Advances in New Institutional Analysis series
Chapter 8: Innovation through transaction management
This chapter discusses the importance of innovations that reduce transaction costs. These trade innovations, or transaction innovations, include a large knowledge component. Because these innovations can bring about positive externalities, the government should pay attention to them. Finally, this chapter discusses the complementary relationship between transaction management and Lean management, the latter being an amply applied business management method of organizational innovations that bring about cost reduction. The examples on standardization in the previous chapter show that innovation and knowledge creation play an important role in a transaction economy. However, innovation and knowledge creation are commonly associated with technological innovation. From that viewpoint, the goal is to increase productivity by making better products and by using better production processes. Investment in R & D is supposed to be an engine for such innovations and knowledge creation. The proposition here is that R & D-driven technological progress leads to an increase in productivity within the links of the production chain (Figure 5.1). Chapter 5 assesses how, from the perspective of the fragmentation of production, two sources of comparative advantage can be distinguished. Process and product innovations within the various parts of the production chain result in lower production costs. This increase in productivity within that part of the production chain can bring about a comparative advantage for production. By contrast, innovations that reduce the transaction costs of linking the various parts of the production chain create value and increase productivity in the orchestrating function. This provides a comparative advantage in the coordination and organization of production.
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