A currency exchange rate-driven vs. strategy-driven analysis of global sourcing

Multinational Business Review,  Spring 1996  by Murray, Janet Y

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H^sub 4a^:There is a negative relationship between the extent of internal sourcing of major components and the extent of domestic (U.S.) sourcing of major components used by U.S. subsidiaries of foreign multinational firms.

H^sub 4b^: There is a positive relationship between the extent of domestic assembly of the product and the extent of domestic (U.S.) sourcing of major components used by U.S. subsidiaries of foreign multinational firms.

MARKET PERFORMANCE AND DOMESTIC SOURCING

A small number of empirical studies have examined the relationship of global sourcing and market performance. However, most of these studies use aggregate data, so the influence of global sourcing on performance typically is investigated at a firm-, industry-, or countrylevel [Kim 1986; Moxon 1975]. As different products, possessing unique characteristics (i.e., technology, product life cycle, industry structure, etc.), may require different competitive strategies, the study of the relationship between global sourcing strategy and market performance is most appropriate and precise at the product-level. Previous studies [Kotabe and Murray 1990; Kotabe and Omura 1989], in using a product-level analysis, concluded that internal sourcing of major components is positively related to a product's market performance; however, neither the locational (domestic vs. foreign) nor the ownership (internal vs. external) aspects of assembly affect market performance. These findings on internal sourcing of major components are consistent with the prediction of internalization theory [Buckley and Casson 1976]. When markets for intermediate products (such as components) and proprietary technology are imperfect, the firm is more likely to create an internal governance structure within the corporate system.

As mentioned in an earlier hypothesis, given the proprietary technology involved in major components of a product, the production of major components tends to be internalized within the corporation, especially in those manufacturing facilities located in the parent's country. Consequently, it is expected that internal sourcing of major components from the parent's country (i.e., foreign sourcing) would influence market performance positively. Therefore, it is hypothesized:

H^sub 5^: A product's market performance is negatively related to the extent of domestic (U.S.) sourcing of major components by U.S. subsidiaries of foreign multinational firms.

RESEARCH METHOD

Sample

A sample of U.S. subsidiaries of foreign multinational firms was selected. The foreign parent firms selected were those listed in the Fortune Global 500 Directory 1991 [Fortune 1991b]. Only "Fortune Global 500" firms were included because they dominate global sourcing activities (domestic vs. foreign sourcing).

Moreover, these firms have subsidiaries around the world, thus facilitating the investigation of the impact of internal vs. external sourcing on domestic vs. foreign sourcing. The International Directory of Corporate Affiliations 1991 [IDCA 1991] was used to identify U.S. subsidiaries, and they were limited to manufacturing firms in the following industries: electronics, transportation equipment, scientific and photographic equipment, motor vehicles and parts, aerospace, computers and office equipment, industrial and farm equipment, and metal products. These industries manufacture products that are made of easily identifiable and separable components, which facilitated the identification of the information on component sourcing.