Modern Economy, 2011, 2, 680-690
doi:10.4236/me.2011.24076 Published Online September 2011 (http://www.SciRP.org/journal/me)
Copyright © 2011 SciRes. ME
International Modularity and Offshoring in
Sandra Valle, Lucía Avella, Francisco García
Department of Business Administration, Universidad d e Oviedo, Oviedo, Spain
E-mail: firstname.lastname@example.org, email@example.com, firstname.lastname@example.org
Received May 10, 201 1; revised July 2, 2011; accepted July 14, 2011
This paper aims to analyze participation by Spanish industrial firms in the marked process of international
production modularity or fragmentation that is taking place on a global scale. It studies whether firms use
offshoring (that is, transfer activities abroad), what type of activities are offshored, the type of offshoring
used, the main target countries, the reasons for offshoring and the benefits it brings. Qualitative research into
four Spanish business groups shows that they all use offshoring, mostly outsourcing manufacturing to inter-
national suppliers. When choosing offshore location, these groups aim to achieve not only cost savings but
also advantages from the agglomeration of the agents with which they need to interact, as well as access to
new markets and relevant resources (infrastructure, auxiliary industry, production capacity, technology and
Keywords: International Modularity, Offshoring, Captive Offshoring, Offshore Outsourcing
Globalization, coupled with the current dynamic nature
of markets, fast technological change-especially in com-
munications- and increasing co mpetition from new inter-
national players—particularly emerging countries with
lower income and wage levels, is placing firms under
great pressure, leading them to adopt changes in the or-
ganization and l ocati on o f thei r val ue chains.
On the one hand, globalization provides firms with
opportunities to target a larger number of markets and
suppliers of raw materials and components . On the
other hand, constant technological change is breaking
down the barriers associated with physical, geographic
and/or cultural distance, and even with time differences
. As a result, businesses can adopt a modular approach,
breaking up their value chains, specializing in their core
activities and transferring the rest to foreign countries
which now have more open markets in addition to unique
resources and/or capabilities. In this way, firms are able
to take up opportunities fo r cultural, administrative, geo-
graphic and economic arbitrage, making the most of dif-
ferences between countries and searching for economies
through intern ational specialization .
The combination of modularity and offshoring, that is,
of fragmentation and the use of resources outside the
firm’s home country, is creating a worldwide panorama
of value chains that are broken up into separate, specia-
lized activities -innovation, component design, industrial
design, logistics, manufacturing, sales and after-sales
service, amongst others- which are carried out by differ-
ent firms in different parts of the world, giving rise to
international pr od uct i o n net works.
The purpose of this research is to analyze whether
Spanish industrial firms are participating in this process
of international production fragmentation by modifying
the organization and location of some of the activities in
their value chains. More specifically, the aim of the study
is to identify which activities are being outsourced to
other firms in foreign countries and which ones are being
carried out internally but relocated to different countries.
The study also focuses on the reasons why such deci-
sions are reached, the benefits sought and the risks taken.
The remainder of the paper is structured as follows.
Section 2 describes what is understood by offshoring.
Section 3 describes the methodology used for the em-
pirical research. This is based on case study and can
therefore be categorized as qualitative. Section 4 presents
the analysis of four large Spanish business groups and
discusses the main findings. Finally, section 5 concludes.
*The authors would like to thank Spanish Ministerio de Ciencia y Tec-
nología (MICINN-09-ECO2009-08485) for its financial support.
S. VALLE ET AL.681
2. International Modularity and Its
The option of combining fragmentation (modularity) of
the production system with economic internation a lization
leads many firms to take key decisions on the organiza-
tion and location of the activities in their value chain.
With regard to organization, firms have to decide which
activities will continue to be carried out internally within
the firm and which to outsource to other independent
national or international companies. And with regard to
location, they have to decide whether those activities
carried out internally are to be located in the firm’s home
country or offshore.
Offshoring includes both internation al outsourcing and
offshore location choices. That is, offshoring is the trans-
fer of activities to foreign countries, eith er to subsidiaries
so that the firm gives up neither ownership nor control
(offshore location or captive offshoring), or to indepen-
dent firms (international outsourcing or offshore out-
sourcing) (see Table 1). This definition of offshoring is
in line with that used by authors such as  and .
