1- Introduction

2- Theoretical background

3- Conceptual model and hypotheses

4- Methodology

5- Data analysis and results

6- Discussion and conclusions

References

Abstract

While an increasing number of firms outsource their logistics activities, the failure rate of logistics outsourcing is still high. To address such issue, this study draws upon transaction cost theory (TCT) and extended resource-based view (ERBV) to examine the mechanism through which transaction attributes (i.e., 3 PL providers’ asset specificity and logistics technological uncertainty) affect logistics outsourcing success. We argue that top management plays an essential role in mediating transaction attributes to exercise their influences on logistics outsourcing success. However, such a mediating mechanism is effective only when trustworthy alternative 3 PL providers are available in the market. The data from 250 manufacturing subsidiaries in China are used to test our model. Important implications for research and practices are discussed.

Introduction

With the globalization, more manufacturers outsource their logistics activities to third-party logistics (3 PL) providers, so that improve their logistics performance (Lai et al., 2008). By doing so, 3 Pl user firms expect to focus on core competencies, save logistics costs, improve customer services, and thus enhance competitiveness (Chu and Wang, 2012; Lai et al., 2008; Zhu et al., 2017). However, along with such advantages, such outsourcing risks as losing control of logistics activities, information leakage, and additional efforts and costs on outsourcing management also exist (Gadde and Hulthén, 2009; Lau and Zhang, 2006; Yang et al., 2016). Logistics outsourcing does not always succeed; rather, the failure rate of logistics outsourcing is relatively high (Yang et al., 2016). Due to the high risk of failure, some large firms in China (e.g., JD.com and Alibaba) even abandoned logistics outsourcing but internalized logistics activities by building their own logistics systems (Zhu et al., 2017). Therefore, how to achieve logistics outsourcing success is an important issue for both 3 PL users and providers. Previous studies suggested that building quality logistics outsourcing relationship can mitigate outsourcing dependence and risks, as well as help firms improve operational and financial performance (Chu and Wang, 2012; Huo et al., 2015; Lai et al., 2013a; Qureshi et al., 2017). However, operational and financial performances are not the direct outcome of logistics outsourcing. Those two measures are distant from logistics outsourcing and thus could not accurately capture the outcome of logistics outsourcing. Rather, as Han et al. (2008) suggested, logistics outsourcing success, referring to the overall advantage attained from logistics outsourcing, should be assessed. Logistics outsourcing success could be assessed from a broader perspective, including strategic, technological, and economic benefits. While most previous studies only focused on a sole and isolated aspect (see Appendix A), further studies are needed to examine logistics outsourcing success from a broader perspective. Therefore, the present study aims to examine how to leverage transaction attributes in logistics outsourcing for overall outsourcing success.

We analyze a model of vertical (dis)integration between manufacturing and design in a monopolistically competitive market. Specialized input manufacturers can serve multiple design firms and the manufacturer-designer pairs negotiate a non-binding contract to share input customization cost and production surplus. Hand-collected data on 387 product lines from 118 semiconductor firms are used to predict the firm’s decision to outsource manufacturing. We find that, for instance, the use of design tools that facilitate collaboration and process technologies that facilitate learning are both positively associated with outsourcing, consistent with the model’s prediction.

Introduction

With the technological advancement in the 20th century and the establishment of such pioneering firms as Fairchild Semiconductor, practicable semiconductor devices, especially in the form of integrated circuits (ICs, or ‘chips’), have shaped the evolution of electronics industries. Originally, semiconductor devices were produced by the so-called integrated device manufacturers (IDMs) having both the capacity to design and manufacture semiconductor devices. A well-known example is Intel, which developed the first microprocessor in 1971 and still dominates the microprocessor product market today. By the late 1980s, however, the so-called foundry model came into being. The foundry model refers to the separation of chip design and fabrication process into different business entities.1 Design firms are often called ‘fabless’ and specialized manufacturers are called ‘foundries.’ Concurrently, most of the foundries were established in Asia, such as Taiwan Semiconductor Manufacturing Company (TSMC, founded in 1987), and there are numerous fabless companies today in many parts of the world specializing in chip designs for a broad range of applications from mobile phones to internet-of-things to self-driving cars. Although a number of industry reports (such as McKinsey & Co’s) and newspaper articles have talked about what might have given rise to the popularity of the foundry model, there have been relatively few studies that rigorously investigate such arguments theoretically and/or empirically, especially using data from the 21st century (see below). This paper fills this gap by presenting an industry equilibrium that explains the conditions under which a stable outsourcing equilibrium may arise and empirically showing that the factors that are highlighted in the model as the drivers can indeed explain a significant variation in the data.

