When does it make sense for US retailers to opt for backward integration for global sourcing?

Abstract

Purpose The purpose of this paper is to examine a US retailer's decision to backward‐integrate its supply channel for global sourcing, based on the framework adapted from transaction cost analysis (TCA). Design/methodology/approach The conceptual framework was developed based on the past literature. A survey method was employed to collect the data from apparel retail firms engaging in global sourcing. Confirmatory factor analysis and ordinal regression analysis were used to diagnose the quality of data and to test hypotheses. Findings A retail firm avoids backward integration when facing high volume fluctuation and high country risk combined with asset specificity, while it favors the integration when perceiving high asset specificity, socio‐cultural distance, free‐ride potential, and sourcing volume. Great experience also leads to backward integration not only as a main factor, but also as a moderator reinforcing the effects of asset specificity and uncertainty on integration. Originality/value Although transaction costs associated with foreign procurement are highly significant, little attempt has been made so far to apply TCA to understand sourcing governance decisions, in particular those by retailers – important participants in the current landscape of global sourcing. This study fills this gap. This study also examines the role of import volume, experience, and free ride potential to provide a more comprehensive understanding of sourcing governance decisions by retailers.

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