Choosing multiple offshoring strategies: Determinants and complementarity

• We find a complementarity between foreign outsourcing and insourcing activities.
• The complementarity is motivated by both bi- and hetero-sourcing strategies.
• Bivariate choice models are used for a choice of foreign outsourcing and insourcing.

In contrast to the existing offshoring literature that typically views foreign outsourcing and integration as alternative strategies, the simultaneous use of these two offshoring strategies by multinational firms becomes common practice in many countries. In this paper, we employ bivariate choice models to investigate firm-level decision-making on foreign outsourcing and insourcing strategies. Analyzing Korean firm-level data, we find a possible complementarity between the two strategies and that a firm’s choice of multiple sourcing strategies is related to its expected gains from increased bargaining power, reduced price risk in purchasing inputs, and costs saved in the production process. Furthermore, our empirical results reveal distinctive roles of various firm-specific characteristics in determining the two foreign sourcing strategies adopted by Korean manufacturing firms.