Changing Paths: The Impact of Manufacturing Offshore on Technology Development Incentives in the Optoelectronics Industry

Abstract

This paper presents a case study of the impact of manufacturing offshore on the technological trajectory of the firm and the industry. It looks in particular at the optoelectronics industry. The paper uses a combination of simulation modeling and qualitative research methods to develop grounded theory. The results suggest that firms face an important dilemma. In the case of optoelectronic firms, they are able to reduce short-term costs by manufacturing offshore; however, manufacturing offshore creates a combination of cost and knowledge constraints which limit the firms’ ability to pursue critical innovations. These results are also of interest to those concerned with trade policy. The interest here is two fold. First, the optoelectronics industry is of strategic importance in the evolution of industrial technology and thus is important to national policy. The paper’s principal finding that manufacturing offshore reduces incentives for innovation raises serious questions about the appropriateness of an offshore manufacturing policy in the long run. Second, the case challenges more generally conventional theories of trade, particularly their underlying assumptions about the long term dynamic effects which work through technological change. This case raises the troublesome question of whether these effects might be generally perverse and reduce or possibly eliminate the gains from trade over the long term.