1- Introduction

2- What is ITO success anyway

3- Outcome prediction

4- Intervention

5- Rigid factors

6- Timing the interviews

7- Conclusions

References

Abstract

We implemented five easy-to-complete questionnaires in Excel, which could serve as early warning signals for practitioners interested in the odds of their IT-outsourcing deals and could serve to redirect their course when still possible. The questionnaires are based on our earlier published longitudinal, observational study on 30 representative ITO-deals in the Netherlands, of which we know whether they failed or not. Our questionnaires predicted their outcome correctly. To help redirect the course of a dubious deal, we developed a questionnaire estimating the odds in relation to boosting strongly significant critical success determinants. Another questionnaire guides practitioners how to further improve on less critical factors. There are no specific reasons that limit our results to the Dutch situation, which makes it promising, therefore, to apply the Excel as an aid in improving ITO deals in other contexts.

Introduction

In 2016 we published an article in Science of Computer Programming which dealt with the research findings from a longitudinal study on IT-outsourcing (ITO) deals in the Netherlands (Delen et al., 2016). About 60 organisations participated: clients (also called outsourcers), suppliers (also called vendors) and intermediaries (also called sourcing consultants). The research sample is a representative cross-section for 700 IT-outsourcing deals in the Netherlands. Representativeness was statistically proved through validations that the sample reflected the Dutch economic sectors, the duration of the deals and the type of outsourced work of the total Dutch ITO-deal population reasonably well. For more details, see Delen et al. (2016). This is a very important result, for it implies that findings of the sample generalize to the entire population. So our Excel-tool can be used for the entire population. Not everybody will immediately realize what this actually means, so we shall elaborate on this fundamental statistical rule below. When statistical tests are used we usually accept a 5% chance that although the null hypothesis is true we still reject it. The probability of making that (type I) error is often called α. Vice versa when the null is false and we fail to reject it, this is called a type II error, and the probability for such errors is often called β and we usually accept a 20% chance of making a type II error.

1- Introduction

2- Development of theoretical framework

3- Method

4- Results

5- Discussion and conclusion

References

Abstract

Prior literature informs us that a company’s decision to outsource a business process depends on process characteristics such as how frequently the process is performed or how specific the assets required by the process are. In this article, we compare the effects of accounting process characteristics on outsourcing decisions across users of traditional and cloud-based accounting information systems (AIS). By focusing on outsourcing of accounting processes among small and medium sized enterprises, we investigate the effect of five business process characteristics (frequency, human asset specificity, uncertainty, information intensity, and need for customer contact) on the outsourcing decision. Our results reveal that process frequency has a weaker negative effect on the outsourcing decision among users of cloud-based AIS. This appears to contribute to users of cloud-based AIS outsourcing a larger variety of accounting processes. Compared to traditional AIS, the inherent properties of cloud-based AIS such as ubiquitous access, scalability, and integration seem to encourage users of cloud-based AIS to also outsource processes that are frequently performed.

