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 2^-H^sub 4^ Because there were both quantitative and categorical strategy-related factors, analysis of covariance was used to test these hypotheses. The results of the analysis of covariance for H^sub 2^ through H^sub 4^ are reported in Table 2.

H^sub 2^ investigates the relationship between product maturity and the extent of domestic sourcing of major components. Product maturity was highly significant (p-value = .00) in determining the level of domestic sourcing of major components used, thus supporting H^sub 2^. H^sub 3^ explores the similarity in sourcing behavior of major components by European and Japanese multinational firms. Region was insignificant (p-value = .73) in determining sourcing behavior. Therefore, the finding did not support H^sub 3^. H^sub 4a^ examines the relationship between the extent of internal sourcing with that of domestic sourcing of major components. The result showed that the relationship was marginally significant (p-value = .10) with a negative coefficient. The hypothesis of the higher the level of internal sourcing, the lower the extent of domestic sourcing of major components received marginal support. H^sub 4b^ evaluates the relationship between the extent of domestic assembly with domestic sourcing of major components. The relationship was significant (p-value = .01), thus supporting H^sub 4b^.

H^sub 5^ The relationship between each of the four indicators of market performance and the extent of domestic sourcing of major components was examined through the correlations of these variables. The results showed that market share (p-value = .02) and sales growth rate (p-value = .03) had a significantly negative relationship with the extent of domestic sourcing of major components, but not for return on sales and return on investment. Thus, H^sub 5^ was partially supported.

It was noted that all the control variables were found to have an insignificant relationship (number of suppliers: p-value = .53, number of substitutes: p-value = .19, switching costs: pvalue = .17, and management's attitudes: pvalue = .22) with the extent of domestic sourcing of major components.

CONCLUSIONS AND IMPLICATIONS

All the hypotheses (except the one examining the relationship between region and domestic sourcing of major components) are supported, regardless of the industry characteristics and management's attitude toward domestic sourcing. The findings strongly suggest that multinational firms coordinate their sourcing activities of major components globally based on strategy-related factors, rather than with currency exchange rate. Furthermore, domestic (U.S.) sourcing of major components by U.S. subsidiaries of foreign multinationals is negatively related to a product's market share and sales growth rate.

Strategic Implications of Domestic Sourcing and Market Performance

The findings are consistent with our hypothesis that among manufacturers with extensive international experience, the decisions relating to domestic vs. foreign sourcing mainly related to strategy-related factors, rather than with currency exchange rate. Therefore, we observed that domestic sourcing of major components is negatively related to a product's strategic market performance (market share and sales growth rate), but not related to financial market performance (return on sales and return on investment).