Managing Transaction Costs in the Era of Globalization

Managing Transaction Costs in the Era of Globalization

Advances in New Institutional Analysis series

Frank A.G. den Butter

Frank A.G. den Butter explains the importance and means of keeping transaction costs as low as possible. He illustrates how this transaction management can contribute to making firms and nations more competitive by exploiting gains from the division of labour and international fragmentation of production, and uses relevant case studies to illustrate how value is created by reducing transaction costs. Policy recommendations for strengthening the competitive position of trading nations and reducing implementation costs of government policy are presented, and management methods for creating value in organizing production on a global scale are prescribed.

Chapter 2: Specialization and coordination

Frank A.G. den Butter

Subjects: economics and finance, institutional economics, international economics


This chapter describes how an increase in specialization leads to the fragmentation of production so that more and more of the comparative advantages of countries can be exploited. On the one hand, it is the reduction of transaction costs that allows for more specialization but, on the other hand, it leads to more transactions. Therefore, it enhances the role of transaction costs and consequently that of transaction management. Moreover, it implies that supply chains become more complicated, which is accounted for by developments in supply chain management (SCM). Most developed countries, especially when they can be characterized as open economies with a high amount of trade, witness an increasing trend in jobs related to trade and services. Gradually, production jobs are replaced by what can be regarded as transaction jobs. A major cause of this trend is the increasing division of labour and specialization both within national economies and in the world as a whole. Specialization means the exploitation of economies of scale and using the diversification of skills and availability of resources in the production of goods and services. Production takes place where it is cheapest. Availability in a country of raw materials and of capital, both physical capital and human capital, determines what is produced and what is traded. These are the comparative advantages of a country in international trade. Traditional Ricardian trade theory explains the goods and services trade flows from such comparative advantages.

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