Understanding offshoring: A research framework based on disintegration, location and externalization advantages

We present an analytical framework explaining offshoring in this paper. We address the question: why do firms offshore their business functions? Given the growing prevalence of offshoring as a dominant business practice in the world of global business, this question merits further research attention. We propose that firms embark on offshoring when they perceive three sets of interrelated advantages: disintegration advantages (D), location-specific resourcing advantages (L) and externalization advantages (E). Theories from multiple disciplines form the foundation of Disintegration–Location–Externalization (DLE) framework. Implications for managers, government policy makers and recommendations for future research are explored.     

Innovativeness,offshoring and black economy decisions. Evidence from Italian manufacturing firms

Following recent models in international trade this paper examines the characteristics that businesses should possess to pursue internationalization strategies. We do this in the peculiar context of Italy, the G-7 country with the largest share of the black economy in GDP. Specifically, we posit that Italian manufacturing firms may use three strategies to counter the competitive threats by emerging economies: (i) improve the innovative content of their products (ii) venturing into offshoring, or, alternatively, (iii) entering the black economy. We estimate the impact of these moves with firm-level data drawn from two waves of the Italian Manufacturing Survey (IMS) covering a six-year period (1998–2003). We find that offshoring firms are larger, more innovative, have higher capital/labour ratio and are located in provinces where the share of the black economy is lower. Firms belonging to provinces in which the share of the black economy is larger are less likely to choose the internationalization mode. The offshoring-black economy nexus bears relevant policy implications. In particular, vis-à-vis their offshoring companions, firms choosing to enter the black economy may be producing negative spillover effects by lowering productivity and the propensity to innovate.     

Home bitter home: How labor protection influences firm offshoring

Drawing on the home country literature, we argue that firms headquartered or located in countries with strong labor protection may face challenges in their domestic operations. These firms are likely to initiate offshoring to enhance operational efficiency. Building on this argument, we also examine the boundary conditions moderating this proposed effect including labor productivity and employee stock ownership. Results based on a sample of information technology firms operating within five developed countries during 1990–2010 provide support for these arguments. These findings suggest that offshoring can be a partial exit strategy for firms to address the institutional challenges in their home country.     

Manage the value and liability of offshoring innovation

The impact of offshoring innovation on firm innovativeness remains unclear. To bridge this gap, we draw upon the new eclectic paradigm and the strategy structure paradigm to examine offshoring innovation, a combination of geographical dispersion and functional interdependence of various innovation activities. We also explore the sole and joint effects of two managing mechanisms – a global offshoring strategy and captive operations – on the relationship between offshoring innovation and firm innovativeness. As offshoring innovation has positive impact on firm innovativeness, each mechanism helps firms appropriate the value of offshoring innovation. Despite that, the joint adoption of both mechanisms exerts a greater impact of offshoring innovation on firm innovativeness than does sole one.     

Environmental sustainability practices and offshoring activities of multinational corporations across emerging and developed markets

Using panel data of 1080 multinational corporations (MNCs) from the United States, we examine the effects of environmental sustainability practices on the degree of firms’ offshoring activities. In addition, we disaggregate offshoring activities into their core components depending on whether or not the firm buys (inputs) or sells (outputs) and/or owns assets in a given country and examine the extent to which sustainability practices influence the different components of offshoring decisions. The results indicate that sustainability practices significantly affect offshoring activities of MNCs. In particular, we found that sustainable business practices matter when the firm sells goods or owns assets in the given host nation. Additionally, the results show that the sustainability–degree of the internationalization relationship is crucial for MNCs that have offshoring activities in advanced economies relative to those firms that have activities in emerging markets. Our results are robust to alternative explanations.     

Bridging what we know: The effect of cognitive distance on knowledge-intensive business services produced offshore

The rise of offshoring of knowledge-intensive business services (KIBS), causing a physical separation between clients and service providers in co-created services, is a major trend in practice but challenges existing theories. International business literature has addressed many types of distance that may affect (service) offshoring, such as cultural or geographic distance. However, limited emphasis has been placed on the implications of differing cognitions of individuals that produce a cognitive distance (CD). We address this gap and ask how increased CD through offshoring affects KIBS production processes. This conceptual paper focuses on how CD interacts with the modularity of different process stages in service production and what effect CD has on repeated production processes. In order to do so we first predict what stages of KIBS production processes can be offshored and what implications offshoring has on these services. We contribute to literature by deepening the understanding of CD and providing a process perspective on KIBS offshoring that looks at modularity within services, rather than firms as bundles of modular production, and on the impact repeated production processes have on service characteristics.     

A systems perspective on offshoring strategy and motivational drivers amongst onshore and offshore employees

Extant research tends to view firm level offshoring strategies and micro level motivational drivers as self-contained units of analysis. By contrast, this paper draws on an inductive study of two global service firms to demonstrate how the implementation and success of an advanced task offshoring strategy depends on certain systemic interdependencies between (a) the strategy, (b) onshore employees’ motivation to transfer advanced tasks and (c) offshore employees’ motivation to spend effort on their tasks and stay with the firm. We analyse how these three elements interact and produce feedback loops to create an ‘offshoring system’. Extrapolating from our findings, we propose how the offshoring system is likely to develop within the external constraints set by the attainable expertise of offshore employees and by client demands.     

