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 8: Innovation through transaction management

Frank A.G. den Butter

Subjects: economics and finance, institutional economics, international economics


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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