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Separable but not equal: The location determinants of discrete services offshoring activities

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Abstract

In this paper we explore the question of why firms offshore particular services to specific geographic locations. We draw on research related to the unique characteristics of services in trade and commerce, and more recent analyses of the transnational unbundling and spatial dispersion of business processes. We move beyond a simple assessment of the cost sensitivity or relative sophistication of offshoring services and develop a typology emphasizing the degree to which offshoring services activities are interactive, repetitive, or innovative. We suggest that the location of offshoring projects will depend on the particular mix of these attributes, and test this assertion using a data set of 595 export-oriented offshore services projects initiated from 2002 to 2005 by US and UK company parents in 45 developed and developing countries. We find that offshore location choices greatly depend on these services characteristics, and in sometimes surprising ways, and draw implications from our findings for international business theory, policy, and practice.

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Notes

  1. In all there were 45 countries represented, with a total of 595 FDI projects. The country locations represented were Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong, Hungary, India, Indonesia, Ireland, Israel, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Norway, Pakistan, the Philippines, Poland, Portugal, Romania, Russia, Slovakia, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey, the United Kingdom, the United States, and Venezuela. We include the UK as a host country for FDI projects initiated by US companies and vice versa.

  2. As Figure 1b illustrates, India is the largest country destination, representing more than 25% of the total projects in our sample. Because of India's large presence, as an additional robustness check we re-ran our models without India in the sample. The results for Model 1 were identical to those with India included, with the exception that t values were somewhat lower. Results for Model 2 were nearly identical, except that for call centers wage no longer was a significant predictor of call center location vs the reference group of shared services centers, and for IT service centers English became significant in comparison with the reference group. Given the importance of India as a destination of offshore projects, we retained India in the sample.

  3. As an additional robustness check, we re-ran the model with the inclusion of Germany and Japan, the next two largest country sources of offshoring projects. The substantive results were the same as those reported in the Results section.

  4. These are government stability, socio-economic conditions, investment profile, internal conflict, external conflict, corruption, military in politics, religious tensions, law and order, ethnic tensions, democratic accountability, and bureaucracy quality. In the overall composite the first five factors are allocated 12 points, the next 6 points (half the weight of the first five), and the final component 4 points.

  5. As an additional robustness check, and in order to ensure that there were no time-dependent effects, we estimated Model 1 with a year dummy: substantively identical conclusions were reached regarding the above coefficients, and the dummy variables were not significant.

  6. To check for potential differences in our sample attributable to the dispersion of developing and developed countries, using the World Bank classification of higher- and lower-income countries, we created a dummy variable that took the value 1 if the host country was high income (i.e., developed), and 0 otherwise We then re-estimated Model 4 including the new variable. The principal difference in this model from the one reported in the Results section is that Log Ratio Wage becomes marginally significant, as opposed to significant. This is understandable in light of the fact that we would expect wages and country income levels to be substantially correlated. Indeed, we found the dummy variable to have a correlation of 0.849 with our Log Ratio Wage variable. For these reasons, we retained and report our original model with the full sample.

  7. We recognize that each of these categories shares some combination of the three characteristics we propose. For example, in addition to being interactive, some outbound call centers provide a service that is highly similar (repetitive) from one producer–consumer relationship to another (telephone solicitation), such that the more this act is repeated, the more routine and undifferentiated it becomes. Even inbound call centers receiving inquiries about computer problems all begin with a common routine (“Have you turned the computer on and off? Have you checked that the computer is plugged into an outlet?”) that is driven by scripts and pre-programmed troubleshooting decision trees. However, on balance, we consider interactivity to be the defining feature of call centers. Hence, while we locate the three services sectors in Figure 2 to reflect that they are not fully discrete, we evaluate and classify each to the extent that we can identify its principal defining feature.

  8. For small values of y, the semilog interpretation holds.

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Acknowledgements

We thank special issue editors Tom Murtha, Silvia Massini, and Martin Kenney and three anonymous reviewers for their feedback and guidance.

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Authors and Affiliations

  1. Department of Management, Villanova School of Business, Villanova University, Villanova, USA

    Jonathan P Doh

  2. Department of Business Administration and Accounting, Wesley College, Dover, USA

    Kraiwinee Bunyaratavej

  3. Department of Information and Decision Sciences, Salisbury University, Salisbury, USA

    Eugene D Hahn

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  1. Jonathan P Doh
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  2. Kraiwinee Bunyaratavej
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Accepted by Thomas Murtha, Martin Kenney, and Silvia Massini, Guest Editors, 16 July 2008. This paper has been with the authors for four revisions.

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Doh, J., Bunyaratavej, K. & Hahn, E. Separable but not equal: The location determinants of discrete services offshoring activities. J Int Bus Stud 40, 926–943 (2009). https://doi.org/10.1057/jibs.2008.89

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