The choice of offshore outsourcing or captive offshor-
ing1 will depend on the relative advantages firms consi-
der they will obtain from carrying out activities inter-
nally rather than having them done by outside suppliers,
as well as on the advantages of transferring them in both
cases to a foreign country. In offshore outsourcing, firms
acknowledge the advantages of outsourcing activities,
that is, to focus on their core competencies and to resort
to the greater capabilities of specialized suppliers. The
resulting benefits of cost, quality and organizational
learning make up for the transaction costs involved. How-
ever, in captive o ffshoring, the advantages of outsourcing
seem limited. When the transaction costs (mainly oppor-
tunism), the possibility of losing management control
and the risks associated with knowledge spillovers to-
wards outside suppliers are too high, then firms choose
to internalize activities while reaping the benefits ob-
tained from the superior resources to be found abroad. In
such cases, the advantages of setting up subsidiaries in
foreign locations make up for the location-specific risk
In addition, there may be other reasons why firms de-
cide to transfer activities to o ther countries and outsource
them to independent suppliers. These may be, among
others, volatile demand, fierce competition from new
global agents or institutional pressure and increasing
costs. By outsourcing firms are able to: transfer the bur-
den of capital investment and the risks of overproduction
to third parties; save on labor costs by freeing themselves
Table 1. Organization and location of activities in the value
Where the activity takes place
Who carries out the
activity Within the firm’s
home country Abroad
The firm In-house development Captive offshoring
An outside supplierDomestic outsourcing Offshore outsourcing
of labor-intensive processes; utilize crucial resources on
key tasks; use the superior, specialized capabilities of
other firms; increase their organizational learning by
sharing information and resources with other firms; they
can make up for shortfalls in in-house resources; access
unique resources, gain flexibility an d improve production
efficiency. When resources are neither limited nor diffi-
cult to imitate and/or substitute, firms can achieve great
advantages in cost, time and quality by obtaining them
As stated above, the final decision on whether to out-
source or not will depend on whether the advantages are
greater than the costs and risks involved in having to
establish transactions with other firms. It should be noted
that, in many of the countries to which firms are out-
sourcing their activities, legal systems are beginning to
fall into line with western standards and provide a con-
siderable degree of protection. This means that costs to
ensure confidentiality are becoming comparable to those
of industrialized countries. Therefore, the costs of infor-
mation and coordination are decreasing , making such
countries much more attractive. So the reduction in trans-
action costs can be said to be facilitating trade across
On the other hand, there may be a number of reasons
for deciding to transfer activities abroad but establishing
owned units (captive offshoring). Many firms transfer
their production to other countries because labor both
technical and services is cheaper. Since labor costs often
represent a large proportion of a firm’s operating costs,
this can be a significant way of achieving cost savings.
Other firms may need the sort of skilled professionals
that are not available in their home countries2 . Even
though cost reduction is an important incentive, it is not
the only reason for captive offshoring. Another reason to
choose an offshore location may well be the need to sell
in the country of destination, either because it is a new
market in which customers can now afford to buy or be-
2Moreover, in these cases, the relative advantages of human capital
stem not only from their cost or their greater skills, but also from time.
Having personnel in different locations in different time zones allows a
continuous workflow, which substantially increases total productivity
and speeds work up .
1Some authors, such as , consider an intermediate hybrid possibility:
going abroad through a joint venture. However, this study focuses only
on the extrem e o p t i o n s -captive offshoring or offshore outsourcing.
Copyright © 2011 SciRes. ME
S. VALLE ET AL.
cause a large number of potential customers will start to
consume once jobs are available, providing them with
regular wages and opportunities . Therefore, poten-
tial offshore locations should not be seen only as inter-
esting sources of suppliers, but also as sources of future
customers. If a privileged market position can be
achieved, this may turn into a competitive advantage for
the firm . In addition, if the firm operates in the coun-
try in which it hopes to sell its produ cts, proximity to the
market will facilitate awareness of customers’ needs,
tastes, preferences and local trends, so the firm will be
able to keep ahead of the market.
The type of product to be sold may also be a reason
for captive offshoring . Localizing production close
to markets is especially relevant in the following cases:
products that have to be manufactured complying with
national specification s, products th at have to be tendered,
perishable or fragile products that might be damaged
during transport to their final destination or market, and
heavy or bulky products.
Following market tren ds and imitating o thers may also
be a reason for captive offshoring. A firm may decide to
invest abroad because it has seen other firms do so .
But the usual reason is to gain access to resources that
are not available in the firm’s home country. In fact,
some studies have shown that internationalization may
be based on the search for new assets (asset-seeking in-
ternationalization) [12-14]. A shortage of land, capital,
labor, capabilities, know-how or any other resource may
make a transfer to another country inevitable. Captive
offshoring may allow firms to enter countries by directly
acquiring unique emerging resources, then retaining di-
rect control over them. First-movers can develop this
potential and may end up gaining a competitive advan-
3. Research Methodology
As stated above, the main purpose of this research is to
analyze and draw some relevant conclusions on partici-
pation by Spanish industrial firms in international pro-
duction modularity or fragmentation through offshoring.
