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 4: Transaction cost economics

Frank A.G. den Butter

Subjects: economics and finance, institutional economics, international economics

Extract

This chapter discusses a key theme of this book. It explains the theory of transaction cost economics and, from this perspective, looks at the broad significance of transaction costs in the modern economy. It shows what types of transaction costs can be distinguished and how transaction costs affect the working of the economy. Ample attention is paid to the fundamental problem of exchange and to the institutional aspects of solving the game of trust. The role of procurement in the modern strategic management of the firm acts as an example of the importance of transaction costs in industrial organization. The crucial importance of transaction costs in a world with increasing specialization and division of labour has already been amply discussed in the previous chapters. The question now is how transaction costs can be defined and what types of transaction costs can be distinguished and categorized. The fragmentation of production, where the production chains of goods and services are split into a growing number of parts, can be seen as a feature of specialization in the globalizing world. The economic theory of industrial organization partly explains how and to what extent this happens. In an industrial organization with fragmented production, from an analytical perspective, it is essential to distinguish between production costs and transaction costs. Production costs can be defined as all costs that are made within the parts of the production chain, including development costs. Therefore, loosely speaking, transaction costs are all other costs that relate to coordinating and connecting the various parts of the production chain.

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