe. In the US only Biotech invests more in R&D
relative to sales (European Commission 2010: pp. 34ff.). Carlo Bozotti, President of the European
Semiconductor Industry Association warned about the high relative R&D investments:
“Maintaining R&D investments at such high levels in a highly globalized economic environment also puts some unique demands on companies. These demands must be recognized and supported in a more coherent and far stronger way to ensure Europe remains a top semiconductor player in the competitive global marketplace.” (ESIA 2011)
The discussion on the innovativeness of the US semiconductor industry is overshadowed by the
dislocation of manufacturing and R&D to low-cost nations. McCormack R. A. (2010) argues that R&D
is eventually following manufacturing overseas. The result is a decline of innovative capacity.
3.2. Offshoring
In scientific debate, there exists an abundant number of classifications with different foci and goals
for offshoring. Moreover, outsourcing and offshoring are often confused or used as synonyms.
Frequently, authors mean offshore outsourcing when referring to offshoring in general. However,
each term has a different meaning, referring to different business strategies. Consequently, the
confusion and lack of standardization leads to incomparability and pain. This paper strives for a
clear definition for offshoring to avoid vagueness. Therefore it was necessary to think of the
important dimensions of offshoring for this paper. The following sub-chapter sketches out various
approaches to offshoring:
Offshoring definitions
When mapping out its strategy, a company has to think of two very fundamental questions: First,
does it produce goods or services internally or externally? Does the production stay in-house,
within the same company or is external sourcing more beneficial? Second, does the company
GUSENBAUER 3. Definitions
22
choose to produce domestically9 or abroad? Being of long-term nature, these two decisions are far
from trivial. High transaction cost makes a revocation of the production mix very expensive (OECD
2007: pp. 15f.). Table 4 shows both decisions and the resulting strategy split in 4 different options:
Table 4: Offshoring defined by the OECD
Internal production (in-house)
External production (outsourced)
Within the country (domestic)
Production within the enterprise and the country (domestic in-house).
Production outside the enterprise but within the country (domestic outsourcing).
Abroad (offshoring)
Production within the group to which the enterprise belongs but abroad (by its own affiliates) (offshore in-house sourcing in the sense of relocation abroad).
Production outside the enterprise (or the group) and outside the country by non-affiliated firms. This involves foreign subcontracting (offshore outsourcing or subcontracting abroad).
Source: OECD (2007): p. 16
Narrow vs. broad definition
Other scholars like Tadelis S. (2007), however, classify offshoring very strictly, as they exclusively
consider offshore outsourcing. Consequently, in-house offshoring, respectively the sheer
relocation of functions within the very same organization, is included in the offshoring definition.
The OECD (2007, pp. 16f.) distinguishes between two types of offshoring: First, by offshoring in the
strict sense, it understands the shift of business functions from domestic to foreign locations. It is
important that an increase of foreign workforce goes along with a reduction of the domestic
headcount. The output stays the same as just the physical location of production changes. Second,
offshoring in the broad sense is defined as sourcing of goods and services from an offshore, non-
affiliated company, also called offshore outsourcing. The dimension of shifting the activities abroad
is not important here; the exclusive consideration is the sourcing process from a non-domestic,
non-company-owned establishment.
In literature offshoring is also classified in terms of its ability to save costs due to sourcing from low
cost locations. Plankenhorn S. (2008: p. 18) defines offshoring as international relocation of
product- and service-related activities to external contractors in low wage countries. The explicit
inclusion of the low wage condition implicitly excludes developed countries. Ireland, for example,
9 “Domestically” means production within the borders of the United States of America. Production abroad includes any country other than the US; may it be on the same continent or overseas. Production is not restricted to tangible goods, but also includes intangibles like services, know-how and innovation.
GUSENBAUER 3. Definitions
23
is prominent for its operations which are classified by many as offshoring. Corporations set up
plants in order to shift business functions to Ireland, a foreign overseas location. As this paper aims
to include developed countries, the distinction between low- and high-cost locations are
consistently neglected. Along the lines of the OECD’s classification, location (domestic vs. abroad)
and affiliation (internal vs. external) are the only determining factors.
Offshoring – A working definition
The definition used in this paper is based on Norwood J. et al. (2006: p. 42), where offshoring is
classified in a broad sense. It is deliberately not restricted to low-cost nations, single relocation
events or the result of job losses in the US. Norwood broadly defined offshoring as: “U.S. firms
shifting service and manufacturing activities abroad to unaffiliated firms or their own affiliates”
(Norwood J. et al. 2006: p. 42). In literature there are three main forms of corporate
internationalization, differing by their level of integration: wholly owned subsidiaries (1),
collaboration: joint ventures or partnerships (2), and licensing agreements and contracting (3).
These forms are used for a broad variety of business internationalizations, including offshoring
(Oshri I. et al. 2009: p. 241). The OECD decisions grid previously presented, already includes two of
the three modes: internal foreign production is conducted through a wholly owned subsidiary and
the external production abroad is achieved through a licensing agreement or contracting. The
definition used in this paper bases on the OECD decisions grid, extended with joint ventures and
partnerships as the third main offshoring dimension. This new dimension is incorporated in the
Table 5, the extended definition used for R&D offshoring:
Table 5: Definition of offshoring used in this study
Internal production (captive)
Joint production External production (outsourced)
Dom
estic
A1: Domestic in-house production
Production within the enterprise and the country.
A2: Domestic joint production
Production at a newly, jointly created firm or partnership for a defined project within the country.
A3: Domestic outsourcing
Production outside the enterprise but within the country.
Abroad
B1: Offshore in-house sourcing
Production within the group to which the enterprise belongs but abroad (by its affiliated firms) in the form of wholly owned subsidiaries.
B2: Offshore joint production
Production in collaboration with foreign partners outside the country in the form of: joint ventures and partnerships.
B3: Offshore outsourcing
Production outside the enterprise (or group) and outside the country (by non-affiliated firms) in the form of licensing agreements and contracting.
Source: based on OECD 2007: p.16; Oshri I. et al. 2009: p. 24; Dicken P. 2011: pp. 395ff.;
Hill Ch. W. L. 2009: pp. 496-511; Contractor F. J. et al. 2011: pp. 6-8
GUSENBAUER 3. Definitions
24
A number of offshoring literature focuses on the actual relocation of business functions to foreign
destinations. The shift from domestic to foreign, as used by Norwood J. et al. (2006: p. 42), narrows
the offshoring definition greatly. Mere foreign sourcing operations with no simultaneous domestic
cutback are categorically excluded. Along these lines investments in a foreign (production)
subsidiary with no apparent effect on domestic production are not considered. However, the
creation of foreign jobs will simultaneously decrease the (potential) domestic job creation at the
same time. The company’s center of gravity shifts automatically, as funds are reallocated and
production is performed outside the country. Kenney M. and Dossani R. (2005: p. 5) support this
perspective: “Offshoring not only causes direct job displacement, but also redirects job growth to lower
cost nations”. Therefore, this study does not consider the shift of functions and follows the broad
definition shown in Table 5. The concluding R&D offshoring definition is:
R&D offshoring is the sourcing of research and development by US companies from affiliated
or non-affiliated foreign enterprises.
3.3. Small and medium sized enterprises (SMEs)
This subchapter defines small and medium sized enterprises, necessary for the operationalization
of this group. The goal is to create a definition which is used in the survey addressing companies in
the US semiconductor industry falling into this category.
Typically headcount, annual turnover or the balance sheet total are used for the classification of
SMEs. However, there are substantial differences among countries and organizations (OECD 2005:
p. 17). In the US the classification of the Small Business Administration (SBA) specifies distinct limits
per industry sector for sales and/or turnover. In semiconductors a company is classified “small” for
up to 500 employees. The SBA states no limits for medium sized enterprises as it only distinguishes
between small or large (US Small Business Administration 2010). The definition used by the
European Commission follows the OECD classification and segments micro, small, medium and
large companies with the same headcount (European Commission 2005: p. 14).
This study uses the definition by the OECD in order to achieve better international comparability.
Additionally, it allows for the segmentation of SMEs into micro, small and medium. This is helpful as
the responses to the survey can be attributed to different size groups. For the exact classification
by headcount see Table 6; the relevant groups for this study are highlighted:
Table 6: SME definition used in this study
Micro enterprise 1 – 9 employees
Small sized enterprise 10 – 49 employees
Medium sized enterprise 50 – 249 employees
Large sized enterprise 250 and more employees
Source: OECD 2005: pp. 17ff.
GUSENBAUER 3. Definitions
25
3.4. Research and development (R&D)
Also, for what is meant by R&D, a clear definition is essential. Additionally, the definition is aimed to
bring survey respondents to a common understanding of the term. The R&D definition used in this
study is broadly based on the one provided by the OECD (2002a: p. 30):
“R&D is creative work undertaken on a systematic basis to increase the stock of knowledge in
order to devise new applications (products or processes).”
As proposed by the OECD, R&D could be further fragmented in basic research, applied research
and experimental development. This detailed specification is not needed as SMEs’ R&D serves
diverse purposes. Nevertheless, it was necessary to define certain R&D related expressions for the
survey:
In order to make foreign R&D sourcing operations more approachable for respondents it was
defined as either of the following:
R&D services carried out abroad
Technologies developed abroad
Rights to technologies patented abroad
Other know-how developed abroad
In accordance with the OECD definition by occupation (OECD 2002a: pp. 93f.) R&D personnel were
defined as researchers, technicians and equivalent staff and other supporting staff.
R&D intensity, as the share of R&D expenditures over company sales, is a commonly used measure
for innovativeness (European Commission 2010: p. 64).
GUSENBAUER 4. Research design
26
4. Research design: The SME survey of the US semiconductor industry
The research design step-by-step describes the process of survey preparation, data collection and
data analysis. The resulting sample is compared to the overall population in order to point out the
relevance of the study. Finally data cleansing improves the quality of the results.
4.1. Detailed research questions
After deriving the research questions in chapter 2, this chapter gives a detailed overview of the
very focus of this study. Table 7, Table 8 and Table 9 show the RQs with the corresponding
variables asked in the questionnaire. Furthermore, for RQ 2.1/2.2 hypotheses were formulated in
order to allow for an efficient comparison of the data from this survey and existing literature.
Most RQs are of descriptive nature, describing importance, relevance, satisfaction and assessing
reasoning. The exceptions are RQ 2.2 and RQ3; they examine causal relationships between
variables and try to explain dependencies.
Table 7: Overview of research question 1.1/1.2/1.3
Research questions Variables
RQ1.1: How important is R&D offshoring for SMEs in the US semiconductor industry currently and in the next 5 years? (descriptive)
v7: Importance of R&D v13: R&D offshoring experience v14: Share of foreign R&D personnel (%) v15: Share of foreign R&D expenditures (%) v20: Likelihood of expansion or beginning of R&D offshoring within the next 5 years
RQ1.2: Which mode of R&D offshoring do SMEs use currently and in the next 5 years? (descriptive)
v16, v17, v18: Ranking of different modes of R&D offshoring currently used according to its scale v20: Likelihood of expansion or beginning of R&D offshoring within the next 5 years v21: Ranking of different modes of R&D offshoring planned to be used in the next 5 years according to its scale
RQ1.3: How satisfied are SMEs with their predominant mode of R&D offshoring? (descriptive)
v16, v17, v18: Ranking of different modes of R&D offshoring currently used according to its scale v19: Level of satisfaction with most important source of foreign R&D
GUSENBAUER 4. Research design
27
Table 8: Overview of research question 2.1/2.2
Research question Variables Hypotheses
RQ2.1: Which reasons have the greatest influence on the SMEs’ decision (not) to offshore R&D? 10 (descriptive)
Facilitators: extraordinarily importantImprovement of R&D:
v23: Improvement of R&D processes v24: Gain of flexibility in R&D capacity v25: Increase of depth and breadth of R&D
Pressures from competitors: v28: Pressures from competitors
Low cost of highly available know-how and skills: v31: Sourcing of highly available foreign know-how and skills v32: Low personnel costs
H1: Extraordinarily important facilitators are ranked higher relative to other variables, indicating highest relevance.
Facilitators: important Foreign market entry:
v26: Good way to enter the foreign market Pressure from proprietor to source R&D from outside the US:
v27: Pressure from proprietor to source R&D from outside the US
Cost savings: v33: Low other costs
Access to infrastructure and collaborations: v34: Access to modern traditional infrastructure v35: Access to modern IT infrastructure v36: Access to research clusters and university collaborations
Governmental incentives and offshoring-friendly framework:
v37: Governmental incentives v38: Favorable administrative, institutional and legislative framework
H2: Important facilitators are relevant for at least 25% of the respondents.
Facilitators: unclarified importance Improved focus on core competencies
v22: Improved focus on core competencies Existing ties to foreign location:
v29: Extension of already existing cooperation v30: Strong psychological connections to foreign location
No assumption
Obstacles: extraordinarily important Intellectual property issues:
v42: Reduction of stock of company know-how v44: Confidentiality issues and privacy concerns v45: Loss of intellectual property rights to supplier
H3: Extraordinarily important obstacles are ranked higher relative to other variables, indicating highest relevance.
Obstacles: important Reduced control and flexibility:
v41: Reduction of control and flexibility over decisions, R&D process, cost, performance, etc.
H4: Important obstacles are relevant for at least 25% of the respondents.
10 Classification according to available offshoring literature and surveys.
GUSENBAUER 4. Research design
28
Poor public relations and client acceptance:v46: Poor public relations and client acceptance
Company vs. host country issues: v47: Cultural fit and corporate culture issues v48: Lack of experience in foreign market and environment
High cost: v43: High transaction costs v49: High initial set-up cost v51: Risk of unexpected cost increases
Insufficient skills and quality of foreign workforce: v50: Insufficient skills and quality of foreign workforce
Country specific risks: v52: Country specific risks
Obstacles: unclarified importance Loss of core business competencies:
v40: Loss of core business competencies Legal requirement to keep R&D in the US:
v53: US policy legally requires domestic R&D
No assumption
RQ2.2: Are the reasons for and against R&D offshoring perceived differently by SMEs with R&D offshoring experience and those without? (explanatory)
See facilitators/obstacles in RQ3.1 v13: R&D offshoring experience
No assumption
Table 9: Overview of research question 3
Research question Variables
RQ3: Do certain company characteristics associate with the scale of current R&D offshoring? (explanatory)
Company age v2.1: current year - v2: year of foundation
Company size v3: Number of personnel
Importance of R&Dv7: Importance of R&D within the company v8: Operation of a distinct R&D department v9: Number of R&D personnel in the entire corporation v11: R&D intensity (%)
International focus of the company v12: Share of sales outside the US (%)
Scale of R&D offshoringv14: Foreign R&D personnel as a share of total R&D personnel (%) v15: Foreign R&D expenditures as a share of total R&D expenditures (%)
v1: Status of firm within corporation (control variable)
GUSENBAUER 4. Research design
29
4.2. Data research
The respondents for the empirical research were exclusively selected from SMEs operating in the
US semiconductor industry. The focus was on small and medium sized enterprises as defined by
the OECD. Micro enterprises with up to nine employees were not predominantly addressed, as this
group is the biggest among SMEs and presumably provides the smallest room for R&D offshoring.
