Bi-Sourcing in the Global Economy

In organizing production, many …rms conduct bi-sourcing, i.e., acquiring the same set of inputs by both buying from external suppliers (outsourcing) and carrying out in-house production (insourcing). We show that, by adopting the bi-sourcing strategy, …rms can use the payo¤ from one supplier as a backup option in negotiating with the other supplier (the cross-threat e¤ect). When …rms conduct bisourcing in the global economy consisting of the high-waged North and low-waged South, they need to make the location choice for both insourcing and outsourcing. We …nd that the low wage in the South can encourage investment by component suppliers (the cost e¤ect). However, …rms may achieve a better cross-threat e¤ect by relocating overly strong component supplier from the cost-advantageous South to the cost-disadvantageous North (the balancing e¤ect). The optimal bi-sourcing strategy is determined by the interplay of the cost e¤ect and the balancing e¤ect. Corresponding author: Zhigang Tao, Faculty of Business and Economics, The University of Hong Kong, Pokfulam Road, Hong Kong. Tel: 852-2857-8223; Fax: 852-2858-5614; Email: [email protected]. Julan Du and Yi Lu are from Department of Economics, Chinese University of Hong Kong and School of Business, The University of Hong Kong respectively. We would like to thank Tom Hout, Ivan Png, Larry Qiu, Michael Riordan, Thomas Ross, editor Jonathan Eaton, two anonymous referees, and participants in the 2005 Econometric Society World Congress, the 2005 Summer Workshop on Industrial Organization and Management Strategy at Tsinghua University, the 2005 International Conference on Trade and Investment in East Asia at Fudan University, and 2006 Midwest International Trade Conference for their useful comments and suggestions. Financial support from HIEBS and Hong Kong Research Grants Council is greatly acknowledged.