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 5: The transition from production to orchestration

Frank A.G. den Butter

Subjects: economics and finance, institutional economics, international economics

Extract

This chapter pays attention to how economic activity in transaction economies gradually shifts towards a situation where the orchestration of production becomes a major economic activity. Parts of the production process are outsourced to subcontractors and suppliers in the home country, but also to subcontractors abroad (outsourcing, off shoring). Three examples of this transition from production to orchestrating production are discussed. As noted previously, the global fragmentation of production implies that the production chain is split up into more and more parts and that outsourcing the parts of the chain that are produced abroad becomes increasingly important. To know how to do this is precisely what creates value in the era of globalization. This decoupling of the production chain and creating value by outsourcing requires a good level of skill to organize and coordinate the whole production process. This is what the orchestrating function is all about. Transaction economies focus increasingly on this orchestrating function, presumably because of their comparative advantages in specific knowledge and infrastructure, and because of their ability to create adequate institutions for fostering exchange, as discussed in the previous chapter. This induces a shift of economic activity from production itself to organizing production. The orchestration of production based on the appropriate cost considerations of what, where and by whom to produce is a vital issue for transaction management. Figure 5.1 pictures the transition from a manufacturing-oriented firm to one focused on trade and orchestration.

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