Introduction

During the last few decades, the business process outsourcing (BPO) market has expanded rapidly as more and more companies outsource a wider range of business functions to professional service providers (Asatiani et al., 2019; Lacity et al., 2016). The rationale for outsourcing processes within these functions is simple: it is often cheaper to acquire (buy) services from a professional from the market than it is to develop and maintain the required competence to do (make) them in-house (Fill and Visser, 2000). This make-or-buy decision lies at the core of the substantial body of literature on outsourcing, in which one of the main questions has been whether the business process characteristics influence this decision. The increasing BPO trend can be partially attributed to the increased use of cloud-based information systems that facilitate outsourcing by reducing transaction costs associated with setting up an outsourcing relationship (Clemons et al., 1993; Gurbaxani and Whang, 1991; Han and Mithas, 2013). A key mechanism through which the use of cloud-based information systems enables outsourcing is that it allows the business process groups to be disaggregated into smaller processes1 that can transcend organizational or geographic boundaries (Apte and Mason, 1995; Quinn, 1992), which, in turn, allows the processes to be organized more efficiently between the outsourcer and the outsourcing service provider. This increases flexibility in how the delivery of processes can be organized, thus enabling companies to both reduce costs and concentrate on core processes (Apte and Mason, 1995; Jacobides, 2005; Kedia and Mukherjee, 2009; Mithas and Whitaker, 2007). However, disaggregation can also complicate outsourcing decisions. Instead of merely choosing whether to outsource a business process, companies that practice disaggregation need to make many processlevel micro-decisions. This disaggregation of business processes is especially prevalent in accounting. In today’s accounting outsourcing market, a company can decide to outsource only payroll tax calculation and retain control over the other payrollrelated processes, such as payments and reporting to government agencies. Therefore, to achieve the most efficient work arrangement, the company would need to carefully consider which parts of the process group to outsource.

Introduction

Due to the pressure for increased change, today’s external labour markets are described as moving towards greater flexibility and limited predictability, while internal labour markets in organisations are changing in the direction of increased insecurity, instability and non-standard employment agreements (Bonet et al., 2013; Kazis, 1998; Osterman, 2010). For organisations to cope with the growing needs of flexibility, human resource (HR) activities have become increasingly important, both at the operative and strategic levels (Boxall and Purcell, 2011). However, many organisations lack the resources and skills to handle these HR activities. This applies particularly to small and medium-sized enterprises (SMEs) (Cardon and Stevens, 2004; Klaas, 2003). An increasingly popular answer to how organisations with scarce resources can handle their HR activities is outsourcing (Reichel and Lazarova, 2013; Sheehan and Cooper, 2011), i.e. to employ an external party to carry out all, or parts of, the work instead of utilising internal resources (Sparrow et al., 2010). Consequently, a growing number of organisations are turning to a new actor in this emerging market for outsourcing of support services, the so-called labour market intermediary (Bonet et al., 2013; Nesheim and Rørvik, 2013). These intermediaries include organisations (private, public, ownership-based, member-based) that operate in the gap between employers and employees (Autor, 2009; Benner et al., 2007). Labour market intermediaries have also been described as important from a regional development perspective since they have the capacity to increase the flexibility of labour markets (Benner, 2003) as well as to support knowledge transfer between organisations within a region (Smedlund, 2006). In this paper, a specific kind of labour market intermediary, the HR intermediary (HRI), is discussed. An HRI acts as a third party between employers and employees, or between organisations, with the purpose of delivering HR services, e.g. recruitment, training, competence development, career assistance, and outplacement (Kock et al., 2012). HRIs are typically profit-driven private companies that specialise in a selection of HR services. For example, they can be traditional recruitment and staffing agencies or so-called professional employer organisations (PEOs) that enter into co-employment relationships and become the employer of record for those working at the client’s company (Klaas, 2003). However, in the paper, the focus is on HRIs that are owned by their clients, and that not only aim to target single clients, but also have ambitions to contribute to a regional development of the labour market, not least due to the fact that both owners and customers are dispersed across a certain region in Sweden. These HRIs can also be classified as advanced because they have moved up the HR value chain, from exclusively working with staffing towards targeting the entire HR flow (see Sparrow et al., 2010; Wallo et al., 2016). The membership approach and the focus on the entire HR flow differentiates the studied HRIs from other types of intermediaries, such as PEOs. A central group of clients for the HRIs in this study is SMEs, which are considered important in terms of employment and economic development, at the local, regional and national levels (Muller et al., 2016; OECD, 2005), but often have limited resources for working with HR activities (Delmotte and Sels, 2008).

