International Sourcing Strategies: Redressing the Balance

Masaaki KotabeThe Fox School of Business and Management

Temple University349 Speakman Hall

Philadelphia, PAU.S.A.

Ph. 215-204-7704Fax. 215-204-8029

mkotabe@sbm.temple.edu

and

Michael J. MolLondon Business School

United Kingdommmol@london.edu

Scheduled for publication in John T. Mentzer, Ted Stank, and Matthew B. Myers, ed., Handbook of Global Logistics and Supply Chain Management, London: Sage Publications, 2007.

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The international sourcing phenomenon

The international sourcing strategy phenomenon continues to capture the public’s mind,

dividing observers into two opposite camps (Economist, 2004). There are those who

loathe its effects, particularly in terms of the job losses it supposedly causes but sometimes

also because of more general concerns over the effects of globalization or because it

potentially undermines the long-term competitiveness of firms, and there are those who

herald it as an efficiency-improving measure that helps support countries’ competitiveness

as well as the performance of firms. However, much of the debate on this topic has taken

place without either substantial empirical or theoretical grounding.

We have now undertaken a range of studies into the international sourcing

phenomenon.1 In this chapter, we will bring together the knowledge from our earlier

publications and will then attempt to synthesize it. These studies have informed our

understanding of the topic and, together with insights we acquired through studying

outsourcing decisions more generally, have enabled us to develop a more intricate

understanding of how international sourcing decisions are taken and what consequences

they produce, especially how they affect firm performance.

We offer some of these insights, in order to provide a conceptually solid approach

to this phenomenon. The key question we address is how much international sourcing

firms should engage in, in order to achieve the best results for overall firm performance.

We start by offering a more or less historical overview of how the phenomenon has

developed over the past 15 to 20 years. We zoom in especially on the three major waves of

international outsourcing the world has witnessed during this time period, the last one of

1 See for instance Kotabe, 1992, 1998; Kotabe and Mol, in print; Kotabe and Omura, 1989; Kotabe and Swan, 1994; Mol, Pauwels, Matthyssens, and Quintens, 2004; Mol, Van Tulder, and Beije, 2001; Murray, Kotabe, and Wildt, 1995; Swamidass and Kotabe, 1993.

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which is the current offshoring wave. We then discuss the performance effects that have

been suggested, both the advantages and the disadvantages, to develop a balanced view of

international sourcing.

This chapter expressly focuses on international sourcing as it adds many more

complexities that do not apply in domestic sourcing strategy. In developing viable

international sourcing strategies, companies must consider not only manufacturing and

delivery costs, the costs of various resources, and exchange rate fluctuations, but also

availability of infrastructure (including transportation, communications, and energy),

industrial and cultural environments, the ease of working with foreign host governments,

and so on. Furthermore, the complex nature of sourcing strategy on a global scale spawns

many barriers to its successful execution. In particular, logistics, inventory management,

distance, nationalism, and lack of working knowledge about foreign business practices,

among others, are major operational problems identified by both U.S. and foreign

multinational companies engaging in international sourcing.

From a contractual point of view, the international sourcing of intermediate

products such as components and services by companies takes place in two ways: 1) from

the parents or their foreign subsidiaries on an “intra-firm” basis (i.e., internal sourcing)

and 2) from independent suppliers on a “contractual” basis (i.e., external sourcing). We

propose that there is a negative curvilinear relationship between the extent of international

sourcing, the term we use to include both internal (offshoring) and external (international

outsourcing) sourcing across borders, and the performance of the firm, such that firms

should neither keep all their activities at home nor outsource everything to far-away

locations.

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With this model in hand, we discuss what predicts the extent of international

sourcing firms ought to engage in. Finally, we examine some of the practical implications

of our model. It is not our intention to turn this chapter into a review of the academic

literature on this topic, we would much rather present our own perspective on this topic.

We will make some reference to the literature where necessary as we build our arguments.

