Beyond Cost: The Role of Intellectual Capital in Offshoring and Innovation in Young Firms

1042-2587
© 2011 Baylor University

E T&P

Beyond Cost: The Role
of Intellectual Capital
in Offshoring and
Innovation in
Young Firms
Martina Musteen
Mujtaba Ahsan

Using the intellectual capital perspective as a theoretical framework, we develop a conceptual model of offshoring of knowledge-intensive, complex work by young, entrepreneurial
firms. We posit that the unique qualities of human, social, and organizational capital of such
firms drive them to offshore complex, nonroutine activities to foreign vendors. In addition,
we argue that offshoring of such activities can lead to innovation under certain intellectual
capital configurations.

Over the past several years, the topic of offshoring and outsourcing has become the
subject of attention of both academics and managers. Recently, scholars have been

1

debating the changing nature of offshoring practices. They note that offshoring no longer
involves only low-wage and low-skill production activities but also more technologically
sophisticated activities including engineering and research and development (R&D;
Grimpe & Kaiser, 2010; Manning, Massini, & Lewin, 2008). In addition, offshoring is no
longer a domain of large corporations but it also occurs among young, entrepreneurial
firms (Engardio, Arndt, & Faust, 2006). While research on offshoring by large corporations has grown into a large body of literature, our understanding of the motivations and
payoffs of offshoring undertaken by young firms is limited. One of the few studies that
investigated the offshore outsourcing of smaller, entrepreneurial firms is that by Di
Gregorio et al. (2009). It indicates that the practice is more common than expected and
that cost does not always appear to be the primary driver of offshoring by small, and often
younger, firms. Furthermore, Di Gregorio et al. provide some preliminary evidence that
Please send correspondence to: Martina Musteen, tel.: (619) 594-8346; e-mail: mmusteen@mail.sdsu.edu,
and to Mujtaba Ahsan at mahsan@pittstate.edu.
1. The terms offshoring and outsourcing have been defined in various ways (e.g., Mol, van Tulder, & Beige,
2005; USGAO, 2004; Venkatraman, 2004) and sometimes used interchangeably. In this study and consistent
with Di Gregorio, Musteen, and Thomas (2009, p. 971), the focus is on the international outsourcing (or
offshore outsourcing), a practice whereby a firm shifts some of its business processes to a foreign third-party
vendor. Thus, it excludes domestic outsourcing and captive offshoring (i.e., internally managed foreign direct

investment).

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DOI: 10.1111/j.1540-6520.2011.00477.x
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offshoring of more technologically sophisticated and knowledge-intensive activities such
as software development or engineering may lead to better performance outcomes than
offshoring of routine, manufacturing tasks. A few other studies (e.g., Klaas, Klimchak,
Semadeni, & Holmes, 2010; Lewin, Massini, & Peeters, 2009) have also suggested that
international outsourcing of knowledge-intensive, complex work (as opposed to routine,
manufacturing tasks) may be associated with the development of new capabilities on the
part of the offshorers. Our research note seeks to extend this line of research. It draws on
the literature on intellectual capital to develop a conceptual model of offshoring of
knowledge-intensive work by young entrepreneurial firms and start-ups. Such firms are
subject to a special set of challenges due to their small size, resource constraints, and lack

of institutional legitimacy but are also characterized by distinct competitive advantages
arising from organizational agility, ability to leverage external, socially embedded
resources, and strategic flexibility. Thus, their motivations for offshoring as well as the
benefits they accrue from offshoring arrangements are likely to be different from those of
larger established firms.
Most of the extant research on offshoring has focused on the cost benefits associated
with the practice. The offshoring literature has been rather silent on one of the potential
benefits of offshoring—innovation.2 Innovation has long been viewed as key to achieving
sustainable competitive advantage and superior profitability (Conner, 1991) and young
firms have often been seen as the primary drivers of innovation (more so than larger firms;
Acs & Audretsch, 1990). Drawing on organizational learning and network perspectives,
we posit that the human, social, and organizational dimensions of intellectual capital of
young firms represent a driver of offshoring of knowledge-intensive activities. Moreover,
we identify processes that emerge as a result of offshoring of knowledge-intensive activities and lead to innovation. Most importantly, we theorize that whether or not offshoring
results in greater innovation depends on the qualities of the intellectual capital embedded
in the offshoring firms.
Our research note makes three main contributions to the extant literature. First, we
extend the research on offshoring by examining the phenomenon in the context of
young firms and by focusing on the most recent “new generation” of offshoring
whereby knowledge-intensive processes are outsourced internationally by such firms.

