Abstract/Summary

We study the relationship between modularity and entry mode choice in the context of business functions offshoring. We define the degree of modularity of an activity as technical architecture (whether it can be detached from the rest of the value chain without loss of synergies). We refer to the entry mode chosen as organizational architecture (whether a captive solution, a partnership or outsourcing). We propose that the selection of entry mode should reflect the alignment of the technical and organizational architectures: that is, they need to be ‘mirrored’. Modular activities are more likely to be outsourced, as modularity decreases transaction costs and knowledge leakages risks, while not-modular activities reflect captive entry modes. Based on the analysis of 486 business function offshoring initiatives, we also argue that firms can “break” the mirror as the entry choice is contingent upon the level of disintegration of the value chain and the offshoring experience of the firms.