Firm capabilities as moderators of transaction cost factors and subsidiary domestic outsourcing

Purpose: This study aims to investigate the influence of transaction cost (TC) factors and the moderating influence of firm capability factors on the extent of domestic outsourcing of a multinational corporation (MNC) subsidiary. Design/methodology/approach: A new research framework is developed comprising four constructs and six research hypotheses, coupled with international experience (IE) and subsidiary scale (SS) as moderating constructs. Applying the regression model, the hypotheses were tested on data from MNC subsidiaries engaged in manufacturing in Taiwan, based on the TC theory, resource‐based view, and outsourcing literature. Findings: The TC factors, including environmental dynamism and subsidiary technology level, are negatively related with degree of domestic outsourcing. Moreover, the MNC IE and SS can reduce the TCs, thus increasing the degree of domestic outsourcing by MNC subsidiaries at the high environmental dynamism and subsidiary technology levels. Research limitations/implications: The study data were obtained from MNC subsidiaries operating in Taiwan, and the single country research design is a limitation of this study. Practical implications: This study provides useful insights into how MNCs and subsidiaries should concentrate on the factors that increase the TCs of domestic outsourcing. Moreover, MNCs and subsidiaries must endeavor to cultivate and apply capabilities to mitigate TCs and fully realize the benefits of domestic outsourcing. Originality/value: This study demonstrates that TC factors can also be applied to examine the outsourcing strategies of firms operating in less advanced countries. Additionally, the capability factors of MNCs and subsidiaries can reduce TCs, thus increasing domestic outsourcing by subsidiaries.