The Relationship between Offshoring Strategies and Firm Performance: Impact of innovation, absorptive capacity and firm size

textabstractHow do offshoring strategies impact firm performance? And how are innovation, absorptive capacity and firm size influencing this relationship? This research investigates how firms of varying size, well-established firms and growing firms may profit from relocating business activities to foreign locations. Offshoring strategies are conceptualized as consisting of both organizational attributes – i.e. function offshored, governance mode and location – and strategic attributes – i.e. cost, resource and entrepreneurial drivers. Data has been collected in Europe and the US in collaboration with (1) the Offshoring Research Network (ORN), (2) Statistics Netherlands (CBS) and Statistics Europe (Eurostat), and (3) business partners. First, the results show that firms of different sizes, i.e. small, medium-sized and large firms, may all profit from offshoring strategies. Different theories, among which transaction cost economics, the resource-based view and entrepreneurship theory, help to explain the different rationales these firms may have their respective strategies. Second, this research indicates that well-established firms do not – or not yet – move beyond cost advantages to improve their competitive position. By applying learning theory, innovation is shown to have an impact on the relationship between offshoring strategy, i.e. function diversity and governance diversity, and competitive position. Third, the knowledge-based view of the firm helps to demonstrate that companies realize additional firm growth by offshoring core functions, while the effect of outsource offshoring on firm growth is contingent upon absorptive capacity. Fourth, the changes over time that firms exhibit in their location choice are explained by way of internationalization theory. While nearshore experience is important for farshoring, experience with farshoring also increases the likelihood of nearshoring, which is an indication of the importance of experience