Flexibility as firm value driver: Evidence from offshore outsourcing
SMC Affiliated Work
1
Status
Faculty
School
School of Economics and Business Administration
Department
Finance
Document Type
Article
Publication Date
5-2018
Publication / Conference / Sponsorship
Global Strategy Journal
Description/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.
Keywords
offshore outsourcing, real options, strategic flexibility, switching costs, uncertainty
Scholarly
yes
Peer Reviewed
1
DOI
10.1002/gsj.1181
Disciplines
Business | Economics | Finance and Financial Management
Original Citation
Choi, J. J., Ju, M., Kotabe, M., Trigeorgis, L., & Zhang, X. T. (2018). Flexibility as firm value driver: Evidence from offshore outsourcing. Global Strategy Journal, 8(2), 351-376. doi:10.1002/gsj.1181
Repository Citation
Choi, Jongmoo J.; Ju, Ming; Kotabe, Masaaki; Trigeorgis, Lenos; and Zhang, XiaoTian T.. Flexibility as firm value driver: Evidence from offshore outsourcing (2018). Global Strategy Journal. 10.1002/gsj.1181 [article]. https://digitalcommons.stmarys-ca.edu/school-economics-business-faculty-works/331