Determinants of Outsourcing: Transaction Cost Economics and Core Competencies Theory

A significant feature of firm behaviors in the 1990s has been the practice of outsourcing. From the view of outsourcing clients, the outsourcing decisions are always influenced by several factors, such as cost reduction, focus on core competency, strategic requirement and so on. This paper based on the theory of transaction cost and core competencies, through the introduction of decision model to illustrate three critical determinants for outsourcing decision. This paper applies qualitative analysis to explain three dimensions of the model: Assets specificity, Sunk costs and Core competencies. The case study of China Development Bank shows how firm makes the outsourcing decision according to three aspects in the model and its outcomes of outsourcing. Finally, summarize our results and try to give suggestions to government, outsourcing suppliers and clients.