We push the offshoring research agenda forward by offering an empirically testable
conceptual model, which links firm-specific characteristics to offshoring and identifies
processes that are likely to lead to innovation. Second, by examining the intellectual
capital dimensions of young firms and their impact on offshoring and innovation, we
also contribute to the literature on intellectual capital. Most research on intellectual
capital has focused on large firms or considered only one dimension of the construct.
Our study extends the literature by describing how human, social, and organizational
dimensions of intellectual capital affect the decision to offshore important value chain
activities and how they enable innovative behavior of young firms. Third, we contribute
to the growing international entrepreneurship (IE) literature. As Di Gregorio, Musteen,
and Thomas (2008) suggest, only a few IE studies considered internationalization of
firms’ value chain activities other than international sales. Our study examines how
shifting “upstream” value chain activities to international partners affects innovation,
which, in turn, enhances international competitiveness of young firms (Di Gregorio
et al., 2009).

2. In this note, we use a broad definition of innovation that encompasses both radical and incremental changes
in products and processes.

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The balance of the paper is structured as follows. First, we provide a brief overview
of the intellectual capital construct. Then, we describe how its three dimensions—
human, social, and organizational—act as a driver of offshoring of young firms. We
follow by theorizing how offshoring leads to innovation and how intellectual capital
represents a catalyst to such innovation. We conclude with a discussion of the implications of the theoretical model for research and practice and provide avenues for future
research.

Theoretical Background
Intellectual capital has been defined as the sum of all knowledge that firms utilize for
competitive advantage (Subramaniam & Youndt, 2005). Considered to represent firms’
stock of most important intangible resources (Rialp & Rialp, 2006), intellectual capital
consists of three interrelated dimensions—human, social, and organizational capital.
Human capital is defined as the knowledge, skills, and abilities of individuals (Schultz,
1961) while social capital refers to the resources derived from social relationships both
within and across organizations (Nahapiet & Ghoshal, 1998). Organizational capital
relates to firm’s knowledge embedded in routines, structures, systems, and processes
(Subramaniam & Youndt).

The three dimensions of intellectual capital have been found to be closely related to
firms’ configuration of value chain activities. Youndt, Subramanian, and Snell (2004), for
example, observed that firms with high levels of human, social, and organizational capital
tend to invest heavily in information technology and R&D. Kang and Snell (2009) noted
that different intellectual capital architecture directly influences the configuration of
human resource management activities. Thus, the intellectual capital perspective lends
itself well to the examination of young firms’ outsourcing of high-skill, knowledgeintensive activities to international vendors. This is particularly true from the perspective
of IE literature that views internationally active ventures and young firms as distinctively
skilled in integrating international economic activities (Matthews & Zander, 2007). In the
next sections, we discuss how intellectual capital drives offshoring of complex, valueadding activities by young firms and how intellectual capital functions as a catalyst for
offshoring-based innovation. The visual representation of our conceptual model is presented in Figure 1.

Intellectual Capital as a Driver of Offshoring by Young Firms
The intellectual capital of young firms is qualitatively different from intellectual
capital of larger, established firms. Each of its dimensions—human, social, and
organizational—is likely to play a unique role in young firms’ motivations to outsource
their knowledge-intensive processes to international vendors. We detail our arguments
linking the intellectual capital dimensions to offshoring below.

Human Capital and Offshoring

Because they are often cash-starved, young firms face challenges when they seek to
develop high-quality human capital. Given their resource constraints, it is generally
difficult for them to recruit qualified professionals and experts at the same level as
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Figure 1
Conceptual Model of Young Firms’ Intellectual Capital, Offshoring,
and Innovation

