Profit Centers, Single-Source Suppliers and Transaction Costs

© 1991 by Cornell UniversityThis paper addresses criticisms of transaction-cost theory that it overstates the effect of asset specialization on vertical integration and understates the costs of managing interunit relationships within an organization, particularly for nonstandard organizations and markets. We apply the theory simultaneously to decentralized supply relationships in a manufacturing corporation and to the corporation's relationships with single-source suppliers. Our results support the core proposition of the theory-that specialized assets have lower transaction costs within the organization. However, the hybrid characteristics of these supply relationships challenge both the theory's basic assumptions and its predictive power. Corporate decentralization and relational contracting in the market diminish the role of asset specificity as a necessary condition for low transaction costs in-house and as a sufficient condition for high transaction costs in the market. Therefore, how the theory should be used as a predictor of shifts in the current boundaries of the corporation is unclear

A WWW-Based Group Cognitive Mapping Approach to Support Case-Based Learning

One of the most difficult learning tasks is to solve complex, abstract, and unstructured problems. In many business problem domains, advanced students are required to perform numerous tasks that involve such higher-order cognitive processing as analyzing the arguments presented, making inferences, drawing logical conclusions, and critically evaluating all relevant alternatives, as well as the consequences of the decisions. This is especially true in the business school capstone courses, such as strategic management

Exchange hazards, relational reliability, and contracts in China: The contingent role of legal enforceability

Building on institutional and transaction cost economics, this article proposes that legal enforceability increases the use of contract over relational reliability (e.g., beliefs that the other party acts in a non-opportunistic manner) to safeguard market exchanges characterized by non-trivial hazards. The results of 399 buyer-supplier exchanges in China show that: (1) when managers perceive that the legal system can protect their firm's interests, they tend to use explicit contracts rather than relational reliability to safeguard transactions involving risks (i.e., asset specificity, environmental uncertainty, and behavioral uncertainty); and (2) when managers do not perceive the legal system as credible, they are less likely to use contracts, and instead rely on relational reliability to safeguard transactions associated with specialized assets and environmental uncertainty, but not those involving behavioral uncertainty. We further find that legal enforceability does not moderate the effect of relational reliability on contracts, but does weaken the effect of contracts on relational reliability. These results endorse the importance of prior experience (e.g., relational reliability) in supporting the use of explicit contracts, and alternatively suggest that, under conditions of greater legal enforceability, the contract signals less regarding one's intention to be trustworthy but more about the efficacy of sanctions. © 2010 Academy of International Business All rights reserved.postprin

Reputation and supplier opportunism in markets and firms

Opportunism in economic exchange has been examined extensively. However, empirical work focuses primarily on asset specificity settings which increase the level of transaction costs, and one potential solution to the opportunistic problem, vertical integration. This study addresses a second condition for opportunism, asymmetric information, and a second potential solution, reputation. I also argue that vertical integration does not necessarily result in cooperative exchanges: the design of internal transfers (e.g. profit center organization and transfer pricing policy) affect the level of cooperation. This study addresses two general areas: (1) Whether a supplier\u27s reputation for product cost disclosure reduces negotiation costs which result from unanticipated changes in the product\u27s costs in both market and intra-firm exchanges and, (2) What conditions give suppliers an incentive to build this reputation. I test the hypotheses with a cross-sectional, intra-firm study: questionnaire data is collected from one assembly divion regarding its transactions with market and vertically integrated suppliers. This study has two main findings: (1) Reputation for product cost disclosure by suppliers reduces difficulty and dissatisfaction from negotiating price changes, and (2) The design of intra-firm exchanges, in particular incentives and the use of authority, need to be addressed when testing transaction costs propositions

Exchange hazards, relational reliability, and contracts in China: The contingent role of legal enforceability

Building on institutional and transaction cost economics, this article proposes that legal enforceability increases the use of contract over relational reliability (e.g., beliefs that the other party acts in a non-opportunistic manner) to safeguard market exchanges characterized by non-trivial hazards. The results of 399 buyer–supplier exchanges in China show that: (1) when managers perceive that the legal system can protect their firm's interests, they tend to use explicit contracts rather than relational reliability to safeguard transactions involving risks (i.e., asset specificity, environmental uncertainty, and behavioral uncertainty); and (2) when managers do not perceive the legal system as credible, they are less likely to use contracts, and instead rely on relational reliability to safeguard transactions associated with specialized assets and environmental uncertainty, but not those involving behavioral uncertainty. We further find that legal enforceability does not moderate the effect of relational reliability on contracts, but does weaken the effect of contracts on relational reliability. These results endorse the importance of prior experience (e.g., relational reliability) in supporting the use of explicit contracts, and alternatively suggest that, under conditions of greater legal enforceability, the contract signals less regarding one's intention to be trustworthy but more about the efficacy of sanctions.

Relational ties or customized contracts? An examination of alternative governance choices in China

As business transactions become more complex in China – an increasingly market-driven economy – are managers more likely to employ relational ties or contracts? Consistent with the view that personal institutions govern transactions in China, our analysis of 361 buyer–supplier exchanges indicates that managers rely more on relational ties as asset specificity and uncertainty increase. We also find some support that impersonal institutions govern market transactions: as uncertainty increases, managers craft more customized contracts. Surprisingly, there is no association between contracts and asset specificity. These results hold for both local and foreign firms. Journal of International Business Studies (2008) 39, 526–534. doi:10.1057/palgrave.jibs.8400363