Global Sourcing and Innovation: The Consequences of Losing both Organizational and Geographical Proximity

The main message of the proponents of strategic outsourcing is that it pays off to concentrate on the activities that you are good at. The result of specialization along the value chain will be a product that will be more competitive in terms of price, quality, and innovation. Globalization has many dimensions, but here we mainly want to consider the movement of manufacturing activities to low wage locations. In this paper we will investigate the implications of global sourcing for the innovative capacity of the outsourcing company. We will argue that these implications will be more pronounced in the case of global sourcing, because in that case the loss of organizational proximity that is inherent in outsourcing is compounded by the increase in geographical distance. The findings presented in this paper are the results from an ongoing research project on the relationships between research, development, and manufacturing against the background of increased global outsourcing of manufacturing. These observations give rise to a whole series of questions. Is there any reason to assume that research can be maintained as an in-house activity in the long run, if development and manufacturing have been outsourced? In other words: we are interested in the conditions for long-term viability of companies outsourcing most or all of their manufacturing, especially if such outsourcing is directed to low wage locations at a large distance from the research laboratories.