A Theory of Offshoring and Outsourcing Based on Agency

While hazardous products made in China have caused panic for consumers worldwide, very few studies attempt to analyze the apparently significant agency cost of outsourcing and offshoring. This paper aims at filling the gap by modeling the incentive effects of outsourcing and offshoring, as well as their interactions. By defining the firm from the perspective of internal financing and focusing on the monitoring aspect of offshoring, we evaluate and rank the performances of six different organization structures of a global supply chain. The results help explain the evolution of three prominent organization structures under globalization — integrated device manufacturer (IDM), original design manufacturer (ODM), and original equipment manufacturer (OEM).