Title

Flexibility as firm value driver: Evidence from offshore outsourcing

SMC Author

XiaoTian T. Zhang

SMC Affiliated Work

1

Status

Faculty

School

School of Economics and Business Administration

Department

Finance

Document Type

Article

Publication Date

2017

Publication Title

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. (2017). Flexibility as firm value driver: Evidence from offshore outsourcing. Global Strategy Journal. doi:10.1002/gsj.1181

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