Most global firms are outsourcing various functions of their firms to save time, cost, intellectual resources and thus utilize their core competencies for their primary competitive strategies. Outsourcing secondary activities have primarily enabled companies into rechanneling their energies toward focusing on the primary value chain activities and strengthening their core strategies ( Jiang et al., 2006). Over the years, outsourcing has gained increasing momentum as no firm operates as a single entity anymore. Various functions like manufacturing, IT, accounting, human resources, research and development (R&D) are outsourced locally and internationally by firms. The concept of re-shoring has also begun gaining momentum in the recent times as some scholars and practitioners argue that risks of outsourcing outweigh its benefits. Due to this, a lot of manufacturing jobs are being brought back to the USA to increase local employment. Most US firms are bringing back their globally outsourced functions locally to save cost. Given this background, we felt it was imperative to investigate the relationships between the following main constructs: “outsourcing” and “performance of firms.” According to Kroes and Ghosh (2010, p. 124), outsourcing is defined as “the allocation of business activities from a source internal to an organization to a source outside of the organization.” Advancement in technology, social media and cloud computing has made outsourcing a very plausible option for most industries as buyers, suppliers and vendors in different parts of the world can collaborate and communicate in a matter of seconds. Some studies have proposed the positive relation between outsourcing and performance while some have counter-argued this point of view. Barthelemy and Adsit (2003) argued that most of these claims about the positive association between outsourcing and firm performance during the nascent stage of outsourcing which is also referred to as the “honeymoon phase” may not be an accurate representation of the relationship. There is a dearth of longitudinal studies to examine whether outsourcing has positively impacted firm performance measures over a span of several years. Gilley et al. (2000) found no association between outsourcing and firm performance, which was moderated by strategy, and environmental dynamism. Jiang et al. (2006) found that outsourcing improved the firm’s operational efficiency. Kotabe and Mol (2009) used secondary data from manufacturing firms in the Netherlands to assess the relationship between outsourcing and performance. They looked at data encompassing two years (1995 and 1998) and observed that market uncertainty moderated the negative relationship between a firm’s outsourcing and its performance measures. Stanko et al. (2007) found that the association between higher profit and outsourcing of R&D differed between high-tech and low-tech industries. We observe that there is a lack of consensus in the extant literature about the effects of outsourcing on firm performance. There are mixed results across various studies that test the empirical linkage between outsourcing and performance.

Outsourcing any activities generates relationships between the buying and selling companies that need to be well managed to ensure that a positive effect comes from said relationships (Roth and Menor, 2003). In the particular case of logistics activity there are many companies that forge long-term links with specialized suppliers in order to increase benefits and decrease risks in logistics outsourcing, improve efficiency and profitability, and offer a better customer service performance (Krizman, 2009). The success of these relationships and, by extension, of the outsourcing of the logistics activity, can become important for achieving a competitive advantage (Fawcett and Cooper, 1998). However, customer company – logistics services provider relationship design and management during the interaction (herein referred to as interaction interface) have been considered to be at the root of the wide differences found in the results of logistics outsourcing (Hartmann and de Grahl, 2012), as can be observed in a range of studies (e.g., Boyson et al., 1999; Lieb and Bentz, 2005; Gadde and Hulthen, 2009). Accordingly, it seems that it is essential for special attention to be given to the design and management of the interfaces of the interaction that determines the logistics outsourcing buyer-service provider relationships (Whipple and Roh, 2010; Hammervoll, 2009). A variety of authors state in relation to this that the design and management of these interfaces is a major determinant of the results that come from customer-provider relationships (e.g., Sampson, 2000; Hertz and Alfredsson, 2003) and that it is essential to know what aspects positively impact the results of outsourcing (Deepen et al., 2008). Despite the importance of the topic, empirical research in the field is limited (Wallenburg et al., 2010). In order to address this gap, the present paper focuses on the design of the interaction interface and its effects on the success of logistics outsourcing. This design establishes the organizational resources required from the buyer and the seller (van der Valk, 2008), among which human resources are especially relevant (Roth and Menor, 2003). In fact, the quality and productivity of outsourced services are often highly dependent on the human resources involved in the production, delivery and consumption of said services on both sides of the relationship (Grönroos, 2000). In line with the above, following Cunningham and Homse (1986), Wynstra et al. (2006) consider that there are two aspects of human resources that must be taken into account in interaction design, which together comprise what these authors call structural dimensions of interaction. These dimensions are the types of organizational resources of either party involved in the outsourcing and, more specifically:

• Representatives involved: type of functional representatives involved in ongoing interactions, both in the buying company and the service provider.

