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The Economics of Outsourcing in a De-integrating Industry


  • Jawaid Abdul Ghani


  • Arif Iqbal Rana


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.

Suggested Citation

  • Jawaid Abdul Ghani & Arif Iqbal Rana, 2005. "The Economics of Outsourcing in a De-integrating Industry," Microeconomics Working Papers 22241, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:microe:22241

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    References listed on IDEAS

    1. 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 203-226, August.
    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, vol. 49(02), pages 361-375, June.
    3. Temin, Peter, 1988. "Product Quality and Vertical Integration in the Early Cotton Textile Industry," The Journal of Economic History, Cambridge University Press, vol. 48(04), pages 891-907, December.
    4. Bengt Holmstrom & John Roberts, 1998. "The Boundaries of the Firm Revisited," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 73-94, Fall.
    5. Chang, Sea Jin & Choi, Unghwan, 1988. "Strategy, Structure and Performance of Korean Business Groups: A Transactions Cost Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 37(2), pages 141-158, December.
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    More about this item


    footwear; Outsourcing; Pakistan; case-study;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D00 - Microeconomics - - General - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights


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