How plural sourcing can help achieve corporate social responsibility in outsourcing relationships

Outsourcing promises economic benefits but creates corporate social responsibility (CSR) risks: As activities are placed outside of a firm’s boundary, firms struggle to adequately measure the performance of their suppliers, particularly with regards to their environmental and social issues. This can lead to increased agency risks due to supplier’s hidden action such as covering up non-compliances. In this paper, we investigate how a buying firm’s sourcing strategy could alleviate some of the CSR-related agency-risks of outsourcing. A plural sourcing strategy builds on the simultaneous pursuit of distinct governance forms (such as make and buy, or make and ally, or all three forms combined). We use an extended agency-theory framework to argue that the buyer’s actual manufacturing experience that is part of plural sourcing can help the buyer to build evaluative capabilities regarding supplier’s internal CSR, and thereby overcome agency-related performance measurement problems. The effectiveness of plural sourcing to overcome agency problems in the outsourcing relationship is further contingent on two conditions: 1) the specific business segment (primary vs. secondary) where plural sourcing takes place; and the buying firm’s presence (i.e., is owning facilities) in the sourcing countries. To test our hypotheses, we consolidate a panel data set consisting of 9,057 firm-year observations based on U.S. publicly traded manufacturing firms. This study combines hitherto unconnected strands of literature on plural sourcing strategies and outsourcing-related CSR-risks to offer novel insights for improving CSR in global supply chains. It also offers an extension of agency theory to incorporate CSR-specific monitoring problems.