What will it take for China to become a competitive force in offshore outsourcing? An analysis of the role of transaction costs in supplier selection

Using transaction costs theory this paper argues that transaction costs are almost as significant as production costs when it comes to offshore outsourcing and, moreover, that it is in the field of transaction costs where China has been unable to compete with India in the supply of information technology outsourcing. The paper outlines a framework for analysing transaction costs and uses the framework for pinpointing where China is unable to compete. The paper concludes with a review of the policy implications for the Chinese Government.