Outsourcing to emerging markets: Theoretical perspectives and policy implications

Creating value through outsourcing has emerged as a popular competitive strategy for firms in various industries. In order to survive in the domestic and international marketplaces, firms, especially in developed countries, are seeking opportunities offshore, which is one focus of globalization. Offshore outsourcing has emerged as a popular competitive strategy and emerging markets have become increasingly attractive locations. As firms in developed countries (e.g., the US) continue to face enormous challenges to sustain competitive advantage, outsourcing to emerging markets is becoming an increasingly important source of business renewal and corporate transformation.In spite of the growing strategic significance of sourcing, we have limited knowledge of offshoring and outsourcing to emerging markets. The objectives of this review are fourfold: (1) to provide a better understanding of the concepts of offshoring and outsourcing business models, (2) to discuss relevant theoretical perspectives related to outsourcing, (3) to present a taxonomy of outsourcing strategies drawing on the extant literature, and (4) to discuss public policy implications. Conclusions and direction for future research are provided.     

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.     

Build-operate-transfer Outsourcing Contracts in Services – Boon or Bane to Emerging Market Vendor Firms?

Build-operate-transfer (BOT) contracting has been widely used in the engineering and construction industry and has recently spread into the service industry domains. Notably, service provider firms from emerging markets, India in particular, are now offering BOT outsourcing contracts in which the client firms are allotted call options, i.e. the right, but not the obligation, to transfer pre-specified assets from the service provider. As such, BOT outsourcing contracts seems to be an interesting contractual novelty that combines the advantages of outsourced and captive offshoring operations. In this paper we investigate under which circumstances a BOT outsourcing contract (i.e. a contract where the client firm exercises its call option) is beneficial, or the opposite, to the emerging market vendor firm. Whether BOT outsourcing contracts are boon or bane to an emerging market vendor basically hinges, we submit, on its internal diffusion of client-specific knowledge and capabilities prior to the execution of the call option.     

创新网络嵌入视角下企业研发竞争的博弈研究

研发投入是创新发展的基础和源泉,如何促进企业研发投入是实施创新驱动战略的关键。本文基于创新网络嵌入的背景,构建同一创新网络内两个企业间的博弈模型,针对不同网络位置企业竞争博弈和相同网络位置企业竞争博弈两种情形,探究在研发竞争状态下企业研发投入受网络地位、网络关系的影响情况。研究结果表明:创新网络嵌入下,同质企业的竞争性研发投入与网络范围的技术溢出、网络平均吸收能力以及网络中心度均存在正向相关关系。研究结论丰富了企业研发投入影响因素的研究成果,也为有效激励企业创新提供一个有价值的思路。     

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.     

Capability,Quality, and Performance of Offshore IS Vendors: A Theoretical Framework and Empirical Investigation

Information systems (IS) offshoring has become a widespread practice and a strategic sourcing choice for many firms. While much has been written by researchers about the factors that lead to successful offshoring arrangements from the client's viewpoint, the vendor's perspective has been largely scarce. The vendor perspective is equally important as offshore IS vendors need to make important decisions in terms of delivering operational and strategic performance and aligning their resources and processes in order to meet or exceed targeted outcomes. In this article, we propose and test a three‐level capability–quality–performance (CQP) theoretical framework to understand vendor outcomes and their antecedents. The first level of the framework represents three vendor capabilities: relationship management, contract management, and information technology management. The second level has three mediating variables representing process quality: partnership, service, and deliverable quality. The third level has three dependent variables representing vendor outcomes: operational performance, strategic performance, and satisfaction. The model was tested with 188 vendor firms from India and China, the two most popular destinations for IS offshoring. Results support the CQP framework; vendor capabilities are significant predictors of intermediate quality measures, which in turn affect vendor outcomes. Implications of the study findings to both theory development and IS offshore vendor strategic decision making are discussed.     

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.     

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.     

A learning perspective on the offshoring of advanced services

Based on longitudinal case studies of offshoring of advanced IT and engineering services from Danish firms to Indian firms, this paper explores organizational learning that occurs over time in both home and host firms and uses learning as a measure of the firm impact of advanced services offshoring. The findings are consistent with the theoretical view that advanced services offshoring must be understood as an antecedent for strategic business development and organizational change in both home and host firms. The study shows that when offshoring partnerships mature and firms gain experience, learning in both home and host firms evolves over time and differs in many cases from their initial objectives and expectations. In some of the Danish firms engaging in offshoring even ignites a process of strategic transformation. Both Danish and Indian firms use the input from their offshoring partnership to upgrade their organizations and business processes.     

Risks in offshore IT outsourcing: A service provider perspective

Offshore outsourcing of Information Technology (IT) services is the prevalent practice in global businesses today. Despite the strategic advantages and cost benefits that offshore outsourcing offers, outsourcing relationships also involve risks, for both the client, as well as the service provider – a fact that is evidenced by the reported failures of such engagements. Some of the prior researches in this area have focused on identifying various types of client risks and their sources. However, the study of risks from a service provider’s perspective has not received due treatment in literature. This study analyses offshore IT outsourcing risks from the perspective of service providers. A case based approach using the principles of grounded theory was used for studying the risks. Theoretical sampling was used to collect data from 5 mid-tier offshore third party service providers based in Bangalore, India. From our coding and analysis three broad categories of service provider risks emerged, namely, macroeconomic, relationship specific and project specific. Relationship maturity, nature of contract, nature of service or project and nature of client were identified as contextual factors which influence the degree of risk.     

