New Horizons in the Economics of Innovation series
Edited by Bengt-Åke Lundvall, Patarapong Intarakumnerd and Jan Vang
Chapter 3: Transnational Communities, Offshore Outsourcing and Offshore Subsidiaries: The Case of the Indian IT Service Industry
Jan Vang and Mikkel Lucas Overby INTRODUCTION Globalization and increased emigration have recently spurred a surge of interest among researchers and policy-makers in the role transnational communities play as agents of development in their home countries. This research ﬁnds that transnational community networks are becoming increasingly important in fostering economic development. Despite the fact that multinational corporations increasingly rely on outsourcing and oﬀshoring to realize cost and innovation advantages through globally distributed resources and competences, traditional theorizing on the issue mostly neglects the insights from this literature. In this chapter we use the term ‘oﬀshore outsourcing’ to denote situations in which a ﬁrm contracts out or sells its assets to a third party supplier located in a diﬀerent country for an agreed time period, whereas ‘oﬀshoring’ refers to situations where a ﬁrm establishes a subsidiary in a foreign country. Transaction cost economics, which has emerged as the dominating theory for explaining whether ﬁrms choose to outsource or organize activities in-house, is silent on the oﬀshore aspect. Transaction cost theory focuses on how economic hold-up threats limit the ﬁrm’s propensity to outsource but disregards the diﬀerent challenges ﬁrms face when outsourcing to or establishing subsidiaries in institutionally distant contexts. Development researchers, in contrast, deal with the oﬀshore aspect through their focus on migration. Development researchers have traditionally treated transnational communities – globally dispersed migrant networks1 – as synonymous with emigration of skilled labour as expressed in the ‘brain drain hypothesis’. According to the brain drain hypothesis,...
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