Wave after wave

International sourcing has been around for centuries, perhaps even millennia. It is, as the

saying goes, as old as the hills. However, the type of international trade in the times of

Adam Smith was qualitatively different from what we observe in modern times, primarily

for two reasons, one technical and one social. First, there was limited if any trade in

intermediate products such as components or services. Instead there was mostly trade in

either raw materials or final products. As the structure of the economy has evolved and

products themselves have become more complicated, the grounds to engage in such trade

have increased. Second, the nature of supplier relations was not anything like the way we

perceive them today. Buyer-supplier coordination and cooperation did not really exist and

communications were normally limited to ordering processes. Thus, we argue, if we want

to understand current practice it makes sense to restrict ourselves to recent history in our

analysis.

In recent history, say the last 15 to 20 years, we can distinguish between three

waves of international sourcing. The first wave, starting in the mid 1980s and continuing to

this day, was primarily focused on international sourcing of manufacturing activities.

Research, therefore, focused primarily on manufacturing firms. The Kotabe and Omura

(1989) study was one of the first to address global sourcing in any detail. Large

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manufacturing firms were increasingly spreading their operations across the world and

began to use suppliers from a variety of countries, to exploit so-called best-in-world

sources (Quinn and Hilmer, 1994). Supply chains, as a consequence, became more global

and also much more complicated in nature. Products could now be created through the

combination of inputs from perhaps ten countries or more. In addition some specialized

suppliers like Flextronics have emerged that can produce entire products including

assembly operations.

A second wave started to occur in the early 1990s, when firms decided to start

getting rid of their information technology (IT) departments, that had, over time grown to a

substantial size (Cross, 1993). This IT outsourcing wave spawned the growth of specialist

providers, such as EDS and Accenture. International sourcing mostly involved labor-

intensive programming activities, which due to their relatively standardized nature, could

be sourced from locations like India with relative ease. IT itself had turned into more and

more of a commodity and many firms started to show little interest in developing new

information systems in-house. The rise of commercial applications for a wide range of firm

activities, epitomized in Enterprise Resource Planning systems, also implied that a

marketplace had developed where independent suppliers could make competitive offerings.

In recent years we have seen the rise of business process outsourcing in what has

become known as the offshoring movement. The object has now broadened from just IT

services to a range of other services, including those in accounting, human resources

management, finance, sales and after-sales such as call centers. India is still a primary

target country, and has now produced a range of strong local business process providers

such as Infosys and Wipro, but competition from elsewhere is on the rise. It is this third

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wave of business process outsourcing that is now generating so much noise and so many

media headlines in part because it has been suggested that the foreign suppliers of such

business processes may be moving up the knowledge chain more rapidly than buyers are

expecting and such knowledge transfer could in the long run undermine buyers’ ability to

differentiate themselves from their foreign suppliers in the marketplace. Such hollowing-

out concerns, of course have previously been raised about outsourcing of manufacturing

activities as well (Bettis, Bradley, and Hamel, 1992; Markides and Berg, 1988; Kotabe,

1998). Our argument on these recent waves of international sourcing is summarized in

Table 1. We will now turn to the performance consequences of international sourcing.

Table 1: Recent waves in international sourcing

Time period First Wave(Since 1980s)

Second Wave(Since Early 1990s)

Third Wave(Since Early 2000s)

Type of activity Manufacturing Information Technology Business Processes

Destinations China, Central and Eastern Europe, Mexico and others

India, Ireland and others India, Pakistan, South Africa and others

Type of firms Manufacturing Manufacturing, banks and others

Financial services, services more generally

Primary motives

Reduction in labor costs Obtaining enough skilled programmers and cost reduction

Reduction in labor costs and round-the-clock service provision

The performance rationale

It is widely suggested that international sourcing occurs in order to improve firms’

performance, particularly their cost effectiveness (e.g., Trent and Monczka, 2003). Firms

located in OECD countries often find that the costs of labor are excessive compared to the

value that is added to their products. While far-away locations such as China lag behind in

productivity, they make up for this lower productivity by providing much lower labor