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larger, established firms (Desouza & Awazu, 2006). This is exacerbated by the tight
labor market for expert knowledge workers, stricter visa requirements on immigrant
workers (Bhide, 2008) and the recent pressure on companies to expense stock options
(a traditional form of compensation in start-ups). The human capital of young firms is
also characterized by a greater number of generalists (i.e., less-specialized employees)
given that fewer individuals are expected to perform a greater variety of functions. This
lack of specialist expertise along with little support for specific employee training and

development programs translate into relatively low levels of human capital. Yet, attracting, retaining, and motivating expert workers have been identified as one of the critical
drivers of product innovation among small firms (Branzei & Vertinsky, 2006). Given the
abundance of relatively inexpensive, educated labor abroad, it is not surprising that
young firms consider offshoring of its knowledge-based processes as a way to access
talent and supplementing their stock of human capital. Indeed, according to Ernst
(2006), competing in the emerging global market for knowledge workers has become
critically important as it creates new sources of talent. Thus, offshoring of knowledgeintensive process is one way of overcoming human capital deficiencies on the part of
young firms.

Social Capital and Offshoring
The unique nature of social capital in young firms is another reason why such firms
increasingly turn to offshoring of their more complex, value-added activities. Research
in entrepreneurship has shown that young firms rely extensively on external (or bridging) relationships to obtain resources and achieve profitability (Davidsson & Honig,
2003). Young firms have been shown to take advantage of strategic alliances and membership in networks to reduce uncertainty, enhance credibility, and gain access to opportunities and competencies (McEvily & Zaheer, 1999). As Baum, Calabrese, and
Silverman’s study (2000) suggests, young start-ups are particularly motivated to form
partnerships with others to gain access to social, technical, and commercial competitive
resources that normally require years of operating experience. Increasingly, because of
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the advances in technology and falling communication barriers, such firms are also
beginning to tap relationships with individuals and firms abroad (Preece, Miles, &
Baetz, 1999). This enables them not only to take advantage of opportunities in the
foreign product markets but also to revamp their value chains (Di Gregorio et al., 2008)
by way of offshoring.
The bridging form of social capital that young firms skillfully develop and leverage is
thus another driver of international outsourcing of knowledge-intensive activities by
young firms. Many new entrepreneurial businesses take advantage of their bridging ties
(i.e., personal connections) that their first-generation immigrant managers or employees
have with their home countries in the offshore regions in India and China (Saxenian,
2002), for example. Such relationships provide young firms with information on potential
offshoring opportunities and also on the practice of offshoring itself. This decreases the
cost of searching for potential vendors and enhances confidence of young firms in their
ability to manage the offshore arrangement.

Organizational Capital and Offshoring
Finally, the organizational capital of young firms is another factor that induces young
firms to offshore their value-added, knowledge-intensive work. Emerging businesses are
typically very different from larger corporations in terms of their organizational structure

and processes. For one, such firms often compete in specialized, niche markets with a set
of fairly narrowly defined know-how. To compete with larger, more established firms, they
must continually update their stock of capabilities and respond actively to changes in the
external environment. The lack of economies of scale makes it difficult for young firms to
develop many auxiliary and support functions and services. Thus, offshoring of at least
some of such activities (e.g., software development, engineering, human resources, and
R&D work) may be particularly beneficial. As Arend and Wisner (2005) suggest, by
handing over noncore business activities, young firms can leverage their scalable competencies such as new product development and design. Externalizing their value chain
activities to foreign suppliers further enhances young firms’ flexibility and responsiveness, qualities that are often lacking in large, established multinationals (Liesch & Knight,
1999).
Low levels of formalization, organic structure, and entrepreneurial culture are typically considered to be an advantage of start-ups and young firms. However, they also
contribute to the resistance to codification and effective embedding of organizational
knowledge (Feldman & Klofsten, 2000). As Jones and Macpherson (2006) documented,
such firms often look to external organizations (e.g., suppliers, customers) to help them
develop systems, routines, and procedures necessary to develop organizational knowledge. They found that by turning to external organizations, resource-constrained firms
can overcome the disadvantages associated with low levels of organizational capital.
Thus, contracting with a foreign provider of a business service such as back-office
information technology, customer care, or higher skill business processes can be viewed
as giving young firms the benefit of both tapping organizational knowledge of others
while focusing on the activities that form the core of their competitive advantage.

