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. 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 production activities. Using data from the 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 of starting outsourcing. However, we find evidence that pro-market reforms influence the relationship between R&D activity and the likelihood of outsourcing. Interestingly, 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. •What determines the firm scope is a fundamental question driving strategy and international business research.•We examine this question by analyzing secondary data on more than 2800 firms in 28 transition economies.•We find that the outsourcing decision is influenced by pro-market reforms and firm-level R&D activities.•Interestingly, while economic reforms weaken the relationship between R&D and outsourcing, legal reforms strengthen it.