Transaction Cost Economics Perspective Research Articles

Interpreting risk allocation mechanism in public–private partnership projects: an empirical study in a transaction cost economics perspective

Risk allocation in public–private partnership (PPP) projects is currently claimed as capability driven. While lacking theoretical support, the claim is often ‘violated’ by current industrial practice. There is thus a need for formal mechanisms to interpret why a particular risk is retained by government in one project while transferred to private partners in another. From the viewpoint of transaction cost economics (TCE), integrated with the resource‐based view (RBV) of organizational capabilities, this paper proposed a theoretical framework for understanding risk allocation practice in PPP projects. The theories underlying the major constructs and their links were articulated. Data gathered from an industry‐wide survey were used to test the framework. The results of multiple linear regression (MLR) generally support the proposed framework. It has been found that partners' risk management routine, mechanism, commitment, cooperation history, and uncertainties associated with project risk management could serve to determine the risk allocation strategies adopted in a PPP project. This theoretical framework thus provides both government and private agencies with a logical and complete understanding of the process of selecting the allocation strategy for a particular risk in PPP projects. Moreover, it could be utilized to steer the risk allocation strategy by controlling certain critical determinants identified in the study. Study limitations and future research directions have also been set out.

OUTSOURCING: TRANSACTION COST ECONOMICS AND SUPPLY CHAIN MANAGEMENT*

This article examines outsourcing from the transaction cost economics (TCE) perspective. The transaction is made the basic unit of analysis and the procurement decision, as between make and buy, is made (principally) with reference to a transaction cost economizing purpose. As sketched herein, the ease of contracting varies with the attributes of the transaction, with special emphasis on whether preserving continuity between a particular buyer–seller pair is the source of added value. The basic regularity is this: as bilateral dependency builds up, the efficient governance of contractual relations progressively moves from simple market exchange to hybrid contracting (with credibility supports) to hierarchy. This last corresponds to the “make” decision, which, as viewed from the TCE perspective, is viewed as the organization form of last resort. The article successively describes the lens of contract approach to economic organization, the operationalization of TCE, different styles of outsourcing, qualifications to the foregoing and the main lessons of TCE for the supply chain literature.

Asset specificity in make or buy decisions for service operations

PurposeThis work analyses make or buy decisions from the transaction cost economics perspective and the resource‐based view of the firm. The aim is to analyse the extent to which the presumptions of the two theories are valid in the service sector in terms of specific assets.Design/methodology/approachThe study was conducted on a representative sample of hotels in Scotland, UK. Each of the surveyed hotels was asked for information about 13 operations or hotel processes. A comprehensive model is developed that establishes the relationship between asset specificity and operation performance and hotel or business performance, moderated by the form of governance (make or buy). Moreover, the relationship between asset specificity and outsourcing in the hotel sector is also examined. The different hotel processes are classified according to the asset specificity. The factors that could lead to an increase in the outsourcing strategy are also analysed.FindingsThe results indicate that, the relationship between asset specificity and operation performance is weaker when the operations are executed in‐house. In the case of the relationship between specific assets and performance, the findings regarding non‐financial performance are not contradictory since it is slightly higher when the operation is outsourced. The factors determining an increase in outsourcing would be those related to the quality of the operation and to non‐financial performance.Research limitations/implicationsPrevious studies have not considered the relationship between specificity and business performance, which gives extra incentive to complement and expand the literature on service operations. Future research should analyze other theories on organisations and outsourcing. The findings should also be tested in other geographical regions and use sources of information other than the hotel managers.Practical implicationsThe work generates knowledge and aids managers in their “make or buy” decisions for the principal processes in the hotel industry according to the asset specificity.Originality/valueThe paper develops a specificity‐outsourcing matrix and identifies each of the hotel operations. Apart from testing the model in the hotel sector, which is an important sector of the service industry, the work offers a better understanding of outsourcing decisions based on the two basic theories used in the literature on services management. The paper also makes an innovative contribution by analysing relationships between operation specificity and performance that are previously untested in the service sector.

Firm's choice of ownership structure: An empirical test with Korean multinationals

This paper examines the choices of ownership structure of multinational firms (MNFs) based in a newly developed country (South Korea) for their foreign affiliates. A transaction cost economics perspective is employed, taking advantage of a distinct and comprehensive firm-level data set. This is investigated as a whole-set sample of all overseas affiliates and as a sample of only partially owned affiliates using a number of analytical techniques. The paper shows that the choice of equity ownership structure is affected by the characteristics of various host countries. We find that the MNF prefers sharing control rights with a local partner when its affiliate is in a resources-based sector, when it enters a country with a large black market, or when there is large socio-cultural difference between the home and the host country.

