“Twenty or 30 years ago, it was common for U.S. multinationals to have one or two offshore manufacturing locations overseen by a dominant parent firm. Today, a lot of the same organizations don’t look like that anymore— they’ve gone to more of a networked approach instead of relying on a central hub.” 

 

When it comes to global sourcing decisions, the dominant narrative has long focused on one factor: cost. And with good reason. It’s become common for U.S. companies to outsource work overseas over the last several decades.

But according to Assistant Professor Aseem Kaul, the story is far more nuanced. The distinction, his research has found, lies in the difference between offshore outsourcing and offshore integration. In the former, companies look to capitalize on low-cost offshore labor that can deliver products and services at lower costs. In the latter, they tap into the expertise of their overseas subsidiaries, typically to develop new products and capabilities.

The distinction, Kaul notes, is critical, as the approaches are driven by different motives. His research examined the actions of U.S. manufacturing multinationals between 1989 and 2004. The key finding: High-performing firms tended to develop new capabilities and offerings by tapping into their foreign knowledge base, while less profitable companies went overseas in search of low-cost labor.

“The high-performing companies are typically sourcing ideas, rather than cheap labor,” Kaul explains. “In a sense, they’ve created a globalized innovation system. What’s more, much of that idea-sourcing comes from developed countries. Think about Ireland. Multinational manufacturers are not going there for low-cost labor, but rather for the R&D needed to create new technology and products.” 

And that, Kaul adds, is a message that has largely been overlooked or ignored. Given the benefits, however, don’t expect it to change anytime soon. In fact, it could be realigning the nature of U.S. multinational corporations. 

“If you think about the competitiveness of U.S. industry in the global market, a lot of the rhetoric tends to be about cheap labor stealing jobs,” he says. “But this research has found that science and innovation are equally important factors drawing companies overseas.”

Watch Kaul further discuss his findings:

 

“Global Sourcing and Foreign Knowledge Seeking” Berry, Heather; Kaul, Aseem, Management Science (2015)