Investigating risks due to political environment as driver for other risks in offshore outsourcing

Abstract

In the current service-oriented economy, make-or-buy decisions are now do-or-buy decisions that reflect the strategic question of whether outside entities should be hired to perform significant support services or not. Some of the risks that offshoring apparently carries with it are the risk of alienating customers, and possibly even losing business permanently if the service experience is negative. Political risk is where a country's policies or situation will become unsupportive and negatively affect an institution's profits. The purpose of this paper is to empirically test a structural model based upon three important risk factors, i.e.: 1) risk due to political environment; 2) risk due to cultural differences; 3) opportunistic behaviour risk. Various statistical techniques were used to verify, validate and test the reliability of the hypothesis and their sub dimensions. Results of structural equation modelling revealed that risk due to political differences has a direct and significant impact towards risk due to cultural differences (0.73) and opportunistic behaviour risk (0.35), thus enhancing them. Also, risk due to cultural differences shows enhancement of direct impact on opportunistic behaviour risk (0.64).