The criterion of a headcount of up to 249 employees became relevant during the selection of
prospective respondents. Although the focus was put on SMEs, data also was unintentionally
drawn from large companies. This was due to the varying quality of the company information
leading to the contacts. The small and medium sized semiconductor enterprises contacted had to
fit the following criteria:
Nationality: US company or US HQ
Company size: 10-249 employees in the entire organization
Sector code: NAICS 334413 (Semiconductor and Related Device Manufacturing)
Organizational status: subsidiaries, single establishments and HQ of larger organizations
(branches were excluded as the survey addresses the HQ)
Corporate website (ideally)
The references to prospective respondents were obtained from the business information providers
Manta.com and Onesource.com. Table 10 compares the number of companies at company
information providers and the US census bureau. Randomly selected companies were screened to
fit the criteria stated above. The operation of a corporate website helped to check the actuality of
the company information and to identify prospective respondents. Although controlling for a web-
site improved the quality of the outcome, it also marginally biased the results. Companies which
were more technologically conscious or the ones perceiving a web presence beneficial were more
likely to be selected. Nevertheless, this measure made finding of knowledgeable respondents
substantially more efficient and improved data quality.
The single responses were obtained from knowledgeable persons; the most common positions
held by the respondents included: presidents, CEOs, COO, CTO or Business development directors.
The data was collected between May and September 2011.
GUSENBAUER 4. Research design
30
Table 10: US semiconductor industry size according to business information providers
Access date Micro 1-9
10-19
20-49
50-99
100-249
SME 10-249
Large250+
Total
Onesource.com (334413 primary only: branches excluded)
08/30/2011 456 456 164 110 63 1249 127 1401
(25 without info on
headcount)
Manta.com11 (Semiconductor and Related Devices: branches excluded)
08/16/2011 1696 588 293 170 115 2862 163
3342 (317
without info on
headcount)
County Business Patterns
2009 update
402 (44%)
110 (12%)
146 (16%)
71 (8%)
73 (8%)
802 (89%)
102(11%)
904 (100%)
Source: Onesource.com, Manta.com, County Business Patterns (US Census Bureau 2009)
Compared to the official data from the US Census Bureau, the number of SMEs in the US
semiconductor industry drawn from business information providers is substantially higher. Instead
of the 802 officially existing businesses, Onesource.com and Manta.com list 1,249 and 2,862
addresses. The data often lacks both quality and up-to-datedness. Although the data collection
turned out to be more complicated, the empirical data, however, is not influenced by these
shortcomings. The data and responses were permanently screened to match the defined criteria.
After a pre-screening of responses and exclusion of single companies obviously operating in a
different industry, a total of 260 companies were contacted. The initial form of contact was a formal
letter announcing the email containing the web-link sent to the prospective respondent. After
forwarding the web-link directing to the questionnaire, the response rate was increased through
several follow-up telephone calls. Altogether 80 usable responses were received amounting for a
response rate of 30.77%.
The 80 responses were classified according to business size (variable 4) as defined in chapter 3.3.
The resulting sample consists of 76 SMEs and 4 large enterprises. Table 11 shows the comparison of
the sample and the actual population. When micro companies are excluded, the
representativeness is significantly higher.
In total, 17% of all small and medium sized enterprises in the US semiconductor industry delivered
satisfactory responses to the survey. Including micro enterprises, the sample represents 9.5% of the
entire industry.
11 Data obtained from Manta.com is also provided by Dun & Bradstreet.
GUSENBAUER 4. Research design
31
Table 11: Comparison of population12 and sample, obtained by the SME survey on the US semiconductor industry
Company headcount
Micro 10-19 20-49 50-99 100-249 SME Large Total
incl. micro
enterprises
Population 402 (50.1%)
110 (13.7%)
146 (18.2%)
71 (8.9%)
73 (9.1%)
802 (100%)
- -
Sample 8
(10.5%) 21
(27.6%) 20
(26.3%) 13
(17.1%) 14
(18.4%) 76
(100%) 4
80
excl. micro
enterprises
Population - 110 (27.5%)
146 (36.5%)
71 (17.8%)
73 (18.3%)
400 (100%) - -
Sample 8 21(30.9%)
20(29.4%)
13(19.1%)
14(20.6%)
68 (100%)
4
80
The empirical data was collected via a web-based questionnaire sent to prospective respondents
via email. It was accessible at Surveymonkey.com, a software tool for online surveys. Respondents
were asked to answer a set of 10 to 18 questions depending on their individual responses. Single
questions included multiple sub-questions. The detailed questionnaire is shown in Appendix D:
SME questionnaire.
Follow-up interview
After the data was processed, the preliminary results were tested via a telephone interview with a
CEO of a small sized semiconductor company in Silicon Valley. The conversation helped to put
results into perspective and to understand causal relationships. In general, the interviewee
confirmed many preliminary results, but also gave new insights. The findings and some statements
of interviews are included in chapter 6 (discussion) and chapter 7 (conclusion); they provide
additional information where appropriate. The transcript remains undisclosed upon request of the
interviewee.
4.3. Data cleansing
Not all data sets were useful to answer all research questions. Some were not completed entirely
and some were filled out randomly. To ensure data quality, some responses were excluded from
evaluation. Mainly, the last two Likert-scale questions on facilitators and obstacles of R&D
offshoring were concerned. In fact, 17 responses to the facilitators and 11 to the obstacles were
excluded. This was necessary as some respondents answered all sub questions the same. This is an
indication of either lack of willingness to fill out the last part of the survey, or an indication of
absolute irrelevance of R&D offshoring for the respective respondent. However, R&D offshoring
12 Source: County Business Patterns, (US Census Bureau 2009)
GUSENBAUER 4. Research design
32
relevance is also reflected in other, more direct questions. Therefore the exclusion of single
responses improved data quality, as greater weight was attached to the remaining answers.
Altogether 53 data sets were completed entirely or almost entirely; the remaining 27 responses
show missing values.
4.4. Data analysis
The findings in chapter 5 are based on the responses drawn from SMEs, excluding micro
enterprises. Only companies with a headcount of 10 to 249 employees are considered. The
separation improves the validity of the responses of the remaining companies; micro and large
companies with significantly different sizes have different needs than their counterparts.
Additionally, the small number of responses in these categories limits the representativeness.
Therefore, micro and large companies are only partially included in the analysis. A comparison of
the sample including or excluding micro enterprises is shown in Table 11. The analysis and
visualization of the results obtained from the survey was conducted via SPSS v20, Tableau v6.1 and
Excel 2010.
GUSENBAUER 5. Findings and validation
33
5. Findings and validation In this chapter the collected data is actually analyzed and processed with multiple statistical
methods. Data aggregation and statistical computation of every single research question made
trends visible. Eventually, this chapter provides the empirical basis for qualified statements
concerning SMEs in the US semiconductor industry.
5.1. Descriptive data examination
The descriptive data examination gives a first look on the data collected from the companies in the
US semiconductor industry. Mean comparisons and relative shares indicate how the variables are
pronounced in each size group. As the main focus was on responses from SMEs with 10-249
employees (highlighted in grey), the representativeness of the data is best for this group.
Nevertheless, for a complete picture the results of micro and large companies are also included; see
Table 12 for details. The connection between the company characteristics presented in this chapter
and the scale of R&D offshoring is elaborated in RQ3.
On average, smaller companies are younger (v2.1). This holds for SMEs up to 249 employees. With a
mean of 11.1 years, micro companies form the youngest group. The four large companies,
however, were relatively young again. Especially for the bigger size groups, the standard deviation
(SD) is relatively high, indicating extreme values. Interestingly, SMEs also operate their own fabs
(v6). Depending on the group, 7.7-25% of the SMEs engage in physical production. Although the
big players in the industry invest in facilities worth several billion USD, smaller fabs are also found
among SMEs. The great majority of SMEs, however concentrates on value added functions not
involving physical production. About half of all SMEs have a departmental organization (v8) of their
R&D. Only the very small micro companies do not maintain such formal setup.
Table 12: Descriptive statistics – first part (n=80)
Sample
(n)
Company age (v2.1)
Personnel (v3)Fab (v6)
R&D department
(v8) Mean SD Mean SD
Micro (1-9) 8 11.1 5.5 6.3 1.8 0.0% 12.5%
SME (10-19) 21 14.0 9.0 13.7 3.3 9.5% 42.9%
SME (20-49) 20 16.6 10.8 30.6 8.6 25.0% 42.1%
SME (50-99) 13 20.4 11.7 59.8 10.8 7.7% 66.7%
SME (100-249) 14 21.4 15.2 162.6 57.3 21.4% 57.1%
Large (250+) 4 14.0 8.0 378.8 58.9 0.0% 50.0%
SME total 68 17.5 11.6 16.2% 50.0%
GUSENBAUER 5. Findings and validation
34
The great majority of companies surveyed perceive their R&D as a core function (see Figure 1). Only
12.5% stated that R&D was not conducted in their company. For the remainder of 26.3% R&D was a
support function, not integral to value creation.
Figure 1: Importance of R&D in the US semiconductor industry (v7, n=80)
Table 13 shows the remaining variables describing SMEs’ valuation of R&D. Proportional to
company size (v3), the R&D personnel (v9) increases almost proportionally. Only for companies
between 10-19 and 20-49 employees the number of R&D personnel is almost the same. Similarly, in
relative terms, the mean share of R&D personnel of total personnel lies in a narrow bandwidth
between 24.1% and 31.3%. The SD also ranges around 30%. Interestingly, R&D intensity (v11),
however, is distributed substantially more unevenly. For example micro companies spend a lot
more on R&D as a share of their total sales compared to the other groups. This can be explained by
their very limited revenue base. One respondent even noted that its company was pre-revenue
with an infinite R&D intensity; this value was excluded. The high SD amounting for 138.5% within
this group also indicates significant differences. In general, with 30.6% the R&D intensity among
SMEs (n=68) is substantially higher than the US industry average. The 2010 EU Industrial R&D
Investment Scoreboard calculated an R&D intensity of 19.1% for the entire US semiconductor
industry (European Commission 2010: pp. 34ff.). Especially for small SMEs, the usage of the relative
share of R&D personnel (v10) seems more adequate. However, the closeness of the average share
of R&D personnel (28.3%) and the average R&D intensity (30.6%) indicates high validity of the
measures.
The responses to R&D offshoring experience (v13) are also very heterogeneous among the
different size groups. However, there is a tendency towards bigger companies rather than having
R&D offshoring experience. Less than 25% of all companies smaller than 50 employees offshored
R&D. For SMEs with at least 50 employees, however, the share is substantially higher; 56% have
already offshored R&D.
GUSENBAUER 5. Findings and validation
35
Table 13: Descriptive statistics – second part (n=80)
R&D
personnel (v9)
R&D personnel (v10)
R&D intensity (v11) R&D
offshoring experience
(v13) Mean SD Mean SD
Micro (1-9) 1.4 28.6% 36.4% 60.0% 138.5% 12.5%
SME (10-19) 5.7 31.3% 28.0% 25.6% 31.8% 38.1%
SME (20-49) 6.7 24.1% 26.2% 31.8% 73.0% 15.0%
SME (50-99) 18.8 30.2% 30.3% 49.4% 67.7% 46.2%
SME (100-249) 40.6 27.8% 33.3% 16.5% 12.5% 64.3%
Large (250+) 127.5 31.3% 31.1% 20.0% 12.2% 75.0%
SME total 28.3% 28.7% 30.6% 52.7% 38.2%
The export share is used to measure the level of internationalization of the firms. The
semiconductor industry is international; a claim that not only holds for large companies, but also
SMEs. As visualized in Figure 2, almost all SMEs export at least parts of their products and services
to foreign countries. More than 30% of all companies surveyed earn more than half of the revenue
abroad; whereas only 13% focus exclusively on the domestic market.
Figure 2: Export orientation of SMEs in the US semiconductor industry (v12, n=80)
5.2. Evaluation of SMEs’ R&D offshoring concerning importance,
mode and satisfaction RQ1.1, RQ1.2 and RQ1.3 are aimed to further provide descriptive insights into the survey. It
provides empirical data on the importance of R&D offshoring in the US semiconductor industry.
Furthermore the choices of offshoring modes are quantified. Finally, this chapter addresses the
overall satisfaction of SMEs with their currently most important offshoring mode. Detailed
interconnections between variables are investigated in RQ2.1, RQ2.2 and RQ3 in a more
explanatory manner.
GUSENBAUER 5. Findings and validation
36
RQ1.1: How important is R&D offshoring for SMEs in the US semiconductor industry currently and in the next 5 years?
Variables / n=68 (excluding micro and large enterprises) v7: Importance of R&D v13: R&D offshoring experience v14: Share of foreign R&D personnel v15: Share of foreign R&D expenditures v20: Likelihood of expansion or beginning of R&D offshoring within the next 5 years
Current R&D offshoring
Offshoring plays an important role as a source of R&D for SMEs in the US semiconductor industry.
Almost every company which started with R&D offshoring continues following this strategy.
Altogether 34% of small and medium sized semiconductor companies invest in foreign R&D. Like
their bigger counterparts, SMEs also employ R&D personnel abroad. In fact, almost all companies
which offshore R&D also have personnel outside the US. Only 6% exclusively purchase foreign
know-how without any deployment of personnel. The remaining 66% which do not offshore either
source R&D domestically or do not engage in R&D at all. Of all SMEs in the US semiconductor
industry only 9% have no R&D. These companies neither invest in internal R&D, nor buy R&D
externally.
The R&D offshoring intensity differs greatly between SMEs. Figure 3 visualizes the variation on the
distribution of R&D personnel and R&D spending. Most SMEs only invest a small fraction of their
total R&D spending abroad. Three out of four SMEs which are involved in R&D offshoring spend
less than 25% of their total R&D expenditures abroad. The biggest part of SMEs which engage in
offshoring still mainly staffs within national borders and develops products and services at home.
Only 9% spend more than 40% of their total R&D investment outside the US. The picture is similar
with foreign R&D personnel. Nevertheless, relatively low foreign R&D expenditures do not
necessarily imply the same low level of foreign R&D personnel. In fact, 18% of all offshoring
operations involve more than 40% of foreign R&D personnel. These deviations can be explained by
the choice of different offshoring modes and international differences in factor costs. A company
might spend less on foreign R&D because the cost of operations outside the US is substantially
lower. This is especially true when personnel costs account for a big part of total R&D spending.
GUSENBAUER 5. Findings and validation
37
Figure 3: Regional distribution of R&D: United States vs. offshore
Current vs. planned R&D offshoring
Whereas a great share of companies with current offshoring intends to expand, only few start
operations from scratch. Figure 4 clearly shows this pattern; it visualizes current R&D offshoring,
broken up by planned R&D offshoring illustrated through different colors. The shades of blue
reflect a great offshoring probability; the shades of red indicate a low probability.
From companies that do not currently offshore R&D, only a marginal 5% will likely begin doing so.
A great share of these inexperienced companies, however, excludes offshoring in the future. On
the other hand, SMEs with established operations are a lot more likely to expand. In the future,
almost two thirds of SMEs with R&D offshoring experience are likely to or will most certainly do it;
on the other hand only some 8% can rule out further R&D offshoring. Altogether 28% of all SMEs in
the US semiconductor industry will likely or almost certainly expand or start R&D offshoring
operations in the next 5 years.
Figure 4: Current vs. planned R&D offshoring
GUSENBAUER 5. Findings and validation
38
In total, 38% of all SMEs have sourced R&D from abroad at some point. Currently, every third
semiconductor SME offshores parts of their R&D, as almost all of them continue pushing this
strategy; there are hardly any quitters. In general, R&D offshoring in semiconductors almost
reaches the level predicted by the Duke University/ORN 2008 report (Heijmen T. et al. 2008). They
found that 44% of all SMEs planned to offshore innovation in 2008. Although the comparability of
both studies is limited due to a different focus, both R&D offshoring levels are at a similarly high
level.
