Academic journal article Journal of Business Economics and Management

International Outsourcing: Empirical Evidence from the Netherlands/Tarptautines Uzsakomosios Paslaugos: Empirinis Tyrimas Nyderlandu Pavyzdziu

Academic journal article Journal of Business Economics and Management

International Outsourcing: Empirical Evidence from the Netherlands/Tarptautines Uzsakomosios Paslaugos: Empirinis Tyrimas Nyderlandu Pavyzdziu

Article excerpt

1. Introduction

Outsourcing is used to describe all the subcontracting relationships between firms (Egger, Falkinger 2003; Fixler, Siegel 1999; Gilley, Rasheed 2000). International sourcing may assume various forms according to geographic location and the level of control in the production function. Domestic insourcing refers to production within the enterprise group to which the enterprise belongs and within the compiling country, whereas international insourcing describes production within the group to which the enterprise belongs but abroad (by affiliated enterprises). There are two kinds of outsourcing: production and services. This paper will specifically focus on outsourcing of production activities.

Domestic outsourcing signals production outside the enterprise or group by non-affiliated enterprises but within the compiling country; while the term "international outsourcing", as will be used in this paper, represents production outside the enterprise or group and outside the compiling country by non-affiliated enterprises. This involves foreign subcontracting.

While manufacturing activities are independent of the location of production, majority of service functions requires a proximity to markets and clients. The international outsourcing of services as a business strategy is being facilitated by information and communication technology and networks. Another significant facilitator is the increased globalisation within services markets as a consequence of market deregulation and trade liberalization.

International outsourcing requires adequate information and organizational infrastructures, effective coordination mechanisms, and logistic capabilities. While it offers numerous benefits, it also poses some recurrent problems such as cultural and communication barriers, longer lead times, higher transport costs, and risks associated with transactions involving distant interlocutors and different normative systems.

Despite the increasing importance of this phenomenon, there is still a lack of literature on empirical investigations and theoretical models that would help enterprises in their outsourcing decision. This scarcity is even more evident in the Netherlands, where empirical studies, going beyond mere case studies, are almost inexistent. This paper describes the results of a field survey on a sample of Dutch companies that was aimed at analyzing the different aspects and characteristics of international outsourcing in this context.

The rest of the paper is organized as follows. Section 2 provides some background information and reviews literature. Section 3 describes methodology and data. Section 4 presents and discusses the results. Section 5 concludes.

2. Background

The recent developments in the industrial, communication and technology areas have resulted in major changes in the ways products and services are planned, produced and distributed. As a measure to improve efficiency, firms allocate their resources to activities for which they enjoy comparative advantage, while other activities are increasingly outsourced to domestic or foreign external suppliers. Outsourcing is expected to reduce production cost relative to internal production because outside suppliers benefit from economies of scale, smoother production schedules and centralization of expertise (Chalos 1995; Roodhooft, Warlop 1999; Williamson 1989). However, the choice between internal or external production requires more considerations than pure production cost differences. For instance, according to the transaction cost economics, outsourcing is desirable only when the cost of asset specific investments is lower than the production cost advantage of outsourcing. This is a result of the fact that outsourcing makes previous investments a sunk cost to the firms.

McLaren (2000) and Grossman and Helpman (2002, 2005) emphasize the importance of the "thickness of the market" in determining the probability that final-good firms and suppliers of specialized inputs find an appropriate match so that investment and production can take place. …

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