The analysis focuses on the following questions:
Of all the activities involved in the firm’s value chain,
which ones have been outsourced to foreign suppliers
and which ones have been transferred to subsidiaries
What are the main reasons why firms make these
What benefits has the firm achieved by transferring
activities abroad? What risks have been taken?
Given these objectives, case study was adopted as the
research methodology as this allows a phenomenon to be
studied within its context, using multiple sources of in-
formation a nd analyzing a large number of vari abl e s 3.
The research covered four Spanish business groups
that are active internationally and are known to have
transferred some of their activities to foreign countries.
Field work was carried out between March and July
2009. Semi-structured interviews were held with owners,
managers and employees at the facilities which each
group has in its respective region of origin (two in Span-
ish region A and two in Spanish region B), requesting
information on the whole group. Since the use of a re-
search protocol helps increase bo th the reliability and the
validity of the data obtained from the study , a semi-
structured questionnaire was drawn up as a guide, though
the interviews were always open. The multiple-respon-
dent formula was also adopted because in most cases a
single person does not have all the knowledge necessary
on the subject under study and cannot provide all the
data required for the research. Moreover, this eliminates
the potential problem that answers from a single respon-
dent may be subjective or subject to personal biases. All
the researchers participated in each of the interviews.
When compiling data for a case study, triangu lation is
important, that is, the use and combination of different
sources of information to study a single phenomenon.
Such sources may include interviews, questionnaires, di-
rect observation, analysis of documents or research into
archives. The use of many sources of data helps increase
the reliability of results, because it allows the researcher
to carry out more thorough analyses, covering a broader
range of factors , and basing conclusions on many
sources of evidence . In this study, triangulation has
been achieved by complementing the information ob-
tained in interviews with information obtained from the
press and from the corporate websites. Additionally,
once the report about the experience of each firm had
been written (with the participation of all the researchers),
the document was sent to the interviewees so that they
could evaluate to what extent it was accurate and tallied
with the conversations held during visits and, where ap-
propriate, make corrections. The final information ob-
tained is presented below.
4. Results and Discussion
This section presents the main results of the empirical
research. Firstly, the four cases under analysis are
showed. Thus, the organization of each firm’s value
chain is described, stressing the activities transferred
abroad -both by outsourcing to third parties or by setting
3This methodology is appropriate in the early stages of research ,
when the aim is to study unusual phenomena for which there is no
consolidated theoretical basis or when causal explanations are sough
Copyright © 2011 SciRes. ME
S. VALLE ET AL.683
up a subsidiary- and the reasons, benefits and risks in-
volved. Secondly, a comparative analysis of the four
cases studied is presented.
4.1. Main Results of the Case Study
4.1.1. Alf a 4
Alfa is a family-run group that competes mainly in three
sectors: open-air toys, sports products and food products.
Alfa exports its products to more than 70 countries.
The activities involved in the group’s value chain are:
R&D + i/design, logistics (purch asing, tran sportatio n and
stocks management), manufacturing, quality control,
administrative processes (administration, HR, cash…),
marketing and after-sales services.
Many of these activities are carried out in-house, some
in Alfa’s home region (region A) and some others in
Hong Kong. More specifically, the purchasing of materi-
als and coordination of some of its sales and transport
logistics have been transferred to Hong Kong. For this
purpose, Alfa has set up a commercial subsidiary from
which it can sell its products in markets in Asia, America
In addition to these in-house activities, Alfa also out-
sources some activities to independen t suppliers, namely,
HR administration and most of its manufacturing. HR
management and administration is outsourced to an in-
dependent firm in region A (domestic outsourcing). Pro-
duction, except for 16% carried out in-house, is out-
sourced to a Taiwanese and several Chinese manufactur-
ers (internatio na l outs o urci n g).
Of all the outsourced production, 65% comes from a
Chinese manufacturer which, though not owned by Alfa,
was set up to operate in the same way as Alfa and to
supply it exclusively. For the rest of the outsourced pro-
duction, Alfa has a portfolio of about 30 suppliers that
were selected because they had the equipment, know-
how and other resources that the exclusive supplier or
other potential suppliers did not have. For example, it
works with a firm in Shanghai w hich is one of the world
best suppliers of high technology in traction.
All the suppliers, which have to comply with a strict
protocol drawn up by Alfa, carry out only the physical
manufacturing, because all design and development
(R&D + i) is still carried ou t in-hou se by Alfa in i ts ho me
region. In fact, this function is so important that it has
recently become an independent firm within the group.