The R&D offshoring trend will further strengthen in future. Currently, more than every second SME
with R&D offshoring will likely, or almost certainly expand its operations. Contrarily, in the past,
only 12% of all SMEs discontinued their efforts; the rest stayed with their long-term strategy. If
future expansion plans are taken into account, about 40% of all US small and medium
semiconductor companies will offshore R&D in the next few years. This amounts for an increase of
6 percentage points. The reason for this moderate growth can be attributed to the low rate of new
starters. Only very few well established SMEs dare to tiptoe in R&D offshoring operations.
Companies with no prior experience in R&D offshoring are substantially less likely to offshore than
companies with already existing operations. Hence, the spreading of foreign sourced R&D will be
mainly due to the expansion and to new operations. Nevertheless, in this observation no new
ventures are taken into account. Not yet established start-ups are expected to further accelerate
the offshoring trend. The question is how the motivation is different among experienced and
inexperienced SMEs. Evidence on this issue is presented in chapter 5.4.
RQ1.2: Which mode of R&D offshoring do SMEs use currently and in the next 5 years?
Variables / n=68 (excluding micro and large enterprises) v16, v17, v18: Ranking of different modes of R&D offshoring currently used according to its scale v20: Likelihood of expansion or beginning of R&D offshoring within the next 5 years v21: Ranking of different modes of R&D offshoring planned to be used in the next 5 years according to its scale
SMEs in the US semiconductor industry typically favor more integrated forms of R&D offshoring.
This study distinguishes three forms: licensing or contracting (1), joint ventures or partnerships (2)
and wholly owned subsidiaries (3). As the most important source of R&D, joint ventures and
partnerships are favored over wholly owned subsidiaries. Figure 5 visualizes the choice of mode
according to its importance for SMEs. The bars to the very left reflect the predominant mode13.
Currently, with 43% most SMEs use joint ventures or partnerships. The high rate of collaboration is
a sign for the great appreciation of local expertise. Nevertheless, more than a third of all offshoring
13 SMEs ranked current R&D offshoring modes according to their importance (1st=most important).
GUSENBAUER 5. Findings and validation
39
SMEs go one step further and establish a subsidiary of their own. Interestingly, 47% of all SMEs also
stated that high initial set-up costs would pose a substantial obstacle for their R&D offshoring
operations (see chapter 5.3). This argument contradicts the great popularity of integrated forms of
R&D offshoring, which involve more initial capital.
Figure 5: Choice of mode for R&D offshoring
Surprisingly, the least attractive mode of R&D offshoring is licensing or contracting, involving the
least long-term commitment. Nevertheless, it is often a second or third choice to cover more
sourcing modes. Although licensing/contracting is the least important for offshoring SMEs, 73% of
them still use it in some way. In fact, a big share of SMEs that offshore do not only concentrate on
one source, but source from a mix of options. Joint ventures/partnerships also provide the second
most important choice, underlining its great relevance for SMEs.
Expanding and newly starting R&D offshoring operations will mostly focus on joint
ventures/partnerships and wholly owned subsidiaries. Less integrated modes of R&D
internationalization are least attractive in the future. Licensing and contracting will also, in future,
continue to lose significance. Figure 6 shows the distribution of offshoring modes according to the
probability of expanding/beginning R&D offshoring. Wholly owned subsidiaries have the best odds
to be chosen in future. Almost every second expansion strategy involves the set-up of subsidiaries.
With only slightly less, at 42%, joint ventures and partnerships will be the second most important
mode. Licensing or contracting, however, will further lose its importance; only 11% plan to rely on
this mode.
Altogether, in the future, 13% of all US small and medium sized semiconductor enterprises will
likely or almost certainly expand via wholly owned subsidiaries. Nevertheless, joint ventures or
partnerships will continue to be the most dominant form of R&D offshoring, whereas wholly
owned subsidiaries rank at a solid second place.
0%
10%
20%
30%
40%
50%
1st 2nd 3rd
Importance of mode
R&D offshoring modes
Licensing agreement /Contracting
Joint venture / Partnership
Wholly owned subsidiary
GUSENBAUER 5. Findings and validation
40
Figure 6: Future expansion / beginning of R&D offshoring
RQ1.3: How satisfied are SMEs with their predominant mode of R&D offshoring?
Variables / n=68 (excluding micro and large enterprises) v16, v17, v18: Ranking of different modes of R&D offshoring currently used according to its scale v19: Level of satisfaction with most important source of foreign R&D v20: Likelihood of expansion or beginning of R&D offshoring within the next 5 years
Nearly all SMEs are satisfied or very satisfied with their current R&D offshoring strategy. One third
was very satisfied, in contrast to only less than a tenth which was dissatisfied. No single company
found its offshoring operations very dissatisfactory. In Figure 7 the level of satisfaction is split up
according to the most important mode of R&D offshoring. The graph shows an overwhelming level
of satisfaction. All of the SMEs operating a wholly owned subsidiary were either satisfied or very
satisfied. Also joint ventures and partnerships, as the currently most important mode, were greatly
appreciated. Only 11% of the SMEs, working together with a foreign partner, voiced dissatisfaction.
Matching the findings of the previous chapter, licensing and contracting is less attractive. The
lower satisfaction rate supports the finding of its decreasing importance.
Interestingly, the level of satisfaction cannot explain the likelihood of R&D offshoring expansion; no
substantial causal relation could be found. Both, SMEs which are satisfied and few which are
dissatisfied with current offshoring plans to expand. On the contrary there are companies which
are very satisfied and do not plan to increase R&D offshoring. However, exclusively SMEs which
were satisfied or very satisfied with their current strategy indicated a very strong intention to
expand it in future.
GUSENBAUER 5. Findings and validation
41
Figure 7: Level of satisfaction with predominant source of foreign R&D
Side note: Micro companies
Only one of the micro companies (13%) sources R&D from abroad. Interestingly it does so with a
wholly owned subsidiary where it spends more than 40% of its R&D expenditures. In future, it will
likely expand its operations; the remaining micro companies stated that the beginning of R&D
offshoring is unlikely or not intended. This proves that also the smallest firms have the potential to
engage in R&D offshoring, even with very integrated forms. R&D offshoring can also shape the
smallest business units in the US semiconductor industry. Nevertheless, foreign R&D sourcing most
likely starts with more mature companies employing more personnel.
Side note: Large companies
Of the four large companies that responded to the survey, three (75%) were heavily engaging in
R&D offshoring. The one company not sourcing foreign R&D was not interested at all; not now and
not in future. The three offshoring companies, however, employed between 375 and 440 persons
in total, whereas more than 40% of their R&D personnel was abroad. The same was true for their
foreign R&D expenditures. They all operated foreign wholly owned subsidiaries with which they
were satisfied or very satisfied. In the future, they want to expand their operations. In general, they
were heavily investing in R&D, both in terms of R&D intensity and R&D personnel as a share of total
personnel. All three were very young, founded between 2000 and 2002, fitting the start-up
definition. Although these four responses are far from representative, the observation shows that
R&D offshoring is interesting for start-ups. This consideration should be addressed in further
research (see chapter 7).
GUSENBAUER 5. Findings and validation
42
5.3. Reasons for and against R&D offshoring
RQ2.1: Which reasons have the greatest influence on the SMEs’ decision (not) to offshore R&D?
Variables / n=68 (excluding micro and large enterprises) See chapter 2.4 Reasons for or against R&D offshoring: facilitators vs. obstacles
SMEs in the US semiconductor industry were asked about the reasons which influence their
decision to source or not to source R&D from outside the US. Seventeen facilitators and 14
obstacles were drawn from literature and similar surveys. Using the 5-point Likert-scale, the
respondents had to choose from 5 (extraordinarily essential) to 1 (irrelevant). The results are shown
in Figure 8 and Figure 9, split up in facilitators and obstacles. Shades of red represent low relevance
and shades of blue represent high relevance. For better visualization, the net responses are given
without the neutral value 3. The aggregated responses are presented as the total count of each
response. In this chapter the values are ordinal. They are ranked according to the number of
responses. The variables with the most responses indicating high relevance (1&2) are ranked
highest.
Facilitators
The different facilitators shown in Figure 8 are almost balanced; most facilitators were neither very
relevant, nor irrelevant. On average, however, the facilitators are rather perceived irrelevant than
relevant. Only a few single reasons are standing out with extremely positive values. The increase of
depth and breadth of R&D is considered the most important reason for SMEs. Half of all SMEs
perceive this point relevant when thinking of R&D offshoring. The access to cheap labor and other
costs abroad is also highly ranked. Almost half of the SMEs think that the extension of an already
existing cooperation and an improved focus on core competences is important. The latter,
however, is also seen as very irrelevant by a great share. A third values foreign know-how and skills
as well as the access to research clusters and university collaborations. The gain of flexibility in R&D
capacity, foreign market entry and strong psychological connections to foreign locations lie at the
same level. About a fourth of all SMEs stated improved R&D processes and governmental
incentives motivated them to consider R&D offshoring. In general, mostly pull factors are more
important than push factors. Whereas only very few responded that they got pushed by
proprietors or competition to source R&D from abroad, many indicated that these variables were
irrelevant for them. Along these lines, only a small share perceived infrastructure and foreign
institutional framework important. Surprisingly, any kind of foreign infrastructure is irrelevant for
more than half of the respondents.
GUSENBAUER 5. Findings and validation
43
Figure 8: Ranked importance of facilitators in percent (5-point Likert-scale, value 3 not shown)
Hypotheses 1 (H1)14
Extraordinarily important facilitators are ranked higher relative to other variables,
indicating highest relevance:15
Out of the most important reasons suggested by literature, three were confirmed most important
in the SME semiconductor survey: The two most crucial facilitators for SMEs are the increase of
depth and breadth of R&D and the low personnel costs abroad. Additionally, the gain of flexibility
in R&D capacity is also among the top priorities. The sourcing of highly available foreign know-how
and skills ranks 8th and is close to being one of the most important facilitators for SMEs.
Surprisingly, competitive pressures do not impact SMEs R&D offshoring strategy. Contrary to the 14 The reasons (variables) were drawn from literature and similar surveys. The ranking and categorization of variables was conducted qualitatively and is described in chapter 2.4. 15 The most important variables are expected to rank on places from 1 to 6.
GUSENBAUER 5. Findings and validation
44
15% which find it relevant, more than two thirds find it insignificant. Although not ranked a top
priority, the improvement of R&D processes still is important to 25%. However, the sourcing of
highly available foreign know-how and skills, the improvement of R&D processes and especially
competitive pressures are substantially less important to SMEs in the US semiconductor industry
than suggested by findings of similar studies.
The facilitators are marked bold, where the hypothesis is confirmed.16
Improvement of R&D: (11th) v23: Improvement of R&D processes (6th) v24: Gain of flexibility in R&D capacity (1st) v25: Increase of depth and breadth of R&D
Pressures from competitors: (15th) v28: Pressures from competitors
Low cost of highly available know-how and skills: (8th) v31: Sourcing of highly available foreign know-how and skills (2nd) v32: Low personnel costs
Hypothesis 2 (H2)
Important facilitators are relevant for at least 25% of the respondents:
Three out of eight facilitators are considered important according to the hypothesis. Especially
other low costs (facilities, energy, licensing requirements, etc.) are among the top pull factors when
it comes to R&D offshoring. The access to research clusters and university collaborations are given
about the same high priority as the fact that R&D offshoring is a good way to enter the market;
almost one third shares these valuations. Although governmental incentives came close to be
important, less than 25% reported them as relevant. The access to infrastructure only motivates
very few SMEs; whereas in IT infrastructure it is ranked lower than traditional infrastructure.
Interestingly enough, low cost is greatly appreciated, as this factor directly influences the bottom
line. The lowest relevance is found with the favorable administrative, institutional and legislative
framework and pressures from proprietors; only 8% of all SMEs consider the latter important for
their R&D offshoring decision. SMEs in the US semiconductor industry only share the opinion
concerning important facilitators (H2) in three cases: for low other costs, the access to research
clusters and university collaborations and as a good market entry technique.
The facilitators are marked bold, where the hypothesis is confirmed.
Foreign market entry: (10th) v26: Good way to enter the foreign market
Pressure from proprietor to source R&D from outside the US: (17th) v27: Pressure from proprietor to source R&D from outside the US
16There are a total of 17 facilitators.
GUSENBAUER 5. Findings and validation
45
Cost savings: (4th) v33: Low other costs
Access to infrastructure and collaborations: (13th) v34: Access to modern traditional infrastructure (14th) v35: Access to modern IT infrastructure (9th) v36: Access to research clusters and university collaborations
Governmental incentives and offshoring-friendly framework: (12th) v37: Governmental incentives (16th) v38: Favorable administrative, institutional and legislative framework
For the remaining three facilitators, no empirical point of reference exists thus far. The survey
clearly showed that all of them are of substantial importance for SMEs. With 43%, the improved
focus on core competencies ranks third among all facilitators questioned. For almost the same
share of SMEs the extension of already existing cooperations encourages one to think about R&D
offshoring. For more than a third of all SMEs, strong psychological connections play an important
role. These findings underline the strong multinational connections SMEs are sustaining.
Obstacles
Altogether, the obstacles SMEs have to overcome for R&D offshoring are perceived as more
relevant than the facilitators. Figure 9 shows the significance of each single obstacle drawn from
literature and similar surveys. A possible explanation for the increased importance might be found
in the different levels of experience with offshoring. An elaborate discussion on this factor can be
seen in RQ2.2.
The survey found that SMEs in the US semiconductor industry have significant concerns about
going offshore with their R&D. Almost all SMEs worry about IP issues; almost two thirds responded
that confidentiality issues and privacy concerns are absolutely essential for them. R&D offshoring
increases companies’ exposure to IP loss, IP theft or the reduction in the stock of IP. However, there
are also other issues: more than two thirds think that R&D offshoring reduces control and flexibility
over internal decisions. About the same share considers high transaction costs as a substantial
barrier. The concern of the bottom line is also reflected in the high ranking of low personnel cost
and other cost in the facilitators. 54% of the respondents think that R&D offshoring results in the
loss of core business competencies. This number stands in contrast to the 43% who have the
opinion that R&D offshoring improves the focus on core competencies. Almost half of the SMEs
dislike the high set-up cost of R&D offshoring, which is necessary for rather integrated sourcing
modes. This indicates these SMEs are thinking about setting up wholly owned subsidiaries or
collaborative forms with equity participation. On the other hand, contracting or licensing
agreements typically only require very limited financial funds initially. Forty percent lack
experience in foreign markets and the general foreign environment. Country specific risks and
cultural fit and corporate culture issues pose a substantial barrier for one third of the SMEs. About
GUSENBAUER 5. Findings and validation
46
the same number of SMEs work on products which require domestic R&D; the US government
legally prevents them from sourcing foreign R&D. However, almost 60% say that the US
government does not restrict them in their R&D offshoring. About one third of the firms believe
that the foreign workforce has only limited capacity regarding skills and general quality. At the end
of the line, unexpected cost increases and poor PR and client acceptance are the least relevant
obstacles. Nevertheless, still 27% and 24% respectively are concerned about these issues.
Figure 9: Ranked importance of obstacles in percent (5-point Likert-scale, value 3 not shown)
Hypothesis 3 (H3)
Extraordinarily important obstacles are ranked higher relative to other variables, indicating
highest relevance:
Intellectual property issues share the highest importance both in literature and in the US
semiconductor survey. Confidentiality issues and privacy concerns as well as the loss of IP rights to
R&D suppliers are SMEs’ top concern: 87% and 83% think these reasons are relevant for their
decision; contrarily, only a marginal 4% think these factors are negligible. A little less important, but
still a top priority, is the reduction of the stock of company know-how. Although not ranked among
GUSENBAUER 5. Findings and validation
47
the top three, this variable is still important for 58%. All in all, IP issues indeed are by far the biggest
obstacle for SMEs in the US semiconductor industry.