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costs, sometimes even culminating in de-automation of tasks when they are transferred to

these locations. Indeed, we have seen some cases, such as a range of bicycle components,

where the production cost differences are so large that it makes no sense to consider

domestic sourcing. This labor cost advantage is of course most significant when labor costs

actually make up a substantial part of overall production costs. At the other extreme we

find some international sourcing that is motivated by knowledge concerns. For some

inputs, such as aircraft parts and technical expertise, may be required that is only available

in other countries and hence makes international sourcing not so much a choice as an

imperative. The source countries in these instances would mostly be other OECD

countries. Where sourcing of raw materials is concerned, a choice may not even be

available to source them domestically. Similarly for certain intermediate products, it makes

much sense to source them for locations near the raw materials source. Another argument

in favor of international sourcing is that it may allow a firm to produce closer to sales

markets, thereby increasing access. Japanese manufacturing firms have for instance over

time replicated supply chains in North America and Europe to operate closer to these

markets. Production and sourcing experience in these regions has also allowed them to

improve their product offerings. Another reason to opt for international sourcing is that

demand from various regions can be pooled and hence maximum scale and bargaining

power is achieved through single sourcing from a foreign supplier.

On the other hand there are also some disadvantages associated with international

sourcing. Typically the first type of problems managers and the popular press put forward

is ‘cultural differences’ between buyers and their foreign suppliers. Indeed, such

differences may affect relationship negatively but we would also like to point at

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institutional and language problems as potential sources of problems in these relations.

One Dutch manufacturer for instance mentioned during an interview we conducted how its

Spanish supplier never appeared to respond to its faxes, which were written in English.

When, however, the company had one of its employees translate the fax into Spanish, a

response suddenly emerged. Cultural misunderstandings and other communication

problems can lie at the heart of quality problems, although these can also be caused by

differences in technical standards or even just different expectation patterns. Another

source of discontent over international sourcing is the long lead times and supply chain

uncertainty it often produces. Levy (1995) takes this issue up in much more detail. Then

there are international trade rules that help determine the feasibility of international

sourcing (Swamidass and Kotabe, 1993). Finally there is the possibility that foreign

suppliers integrate forward into the buyers market, sometimes by inventing around patents

or ignoring them altogether.

This raises another layer of issues related to the long-term sustainability of firms’

core competencies. There are two opposing views of the long-term implications of

international sourcing. One school of thought argues that many successful companies have

developed a dynamic organizational network through increased use of joint ventures,

subcontracting and licensing activities across international borders (Miles and Snow.

1986). This flexible network system is frequently referred to as alliances. Such supply-

chain alliances allow each participant to pursue its particular competence. Therefore, each

network participant can be seen as complementing rather than competing with the other

participants for the common goals. Such alliances may even be formed by competing

companies in the same industry in pursuit of complementary abilities (new technologies or

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skills) from each other. The other school of thought argues that although this may be true

in gaining transitory advantages in the short run, there could also be negative long-term

consequences resulting from a company’s dependence on independent suppliers and

subsequently the inherent difficulty for the company to sustain its long-term competitive

advantages because it could not keep abreast of constantly evolving design and engineering

technologies without engaging in those developmental activities (Kotabe, 1998).

The hollowing-out argument we discussed earlier nicely captures such problems:

over time a firm’s technical expertise and capability surplus vis-à-vis its foreign suppliers

diminished to the point that its value added is limited and it is little more than trading

company. These arguments are summarized in Table 2. It seems fair to conclude that

international sourcing provides both advantages and disadvantages.

Table 2: Some advantages and disadvantages of international sourcing

Possible Advantages Possible Disadvantages

Increases size of potential supply base Having to deal with foreign institutions such as legal differences

Lower production costs, especially for labor intensive production and services

Having to deal with a foreign culture which could affect communication

Increased technical expertise, especially for high-tech products from specialized locations

Having to deal with a foreign language which could affect communication

More flexibility to switch between supply sources, whether internal or external

Need to pay import duties where applicable

Source closer to sales markets, experience in sourcing may be translated into sales

Transportation costs and supply chain uncertainty

Achieve scale economies through use of one global supply source

Forward integration by foreign suppliers, patent infractions possible

Source of intermediate products closer to source of raw materials

Quality problems

Raw materials only available from Can affect employee commitment and

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foreign sources public relations

