It is Really not Only About Costs: The Tacit Advantage of Local Vendors – Three Perspectives on International Trade in Software Development Services
13 Pages Posted: 12 Jul 2010
Date Written: February 17, 2010
This study examines the onshore/offshore decision in external software development, comparing the prediction of three theories of international trade. (1) Applying Ricardo's theory of comparative advantage, offshoring to low labor cost countries should apply mainly with large projects. (2) Applying the factor proportion model, however, projects that require little client-specific knowledge are those that should be offshored. And, (3) according to vertical specialization, offshoring should apply mainly to tasks that require little coordination. These contradictory predictions were examined with a portfolio of 270 software development contracts granted by a large European bank to local and international vendors. The results support the importance of client-specific knowledge and coordination costs in the onshore/offshore decision, but do not support the size and labor-cost consideration. Implications for local and international vendors as well as clients are discussed.
Keywords: Offshoring, Software Development
JEL Classification: F10
Suggested Citation: Suggested Citation