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The role of strategic reasons for offshoring and nearshoring success

September 21, 2012 Leave a comment

by Federico Caniato (Politecnico di Milano), Ruggero Golini and Matteo Kalchschmidt

When investing across borders, companies may incur in several problems not experienced at the domestic level and these problems can change from country to country (World Bank Group, 2010). Moreover, managing a global manufacturing network can pose some issues to the profitability of the company: because of that, in past years, many companies backshored the production home (Kinkel & Maloca, 2009).

One of the key aspect, even if under investigated, is the strategic reason why the company moved the production abroad.

To analyze the problem, we used data collected in 2009 within the fifth edition of the International Manufacturing Strategy Survey (IMSS 5). We selected only Western European companies, and, in particular, 227 companies provided information for this research. Companies are mainly small sized (47.6% of the sample) but also medium and large companies are represented. Different industrial sectors from the assembly industry are considered, mainly from the manufacturing of fabricated metal products, machinery and equipment.

The problem is that for European countries literature does not provide much evidence about the differences in the strategic reasons between offshoring (defined as moving the production outside Europe) and nearshoring (defined as moving the production to another country within Europe).

Our data show that for both nearshoring and offshoring the cost driver (that is, seek for lower input and work cost) is the most important. Then, for nearshoring, the entrepreneurial driver (that is, seek for new markets, establish new business relationships, follow customers, react to competitors…) see and resource driver (that is, seeking for new technologies and skills) follow, sharing the second place. On the contrary, for offshoring, the entrepreneurial driver follow and resource driver comes last (Table 1).

Table 1 – Comparison of the reasons for offshoring and nearshoring (1-5 scale)

Nearshoring

Offshoring

 

Mean

Rank

Mean

Rank

Cost driver (seek for lower operational costs)

2.7

1

2.7

1

Entrepreneurial driver (seek for new markets, establish new business relationships, follow customers, react to competitors…)

2.1

2

2.2

2

Resource driver (seeking for new technologies and skills)

2.2

2

1.9

3

Next we looked at the performance obtained measured as the Return Of Investment in the last three years:

  • For nearshoring the entrepreneurial driver is significant in explaining a higher performance
  • For offshoring, the resource driver, despite its lower importance (Table 1), has a strong positive and significant impact on the performance.

In conclusion,  we did not find any significant difference in business performance among companies that offshored or nearshored. This highlights that is not where the companies invest that matters, but how. In particular, companies should look at moving the production abroad as a mean to conquer new markets (entreprenurial driver) or find new skills and resources, rather than a way to reduce costs.

 

From: Caniato, F., Golini, R., Kalchschmidt, M., 2011. Offshoring and nearshoring success: the importance of strategic reasons, 18th EurOMA Conference, Cambridge (UK). Downlaod paper: EurOMA2011_0175

References

Buckley, P. J., & Casson, M. (1976). The future of the multinational enterprise. London: Macmillan

Dunning, J. H. (1998). Location and the multinational enterprise: A neglected factor. Journal of International Business Studies, 29(1), 45-66.

Kinkel, S., & Maloca, S. (2009). Drivers and antecedents of manufacturing offshoring and backshoring–A German perspective. Journal of Purchasing and Supply Management, 15(3), 154-165.

Roza, M., Van den Bosch, F. A. J., & Volberda, H. W. (2011). Offshoring strategy: Motives, functions, locations, and governance modes of small, medium-sized and large firms. International Business Review.

Sakthivel, S. (2007). Managing risk in offshore systems development. Communications of the ACM, 50(4), 69-75.

World Bank Group. (2010). Investing Accross Borders.

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