In spite of this high level of outsourcing, Alfa still car-
ries out approximately 16% of its production within its
plant in region A. This is due to the fact that Alfa con-
siders there are certain high-technology products that
cannot be outsourced to other firms, either because such
firms do not have the necessary capability to manufac-
ture them or because of the high risk of dissipation and
loss of know-how. So, essentially, Alfa takes labor to
China but has left the firm’s “brain” (what really adds
value to its products) in its home facilities.
Alfa had various reasons for choosing China as its
offshore dest i n a t i on :
The country was not unknown to the firm, as its
chairman had had contacts in China since 1985.
China has the required skilled labor that, in addition,
is productive and cheaper.
China has the necessary infrastructure.
The Chinese government guarantees protection for
Many of the firm’s competitors were already in Chin a
before Alfa established there5.
Hong Kong is the business hub in the toy sector, and
many of Alfa’s most important customers are there.
Alfa considers that it made the right decision in
choosing China6. In spite of the cultural differences and
the difficulties they entail, Alfa has a close relationship
with all its Chinese suppliers, and shares information,
resources and values with them. In addition to the man-
agement team and the Office Manager in Hong Kong,
Alfa has four people acting as links with all suppliers.
They all speak Chinese and have received specific train-
ing for this jo b .
The main advantages for Alfa of outsourcing product
manufacturing to China are: a) cost savings, b) organiza-
tional learning, c) larger sales volume and market share,
and d) improved profitab ility.
Alfa considers that the main risks of offshore out-
sourcing to China are: lower quality, longer lead times,
loss of intellectual property, lack of sk ills in maintaining
good relations with suppliers, and the potential for sup-
pliers to turn into future competitors.
Alfa has been able to prevent such risks from turning
into real problems, mainly because of its careful selec-
tion of suppliers, which have to follow the Alfa philoso-
phy, and also because of its strategy of patenting all its
innovations. Perhaps the only real risk is that of longer
lead times, but this is offset by all the other advantages.
Alfa plans to continue offshoring activities in China.
5Today, most of these competitors are considering relocating their ac-
tivities once again. The new destinations would be Vietnam and Africa,
mainly because prod uction is now cheaper there than in China. But Alfa
is not planning to relocate. It knows that China will not be feasible in
the future but, meanwhile, it prefers to achieve cost savings through
6When Alfa decided to outsource production to China, it also consid-
ered the possibility of outsourcing to a Polish supplier. But the latter’s
rices, because of labor costs, were very similar to those in Spain, so i
would not have been profitable. There were also problems with raw
materials, because in Poland the tariff regime would have complicated
customs formalities. Portugal was also considered but it was neither
rofitable nor did it h a ve su i ta bl e i n frastructure.
4For reasons of confidentiality and at the request of the firms studied,
fictitious names are used.
Copyright © 2011 SciRes. ME
S. VALLE ET AL.
In fact, it is considering creating a buffer warehouse in
Hong Kong, similar to the one it has in region A. The
aim is to have two strategically-located buffer ware-
houses in the world one for medium and large customers
buying from Europe, America, the Middle East and Af-
rica, and another for mediu m and large customers bu ying
for the whole world but from Hong Kong. This new pro-
ject will allow the firm to offer a good service to its cus-
tomers, while improving the positioning of its products
internationally. Moreover, with this investment, Alfa will
be setting up a new logistics management business for all
the firms that do not have the resources, capability or
know-how to manage their own logistics. The firm is
also considering the possibility of entering Africa by
setting up a facility in Tunisia.
The Alfa group is, therefore, a neat example of a firm
that has resorted to offshoring, specifically in China. It
uses the two types of transfer modes being analyzed,
both offshore outsourcing (mainly manufacturing) and
captive offshoring (the purchase of materials and coor-
dination of some sales and transport logistics).
The Beta group is a business holding that manufactures,
provides advisory services and distributes products and
services in the electricity and electronics sectors and
controls industrial and domestic facilities.
All the administrative processes required in its value
chain tax management, accounting, HR, etc. are carried
out in-house but in a decentralized fashion, that is, in
each of the group’s facilities. The same happens for dis-
tribution and sales, carried out internally at each of
Beta’s distribution centers located in Spain, Portugal,
Poland, Mexico and China.