Restructuring diversified telecom operators

The paper examines restructuring cycles among diversified major telecom operators from two different perspectives, the governance deficiency perspective of agency theory and the governance efficiency perspective of transaction cost economics, the former being less consistent with the spirit of recent pro-competitive regulatory reforms than the latter. This restructuring cycle describes how incumbent operators grew larger and more diversified during the telecom boom before they were transformed into more efficient scale and scope either by economizing managers or by market forces along with actively intervening owners and bondholders during the subsequent telecom bust. A cycle whose expansion phase is characterized by highly acquisitive companies expanding into non-related activities followed by a delayed contraction phase where overdiversified companies are being restructured by market forces and intervening owners and bondholders is consistent with the reform-non-compliant governance deficiency thesis of agency theory. A cycle whose expansion phase is characterized by acquisitive companies expanding into related activities followed by a contraction phase where companies are restructured by their own managers after having realized that previously acquired assets have become more redeployable and their services more tradable is consistent with the reform-compliant governance efficiency thesis of transaction cost economics. Now, in the aftermath of the contraction phase of the business cycle, more narrowly focused incumbents are once again ready for another round of acquisitive expansion. Anecdotal evidence from five restructuring cases, along with available secondary information about the development of the industry, seems to support the reform-noncompliant governance deficiency thesis of agency theory rather than the reform-compliant governance efficiency thesis of transaction cost economics.

Offshore outsourcing of professional services: A transaction cost economics perspective

This research utilizes the framework of transaction cost economics (TCE) to develop an understanding of how firms manage the costs and risks of offshore outsourcing of professional services. This research examines the perspectives of eight organizations through interviews with 10 high-ranking supply management executives. The paper first explores the rationale for offshore outsourcing among the organizations studied. Using the tenants of TCE, this paper postulates that fixed costs of establishing the relationship dominate the variable costs of day-to-day transactions, and that organizations will not offshore outsource areas where there is high perceived degree of unmanageable risk. The paper expands on themes provided by TCE and offers some lessons learned, and guidelines for managing and controlling offshore outsourced services relationships.

The hold-up problem in the management of construction projects: A case study of the Channel Tunnel

The hold-up problem in the presence of asset specificity poses great transaction hazards. Therefore, having a sound understanding of this problem is an important managerial issue. The purpose of this research is to apply the perspective of transaction cost economics (TCE) to the analysis of three major disputes that arose in the Channel Tunnel project during 1988–94. A special form of asset specificity is identified for construction projects: process specificity. This yields additional insights into the root causes of the hold-up problem. Three parameters, including ungovernable uncertainty, degree of lock-in and amount of money under dispute, are identified. It is shown that the observed connection between bargaining power as specified by this TCE model and the outcomes of dispute resolution is in line with the theoretical predictions. The lesson learnt from this project is that clients should not stretch the protective strength of a lump-sum contract too far and that the hold-up problem can indeed in some circumstances be regarded as both serious and unsolved by existing administrative structures and governance.

Outsourcing in Australian Hotels: A Transaction Cost Economics Perspective

A triangulated field study and questionnaire survey methodology was applied to investigate antecedents of outsourcing activity in Australian hotels. The field study involved the conduct of semistructured interviews with 15 managers in large hotels. Subsequent to this, a survey questionnaire was mailed to 356 general managers in Australian hotels with 100 or more rooms. The survey yielded a return of 111 completed questionnaires. The study represents an examination of transaction cost economics (TCE), a partial investigation of agency theory, and other organizational factors that may influence hotel outsourcing. The study’s findings provide some support for TCE and provide insight into other factors that appear to be affecting Australian hotels’ propensity to outsource.

An empirical examination of the role of joint new product development in industrial buyer seller relationship

From the theoretical perspective of transaction cost economics, cooperative relationships between firms reflect the increased use of non-market governance. In addition to transaction cost, transaction value is also important to governance decision-making. Governance mechanisms can advantageously incorporate features that both enhance transaction value and minimise transaction costs. The objective of this study is to examine the associations among supplier's assets specificity, Joint New Product Development (JNPD) and Relationship Performance (RP). The conceptual model is empirically tested using cross-sectional survey data, based on the administration of mail questionnaires to key informants within a sample of Taiwanese contract manufacturers of information products. It is found that the JNPD activities were positively related to the supplier's RP. The supplier's Domain Knowledge Specificity (DKS) and Site Specificity (SS) positively influence the degree of JNPD. Besides, RP is positively associated with supplier's DKS.

