Pro-market reforms and outsourcing trade-offs: Evidence from transition economies

What determines the firm scope is a fundamental question driving strategy and international business research. Extant literature examining a firm’s vertical scope decision has historically not accounted for the influence of institutional reforms. In attempting to fill this gap, we develop a theoretical framework based on insights from institutional economics to examine how pro-market reforms and firm-level R&D activity influence the likelihood of outsourcing of production activities. Using data from Business Environment and Enterprises Performance Surveys conducted by World Bank and European Bank for Reconstruction and Development in twenty-eight transition economies, we analyze the influence of pro-market reforms on the outsourcing decision. We do not find support for a strong direct influence of pro-market reforms on the likelihood to start outsourcing. However, we find evidence that pro-market reforms influence the relationship between R&D activity and the likelihood of outsourcing. However, economic and legal reforms moderate the relationship between R&D activity and the likelihood to start outsourcing in different ways. While economic reforms weaken the positive relationship between R&D activity and outsourcing, legal reforms strengthen it.