R&D + i is also carried out in-house, thou gh it is cen-
tralized for the whole group. The firm has its own tech-
nology center located in its home region (region A),
which carries out basic research, industrial research and
experimental and industrial development. Beta has main-
tained this activity in its home region because it runs
smoothly as a result of cooperation with the university,
with various technology centers and with the local gov-
Manufacturing is partly carried out by Beta in-house,
in its Spanish and its Chinese plants, and partly out-
sourced to manufacturers in China. More specifically, in
Spain it produces the mechanical parts of the electrical
equipment because in Spain it has the necessary know-
how and technological and intellectual capital, so there
would be no point in transferring it elsewhere. Beta ma-
nufactures all the electronics components in China. This
type of production was previously entirely outsourced to
third parties, but it is now done in-house. For this pur-
pose, Beta has a plant in Haian (Jiangsu) and another in
Zhen-Zhen. The Haian plant carries out production em-
ploying local labor. The Zhen-Zhen plant carries out the
final technological development of products, prior to
production and based on prototypes sent from Spain,
taking into account the need to adapt these products to
the conditions in the countries in which they are to be
sold. This plant also carries out quality control on all
products manufactured in China.
Initially, Beta mainly outsourced because electronics
manufacturing know-how was mostly in the hands of
Chinese manufacturers but, over the years, the firm has
gained greater know-how and experience and now con-
siders that, by maintaining tighter control over costs,
labor and overheads, it can be more competitive by ma-
nufacturing its products itself rather than by outsourcing.
In fact, the only production that Beta currently out-
sources is the manufacture of highly innovative end pro-
ducts. When Beta detects products with potential, for
which it does not yet have the necessary know-how or
technological resources, it starts out by outsourcing pro-
duction to Chinese manufacturers in order to benefit
from their higher capability and, meanwhile, learns with
the aim of manufacturing the products itself.
Beta chose China for the following reasons:
Access to the electronics manufacturing know-how
that is available in China, the location of the world’s
best centers for this type of technology.
The wish to sell in China, which is not only the
world’s largest market but it also has very well-deve-
loped infrastructure, facilitating distribution. The group
considers that, in order to have a trade presence in
China, it is necessary to manufactu re there.
Cost saving. Production costs in China are much
lower than in Spain. In electronics components, labor
represents a very large proportion of the final cost
(these are very labor-intensive processes) and labor is
cheaper in China. But, in the case of Beta, it should
be stressed that this was not the main reason because,
as stated above, the firm has established in China to
sell there, not to bring cheaper products to Spain.
Beta sees China as a land of opportunity, not only for
technology and industry, but also for sales. By transfer-
ring activities to China, the firm can obtain the following
benefits: access to new markets, greater knowledge of
local customers, cost savings, and enhanced learning
For the future, the Beta group is also considering set-
ting up activities in Mexico. The firm believes that this
country would be optimal for replicating their Chinese
business model, given that operations and costs would be
similar. Mexico would also be a good platform for en-
tering other markets.
Copyright © 2011 SciRes. ME
S. VALLE ET AL.685
The Beta group, therefore, is another example of a
firm that offshores some of its value chain activities. The
chosen destination country is China, and Beta uses the
two types of transfer modes analyzed. On the one hand,
Beta started out in China with its own subsidiaries and,
on the other hand, the group outsources activities to a
notable number of local suppliers there.
Gamma is a footwear and accessories firm in Spanish
region B. In its facilities in Spain, it carries out all R&D,
engineering and design, the production of prototypes (the
first shoe), 10% of final manufacturing7, most of its lo-
gistics, administrative processes and sales, and after-
However, some of Gamma’s activities are not carried
out in-house, namely those relating to manufacturing,
which is almost totally outsourced (90%). Currently
Gamma outsources the production of shoes to independ-
ent firms in Spain, China and India. The firm is also car-
rying out tests in Bangladesh and Morocco8.
Offshore outsourcing originally was a strategy for the
firm, but has now become a necessity. For reasons of
cost, it would no longer be feasible to carry out all
manufacturing in Spain but, though production cost is
one of the basic reasons why the firm uses foreign sup-
pliers, it is not the only one. Gamma now also interna-
tionally outsources an increasing proportion of its pro-
duction for reasons of production capacity which, in
China for example, is enormous. In fact, shoe production
can only be outsourced to China when it involves a huge
sales volume, that is, large-scale production. If not, Chi-
nese manufacturers are not interested. India is different,
however, and there it is possible to achieve very good
prices even for small batches.
Auxiliary firms are extremely important in the foot-
wear industry. In Spain, they have gradually disappeared
as the industry has developed. Gamma has therefore
sought countries where this necessary auxiliary industry
is still available. The firm has also sought out technical
capability of the sort that can meet Gamma’s quality and
service requirements. Even though production is out-
sourced, quality is strictly contro lled by Gamma in order
to guarantee product uniformity. This control is carried
out by the firm’s own specialists who check that suppli-
ers meet the firm’s stipulations regarding materials,
Other important consider ations in offshore outsourcing
are transport costs and times, as well as production times.
