International offshoring of services: A parity study

Conventional wisdom suggests that firms engage in international offshoring of services primarily to reduce wage costs associated with a given service activity. Drawing on international business research on the costs of doing business abroad (CODBA), liability of foreignness (LOF), and institutional theory, we investigate the factors that contribute to the location choices for services offshoring activity, including wage differentials between the home and host countries. We find that consistent with a parity perspective but contrary to conventional expectations, a country is more likely to be a destination of services offshoring as the average wage of a country increases. We also find that education level and cultural similarity are significant drivers of offshoring location choices, again consistent with a parity perspective. This study contributes to debates about the economic impact of services offshoring by showing that firms locate offshoring facilities in destinations that are closer in wages to the home country and those with higher education levels and cultural similarity.     

Structuring Work Distribution for Global Product Development Organizations

This study describes (through an application) a novel approach toward organizing work distribution across globally distributed design and development centers of a product development (PD) organization. While there exist several studies (and modeling applications) for work distribution and allocation for manufacturing and supply chain networks, those related to product development organizations are limited to qualitative suggestions such as offshoring of modular tasks. However, most PD efforts are characterized by significant complexity in information sharing and information dependency among PD tasks (represented by coupling in the system architecture of the firm), thus preventing the identification of modular tasks. Also, redesigning the architecture to introduce modularity has associated risks of costs and product integrity. We demonstrate a methodology to organize work distribution globally in an industrial setting, utilizing the design structure matrix to quantify the system architecture of the firm. Our optimization results show significant cost savings through a restructured PD organization. On analysis of the results, we make two significant observations: (a) while offshoring based on modularity is generally appropriate, it is not the whole answer, as there exists a trade‐off between the efficiency of performing specific PD tasks at the offshore location and the modularity of the task; and (b) firms should successively increase work allocation to the offshore location, benefiting from capability improvements through learning effects.     

The Role of Task Adhesion in Limiting Specialization along the Medical Care Continuum

Increasing specialization has become a dominant feature of modern medicine. We develop a model of specialization when vertical restraints prevent transfers between physicians but task adhesion makes payment for one task contingent on carrying out another. We show how the probability of transitioning between tasks and relative payments for adjacent tasks determine the division of labor in the presence of task adhesion, and why skill complementarities may not be necessary to inhibit specialization. These results imply that a regulator who sets prices without considering the disincentives to specialize inherent in the demand complementarities described here may fail to maximize welfare.     

When outsourcing is not an option: International relocation of investment bank research — Or isn't it?

Outsourcing is high on the agenda of firms seeking to cut costs. Based on an enhanced value-chain concept we develop a model that determines the conditions under which outsourcing and offshoring are not expedient. The model allows for an integrated analysis of horizontal and vertical links to actors within and outside the firm. Equity and country research in investment banks and their outsourcing potential are used as case studies. We draw mainly on qualitative evidence from interviews with investment bank analysts, as well as data on locations of research units of foreign investment banks in India. The option of outsourcing certain stages of business processes and offshoring parts of the value chain within firms to low-wage locations depends crucially on how processes are ‘embedded’ in relation to other departments within and to corresponding actors outside the firm. Our analysis shows that there is little, if any, scope for outsourcing but some potential for low-level research activities to be offshored to low-cost regions.     

Transfer Pricing and Sourcing Strategies for Multinational Firms

Taking advantage of low tax rates using transfer pricing and taking advantage of low production costs using offshoring are two strategies multinational firms (MNFs) use to increase profits. We identify an important trade‐off that MNFs face in setting their transfer prices: the conflict between (i) the incentive role and (ii) the tax role of the transfer price. For MNFs, we find the profit‐maximizing transfer‐pricing strategies that motivate divisional management to (i) make good sourcing decisions and (ii) take advantage of favorable tax rates. We quantify the absolute and relative maximum inefficiency in terms of the after‐tax MNF's profit change from using a single transfer‐pricing system as compared to the dual transfer‐pricing system. We show that the highest relative loss is attained when the average sourcing cost and the tax differential are high. We demonstrate that the highest absolute loss is attained when the average outsourcing cost is approximately equal to the offshoring cost. We extend our results to two practical variations in MNF structures: an MNF that faces operational constraints on its offshoring capacity and an MNF that uses compensation contracts linked to after‐tax firm‐wide profits. Our insights help MNFs' managers identify when to use single and dual transfer‐pricing systems.     

