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Cluster capabilities or ethnic ties? Location choice by foreign and domestic entrants in the services offshoring industry in India

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Abstract

We contrast the knowledge spillovers perspective, which focuses on the externalities that arise from locating in a cluster, with the social ties perspective, which emphasizes resource flow through ethnic connections, arguing that these factors differentially influence the location decisions of foreign and domestic entrants in the services-offshoring industry in India. We develop a typology of the capabilities involved in the offshoring of services and, using 108 location decisions across 11 city clusters, find that ethnic networks exert greater influence than cluster capabilities on location decisions, although, as expected, the effect is stronger and more widespread in the case of Indian rather than foreign firms.

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Notes

  1. Offshored services are typically enabled by information technology and cover a broad swathe of administrative and technical work, such as business processes outsourcing, medical transcription, engineering design, and call-center services. We refer to this set of offshored services as “information-technology-enabled services” (ITES), a term that is commonly used in India to describe them.

  2. We use the term “founder/affiliate CEO” to refer to the head of the entering firm. For domestic firms, this is the founder, who is typically also the CEO of the new firm. For foreign firms, this person is typically the first CEO or managing director of the new Indian affiliate.

  3. The conditional logit assumes the independence of irrelevant alternatives (IIA). This means that adding or deleting an alternative, in our case a city cluster, does not affect the odds of selecting an alternative among the remaining alternatives. The results of the Hausman–McFadden (1984) test for our model indicated that two of the cities violated IIA. However, Cheng and Long (2005) show that the Hausman–McFadden test has poor size properties, especially for small samples, and conclude that this test is not useful for assessing violations of the IIA property. In writing about the tests for IIA, Long and Freese (2006: 244) conclude by saying that “we do not encourage their use.” Instead, Long and Freese (2006) hark back to McFadden (1974), and suggest that conditional logit models should be used in cases where the alternatives can be assumed to be distinct in the eyes of decision-makers. Because our sample size is small and the clusters are clearly distinct, we use the conditional logit model in our analyses.

  4. The likelihood ratio test statistic evaluates whether the estimated branch-specific parameters in the nested logit estimation are equal to zero (null hypothesis). If the null hypothesis that the parameters are zero cannot be rejected, then the nested logit estimation is not appropriate for this model, and the conditional logit should be used. The statistic shows that the null hypothesis cannot be rejected. This lends additional support to our use of the conditional logit estimation.

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Acknowledgements

Earlier versions of this paper were presented at the Duke Conference on Offshoring, at an Academy of Management symposium, and at a special issue paper development workshop at the Academy of International Business, as well as at a Strategic Management Research Center workshop at the Carlson School of Management. We also thank Aks Zaheer and the Special Issue editors and reviewers for their comments and suggestions.

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Authors and Affiliations

  1. Carlson School of Management, University of Minnesota, Minneapolis, USA

    Srilata Zaheer & Mani Subramani

  2. College of Business Administration, Northeastern University, Boston, USA

    Anna Lamin

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  1. Srilata Zaheer
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Correspondence to Srilata Zaheer.

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Accepted by Martin Kenney and Silvia Massini, Guest Editors, 16 July 2008. This paper has been with the authors for three revisions.

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Zaheer, S., Lamin, A. & Subramani, M. Cluster capabilities or ethnic ties? Location choice by foreign and domestic entrants in the services offshoring industry in India. J Int Bus Stud 40, 944–968 (2009). https://doi.org/10.1057/jibs.2008.91

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