The obstacles are marked bold, where the hypothesis is confirmed.17
Intellectual property issues: (5th) v42: Reduction of stock of company know-how (1st) v44: Confidentiality issues and privacy concerns (2nd) v45: Loss of intellectual property rights to supplier
Hypothesis 4 (H4):
Important obstacles are relevant to at least 25% of the respondents:
Almost all obstacles are as important as hypothesized. Only poor public relations and client
acceptance are not considered relevant by at least 25%; the remaining obstacles are of more or less
serious concern to SMEs. Especially the reduction of control and flexibility and the high transaction
cost are perceived significant drawbacks; about two thirds find these obstacles relevant. Almost
half is worried about the high initial set-up cost coming along with the establishment of foreign
R&D operations. Implicitly, these companies opt for a more integrated mode of R&D offshoring, as
wholly owned subsidiaries or some joint ventures, for example, require substantial initial
investments. The lack of experience in the foreign market and country specific risks are important
to more than one third of all SMEs. With 32%, insufficient skills and quality of the foreign workforce,
as well as cultural fit and corporate culture issues, are at the same level of concern. Compared to
the high significance of high transaction cost and high initial set-up cost, the risk of unexpected
cost increases is valued relatively low: Still fulfilling the hypothesis of being important to SMEs, it is
only relevant for 27%. To sum up, the obstacles preventing SMEs to offshore their R&D are
perceived as highly significant. SMEs in the US semiconductor industry are well aware of the
obstacles accompanying R&D offshoring. In fact, almost all variables drawn from literature were
supported by the survey.
The obstacles are marked bold, where the hypothesis is confirmed.
Reduced control and flexibility: (3rd) v41: Reduction of control and flexibility
Poor public relations and client acceptance: (14th) v46: Poor public relations and client acceptance
Company vs. host country issues: (11th) v47: Cultural fit and corporate culture issues (8th) v48: Lack of experience in foreign market and environment
17There are a total of 14 obstacles.
GUSENBAUER 5. Findings and validation
48
High cost: (4th) v43: High transaction costs (7th) v49: High initial set-up cost (13th) v51: Risk of unexpected cost increases
Insufficient skills and quality of foreign workforce: (10th) v50: Insufficient skills and quality of foreign workforce
Country specific risks: (9th) v52: Country specific risks
Two obstacles were identified in literature where no hypotheses were empirically backed: First, the
loss of core business competencies is highly important for SMEs; more than half of them think they
would lose these competencies due to R&D offshoring. Second, the legal requirement of domestic
R&D was very unequal. Although one third finds this regulatory obstacle relevant for its operations,
almost double the number seems unconcerned. With 45% considering regulatory obstacles
completely irrelevant, this factor only affects specific parts of the industry.
Side note: Responses to open questions
Some respondents stated absolutely essential facilitators and obstacles in addition to the closed-
ended questions. One SME stated the local support for OEM/ODM18 operating abroad was very
important; more favorable US terms for small businesses would help to keep R&D at home. Two
responses pointed out the necessity of keeping R&D and production within the United States;
statements that were patriotically motivated. In addition, two other SMEs found the protection of
IP was one of the biggest problems when dealing with R&D offshoring. Patent infringements and
the very limited possibility of litigation reduce the attractiveness of the relocation of R&D. This
supports the extraordinarily high relevance of IP issues.
18 OEM = Original Equipment Manufacturer ODM = Original Design Manufacturer
GUSENBAUER 5. Findings and validation
49
5.4. Influence of experience on the reasoning behind R&D
offshoring
RQ2.2: Are the reasons for and against R&D offshoring perceived differently by SMEs with R&D offshoring experience and those without?
Variables / n=68 (excluding micro and large companies) See chapter 2.4 Reasons for or against R&D offshoring: facilitators vs. obstacles
v13: R&D offshoring experience
Assessing the differences between offshoring and non-offshoring SMEs
This chapter deals with the question of which way R&D offshoring experience influences and the
facilitators and obstacles associated. In a first step, the respondents are divided into two groups
according to their prior R&D offshoring experience. Of the 68 respondents 38% have sourced R&D
outside the US at some point. As both groups are sufficiently large, significant results are possible.
The dummy variable R&D offshoring experience (v13) is used to divide the two groups. The results
are presented in Figure 10, where the responses are summed up to aggregated means for each
group. The differences in the two groups’ mean responses are visualized for each single reason.
Moreover, the SD for each reason is written next to the bars indicating the difference in means.
In a second step, the differences are statistically tested for significance via an independent-samples
t-test. For all dependent variables which were not normally distributed, a Mann-Whitney U Test was
conducted. As the latter does not require normal distribution but is of non-parametric nature, it is
suitable for the remaining variables.
1. Visual comparison of means between offshoring and non-offshoring SMEs
Figure 10 clearly shows the significant differences in the means of offshoring and non-offshoring
SMEs. For some, the difference is minor; for others it is as great as 1.3 on the 5-point Likert-scale.
Interestingly, the direction of deviation is almost the same within all facilitators and obstacles:
Facilitators that attract R&D offshoring are substantially more relevant to SMEs which already
offshore. Inexperienced SMEs, however, are more concerned about the obstacles preventing them
from R&D offshoring. The biggest differences in perception within the facilitators can be observed
in the improved focus on core competencies and the strong psychological connections to the
foreign location. Both means differ between the two groups by about 1.3. However, they also have
the highest SD among all facilitators.
The perception of two obstacles: poor public relations and client acceptance and cultural fit and
corporate culture problems varies greatly. The means differ by about 1.1 between the two groups.
Again, the SD for these two reasons is also among the greatest in the obstacles. The subsequent
statistical test will cast light on the significance of the deviation between offshoring and non-
offshoring SMEs.
GUSENBAUER 5. Findings and validation
50
Figure 10: Comparison of means between offshoring and non-offshoring SMEs (same ranking as in chapter 5.3; 1=irrelevant / 5=absolutely essential)
GUSENBAUER 5. Findings and validation
51
2. Statistical comparison of means between offshoring and non-offshoring SMEs
As a first step, before any test can be conducted, the dependent variables are tested for normal
distribution. This is done via a One-Sample Kolmogorov-Smirnov test. An aggregated result of the
test is shown in Table 14; for detailed results consult Appendix B: Comparison of means. Of all 17
facilitators, the responses of 11 reasons are normally distributed; of the 14 obstacles only 4 have a
normal distribution.
Table 14: Aggregated result of the One-Sample Kolmogorov-Smirnov test
17 Facilitators (normally distributed variables in bold)
v22: Improved focus on core competencies v23: Improvement of R&D processes v24: Gain of flexibility in R&D capacity v25: Increase of depth and breadth of R&D v26: Good way to enter the foreign market v27: Pressure from proprietor to source R&D from outside the US v28: Pressures from competitors v29: Extension of already existing cooperation v30: Strong psychological connections to foreign location
v31: Sourcing of highly available foreign know-how and skills v32: Low personnel costs v33: Low other costs v34: Access to modern traditional infrastructure v35: Access to modern IT infrastructure v36: Access to research clusters and university collaborations v37: Governmental incentives v38: Favorable administrative, institutional and legislative framework
14 Obstacles
v40: Loss of core business competencies v41: Reduction of control and flexibility over decisions, R&D process, cost, performance, etc. v42: Reduction of stock of company know-how v43: High transaction costs v44: Confidentiality issues and privacy concerns v45: Loss of intellectual property rights to supplier v46: Poor public relations and client acceptance v47: Cultural fit and corporate culture issues
v48: Lack of experience in foreign market and environment v49: High initial set-up cost v50: Insufficient skills and quality of foreign workforce v51: Risk of unexpected cost increases v52: Country specific risks v53: US policy legally requires domestic R&D
Independent-samples t-test for normally distributed variables
As the differences between two groups (offshoring experience/no offshoring experience) are
measured, an independent-samples t-test is appropriate for normally distributed variables. The two
groups are defined by the independent dummy variable “R&D offshoring experience” (v13). The
independent dummy variable (v13) influences the dependent variables listed in Table 14. The
confidence interval chosen is 95%.
The independent-samples t-test found that there is a significant difference between the two
groups for the following dependent variables: gain of flexibility in R&D capacity (v24), low
personnel costs (v32), cultural fit and corporate culture issues (v47).
GUSENBAUER 5. Findings and validation
52
Non-parametric test for non-normally distributed variables
For all variables which are not normally distributed, the Mann-Whitney U Test is used as the non-
parametric alternative for the t-test. The reasons selected for the Mann-Whitney U Test are shown
in Table 14, whereas relevant variables are not highlighted. The test found that for four variables
the null hypothesis (H0) is rejected. Therefore a significant difference between experienced and
inexperienced companies is assumed for the following factors: improved focus on core
competencies (v22), increase of depth and breadth of R&D (v25), strong psychological connections
to foreign location (v30) and poor public relations and client acceptance (v46). The results are
highlighted in Figure 11. The details of the non-parametric test are shown in Appendix B.3: Mann-
Whitney U Test.
The significant deviations found in the T-test and the Mann-Whitney U Test match the results of the
mean comparison. Statistically significant differences are found with variables which also have the
greatest differences in means between experienced and inexperienced SMEs. Five of the top seven
facilitators are perceived significantly differently. Contrarily, for the obstacles only two relatively
irrelevant variables were found to be different between the two groups. However, the direction of
causality is not clear: Does offshoring influence the perception of the motives OR do motives
influence the offshoring decision? This question is addressed in chapter 6.
SMEs with R&D offshoring want to benefit from enhanced R&D capability and lower cost. They not
only want to improve the scope of R&D, but also the response time to market changes as well as
the focus on core competencies. Locational advantages only play an important role for R&D
offshoring in the form of factor cost differences. Especially lower personnel costs pull them abroad.
One of the biggest differences between the two groups can be observed in the relevance of
psychological connections to the foreign location. SMEs with R&D offshoring experience find
bindings much more important than SMEs without any such experience. The only facilitators where
inexperienced companies reach a higher mean score was the perception of R&D offshoring as a
good market entry.
Concerning the obstacles, SMEs with offshoring value cultural fit and corporate culture issues
significantly lower than the others. They have greatly overcome the organizational issues
offshoring brings along. Moreover they do not think offshoring harms relations to clients and the
public. In general, especially the most important obstacles are valued more or less similarly among
both groups. The only obstacle more relevant to offshoring SMEs is the risk of unexpected cost
increases. Although of minor significance, this topic is potentially underestimated by
inexperienced SMEs.
GUSENBAUER 5. Findings and validation
53
Figure 11: Result of comparison of means (1=irrelevant / 5=absolutely essential)
GUSENBAUER 5. Findings and validation
54
5.5. Relation of company characteristics and R&D offshoring
RQ3: Do certain company characteristics associate with the scale of current R&D offshoring?
Variables / n=80 v2.1: current year - v2: year of foundation v3: Number of personnel v7: Importance of R&D within the company v8: Operation of a distinct R&D department v9: Number of R&D personnel in the entire corporation v11: R&D intensity (%) v12: Share of sales outside the US (%) v14: Foreign R&D personnel as a share of total R&D personnel (%) v15: Foreign R&D expenditures as a share of total R&D expenditures (%)
The goal is to find a set of company characteristics which predict corporate R&D offshoring. These
characteristics are drawn from a selection of variables presented in Table 2. For the analysis all the
collected data (n=80) are used. This also includes the four large companies with between 300 and
440 employees. As the size of the companies is respected in the set of variables, the use of the
extended sample made sense. First, a descriptive analysis gives an impression of the association of
the continuous variables. This is done via a mean comparison shown in Table 15. Second, an
ordered logistic regression is used to statistically validate the connections and give an in-depth view
on the relation between variables. The model allows the combined evaluation of the continuous
and ordinal variables selected.
Descriptive analysis of continuous, dependent variables (v2.1, v3, v9, v11)
The descriptive statistics gives a first view on the continuous variables in order to roughly predict
the outcome. The dependent variables are grouped according to the values of the independent
variables (v14, v15). The results for each group are presented in the form of means with the
corresponding SD. Table 15 gives a detailed view on the data where linearities are highlighted. For
the analysis of the company age (v2.1) each group’s most outlying value was deleted in order to
improve the explanatory value. The outcome clearly shows that companies which have more
foreign R&D personnel or spend more on foreign R&D tend to be younger. On average, the ones
with extensive R&D offshoring were only 9 years old; whereas companies in the other groups had a
mean age of up to 17 years. The relatively low SD (2.2 and 2.3) supports the assumption of young
companies having more R&D offshoring. Along these lines, companies with increased R&D
offshoring efforts employ more personnel than others. This is reflected in both the overall
headcount and R&D personnel. For R&D intensity, however, no linearity can be observed.
GUSENBAUER 5. Findings and validation
55
Table 15: Comparison of means between groups (n=80)
Company age(v2.1)
Personnel (v3)
R&D personnel (v9)
R&D intensity (%) (v11)
Mean SD Mean SD Mean SD Mean SD
R&D
personnel (v14)
None 17.3 9.9 41.3 53.6 6.6 10.1 22.8 59.4
1-25% 13.4 10.0 79.9 72.0 20.6 15.1 70.4 69.0
more
than 25% 8.8 2.2 186.9 154.6 89.1 91.6 36.7 33.3
R&D
expenditures
(v15)
None 17.6 10.0 48.4 70.1 9.8 28.5 21.2 58.3
1-25% 11.6 7.5 81.6 75.7 20.9 15.3 74.5 104.7
more
than 25% 9.1 2.3 190.4 168.1 75.2 94.2 30.2 27.3
Ordinal logistic regression (n=80)
The ordinal logistic regression tests the independent variables (v2.1, v3, v4, v6, v7, v8, v9, v11, v12)
for their predictive value with respect to the scale of current R&D offshoring (dependent variables:
v14, v15). For a detailed description of the variables see Table 2. The results of the ordinal logistic
regression are visualized in Table 17 and Table 18, where significant values are highlighted. The
remaining output, including tests on the model quality, can be found in Appendix C: Ordered
logistic regression. The thresholds show where the latent variables have their cut points. The
location output indicates which relation these variables have with the scale of current R&D
offshoring (dependent variables: v14, v15). It shows the direction and magnitude of the effect of
every independent variable on the dependent variable.
The overall quality of both models is good, as they significantly improve the ability to predict the
dependent variables. In both cases the chi-square statistics indicate that the final model is
significantly (p < 0.001) better than the intercept-only baseline. The goodness-of-fit test shows that
the null hypothesis is not rejected; meaning that both models have a good fit. Although both
goodness-of-fit tests are not significant and attest good model quality, there is a difference in the
explanatory value for the dependent variables. The independent variables explain the share of
foreign R&D personnel (v14) better than R&D expenditures (v15). This is also reflected in the
pseudo R-square test, where v14 gets slightly better results. The two R-square values, e.g.
Nagelkerke = 0.696 and 0.641, indicate the independent variables are good predictors in both
models.
As both v14 and v15 produce similar outcomes, the results of the ordinal logit model are similar as
well. Three independent variables are significantly associated with both of the dependent variables
(v14, v15): company age (v2.1), company size (v3) and importance of R&D (v7). It was found that
GUSENBAUER 5. Findings and validation
56
these three variables can at least partly predict the scale of current R&D offshoring with respect to
foreign R&D personnel (v14) and foreign R&D expenditures (v15): Younger and also very mature
companies with absolutely more R&D personnel and R&D being a core or support function will
engage more in R&D offshoring. The company age (v2.1) is a non-linear predictor of the scale of
current R&D offshoring. This is reflected in v2age2, a measure of squared company age19. For
company age (v2.1), with a significance of p = 0.002, one unit increase means 0.517 increase in the
ordered log odds of v14, provided that all other variables are held constant. The contrary is true for
age squared (v2age2): With a significance of p = 0.003, one unit increase means a 0.01 decrease in
the ordered log odds of v14. In both models (v14 and v15) the youngest companies were those to
invest the most in foreign R&D. On the other side, also very mature companies engage in R&D
offshoring. However, compared to young companies, substantially fewer old companies offshore
R&D. Interestingly, it is almost irrelevant whether companies perceive their R&D as core or support
functions. Both responses are suitable to predict a higher level of R&D personnel and expenditures.
