Do we need a theory of externalization?

Abstract

Recent years have witnessed the proliferation of factoryless goods producers (FGPs) in the contemporary global economy. Such FGPs have externalized (outsourced) the production activities within their global value chains (GVCs) to independent contract manufacturers. Typically, such FGPs only undertake selected pre-production (e.g. design, R&D, engineering) and/or post-production (e.g. sales, marketing, distribution) activities. Notable examples include Apple, Dyson, Nike, Nokia and Uniqlo, but there is evidence of the substantial externalization of production activities to contract manufacturers worldwide across a range of industrial sectors including garments, footwear, toys, electronics, pharmaceuticals, automotive, and footwear. Control is the key issue. Internalization theory provides a compelling explanation for the conditions under which it will be optimal for lead firms to bring geographically-dispersed GVC activities under common ownership |(and hence control) – but can not satisfactorily explain the FGP phenomenon. In this presentation, I outline a theory of externalization to explain not only the existence of factoryless goods producers, but also their ability to exert effective control over the activities throughout their organizationally-fragmented global value chains (GVCs). I stress the key role played by isolating mechanisms both in providing this control and in conferring upon the FGPs the power to determine the distribution of the value created within their GVCs.

Biography

Roger Strange is Professor of International Business at the University of Sussex Business School, UK. His current research focuses on four main areas of International Business: the reasons for, and the implications of, the growing trend towards the externalization of production in global value chains; the effects of corporate governance factors on foreign direct investment decisions and upon MNE innovation; the determinants of MNE subsidiary location; and the impact of new digital technologies on international business theory and practice. He is Editor-in-Chief of International Business Review, a former President of the European International Business Academy (EIBA) and an EIBA Fellow.