Summary Offshoring in the service sector: An empirical investigation on the offshoring behavior of service firms and its influence on their foreign entry mode choice Désirée van Gorp This study provided insights in the offshoring behavior of service firms and a decisionmaking model for service firms regarding their choice for a foreign entry mode when relocating their activities, i.e. captive offshoring or offshore outsourcing. Entry mode decisions of service firms are considered to be of strategic importance and influential on their performance if they want to enter international markets. Service firms were taken as the focus of this study because of a perceived shift from manufacturing to services offshoring. This research was built according to the principles of a grounded theory approach and was inductive in nature. Empirical evidence was used to directly establish variables, concepts and relationships, which were used to generate and refine theory regarding the offshoring behavior of service firms and their foreign entry mode choice. The variables were measured as a function of the perception of managers acknowledging its importance in decision-making. The first field study identified which variables, determining the offshoring behavior of service firms, had a significant relationship with their choice for captive offshoring or offshore outsourcing. In the second field study, conducted to obtain more in-depth insights in the collective interpretations of top management regarding the offshoring behavior of service firms and its influence on their entry mode choice, these findings were refined. Based on the empirical findings derived from the first two field studies, twelve propositions were formulated. A third field study was executed to test these propositions in a binary regression model for relationships between types of offshoring. The literature review was mainly used to verify if and in what way the empirical findings of these three field studies corresponded with existing theories. The offshoring of services expanded rapidly at the turn of the last century when service firms started to relocate part of their service activities abroad on a large scale. This was done by configuring and coordinating different sourcing activities around the world while exploiting comparative locational advantages of various countries. The empirical results of this study indicated that although offshoring of service firms may often be a result of pressure for cost reductions, they primarily were motivated by strategic opportunities such as following customers and suppliers, entering new markets and availability of qualified employees. Furthermore, the empirical results indicated that the majority of service firms involved in this research relocated core-activities and used, regardless of their size, captive offshoring to do so while choosing foreign locations distant from their domestic market and switching between different foreign entry modes. They relocated their activities not only to lower income countries, but also to offshore locations with higher income levels. In contrast to earlier foreign entry mode theory, they entered a foreign market in a non-linear way, in the case of offshoring outsourcing in cooperation with foreign affiliates. This provided them with the opportunity of accumulating experiential knowledge abroad to exercise control over foreign operations resulting in reduced effects of psychological distance. These developments in offshoring of service
firms require organizations to adopt a dynamic model of defining boundaries of the core organization, whereby they blend in with embedded third-party offshore providers. Based on these empirical findings, it is suggested in this study that explaining and exploring the offshoring behavior of service firms should be done with the OLIN-framework, which is a combination of the OLI-framework and the Network model. The OLIN-framework invites to study the offshoring behavior of service firms and their choice for a foreign entry mode in a non-linear way. It allows a widening of the internalization-specific advantages beyond a transaction cost perspective by simultaneously focusing on objectives for offshoring such as market access and strategic asset seeking. Furthermore, the empirical findings derived from the first two field studies confirmed that the offshoring behavior of service firms influenced their choice for a foreign entry mode. The third field study tested for relationships between the variables of this behavior and types of offshoring and resulted in a decision-making model for service firms regarding their choice for a foreign entry mode. The model provided in this study can serve as a guideline for the decision-making process of service firms regarding their choice for captive offshoring or offshore outsourcing. In addition, the findings in this study helped to sharpen the understanding of the strategic logic of that choice when service firms split up various business processes and tasks belonging to their value chains and locate them around the world. The consequences of the developments regarding offshoring are not felt by service firms only; they have implications for governments and their national policies as well. Although differences in comparative locational advantages have always played a role in the internationalization of firms, today’s developments in the service sector happen at a much more rapid pace than was the case in the manufacturing industry. Governments must continuously deal with the public concern, primarily focused on the negative labor market effects of threatening unemployment, while to date lacking sufficient information to monitor services offshoring. This hinders their ability to respond to the increased mobility of services and capital resulting in an increase of services offshoring. It is recommended in this study that governments should consider comparative locational advantages beyond cost advantages that are often short-lived, especially if they are built on low wages solely. Rather than cost advantages and geographical proximity, other locational advantages such as cultural similarity, protection of intellectual property and high educational levels, become more important.