Focus on core competencies Dependence on independent suppliers, and decreased ability to keep abreast of emerging technical requirements

On balance

We therefore propose a more balanced view of how international sourcing is related to firm

performance. Elsewhere we have talked at length about the relationship between the degree

of outsourcing across all activities of a firm and the performance of that firm (Kotabe and

Mol 2004, 2005). We proposed and empirically verified that firms are best off by

outsourcing some but not all of their activities. The underlying argument is that firms that

outsource all of their activities run into a string of problems, like lack of innovation and

bargaining power, and an inability to be distinct in the eyes of the customer. Firms that are

completely vertically integrated however, fail to use the powerful incentives supplied by

markets and become bureaucratic and inefficient. Therefore, outsourcing some but not all

activities provides the best solution overall and there is an optimal degree of outsourcing.

Deviations from that optimum are costly and the larger the deviations, the more severe the

performance penalty will be. Hence there is a negative curvilinear relationship (inverted U-

shape) between degree of outsourcing and firm performance.

We believe a similar line of reasoning can be applied to the degree of

internationalization of sourcing and how that affects performance. More specifically, there

are advantages and disadvantages associated with international sourcing, as we highlighted

above. As a firm does more international sourcing, the disadvantages become larger to the

point where they severely impede performance. If firms do no international sourcing at all,

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they cannot access any of the advantages of international sourcing such as a wider supply

base to choose from. This line of reasoning is consistent with research in the International

Business and neo-institutional economics traditions, particularly the transaction costs

framework (Williamson, 1985).

Williamson (1985) distinguishes between production costs and transaction costs,

the former referring to the costs of actually producing a good or service, the latter to all

those costs that are incurred as the product is transferred from one supply chain partner to

the next. When firms use foreign suppliers, this potentially lowers production costs, as we

discussed above. In some instances, of course, production costs of a local supplier are

actually lower than those of any foreign supplier but this is the exception and not the rule.

Transaction costs, on the other hand, are invariably higher for international sourcing, as

there are all kinds of institutional, cultural and language barriers that must be overcome.

Rangan (2000) has discussed this in terms of the costs of ‘search and evaluation’.

Searching for supply sources abroad, whether internal or external sources, is somewhat

more expensive than search for local supply sources. Evaluating those foreign supply

sources is much more expensive, as the costs of evaluation are strongly related to the

familiarity that decision-makers have with the other party. Since foreign firms are likely to

be less familiar and decision-makers cannot draw on their networks so much to help them

evaluate these sources, this induces substantial evaluation costs. Rangan (2000) uses this

argument to explain why buying firms are much more likely to choose a domestic supplier

than a foreign supplier, even when the physical distance between the buyer and each of

these suppliers is the same.

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International sourcing, so we argue, is therefore a balancing act between production

and transaction costs. Firms need to find the proper balance between domestic and foreign

supply sources if they wish to locate on the top of the curve and obtain the highest possible

performance. They do this by using foreign sources for part, but not all of their sourcing.

Sourcing everything from abroad produces poor performance results because the

disadvantages of international sourcing, like the hollowing-out argument, become too

large. Focusing all efforts on domestic supply sources, however, is a serious form of

myopia with equally disastrous effects for firm performance, primarily because important

opportunities to improve competitiveness are missed out on. Figure 1 contains a graphic

illustration of our argument.

Figure 1: A negative curvilinear relationship between the degree of international sourcing and firm performance

Redressing the balance

If firms need to balance local and international sourcing, then what can we say about a)

what their international sourcing strategies look like and b) what their international

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sourcing strategies ought to look like? For many firms sourcing location appears to be an

afterthought, so our experience tells us, a decision that is a derivative of which internal or

external source they wish to use. The process through which relocation takes place often is

very discontinuous. No relocation takes place in an industry for quite a while, until all

firms in an industry suddenly decide to relocate to one and the same location, say China.