Only companies without any R&D do not offshore at all. Comparing the models for both
dependent variables (v14, v15), the three significant independent predictors work better for v15.
Only one variable is not consistently significant in both models: the number of R&D personnel (v9)
is only significant for v14 and not for v15. As v14 is the measure for the share of a company’s
foreign R&D personnel, the connection is not surprising. For the total number of R&D personnel
(v9), with a significance of p = 0.029, one more researcher hired results in a decrease of 0.056 in the
ordered log odds, provided all other variables are held constant. In other words, companies with
more R&D personnel will also employ more foreign R&D personnel. However, v9 is a bad predictor
for the scale of current foreign R&D expenditures. With a significance of p = 0.953 it does not
improve the value of the second model (v15).
The significance level of the four remaining factors (v6, v8, v11, v12) is too low (p > 0.05) to attest
an association. Therefore, the operation of a fab (v6) and of a R&D department (v8) as well as R&D
intensity (v11) and the level of internationalization (v12) are not suitable to predict the scale of R&D
offshoring. This is especially surprising because R&D intensity is a commonly used measure for the
relative importance of a company’s R&D. It is far from having a significant relation to the scale of
R&D offshoring. For this SME study, absolute variables measuring the scale of company
characteristics were more reliable than relative ones.
To sum up, some company characteristics are good predictors of a company’s R&D offshoring with
respect to foreign personnel employed and foreign investments: Age, size and the importance of
R&D within a company relate well to the scale of R&D offshoring. The total amount of corporate
R&D personnel is also suitable to predict the share of foreign R&D personnel. The results for the
variables company age (v2.1), company size (v3) and number of R&D personnel (v9) are almost
perfectly consistent between the mean comparison in step one and the ordinal logit regression in
19 Company age (v2) was the only variable to improve the model with a non-linear path; for all remaining factors the results were best with linear progressions.
GUSENBAUER 5. Findings and validation
57
step two. Only one time the mean comparison was misleading and did not indicate the result as
shown by the ordinal logit regression: The R&D personnel is a good predictor for the scale of
foreign R&D personnel (v14), and not R&D expenditures (15).
Side note: A glance at the importance of R&D (v7) and R&D offshoring
When the scale of current R&D offshoring (v14, v15) is transformed into a dummy variable, the
descriptive statistics tell a different story. Table 16 shows that almost half of the companies with
R&D as a core function offshore R&D. Compared to companies with R&D as a support function, the
former source foreign R&D substantially more often. None of the companies without R&D source
foreign R&D. To sum up, when the scale of offshoring is left aside, the difference in the perception
of R&D does matter.
The question of whether R&D offshoring helps or harms the focus on core competencies is not as
clear. The mean comparison shows that companies without R&D most likely think R&D offshoring
improves their focus on core competencies. Nevertheless, none in this group actually engage in
offshoring. On average, the other two groups do not think this factor is of extraordinary
importance. The risk of the loss of core competencies, however, is comparatively more relevant for
all companies. The ones with R&D as a core function think losing core competencies is least risky.
Table 16: R&D importance vs. R&D offshoring
Current R&D offshoring
(v14, v15)20
Improved focus on core competencies (v22)
(1=irrelevant; 5=absolutely essential)
Loss of core business competencies (v40)
(1=irrelevant; 5=absolutely essential)
Yes No Mean SD Mean SD
Importance of R&D
Core function 47% 53% 2.97 1.44 3.35 1.35
Support function
29% 71% 2.50 1.73 3.56 1.29
No R&D 0% 100% 3.60 1.52 3.75 .50
20 Dummy variable with two values: Yes = current R&D offshoring / No = no current R&D offshoring.
GUSENBAUER 5. Findings and validation
58
Table 17: Ordinal regression output: Parameter Estimates for v14 (share of foreign R&D personnel)
Estimate Std.
Error Wald df Sig.
95% Confidence
Interval
Lower
Bound
Upper
Bound
Threshold
[v14 = 1] Threshold
between “more than 25%”
and “1-25%”
-20.752 2.023 105.240 1 .000 -24.717 -16.788
[v14 = 2] Threshold
between “1-25%” and none -18.513 2.052 81.364 1 .000 -22.536 -14.491
Location
v2.1age .517 .170 9.282 1 .002 .184 .849
v2age2 -.010 .003 8.617 1 .003 -.016 -.003
v3Personnel -.013 .006 4.478 1 .034 -.024 -.001
v9RDpers -.056 .025 4.827 1 .028 -.106 -.006
v11RDintens -.002 .005 .177 1 .674 -.012 .008
[v6Fab=1] -.386 1.567 .061 1 .805 -3.457 2.685
[v6Fab=2] 0a . . 0 . . .
[v7RD=1] -21.093 1.037 413.506 1 .000 -23.126 -19.060
[v7RD=2] -21.503 .000 . 1 . -21.503 -21.503
[v7RD=3] 0a . . 0 . . .
[v8RDdep=1] .549 .867 .401 1 .527 -1.150 2.248
[v8RDdep=2] 0a . . 0 . . .
[v12SALESoutside=1] .567 1.442 .155 1 .694 -2.259 3.393
[v12SALESoutside=2] .303 1.338 .051 1 .821 -2.319 2.925
[v12SALESoutside=3] -.379 1.356 .078 1 .780 -3.036 2.278
[v12SALESoutside=4] 1.109 1.382 .643 1 .422 -1.600 3.817
[v12SALESoutside=5] 0a . . 0 . . .
Link function: Logit. / a. This parameter is set to zero because it is redundant.
GUSENBAUER 5. Findings and validation
59
Table 18: Ordinal regression output: Parameter Estimates for v15 (share of foreign R&D expenditures)
Estimate Std.
Error Wald df Sig.
95% Confidence
Interval
Lower
Bound
Upper
Bound
Threshold
[v15 = 1] Threshold
between “more than 25%”
and “1-25%”
-21.088 1.875 126.482 1 .000 -24.764 -17.413
[v15 = 2] Threshold
between “1-25%” and none -18.767 1.961 91.597 1 .000 -22.610 -14.923
Location
v2.1age .584 .168 12.136 1 .000 .255 .912
v2age2 -.011 .003 10.640 1 .001 -.017 -.004
v3Personnel -.013 .006 5.606 1 .018 -.024 -.002
v9RDpers .001 .013 .003 1 .953 -.025 .027
v11RDintens .001 .005 .046 1 .830 -.008 .010
[v6Fab=1] -.326 1.507 .047 1 .829 -3.281 2.628
[v6Fab=2] 0a . . 0 . . .
[v7RD=1] -23.460 .974 580.186 1 .000 -25.369 -21.551
[v7RD=2] -23.026 .000 . 1 . -23.026 -23.026
[v7RD=3] 0a . . 0 . . .
[v8RDdep=1] .911 .782 1.359 1 .244 -.621 2.444
[v8RDdep=2] 0a . . 0 . . .
[v12SALESoutside=1] -.942 1.177 .641 1 .424 -3.250 1.365
[v12SALESoutside=2] -.438 1.188 .136 1 .713 -2.766 1.891
[v12SALESoutside=3] .008 1.246 .000 1 .995 -2.433 2.449
[v12SALESoutside=4] .981 1.247 .618 1 .432 -1.463 3.424
[v12SALESoutside=5] 0a . . 0 . . .
Link function: Logit. / a. This parameter is set to zero because it is redundant.
GUSENBAUER 6. Discussion
60
6. Discussion This chapter assesses all key findings of the survey on SMEs in the US semiconductor industry. It
confronts existing surveys and literature on (R&D) offshoring with the new insights. The
assumptions of existing research on (R&D) offshoring often address issues in general or lack
industry focus. As previously noted, comparability is therefore limited. Furthermore, the follow-up
interview providing additional information is included wherever appropriate. The results of this
paper support existing theory in some points; in other cases the findings are substantially different.
The discussion of the findings follows the sequence of the research questions:
RQ1.1: How important is R&D offshoring for SMEs in the US
semiconductor industry currently and in the next 5 years?
R&D offshoring is very relevant for small and medium sized enterprises in the US
semiconductor industry.
A great share of SMEs has experience with R&D offshoring; 38% have already invested in foreign
R&D. Almost all SMEs continue their operations; hardly anyone discontinues their R&D offshoring.
Therefore, the current level of R&D offshoring is only marginally smaller: about every third SME in
the US semiconductor industry offshored in 2011. However, the scale of R&D offshoring varies
greatly among SMEs. The majority still staffs mainly in the US and mainly develops products and
services at home. Nevertheless, R&D offshoring in the US semiconductor industry is expected to
grow substantially in future.
Future R&D offshoring growth is mainly due to further expansion and NOT due to
initiative of well-established SMEs.
Altogether, 28% of all SMEs will likely or almost certainly expand or start R&D offshoring operations
until 2016. However, the share is significantly higher with SMEs that currently offshore: about 70%
will probably expand; the remainder will most likely continue. Contrarily, in the past only a
marginal 12% discontinued their offshoring. The reasons varied; some were satisfied and planned
to revive their efforts, others were dissatisfied and stayed with their decision. The interview with a
small sized company’s CEO confirmed the SMEs’ adherence to R&D offshoring: “It is such a long-
term trend. So, once you made that commitment, typically people keep on expanding. I have not heard
anyone coming back home yet.” In total, 40% of all US small and medium sized semiconductor
companies are expected to offshore R&D in the next few years. Companies with no prior
experience in R&D offshoring are substantially less likely to offshore than companies with already
existing operations. The authors of the Duke University/ORN 2008 report predict a marginally
higher level of innovation offshoring among SMEs. They conclude that about 44% of all SMEs in
various industries plan to offshore parts of their R&D (Heijmen T. et al. 2008). The results from both
studies are similar, even though the industry focus is different.
GUSENBAUER 6. Discussion
61
Start-ups are likely to further accelerate the R&D offshoring trend.
Although well-established SMEs rarely plan to start their R&D offshoring from scratch, ventures are
likely to do so. One of the findings of RQ3 is the high concentration of R&D offshoring activity
among young companies, including start-ups. The offshoring trend is expected to gather
momentum as newly founded companies will begin offshoring. The follow-up interview supports
this statement and notes that start-ups with two to five years are able to offshore parts of their
R&D. Some products or services are even necessary to be sourced abroad: For example, SMEs have
no option but to source process developments outside the US. In addition, VCs may push R&D
offshore in order to increase competitiveness (see RQ2).
The results of the semiconductor study prove that R&D offshoring is happening among the
smallest entities in the industry. It underlines the capability of SMEs to take measures in order to
offshore R&D. Amid their limited size and financial capacity, they are more and more opening up to
global business opportunities. The CEO interviewed strongly supported the statement that R&D
offshoring still is in an early stage.
RQ1.2: Which mode of R&D offshoring do SMEs use currently and in the
next 5 years?
Currently more integrated forms of R&D offshoring are most attractive to SMEs.
Joint ventures and partnerships with a foreign company are the most widespread form of foreign
R&D sourcing. Indeed, partnerships are a lot more common than joint ventures. The follow-up
interview brought light into this matter: “Partnerships are everywhere! They are even more important
than licensing!” The CEO noted that companies very frequently partnered with others as a form of
appreciation to stimulate business and show respect. Moreover, the sourcing from external service
providers falls into the category of partnerships. As it only requires very limited offshoring
experience, foreign 3rd party service providers are frequently used by SMEs as their initial form of
sourcing. According to the CEO joint ventures on the other hand have become relatively irrelevant
in the US semiconductor industry.
Although wholly owned subsidiaries come second, they are almost as important as partnerships. A
considerable share of SMEs decided to invest substantial funds and know-how in order to benefit
from tighter control over R&D operations. This finding is backed by the results in RQ2.1, where the
IP issues rank at the top of risks associated with R&D offshoring. A higher level of integration helps
to mitigate these downsides while still benefiting from the upsides. After rating organizational and
structural risk, Aron R. and Singh J. V. (2005: pp. 138-143) suggest the use of captive centers located
nearby the company’s home country. Furthermore, wholly owned subsidiaries are the logical
consequence in the internationalization process. Gradual learning from low-commitment
offshoring via 3rd party manufacturers or service providers is followed by not only more functions
GUSENBAUER 6. Discussion
62
being offshored but also a change in mode. The CEO noted that after gradually building
confidence, the next step is the opening of a wholly owned subsidiary under direct control. For
SMEs, licensing agreements and contracting are the least important forms to source R&D. On the
one hand, it is used to obtain IP; on the other hand, it is a quick way to monetize patents.
Surprisingly, licensing is ranked least important, as it is less complicated and needs the least trust–it
practically excludes the risk of unintentional IP loss.
Also in future more integrated forms will dominate SMEs’ R&D offshoring.
Among the companies with more or less concrete plans to begin or expand R&D offshoring, almost
everyone chooses wholly owned subsidiaries or joint ventures and partnerships. Only a small
fraction considers licensing agreements or contracting. The level of comfort rises and best-practice
knowledge in the industry spreads; it certainly is a step-by-step process of gradually building
confidence, the CEO explained. Clearly, SMEs moved up the learning curve and foster their
operations abroad. For SMEs wholly owned subsidiaries are a way to grow after a journey of
continuous learning on the way.
As SMEs are defined as companies with less than 250 employees, the number of SMEs operating
wholly owned subsidiaries will always be lower than for large ones. With time, SMEs mature and
gain experience in dealing with their offshore operations–but at the same time, they are falling out
of the SME category.
The situation of large companies is much different: They can more easily access all offshoring
modes, as their funds and capabilities are substantially greater. According to the follow-up, they
also care significantly less about IP, as they have more infrastructure and resources to control R&D
more tightly; also abroad.
RQ1.3: How satisfied are SMEs with their predominant mode of R&D
offshoring?
The great majority of SMEs is happy with its R&D offshoring.
Altogether, 91% responded they are satisfied or very satisfied with their predominant mode of R&D
offshoring. Most SMEs were satisfied with wholly owned subsidiaries and joint
ventures/partnerships. Licensing agreements or contracting, however, were perceived as slightly
less positive. Overall, however no respondent was very dissatisfied.
Two out of every three respondents which were satisfied with current R&D offshoring plan to
expand their operations further. However, a high level of satisfaction does not necessarily lead to
an expansion.
GUSENBAUER 6. Discussion
63
RQ2.1: Which reasons have the greatest influence on the SMEs’ decision
(not) to offshore R&D?
The primary goal of SMEs’ R&D offshoring is the enhancement of R&D capabilities. Cost is
important, but secondary.
The most relevant motivator for SMEs’ R&D offshoring is the increase of breadth and depth of R&D.
Combined with an improved focus on core competencies and a gain of flexibility on R&D capacity,
these highly ranked facilitators express the SMEs’ effort for improved R&D capabilities. They want
to increase efficiency and streamline R&D. Low cost of personnel ranks second, ahead of low “other
costs”.
In the last few years researchers have observed a shift from cost to quality. Dossani R. and Kenney
M. (2004), for example, postulate that businesses initially offshore for cost, but stay for quality. The
CTO of Global Electronics finds human capital more important than cost: “Offshoring is a matter of
global access to intellectual capital. In the end, companies will go to low-cost countries for the people,
not for the costs.” (Duke University/Booz Allen Hamilton 2006: p. 3) For SMEs in the US
semiconductor industry, this statement is only partly true. Indeed, R&D capabilities are more
important than cost – access to global talent, however, has moderate relevance:
SMEs go offshore for cost and R&D capabilities, not because of the engineering talent
itself.