Seasonal products (those for which orders are placed
months in advance) can be outsourced in distant coun-
tries. However, fashion or “replacement” products (which
need to be available in just a few days) require prox-
In all cases, Gamma’s relations with its suppliers are
based on long-term collaboration agreements and on a
protocol for action which has resulted from the firm’s
learning process over the years. Communication is car-
ried out by an international quality manager who deals
with all foreign relations and acts as mediator. If prob-
lems arise with a supplier, the firm can resort to a group
of alternative suppliers that it has in each country.
The main benefits obtained by Gamma from offshore
outsourcing its manufacturing are: cost reduction, less
capital investment, greater flexibility in line with fluctu-
ating demand and organizational learning relating to
management of the whole chain of suppliers. Offshore
outsourcing has also led to increased profitability and
productivity. However, the group does not obtain advan-
tages in quality (it is the same to outsource internation-
ally as to produce in-house in Spain), or in time (lead
times are maintained if outsourcing is in Spain, but in-
crease in offshore production). Nor does the firm achieve
greater innovation or faster development. The risks per-
ceived by Gamma from offshore outsourcing are basi-
cally increased lead times and the loss of intellectual
Gamma is, therefore, another example of a firm that
resorts to offshoring though, in this case, only to offshore
outsourcing, not captive offshoring. As stated above, it
outsources internationally those activities in which eco-
nomies of scale are possible and which are labor-inten-
sive, such as manufacturing, but it has not transferred
any plants from Spain to another country. The firm could
afford to do so but obtains greater benefits from out-
4.1.4. Del t a
Delta is a toy manufacturer from the same region as
Gamma. It has several product lines but two main ones-
one for baby entertainment, safety and hygiene (highly-
innovative electronics produ cts), and the other for educa-
tion (toys and teaching materials).
Delta carries out the following activities in its value
chain in-house most of its design, purchasing, quality
7For this purpose, it has its own plant in Spain which does not make a
rofit but nor does it incur losses. It is being retained because of the
firm’s social commitment (to preserve jobs) and in order to preserve the
firm’s history. This plant is used to do production tests, to produce very
small batches or t o check design feasibility.
8Originally, everything was outsourced within Spain. Afterwards, out-
sourcing to Portugal began, given that Portugal has a longstanding
tradition in footwear production, it has auxiliary industry and its trans-
ort and production costs are low. Su
sequently, the firm also started
outsourcing to Romania, where costs were also reasonable. But, in spite
of cheap prices, Romania is not a great footwear producer and has no
auxiliary industry, so materials had to be sent from Spain, which was
not sustainable for large-scale production. Eventually, the firm decided
to look for manufacturers in China.
Copyright © 2011 SciRes. ME
S. VALLE ET AL.
control, logistics, administrative tasks and part of its
sales. Other activities such as marketing, assembly and
manufacturing are ou tsourc ed marketin g an d assembly to
local firms, and manufacturing to both Spanish and for-
eign firms. Nevertheless, product line determines the
choice of in-house d evelopment, national or internation al
On the one hand, for the educational product line,
100% of engineering and design is carried out in-house,
these being the firm’s core competencies. Manufacturing
is almost completely outsourced (approximately 50% in
Spain and 50% abroad), and only a very small proportion
is carried out in-house, that involving a special, un-
breakable material designed by Delta which they wish to
prevent from being copied. 70% of the firm’s interna-
tional outso urcing goes to China, 20% to Taiwan and the
remaining 10% to Korea, Thailand and Malaysia. De-
pending on each specific article, either full product
manufacturing is outsourced, or just the manufacturing
of some components, with assembly taking place
in-house in Spain.
On the other hand, for the electronics product line, th e
physical design is also carried out in-house but the tech-
nological design and engineering are fully outsourced.
Many of Delta’s technological products have been de-
veloped by other firms. Delta’s involvement in product
design is then limited to product customization, adapta-
tion to the firm’s product collection and affixation of its
own brand. The firm usually looks for fairly exclusive
products but, if it cannot find them, it also produces its
own designs. In this case, it only carries out the external
design, and has the technological development carried
out by experts, mostly by firms in Hong Kong and Tai-
wan. Delta contacts the engineering teams in these firms
and explains the specific characteristics it wants the
product to have. This method seems reasonable because
Delta is not a technology firm, so this activity is not
among its strengths. The firm does not have the neces-
sary resources or capabilities to be able to develop this
type of product internally. Moreover, considering the
speed of technological change, in order to avoid reaching
the market with obsolete technology, it is important to
resort to manufacturers having the necessary experience
and know-how. Rather than producing in-house, it is
much faster and more efficient for Delta to outsource the
technological development and use the global network of
In general, this firm considers that one of the main
advantages of outsourcing is that they can produce when
necessary and determine costs ex-ante (in-house manu-
facturing is more risky as costs only become clear
ex-post). However, in addition to cost, there are many
other re asons wh y off shore ou tsour cing may be p referr ed.
