Abstract
The study explores how inter-personal trusts between the Owners of Small Enterprises (OSEs) and their exchange partners affect the mitigation of Transaction Costs (TC) of Small Enterprises (SEs) in Sri Lanka. Data were collected from 373 SEs located in nine Districts representing all Provinces in Sri Lanka, by conducting face to face personal interviews with the respondents. The data were analyzed using Partial Least Squares-Structural Equation Modelling. Results revealed that inter-personal trust between the OSEs and exchange partners has negatively affected firm TC, providing sufficient evidence to conclude that inter-personal trust has a significant impact on mitigating TC of SEs and providing important insights for policy makers to focus their strategies on new direction on focus their strategies conventional approaches to support SEs.
Highlights
Small Enterprises (SEs) have been recognised as a dynamic sector in the economic development of a country because they positively contribute to employment generation, accelerate economic growth, and reduce poverty, income inequality, inflation and balance of payment (Buganza, Colombo and Landoni, 2014; Fatoki, 2011; Malik and Nilakant, 2011;)
This paper studied how interpersonal trust affects transaction costs of SEs in Sri Lanka? The results provide sufficient justifications to answer this research question and reveal that inter-personal trust between OSE and exchange partners has strongly contributed to mitigate Transaction Costs (TC) of SEs in Sri Lanka
The results further confirmed that interpersonal trust has a powerful effect on mitigating opportunism of exchange partners, improvement of the rational ability of OSEs, decrease of transaction uncertainty, has a significant negative effect on transaction uncertainty and encourages transition frequency
Summary
SEs have been recognised as a dynamic sector in the economic development of a country because they positively contribute to employment generation, accelerate economic growth, and reduce poverty, income inequality, inflation and balance of payment (Buganza, Colombo and Landoni, 2014; Fatoki, 2011; Malik and Nilakant, 2011;). SEs have higher TC compared to large firms because they suffer hazards from the opportunism of exchange partners due to asymmetrical information and resources (Carmel and Nicholson, 2005; Nooteboom, 1993). Some studies (Bhagavatula, 2009; Lu et al, 2007; Priyanath and Premaratne, 2017) underline that SEs use their informal and personal connections in order to get required information and resources These connections do not have formal and written agreement but are based on inter-personal relationships with family members, relatives, friends, business partners, supportive institutions and members of society (Bhagavatula, 2009; Lu et al, 2007; Priyanath and Premaratne, 2015). Some scholars (Artz and Brush, 2000; Dyer and Chu, 2003; Fierro and Redondo, 2008; Gulati and Singh, 1998; Morgan and Hunt, 1994; Poppo and Zenger, 2002) discuss that inter-personal trust among businesses is associated with the mitigation of TC and provides an effective safeguard against the opportunism
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