For SMEs, sourcing of highly available foreign know-how and skills has only average importance.
For about 35% it was relevant; whereas every second company perceived it more or less irrelevant.
Even when only SMEs with offshoring experience are considered, the mean importance is only
mediocre21.
Examining engineering talent in general22, Manning S. et al. (2008) draw a different picture. They
conclude that access to engineering talent is the second most important driver for offshoring; the
first still is cost. Heijmen T. et al. (2008) found 60% of the small companies23 surveyed rated the
“access to qualified personnel offshore” as important or very important. Although the
semiconductor survey’s findings do not match the previous studies, the follow-up interview
strongly supported the conclusions drawn for SMEs in the semiconductor industry: First and
foremost, companies have to make sure that foreign R&D providers can deliver; the capability of
producing the right results is an absolute must. However, the ultimate motivation for R&D
offshoring is to get more for the available Dollar. The CEO disagreed with a lack of talent in the US
semiconductor industry:
21 The mean response is 3.17 (SD=1.34), whereas 1 is the lowest and 5 is the highest value. 22 The findings base on data from the ORN at Duke University. 23 Small companies were defined as under 500 employees.
GUSENBAUER 6. Discussion
64
“I totally disagree with that [a shortage of qualified engineering talent]. We have had all the talents and partly still do. In the name of cost savings we have exported all those talents and functionality. So most people have learned new skills and moved on. But the R&D talent was never a problem in the US.”
The quality of the foreign workforce has improved; its reputation too.
Although the access to global talent is not among SMEs’ top priorities, they do indeed know that
offshore R&D capabilities have improved. The perception of an unskilled, unproductive foreign
workforce is not the reality any more. Inexperienced SMEs, along with SMEs with offshoring
experience, do not believe in the bad quality of the foreign workforce. There is no significant bias
of companies without offshoring knowledge; this group realized that foreign engineers are also
capable of delivering sufficient quality.
The SME’s relation to the R&D offshoring destination is a decisive factor.
After R&D capabilities and cost, the extension of existing ties and psychological closeness are the
next important factors. Not only hard facts, but also the migration background or the sympathy for
a destination play a role for the R&D offshoring decision. This does not come as a surprise as the
semiconductor industry is highly internationalized with global cross-links. A great share of US
employees working in the semiconductor industry have a migration background and ties to
offshoring destinations. For the CEO interviewed, heritage was absolutely crucial to not only decide
on whether or not to offshore, but also on where:
“Anytime you go in an unchartered territory, you have all kinds of concerns in comfort. So people tend to do what they are comfortable with, even though it may not be the most optimal solution. Heritage brings you the comfort.”
Comfort is even more important for SMEs, as offshoring usually is a few people’s decision. Large
MNCs focus more on other criteria, and being comfortable is less relevant. It allows SMEs to move
faster. More international and culturally open SMEs have an edge in their offshoring operations.
This comfort with international settings helps them to accelerate the relocation of their R&D
functions.
Contrarily, the lack of internationality or cultural openness can also hinder offshoring. Some 40%
responded they lacked experience in the foreign market and environment. About every third SME
rates cultural fit and corporate culture issues as more or less relevant. However, these obstacles are
not no-go criteria either. To sum up, migration background, extensive cultural experience and an
established international network are valuable assets to base a successful offshoring operation on.
Virtually every SME thinking of R&D offshoring gets a headache from IP issues.
“Confidentiality issues and privacy concerns” and the “loss of IP rights to suppliers” are seen as the
two single most serious obstacles. More than 80% considered these risks as essential or absolutely
essential. Along these lines, R&D offshoring is feared to cause a reduction in company know-how
by almost two thirds of the industry.
GUSENBAUER 6. Discussion
65
The survey conducted by Duke University/ORN (2006: p. 10) found that IP issues are important for
about 40 to 54% of the respondents depending on the concrete aspect. For SMEs in the
semiconductor industry, IP issues are significantly more relevant. Reasons can be found in the
sensitivity of R&D and company size. The follow-up interview confirmed the SMEs’ struggles with IP
protection: “The large companies are less concerned about IP protection. […] Whereas for a small
company it is a very challenging task.” Nevertheless, it is possible to reduce IP risks partly by picking
the adequate offshoring mode. This is done by choosing the appropriate location and getting the
make-or-buy decision right. Licensing agreements and contracting might keep the information
flow one-directional. Wholly owned subsidiaries might be suitable when a joint venture or
partnership seems too risky.
Loss of control and high cost are perceived as second highest risks.
The reduction of control and flexibility, along with high transaction and initial set-up cost are major
factors preventing foreign R&D sourcing. Offshoring is not just the shift of financial funds abroad,
but also the shift of control and capacity. As the decision is strategic and uncertainty is high, SMEs
think twice before engaging in offshoring operations. Additionally, the Economist Intelligence Unit
(2009: p. 16) found that especially start-ups were lacking financial funding in recent years. Due to
the financial crisis this problem got worse and SMEs had to cut costs wherever possible.
There is great ambiguity concerning the influence of R&D offshoring on SMEs’ core
competencies.
On the one hand, R&D offshoring is perceived to improve the focus on core competencies; on the
other hand, it leads to a loss of core competencies. Both contrasting results of R&D offshoring are
highly relevant for SMEs: The “improved focus on core competencies” ranks third among the top
facilitators; the “loss of core business competencies” is relevant for more than half of all SMEs.
Interestingly, even some respondents who offshore R&D found both effects absolutely relevant:
For them, R&D offshoring not only improved the focus on core competencies, but also led to a loss.
Aron R. and Singh J. V. (2005) suggest ranking business processes according to their importance
concerning value creation. Only the ones with low or medium importance should be outsourced
and/or offshored. Therefore, SMEs have to think about the impact every single R&D process has on
their bottom line. As no core competencies are offshored, they cannot be “lost.” Contractor F. J. et
al. (2011: pp. 13ff.) notes that the definition of core competencies has become narrower in recent
years. What was crucial for value creation yesterday is now considered a support function; a change
of thought paving the way for increased R&D offshoring. As the definition is getting narrower, the
loss of core competencies becomes more serious–even for companies trying to benefit from an
improved focus. Therefore, it is questionable if SMEs get their R&D offshoring right or if ultimately
advantages outweigh the risks. According to the CEO interviewed, there is a clear trade-off. After
gradually expanding R&D offshoring, the long-term effect is the loss of core competencies: “You
will shoot yourself in the foot. However, the injured only realizes in the long run that he is hurt.”
GUSENBAUER 6. Discussion
66
Companies are well aware of the loss of core competencies; however, the pressures for offshoring
are strong, especially for new ventures.
Country specifics are only marginally relevant for the R&D offshoring decision. Major
concerns rather deal with the management of R&D offshoring itself or with organizational
specifics.
Facilitators like modern infrastructure, governmental incentives as well as a favorable
administrative, institutional and legislative framework have a very low relevance for offshoring.
Only access to research clusters and university collaborations is marginally more important. On the
other hand, the country specific obstacles are almost insignificant. Country specific risks,
insufficient skills and quality of the foreign workforce, or the risk of unexpected cost increases
matter to approximately every third company. Compared to the other risks, these factors are
ranked very low.
Proprietary pressures to offshore R&D are rare, but existent.
VCs and stock holders in general put more and more pressure on SMEs to cut costs and reduce
funds required with R&D offshoring (Kenney M. and Dossani R. 2005: p. 9; Hira J. 2005: p. 25).
However, this survey found that pressures from proprietors or VCs are relevant for only a small
fraction of the industry. In fact, only three SMEs heavily engage in R&D offshoring where pressures
from their proprietors were absolutely essential for their offshoring decision. Currently, they
operate wholly owned subsidiaries and allocate more than 40% of their funds and personnel
abroad. For these companies, the decision seemed justified as their current R&D offshoring
operations are perceived “satisfactory” or “very satisfactory”. In the end, however, it all comes down
to one question: Can cost and risk be compensated by better and cheaper R&D? If yes, the VCs
were right.
External influence on offshoring decisions is very uncommon.
The general environment is not decisive for a SME’s offshoring operations. Competition is seen as a
relevant factor by just 15%. Contrary studies on (R&D) offshoring found that this factor is
substantially more relevant: According to Duke University/ORN (2009a: p. 10), about two out of
three companies see competitive pressures as a key facilitator for R&D offshoring. Surprisingly, the
follow-up interview did not support the low ranking, but rather underlined the significance of
competitive pressures: “Competitors follow competitors.” Offshoring rather influences SMEs’
decisions as it becomes a common business practice. Mere competitive pressures do not seem to
be relevant at this early stage of corporate evolution.
Bad public relations and a lack of client acceptance are relatively irrelevant for SME’s offshoring in
the semiconductor industry. In fact, experienced SMEs do not care at all; they significantly rank this
factor lower than SMEs without experience. Offshoring is already very established as a business
practice and the industry mainly serves business clients. Therefore, public opinion generally does
not matter; a view strongly shared by the interviewed CEO.
GUSENBAUER 6. Discussion
67
Legal requirements for R&D staying on US soil are enforced in some parts of the industry.
Nevertheless, it is widely irrelevant to the great share of small and medium sized semiconductor
companies. Although every fifth enterprise stated that US legislation absolutely restricts offshoring,
the largest share of SMEs rated it irrelevant. Some respondents reported R&D offshoring, including
joint ventures and wholly owned subsidiaries, even though legal restrictions were relevant. In
general, SMEs rather concentrate on factors more directly impacting R&D offshoring results; not on
the external stakeholders.
RQ2.2: Are the reasons for and against R&D offshoring perceived
differently by SMEs with R&D offshoring experience and those without?
The first part of RQ2 brought a comprehensive insight into facilitators and obstacles influencing
R&D offshoring decisions. This second part provides a deeper understanding of the critical factors
which specifically led SMEs to source abroad.
Experienced SMEs assess facilitators and obstacles substantially more optimistically.
The perception of the reasons for and against R&D offshoring is very one-sided. Inexperienced
companies categorically underestimate the potential of R&D offshoring and overestimate the risks
associated with it. Out of 31 factors, there are only two minor exceptions. The significantly greater
confidence of SMEs with offshoring operations raises the following question: Why do inexperienced
companies perceive R&D offshoring systematically less attractive? There are two scenarios at hand:
either there is an information bias concerning offshoring (1) or there is not (2). If there is,
inexperienced companies underestimate the potential of offshoring and should rethink their
business strategy. If there is no such bias, companies which rather offshore can simply benefit more
from these opportunities than others. The follow-up interview brought some light into this
question:
The US semiconductor industry is well aware of R&D offshoring risks, benefits and best
practices.
The CEO strongly agreed that the US semiconductor industry knew very well about R&D offshoring:
“[…] by large in the semiconductor world the people have recognized the value of offshoring–because it’s already done. I mean the industry is already gone. […] I think there is a very widespread knowledge available and it would be very hard for me to think that people don’t know about it.”
As companies know, the differences in the perception of facilitators and obstacles are at least in
part due to company specifics. These influence the result of R&D offshoring in a positive or
negative way.
GUSENBAUER 6. Discussion
68
Experienced SMEs point out where R&D offshoring opportunities lie.
The majority of experienced SMEs are very comfortable with R&D offshoring. More than nine out of
ten SMEs are satisfied or very satisfied with their operations and a great share of future offshoring
activity comes from expansion. It is safe to say that SMEs with offshoring experience are generally
successful. Therefore, the assessment of the facilitators and obstacles by experienced companies
reveals the potential of offshoring for SMEs.
Nevertheless, R&D offshoring is not suitable for everyone. Some SMEs do not carry out R&D, some
need R&D they cannot source abroad, and others do not have the organizational capability. In
order to source R&D successfully the corporate structure has to be prepared and certain pre-
requisites have to be met (Aron R. and Singh J. V. 2005; Contractor F. J. et al. 2011). At the same
time, where experience makes for a significant deviation in the perception of single factors, starters
should listen closely:
The company’s R&D goals and organizational environment significantly influence the
R&D offshoring decision.
The most important factors distinctive comprise the company’s R&D focus: The increase of depth
and breadth of R&D (1), improved focus on core competencies (2), and the gain of flexibility in R&D
capacity (3) are all essential for offshoring operations. The ability to benefit from these advantages
is mainly attributed to a company’s R&D conception. SMEs with offshoring can benefit significantly
more from these factors than inexperienced companies would. Offshoring therefore benefits
companies that need to improve the scope of R&D and tightly want to focus on their core
competencies.
Psychological connections to the foreign location, cultural fit and corporate culture depend on the
mutual relation between organization and potential offshoring location. These factors all increase
or decrease the level of comfort SMEs have when going abroad. The follow-up interview supported
these findings: Migration background, internationalism or the level of openness to foreign cultures
are important factors influencing the engagement abroad.
Locational factors are less relevant for all SMEs–personnel cost is the exception.
In general, country specific factors are perceived very similary by both groups. However, all
differences observed are directly related to SME’s R&D and the influence of offshoring on R&D. The
only significantly different factor, relating to the host country, is low personnel cost. Inexperienced
companies care significantly less about personnel cost. Surprisingly, for them the variable “other
costs” is more relevant. This leads to the conclusion that non-offshoring SMEs cannot profit from
low personnel costs like experienced SMEs can. For them, the wage rate differential is not
convincing enough to offshore.
Interestingly, there are no significant deviations in the perception of the costs involved in the set-
up and maintenance of R&D offshoring operations. The only obstacle underestimated by
GUSENBAUER 6. Discussion
69
inexperienced SMEs is the risk of unexpected cost increases. Although it is of rather minor
significance, experienced SMEs think it is more relevant than SMEs that stay in the US.
IP issues are extremely relevant, irrespective of R&D offshoring experience.
Problems with IP in offshoring operations are a reality. Throughout the entire US semiconductor
industry they are the biggest concern for SMEs considering R&D offshoring. Therefore, if a long-
term offshoring strategy should succeed, IP risks are most important to mitigate. The choice of the
right offshoring mode, along with the right supplier is the single most important strategy to tackle
IP problems. SMEs should carefully choose trustworthy and well-known suppliers where they first
only source a fraction or less important R&D. Trust comes with time and in the end a wholly owned
subsidiary is the way to go, so the CEO in the follow-up interview. For the analysis of offshoring
modes see RQ1.2.
RQ3: Do certain company characteristics associate with the scale of
current R&D offshoring?
The survey collected certain company characteristics describing the corporate structure and
orientation. The question is whether some of these characteristics can be used as a predictor for
R&D offshoring–whether certain companies have a greater tendency to offshore than others.
R&D offshoring is an age thing: mainly young companies source R&D from abroad.
Companies that experienced the birth of the semiconductor industry a long time ago rarely
offshore; only a few outliers between the ages of 30 to 49 do. The big chunk of offshoring
companies is found to be not older than 15 years; the youngest is four years old. Typically, a start-
up tries to leverage R&D offshoring as soon as possible.
Initially, start-ups are not eligible for offshoring; they have to get to a certain level first.
It is true that SMEs start to offshore very early. However, they have to reach a certain level of their
R&D before they can think of offshoring certain R&D functions. The CEO notes that typically the
venture is founded by a handful of R&D experts to advance an idea and come up with first
prototypes. When they reach the commercialization stage after three to five years, outsourcing
starts being considered. Nevertheless, “it is really not time-bound as much as it is how quickly you can
get to a product level.” the CEO noted. First certain engineering functions, followed by more
elaborate work–offshoring is a gradual process.