Elsewhere (Kotabe and Mol, 2005) we have suggested that the notion of bandwagoning,

which implies leader-follower behavior in international sourcing decisions, may be

applicable here. There is much uncertainty surrounding international sourcing decisions in

the form of currency fluctuations, political change, possible supply chain instability, and

perhaps most importantly uncertainty concerning the future development of relations with

internal and external supply chain partners. In need of some reassurances, firms look for

decision-making heuristics that allow them to avoid paralysis. Copying the behavior of

competing firms can clearly be one such heuristic, which could be framed ‘competitive

bandwagoning’ (Abrahamson and Rosenkopf, 1993) as it involves the perception that

competitors improve their performance due to strategic decision-making. Another heuristic

can be to take on board the advice and submerge to the pressures of external institutions,

such as suppliers, consultants, media, and business school professors. This type of process

we frame ‘institutional bandwagoning’ (Abrahamson and Rosenkopf, 1993).

Bandwagon processes are not inherently bad, but there is no reason to believe they

will normally produce the best results, either. Bandwagoning may easily lead to too much

international sourcing. On the other hand, periods preceding a wave of international

sourcing caused by bandwagoning are normally characterized by inertia, implying there is

too much domestic sourcing. In other words, if firms are led by bandwagoning in their

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international sourcing strategy, this is normally an indication their international sourcing

policies are not well-balanced. Furthermore the firm’s competitive advantage will not be

raised if what it does is merely to copy other firms’ behavior. The leaders of an

international sourcing wave may appropriate some benefits early on but for followers this

is normally not the case.

Tackling the second issue, what firms’ international sourcing strategies ought to

look like, we can take our negative curvilinear relationship as a base. Firms should use

some international sources then but not rely on them exclusively. For purposes of

simplification we have up to this point discussed the curvilinear relationship and the top of

the curve as if they were one and the same for every individual firm. This, of course, is not

the case. Where the optimal point lies, in terms of what part of all sourcing should be

international, will vary wildly depending on the context in which the firm operates. In

addition how high the top of the curve is, i.e. what optimal performance is possible for a

given firm will equally vary from case to case. This does not mean, however, that we

cannot provide any type of guidance as to what drives these outcomes. In fact, previous

research by us and other scholars has provided a range of possible guidelines for firms to

follow. Essentially these can be split into four types of predictors of international sourcing,

which are country, industry and product, firm, and relationship (also see Kotabe and Mol,

in print).

At the country level, both the characteristics of the country the sourcing firm is

located in, and differences between that country and the source country matter. For

instance, and this may sound obvious, size of the country matters. Firms located in the U.S.

are much more likely to find a proper domestic supply source than are firms in Denmark.

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In countries that are well integrated in a regional trade bloc, such as NAFTA or the

European Union, it is easier to use foreign supply sources, located in countries inside the

trade bloc. If the country in which the sourcing firm is located has liberal policies

concerning imports and exports, this helps to promote various forms of international

sourcing too. Tariff barriers have been shown to negatively impact international sourcing.

In addition there are several inter-country differences that matter. First, either the

production cost differential or the knowledge differential between the sourcing country and

the source country must be sufficient to overcome the costs of transacting across borders.

By this we mean to say that a) either production in the other country must be a lot cheaper,

or b) sources in the other country must be able to produce a good or service that is far

superior to what domestic sources can produce. This production cost or knowledge

differential can therefore be seen as an enabler of international sourcing. On the other hand

there are several other inter-country differences that can act as inhibitors. These inhibitors

invariably fall under the header of culture, institutions and language. They include written

rules in the form of law for instance, which may determine how safe it is to share

intellectual property or other assets. They also include the costs that arise due to the need

to bring in translators, or the costs that arise when no translators were brought in and ex

post alterations must be made. They may include costs that come about because the habits

of doing business vary from one place to the next, for instance because bribes can be

perfectly acceptable in some countries but have been outlawed in others. As the magnitude

of inter-country differences grows, so they become more of an inhibitor and discourage

international sourcing more.

