Managing Innovation Spillover in Outsourcing

When an innovator outsources the manufacturing of an innovative product to a contract manufacturer (CM) which is also a competitor in the end market, the potential innovation spillover may be a serious concern. We study an innovator’s outsourcing decision under spillover risks with an emphasis on the ex ante uncertain values of innovations, and distinguish between technical innovations which can only spill over through outsourcing and non-technical innovations which can also spill over in the market. We find that in both cases an innovator may strategically outsource to a competitor-CM, albeit for distinct motivations: for technical innovations, it is done so that the competitor-CM would yield market leadership to the innovator; and for non-technical innovations, it is done so that the competitor-CM would face innovation uncertainties alongside the innovator.