Delta also takes into account where global manufacturers
are located and where it can find the know-how needed
for its products. Ch ina is a strong player in toy manufac-
turing and has extensive know-how in technological
production, so offshoring there is a guarantee.
In other words, the reasons why Delta decided to out-
source internationally are: to reduce costs, to focus only
on the firm’s core competencies (that is, channel and
product specialization) and to better meet its product
requirements. In the case of technological products, by
outsourcing to foreign firms Delta aims to shorten lead
times and to use the higher capabilities of other firms.
Delta’s relations with all its Chinese and Taiwanese
suppliers are always based on long-term agreements,
aiming to achieve continuity and trust and, essentially,
looking for b usiness allies. Supplier selection criteria are
price, supplier’s characteristics and trust. These firms
should be experts and enjoy a degree of prestige which
should stem not only from their low costs. It is, however,
the manufacturer that has to guarantee quality.
The greatest risk perceived by this firm in interna-
tional outsourcing is loss of control over the product,
which is inevitable. However, Delta is not afraid of los-
ing data or know-how because it has observed that Asian
suppliers tend to respect their customers.
Delta can therefore be considered another example of
a firm that uses offshoring but only offshore ou tsourcing .
It has not relocated any of its production facilities.
4.2. Comparative Analysis of the Cases
Table 2 compares the situation of the firms studied with
regard to: 1) the activities in the value chain that are off-
shored internationally, 2) th ose that are carried out inter-
nally but in a different country, 3) the destination coun-
tries, and 4) the reasons for choosing them.
The activities transferred abroad by the four groups
analyzed are basically the same -primarily manufacturing,
although the transfer mode differs. Alfa and Beta not
only outsource production to foreign suppliers but have
also set up their own facilities abroad. Gamma and Delta
only use offshore outsourcing without relocating.
None of the four groups studied have transferred their
research and design abroad because of the strategic im-
portance of this activity for all of th em. In Alfa and Beta,
research and development and, above all, innovation, are
a strategic priority and one of the main drivers of their
success. For Delta, the educational nature of its toys
makes design a priority, the main aim being to guarantee
quality and the educational content. And for Gamma,
design is one of its core competencies. As a result, none
of these business groups seems prep ared to accep t either
Copyright © 2011 SciRes. ME
S. VALLE ET AL.
Copyright © 2011 SciRes. ME
Table 2. Comparative analysis of offshoring decisions in the groups studied.
in the value chain Activities offshored
(partially or fully) Method of transfer
R&D + i/Design
Logistics Transport (partially) Owned facilities China
(84%) Outsourcing China and Taiwan
Sales and after-sales
services Sales (partially) Owned facilities China
It is not an unknown country.
Has the necessary infrastructure.
Possesses qualified, productive,
Guarantees protection of fore i gn
Competitors and customers are in
R&D + i
Electronics products :
Owned facilities China
Very new products Outsourcing China
Possession of know-how on elec-
Desire to sell in China.
Lower manufacturing costs because
of cheaper labor
(90%) Outsourcing China and India
Logistics Logistics (partially) Outsourcing China
Sales and after-sales
-Existence of auxiliary firms
-Timing (production and transport)
Design Electronic Outsourcing China
Engineering Electronic Outsourcing China
(50%) Outsourcing China, Taiwan,
Sales and after-sales
Concentration of worldwide
Location of know-how and expert ise
Source: Drawn up by the authors.
the high risks involved in outsourcing R&D (potential
undesired dissemination of knowledge amongst other
firms and/or loss of control of such activities) nor the
operating difficulties involved in locating R&D in other
countries (managing the flow of information and coordi-
nating with other related activities in the value chain).
In respect to location, the four groups’ have out-
sourced/relocated activities primarily to China, although
some activities have also been outsou rced to other South-
East Asian countries and to India. In China, costs, and
especially labor costs, are low. For both Alfa and Gamma,
China was the inevitable choice because the costs they
S. VALLE ET AL.
faced in Spain did not allow them to produce competi-
tively. Offshoring has allowed them to survive. Beta and
Delta also enjoy lower production costs in China, but for
them this was not the main reason for their choice.
