The Dynamics of Offshore Sourcing: A Study of Australasian High-tech Small–medium Manufacturers
This study contributes to knowledge about offshore sourcing dynamics by investigating the determinants of a firm’s mode choice during offshore sourcing, highlighting the triggers that initiate mode switching. Accordingly, the study focuses on a foreign firm’s choice of governance mode, while also contributing to a deeper understanding of how governance mode switching impacts offshored activities, using a sample of Australasian small and medium-sized enterprises (SMEs) within the high-tech manufacturing industry outsourcing to China. The study investigates the triggers that initiate mode switches and the impact of alternative governance arrangements on a firm’s offshored activities in China.
This study utilises the philosophical position of an interpretive framework. It employs multiple case studies as a strategy of inquiry, drawing on the experience of offshore sourcing to China recounted by 20 entrepreneurs or key personnel at the managerial level, during in-depth, semi-structured face-to-face interviews, which were then thematically analysed. The study uses the metonymic title of governance mode choice and mode switching determinants, theoretical constructs that developed from the findings and were integrated into a framework and discussed in the light of relevant literature.
The results show that every participant firm changed governance mode at least once whilst offshoring in China and that there was a pattern of mode switching among the studied firms. After being in China for more than two years the findings show that firms start switching their transaction modes in various ways that are termed pure switch, mode expansion, or mode extension. The study shows that a firm’s mode and transaction switches could occur simultaneously, which extends understanding of the dynamic aspects of firms’ governance mode choices and mode switching during offshore sourcing and provides insights into the determinants that trigger and initiate mode switching.
The findings highlight a relationship between the firms’ learning process in acquiring market knowledge and their mode switching behaviour. As firms become more knowledgeable, they were willing to assume higher levels of risk and to commit resources to building trust-based relationships. This finding contributes to strengthening global value chain (GVC) theory suggesting that it is not only changes in task or transaction variables that trigger mode switching, but also learning, which enables both corrections and moves towards more optimal modes.
The thesis offers three key findings. First, it is clear that there are shortcomings in existing theory, including global value chain theory, transaction cost economics, and process models of internationalization. In particular the model of Gereffi et al. (2005) omits important determinants of both initial mode choice and mode switches. Second, it is not only the 3C variables (complexity, codifiability and supplier capability) that determine mode switching; there are other factors such as home-host country institutional differences and market knowledge acquired through experience in overcoming home-host country institutional differences. Third, the GVC model is static and lacks dynamism which the results of this study reveal in the form of ongoing learning and which is important in initiating different forms of mode switching (pure switch, mode expansion, and mode extension). The results illustrate that maintaining a firm’s international competitiveness through mode switching during offshore sourcing can be challenging but manageable, but one that can offer an opportunity for a stronger and more competitive market position. Policy makers, educators, and entrepreneurs can benefit from the findings that highlight factors critical to successful offshore sourcing and its contribution to SME competitiveness.