Home-Host Country Distance and Governance Choices in Service Offshoring

This paper studies the effect of home-host country distance on the choice of governance mode in the offshoring of services. Using a Transaction Cost Economics approach, we look at the comparative costs of the hierarchical and contractual models to show that different dimensions of distance (geographic, cultural and institutional), because they generate different types of uncertainties, impact offshore governance choices in different ways. On the one hand firms are more likely to respond to internal uncertainties resulting from geographic and cultural distance by leveraging the internal controls and collaboration mechanisms of a captive offshore service center. On the other hand, they tend to respond to external uncertainties resulting from institutional distance by leveraging the resources and local experience of third party service providers. Finally, we find that the temporal distance component of the geographical dispersion between onshore and offshore countries plays a dominant role over the spatial distance component.