Impacts of Risk and Service Type on Nearshore and Offshore Investment Location Decisions

Abstract

0Offshoring of services has gained considerable attention in management circles. however, little empirical research has explored the emerging sourcing alternative of nearshoring, despite the fact that firms situate about one out of five projects abroad in a nearshore location as opposed to an offshore location. 0 We empirically assess the impact of economic and risk factors regarding firms' services location choices between offshoring and nearshoring. We find these factors influence firm decision-making regarding services offshoring location choices, and that these factors are more or less important to firms depending on whether the firm offshores relatively higher versus relatively lower skill services. 0Offshoring firms appear willing to trade off some gains in one area (lower wages) to mitigate costs in others (higher risk), and that the factors that drive nearshoring are qualitatively different than those that influence offshoring.

Offshoring of Services: A Review of the Literature and Organizing Framework

“…On the other hand, higher risks associated with the host (versus home) country tend to create a stronger deterrent to locating higher skill services. Hahn et al (2011) also demonstrate that the factors driving near-shoring are qualitatively different from those involving far-flung locations. According to their findings, near-shoring remains a valuable strategic alternative to remote offshoring, as firms appear willing to trade higher gains, including labor costs, in order to alleviate the high risks of other dimensions such as political unrest.…”

“…For instance, Kumar et al (2009, p. 646) stress that ''the guidelines for global distribution of work are primarily experience-driven, ad hoc, and without a cohesive theoretical base.'' Our review also shows that most studies explicitly focused on the specific task attributes associated with offshored services examine their impact on the location choice (Doh et al 2009;Hahn et al 2011;Jensen and Pedersen 2011;Zaheer et al 2009). Future research should further our understanding of how task characteristics can influence other relevant aspects of OS implementations, such as the adoption of specific coordination and control mechanisms.…”

“…Furthermore, they show that system-based capabilities are more influential than either people-embedded routine or creative capabilities when it comes to attracting companies to a particular offshore cluster. Hahn et al (2011) consider the basic distinction between lower and higher skill services and, similarly to Jensen and Pedersen (2011), who examine the offshoring of standardized versus advanced activities, show that discounted wages in the host (versus home) country have a stronger influence in determining the attractiveness of a particular offshore location for lower skill services. On the other hand, higher risks associated with the host (versus home) country tend to create a stronger deterrent to locating higher skill services.…”

“…At the more micro level, aligned with an increasing awareness that the specific nature of offshored activities is a primary determinant of location decisions (Graf and Mudambi 2005;Hätönen 2009), four studies focus on the attributes of offshored services and examine their influence on the OS location choice (Doh et al 2009;Hahn et al 2011;Liu et al 2011;Zaheer et al 2009). Doh et al (2009) consider the degree of interactiveness, repetitiveness, and innovativeness of services and suggest that these influence the location choice by interacting with basic host country factors.…”

“…The impossibility of separating the production and consumption of a service has obviously precluded the geographic relocation of its production away from the consumer. Recent advances in information and communications technology (ICT) and the emergence of a global workforce have helped loosen this constraint, enabling companies to relocate service activities formerly considered nonoffshorable to foreign locations, where they can be performed more efficiently and coordinated in a global system (Apte and Mason 1995;Bunyaratavej et al 2007;Hahn et al 2011;Murray and Kotabe 1999;Tambe and Hitt 2012).…”