Typically, offshoring starts with a company size of 50 employees; however, there are
numerous exceptions starting well below that number.
The regression analysis found that there is a significant relation between company size and the
scale of offshoring. The bigger the company the more likely it is involved in higher scale offshoring
operations, both in terms of financial investment and personnel employment abroad.
GUSENBAUER 6. Discussion
70
Nevertheless, there are some exceptions. The smallest company with offshoring was a four-person
business spending more than 40% of its R&D abroad. The smallest firm that employed foreign R&D
personnel had a size of 10 people. Although offshoring is more likely to be executed by larger,
more structured companies, there are numerous exceptions to that rule. Clearly, offshoring has
reached the smallest entities in the US semiconductor industry:
“A typical start-up company today begins planning for global growth from its inception. In response to pressure from venture capitalists to reduce cash burn rates, start-up companies are creating offshore facilities even before their head counts reach 100.” (Hira R. 2005: p. 9)
Exclusively companies with internal R&D source (parts of their) R&D abroad.
No single company without internal R&D efforts sourced R&D offshore. Only where a certain R&D
focus existed, companies also looked for R&D elsewhere. Interestingly, in the regression analysis it
almost made no difference whether R&D was a core or a support function. In the separate
descriptive analysis, however, substantially more companies with R&D as a core function sourced
foreign R&D. There is still a need for more research on the importance of R&D/perception of core
competencies and R&D offshoring.
Companies with a high stock of R&D personnel are the ones most likely to employ offshore
R&D staff.
The size of R&D staff is a good predictor for foreign R&D personnel. Companies with a high number
of R&D-dedicated personnel will most likely choose more integrated forms of foreign R&D. In these
facilities they employ foreign researchers and developers delivering to the parent. However, R&D
personnel is a bad indicator for the scale of foreign R&D expenditures. As foreign R&D investments
also include modes where no personnel is involved, this finding does not come as a surprise:
Licensing or partnerships do not necessarily require foreign R&D staff.
R&D offshoring is not associated with the maintenance of R&D departments.
According to Contractor F. J. et al. (2011: pp. 23ff.) the micro-dissection of the company’s value
chain is a prerequisite for offshoring or outsourcing. Along these lines the variable “R&D
department” was used as a measure of the level of organizational segmentation and R&D
importance. In the statistical analysis, however, no significant relation could be found.
SMEs also operate fabs, they do not relate to R&D offshoring, however.
Of all 80 companies questioned, 14% indicated the operation of a semiconductor fabrication plant.
The SMEs which confirmed were as small as 12 employees and as big as 249 employees. The CEO
could not believe this finding: Typically SMEs outsourced and/or offshored wafer production to big
3rd party manufacturers. They were not able to afford facilities like this, the CEO stated. The finding
is interesting as there is either a misperception of semiconductor production or a lack of
standardization in the use of the term “semiconductor fabrication plant”.
GUSENBAUER 6. Discussion
71
In the regression model, the variable could not significantly add to the predictive value. The
operation of a fab neither relates to the scale of foreign R&D investment nor the scale of foreign
R&D personnel.
Ratios as indicators are not as good as absolute measures to predict the scale of R&D
offshoring in a SME environment.
Compared to big companies, SMEs operate under different conditions. Ratios measuring relative
values are sometimes misleading. A high R&D intensity might be due to a marginal sales base or a
start-up being pre-revenue. The same is true for the international sales and R&D personnel. All of
these ratios mentioned were found to be inadequate for predicting the scale of R&D offshoring; the
relation between the variables in the regression model was insignificant. Therefore it is strongly
advisable to use absolute or ordinal values for describing SMEs.
GUSENBAUER 7. Conclusion
72
7. Conclusion This study is aimed to trace and understand R&D offshoring in one of the most innovative
industries in the world. It provides up-to-date, quantitatively backed insight on small and medium
sized enterprises, a group that was widely spared from research in this field. 80 randomly selected
US SMEs responded to a pilot-tested, standardized, web-based questionnaire. The preliminary
results were crosschecked with first-hand information of an experienced CEO managing a small
sized semiconductor company in Silicon Valley. This method was suitable to learn basically about
three areas: the scale of R&D offshoring (1), factors influencing R&D offshoring (2), portraying
companies that engage in R&D offshoring (3).
It showed that R&D offshoring is widely spread in the US semiconductor industry; not only in big
companies, but also in SMEs. In addition to providing a snapshot of the current situation, the study
also presents an outlook for the next five years: SMEs’ R&D offshoring is in full swing and is
expected to accelerate in future. This is due to the expansion of current offshoring and the
beginning of mainly venture-driven operations. Over the last two centuries R&D offshoring evolved
from being accessible to only a few large companies, to a business strategy used throughout the
industry. Nowadays, it is common for VCs to require an offshoring plan before certain stages of
funding are granted. Nevertheless, there are differences in offshoring practices among size groups.
Unlike large companies, SMEs have a more limited scope and therefore special needs. For them,
offshoring is a gradual process rather than a big push. However, the survey showed that small
companies are also capable of maintaining wholly owned subsidiaries abroad; the trend clearly
goes towards more integrated forms of R&D offshoring.
The semiconductor study revealed the important reasons influencing the SMEs’ R&D offshoring
decision. It showed significant differences between experienced and inexperienced SMEs
concerning the valuation of facilitators and obstacles. The assessment from SMEs with offshoring
experience offers a benchmark for other companies’ R&D offshoring plans. Interestingly, the results
of this study not always matched general offshoring surveys and literature. In particular, the drivers
for R&D offshoring were prioritized differently by SMEs. In fact, from the top five drivers found by
Duke University/ORN survey report (2009a: p. 10) three did not matter for SMEs in the
semiconductor industry.
Primarily, SMEs offshore because they strive for enhanced R&D capabilities at low cost. They do not
go offshore because of the foreign engineering talent. This is in contrast to the results of Duke
University’s ORN surveys; they found that access to foreign talent is one of the most important
drivers. The follow-up interview confirmed the semiconductor survey data: SMEs source foreign
R&D because of low cost and the R&D capabilities, not the talent itself. This survey exemplified that
SMEs are well worth researching separately. Still, there is a lot of room for further research on this
young topic with great impact:
GUSENBAUER 7. Conclusion
73
Certain reasons for SMEs’ R&D offshoring are dealt with insufficiently by existing literature; no
research specifically addresses offshoring and its interrelation with core competencies. There is still
some ambiguity whether offshoring helps to sharpen the focus on core functions and/or causes
the loss of core business competencies. The results in this study only provided limited insights in
this respect: Some SMEs responded R&D offshoring improved the focus on core competencies;
others thought it led to a loss of core competencies and in a number of cases both were true.
Therefore, it is well worthwhile to conduct further research exclusively on this topic: qualitative
interviews could provide a deeper understanding.
Start-ups and the industry’s innovativeness
The study showed that the vast bulk of offshoring is done by companies younger than 15 years; the
youngest company with offshoring was just four years old. Start-ups have to reach a certain level
first. When they reach the commercialization phase, offshoring typically starts. It is safe to say that
R&D offshoring has become a frequent best practice accompanying fledgling businesses
throughout their evolution. Ernst D. (2006: p. 10) supports this finding and notes that start-ups and
small companies in US high-tech industries are moving R&D more and more abroad. Considering
the results of this study, it is out of question that start-ups implement R&D offshoring; the question,
however, is: Does R&D offshoring harm the industry’s innovative milieu–the breeding ground for
new ideas? (1) Is R&D offshoring an innovation enabler or an innovation disabler? (2)
The CEO following-up on the preliminary results strongly agreed that R&D offshoring ultimately
harmed the industry’s innovativeness. He argued that pessimistic job perspectives in
semiconductors made engineering less attractive. Offshoring had caused situations where
engineers had to train their foreign replacements before getting laid off. VCs looked for the next
Google, Facebook or Groupon, instead of financing semiconductors. About the outlook of the
semiconductor industry he said:
“[…] there are less start-ups; there is less entrepreneurship because the environment changed. All the requirements needed to build innovation go away- the risk takers, the government support, the VSs, the funding. […] entrepreneurship dies out. However this is also bad for the large companies which used to buy up the small ones for their ideas.”
This rather pessimistic outlook is an interesting starting point for further research about the impact
of R&D offshoring on start-ups. Especially because other studies prove differently: Duke
University/Booz Allen Hamilton (2006: pp. 4-5) states that offshoring of high-value functions
(including R&D) creates jobs, rather than sending them overseas. Following the CEO’s assessment
this statement sounds rather euphemistic. Especially because of its highly controversial nature, this
topic is worth researching.
Although the effects of offshoring are debated, the overall consequences are rather clear: When
R&D offshoring harms start-ups, it harms the industry as a whole (OECD 2010a: pp. 25f.). Basil P.
(2010), a successful angel investor, stated that nowadays the brightest minds accumulated in start-
ups. Big companies had realized that and started to outsource innovation to smaller organizations:
GUSENBAUER 7. Conclusion
74
“Most of them [big companies] now are spending much more on M&A24 than they are on R&D. And the reason is they have learned that that is the best way for them to grow.”
Kenney M. and Dossani R. (2005: p. 9) note that “the relocation of new jobs by small firms could lead to
the “relocation of entrepreneurship” per se.” Therefore, it is essential to understand the effects of R&D
offshoring on start-ups; not only as an enabler for growth, but also as a disruptor of the industry’s
innovative milieu. More emphasis in research has to be put on early-stage R&D offshoring. A first
descriptive assessment has been made by this study surveying SMEs in the US semiconductor
industry.
24 M&A = Mergers & acquisitions
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Appendix A: Semiconductor industry classification
A.1 North American Industry Classification System (NAICS) code: 334413 Diodes, solid-state (e.g., germanium, silicon),
manufacturing Photonic integrated circuits manufacturing
Fuel cells, solid-state, manufacturing Photovoltaic devices, solid-state, manufacturing
Gunn effect devices manufacturing Rectifiers, semiconductor, manufacturing Hall effect devices manufacturing Semiconductor circuit networks (i.e., solid-
state integrated circuits) manufacturing Hybrid integrated circuits manufacturing Semiconductor devices manufacturing Infrared sensors, solid-state, manufacturing Semiconductor dice and wafers
manufacturing Integrated microcircuits manufacturing Semiconductor memory chips manufacturing Laser diodes manufacturing Silicon wafers, chemically doped,
manufacturing LED (light emitting diode) manufacturing Silicon wave guides manufacturing Light emitting diodes (LED) manufacturing Solar cells manufacturing Metal oxide silicon (MOS) devices
manufacturing Static converters, integrated circuits,
manufacturing Microcontroller chip manufacturing Thin film integrated circuits manufacturing Microprocessor chip manufacturing Thyristors manufacturing Monolithic integrated circuits (solid-state)
manufacturing Transistors manufacturing
MOS (metal oxide silicon) devices manufacturing
Voltage regulators, integrated circuits, manufacturing
Optoelectronic devices manufacturing Wafers (semiconductor devices) manufacturing
Photoelectric cells, solid-state (e.g., electronic eye), manufacturing
Source: US Census Bureau 2007
A.2 Other classifications used by international organizations
International Standard Industrial Classification (ISIC) used by the OECD:
Code 3210 for “Electronic valves and tubes and other electronic components” (OECD
2002b: pp. 83-85)
Nomenclature statistique des activités économiques dans la Communauté
européenne (NACE)25 used by the EU: Code 32.1 (OECD 2002b: p. 83)
Industry Classification Benchmark (ICB): Code 9576 defines the following:
“Producers and distributors of semiconductors and other integrated chips, including other products related to the semiconductor industry, such as semiconductor capital equipment and motherboards. Excludes makers of printed circuit boards, which are classified under Electrical Components & Equipment.” (FTSE International Limited 2011)
25 English translation: Statistical Classification of Economic Activities in the European Community
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Appendix B: Comparison of means
B.1 One-Sample Kolmogorov-Smirnov test26
N Normal Parametersa,b
Most Extreme Differences Kolmogorov-Smirnov Z
Asymp. Sig. (2-tailed)
Mean Std. Deviation
Absolute Positive Negative
Improved focus on core competencies
46 2.80 1.529 .222 .222 -.218 1.508 .021
Improvement of R&D processes
47 2.53 1.213 .180 .180 -.142 1.235 .095
Gain of flexibility in R&D capacity
45 2.96 1.224 .160 .160 -.159 1.075 .198
Increase of depth and breadth of R&D
47 3.32 1.163 .210 .130 -.210 1.441 .031
Good way to enter the foreign market
46 2.78 1.298 .153 .140 -.153 1.041 .229
Pressure from proprietor to source R&D from outside the US
45 1.84 1.167 .343 .343 -.235 2.302 .000
Pressures from competitors
45 2.00 1.243 .301 .301 -.211 2.016 .001
Extension of already existing cooperation
46 2.98 1.374 .184 .153 -.184 1.251 .087
Strong psychological connections to foreign location
46 2.65 1.509 .211 .211 -.162 1.432 .033
Sourcing of highly available foreign know-how and skills
47 2.72 1.330 .172 .158 -.172 1.178 .125
Low personnel costs 46 3.17 1.355 .185 .133 -.185 1.258 .084
Low other costs 45 3.04 1.296 .192 .145 -.192 1.286 .073
Access to modern traditional infrastructure
46 2.24 1.320 .224 .224 -.174 1.520 .020
Access to modern IT infrastructure
46 2.41 1.343 .186 .186 -.146 1.262 .083
Access to research clusters and university collaborations
45 2.80 1.217 .187 .130 -.187 1.258 .085
Governmental incentives
45 2.56 1.358 .185 .185 -.139 1.242 .091
26 Insignificant values in bold
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Favorable administrative. institutional and legislative framework
43 2.33 1.210 .189 .189 -.153 1.240 .093
Loss of core business competencies
53 3.49 1.280 .202 .119 -.202 1.469 .027
Reduction of control and flexibility
52 3.87 1.103 .222 .152 -.222 1.598 .012
Reduction of stock of company know-how
50 3.50 1.374 .222 .137 -.222 1.570 .014
High transaction costs 52 3.60 1.287 .277 .138 -.277 1.997 .001
Confidentiality issues and privacy concerns
54 4.46 .818 .374 .256 -.374 2.748 .000
Loss of intellectual property rights to supplier
53 4.26 .836 .282 .189 -.282 2.056 .000
Poor public relations and client acceptance
52 2.50 1.379 .208 .208 -.142 1.498 .022
Cultural fit and corporate culture issues
53 2.68 1.384 .171 .171 -.151 1.242 .092
Lack of experience in foreign market and environment
52 2.96 1.400 .175 .150 -.175 1.260 .083
High initial set-up cost 52 3.17 1.200 .216 .130 -.216 1.559 .016
Insufficient skills and quality of foreign workforce
51 2.78 1.286 .155 .141 -.155 1.106 .173
Risk of unexpected cost increases
52 2.69 1.164 .186 .186 -.143 1.338 .056
Country specific risks 52 2.87 1.387 .195 .195 -.140 1.408 .038
US policy legally requires domestic R&D
51 2.47 1.617 .269 .269 -.182 1.924 .001
a. Test distribution is Normal. / b. Calculated from data.