Offshoring-Based Innovation
In the previous section, we discussed how the unique nature of intellectual capital of
young firms drives such firms to outsource complex, knowledge-intensive activities to
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offshore partners. Indeed, offshoring can supplement, augment, and leverage the intellectual capital available to emerging businesses. In this section, we theorize how offshoring
helps firms innovate. In the following section, we explain how the three dimensions of
intellectual capital enable such innovation.
Literature states that young firms must view innovation as a priority and utilize a
strategy of exploiting advantages of flexibility, speed of response, and external sources
of knowledge to produce innovations and compete with larger and more established
firms (Acs & Audretsch, 1990; Zahra, Sapienza, & Davidsson, 2006). Innovation has
also been viewed as key to attaining global competitiveness (Knight & Kim, 2008).
Previous research (e.g., Barnett & Storey, 2000; McCann, 1991) also suggests that
young firms do not innovate in formally recognized ways. That is, as opposed to larger,
established firms, they tend to innovate through ad hoc improvisation, not through
formal scientific experimentation (Zahra et al.). The process and product innovation of
emerging businesses is often based on their ability to rapidly integrate, develop, and
reconfigure their internal capabilities and external competencies in order to address the
changing environmental conditions and needs of their customers (Cusmano, Mancusi, &
Morrison, 2009). An important element in such an innovation process of young firms is
the speed with which they commercialize and bring new technologies to market. Offshoring of certain high-end, knowledge-intensive work helps them do so. Instead of
developing competencies in-house, offshoring of such activities to qualified partners
allows young firms to decrease their lead times and focus on marketing of their products
and services in the local market.
According to Bhide (2009), most young firms that innovate are niche players that
focus on customization of products or services marketed to other businesses. Offshoring
helps such firms minimize the risk associated with developing innovative new offerings.
For example, they can hand over the development of peripheral projects that have not
yet been commercially proven but can potentially improve their core offering.
Chesbrough and Garman (2009, p. 71) refer to this process as an “inside-out open
innovation,” which allows firms to “reduce R&D costs without relinquishing related
growth opportunities.” This increases their chances of successful innovation commercialization (Carayannopoulos, 2009).
Offshoring also provides young firms the opportunity to access new and diverse ideas
from a variety of supply markets and cultural perspectives. That can lead to innovation in
terms of new products and processes (Miller, 1996) but also improved business models.
According to Chesbrough (2007), innovation in business models is difficult. The most
advanced, innovative business models are those based on bringing together external
technologies and integrating suppliers into the internal processes. Offshoring of
knowledge-intensive activities is most likely to create conditions where entrepreneurs
recognize opportunities for doing so. Unlike international outsourcing of routine, lowskill tasks, offshoring of activities such as software development, product design, engineering, and R&D requires intensive intra-organizational collaboration and transfer of
information between the offshoring company and the foreign service provider. It develops
over an extended period of time, making the offshore relationship less transactionoriented and more cooperative in nature (Vivek, Richey, & Dalela, 2009). The greater
“customer-stickiness” associated with offshoring of complex, knowledge-intensive activities enables young firms to share knowledge and find novel ways of combining resources
and improving their processes.
While young firms offshoring knowledge-intensive work to foreign providers are in a
better position to innovate, the degree to which such offshoring actually results in innovation, however, is likely to be contingent on the configuration of their intellectual capital.
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In the next section, we describe how the human, social, and organizational dimensions of
young firms’ intellectual capital influence offshoring-based innovation.