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At the industry and product level several additional considerations arise. The type

of product is perhaps the core consideration for determining the sourcing location. Many

services for example require face-to-face contact, which simply makes international

sourcing impossible. Some types of goods are so heavy compared to the value they

represent, that transportation costs become excessive even though for many other goods

transportation costs have more or less become irrelevant. It may also be considerations of

transportation time that drive a firm towards domestic sourcing. As we noted before, for

labor-intensive products the reverse is often true, as labor intensity generally encourages

international sourcing from low cost source countries. Likewise where many highly

specialized inputs are needed to put a product together, international sourcing can be the

only option. Airbus for instance sources different components from a range of European

countries, where supplier firms have each developed their own area of specialization.

Industry dynamics can be another factor driving the viability of international sourcing.

When there is much competition, especially competition for being the lowest-cost

producer, firms not only tend to outsource more but are also pressed into looking for the

lowest-cost supply sources worldwide. In highly uncertain environments, it may be helpful

to source nearby since that improves response times. As we discussed earlier, when many

other firms in an industry source from abroad, a firm may feel bandwagon pressures to

copy that behavior. There are, however, instances where this makes much sense, like when

foreign suppliers have managed to learn from other buyers and have now become more

efficient or more effective producers as a consequence.

At the firm level further explanations of international sourcing have been

discovered. Large firms are much more prolific when it comes to international sourcing.

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There are two ways of explaining this. The literature has discussed the barriers that small

firms face when they attempt to source internationally in the form of lack of knowledge of

foreign supply markets, formal requirements for shipping goods, the inability to force

foreign suppliers to do their job well due to lower bargaining power and some additional

factors. Unlike large firms they are not able to build a dedicated international sourcing

function. There is, however, another side to this coin, which is that large firms stand to

benefit more from international sourcing. Since transaction costs are relatively, though not

completely, independent of transaction volumes, they become smaller relative to

production costs as production volume rise. In other words, large firms have much more of

an incentive to source internationally because they stand to gain more in the form of

production cost savings. Because large firms source larger volumes they sometimes have

to source internationally because it is the only way to find these volumes. Multinational

firms have also been shown to be more apt at international sourcing. These firms have

international experience and often global networks that were built through other activities

such as international sales or mergers and acquisitions across borders. Another way to look

at this is to say that different forms of internationalization, inward and outward, are

correlated simply because some firms’ strategies and markets are more international. How

multinational firms are organized internally is a further cause of differences in international

sourcing. Those firms that are more tightly integrated between countries exchange more

information between their various locations, which helps them to assess foreign suppliers

more easily. In terms of the search and evaluation framework we discussed earlier, more

tightly integrated firms are able to lower the costs of searching for and evaluating foreign

supply sources because they can obtain more and more reliable information through their

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internal networks. Another form of integration that has been shown to positively impact

international sourcing, is integration between different functional areas of a firm (Kotabe,

1992; Mol et al., 2004). Where there is much communication between operations,

marketing, R&D and other functions, it becomes easier to source abroad because sourcing

needs can be defined less ambiguously.

The fourth level at which explanations of international sourcing can be invoked, is

the relational level. In this area research findings are a bit less well developed so some of

the things we will now mention are perhaps still speculative in nature. Offshoring

primarily relies on internal relations, between headquarters and subsidiaries or among

subsidiaries. International outsourcing, on the other hand, primarily revolves around

relations with external foreign suppliers. Since these two types are qualitatively different,

we will discuss them separately. In the area of subsidiary relations the focus has gradually

shifted from how to control subsidiaries to how to best employ them for knowledge

creation and knowledge transfer purposes. In sourcing terms, this implies that foreign

subsidiaries are no longer used just as low-cost production bases but also to innovate and

add value to products. Furthermore all subsidiaries taken together are now viewed as the

internal network of a firm. Since ties between network partners vary, offshoring to a

particular source country is likely to depend on the strength of relational ties between the

sourcing subsidiary and the source subsidiary. These relational ties may occur both at the

personal and the organizational level. When subsidiary managers share previous

experience with the managers of another subsidiary abroad, they are more likely to employ

that subsidiary for sourcing inputs. Similarly a previous sourcing relationship between two

subsidiaries is a positive predictor for a future sourcing relationship. Where external

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suppliers are concerned a similar argument holds, previous experience increases the

likelihood of future transactions but some additional arguments apply. There is also an

issue with the fit between the organizational cultures of the buyer and supplier firms.

