Sourcing Strategies of Firms: Recent Theoretical Developments

Sourcing Strategies of Firms: Recent Theoretical Developments

Tomasz Serwach (University of Lodz, Poland)
DOI: 10.4018/978-1-5225-2345-1.ch001
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Abstract

The purpose of the chapter is to present recent theoretical developments in FDI theories with an emphasis on sourcing strategies of firms. It is stated that economic theory explains the existence of the so called vertical FDI as the result of market failures or transaction costs and incomplete contracts. Firms engage in foreign sourcing due to lower costs or an access to unique resources but that sourcing takes place within firms' boundaries in order to benefit from internalization advantages. Although recent theories have been developed in the context of FDI from developed countries, those new insights can be easily applied to the case of outward FDI from emerging economies as well.
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Background

The dynamic growth of FDI activities has been observed especially since mid-1980’s with the noticeable acceleration since mid-1990’s. It seems that the empirics goes in tandem with the theory. The first models of vertical FDI were formalized in the mid-1980’s (Helpman 1984 and 1985, Ethier 1986). Additionally, the so called eclectic theory of international production (OLI paradigm) was introduced. That theory suggests that a firm investing abroad must exploit three kinds of advantages:

  • Ownership Advantages: Associated with the competitive edge of a company (due to, for example, market power or size),

  • Location Advantages: Related to beneficial characteristics of the host country/region (like a significant pool of cheap labor or an easy access to natural resources, technology etc.),

  • Internalization Advantages: Stemming from keeping certain operations within firm’s organization.

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