The social efficiency of instruments of promotion of renewable energies: A transaction-cost perspective

This paper compares the social efficiency of the regulatory instruments used to promote renewable energy sources in electricity generation, taking into consideration their role in promoting the preservation of collective goods. They are based on a purchase obligation and act either by price (feed-in tariffs) or by quantity (bidding for new RES-E capacities; RES-E quotas). From the Public Economics perspective, the two instruments are distinct in terms of cost-efficacy and market incentives in a world of imperfect information. Exchangeable quotas of green certificates are preferred because this instrument allows better control over consumer costs and whilst retaining market incentives. Transaction cost economics (TCE) contributes to the assessment of these instruments, by introducing RES-E investment safeguard as a major determinant of social efficiency, and the instruments' conformity to its institutional environment as a determinant of its viability. In light of this additional consideration, the arrangements between RES-E producers and obligated buyers inherent in each instrument are in fact quite similar—either long-term contracting or vertical integration. We compare and assess RES-E price- and quantity-instruments on several dimensions from both the public economics and TCE perspectives: control of the cost for consumers, safeguards of RES-E investments, adaptability of the instrument in order to preserve its stability in the long run, market incentive intensity, and conformity with the new market regime of electricity industry. It shows neither instruments offer an optimal solution in each of these dimensions. The government will thus select an instrument in accordance with the relative importance of its objectives.

Professional versus Political Contexts: Institutional Mitigation and the Transaction Cost Heuristic in Information Systems Outsourcing

IS research has considered the outsourcing decision from the perspective of transaction cost economics (TCE) and institutional theory. In this research, we consider how the appropriation of the logic of transaction cost economics is contingent on decision makers' institutional context. The institutional contexts contrasted are professional versus political contexts. In a survey of 214 city governments in the United States, we substantiate the existence of these two institutional contexts, a distinction that has been noted to extend into the private sector as well. Subsequent analyses of the moderating effects of institutional context on the application of the TCE heuristic to the outsourcing decision revealed the following: The institutional context moderated the impacts of conditions-of opportunism and bounded rationality-and of transaction frequency on outsourcing decisions. In professional contexts, opportunism reduced outsourcing and frequency increased outsourcing; in political contexts, bounded rationality fostered outsourcing and frequency dissuaded outsourcing. However, no institutional moderation was noted for the situational conditions of asset specificity and uncertainty. Instead, situational conditions were found to increase the incidence of outsourcing across both contexts. Findings about the contingent effects of human frailty conditions augment our understanding of the outsourcing phenomenon by emphasizing that decision makers' attentiveness to the logic of transaction costs during outsourcing is shaped by their institutional context. Findings with regard to situational conditions suggest a need for future research to consider the role of another contextual factor-resource munificence-in mitigating the effects of situational conditions on responses to transaction costs.

The Performance and Survival of Joint Ventures with Parents of Asymmetric Size

Researchers have argued that IJV performance and survival is affected significantly by its parent firms. In this regard, previous studies mostly focused on the relationship between an IJV and its individual parents, while leaving the relationship between parents firms unexplored. This study considered whether size asymmetry between IJV parents is an additional factor influencing IJV performance and survival. From the perspective of transaction cost economics and resource-based view, we proposed two opposing hypotheses. To test the hypotheses, we used 261 firm-year observations of 145 Japanese IJVs in 1996, 1998 and 2000, with generalized estimating equations (GEEs) and Chi-square tests. No significant relationship was found between size asymmetry between parents and IJV performance and survival. [PUBLICATION ABSTRACT]

Understanding Business Group Performance in an Emerging Economy: Acquiring Resources and Capabilities in Order to Prosper*

ABSTRACT The prevalent organizational form in most emerging markets is business groups. These groups have typically been viewed through a transaction cost economics perspective where they are perceived as responses to inefficiencies in the market. However, the evidence to date on what generates a positive business group‐performance relationship in such environments is not well understood. This study expands the understanding of business groups by employing the resource‐based and institutional theoretical perspectives to examine how groups acquire resources and capabilities to prosper. The empirical evidence is based on over 224 business groups in the emerging economy context of China and shows that most of the endowed government resources do not help business groups to create a competitive edge. Instead, those business groups with strategic actions to develop a unique portfolio of market‐oriented resources and capabilities are most likely to prosper. The results provide critical insights on the relationship between the initiation of institutional transformation and the desired outcome to be realized by organizational transformation, thus enriching our understanding of institutions and strategic choices facilitated or constrained by organizational resources in emerging economies.

Online buying behavior: a transaction cost economics perspective

Using a transaction cost economics perspective, this paper presents a model for understanding consumers' on-line buying behavior. An empirical study was conducted in Singapore to test the model. The results indicate that consumers' willingness to buy online is negatively associated with their perceived transaction cost, and perceived transaction cost is associated with uncertainty, dependability of online stores and buying frequency. When consumers perceive more dependability of online stores and less uncertainty in online shopping and have more online experiences, they are more likely to buy online. Implications of the results are discussed.

