The role of political risk in service offshoring entry mode decisions

Abstract

This research investigates the effect of political risk on the offshore service industry. The study empirically examines how an extended political risk definition, operationalised into a model consisting of 12 political risk variables, helps predict location decisions across offshoring entry modes and activity types. The research focuses on captive offshoring and offshore outsourcing entry modes, and Information Technology Outsourcing (ITO), Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) activity types. The research indicated that political risk factors accounted for 38% of the variability in offshore outsourcing flows, implying that concerns about service disruptions and/or cost implications of external uncertainties feature as a key factor in supplier selection and location decisions. The findings further confirm a positive relationship between institutional and regulatory factors in host locations, and the flow of offshoring activities with a high knowledge content. The research contributes to enhancing the explanatory ability of Transaction Cost Economics by re-operationalising the concept of political risk in the context of both offshore outsourcing and captive offshoring. For practitioners, these findings provide a clear indication of the political risks that can affect service offshoring decisions; for policymakers, they highlight the importance of strengthening institutional and regulatory factors to attract investment.