• Critical capabilities: skills that buyer and service provider representatives involved in the interaction should master.

1.1 Background of the study

Globalization is a topic with supporters of the idea that the development of technology and infrastructure in emerging countries will foster the expansion of supply networks. Others suggest that recent events like the “Brexit” vote and the withdraw of the USA from the Trans-Pacific Partnership (TPP) agreement promoted by Donald Trump are signs of increased protectionism that could lead to the contraction of local-for-local supply chains, a phenomenon described as a wave of “deglobalization”. A survey by O’Marah and Chen (2016) conducted on 1,415 supply chain practitioners across the world supports the idea that, if not localized, the trend of supply chains is to get closer to the target markets. Regardless of the present arguments, this research leverages on the fact that globalization is a reality, and managers need to develop strategies that create the most value for organizations and its shareholders. Outsourcing to China is a topic of continuous discussion fueled by transparency in social media, increasing visibility of accidents, disruptions, product recalls or prosecution to Chinese organizations incurring in illegal/unethical business practices. Some researchers suggest that the risk of failure associated with this supply chain model could offset the gains obtained from cheaper labor costs and the economies of scale created by its manufacturing ecosystems (Ngwenyama and Sullivan, 2007); others like Tse and Tan (2011) argue that the issue is not the practice of outsourcing itself but the lack of supply chain risk management (SCRM) programs to avoid disasters like the one occurred to Mattel, leading to the recall of more than 21 million of Chinese-made toys. Other active promoters of SCRM programs are third-party agencies, leveraging on the idea of a “disproportionate” effect on retailers when failures occur in comparison to the investment in SCRM programs (SGS, 2016). While some may argue that this is a biased stance toward business gains; authors like Heerde et al. (2007), Enderwick (2008), Roberts et al. (2001) defend that, if not managed properly, risk can be very costly and affect customers, suppliers, employees and investors. Drysdale (2008) went beyond, suggesting annual recall losses over US$100bn for the technology industry in the USA with other indirect costs associated with brand damage; additionally, data provided by SGS (2016) show that, during 2015, 16 per cent of consumer recalls in the USA belonged to clothing, textile and other fashion categories

According to the Census Bureau of the United States, 99.7% of U.S. firms employ fewer than 500 workers (Small Business and Entrepreneurship Council, 2016). Further, of the 22.9 million net new jobs created from 1993 to 2013, 63% are in small businesses (Small Business Administration Office of Advocacy, 2014). Thus, the performance of these small- and medium-sized enterprises (SMEs) is greatly important to a variety of stakeholders. A factor that enhances SMEs’ performance is firms’ entrepreneurial orientation (EO). EO is characterized by firm behavior that involves taking risks and being innovative and proactive (Covin & Slevin, 1989, 1991). It is also a proven predictor of firm performance (e.g., Wiklund & Shepherd, 2003). However, given the complex relationship of SMEs’ resource investments and firm performance, it is likely that additional factors beyond EO are at work. Despite the acknowledgment that (1) human resources (HR) management is vital for small and entrepreneurial firms (Bendickson, Muldoon, Ligouri, & Midgett, 2017) and that (2) SMEs often rely on external parties for HR services (e.g., Klaas, 2003), few studies explore the combination of EO and HR practices. Given that resource insufficiency (Dada & Fogg, 2016; Klaas, McClendon, & Gainey, 2000) often characterizes SMEs, the interaction of EO, which is a resourceintensive strategic posture (Covin & Slevin, 1991), with human capital (HC), which is a key resource in small firms (Coder, Peake, & Spiller, 2017; Lepak & Snell, 2002), deserves additional attention. A broad definition of HC is as “a unit-level resource that is created from the emergence of individuals’ knowledge, skills, abilities, and other characteristics” (Ployhart & Moliterno, 2011, p. 128). In order to enhance SMEs’ focus on innovation and proactiveness for competitive advantage, we offer a new insight: The outsourcing of traditional HR functions (i.e., recruitment and training) can act as a lever to strengthen the relationship between EO and firm performance in SMEs. The current study uses the knowledge-based view (KBV) of the firm (Grant, 1996) to examine the relationships between HR, EO, strategic HC, and firm performance. In addressing this under-researched area, we make four contributions to the literature. First, to the best of our knowledge, no other study examines the effects of outsourcing specific HR functions, as opposed to simply the effects of general HR management practices, on SME performance (e.g., Hayton, 2003). Second, although HC has a strong relationship with firm performance overall (Crook, Todd, Combs, Woehr, & Ketchen Jr., 2011), empirical testing of HC as a competitive advantage is somewhat limited, and even more so for SMEs. Thus, we add to the understanding of the effects of HC strategy on SMEs. Third, we expand the EO literature by showing that specific human resources outsourcing (HRO) enhances the EO–SME performance relationship, with strategic HC acting as an influencer. Finally, in a departure from much of the EO literature (with the exceptions of Dada & Fogg, 2016 and Wiklund & Shepherd, 2003), we utilize the KBV as a lens to examine factors that impact SMEs’ firm performance.

