Path Dependence, Modularity and the Offshoring of (Some) Physician Services

There is a large and growing literature regarding the decision making process firms undertake as they evaluate what to make versus what to buy. One group of scholars studying these issues of vertical integration uses the concept of modularity: according to Pil and Cohen (2006, p. 995) ‘modularity in product design allows a firm to exploit technological opportunities through recombination, modular innovation, and outsourcing.’ Modularity focuses on how complex processes can be decomposed into discrete components that can in turn be handled by the most efficient organization or transferred to the most efficient location. At the same time that new technologies and organizational processes are enabling a growing range of processes to be offshored, there is growing recognition of the regulatory and cultural barriers that often inhibit the ability of firms and entrepreneurs to fully modularize and offshore their production processes or supply chains. While many different ideas attempt to explain why specific production methods remain in place, the theory of path dependence provides a compelling framework to examine why less efficient production models may remain locked in place despite more efficient alternatives. As we argue below, path dependence is very useful in explaining regulatory and behavioural inertias that impede business practices such as offshoring and offshore-outsourcing.