Outsourcing Theory

Topics: Economics, Strategic management, Transaction cost Pages: 2 (529 words) Published: October 12, 2011
Outsourcing theory

International business theorists have long been fascinated by the way in which companies opt for internalization solutions, in which in-house units take responsibility for most value chain operations, versus externalization approaches, in which most value chain work is outsourced. Some view this arbitrage in national, macro-level terms, one example being a recent study showing that MNEs headquartered in mid-sized countries with an abundance of skilled labour tend to prefer outsourcing, unlike MNEs from smaller countries with an abundance of skilled labour, who tend to 'offshore' production to overseas units owned by the MNE itself (Alyson 2006). Theories like transaction cost analysis (see Chapter 8 ORC extension material), on the other hand, highlight more internal, micro-level considerations like the relative advantage for a firm of dealing with external partners instead of fulfilling a function through its own 'internal market'. Such externalization advantages can be calculated in different ways. Sometimes, the goal is strategic. For instance, in sectors where technological aptitudes are a key factor of success, it may be in companies' interest to access the capabilities of a specialist firm by purchasing its products or services instead of spending a great deal of time and money trying to develop similar competencies internally. In more commoditised sectors, on the other hand, cost is usually the key factor of success. By acquiring inputs from specialist suppliers that already benefit from unparalleled economies of scale, and even after paying their mark-up profit margins, companies may be able to access inputs more cheaply than if they were to produce them directly. In this case, the externalization advantage is being calculated in financial terms.

A more advanced approach to outsourcing is the 'resource-based view (RBV) of the firm' construct, arising from a seminal text by Edith Penrose (1959). This is an analysis that identifies a...
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