DETERMINANTS OF

INTRA-FIRM SOURCING
AND MARKET
PERFORMANCE

Maasaki Kotabe & Janet Y.Murray

By: Roy Teh

 Introduction
 Earlier studies have shown that internal
sourcing of major components has a direct
bearing on multinational firm's market
performance.
 The following components strongly affects
the degree if internal sourcing:-
 Process innovation
 Asset specificity
 Management’s attitude
 Nationality
 Availability of substitute
Product Related Variables:
Industry Related Variables:
Firm Related Variables:
Product Innovation
Switching Cost
Process innovation Nationality
Number if Suppliers
Asset Specificity Management’s Attitude
Number of Substitute

Global Competitive Strategy

Internal Sourcing of
Major Components

Performance

Strategic
Financial
 Hypothesis Development
 Kotabe et al found that global intra sourcing
of major components influences the product’s
market performance.
 Major components are defined as
intermediate products that could not be
sourced in newly industrialised countries
without technical support from the principal
firm and reflect its proprietary technology
 Proprietary technology is a concept which
involves product and process innovation
 Determinants of Internal Sourcing
Criterias
 Leroy (1976) found that strategic product
decision depends on product, firm and
industry characteristics.
 Following his findings, this study
investigates product-, firm-, and industry
related variables as determinants of
internal sourcing of major components.
 Product Related Variable –
Product Innovation
 By internalizing highly proprietary technologies, firms can
 keep major components in their corporate system.
 reap the full economic rent of its technologies rather than receiving less
by relying on market mechanisms (imperfect).
 The higher the technology content of a product, the more likely is a
firm to source internally.
 Also, with increasingly shorter product life cycle, outsourcing major
components is a sure way to leak product related trade secrets to
competitors (Bermingham, 1991).
 Product innovation tends to be reflected in those major components
procured internally

 Hypothesis 1a – product innovations is positively related to extend

of internal sourcing of major components
Product Related Variable – Process
Innovation
 Process innovation consist of an alternative way of
gaining and maintaining competitive advantage.
 It involves a great deal on intangible know-how (eg. JIT,
TQM, CAD/CAM) across a wide spectrum of value
added chain (Porter, 1986).
 Such know-hows are generally hard to codify and
imitated (Kogut & Zander, 1993).
 A high level of manufacturing process capabilities
equally provides a long term competitive advantage over
competitors.

Hypothesis 1b – process innovations is negatively related

to extend of internal sourcing of major components
 Product Related Variable –
Asset Specificity
 Major or crucial components almost always require
deployment of specialised assets
 It is necessary for a firm to choose between “make or
buy” decision for these components.
 Asset Specificity refers investment made with
idiosyncratic (nonmarketable) assets.
 It is expected that when asset specificity is relatively
high, firms would rely on internal sourcing to control its
quality and availablility.

Hypothesis 2 – Asset Specificity is positively related to the

extend of internal sourcing for major components
 Firm Related Variable –
Management Attitude
 Within a firm, strategy chosen to fulfill a business
objective is partly dependent on management's
attitude.
 Management attempts to decide on the extend
of internal sourcing only if its perceived benefits
exceeds expected cost (Geringer, 1991).

Hypothesis 3 – Managements favoring intra

sourcing is positively related to the extend of
internal sourcing of major components
 Firm Related Variable –
National Differences in Sourcing Behavior
 Nationality of multinational firm plays an important role in their strategic
decisions.
 Davidson (1989) suggested that “there exists a strong corelation between
the nationality of a corporation and its operating strategy”.
 Graham & Krugman (1989) observed a high level of import propensity for
Japanese firms in US compared to European firms.
 This attribute may be due to:-
 Japanese FDI are newer and less mature in US compared to European firms
 Japanese firms are more reluctant to use US made components from
independent suppliers due to their unsatisfactory quality (Fortune, 1986).
 As these firms become more experienced in the foreign market, they tend to
source more from local independent suppliers.

Hypothesis 4 – Japanese multinational firms emphasizes more internal

sourcing of major components than European firms.
 Industry Related Variable –
Switching Cost
 Ifswitching costs are high, the sourcing form’s
ability to have price concessions or request for
additional components during emergencies will
be restricted.
 Internal sourcing will eliminate the costly
dependence on independent suppliers.

Hypothesis 5a – Switching Cost is positively

related to extend of internal sourcing for major
components.
 Industry Related Variable –
No. of Suppliers & No. of Substitutes
 No. of Suppliers determines dictates the availability of
supply sources.
 No. of Substitutes allows flexibility for firms to turn to
suppliers from other industry for its needs.

Hypothesis 5b – # of supplier is negatively related to extend

of internal sourcing for major components.

Hypothesis 5c - # of substitute is negatively related to

extend of internal sourcing for major components.
 Industry Related Variable –
Internal Sourcing & Market Performance
 Internationalization theory underscores the importance of sourcing internally
to protect monopolistic advantage in know-how.
 Core competency argument emphasizes the strategic imperative of focusing
on the production of major components that provide competitive advantage
over rivals.
 Internal sourcing of major components for the manufacture of a product can
help fulfill the strategic aspect of market performance (market share, sales
growth rate) by securing consumers’ goodwill and confidence (Casson,
1982, Prahalad & Hamel, 1990).
 However, use of internal sourcing may not positively contribute to financial
performance (return on sales, return on investment) due to high investment
on R&D, manufacturing & distribution channel.

Hypothesis 6a – product’s strategic mkt performance positively related to

extend of internal sourcing for major components.

Hypothesis 6b – product’s financial mkt performance negatively related to

extend of internal sourcing for major components.
 Conclusion
 Product and firm related variables generally
have more significant influence on internal
sourcing then industry related variables.
 Internal sourcing is a micro level decision,
therefore more apt to be influenced by
controllable factors in the firm’s internal
environment.
 Because of strategic importance of major
components, internal sourcing is mostly
influenced by strategic (process innovation &
asset specificity) rather than cost (switching cost
& no. of suppliers) factors.