The Outsourcing Strategy of Local and Multinational Firms: A Supply Base Perspective

• Date: 01 February 2014
• Published date: 01 February 2014
• DOI: http://doi.org/10.1111/j.2042-5805.2013.01070.x
• Author: Michael J. Mol,Chris Brewster

THE OUTSOURCING STRATEGY OF LOCAL

AND MULTINATIONAL FIRMS: A SUPPLY

BASE PERSPECTIVE

MICHAEL J. MOL1* and CHRIS BREWSTER2,3

1Warwick Business School, University of Warwick, Coventry, United Kingdom

2Henley Business School, University of Reading, Whiteknights Campus,

Reading, United Kingdom

3Faculty of Business Studies, University of Vaasa, Vassa, Finland

Firms outsource through connecting to local and global supply bases and making such

connections produces costs of search and evaluation, which are a function of transaction

characteristics and firm capabilities. We arguethat firms outsource more when those costs are

low. Hence, domestic subsidiaries of multinational firms, with low cost access to both local and

global supply bases, outsource more than either domestic firms or foreign subsidiaries, as

confirmed by evidence from a large data panel. We also propose that among foreign sub-

sidiaries, distance from the home country co-determines search and evaluation costs such that

subsidiaries from more distant countries outsource less. This is confirmed for geographic

distance, but a positive effect is found for political distance and a mixed effect for cultural

distance. Copyright © 2014 Strategic Management Society.

INTRODUCTION

Outsourcing is a topic that has received substantial

research attention over the past few decades, just as

its use in practice has grown explosively. Outsourc-

ing and offshoring are some of the key means firms

utilize to devise more modular production strategies,

through disaggregation of activities and more

modular organizations (Brusoni, Prencipe, and

Pavitt, 2001; Jensen and Petersen, 2013; Lewin,

Massini, and Peeters, 2009; McDermott, Mudambi,

and Parente, 2013; Mudambi, 2008). While in recent

years the research focus in global strategy has shifted

toward offshore outsourcing (e.g., Bertrand and Mol,

2013), there is at least as much domestic outsourcing

and almost all of the theorizing around outsourcing

has in fact emerged from the study of the domestic

variety (e.g., Leiblein, Reuer, and Dalsace, 2002).

Theories that have been especially prominent as

explanations for outsourcing choices include trans-

action cost economics (Murray, Kotabe, and Wildt,

1995; Williamson, 1991) and the resource-based and

knowledge-based views of the firm (Leiblein and

Miller, 2003; Poppo and Zenger, 1998), but alterna-

tive explanations have come from perspectives

as diverse as institutional theory (Loh and

Venkatraman, 1992), real options (Leiblein and

Miller, 2003), evolutionary economics (Mahnke,

2001), and firm positioning (Porter, 1997).

Causal explanations of outsourcing choices

operate at one of four contextual levels (Mol, 2007):

the transaction (activity), the firm, the industry, and

the broader environment. The outsourcing decision,

also referred to as the make-or-buy decision, varies

heavily with context: for instance, transaction-level

variations in asset specificity and uncertainty

(Williamson, 1991) and firm level variationsin capa-

bilities (Barney, 1999). Most research, especially in

Keywords: outsourcing; subsidiaries; geographic distance;

political distance; cultural distance

*Correspondence to: Michael J. Mol, Warwick Business

School, University of Warwick, CV4 7AL Coventry, U.K.

E-mail: michael.mol@wbs.ac.uk

Global Strategy Journal

Global Strat. J., 4: 20–34 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111/j.2042-5805.2013.01070.x

Copyright © 2014 Strategic Management Society