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B.2 Independent-samples t-test
Group Statistics
Current R&D
offshoring
N Mean Std. Deviation Std. Error
Mean
Improvement of R&D processes Yes 25 2.60 1.155 .231
No 22 2.45 1.299 .277
Gain of flexibility in R&D capacity Yes 25 3.36 1.221 .244
No 20 2.45 1.050 .235
Good way to enter the foreign market Yes 25 2.76 1.480 .296
No 21 2.81 1.078 .235
Extension of already existing cooperation
Yes 24 3.33 1.404 .287
No 22 2.59 1.260 .269
Sourcing of highly available foreign know-how and skills
Yes 25 3.04 1.369 .274
No 22 2.36 1.217 .259
Low personnel costs Yes 25 3.60 1.291 .258
No 21 2.67 1.278 .279
Low other costs Yes 24 3.21 1.351 .276
No 21 2.86 1.236 .270
Access to modern IT infrastructure Yes 25 2.72 1.339 .268
No 21 2.05 1.284 .280
Access to research clusters and university collaborations
Yes 25 2.88 1.201 .240
No 20 2.70 1.261 .282
Governmental incentives Yes 25 2.64 1.350 .270
No 20 2.45 1.395 .312
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Independent Samples Test
Levene's Test
for Equality of
Variances t-test for Equality of Means
F Sig. t df
Sig.
(2-
tailed)
Mean
Differe
nce
Std.
Error
Differe
nce
95%
Confidence
Interval of the
Difference
Lower Upper
Improvement of R&D processes
Equal variances assumed
.833 .366 .406 45 .686 .145 .358 -.575 .866
Equal variances not assumed
.403 42.409 .689 .145 .361 -.582 .873
Gain of flexibility in R&D capacity
Equal variances assumed
.455 .503 2.641 43 .011 .910 .345 .215 1.605
Equal variances not assumed
2.687 42.741 .010 .910 .339 .227 1.593
Good way to enter the foreign market
Equal variances assumed
5.434 .024 -.127 44 .899 -.050 .389 -.833 .733
Equal variances not assumed
-.131 43.207 .896 -.050 .378 -.812 .713
Extension of already existing cooperation
Equal variances assumed
.550 .462 1.881 44 .067 .742 .395 -.053 1.538
Equal variances not assumed
1.890 43.983 .065 .742 .393 -.049 1.534
Sourcing of highly available foreign know-how and skills
Equal variances assumed
.462 .500 1.780 45 .082 .676 .380 -.089 1.442
Equal variances not assumed
1.793 44.992 .080 .676 .377 -.083 1.436
Low personnel costs
Equal variances assumed
.016 .901 2.454 44 .018 .933 .380 .167 1.700
Equal variances not assumed
2.456 42.785 .018 .933 .380 .167 1.700
Low other costs
Equal variances assumed
.301 .586 .905 43 .371 .351 .388 -.431 1.134
Equal variances not assumed
.910 42.900 .368 .351 .386 -.427 1.129
Access to modern IT infrastructure
Equal variances assumed
.116 .735 1.728 44 .091 .672 .389 -.112 1.456
Equal variances not assumed
1.735 43.198 .090 .672 .388 -.109 1.454
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Access to research clusters and university collaborations
Equal variances assumed
.275 .602 .489 43 .628 .180 .368 -.563 .923
Equal variances not assumed
.486 39.944 .630 .180 .370 -.569 .929
Governmental incentives
Equal variances assumed
.014 .905 .462 43 .646 .190 .411 -.639 1.019
Equal variances not assumed
.461 40.260 .648 .190 .413 -.644 1.024
Favorable administrative. institutional and legislative framework
Equal variances assumed
.007 .932 .378 41 .707 .141 .374 -.613 .896
Equal variances not assumed
.377 39.599 .708 .141 .375 -.616 .899
Cultural fit and corporate culture issues
Equal variances assumed
.010 .921 -3.076 51 .003 -1.089 .354 -1.800 -.378
Equal variances not assumed
-3.076 49.179 .003 -1.089 .354 -1.801 -.378
Lack of experience in foreign market and environment
Equal variances assumed
1.707 .197 -1.631 50 .109 -.625 .383 -1.395 .145
Equal variances not assumed
-1.610 45.304 .114 -.625 .388 -1.407 .157
Insufficient skills and quality of foreign workforce
Equal variances assumed
.024 .877 -.662 49 .511 -.241 .364 -.972 .490
Equal variances not assumed
-.661 46.890 .512 -.241 .364 -.973 .492
Risk of unexpected cost increases
Equal variances assumed
.373 .544 .091 50 .928 .030 .327 -.627 .686
Equal variances not assumed
.091 48.226 .928 .030 .328 -.629 .689
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B.3 Mann-Whitney U Test
Ranks
Current R&D offshoring N Mean Rank Sum of Ranks
Improved focus on core competencies
Yes 25 28.64 716.00No 21 17.38 365.00
Total 46
Increase of depth and breadth of R&D
Yes 25 28.38 709.50No 22 19.02 418.50Total 47
Pressure from proprietor to source R&D from outside the US
Yes 25 25.30 632.50No 20 20.13 402.50Total 45
Pressures from competitors Yes 24 23.71 569.00No 21 22.19 466.00Total 45
Strong psychological connections to foreign location
Yes 25 28.26 706.50No 21 17.83 374.50Total 46
Access to modern traditional infrastructure
Yes 25 25.62 640.50No 21 20.98 440.50Total 46
Loss of core business competencies
Yes 24 24.75 594.00No 29 28.86 837.00Total 53
Reduction of control and flexibility
Yes No Total
242852
24.46 28.25
587.00791.00
Reduction of stock of company know-how
Yes 23 22.78 524.00No 27 27.81 751.00Total 50
High transaction costs Yes 24 25.21 605.00No 28 27.61 773.00Total 52
Confidentiality issues and privacy concerns
Yes 24 24.94 598.50No 30 29.55 886.50Total 54
Loss of intellectual property rights to supplier
Yes No Total
24 24.54 589.002953
29.03
842.00
Poor public relations and client acceptance
Yes 24 19.42 466.00No 28 32.57 912.00Total 52
High initial set-up cost Yes 24 24.85 596.50No 28 27.91 781.50Total 52
Country specific risks
Yes 24 24.50 588.00No 28 28.21 790.00
Total 52
US policy legally requires domestic R&D
Yes 24 22.88 549.00No 27 28.78 777.00Total 51
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87
Test Statisticsa
Mann-Whitney U Wilcoxon W Z Asymp. Sig. (2-
tailed) Improved focus on core competencies
134.0 365.0 -2.921 .003
Increase of depth and breadth of R&D
165.5 418.5 -2.417 .016
Pressure from proprietor to source R&D from outside the US
192.5 402.5 -1.471 .141
Pressures from competitors 235.0 466.0 -.418 .676
Strong psychological connections to foreign location
143.5 374.5 -2.706 .007
Access to modern traditional infrastructure
209.5 440.5 -1.220 .222
Loss of core business competencies
294.0 594.0 -.993 .321
Reduction of control and flexibility 287.0 587.0 -.941 .347
Reduction of stock of company know-how
248.0 524.0 -1.253 .210
High transaction costs 305.0 605.0 -.596 .551
Confidentiality issues and privacy concerns
298.5 598.5 -1.248 .212
Loss of intellectual property rights to supplier
289.0 589.0 -1.146 .252
Poor public relations and client acceptance
166.0 466.0 -3.231 .001
High initial set-up cost 296.5 596.5 -.750 .453
Country specific risks 288.0 588.0 -.901 .368
US policy legally requires domestic R&D
249.0 549.0 -1.495 .135
a. Grouping Variable: Current R&D offshoring
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Appendix C: Ordered logistic regression
C.1 Ordinal regression output: v14 (share of foreign R&D personnel)
Case Processing Summary
N Marginal
Percentage
v14_2
More than 25% 11 16.2%
1-25% 11 16.2%
None 46 67.6%
Operation of a fab Yes 7 10.3%
No 61 89.7%
Importance of R&D
Core function 42 61.8%
Support function 16 23.5%
No R&D 10 14.7%
R&D department Yes 32 47.1%
No 36 52.9%
Sales outside US (%)
76-100% 11 16.2%
51-75% 11 16.2%
26-50% 16 23.5%
1-25% 24 35.3%
None 6 8.8%
Valid 68 100.0%
Missing 12
Total 80
Model Fitting Information
Model -2 Log Likelihood Chi-Square df Sig.
Intercept Only 116.111
Final 58.717 57.393 13 .000
Link function: Logit.
Goodness-of-Fit
Chi-Square df Sig.
Pearson 87.658 121 .990
Deviance 58.717 121 1.000
Link function: Logit.
Pseudo R-Square
Cox and Snell .570
Nagelkerke .696
McFadden .494
Link function: Logit.
GUSENBAUER Appendices
89
C.2 Ordinal regression output: v15 (share of foreign R&D expenditures)
Case Processing Summary
N Marginal
Percentage
v15_2
More than 25% 10 14.7%
1-25% 14 20.6%
None 44 64.7%
Operation of a fab Yes 7 10.3%
No 61 89.7%
Importance of R&D
Core function 42 61.8%
Support function 16 23.5%
No R&D 10 14.7%
R&D department Yes 32 47.1%
No 36 52.9%
Sales outside US (%)
76-100% 11 16.2%
51-75% 11 16.2%
26-50% 16 23.5%
1-25% 24 35.3%
None 6 8.8%
Valid 68 100.0%
Missing 12
Total 80
Model Fitting Information
Model -2 Log Likelihood Chi-Square df Sig.
Intercept Only 120.899
Final 69.185 51.714 13 .000
Link function: Logit.
Goodness-of-Fit
Chi-Square df Sig.
Pearson 80.354 121 .998
Deviance 69.185 121 1.000
Link function: Logit.
Pseudo R-Square
Cox and Snell .533
Nagelkerke .641
McFadden .428
Link function: Logit.
GUSENBAUER Appendices
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Appendix D: SME questionnaire27 Status of your firm
- Please note that many responses qualify as estimates or opinions. Therefore it is valid if the
questionnaire is answered differently depending on the respondent in your company.
- Please keep in mind that estimates are of greater value than no answer.
1. How would you describe the status of the business at this specific location? (v1)
Single establishment [value=1]
Branch of larger organization [value=2]
Subsidiary of larger organization [value=3]
Headquarters of larger organization [value=4]
Other (please specify)
Function of R&D within your company
Abbreviations:
R&D = research & development
2. What year was your company founded? (v2)
3. Please specify the total number of personnel in your company: (v3)
4. Does your company operate its own semiconductor fabrication plant (fab)? (v6)
Yes [value=1]
No [value=2]
5. How important is R&D as a function in your company? (v7)
R&D = creative work undertaken on a systematic basis to increase the stock of knowledge in order to
devise new applications (products or processes)
It is a core function that is crucially important for company success. [value=1]
It is a support function. [value=2]
We do NOT conduct R&D. [value=3]
6. Does your company maintain a distinct R&D department? (v8)
Yes [value=1]
No [value=2] 27 Questionnaire was accessible at Surveymonkey.com
GUSENBAUER Appendices
91
7. Please estimate the number of your company's R&D personnel that are partly or fully
engaged in R&D: (v9)
R&D personnel = researchers / technicians & equivalent staff / other supporting staff
8. Please estimate your company's R&D spending as a percentage of sales (known as R&D
intensity): (v11)
International focus of your company
9. Of your company's total sales, please estimate the share of sales generated outside of the
US in 2010: (v12)
76 - 100% [value=1]
51 - 75% [value=2]
26 - 50% [value=3]
1 - 25% [value=4]
None [value=5]
10. Has your company ever sourced/obtained R&D from outside the US, from an affiliated or
non-affiliated establishment? (v13)
Sourced R&D might constitute:
1) R&D services carried out abroad
2) Technologies developed abroad
3) Rights to technologies patented abroad
4) Other know-how developed abroad
Yes [value=1]
No [value=2]
Current situation of R&D in your company
11. From your total worldwide R&D personnel, please estimate the share of foreign
employed R&D personnel (partly or fully engaged in R&D): (v14)
R&D personnel = researchers / technicians & equivalent staff / other supporting staff
More than 40% [value=1]
25 - 40% [value=2]
15 - 25% [value=3]
5 - 15% [value=4]
1 - 5% [value=5]
None [value=6]
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12. From your total worldwide R&D expenditures, please estimate the share of foreign R&D
expenditures: (v15)
More than 40% [value=1]
25 - 40% [value=2]
15 - 25% [value=3]
5 - 15% [value=4]
1 - 5% [value=5]
None [value=6]
13. Please rank the following sources of foreign R&D according to their importance to your
company. (v16, v17, v18)
Please do NOT RANK option, if not used by your company.
Via a licensing arrangement with an independent foreign firm / R&D contracting or
sourcing from an independent foreign firm [value=1-3]
Via a foreign joint venture / R&D partnership with a foreign firm [value=1-3]
Via a foreign wholly owned subsidiary [value=1-3]
14. Please rate your level of satisfaction with sourcing R&D from the most important type of
establishment ranked above. (v19)
Very satisfied [value=1]
Satisfied [value=2]
Dissatisfied [value=3]
Very dissatisfied [value=4]
Future situation of R&D in your company
15. How likely is your company to expand/start its sourcing of R&D from abroad within the
next 5 years? (v20)
Planned / almost 100% sure [value=1]
Likely [value=2]
Unlikely [value=3]
We do NOT intend to expand/start our sourcing of R&D from abroad [value=4]
16. By what type of arrangement would you prefer to expand sourcing of R&D from outside
the US? (v21)
Via a licensing arrangement with an independent foreign firm / R&D contracting or
sourcing from an independent foreign firm [value=1]
Via a foreign joint venture / R&D partnership with a foreign firm [value=2]
Via a foreign wholly owned subsidiary [value=3]
Other (please specify)
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Motives for R&D sourcing
17. For what reasons would your company choose sourcing R&D from outside the US?
Please rate on a scale from "1 = Irrelevant" to "5 = Absolutely Essential". [value=1-5]
…it allows us to focus on our core competencies (v22)
…it improves our R&D processes (v23)
…we get more flexibility in our R&D capacity (v24)
…we can increase the depth and breadth of our R&D (v25)
…it is a good way to enter a foreign market (v26)
…our company's owner/s push us to source R&D from outside the US (v27)
…our competitors do it (v28)
…we use it to expand existing collaborations (v29)
…some employees have strong connections to the foreign location (migration
background, etc.) (v30)
…know-how and skills we need are more available abroad (v31)
…personnel costs are lower abroad (v32)
…other costs are lower abroad (facilities, energy, licensing requirements, etc.) (v33)
…we get access to modern (traditional) infrastructure (roads, railway system, electricity,
etc.) (v34)
…we get access to modern information technology infrastructure (v35)
…we get access to research clusters and university collaborations (v36)
…the foreign government gives us incentives (tax breaks, subsidies, grants, etc.) (v37)
…the foreign administrative, institutional and legislative framework is favorable (v38)
Other absolutely essential reasons (please specify) (v39)
Obstacles for R&D sourcing
18. For what reasons would your company choose NOT to source R&D from outside the US?
Please rate on a scale from "1 = Irrelevant" to "5 = Absolutely Essential". [value=1-5]
…it would dilute the focus on our core competencies (v40)
…we would lose control and flexibility over decisions, R&D process, cost, performance, etc.
(v41)
…it reduces our stock of company know-how (v42)
…it is too much effort to source abroad (communication, contracts, travelling, etc.) (v43)
…our data might not be safe and intellectual property could be stolen (v44)
…we would lose the intellectual property rights to the source (supplier) (v45)
…it would bring bad public relations and clients might not accept it (v46)
…it would not fit our corporate culture and/or foreign culture is too different (v47)
…we have too little experience in the foreign market and environment (v48)
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94
…initial set-up costs are too high (plant, training, etc.) (v49)
…foreign personnel do not have enough skills / the quality of the workforce is too inferior
(v50)
…costs might increase unexpectedly (wages, exchange rate fluctuations, etc.) (v51)
…there is too much political, legal or economic instability in selected countries (v52)
…US policy requires us to keep our R&D within the US (v53)
Other absolutely essential reasons (please specify) (v54)