Creating value through offshore outsourcing: An integrative framework

This article proposes an analytical framework to explain value creation through offshore outsourcing by addressing a key question: How do firms create value by outsourcing their business functions to foreign external providers? The growing prevalence of offshore outsourcing as a dominant business practice in global business makes this question worthy of further research attention. Situated within the organizational design literature, our proposed value creation framework also draws from strategic resource management, disintegration, location-specific resourcing, and externalization (D–L–E) and contingency perspectives. Our analysis shows that firms embarking on offshore outsourcing create value by effectively managing their internal and external resources in accordance with a changing global environment. The framework has significant implications for theory and practice and suggests avenues for further research.     

CREDIT CONSTRAINTS AND THE CYCLICALITY OF R&D INVESTMENT: EVIDENCE FROM FRANCE

We use a French firm‐level data set containing 13,000 firms over the period 1994–2004 to analyze the relationship between credit constraints and firms’ R&D behavior over the business cycle. Our main results can be summarized as follows: (i) R&D investment is countercyclical without credit constraints, but it becomes procyclical as firms face tighter credit constraints; (ii) this result is only observed for firms in sectors that depend more heavily upon external finance, or that are characterized by a low degree of asset tangibility; (iii) in more credit‐constrained firms, R&D investment plummets during recessions but does not increase proportionally during upturns.     

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.     

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.     

关系契约治理与外包合作绩效——对日离岸软件外包项目的实证研究

对日离岸软件外包项目具有典型的关系契约特性,现有文献对软件外包中的关系契约治理及对合作绩效的影响还缺乏系统的理论分析和实证研究。信任、交流和相互适应调整作为重要的关系规范,在对日软件外包关系契约治理中具有重要意义。本研究根据访谈和110个项目的数据实证检验了关系规范对离岸软件外包项目绩效的影响。通过结构方程模型方法发现,交流的有效性对于项目质量和供应商成本控制绩效有积极影响,相互适应调整对于成本控制绩效也有积极影响。这个发现有助于构建有效的关系契约治理机制,促进软件外包产业发展。     

Casting a Wide Net for Innovation: Mediating Effect of R&D Human and Social Capital to Unlock the Value from Alliance Portfolio Diversity

This paper examines the performance effects associated with different alliance portfolio configurations in terms of geographical location and partner type. Based on these distinctions, the authors hypothesize that more diverse alliance portfolios enable firms to gain and exploit innovation opportunities. Additionally, the mediating effects of R&D human and social capital on the R&D alliance portfolio diversity–innovation performance relationship are explored. The authors reason that the absorptive capacity of R&D intellectual capital determines a firm's potential gains from highly diverse alliance portfolios. From panel data of manufacturing firms in Spain for the period 2008–2013, the results confirm the inverted U‐shaped relationship between alliance portfolio diversity and firm innovation performance, implying that both insufficient and excessive alliance portfolio diversity may be detrimental to firm innovativeness. Additionally, R&D human and social capital partially mediates the R&D alliance diversity–innovation performance relationship, emphasizing the importance of internal capabilities to leverage the benefits of highly diverse alliance portfolios. These findings add a dynamic dimension to the conceptualization of alliance portfolios and how firms create value by balancing explorative and exploitative alliances.     

Institutions and the Diversity and Prevalence of Multinationals’ Knowledge‐Augmenting Subsidiaries

Multinational corporations (MNCs) increasingly seek to gain access to, and exploit, locationally specific sources of advanced knowledge and technological capabilities, creating a need to explain (1) the diversity among these facilities and (2) how institutions influence MNCs’ abilities to invest in different subsidiary types. Extending debates on firms’ knowledge‐augmenting activities, the authors integrate institutions into their analytical framework to a greater extent than previous work has done. Moreover, existing contributions provide typologies of R&D subsidiaries. In contrast, the authors focus on a particular subset of subsidiaries, knowledge‐augmenting ones, and put forward a theory to explain their variety and their prevalence, enabling them to identify previously neglected subsidiary types that have important managerial and policy implications. By downplaying the diversity of these subsidiaries, existing work has not been able to capture the full range of managerial challenges as well as the costs and benefits of different subsidiary types to host countries. The authors, therefore, problematize firms’ abilities to gain access to foreign knowledge‐generating assets, highlight the importance of institutional environments, provide policy recommendations and identify areas for future research.     

Union–Firm Bargaining,Productivity Improvement and Endogenous Growth

This paper presents a growth model with two sectors. In the high‐tech sector, R&D increases productivity and union–firm bargaining determines wages, but in the traditional sector there are neither R&D nor labour unions. The government is able to regulate union bargaining power. The main results are as follows. Because firms try to escape wage increases through the improvement of productivity by R&D, the increase in union bargaining power boosts R&D and growth. It is welfare enhancing to strengthen (weaken) unions when the growth rate is below (above) some critical level. A specific rule is presented for when de‐unionization is socially desirable.     

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.     

Technology development control styles in multinational corporations: a case study

Multinational firms tend to geographically disperse their R&D activities to a larger extent than in the past. International R&D seems to play an increasingly important role within the global process of technological innovation taking place in multinational corporations. As a consequence, firms are challenged to design global R&D organisations and manage foreign units playing a central role in their innovation process. A key managerial aspect is the balance between autonomy and control of foreign R&D units. This case study deals with management control styles over foreign R&D units. It is based on the results of an empirical analysis of 16 multinational firms operating in technology-intensive industries. It proposes a taxonomy of management control styles in foreign R&D and gives the cue for further research in the area of technology development control.