The Evolution of Risk in Information Systems Offshoring: The Impact of Home Country Risk, Firm Learning, and Competitive Dynamics

Information systems offshoring has emerged as a significant force in the global political economy, an important source of firm-specific competitive advantage, and a focal point for debates over the benefits and costs of globalization. As worldwide competition exerts increasing pressure on the IS function of firms to become geographically unbundled, and IS services are dispersed among increasingly distant and unfamiliar locations, the issue of risk emerges as a significant factor in decisions about where to locate offshore facilities. Drawing from prior research in IS outsourcing/offshoring and theoretical perspectives from international strategy and multinational management, we examine the determinants of risk firms bear in their offshoring decisions. In particular, the current paper explores firm-level and environment-level “push” factors that drive firms to accept increasingly greater degrees of host country risk. We predict that firm-level risk outcomes for locating IS offshore facilities will be influenced by prior firm-specific experience, the relative gap between home and host country risk levels, and the overall movement by IS offshore services providers toward increasingly riskier locations. We test these hypotheses on a proprietary data set of more than 850 information technology and software offshoring projects in 55 host countries worldwide during the period 2000 through 2005. We find that firm-specific experience and the core “risk gap” between home and host country are predictive of companies pursuing progressively riskier locations, but that their effects dissipate as environment-wide experience is incorporated into our model. Our analysis suggests that broader dynamics in the competitive environment are powerful contributors to the overall observation that IS offshoring is moving to increasingly high-risk locations. This trend has implications for the management, security, and global integration of information systems. Our study contributes to the literature on risk and IS offshoring in providing the first worldwide empirical examination of the determinants of actual firm IS offshoring behavior with respect to offshoring location risk.