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

See all articles by Yossi Lichtenstein

Yossi Lichtenstein

City University London - Sir John Cass Business School

David Gefen

Drexel University

Simon Wyss

University College Dublin (UCD)

Date Written: February 17, 2010

Abstract

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

Lichtenstein, Yossi and Gefen, David and Wyss, Simon, It is Really not Only About Costs: The Tacit Advantage of Local Vendors – Three Perspectives on International Trade in Software Development Services (February 17, 2010). Available at SSRN: https://ssrn.com/abstract=1639134 or http://dx.doi.org/10.2139/ssrn.1639134

Yossi Lichtenstein (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

David Gefen

Drexel University ( email )

3141 Chestnut St
Philadelphia, PA 19104
United States

Simon Wyss

University College Dublin (UCD) ( email )

Belfield, Dublin 4 4
Ireland

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