The coincidence of private branding and foreign sourcing: Is there a causality direction?

Abstract

Private branding, a retail trend whereby products made by unaffiliated manufacturers are sold under the private brands owned by retailers, has coincided with another trend known as foreign sourcing, whereby retailers outsource products from foreign manufacturers. Prior studies have tended to treat private branding and foreign sourcing as two separate trends without paying much attention to their coincidence. In this paper, we take a transaction cost approach to explore why the two retail trends coincide and whether there is a causality direction between them. Focusing on the manufacturer-retailer relationship, we point out that a special case of asset specificity (i.e., brand specificity) can drive up the costs of intra-channel transactions in foreign sourcing, in that private branding serves to neutralize the transaction cost disadvantage of foreign manufacturers and preserve their production cost advantage. Empirical data drawn from a multi-product/single-retailer sample confirm this transaction cost view and reveal a clear causality direction between the two retail trends. Both scholars and managers can derive useful insights from the conceptual framework and empirical evidence presented in this paper.