This study addresses how buyers organize their offshore outsourcing new product development relationships. Building on transaction cost economics and resource dependence theories, we propose a model of the influence of key new product development offshore outsourcing factors on two important buyers’ governance decisions (i.e., supply concentration and degree of supplier involvement). The antecedents, drawn from the marketing, management, and international business literatures, include: three sources of asset specificity (degree of modularity, strategic value of the project, and technology specificity) and two sources of uncertainty (cultural distance and technological discontinuity). The results, derived from an analysis of 200 offshore outsourcing new product development relationships, provide new insights for academics and practitioners.
The study of globalized, rapidly changing technology-intensive (TI) markets has attracted research attention in the marketing, management and international business disciplines (John, Weiss, & Dutta, 1999; Matthews & Cho, 1999; Stremersch, Allen, Benedict, & Ruud, 2003). TI markets are characterized by uncertainty due to heterogeneous and rapidly changing technologies, and by the fact that buyers frequently lack relevant prior experience. To survive, firms increasingly build new product development (NPD) capabilities and achieve strategic flexibility by outsourcing and building close supplier relationships in offshore markets (Carson, 2007; Kotabe & Murray, 1990; Yalcinkaya, Calantone, & Griffith, 2007). For example, IBM, Accenture, Electronic Data Systems, Computer Sciences Corp. and HP all recently signed global sourcing contracts exceeding $1 billion in value; growing foreign companies, such as TCS, Infosys and Wipro, are rising in the top 10 supplier ranks (12 July 2006 in The Wall Street Journal; 28 December 2007 in Business Wire).
Offshore outsourcing creates avenues for inter-firm learning and provides for global leverage. Building NPD partnerships with offshore suppliers provides buyer firms with substantial advantages, such as the ability to increase product variety, decrease necessary NPD resources and costs required to bring new products to market, and speed up the introduction of innovative products. Partnering with offshore suppliers, however, can also create supplier–buyer dependence, risks of leakage of tacit know-how, and loss of knowledge-based capabilities (Heide & Weiss, 1995; Stremersch et al., 2003). Dependence on suppliers for product design may put intellectual property (IP) in jeopardy, casting doubt on how much intellectual property the firm really owns. This threat increases when collaborating on a global scale due to differences in IP protection across markets, cultural distance, and so on; for example, business press discusses security risks and breaches of negotiated contracts (e.g., counterfeit and/or over-quota production; Fortune, 1 May 2006). Surprisingly, little research has investigated governance structures of these relationships, and thus we investigate how buyers organize offshore outsourcing NPD relationships in the face of asset specificity and uncertainty.
While this study provides a number of new insights into offshore outsourcing of NPD processes in technology intensive markets, its implications are tempered by its limitations. For instance, although this study explored two forms of channel governance decisions, its findings are limited by its context and measurement. For example, only technology intensive markets were examined. While technology intensive markets are one type of fast moving markets, they are not the only type and therefore exploration of other fast moving markets should be investigated. Moreover, one could argue that industry issues could play a significant role across markets (e.g., telecommunications versus pharmaceutical). Further, in markets with dynamic consumer tastes, a different set of conditions that could influence firm governance structuring.
Second, although this study explored two types of channel governance decisions, these two are not the only forms of governance. In this study, the decision was made to adhere to an arms-length transaction context so that offshore outsourcing issues could be investigated. However, under TCE, one could argue that vertical integration as a governance option needs to also be explored (Williamson, 1975). This is particularly important in TI markets where competitive advantage is often embedded within the specified technology. Future research should explore alternative governance forms for organizing NPD process relations in TI markets. In particular, examination of plural governance forms (cf., Heide, 2003) could shed additional light on the organization of firm boundaries in fast changing markets.
Third, a narrow perspective (i.e., NPD) was taken in relation to offshore outsourcing. The domain of offshore outsourcing is much broader and clearly warrants investigation. For example, offshore outsourcing of NPD denotes upward migration issues within the value chain. The influence of offshore outsourcing on other activities at the same level of the value chain as well as other levels of the value chain, would increase our understanding of this important topic.