So, in addition to cost, there have been other reasons
driving location choice market size, industry trends, the
existence of a powerful auxiliary industry, production
capacity and the possibility of accessing better technolo-
gies and/or products. For example, for Beta, in addition
to collaborating with Chinese firms in technology deve-
lopment, gaining know-how and more advanced tech-
nologies had priority. For Alfa, both its main competitors
and main customers are present in China so it was prac-
tically inevitable for the firm to enter China in order to
compete. Similarly, the suppliers of electronics technol-
ogy for one of Delta’s product lines are concentrated in
China, so the firm necessarily has to purchase goods
there. And for Gamma, what was particularly relevant
about the Chinese market was the concentration of aux-
iliary firms which are essential for footwear production.
Based on case study methodology, this paper analyzes
whether and how Spanish industrial firms are interna-
tionally reorganizing and relocating at least part of their
value chains and, thus, are taking part in the current
world scale process of international production disinte-
gration. The study analyzes offshoring decisions (both
offshore outsourcing and captive offshoring) by four
Spanish groups. More specifically, it is focused on the
type of activities transferred abroad, the transfer mode,
the choice of destination countries, the reasons driving
offshoring decisions, the advantages obtained and the
risks faced in the process. The following conclusions
may be drawn from the study.
Firstly, of all the activities in the value chain of the
Spanish firms analyzed, the ones that tend to be trans-
ferred abroad are those relating to product manufacture
(and to a lesser extent logistics and sales). Firms tend to
leave their R&D + i activities in their country of origin.
Most of the activities transferred are routine, standard-
ized, labor-intensive activities, in which a high volume
of production can be reached, with a limited technologi-
cal component and not based on secret information
Secondly, although the business groups analyzed
transfer activities to other countries either by outsourcing
them to local, independent firms offshore outsourcing or
by setting up subsidiaries captive offshoring, the former
prevails over the latter (Figure 2).
Thirdly, activities are primarily offshored to Asian
countries, and particularly to China (Figure 3). A lthough
Figure 1. Type of offshored activities.
Figure 2. Transfer mode used.
Figure 3. Chosen offshore location.
Copyright © 2011 SciRes. ME
S. VALLE ET AL.689
low costs especially labor costs is one powerful reason
why the four analyzed firms chose China over other po-
tential locations, it must be noted that this was not the
only, nor the most important motive in this respect.
Firms also emphasized the attractiveness of the Chinese
market in terms of its large size, its infrastructure en-
dowment, the existence of an important auxiliary indu-
stry, its high production and technical capability, the
positive attitude of its government towards foreign in-
vestment and its better technologies and more advanced
know-how in some industries. Also important for choos-
ing China is the existence of other agen ts with which the
firms studied need to interact (competitors, customers,
suppliers and aux iliary firms). Thus, the concentration of
the relevant agents in a single location is an important
reason for select i ng a n offshorin g d est i nat ion.
Fourthly, the list of advantages derived from the inter-
national disintegration of the firms’ value chains is rela-
tively long. Among these the analyzed firms mentioned
large cost savings, the possibility of focusing on core
competencies, taking advantage of favorable conditions
offered by foreign locations or access to new markets.
However, improved organizational learning is the most
important benefit firms may reap from offshoring. By
transferring part of their activities abroad, firms may gain
access to greater technological and market knowledge,
may improve awareness of state-of-the-art, more effi-
cient processes and may acquire new or improve their
existing skills, experience and know-how. Taken to-
gether, these will lead to innova tive, fast, specialized and
integrated operations. As a consequence, firm sales
volume, market share, profitability and productivity may
Finally, although the firms studied perceived several
potential risks of offshoring (reduced product quality,
loss of incentives for R&D + i, increased lead times, loss
of intellectual property, the loss of control or suppliers
potentially turning in to future competitors), non e of these
have turned into real problems for any of the firms ana-
lyzed. Or if they have, the benefits achieved in the proc-
ess of international disintegration have offset the prob-
Although inferences from this stud y are limited by the
small number of cases analyzed, it can be concluded that
Spanish firms are involved in the process of international
fragmentation that is taking place on a global scale. Off-
shoring allows these firms to reap the benefits of specia-
lization and to take advantage of specific locations
worldwide. As a consequence, Spanish firms are im-
proving their competitiveness and, above all, their sur-
Finally, it should be noted that th is qualitative study is
only the starting-point for a more extensive future re-
search line. Based on the general conclusions from this
first study, the authors have the intention to develop and
propose specific hypotheses to be tested in a broader
sample of Spanish firms. The authors are particularly
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