Home-Host Country Distance in Offshore Governance Choices

This paper studies the effect of home-host country distance on the choice ofgovernance mode in service offshoring. Using a Transaction Cost Economicsapproach, we explore the comparative costs of the hierarchical and contractualmodels to show that different dimensions of distance (geographic, cultural andinstitutional), because they generate different types of uncertainties, impactoffshore governance choices in different ways. Empirical results confirm that, onthe one hand, firms are more likely to respond to internal uncertainties resultingfrom geographic and cultural distance by leveraging the internal controls andcollaboration mechanisms of a captive offshore service center. On the other hand,they tend to respond to external uncertainties resulting from institutional distanceby limiting their foreign commitment and leveraging the resources and localexperience of third party service providers. Finally, we find that the temporaldistance component (time zone difference) of geographical dispersion betweenonshore and offshore countries plays a dominant role over the spatial distancecomponent.