Chapter 1 Theoretical Background
This chapter presents the theoretical background for the thesis. This theory deals with the organization of transactions that occur between successive stages of activity. For example, components have to be brought from where they are produced to where they are assembled into a nished product, iron ore or coal has to be transported from the mine to the smelter to the steel producer, and knowledge has to be transported from where it is created using money to where it is used to make money. The phrase `successive', by the way, is not used to suggest that only vertical relations are implied, but simply that one activity happens before another; these may be di erent activities at the same level between di erent rms in cooperative R&D, for example, yielding a horizontal relation. In any case, goods and services have to be transferred from one stage to another. The main substantive theory used here is transaction cost economics, which says what the best structural form is for organizing such transfers. For example, both stages might be brought together within the bounds of a single rm|i.e. vertically integrated|or put in separate rms, using the market to organize transactions between them. A company might own its own R&D department, or outsource research work to a specialized institute. Depending on the characteristics of the transaction, some organizational forms are more appropriate than others. Transaction cost economics is about nding the most appropriate|i.e. 7
CHAPTER 1. THEORETICAL BACKGROUND
the economic|organizational form for a given transaction. Transaction cost theory is described in Section 1.1. The approach used in this thesis requires certain substantive extensions, described in Section 1.2. These will be shown to supplement transaction cost economics in a very natural way. Methodological issues, on the other hand, are discussed in Chapter 2, where objections are raised to the approach taken in TCE, and where the alternative approach that was taken in this research is presented.
1.1 Transaction Cost Economics
Transaction cost economics says which structural form should be used for organizing a given transaction. A transaction occurs when a good or service is transferred across a technologically separable interface. One stage of activity terminates and another begins" Williamson 1981a, p. 552. Rather than focus on individual stages of activity|viewing the rm as a production function to be optimized|TCE focuses on transactions between stages of activity and views the rm as one of the organizational forms that may be used to organize such transactions. Figure 1.1 shows an example. The gure shows a rm whose technological core consists of three stages of production, S1, S2, and S3. These are the rm's core activities and|in the example|it `always' performs those itself. Raw materials production is R, which, likewise, the rm has decided `never' to perform itself, and distribution of nished products is D. This is not to say that the rm will indeed always perform each of the productive stages S itself, but it will in the context of the example, in which this is not at issue. More generally, all such decisions about which activities a rm performs will eventually have to be justi ed in terms of transaction cost economic reasoning. Each stage of production S uses a component C , which has to be produced. The choice exists for the rm to produce the component itself C -M for make or to let a specialized outside supplier produce it C -B for buy. The same applies to distribution D, which is D-M if the rm owns distribution and D-B if the rm uses market distribution. Each of x x x x x
1.1. TRANSACTION COST ECONOMICS
C1-M C2-M C3-M D-M R S1 S2 S3 D-B C1-B C2-B C3-B
potential transaction actual transaction
Figure 1.1: E cient boundary adapted from: Williamson 1981a. the four transactions C S = 1 2 3 and S3 D might be organized within, as well as across...
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