Intellectual Capital as a Catalyst for Offshoring Innovation
Hayton and Zahra (2005) found that the level of human capital in young technology
firms plays an important role in the relationship between international venturing and
innovation. They argued that human capital enhances the absorptive capacity (i.e., the
capacity to learn and commercialize new knowledge). We expect a similar dynamic in
the context of offshoring. Specifically, we argue that whether or not young firms will be
in a better position to innovate as a result of a relationship with their offshore partners will
be contingent on the level of their human capital. Their human capital will determine how
receptive they will be to new ideas and how efficient they will be in discovering and
exploiting new ways of creating value by absorbing and reconfiguring knowledge from
offshore partners. Start-ups headed by more educated and experienced entrepreneurial
teams are expected to be more open to new solutions to problems in production processes
that arise as a result of offshoring arrangements. They are also more likely to appreciate
the talent and absorb the knowledge of the highly skilled employees of the offshore
providers and apply it in new, radically different ways (Subramaniam & Youndt, 2005).
Technologically savvy start-ups (i.e., those headed by entrepreneurial teams consisting of
engineers and highly trained personnel) are likely to be more skilled in learning about new
technologies from their offshore partners and using them to adjust their own organizational processes. Thus, by affecting the absorptive capacity of young firms, the quality of
human capital is likely to influence the degree to which offshoring will lead to innovation.
Social capital of young firms is another important factor determining whether or not
offshoring of knowledge-intensive activities will lead to more innovative activities.
Because of their size, young firms are less likely to use multiple offshore providers for a
particular activity. In addition, they often cannot afford to duplicate the activity in-house,
which would allow them to hedge against the risk of poor quality and/or opportunism on
the part of the foreign provider. This increases the risk of loss should the partnership
terminate. The risk of loss as a result of poor performance on the part of the offshore
service provider is further exacerbated by the fact that young firms rarely have the
resources to bring lawsuits that would enforce contracts with their international partners.
One way to manage such a risk is to create a trustworthy, close relationship with their
offshore partner. This type of relationship has been shown to function as a (trust-based)
governance mechanism that ensures that the partners deliver on their promises and have
the intention to continue the relationship over the long term (Dyer & Singh, 1998). In
other words, in order to reduce the risk of opportunism and nonperformance on the part
of their offshore partner, young firms must invest in bonding social capital. The degree to
which they are able to do so also affects the likelihood that the offshore partnership
will lead to innovation. This is because the bonding form of social capital that emerges as
a result of greater trust tends to encourage more information sharing, collaboration, and
creation of specialized knowledge. That, as observed by Vivek et al. (2009), provides a
platform for discovery of new ways of operating and development of new capabilities.
Moreover, bonding social capital associated with the offshoring relationship is also likely
to increase the likelihood of the offshore partners making relationship-specific investments (Levina & Su, 2008), which are necessary for exploration of new ideas, and
ultimately, innovation (Zollo, Reuer, & Singh, 2002). Thus, by creating conditions for
greater information exchange and relationship-specific investments, social capital of
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offshoring young firms is likely to enhance chances that such firms reap offshoring-based
innovation benefits.
Finally, the degree to which offshoring of knowledge-intensive work leads to innovation among young firms is likely to be contingent on the nature of their organizational
capital. Young firms and new ventures possess a stock of organizational capital that is very
different from that of larger, well-established corporations. While lack of such organizational capital (embedded in manuals, systems, and formal structures) is one of the reasons
why young firms are initially motivated to offshore some of their knowledge-intensive
activities, the lack of rigid, bureaucratic structures and few reporting procedures provide
benefits in terms of less-constricted information flows within and outside the organization.
This can lead to greater absorptive capacity (Lane & Lubatkin, 1998) wherein young firms
easily recognize and implement new ideas in their routines and processes. The IE literature
refers to such ability as the “learning advantage of newness” (Zahra, 2005). This unique
nature of organizational capital enhances the learning that occurs within the offshoring
relationship and ultimately should lead to greater innovation. Specifically, the lack of
formal organizational systems and processes enables young firms to gain as well as quickly
implement creative insights from the cooperation with their offshore service providers. The
high involvement of owners-managers in the offshore relationship (which is unique to
young firms) facilitates the dissemination of such new knowledge to creative uses in their
organizations. Thus, unhindered by organizational capital embedded in rigid routines and
codified practices, young firms are more flexible and thus in a better position to put into
practice and act upon novel solutions emerging from their offshore arrangements.
Taken together, each of the intellectual capital dimensions impacts the degree to
which firms can attain benefits of offshoring-based innovation. This occurs by affecting
the absorptive capacity, the motivation to engage in offshore relationship-specific investments and information sharing, and flexibility to implement new ideas.

Discussion
Using the intellectual capital perspective as a theoretical framework, we sought to
deepen our understanding of the “new generation” of offshoring whereby young firms
outsource some of their high value-added, knowledge-intensive activities to international
vendors. First, we examined how intellectual capital of young firms acts as a driver of such
offshoring. Our analysis revealed that there are many reasons other than cost savings that
induce young firms to offshore their knowledge-intensive activities. Specifically, the
deficiencies in human and organizational capital of young firms push them to tap the talent
of their offshore vendors while retaining their flexibility. In addition, their social capital
and the ability to harness external resources of others make young firms uniquely positioned to learn about and leverage offshore partnerships. Second, we argued that offshoring of knowledge-intensive activities can lead to greater innovation on the part of the
young firms. However, this is contingent on their intellectual capital configuration. In
other words, the level of human, social, and organizational capital is an important factor
in offshoring-based innovation by enabling mechanisms such as enhanced learning and
absorptive capacity, information sharing, relationship-specific investments, and organizational flexibility, which are antecedents for such innovation.

