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This paper examines how heterogeneous offshore outsourcing demands affect an insourcing firm's innovation choices, how its choices affect an outsourcing firm's decision on what to outsource, and how these two dynamic decision interactions consequently shape an insourcing firm's organizational innovation capability. This paper contributes to the understanding of outsourcing demand pull innovation in several vital ways: First, this paper collect firm-level data of two types of offshore outsourcing contracts and two types of R&D investments in the IT hardware industry, a type of data that was previously nonexistent but sorely needed to deepen the understanding. Second, the theoretical and empirical results show that an insourcing firm's innovation decision depends on the type of its outsourcing demand, technological advantage, and industry's competitive and technological environment.
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