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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The perceived vs. the actual cost benefits derived by using domestic (U.S.) sourcing due to U.S. dollar depreciation have important public policy implications. In 1985, through the Plaza Accord, the U.S. requested the G-5 nations to agree on the devaluation of the U.S. dollar, with the objective of shrinking the increasing U.S. trade deficit. This policy was based on the assumption that global procurement decisions are solely based on currency exchange rate. This assumption is contrary to our finding that strategy-driven factors, rather than currency exchange rate, important determinants in sourcing crucial components that are critical to a product's market performance and in achieving its business objectives. Because of the strategic implications of major components, U.S.-based firms may have to continue to source them from overseas suppliers, despite the increased costs of these components because of the dollar depreciation. Consequently, public policy makers, in an attempt to boost procurement activities within the U.S., may hinder the ability of U.S.-based firms to coordinate their global sourcing activities effectively.

LIMITATIONS

This study has its limitations. First, U.S. subsidiaries of foreign multinational firms were chosen as subjects of this study; therefore, results may not be generalizable to U.S. multinational firms. Second, due to the scope of the present study, the potential interaction effects between currency exchange rate and strategyrelated factors were not examined.

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