Rethinking international fragmentation of production processes: A communication cost-based explanation

In this study, we develop a model of organizational choice in which international fragmentation of production processes is impeded by communicating frictions between a headquarter firm and its foreign teams. We begin by considering a static model to offer a communication cost based explanation for the new version of the product cycle hypothesis. We then show how this approach can be extended to a dynamic setting to address questions concerning the diffusion process of organization. First, we show that a speedier technological revolution increases the rate of diffusion. Secondly, an improvement in technology of standardization expedites the adoption of a new production mode through an industry. The proposed model contributes to the understanding the diffusion of global sourcing network throughout the life cycle of a product.