The organizational design of offshoring: Taking stock and moving forward

Offshoring can be defined as the relocation of organizational tasks and services to foreign locations. At the same time as the scale and scope of offshoring have reached unprecedented levels in recent years, firms have increasingly been exposed to the challenges relating to managing an organization consisting of a number of offshored activities. In this special issue introduction paper, we argue that an organizational design perspective on offshoring can benefit research and practice in understanding how firms can coordinate and integrate offshoring activities. Specifically, we argue that offshoring implies an organizational reconfiguration consisting of three stages: disintegration, relocation and reintegration. We discuss the implications of this perspective and outline a research agenda.     

Revenue Management in Business Services

A significant portion of the services industry is focused on providing services (medical, legal, financial, personal, and travel) to individuals. However, studies have shown that a less visible but rapidly growing segment of the service sector comprises firms that provide business functions to other businesses. The sector covers tasks such as payroll processing, procurement, and information systems management, as well as business consulting, technical support, call center operations, and software development. Firms may choose to purchase, rather than perform, these business functions to reduce costs, to mitigate risk, or simply to focus on their processes that provide marketplace differentiation. Transferring a business function from within a firm to an outside supplier is often called “outsourcing”; when the supplier provides the service from a lower‐cost country, it is called “offshoring.” The risks and benefits of outsourcing to the firm purchasing a business service have been studied in some detail by both academics and consultants. In this paper, we outline revenue management issues faced by business service providers and describe some new opportunities for the use of analytic methods in the service science sector.     

Foreign language skill,anxiety, cultural intelligence and individual task performance in global virtual teams: A cognitive perspective

Global virtual teams (GVTs) operate in a globally dispersed work environment, principally relying on communication and information technologies to achieve work tasks. In this work context, using language effectively is crucial. We utilize the cognitive perspective to explain how foreign language use in a GVT influences individual task performance. This study employs (a) cognitive neuroscience of foreign language processing perspective to explain the relationship between foreign language skills and individual task performance; (b) the theory of cognitive load to explain foreign language anxiety as a pathway that further explains how low-level foreign language skill negatively influences individual task performance; and (c) the theory of intelligence to examine the conditional role of cultural intelligence in the mediation process. Utilizing 294 data pairs (collected from GVT members and their respective supervisors) in a multinational offshoring firm, we found support for the mediation process and the conditional influence of the dimensions of cultural intelligence in reducing the negative effect of foreign language anxiety on individual task performance in GVT.     

Employment Protection and Temporary Work Agencies

Employers who use temporary agency staff in contrast to regular staff are not affected by employment protection regulations when terminating a job. Therefore, services provided by temporary work agencies may be seen as a substitute for regular employment. In this paper, we analyse the effects of employment protection on the size of the temporary work agency sector in a model of equilibrium unemployment. We find that higher firing costs may even reduce temporary work agency employment if agencies themselves are subject to employment protection, a consideration that distinguishes our results from those for fixed‐term employment arrangements.     

Fair task allocation in transportation

Task allocation problems have traditionally focused on cost optimization. However, more and more attention is being given to cases in which cost should not always be the sole or major consideration. In this paper we study a fair task allocation problem in transportation where an optimal allocation not only has low cost but more importantly, it distributes tasks as even as possible among heterogeneous participants who have different capacities and costs to execute tasks. To tackle this fair minimum cost allocation problem we analyze and solve it in two parts using two novel polynomial-time algorithms. We show that despite the new fairness criterion, the proposed algorithms can solve the fair minimum cost allocation problem optimally in polynomial-time. In addition, we conduct an extensive set of experiments to investigate the trade-off between cost minimization and fairness. Our experimental results demonstrate the benefit of factoring fairness into task allocation. Among the majority of test instances, fairness comes with a very small price in terms of cost.     