Moving beyond differences in national cultures, we can also look at how the company

specific cultures differ and how this impacts international sourcing relationships. When

one company values a perfect technical quality of services or goods while the other is

mostly interested in the timeliness of delivery, this negatively impacts the likelihood of a

future sourcing relation. Some firms are known to have a larger capacity for building

supplier relations than others. Toyota is perhaps the most well known example of a firm

that has managed to create strong relations with suppliers. Because building relations with

foreign suppliers is generally harder than building relations with domestic suppliers, for

reasons we discussed earlier, this capacity is crucial in determining how effectively

international sourcing can be undertaken and how much international sourcing can be

undertaken effectively.

As a final note to this part of the discussion, and to complicate matters further, the

optimal point in terms of how much international sourcing to engage in will shift over

time. Over the past 15 to 20 years we have certainly seen it shift to the right, which is

towards more international sourcing. Some of the underlying factors, which have been

discussed at length in the globalization literature, include new information and

communication technology, lower transportation costs and more transparency and perhaps

even convergence across international markets. Of course that a shift toward more

international sourcing has occurred in recent years need not mean this trend will continue

endlessly. The past is often a reasonable indicator for the future but never a great indicator.

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Riding the waves

Now what practical advice can we give managers and other decision makers who deal with

international sourcing decisions and what do we see as areas where more research must be

done to improve our understanding of international sourcing? Turning to the last question

first and as we look through the landscape on international sourcing, there are several key

points to make. First, research on this topic is scattered through a number of functional

areas like marketing, operations management, international business and international

management, and supply chain management (for a more detailed discussion see Kotabe

and Mol, in print). Unfortunately there is relatively little communication between these

fields and as a consequence knowledge accumulation is not as effective as it could be.

Rather than reinventing a wheel that has not yet been seen in their specific area of work,

we would encourage scholars to go out and explore other areas and find out how these can

add to their understanding. Second, there is a clear lack of understanding of how the

process of international sourcing develops over time. There are not many studies that

follow the development trajectory a firm takes over time in international sourcing. Are

capabilities to source across borders built over time? If so, does this happen in a more or

less linear fashion or rather more through a set of discrete events? Is there a clear

progression over time in terms of how different the source countries are that firms source

from? Is there perhaps a cyclical model at work where international sourcing is followed

by disillusionment and a reversal of earlier decisions? Answering these questions would

require process-based studies, in the form of case studies and the like.

As we showed above, achieving the right balance is crucial in international

sourcing. This implies that firms need to find mechanisms to adapt to changing

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circumstances without falling foul to bandwagon pressures. Clearly an in-depth analysis of

the advantages and disadvantages of international sourcing in every individual case

benefits the quality of managerial decision-making. The factors to analyze include those

we discussed above and probably some more. Formal evaluation tools might be developed

based on these factors. An organization structure that could be of value to firms is an

international sourcing center, where information on foreign sourcing opportunities is

gathered and disseminated to local decision-makers. A center like this could also aid in the

development of formal evaluation tools. More generally, there clearly is an

experimentation process involved in international sourcing, which requires firms to make

mistakes in the form of episodes of too much domestic sourcing or too much international

sourcing. Those firms that understand they are experimenting and are willing and able to

learn from their mistakes are in a better position to improve future decisions on

international sourcing. This is a far from trivial step.

Since there are bound to be further waves of international sourcing in the future,

what matters is how to ride these waves. We believe that those firms that anticipate the

wave and deal with it in a timely and effective manner will turn out to be winners. If,

however, international sourcing is just a response to periods of inertia and sluggishness

there is unlikely to be much competitive value in it. The best wave riders understand how

waves are shaped and as a consequence can predict their shapes and speed.

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References

The Economist (2004) The rich world's Bangalore. Nov 11th 2004.

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