Business process outsourcing (BPO) project refers to projects where service providers accept, manage, and control business processes that a client entrusts and selects (Heffes, 2005; Liu et al., 2017). BPO projects can reduce cost and enhance the competitiveness of firms (Beverakis et al., 2009), but the implementation of these projects is unsatisfactory. According to a recent survey, approximately 50% of outsourcers believe that their outsourced business processes do not generate additional value, provide special knowledge, or reduce the expected cost for business operations management (Fersht, 2014). The process of BPO project implementation is subjected to numerous risks. Although previous studies investigated the relationship between risk and outsourcing project success, some research gaps remain unaddressed. Empirical evidence is lacking in the investigation of this relationship. For example, Alipour et al. (2011) argued that performance, financial, psychological, and strategic risks have negative effects on BPO projects, but no solid evidence was provided. Perçin (2008) divided BPO risks into six categories, namely, information security and privacy, hidden cost, loss of management control, employee morale, business environment, and service provider. They further proposed a fuzzy multi-index evaluation method to evaluate the risk effect, but the results lack practical data support. Therefore, the mechanism of how risks influence the success of BPO projects remains unclear. Previous studies also lack a comprehensive examination into different BPO risk types. Shi (2007) indicated that market performance and organizational risks of a customer will significantly affect long- and short-term performance of BPO; however, the risks of BPO proposed in the study are not comprehensive and only include three types. Based on a survey of 218 BPO projects in 126 banks, Gewald and Dibbern (2009) empirically showed that BPO project risk significantly affected success, but the effect of each type of risk (financial, psychological, and strategy risks) on performance was not analyzed. Herath and Kishore (2009) found that differences exist in the effect of risk on BPO project satisfaction in different contexts. They examined the risk of offshore BPO and contended that its impact differs from that of onshore BPO project risk. These studies have initially identified that BPO project risk has a negative effect on outsourcing project results (e.g., satisfaction). However, these studies did not conduct comprehensive risk identification. Many other risks exist in the BPO process (e.g., implementation and customer risk), but evidence for the effects of these additional risks are lacking. Further clarification on the mechanism of how different risks influence BPO project success or satisfaction is beneficial for developing differentiated and effective risk management strategies. Therefore, the first objective of this research is to address the effect of different types of risks on BPO project satisfaction.

