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The Economics of Outsourcing in a De-integrating Industry

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  • Jawaid Abdul Ghani

    (LUMS)

  • Arif Iqbal Rana
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    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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    File URL: http://saber.eaber.org/node/22241
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    Bibliographic Info

    Paper provided by East Asian Bureau of Economic Research in its series Microeconomics Working Papers with number 22241.

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    Date of creation: Jan 2005
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    Handle: RePEc:eab:microe:22241

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    Related research

    Keywords: footwear; Outsourcing; Pakistan; case-study;

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    1. Temin, Peter, 1988. "Product Quality and Vertical Integration in the Early Cotton Textile Industry," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 48(04), pages 891-907, December.
    2. Langlois, Richard N. & Robertson, Paul L., 1989. "Explaining Vertical Integration: Lessons from the American Automobile Industry," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 49(02), pages 361-375, June.
    3. Hennart, J.M.A., 2001. "Explaining the swollen middle: Why most transactions are a mix of market and hierarchy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-87538, Tilburg University.
    4. Chang, Sea Jin & Choi, Unghwan, 1988. "Strategy, Structure and Performance of Korean Business Groups: A Transactions Cost Approach," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 37(2), pages 141-58, December.
    5. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(4), pages 73-94, Fall.
    6. Lall, Sanjaya, 1980. "Vertical Inter-Firm Linkages in LDCs: An Empirical Study," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 42(3), pages 203-26, August.
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