WORKERS,WARRIORS, AND CRIMINALS: SOCIAL CONFLICT IN GENERAL EQUILIBRIUM

We incorporate appropriation activities (social conflict) into canonical models of trade and study how economic shocks and policies affect the intensity of conflict. We show that not all shocks that could make society richer reduce conflict: positive shocks to labor‐intensive industries diminish conflict, while positive shocks to capital‐intensive industries increase it. The key requirement is that conflict activities be more labor intensive than the economy as this determines how shocks affect the returns and costs of conflict. Our theory is consistent with several observed patterns of conflict and implies that empirical work should take into account the relative factor intensities of the productive and conflict sectors in each country. Incorporating appropriation into a canonic general equilibrium model affects what policies may be deemed desirable: in order to reduce conflict and generate Pareto‐improvements policy must be distortionary, while reforms that appear efficiency‐enhancing under the unrealistic assumption of perfect property rights may backfire. This offers one explanation for why reforms based on traditional models without appropriation may be delayed and become unpopular when implemented, and why societies may sympathize with seemingly inefficient redistribution.     

Priority Rules for Multi‐Task Due‐Date Scheduling under Varying Processing Costs

We study the scheduling of multiple tasks under varying processing costs and derive a priority rule for optimal scheduling policies. Each task has a due date, and a non‐completion penalty cost is incurred if the task is not completely processed before its due date. We assume that the task arrival process is stochastic and the processing rate is capacitated. Our work is motivated by both traditional and emerging application domains, such as construction industry and freelance consulting industry. We establish the optimality of Shorter Slack time and Longer remaining Processing time (SSLP) principle that determines the priority among active tasks. Based on the derived structural properties, we also propose an effective cost‐balancing heuristic policy and demonstrate the efficacy of the proposed policy through extensive numerical experiments. We believe our results provide operators/managers valuable insights on how to devise effective service scheduling policies under varying costs.     

What effect does the aggregate industrial R&D offshoring have on you? A multilevel study

The present study argues that R&D offshoring is not only a matter of firm's decision as in previous literature, but also has an important industrial externality component. For a sample of manufacturing and services industries in the period 2005–15, I study the externalities coming from R&D offshorers in a given industry and the heterogeneous effects of enterprises' internal knowledge base characteristics. The evidence points to offshoring externality (OE) presenting an inverted U-shape with respect to the firms' innovative processes. However, firms with higher levels of human capital and/or internal R&D investments obtain higher returns coming from the OE. Overall, it seems that a strategy (R&D offshoring) that is highly beneficial for enterprises individually, might be also optimal for the Spanish economy.     

IS THERE A FISCAL FREE LUNCH IN A LIQUIDITY TRAP?

In this paper, we use a dynamic stochastic general equilibrium model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. However, given this fiscal free lunch, it is unclear why policymakers would want to limit the size of fiscal expansion. Our paper addresses this question in a model environment in which the duration of the liquidity trap is determined endogenously, and depends on the size of the fiscal stimulus. We show that even if the multiplier is high for small increases in government spending, it may decrease substantially at higher spending levels; thus, it is crucial to distinguish between the marginal and average responses of output and government debt.     

GROUP INEQUALITY

We explore the combined effect of segregation in social networks, peer effects, and the relative size of a historically disadvantaged group on the incentives to invest in market‐rewarded skills and the dynamics of inequality between social groups. We identify conditions under which group inequality will persist in the absence of differences in ability, credit constraints, or labor market discrimination. Under these conditions, group inequality may be amplified even if initial group differences are negligible. Increases in social integration may destabilize an unequal state and make group equality possible, but the distributional and human capital effects of this depend on the demographic composition of the population. When the size of the initially disadvantaged group is sufficiently small, integration can lower the long‐run costs of human capital investment in both groups and result in an increase the aggregate skill share. In contrast, when the initially disadvantaged group is large, integration can induce a fall in the aggregate skill share as the costs of human capital investment rise in both groups. We consider applications to concrete cases and policy implications.     

Processing in a multi-machine batch manufacturing system with sequence dependent cost

Many workcells in batch manufacturing systems are populated with multiple, nonidentical machines that perform similar tasks. Because of the size of a batch when a job arrives, it may be uneconomical to set up two or more machines to process the same job simultaneously. An economic decision has to be made as regards which machine in the cell to assign the job. Likewise, many multi-operation jobs can be processed using one of several feasible operation sequences that may lead to different total manufacturing costs. The cost differences are the result of several factors, among which are processing time and cost dependencies between operations, fixturing requirements, and material handling requirements. When the workcell machine selection decision is considered along with the operation sequencing decision, determination of the best machine in a cell and the best operation sequence for the batch is a non-trivial task. In this paper, we address the problem of selecting the best machine within a cell and the best operation sequence for a batch when operation cost is machine and sequence dependent. The problem is modeled mathematically and solved using a heuristic algorithm. The performance of the algorithm is compared with that of an exact solution procedure.     

