An IB study, “Geographical reconfiguration in global value chains: Search within limited space?” is published as an Open Access article in Global Strategy Journal
There are many studies of how multinational enterprises (MNEs) configure their global value chains (GVCs), but relatively few studies have – like this - explored GVC changes. In this study, the authors show how underperforming offshore activities tend to be relocated. However, it is shown how this relocation is limited by the managers' cognitive span. So, for example, an activity offshored to a large country like India, might – in case of a negative performance gap - just be moved from one Indian offshoring hub to another instead of being relocated to a new country. Alternatively, when activities are moved across borders, it is likely that the MNE already has some activities in the “new” host country.
Negative performance feedback in offshoring service activities entices firms to undertake geographical reconfiguration of their GVCs as a substitute for, or complement to, change of governance modes, decomposition of offshored activities, or shift of local service providers. In this study, the authors build on performance feedback theory and the concept of problemistic search to examine the extent to which firms move offshored service activities to new countries when facing negative performance gaps. The authors also examine if these relocations take place within a search space limited by the managers' cognitive span. The authors formulate a set of hypotheses revolving around this idea of search within a limited space. The hypotheses of the study are supported when tested on a sample of global sourcing projects undertaken by 223 firms between 1995 and 2012.
The essence of reconfiguration is the continuous search for efficient combinations of functions, local service providers (when functions are outsourced), governance modes, and—in our case—locations. Limiting the search for improved combinations to fewer locations entails a higher dependence on these locations maintaining the country-location-specific advantages that made them attractive in the first place. It is thus possible that MNE managers who reconfigure their GVC in a geographically bounded way in the long run will struggle to compete with MNEs that search for optimality within a broader range of locations as possible remedies for the GVC operations that experience negative performance gaps.