The Economics of Outsourcing in a De-Integrating Industry

Abstract

Many large firms in low scale economy industries are actively considering outsourcing options, in the face of competition from smaller more efficient players. Based on a review of the theoretical literature and a case-study of outsourcing decisions at two large vertically integrated footwear manufacturers in Pakistan, a framework is developed for determining which set of products and activities to outsource and which to keep in-house. The framework suggests activities being considered for outsourcing be evaluated in terms of level of proprietary knowledge, economies of scale, inefficiencies of vertical integration, transactional costs, and the existence of reliable vendors. It is suggested that activities with low levels of proprietary knowledge and activities where cost savings due to outsourcing justify the increased transaction costs, should be outsourced.

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