The Economic Theory of International Supply Chains: A Systems View

Abstract

This paper offers an integrated analysis of outsourcing, offshoring, and foreign direct investment within a systems view of international business. This view takes the supply chain rather than the firm as the basic unit of analysis. It argues that competition in the global economy selects supply chains that maximise the joint profit of all the firms in the chain. The systems view is compared with the firm-centred view commonly used in strategy literature. The paper shows that a firm’s strategy must be embedded within an efficient supply-chain strategy, and that this strategy must be negotiated with, rather than imposed upon, other firms. The paper analyses the conditions under which various supply-chain strategies – and by implication various firm-level strategies – are efficient. Only by adopting a systems view of supply chains is it possible to determine which firm-level strategies will succeed in a volatile global economy.

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