Another look at offshoring: Which jobs are at risk and why?

Many recent articles regarding offshoring have made sweeping, industry-wide generalizations about the impact of this process, but have not typically addressed the specific types of jobs that are at risk and why. In this paper, we develop a framework that integrates several key variables–the (changing) need for proximity, the regulatory environment, firm-level security and intellectual property rights concerns, and the socio-political context within which the offshoring phenomenon is unfolding–which collectively help explain how vulnerable particular jobs are to offshoring. We use this framework to examine what types of healthcare and information technology jobs are most and least at risk to offshoring, and suggest extending this model to other industries in order to better understand which jobs are most vulnerable to offshoring and why.     

Offshore Outsourcing and Non‐production Workers: Firm‐level Relationships Disaggregated by Skills and Suppliers

In analysing the impact of offshoring on the skill composition, previous empirical studies have established that offshoring firms employ more non‐production workers. However, not all non‐production workers are highly skilled. This paper disaggregates non‐production workers into the following three categories: (i) skilled non‐production workers, (ii) unskilled non‐production workers and (iii) non‐production workers with special skills for offshoring and other overseas business management. By linking our offshoring survey data with firm‐level data for Japanese manufacturing firms, this paper finds that the share of skilled non‐production workers tends to be significantly high in offshoring firms but that of unskilled non‐production workers is not. As offshoring has expanded from production to non‐production tasks, this result implies that the distinction between skilled versus unskilled workers becomes critical among non‐production workers. Using our unique data on supplier types in offshoring, this paper finds that the share of non‐production workers for the management of overseas activities tends to be high in foreign direct investment firms and in firms outsourcing to foreign independent suppliers, but not in Japanese firms outsourcing to offshore suppliers located abroad but owned by other Japanese firms. This difference indicates that coordination burdens are likely to be at least partly mitigated by common languages or shared business practices. These findings suggest that offshoring has different impacts on employment depending on suppliers and the worker’s skill. The principal results are confirmed robust even after various firm characteristics are controlled for in panel regressions, though we should not give any causal interpretations.     

Nearshoring,reshoring, and insourcing: Moving beyond the total cost of ownership conversation

As firms from across all manufacturing sectors are rethinking their outsourcing and offshoring strategies, there is the potential for a manufacturing renaissance in the U.S. The findings from this case study suggest that the current manufacturing relocation shift is not perceived by manufacturers as a long-term business strategy (as outsourcing has been). As such, the results suggest that manufacturing relocation decisions based exclusively on models such as total cost of ownership (TCO) will not deliver anticipated near-term costs savings. In addition to TCO, firms must have access to information concerning the complexity of the outsourced manufacturer’s manufacturing and supply chain processes in order to fully evaluate the ‘as-is’ outsourced function against ‘to-be’ manufacturing relocation opportunities.     

Offshoring strategy: Motives,functions, locations,and governance modes of small,medium-sized and large firms

How does firm size impact on a firm's offshoring strategy? Are the underlying motives for offshoring, the particular functions considered, the locations to relocate, and the particular governance mode different for small, medium-sized and large firms? In this paper, cost, resource and entrepreneurial drivers are investigated for their relationship with firm size. Moreover, we hypothesize on the relationship between function, location and governance mode choices of offshoring and firm size. Using multi-country data of the Offshoring Research Network (ORN), we present empirical evidence on the three offshoring driver categories and function, location and governance mode choices of small, medium-sized and large firms. The results show offshoring might be used as cost, resource or entrepreneurial strategy. Cost drivers are most important for large and small firms, whereas resource drivers are especially important for medium-sized and large firms. Entrepreneurial drivers are most important for medium-sized firms, just like these firms have a relatively stronger preference for nearshoring. Small firms mostly offshore competence exploring activities, whereas large firms relocate competence exploiting activities.     

The Economic Theory of International Supply Chains: A Systems View

This paper offers an integrated analysis of outsourcing, offshoring, and foreign direct investment within a systems view of international business. This view takes the supply chain rather than the firm as the basic unit of analysis. It argues that competition in the global economy selects supply chains that maximise the joint profit of all the firms in the chain. The systems view is compared with the firm-centred view commonly used in strategy literature. The paper shows that a firm’s strategy must be embedded within an efficient supply-chain strategy, and that this strategy must be negotiated with, rather than imposed upon, other firms. The paper analyses the conditions under which various supply-chain strategies – and by implication various firm-level strategies – are efficient. Only by adopting a systems view of supply chains is it possible to determine which firm-level strategies will succeed in a volatile global economy.     