Organizations are increasingly becoming leaner and more focused via outsourcing; i.e., locating certain specialized activities outside their boundaries. It helps the firm to become agile and in turn enhance its competitiveness (Gilley & Rasheed, 2000; Quinn, 1999). Anecdotal evidence highlights the prominent use of outsourcing by business organizations due to its positive impact on firm performance. For instance, an article published in Forbes reports that Apple corporation adds at least US$14 billion to its profit every year by outsourcing production into China (Chen, 2012). However, empirical research in this field is still evolving. Thus far, scholars have provided mixed results suggesting positive, negative or no relationship between outsourcing and performance. It seems that previous studies have not systematically captured the impact of outsourcing on firm performance and further investigation is warranted to bring some coherence (for details, see Ketokivi, 2016 and Lahiri, 2016). Moreover, prior work has mainly focused on the outsourcing models of large Western multinational enterprises, which seek efficiency gains by relocating production to emerging economies, where the cost of production is lower (e.g., Guillén & García-Canal, 2009; Kang, Wu, Hong, & Park, 2012; Musteen, 2016). Meanwhile, less attention has been paid to outsourcing patterns of firms from emerging economies. Firms from such economies have higher needs and motivations for outsourcing because they are more likely to lack necessary resources compared to large Western multinational enterprises (Buckley, Munjal, Enderwick, & Forsans, 2016a; Ciravegna, Lopez, & Kundu, 2016; Ramamurti, 2012; Thite, Wilkinson, Budhwar, & Mathews, 2016; Westhead, Wright, & Ucbasaran, 2001). Moreover, as a result of their continued expansion, the needs of emerging market firms for seeking specialized resources outside their boundaries are growing rapidly. Previous studies (e.g., Buckley & Munjal, 2017; Chittoor, Aulakh, & Ray, 2015; Luo & Tung, 2007; Munjal, 2014a; Rabbiosi, Elia, & Bertoni, 2012) relate this growing need for specialized foreign resources with the increase in cross-border acquisitions. This strategy gives emerging market firms access to specialized resources tied with other firms. However, cross-border acquisitions are a complex and expensive mode of getting valuable foreign resources. In addition, it may not always be a viable alternative for the firm. In this context, we argue that firms can gain access to certain strategic resources through outsourcing. In particular, we focus on technological resources and professional services, such as marketing and managerial skills, because these are the typical resources and capabilities lacked by emerging market firms (Dunning, Kim, & Park, 2008; Luo & Tung, 2007; Munjal, 2014b; Ramamurti & Singh, 2010).

R&D outsourcing, that is, the purchasing of R&D or technological knowledge from external providers, can provide the firm with many advantages (for a recent review of international R&D outsourcing, see Contractor et al., 2010). Thus, some scholars argue that R&D outsourcing is beneficial for the firm’s competitive advantage, because a firm increases its diversity of knowledge, helping it innovate more (Berchicci, 2013; Bertrand and Mol, 2013; Nieto and Rodrı´guez, 2011). However, other scholars counter that R&D outsourcing may have a negative effect on the firm’s competitive advantage, because the firm is not developing the capability to create the technological knowledge it purchases since firms typically learn by doing (e.g., Bettis et al., 1992; Helfat, 1994; Pe´ rez-Lun˜o and Valle-Cabrera, 2011; Weigelt, 2009). Thus, it appears that we have a debate regarding the benefits of R&D outsourcing, and this debate may be driven in part by a limited understanding of the drivers that lead firms to invest more in R&D outsourcing. Therefore, this study fills an important gap in the literature by developing theory to explain firms’ investments in R&D outsourcing. I use the knowledge-based view of the firm (KBV) (Grant, 2013; Kogut and Zander, 1992, 1993) and link it to the concept of absorptive capacity (Cohen and Levinthal, 1990; Zahra and George, 2002) to propose a separation between the mechanisms that enable the firm to identify and integrate outsourced R&D knowledge into the firm, and the mechanisms that enable the firm to use outsourced R&D knowledge to innovate. I propose that outsourced R&D knowledge can be viewed as a type of external knowledge and that firms with particular characteristics that build their absorptive capacity are more likely to invest more in R&D outsourcing. Specifically, first, I propose that firms that engage with foreign customers and with foreign suppliers are more likely to invest more in R&D outsourcing. The reason is that these firms develop an ability to understand new and complex external knowledge in their relationships, and this ability becomes useful for integrating outsourced R&D knowledge. These mechanisms reflect the potential absorptive capacity of the firm. Second, I argue that firms that have more skilled employees and invest more in internal R&D are also more likely to invest more in R&D outsourcing.