Global Sourcing and Foreign Knowledge Seeking: A Formal Model and Empirical Analysis

Abstract

This study examines the antecedents of firm global sourcing choices, focusing on the role of foreign knowledge seeking in this context. We develop a formal model showing that firms that invest in foreign R&D are driven to increase their levels of offshore integration, especially when they have strong capabilities, and from developed countries. In contrast, firms that do not invest in foreign knowledge seeking are more likely to pursue offshore outsourcing in response to cost pressures, especially when they have weak capabilities, and when they are able to better monitor third party suppliers through investments in information technology. We find support for these insights analyzing a unique and comprehensive firm-level panel of cross-border product transfers by US MNCs from 1989 to 2004. Our paper thus highlights the effect of foreign knowledge seeking on firm global sourcing choices, while distinguishing between the antecedents of offshore integration and offshore outsourcing.