Retroalimentación de experiencia operativa

The transaction cost theory is grounded in economic analysis and was initiated by Ronald Coase (Coase, 1937; 1988). The basic unit of analysis is the economic transaction, which is defined as an exchange of goods or services between two parties. Coase (1937) divides transactions into the two major categories of “market” and “hierarchy” in accordance with their organisational form. The deciding factor is whether a particular transaction can be undertaken at lower cost through the market or internally within a firm (“hierarchy”). If the costs of undertaking the transaction via the market are high, then the firm can gain economic benefits by “internalising” the transaction within its own organisation (Buckley and Casson, 1988). Coase’s theory was subsequently considerably developed by Williamson (1975, 1985) with his “transaction cost economics” theoretical framework by examining the relationship between uncertainty with regards to how the parties may behave, and transaction costs. In the view of this theory, organisations will tend to favour the IJV as an alternative mode if it incurs lower transaction cost than other modes of governance.

Williamson (1975, 1985) suggests that firms decide how to transact after considering how best to minimise total production and transaction costs. Production costs may vary between one firm and another depending on the scale of operations and proprietary knowledge. Transaction cost refers to the expenses incurred in writing and enforcing contracts, haggling over terms and contingent claims, deviating from optimal kinds of investments in order to increase dependence on a party or to stabilise a relationship, and in administering a transaction (Williamson, 1975, 1987). He establishes an organisational failure framework by explaining that, “first of all, markets and firms are alternative instruments for completing a related set of transactions. Second, whether a set of transactions ought to be executed across markets or within a firm depends on the relative efficiency of each mode. Third, the costs of writing and executing complex contracts across a market vary with the characteristics of the human decision-makers involved with the transaction on the one hand, and the objective properties of the market on the other. Fourth, although the human and environmental factors that impede exchanges between firms (across a market) manifest themselves somewhat differently within the firm, the same sets of factors apply to both” (Williamson, 1975: 8). A presumption of market

failure is warranted where it is observed that transactions are shifted out of a market and into a firm, whereas a presumption of internal organisational failure is warranted for transactions that are unshifted (continuing to be market-mediated). Therefore, the organisational failure framework is a symmetrical term meant to apply to market and non- market organisations alike (Williamson, 1975; 1985).

Williamson (1975; 1985) points out that the choice of mode of governance between the market and hierarchies is determined by a set of related environmental and human factors. These factors lead to circumstances under which complex contingent claims contracts are costly to write, execute, and enforce. Encountering such difficulties, and considering the risks that simple (or incomplete) contingent claims contracts pose, a firm may decide to bypass the market and resort to hierarchical modes of organisation. Transactions that might otherwise be conducted in the market are instead performed internally and governed by administrative process.

Two environmental factors which lead to prospective market failure are uncertainty and small numbers-exchange relations. Two human factors are ‘bounded’ rationality and opportunism. Williamson (1975; 1985) indicates that a combination of the human environmental factors need not obstruct market exchange, unless the factors interact. He emphasises that the pairing of uncertainty with bounded rationality and a combining of small numbers with opportunism are especially damaging.

Bounded rationality results, according to Williamson, from the fact that “the capacity of the human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behaviour in the real world” (Williamson, 1975: 9). Simon (1957) long ago identified neurophysiological and language limitations which restrict rationality. Opportunism refers to a lack of candour or honesty in transactions, and includes “self-interest seeking with guile” (Williamson, 1975: 26).

According to Goffman (1969: 105), quoted by Williamson (1975), opportunistic behaviour involves making “false or empty, that is, self-disbelieved, threats and promises” in the

expectation that individual advantage will thereby be realised. Highly opportunistic behaviour can lead firms to experience diminishing performance levels (Coase, 1937). Buckley (1988) claims that the opportunism of individuals may influence them to act in their own interests rather than the organisation’s, and this leads to the arising of potential costs of monitoring and enforcing agreements and contracts.

