Outsourcing and vertical integration: a theory of the Firm Approach/ Willington O. Onuh

This study has investigated the relationships between firm factors and firm objective functions, and the determinants of outsourcing. The results show that most hypotheses regarding firm factors, such as organizational management competencies and objective functions are supported. Organizational management competencies, such as monitoring, communication, export-orientation, and market knowledge, have positive and significant correlation with firm objective functions. These are market share, quality of products, and satisfaction of employees. The paper highlights an interesting marked shift from the emphasis on profit maximization as the overriding goal to other interrelated objectives of a firm. The results on probit and logistic regressions show that the organizational management competencies illustrates fixed cost, number of years in business, number of regular employees, financial asset size and profit effect the decision to outsource. On the other hand, firms with high capacity utilization, high profit without outsourcing, and contractual employees are less likely to outsource. These results are consistent with agency theory, transaction cost theory, and resource-based theory