Flexibility as firm value driver: Evidence from offshore outsourcing

Jongmoo J. Choi, Ming Ju, Masaaki Kotabe*, Lenos Trigeorgis, Xiaotian T. Zhang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

15 Citations (Scopus)

Abstract

Research Summary: This article tests real options theory predictions that uncertainty and flexibility are key value drivers for offshore outsourcing moderated by switching costs. Examining firm-specific and market data for outsourcing cases by U.S. firms, we find that the impact of market and environmental uncertainty and flexibility on outsourcing value is net positive and that it is greater for offshore than for domestic outsourcing. Outsourcing benefits are related to flexibility arising from growth options and moderated by switching costs underlying outsourcing activities, including loss of innovative capability and economic, institutional, and cross-country cultural differences. Managerial Summary: In the popular business literature, the “footloose” nature of outsourcing strategy characterized by an outsourcing firm's flexibility, as well as the ability in finding appropriate suppliers on a global basis, has often been touted as an important means of dealing with market uncertainty. However, the academic literature has not offered direct empirical support for the inherent value of such outsourcing strategies. Our study shows that firms tend to perform better financially when they have such outsourcing flexibility under uncertain market and environmental conditions, although this relationship may be somewhat weakened by potential loss of innovative capability and cultural and other differences in dealing with foreign suppliers.

Original languageEnglish
Pages (from-to)351-376
Number of pages26
JournalGlobal Strategy Journal
Volume8
Issue number2
DOIs
Publication statusPublished - 2018 May
Externally publishedYes

Keywords

  • offshore outsourcing
  • real options
  • strategic flexibility
  • switching costs
  • uncertainty

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management

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