Environmental Engineering Reference
In-Depth Information
adapting, and monitoring task completion under
alternative governance structures.” (p. 2)
with empirical studies and some of these studies
support that asset specificity is positively corre-
lated with the vertical integration level (Joskow,
1988; Mahoney, 1992; Whyte, 1994; Shelanski
and Klein, 1995; Rindfleisch and Heide, 1997;
Gulbrandsen et al., 2009). Also, a negative cor-
relation was determined in the study of Kvaløy
(2007). Although, there is not many application of
transaction cost economics theory in the sustain-
ability literature, we will present some examples
in the following section.
Coase (1937) noted that the transaction cost
economics forms the boundary of the firm. Some
transaction costs may not be handled in the market;
therefore, firms may need to increase vertical inte-
gration level to undertake these transaction costs.
Williamson (1996) defines the transaction costs as
“the ex ante costs of drafting, negotiating and safe-
guarding an agreement and, more especially, the
ex post costs of maladaption and adjustments that
arise when contract execution is misaligned as a
result of gaps, errors, omissions, and unanticipated
disturbances” (p. 379). Hence, these types of costs
have influence on outsourcing decisions and the
success of outsourcing depends on the managing
outsourcing relationships. Transaction costs may
be external if firm outsource its inputs or may be
internal if firm produces its inputs. According to
the TCE theory, firms should be vertically inte-
grated when their external governance costs are
larger than the costs of producing in firms' own
facilities (Gulbrandsen, 2009).
Transaction cost economics assumes that
people may not be truthful and honest about their
contracts to take advantage of some circumstances
in the market (i.e. opportunism assumption - limi-
tations on information and restriction to process)
and may not foresee all possible results due to
existence of uncertainties (i.e. bounded rational-
ity assumption) in transactions (Williamson,
1975; 1985). Acemoglu et al. (2009) found that
companies are more vertically integrated in some
developing countries which have high contract-
ing costs.
Asset specificity is the also another important
concept in TCE theory and refers to “durable
investments that are undertaken in support of
particular transactions'' (Williamson, 1985, p. 55).
According to TCE theory, asset specificity is one
of the fundamental factors that determine the verti-
cal integration strategy of the firm (Williamson,
Natural Transaction Cost Economics
Limited number of researches was conducted on
the intersection of sustainability-focused strategies
and transaction cost analysis. For example, the
empirical study of Rosen et al. (2001) confirms
that, in computer industry, SFCs were more likely
to specify a role for third parties to help with con-
flict resolution in contracting and recognize and
express concern about potential “expropriation
and shirking” risks. The problem in contracts may
be a reason for internationalization of production.
In other words, SFCs will tend to reduce transac-
tion costs of contracting by vertical integration
(Rao, 2003).
Carter and Carter (1998) examined the effect
of vertical coordination between buyers and sup-
pliers to environmental purchasing activities with
conducting a survey to managers and they observed
that the greater the vertical coordination between
suppliers and buyers supports the environmental
purchasing activities. Additionally, they detected
that as manufacturers use environmentally friendly
input they become more vertically integrated with
their suppliers.
Finon and Perez (2007) explore the efficiency
of the regulatory instruments used to encourage
renewable energy sources in electricity genera-
tion. They argued that governments coordinate
renewable energy sources more effectively with
long-term contracting and explained the main
goal of this contractual format as supplying long-