Theoretical Implications
By drawing on the intellectual capital perspective and extant research on offshoring, we
make important contributions to several streams of literature. First, we add to the offshoring
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literature by explaining the relatively new phenomenon of young firms’ offshoring of
technologically sophisticated, knowledge-intensive activities. We conceptualize the role
of the intellectual capital in offshoring of such activities as a two-stage model where the
unique configuration of intellectual capital of young firms pushes such firms to offshore
high value-added work and it also affects the degree to which they benefit from the
offshoring relationship. In doing so, we extend Vivek et al.’s (2009) and Di Gregorio et al.’s
(2009) research that suggested that lower cost is no longer the only motivation to outsource
value chain activities internationally. In our paper, we focus on one such non-cost
benefit—innovation. We thus contribute to the literature on innovation by identifying
the ways young companies can gain new insights and engage in creative cooperation with
their offshore partners. Specifically, we outline how (i.e., through which processes)
intellectual capital of young firms catalyzes and enables generation of new ideas and
solutions in the context of the offshoring relationship, which ultimately leads to greater
innovation. Our paper is one of the first to present testable conceptual model linking the
unique qualities of young firms (e.g., relative lack of human capital, strong reliance on
relational forms of governance with external partners, and organic structure) with the “new
generation” of offshoring and the outcomes associated with the same.
Our paper also represents a contribution to the emerging literature on IE, a stream of
research on innovative, risk-taking behavior of firms across national borders (McDougall
& Oviatt, 2000). While most studies of IE have focused on exploitation of opportunities
in terms of foreign sales and product markets (Di Gregorio et al., 2008), our model
suggests that young firms can also reap substantial benefits by exploring opportunities in
internationalization of their value chains via offshoring. As Zahra (2005) noted in his
article on theory of international new ventures (INVs), one of the critical insights of Oviatt
and McDougall’s (1994) seminal paper was that firms that internationalize at or soon after
inception (i.e., INVs) do not typically own all the resources necessary to internationalize
their operations. Our work draws the attention to the importance of tapping external
capabilities of offshore partners. Specifically, we have focused on the innovation-based
benefits conferred on young firms that internationalize some of their complex, knowledgeintensive work to foreign partners.
Finally, our work presents a complementary perspective on the motivation for internationalization of young firms. In general, the IE literature has suggested that three factors
motivate young ventures to compete globally. First, their tendency to operate in niche
markets limits their market opportunities locally. This makes it important for them to
expand internationally to achieve sales growth. Second, the high cost of research and
development makes international expansion a necessity to achieve growth and support
such large upfront costs. Third, the speed of technological change and product obsolescence forces them to accelerate market penetration. Under the conditions of intense
competition, the speed of product and market development becomes critically important
for young firms’ success (Preece et al., 1999, p. 261). Our paper suggests that through
offshoring, young firms can not only overcome the large upfront costs and lead times
associated with product development, but they can also attain resources necessary for
innovation. Given the avowed link between survival and growth of young firms and
innovation, our paper draws the attention of scholars toward “innovation-seeking” offshoring behavior in young firms and thereby makes a contribution to the IE literature.

Implications for Entrepreneurs
From the practitioners’ viewpoint, the ideas in our paper raise the awareness of
offshoring partnerships as potential sources of innovation. However, it cautions that such
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innovation is not guaranteed as it depends on the levels of human, social, and organizational capital in their organizations. For example, our model suggests that offshoring can
help young firms overcome the deficiencies in their human resources. However, such firms
must have the absorptive capacity—the capability to learn and recognize new knowledge
and apply it to new solutions in order to tap the innovation benefits of offshoring. This
requires human capital that has the requisite technological and marketing knowledge. Our
model also indicates that young firms (more so than established corporations) should
invest in social capital in their offshore partnerships. This represents a form of governance
as well as facilitates relationship-specific investments and information sharing between
the partners, which promotes innovation.