Towards horizontal archetypes of management control: a transaction cost economics perspective

This paper offers an economic explanation of an observed tendency to adopt and (re)design horizontal management control systems. To this end, the paper first describes generic vertical and horizontal management control templates: archetypes of management control. These archetypes draw on bureaucratic control mechanisms and some of them also on a market mechanism. Next, the observed tendency towards horizontalization is explained by making a differential transaction cost economics analysis of the movement towards horizontal archetypes of management control. This is not with the intention to generategeneral normative statements nor to generate a general positive economic theory of choices in management control systems design. Rather, the paper aims at acquiring a richer understanding of the economics of the horizontal direction into which management control systems are developing. In particular, it throws some light on the importance of various transactional and behavioural features for an efficient adoption and tailor-made design of management control systems in practice.

Resolving ethical dilemmas through international human resource management: a transaction cost economics perspective

This paper examines the interaction between cross-cultural variation in ethics and international human resource management. Literature is reviewed that suggests the ethical orientation of a culture can vary based upon whether the culture values collective outcomes or adherence to generally accepted rules, processes, and rights. Drawing on transaction cost economics and social contracts theory, it is suggested that differences in ethics between a multinational organization and its host culture(s) can damage the multinational's reputation, reduce its ethical decision-making capacity, raise its transaction costs, and reduce performance. Theory is developed suggesting the appropriate approach to international human resource management can attenuate these problems.

Public and private bureaucracies: a transaction cost economics perspectives

The public bureaucracy is a puzzle. How is it that an organizational form that is so widely used is also believed to be inefficient - both in relation to a hypothetical ideal and in comparison with private bureaucracies? This article examines public bureaucracy through the lens of transaction cost economics, according to which the public bureaucracy, like other alternative modes of governance, is well suited to some transactions and poorly suited to others. Rather than proceed in a completely general way, I focus on what James Q. Wilson describes as 'sovereign transactions', of which foreign affairs is an example. I ask what it is that distinguishes sovereign transactions, after which I compare the efficacy of public and private bureaucracies for managing such transactions. I conclude that there is an efficiency place for public bureaucracy, but that all modes of governance (markets, hybrids, firms, regulation), of which public bureaucracy is one, need to be kept in their place. I further observe that public bureaucracies are not all of a kind and that differences between them need to be distinguished.

HR OUTSOURCING AND ITS IMPACT: THE ROLE OF TRANSACTION COSTS

Although HR activities have traditionally been performed in‐house, organizations are increasingly relying on outside contractors to perform these activities. Using a Transaction Cost Economics perspective, this study examined whether organizational‐level factors moderated the relationship between the degree of reliance on HR outsourcing and the perceived benefits produced by outsourcing. Moderated regression was performed using data provided by over 300 HR executives on outsourcing levels, organizational characteristics, and the perceived impact of outsourcing. Support was found for a number of the transaction cost hypotheses regarding the impact of organizational characteristics. Specifically, the relationship between the degree of outsourcing and the perceived benefits generated was moderated by reliance on idiosyncratic HR practices, uncertainty, firm size, and cost pressures. No support was found for hypotheses regarding the moderating effect associated with pay level, overall outsourcing emphasis, or strategic involvement by HR.

HR Outsourcing: A Transaction Cost Perspective.

This study uses a Transaction Cost Economics (TCE) perspective to examine how organizational-level factors affect choices regarding HR outsourcing. Data obtained from 432 HR executives show that idiosyncratic HR practices, positive HR outcomes, promotional opportunities, demand uncertainty, pay level, and outsourcing by competitors are significant indicators of HR outsourcing.

Corporate Law and Corporate Governance

We have seen a revival in interest in corporate law and corporate governance since the 1980s, as researchers applied the tools of the new institutional economics and modern corporate finance to analyze the new transactions emerging in the 1980s takeover wave. This article focuses on three mechanisms of corporate governance to illustrate the analytical usefulness of transaction cost economics for corporate law. They are the board of directors; relational investing, a form of block ownership in which a large shareholder is more actively involved in firm management than is ordinarily expected of non-management shareholders; and the choice of law governing shareholder-manager relations, referred to in the literature as state competition for corporate charters. Each of the three sections in the article sketches first the theory of the corporate governance mechanisms from the perspective of transaction cost economics and then addresses the question whether corporate governance matters, by discussing the empirical evidence on whether the mechanism is effective. In addition to limning Williamson's contribution, the objective is to relate theory and data, to ascertain where we are, 20 years after Williamson's fundamental contribution was the first articulated in Markets and Hierarchies, and over a decade after the corporate law applications were first explicitly worked out.