There can be situations where “a small number of agents/amount of bargaining” are present, where only a few or even just one buyer and one seller exist (Williamson, 1975, 1985; Ouchi, 1979, 1980). Klein et al. (1978) argue that in small number conditions, the cost of switching partners will be high and one party can be held to ransom by another. Under these circumstances competitive pressure will vanish, creating a small number of suppliers who behave opportunistically to claim higher costs and supply poor quality work. Williamson (1975, 1985) asserts that when opportunism is combined with a small-numbers condition, the trading situation will be greatly improved if allocation of resources takes place on a basis of ‘hierarchy’ or ‘internal organisation’. The transaction costs arise because of conducting business in imperfect markets. Accordingly, it can be more efficient for firms to use internal structures rather than market intermediaries (Beamish and Banks, 1987).

A hierarchical, internal solution has many attractions, given the problems which affect contracts because of bounded rationality and the possibility of opportunistic behaviour where small-scale operations are concerned. Internal organisation can be a way of overcoming information “impactedness”, defined as a condition which arises mainly as a result of uncertainty and opportunism, as well as bounded rationality. According to Williamson, information impactedness is present when the true circumstances underlying the transaction are known to one or more parties but cannot be discovered by others without expense. It need not be a problem for a market-based solution if the parties do not behave in an opportunistic manner; or if there is no problem of bounded rationality; or if sufficient competition is present because of a large numbers situation. If all of these are absent, however, hierarchy rather than market may be the best way to curb opportunism. Internal organisation may minimise the problem of bounded rationality with its accompanying dangers of opportunistic behaviour. Williamson (1975) argues that it is,

nevertheless, mainly the incentive, auditing and dispute settling benefits of internal organisation which reduce information problems.

Williamson (1985) also emphasises the importance of “asset specificity”, by which he means durable investments made in support of particular transactions, “the opportunity cost of which investment is much lower in best alternative uses or by alternative users should the original transaction be prematurely terminated” Williamson (1985: 55). He argues that parties whose mutual trade is supported by substantial investment in transaction-specific assets are effectively operating in a bilateral relationship. As such, “Harmonising the contractual interface that joins the parties, thereby to effect adaptability and promote continuity, becomes the source of real economic value” (Williamson, 1985: 30). In effect, transactions heavily dependent on asset specificity will be more economically dealt with through hierarchy. There is, of course, a risk of high costs arising with a hierarchy transaction mode because of such bureaucratic costs as planning, control, measuring and co-ordination (Williamson, 1975; 1985).

To apply the transaction cost framework to IJV formation, a number of researchers (for example, Beamish and Banks, 1987; Hennart, 1988; Kogut, 1988; Buckley and Casson, 1988) argue that in a situation where both market and hierarchy modes would cause excessive costs, a transaction mode in the form of IJVs may be an appropriate alternative. An IJV mode is a specific type of bilateral governance based on transactional reciprocity, and can serve to reduce the defects of both market and hierarchy modes (Williamson, 1985).

Hill and Kim (1988) argue that the IJV creates dedicated assets from at least one of the partners and these assets are protected by a reciprocal long-term exchange agreement. The IJV thus creates a ‘mutual hostage’ situation, which may mitigate the risks of opportunism (Kogut, 1988). In addition, Hayes and Wheelwright (1984) assert that in some situations, an IJV solution can simultaneously incorporate long-term reciprocity and retain the benefits of market contracting, like economies of scales or economies of scope, which are of considerable importance in manufacturing.

To explain transaction cost theory in an international context, Hennart (1988) claims that, in global business environments, MNEs which sell their products overseas must first decide on the production site: whether to produce at home and export to the foreign markets, or to locate their production abroad. This decision is based on a comparison of delivery costs. It reflects the relative production costs of the home location compared with a foreign location, plus transport costs and tariff and non-tariff barriers to trade.

