Relocation, innovation, and the difference that firm size makes: insights for global sourcing strategies of SMEs

Although small and medium-sized enterprises increasingly utilize global sourcing strategies which involve the spatial relocation of their business activities, little is known about the effects of these strategies on firm performance—particularly firm innovativeness. Here, we analyze if alternative relocation strategies, specifically domestic and international relocations, differ in their performance effects on firm innovativeness by firm size and organizational configuration. Our econometric approach uses detailed micro data for German firms, and the empirical findings indicate that both product and process innovation rates negatively respond to international but not domestic relocations. Effects are more pronounced for smaller firms and are mainly associated with outsourcing arrangements. Only for large firms we observe a positive association between relocation and firm innovativeness. This indicates that short- to mid-run organizational costs associated with relocation activities can generally be better covered by larger firms.