International Business and Trade GM0112, Global Sourcing (III) The WHERE question: The (re)location decision Bent Petersen Visiting Professor Global Sourcing - Fall 2010

Contents of today’s lecture Modeling the location decision A disaggregated and dynamic approach to localization The “Smile curve” Case example: The GPN of Dell computer Global Sourcing - Fall 2010

The WHERE question Where to (re)locate underperforming, or under-developed), domestic value chain activities? Literature streams/theory: Economic geography (including agglomeration economies), institutional theory, global SCM/logistics literature. In the case of offshore outsourcing the WHERE question is closely related to the question of partner selection (“the WHO question”) . Global Sourcing - Fall 2010

The choice of location and partner selection following an offshore outsourcing decision (Graf & Mudambi, 2005) Global Sourcing - Fall 2010

Modeling the offshore out-sourcing location decision (Graf & Mudambi, 2005) Global Sourcing - Fall 2010

A value chain approach to location The location decision should be taken for individual value chain activities (‘tasks’) – not for the value chain as a whole. As an example, the optimal location of manufacturing would usually differ from R&D location (unless co-location synergies are vital). What about “top management”, logistics, etc.? Global Sourcing - Fall 2010

A dynamic approach to location Comparative advantages are proprietary to countries, not to single firms, and they tend to dry out (Porter 1990). Therefore… …either MNCs should re-locate their value chain activities persistently according to geographically changing comparative advantages (thereby becoming “footloose MNCs”), or … MNCs should locate their value chain activities according to comparative advantages that over a period of time may transcend into competitive advantages, i.e. firm-specific advantages through competence creation. Global Sourcing - Fall 2010

The “Smile curve” The smile curve of value creation (or rather, value appropriation?) conjectures a division of labor between developed market firms and firms from emerging market economies. Developed market firms are concentrating on up- and down-stream high value-added activities and relocating /outsourcing low value-added activities to emerging economies firms. Global Sourcing - Fall 2010

The smile of value creation (Mudambi, 2007) Mudambi, R. J Econ Geogr 2008 8:699-725; doi:10.1093/jeg/lbn024 Global Sourcing - Fall 2010 Copyright restrictions may apply.

Value chain configuration in the Danish apparel industry: Three business models Global Sourcing - Fall 2010

shoes: Location of employees .

Evidence of value chain configuration of Danish MNCs Global Sourcing - Fall 2010

Evidence of value chain configuration of Danish MNCs (cont’d) Global Sourcing - Fall 2010

The smile curve in transition 3 forces are eroding the traditional DoL pattern: The catch-up effect of emerging economies firms. Standardization and commodization of high added-value activities such as R&D. Move of entire ‘sunset’ industries to emerging economies. Global Sourcing - Fall 2010

The smile. Dynamic analysis Mudambi, R. J Econ Geogr 2008 8:699-725; doi:10.1093/jeg/lbn024 Global Sourcing - Fall 2010 Copyright restrictions may apply.

The smile curve of Apple’s i-Phone Apple’s outsorcing pattern conforms to the “smile of value creation/appropriation” The miles of value creation may be a nested one inside the other, like ‘Russian dolls’. Please note that Mudambi (2008) uses “dispersed value chains” in a purely geographic sense, and not in relation to DoL. Global Sourcing - Fall 2010

Value creation in the iPhone Mudambi, R. J Econ Geogr 2008 8:699-725; doi:10.1093/jeg/lbn024 Global Sourcing - Fall 2010 Copyright restrictions may apply.

A world map of services offshoring Source: McKinsey Global Institute, 2005 Global Sourcing - Fall 2010

The global production network (GPN) of Dell Computer Global Sourcing - Fall 2010

Dell’s nested hierarchy of location factors: Market access The GPN of Dell Dell’s nested hierarchy of location factors: Market access Labor costs and quality Transportation and telecommunication infrastructure Government incentives Industry clusters (question of partner selection). Global Sourcing - Fall 2010

The GPN of Dell (2) However, Dell’s nested hierarchy relates primarily to manufacturing (assembling activities)… …and differs with value chain functions (such as sourcing, M&S, customer services) and subsumed activities (e.g. call centers servicing different customer groups). Examples: European data center in Bracknell, UK (not in low-cost Ireland) due to better infrastructure. Sales offices very scattered. Global Sourcing - Fall 2010

The GPN of Dell (2) Two thirds of Dell’s employees are still employed in USA (2002). Regional orientation. Extreme pressure on suppliers (e.g. demands of JIT, annual price lowering). Core competencies of Dell: Assembling activities are kept in-house. Sweden considered “English speaking market” (p. 15)! Global Sourcing - Fall 2010

Next lecture: The HOW question How to organize global sourcing? What should be the ownership structure of activities (re-) located abroad? Captive? Outsourced? JV? Theory/literature streams: Organizational economics (including TCEs and agency theory), organizational learning literature. End of lecture 6 October, 2010 - Thank you for your attention! Global Sourcing - Fall 2010