Solutions for customer complaints about offshoring and outsourcing services

In order to provide the highest quality services at lower costs, global firms have shifted their customer service functions offshore. Despite the apparent advantages of offshoring services, customers tend to object to the practice based on concerns about private/personal information being sent overseas. Additionally, executing service exchanges with overseas providers can be challenging because of perceived communication difficulties and cultural differences. The purpose of this article is to offer managers of firms that offshore services a clearer understanding of consumer concerns and provide guidance for alleviating these concerns. Specifically, suggestions are proffered regarding how to (1) minimize communication and cultural misunderstandings between customers and service providers, (2) assure customers that personal/private information is secure, and (3) restructure service activities to alleviate customer dissatisfaction. Unless such customer concerns are successfully identified and addressed, companies may not benefit from pursuing a services offshoring strategy.     

服务外包与国内就业:基于全球15个国家25个行业的实证分析

利用2000年和2005年的投入产出表数据,计算了世界15个主要发包国25个行业的服务外包率,并建立计量模型实证分析了服务外包对发包国国内就业的影响。研究结果表明,从总体上看,服务外包对发包国国内就业的影响方向是不确定的,正负效应主要取决于服务外包量的大小、外包对国内就业的替代效应和规模效应以及外包环节的类型;对绝大多数国家而言,服务外包的就业效应是不显著的,仅是影响国内就业的弱因素,工资水平和产业规模是影响各国国内就业的重要因素。     

Multinational investment and host country development: Location efficiencies for services offshoring

Services offshoring has become an important source of investment and development in many emerging economies. While much attention has been paid to companies’ use of services offshoring to lower costs, not all of these offshoring activities have yielded the anticipated results. Thus, the choice of where to locate offshore facilities is an important yet complex one that has substantial implications for both the investing firm and host country. In this paper, we adopt the perspectives of service firms located in the U.S. and empirically examine the attractiveness of host countries for offshoring of services. Using data envelopment analysis (DEA), we examine which countries use their resources or inputs most efficiently in order to produce outputs that make them attractive for services offshoring. We find that China, India, Ireland, the Netherlands, Pakistan, Slovakia, Spain, and the U.K. are particularly attractive locations for services offshoring. All of these countries have at least one core efficiency-creating competency among the key inputs of wages, education, and infrastructure. We discuss implications for firms and government policy makers and offer recommendations for future research.     

Governance modes for offshoring activities: A comparison of US and German firms

A new field of research centered on the offshoring of white-collar tasks is opening. We analyze the choice of governance mode for international offshoring activities based on a four-fold framework that integrates multiple theoretical perspectives. Firms choose between an internal or external mode based on their institutional environment, the offshoring behavior of similar firms in their reference group, firm-specific characteristics and objectives, and the particular setting of specific implementations. We test our relationships using detailed data on offshoring activities of US and German firms. Based on the outcomes we conclude that each dimension of the chosen framework is needed to explain the governance mode decisions of firms and this overarching framework may also be applicable to other topics in internationalization research.     

International sourcing of services: the “Homeshoring” alternative

The offshoring and outsourcing of service work from high-wage to low-wage countries has received considerable exposure in the popular press. Here, an alternative to offshoring is presented, called “Homeshoring.” In Homeshoring, a process is decoupled, just as it would be if it were offshored, but the work is sent to low-wage areas within a firm’s own country, rather than to another country. Homeshoring does not represent merely “domestic sourcing,” as it implies a new relationship and a working relationship with governmental economic development agencies. The benefits and disadvantages of this strategic choice are examined.     

Trade-in-goods and trade-in-tasks: An integrating framework

We introduce a simple but flexible analytical framework in which both trade in goods and trade in tasks arise. We use this framework to provide versions of the gains-from-trade and the famous four HO theorems (Heckscher–Ohlin, factor-price-equalisation, Stolper–Samuelson, and Rybczynski) that apply to this environment. We extend our framework to accommodate monopolistic competition and two-way offshoring and to integrate theoretical results of the early offshoring literature.     

The Trouble with Offshoring: Static and Dynamic Losses in the Presence of Unemployment

This study provides theoretical support for the popular objection to offshoring, whereby firms at home employ services of labour located abroad. In the presence of unemployment, our analysis highlights welfare losses from offshoring – not only for the static case of a fixed stock of capital, but also for the dynamic one of optimal saving and investment. We compare these static and dynamic losses to the gains that would instead arise under full‐employment conditions, assumed by most of the theoretical literature on offshoring. Our results suggest that public concerns over offshoring are justified when unemployment is taken explicitly into account.     

Mitigate,tolerate or relocate? Offshoring challenges,strategic imperatives and resource constraints

This paper examines key firm-level factors influencing initial strategic responses to offshoring implementation challenges. Comparative case findings indicate that firms are likely to try to mitigate challenges if they perceive to have control over their cause; if strategic objectives are diverse; and if firms have abundant resources available. By comparison, firms tolerate challenges if cost is a strategic imperative, or if resource endowments are limited. Firms relocate operations temporarily or permanently in particular if challenges are externally caused, whereby temporary relocation requires investments into flexible global infrastructures. Findings reveal critical contingencies of capability development and learning in offshoring and beyond.