Operationalization and Empirical Testing
The natural next step in advancing our research is testing our model empirically. The
literature on offshoring of knowledge-intensive work is still relatively limited. Therefore,
the existing measures are also few, typically consisting of survey items asking offshoring
firms about the activities they outsource to foreign vendors (Weigelt, 2009). In some
studies, offshoring has been conceptualized as a nominal variable indicating whether or
not a firm offshores a particular activity (Di Gregorio et al., 2009). Fortunately, researchers interested in empirical testing of our theoretical model can rely on numerous measures
of intellectual capital (e.g., Davidsson & Honig, 2003; Hayton & Zahra, 2005; Marvel &
Lumpkin, 2007; McEvily & Zaheer, 1999).
Given the mediating and moderating relationships proposed in our model, empirical
testing of our propositions will be best suited for structural equation modeling techniques. Qualitative studies are also likely to be helpful in assessing the validity of the
theoretical model and motivations of firms to offshore their knowledge-intensive work
and provide insights on the processes that we identified as leading to offshoring-based
innovation.

Boundary Conditions and Future Research
Our theoretical model raises several questions regarding its boundary conditions.
First, does it apply to all young firms? The IE literature suggests that venture capitalists
(VCs) have been shown to play a major role in internationalization of small and young
companies (Fernhaber & McDougall-Covin, 2009). According to Bhide’s (2008) recent
study of 106 U.S.-based, VC-backed businesses, VCs put significant pressure on young
firms to offshore their activities abroad. In some cases, VC firms were found to use
offshoring as an investment criterion. In other cases, VCs facilitated outsourcing of certain
activities to foreign vendors. Thus, VC-backed firms may be expected to be more inclined
to offshore their processes abroad than firms that obtain financing through other sources.
Our theoretical model may also be limited to firms with more sophisticated and
technology-based business models. As Rialp, Rialp, and Knight’s (2005) review of the
IE literature suggested, most studies on international new ventures have focused on
firms in high-tech industries because such industries are often most globally integrated
and subject to significant competitive pressures. Thus, companies in knowledgeintensive industries are likely to feel even more pressures to offshore to gain access to
the requisite human capital and take advantage of enhanced speed in their innovative
activities, which offshoring provides. Besides testing our theoretical model empirically,
future research should strive to delineate more clearly the boundaries mentioned above.
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On a macroeconomic level, it would be interesting to see if there are longitudinal and
geographical patterns in offshoring of knowledge-intensive activities by young firms.
With further falling of barriers to finding qualified offshore partners and technology
enabling shifting such activities abroad, it is likely that we will see more offshoring
particularly by high-tech start-ups.
On the firm level, future studies should seek to identify other mediating and moderating factors of offshoring by young firms and its impact on firm-level innovation. For
example, how does the age of the firms influence their proclivity to outsource complex,
knowledge-based activities to foreign service providers? Very young start-ups, despite
their lack of human capital, may be more inclined to keep most of their activities in-house
or choose onshore partners, given that their value chain activities are very fluid and it may
be difficult to distinguish core activities from those that can be outsourced. Young firms
that have had time to establish some routines and processes may be therefore better
candidates. Another valuable extension of our work would address the question whether
offshoring of certain knowledge-intensive processes leads to more innovation than others.
A recent research by Grimpe and Kaiser (2010) suggested that R&D outsourcing can lead
to innovation but only to a certain point. It may be interesting to examine how offshoring
of other knowledge-intensive activities such as software development or engineering
differs in terms of its impact on innovation.
In conclusion, the objective of this research note was to examine the role that the
intellectual capital plays in the offshoring of knowledge-intensive work by young companies. In doing so, we shed more light on a relatively new trend of young firms’
offshoring (Dossani & Kenney, 2007). We hope our work stimulates further research on
this topic.

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Martina Musteen is an Associate Professor in the College of Business Administration at the San Diego State
University.
Mujtaba Ahsan is an Assistant Professor of Management in the Kelce College of Business at the Pittsburg
State University.
The authors wish to thank the editor, Dr. Friederike Welter, and two anonymous reviewers for their invaluable
comments. This research was supported in part by San Diego State University’s (SDSU) Center for International Business Education and Research (CIBER), SDSU University Grant, and Pittsburg State University’s
Youngman Grant (Summer Research Grant). An earlier version of this manuscript was presented at the 2009
Academy of Management conference in Chicago, IL.

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