Global Sourcing Strategies of U.S. Subsidiaries of Foreign Multinationals

Global sourcing encompasses the production, purchase, and assembly of parts and finished products worldwide. It involves decisions relating to how components are supplied for production and which production units serve particular markets (Davidson 1982, Kotabe 1992). Global sourcing is generally recognized as a means to enhance a firm's competitiveness in the global market. Therefore, the concern for many firms is not whether to use global sourcing, but how best to use it to achieve business objectives. Although a primary business objective is to maintain or improve market performance, there is limited empirical evidence on the influence of global sourcing strategy on market performance. The few available empirical reports examining the relationship between global sourcing strategy and market performance use data collected in the mid-1980's or before (Kim 1986, Kotabe 1992, Moxon 1974). Literature Firms make sourcing decisions in each of the two phases of production: component sourcing and assembly. In either phase, firms can choose to use domestic or foreign sourcing (the locational aspect), and internal or external sourcing (the ownership aspect). "Domestic sourcing" is when the sourcing firm and its suppliers are located in the same country, while "foreign sourcing" involves sourcing from abroad. A firm uses "internal sourcing" when it procures or assembles parts and components from within the corporate system, either a parent from its subsidiaries, or subsidiaries from their parent or from other subsidiaries. "External sourcing" occurs when sourcing originates from independent suppliers on a contractual basis. These activities often cross national boundaries. Locational Aspects of Global Sourcing Strategy Many studies report dramatic increases in foreign sourcing by U.S. multinational firms.(1) For example, 26 large multinational firms surveyed by Monczka and Giunipero (1984) reported that, during 1977-1981, there was on average a 60 percent increase in foreign purchases. In a more recent survey of 80 large U.S. manufacturing firms by the Machinery and Allied Products Institute (MAPI) (1986), it was found that the larger the firm, the more likely it is to use foreign sourcing. Further, more (81%) firms used foreign sourcing to procure component parts than for the procurement of materials (76%), machinery and equipment (69%), and services (16%). In penetrating the U.S. market, domestic (i.e., U.S.) sourcing is often employed by foreign multinational firms as a means to overcome tariff and non-tariff barriers. Recently, because of the high levels of foreign direct investment, foreign multinational firms (Japanese multinationals in particular) have been using more and more local (U.S.) content in their products. Whether a firm uses domestic or foreign sourcing partially depends on the cost advantage derived from the relative prices of goods and labor in various countries, which is influenced by currency exchange rates. From the perspective of U.S.-based firms, if the U.S. dollar depreciates, it is relatively more expensive to source from suppliers outside the U.S. Other important factors influencing the level of domestic and foreign sourcing include trade barriers, transportation costs, availability and delivery time, among others (e.g., Birou and Fawcett 1993, Carter and Narasimhan 1990). Ownership Aspect of Global Sourcing Strategy Leontiades (1971) and Moxon (1974) were among the earlier researchers to recognize the strategic importance of intra-firm imports (internal sourcing) from less-developed countries to developed countries. Later, Helleiner (1979) reported that internal sourcing (intra-firm transactions) by U.S. multinational firms comprised approximately 48 percent of total U.S. imports. A separate survey of 76 U.S. multinational manufacturing firms revealed the significant level of intra-firm imports by U.S. parent companies in the following categories: finished goods (20-25 percent), components (65-70 percent), and raw materials (10 percent) (Business International 1982). …