Antecedents and performance consequences of international outsourcing

doi:10.1016/j.ibusrev.2005.05.004

International Business Review

Volume 14, Issue 5, October 2005, Pages 599-617

https://doi.org/10.1016/j.ibusrev.2005.05.004 Get rights and content

Abstract

The outsourcing of intermediate products to international suppliers is believed to improve firm performance. We investigate this claim and test key dimensions of the decision to outsource internationally using survey data on 200 manufacturing firms located in the Netherlands. We find that most international outsourcing is intra-regional in nature. Furthermore, international outsourcing is a consequence of a firm's ability to search and evaluate foreign suppliers, which is co-determined by its size, multinationality, and frequency of cross-border communications. Finally, no performance effects were observed for international or global outsourcing. We conclude international outsourcing is a balancing act between lower production costs abroad and lower transaction costs locally.

Section snippets

Optimal sourcing strategies?

Since the 1980s, the preferences of managers and management scholars on the optimal sourcing strategy of a firm have changed significantly in two respects. First, firms have moved away from vertical integration towards increased outsourcing, in the conviction that lean and flexible (manufacturing) firms that ‘stick to their knitting’ and focus on their core competencies perform better (Quinn & Hilmer, 1994). Second, fitting with the era of globalisation of the 1990s, firms were advised to use

The increasing prevalence of global sourcing

To evaluate whether academic interest in global sourcing has increased, we investigated the ProQuest database to identify peer-reviewed articles on (global) sourcing. Over the entire 1970–1985 period, only 29 articles featured the issue of ‘sourcing’. Before 1986, there is not a single article containing both ‘global’ and ‘sourcing’. Starting with the seminal article by Kotabe and Omura (1989), the interest in global sourcing rose rapidly. From 1989 to 2000, the average yearly number of

Existing evidence

The literature offers several insights into the antecedents of the sourcing location. Although earlier literature did not always specifically look at outsourcing, we believe it has important implications for this study. Empirical studies have demonstrated effects associated with the size of the home country, foreignness, home base, and product-life cycles.

Antecedents of international outsourcing

The literature review showed that those firms most likely to use international sources are subsidiaries of foreign firms, given their more extensive social networks outside the focal country. The presence of these networks makes it relatively cheaper for foreign firms to outsource abroad as they need not engage in transaction cost increasing socialisation processes and can refrain from complicated formal contracts. These firms are therefore able to combine their home and host supply bases.

Performance consequences of international/global (out)sourcing

The previous discussion on the antecedents of international outsourcing now enables a treatment of its consequences. To date, the relationship between international or global outsourcing and performance has been problematic. There is a lack of empirical studies linking international outsourcing and performance. While there is a wide and growing range of studies looking at the performance consequences of the outsourcing or make-or-buy decision in general (Leiblein & Miller, 2003), the impact of

Research methods

There is a lack of data on international outsourcing. Furthermore, most empirical measurement has taken place in the late 1980s and early 1990s, and most of the firm level data on global sourcing are from US companies or foreign companies operating in the US. Sourcing research in the EU has mostly been confined to descriptions of particular outsourcing relations and networks (Ford, 1998). There does not appear to be any systematic evidence on (the performance of) international outsourcing

Findings

Table 1 presents the means and correlations between key variables in this study. The means on international and global outsourcing provide support for the recent regionalisation debate in IB (e.g. Rugman, 2000, Rugman and Verbeke, 2004). Internationalisation of the supply base is mainly limited to other EU countries, with the exception of a few firms and industries. In fact, only 11% of outsourcing stems from other areas of the world. Of all outsourcing, domestic outsourcing from within the

Discussion and limitations

Our findings indicate that foreign (host) firms do not outsource substantially more intermediate inputs abroad than local firms do. Manufacturing firms source key components from nearby places, but may be willing to take more risks with other inputs as they contribute less to the total costs of the final product. We suggested that host firms may have problems adapting to local circumstances and constructing a local supply base may be costly in terms of the costs involved in finding local

Conclusions

In this study, we adopted a search and evaluation perspective to analyse how dealing with foreign suppliers increases transaction costs, although it normally reduces production costs. Firms vary in their ability to search and evaluate foreign suppliers. Large and multinational firms, and those with frequent communications between various locations outsource more internationally. This finding suggests there may be something like a ‘capability to outsource internationally’. Further research may

Acknowledgements

The authors would like to thank Jos Benders and Isabelle Maignan for their helpful comments.

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View full text

Antecedents and performance consequences of international outsourcing

Abstract

Section snippets

Optimal sourcing strategies?

The increasing prevalence of global sourcing

Existing evidence

Antecedents of international outsourcing

Performance consequences of international/global (out)sourcing

Research methods

Findings

Discussion and limitations

Conclusions

Acknowledgements

Managing across borders: The transnational corporation

International purchasing: Benefits, requirements and challenges

International Journal of Purchasing and Materials Management

Overseas production and exporting by the world's largest enterprises: A study in sourcing policy

Journal of International Business Studies

Mail and telephone surveys: The total design method

Multinational enterprises and the global economy

Worldwide sourcing: Facilitating continued success

Production and Inventory Management Journal

Managing business relationships

Offshore sourcing: Its nature and scope

International Journal of Purchasing and Materials Management

Operating flexibility, global manufacturing, and the option value of a multinational network

Management Science

Global sourcing strategy: R&D, manufacturing, and marketing interfaces

Efficiency vs. effectiveness orientation of global sourcing strategy: A comparison of US and Japanese multinational companies

Academy of Management Executive

Sourcing strategies of European and Japanese multinationals: A comparison

Journal of International Business Studies

Offshore sourcing: Reaction, maturation and consolidation of US multinationals

Journal of International Business Studies

The pattern of intra-firm exports by US multinationals

Oxford Bulletin of Economics and Statistics

International sourcing strategy

Columbia Journal of World Business

An empirical examination of transaction- and firm-level influences on the vertical boundaries of the firm

Strategic Management Journal

International sourcing and supply chain stability

Journal of International Business Studies

International production and sourcing: Trends and issues

Science, Technology and Industry Review