Whether MNEs organise their interdependence with investors in host countries through market or hierarchical means is the second decision. Transaction cost theory can be applied here. Firms have to compare and choose a governance structure which will minimise their transaction costs. They have to rely either on the price mechanism operating through market transactions, or on hierarchy seeking alignment of corporate goals and performance. A decision in favour of the hierarchy mode, due to high transaction costs in the situation of an imperfect market, leads to the establishment of a wholly-owned subsidiary of the MNE (Buckley and Casson, 1988). However, Kogut (1988) argues that forming wholly-owned subsidiaries often entails a significant amount of investment and other resource input. Accordingly, where equity partnership incurs lower transaction costs than other organisational modes, the IJV may be selected as more appropriate.

Williamson considers the IJV approach to be a hybrid occupying a position between the two extremes of the market-hierarchy continuum, and to provide stronger incentives and adaptive capabilities than hierarchies, while also providing more administrative control than markets (Williamson, 1985). In other words, MNEs need to decide whether they should establish wholly-owned subsidiaries (hierarchy mode), conclude contractual agreements with local agents (market mode), or establish IJVs (hybrid mode) on the basis of which option will minimise their transaction costs.

To summarise, then: the central contention of the transaction cost theory is that transactions can be classified by organisational form. Coase presented the idea that the market and the firm are alternative ways of organising similar kinds of transaction, and that one or the other may prove to have a lower cost depending on the circumstances of the

transaction. The theory was further developed by Williamson (1975; 1985) who introduced the classification of “markets” and “hierarchies”. This defines a set of human factors and a set of environmental factors which, taken together, establish the efficiency of a particular form of contracting. The human factors are bounded rationality and opportunism. The environmental factors are uncertainty and small numbers. There are the further conceptual tools of information impactedness, which is compounded from uncertainty and opportunism, and asset specificity. Where these factors are problematical they may encourage a firm to bypass the market and resort to hierarchical modes of organisation.

In other words, transaction cost theory describes the market as a mode of economic transaction with certain in-built risks. Market transactions become risky when information relevant to a contract is asymmetrically distributed between the parties, or when contracts cannot spell out all the contingencies which might arise during the duration of the contract (Williamson, 1975). This kind of information disparity is likely to encourage opportunistic behaviour in the party enjoying the advantage, and particularly in “small numbers” bargaining situations where competition is limited. Guarding against opportunism may lead to such extra costs as monitoring and enforcement. Hierarchy is seen as the solution to market failure in this situation, mitigating transaction risks. (Williamson, 1975; 1985) Where the parties to a transaction operate within a single hierarchy, incentives to opportunistically exploit information disparity and asset specificity are reduced.

In transaction theory terms, where both the monitoring costs associated with a market transaction and the bureaucratic costs of a hierarchy transaction are excessive, the IJV transaction mode may be an attractive compromise.

Transaction cost theory has been criticised as having limited applicability in at least two major respects when applied to such collaborative strategies such as IJVs. First, it has been suggested that the theory’s single-party, cost-minimisation emphasis neglects the inter-dependence of the partners in an IJV. Second, it is seen as placing too much emphasis on the structural features of trading at the expense of other important aspects. Zajac and Olsen (1993) suggest that the proliferation of collaborative arrangements has

more to do with anticipated gains than anticipated losses incurred in attempting to restrict opportunistic behaviour.

Further, it is sometimes complained that the theory assumes it is a simple matter to separate production and transaction costs, which is often not the case. It can be very difficult in practice to measure, or even to define, transaction costs. In his study of the automotive industry Dyer (1997) suggested that the mode of governance affects not only transaction costs but also production costs in ways which are difficult to identify and quantify. The exact costs associated with a strategic choice are difficult to calculate, so that the theory probably needs to be supplemented by the use of other analytical tools. (Kogut, 1988; Dunning, 1993)

Although transaction cost theory emphasises bounded rationality, it makes little allowance for other factors which affect decision-making. There is an unspoken assumption that a company’s sole objective is to maximise profit and minimise cost, but in reality there can be conflicts of interest between managers, and the interests of managers and shareholders do not necessarily coincide completely. The power of individuals within an organisation can have an important impact on decision-making.