Specifically, we argue the level of endogenous and exogenous uncertainty surrounding IT offshoring determines whether a client firm adopts a captive offshoring, joint-venture, third-party or onsite IT offshoring model.
In order to develop a parsimonious theoretical framework to effectively capture the various uncertainties involved in the IT offshoring decision, we introduce and rely on the distinction between endogenous and exogenous uncertainty (Dixit & Pindyck, 1994; Folta, 1998).
Consider first moving eastward along line A, increasing exogenous uncertainty while holding endogenous uncertainty constant at a relatively low level.
QUADRANT I: LOW ENDOGENOUS UNCERTAINTY AND LOW EXOGENOUS UNCERTAINTY
Viewing the offshoring decision from the real options perspective, under conditions of both low endogenous and low exogenous uncertainty, client firms do not have to take an option to defer the action to offshore (McDonald & Siegel, 1986).
Ceteris paribus, client firms are likely to pursue captive offshoring model based in a foreign location when endogenous and exogenous uncertainty is low.
joint venture offshoring) by client firms when operating in host countries with low endogenous and low exogenous uncertainty environments.
QUADRANT II: HIGH ENDOGENOUS UNCERTAINTY AND LOW EXOGENOUS UNCERTAINTY
In the two-armed bandit study, in which exogenous uncertainty is present, consistent deviations from the "maximizing" strategy, described by the authors as experimentation and hedging, are observed.
There is no strategic uncertainty, no risk, no exogenous uncertainty, and no complex computation.
The removal of all strategic uncertainty, risk, exogenous uncertainty, and complex computations is not sufficient to ensure that subjects choose an optimal decision.