International Business and Trade
GM0112, Global Sourcing (III)
The WHERE question:
The (re)location decision
Bent Petersen
Visiting Professor
Global Sourcing - Fall 2010
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Contents of today’s lecture
1. Modeling the location decision
2. A disaggregated and dynamic approach to
localization
3. The “Smile curve”
4. Case example: The GPN of Dell computer
Global Sourcing - Fall 2010
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The WHERE question
 Where to (re)locate underperforming, or underdeveloped), 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”)
.
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The choice of location and partner selection
following an offshore outsourcing decision
(Graf & Mudambi, 2005)
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Modeling the offshore out-sourcing location
decision (Graf & Mudambi, 2005)
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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.?
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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.
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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 upand down-stream high value-added activities and
relocating /outsourcing low value-added activities
to emerging economies firms.
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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.
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Value chain configuration in the Danish apparel
industry: Three business models
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shoes: Location of employees
Composition of employees in ECCO by geography
10000
.
8000
6000
4000
2000
0
1980
1982
1984
1986
1988
Employees in Denmark
1990
1992
1994
1996
1998
Employees outside Denmark
2000
2002
2004
Evidence of value chain configuration of
Danish MNCs
Type of activities carried out in Denmark and abroad
60
50
40
30
20
10
0
D
R&
an
Lo
d
Carried out in Denmark primarily to serve
the local market
Carried out in Denmark primarily to serve
the company and all its markets
Carried out abroad primarily to serve the
local market
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Global Sourcing
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Carried out abroad primarily to serve the
company and all its markets
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Evidence of value chain configuration of
Danish MNCs (cont’d)
Character of flows between company units in
different countries
60
50
40
30
20
10
0
Goods
Services
Knowledge
Money/Capital
Mainly from
Fairly balanced
Denmark to
foreign countries
Mainly from
foreign countries
to Denmark
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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.
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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.
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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.
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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.
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A world map of services offshoring
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Source: McKinsey Global18
Institute, 2005
The global production
network (GPN) of
Dell Computer
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The GPN of Dell
Dell’s nested hierarchy of location factors:
1. Market access
2. Labor costs and quality
3. Transportation and telecommunication
infrastructure
4. Government incentives
5. Industry clusters (question of partner
selection).
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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.
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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)!
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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!
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