Capital Mobility and Asset Pricing

We present a model for the equilibrium movement of capital between asset markets that are distinguished only by the levels of capital invested in each. Investment in that market with the greatest amount of capital earns the lowest risk premium. Intermediaries optimally trade off the costs of intermediation against fees that depend on the gain they can offer to investors for moving their capital to the market with the higher mean return. The bargaining power of an investor depends on potential access to alternative intermediaries. In equilibrium, the speeds of adjustment of mean returns and of capital between the two markets are increasing in the degree to which capital is imbalanced between the two markets, and can be reduced by competition among intermediaries.     

EQUILIBRIUM INCENTIVE CONTRACTS AND EFFICIENCY WAGES

We analyze the optimal (efficiency) wage contract when output is contractible but firms neither observe the workers' effort nor their match‐specific productivity. Firms offer wage contracts that optimally trade off effort and wage costs. As a result, employed workers enjoy rents, which in turn creates unemployment. Nonetheless, the incentive power of the equilibrium wage contract is constrained efficient in the absence of taxes and unemployment benefits. We also show that more high‐powered incentive contracts tend to be associated with higher equilibrium unemployment rates. (JEL: E24, J30, J41)     

Idiosyncratic Shocks and the Role of Nonconvexities in Plant and Aggregate Investment Dynamics

We study a model of lumpy investment wherein establishments face persistent shocks to common and plant‐specific productivity, and nonconvex adjustment costs lead them to pursue generalized (S, s) investment rules. We allow persistent heterogeneity in both capital and total factor productivity alongside low‐level investments exempt from adjustment costs to develop the first model consistent with the cross‐sectional distribution of establishment investment rates. Examining the implications of lumpy investment for aggregate dynamics in this setting, we find that they remain substantial when factor supply considerations are ignored, but are quantitatively irrelevant in general equilibrium. The substantial implications of general equilibrium extend beyond the dynamics of aggregate series. While the presence of idiosyncratic shocks makes the time‐averaged distribution of plant‐level investment rates largely invariant to market‐clearing movements in real wages and interest rates, we show that the dynamics of plants' investments differ sharply in their presence. Thus, model‐based estimations of capital adjustment costs involving panel data may be quite sensitive to the assumption about equilibrium. Our analysis also offers new insights about how nonconvex adjustment costs influence investment at the plant. When establishments face idiosyncratic productivity shocks consistent with existing estimates, we find that nonconvex costs do not cause lumpy investments, but act to eliminate them.     

Managing Enterprise Risks of Technological Systems: An Exploratory Empirical Analysis of Vulnerability Characteristics as Drivers of Exploit Publication*

Enterprises experience opportunistic exploits targeted at vulnerable technology. Vulnerabilities in software‐based applications, service systems, enterprise platforms, and supply chains are discovered and disclosed on an alarmingly regular basis. A necessary enterprise risk management task concerns identifying and patching vulnerabilities. Yet it is a costly affair to develop and deploy patches to alleviate risk and prevent damage from exploit attacks. Given the limited resources available, technology producers and users must identify priorities for such tasks. When not overlooked, vulnerability‐patching tasks often are prioritized based on vulnerability disclosure dates, thus vulnerabilities disclosed earlier usually have patches developed and deployed earlier. We suggest priorities also should focus on time‐dependent likelihoods of exploits getting published. We analyze data on software exploits to identify factors associated with the duration between a vulnerability discovery date and the date when an exploit is publicly available, a time window for patching before exploit attack levels may escalate. Actively prioritizing vulnerability patching based on likelihoods of exploit publication may help lessen losses due to exploit attacks. Technology managers might apply the insights to better estimate relative risk levels, and better prioritize protection efforts toward vulnerabilities having higher risk of earlier exploitation.