Management Science, January 2015
Abstract: We develop and test a rigorous theoretical account of firm global sourcing decisions, distinguishing the antecedents of offshore integration from those of offshore outsourcing. Although traditional theories of global sourcing focus on lowering costs, we argue that as high-performing firms seek to develop new capabilities by tapping into foreign knowledge, they will increasingly turn to offshore integration to reap colocation benefits and overcome expropriation challenges. By contrast, offshore outsourcing will be preferred by less profitable firms seeking to tap into low-cost inputs, especially as investments in information technology lower monitoring costs. Empirical analysis of a comprehensive panel of cross-border product transfers by U.S. manufacturing multinational corporations from 1989 to 2004 reveals support for these arguments. Our study thus highlights the effect of foreign knowledge seeking on global sourcing and helps explain recent trends in this increasingly important phenomenon, especially the increasing reliance on offshore integration in technology intensive industries.