Transaction Cost Economies and Resource-Based View

Introduction

The concept of internationalisation emerges from an attempt by companies to expand their enterprises beyond their primary markets (Liker & Meier 2005). Although researchers rarely agree on what internationalisation entails, many of them have developed different theories to explain the process (Ramanathan 2009). Common theories include the absolute cost advantage theory, the comparative cost advantage theory, the gravity model of trade theory, Leontief paradox, Linder hypothesis, location theory, market imperfection theory, new trade theory, transaction cost theory and the resource-based view (Martins et al. 2010). These theories emerged from a background of extensive development in research and literature on globalisation.

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However, the proliferation of these theories in this research field has created an unstable theoretical environment for researchers. Particularly, their differences, in terms of scope and impact on companies, have compounded this analysis. This paper focuses on the transaction cost theory and the resource based view by highlighting their usefulness in explaining firms’ internationalisation strategies. To meet this objective, this paper highlights four case studies, which show the influence of the two theories in informing the decisions of multiple multinational companies to expand their operations beyond their primary scopes. However, before delving into this issue, it is important to describe both theories.

Transaction cost theory

Researchers say the transaction cost theory denotes the costs that most companies have to pay to operate in a market (Liker & Meier 2005). This is why Martins et al. (2010) say it is the cost associated with finding the best suppliers, customers, or partners in the market. Through the same analytical lens, Ramanathan (2009) views the transaction cost as the cost associated with making an exchange in the market. Based on this analysis, companies often pay different transaction costs. Information cost is among the most notable costs of operating in the international market (Liker & Meier 2005). It could gather data regarding the kinds of products available in the market and explain which producers stock them. Bargaining costs are also synonymous with international transactions and they highlight the costs associated with finding new customers.

Lastly, implementation costs outline the last type of transaction costs in international transactions. According to Ramanathan (2009), failing to understand the impact of transaction costs is tantamount to the failure to understand economic systems. The transaction cost theory helps to explain a firm’s behaviour and existence in the market. Based on the different types of costs mentioned in this paper, the transaction costs theory posits that a firm’s market transactions may not be entirely reliant on the firm’s strategies because external factors, such as taxes, could affect such relationships. Some researchers associate the transaction cost with the social cost of doing business (Furrer 2010). The transaction cost theory also borrows from this analysis and shows that most firms would be attracted to markets that have a low “social cost” as opposed to those that have a high cost. This is the gist of the transaction cost theory.

Resource-based View

The resource-based view has carved a niche in explaining the motivations for companies to venture into international business. In this regard, the resource-based view explains the motivation for firms to venture into new and international markets. As its name suggests, the theory bases its motivation on two subsets of resources – financial resources and human resources. Based on these views, the resource-based view argues that the internationalisation of firms often occurs when firms have the resources to pursue an internationalisation strategy (Furrer 2010). For example, many international firms that emerge from developing economies would seek cost advantages when pursuing an international strategy.

Similarly, they would mostly be motivated by the quest to gain new knowledge to enhance their reputation (usually, this knowledge would be unavailable domestically). In this regard, the resource-based view argues that most firms would internationalise if they have the resources that would give them a competitive advantage over their rivals (Martins et al. 2010). These resources could be either tangible or intangible. Several examples demonstrate how companies have used the resource based view and the transaction cost theory to internationalise. The following section of this paper illustrates examples of international companies that have used these theories in their internationalisation strategies.

Resource based View Theory

Toyota

Toyota is a leading Japanese automobile company. It has successfully managed to penetrate international markets, including the US, by leveraging its resource capabilities to maintain a competitive advantage over its rivals (Liker & Meier 2005). For example, in the US, Toyota has differentiated itself from formidable competitors, such as General Motors, by leveraging its superior quality and productivity. Customers have found these advantages useful because they have allowed them to enjoy increased utility, relative to the cost of purchasing a vehicle. In this regard, the company has developed a positive perception among customers in the US market through the impression that they would get value for their money (Martins et al. 2010). This competency comes from Toyota’s internal capabilities that have allowed it to build a lean production system that other competitors have found it difficult to imitate or assimilate.

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This lean production system is characterised by a just-in-time inventory system and self-managing systems that have increased Toyota’s efficiency in assembling high quality and efficient cars. The same competencies have allowed the Japanese giant to set up complex equipments within a short time and pass the advantages to their customers through reduced costs (Liker & Meier 2005). Low-cost customers are not the only ones who have enjoyed the same advantages because high-end customers have also benefitted from the same advantages through the adoption of high-tech performance features and superior quality in their car models. The success of the Lexus brand in the US demonstrates Toyota’s competency in this regard.

Observers have learned that Toyota’s resource capability is responsible for its ability to overshadow its competitors, such as Mercedes and BMW, in the luxury car segment because its cars are relatively cheaper than its rivals are (Liker & Meier 2005). The company’s success in leveraging its resource capabilities is not only limited to the high-end car segment, but also in new and emerging markets of the automobile industry (such as the hybrid car segment). For example, through the company’s willingness to upgrade its resources and capabilities, Toyota has realised tremendous success in developing and marketing the Toyota Prius model in America as the best selling hybrid car in the US (Liker & Meier 2005). Generally, Toyota’s lean production system has allowed it to develop superior and efficient vehicles. Its superior product quality has also led to increased differentiation in the global automobile market and lower costs for the company’s vehicles. Today, many companies are struggling to match Toyota’s success in not only the US market, but also in other parts of the world as well.

Apple Incorporated

Apple’s internationalisation strategy also demonstrates the importance of the resource base view in explaining internationalisation strategies of multinational companies. The company is a US-based multinational, headquartered in California, which produces smart-phones (iPhones), iPads, iPods, and similar technological devices. Like Toyota, it has successfully leveraged its resource capabilities to outperform other companies in the international market. Its resource capabilities emerge from its innovation strategy and product improvement (research and development) strategy.

Ramanathan (2009) emphasises the above assertion by saying the company’s constant innovation has made it stand out as the best technological among its competitors. Based on these resources and capabilities, other companies have had a difficult time imitating the Apple’s product design and capabilities. The company’s rare resources have also made it difficult for users to use apple’s software on other products because they work on the company’s hardware only. In this regard, the company’s resources are non-substitutable and difficult to imitate. The company’s superior quality is also another competency that has distinguished Apple’s products in the international market.

Transaction Cost Theory

General Motors and Fisher Body

Few examples explain how companies have used the transaction cost theory in their internationalisation strategies. This inadequacy of information stems from the secrecy surrounding the formulation of company strategies when making decisions to expand into foreign markets. The problem is more serious for private companies because their shareholders do not require them to reveal the reasons for their pursuit of internationalisation strategies. Nonetheless, the 1920 attempt by General Motors (GM) to encourage Fisher Body (a partner) to set up a plant next to the General Motors factory and supply the company with car bodies demonstrates the application of the transaction cost theory in international business (Furrer 2010). Fisher Body considered this proposal, but was wary of investing in starting a new plant next to GM, because General Motors could force it to sell its car bodies to the company only. In this way, the company was afraid that GM would insist on paying only a fraction of its profit margins.

In such a case, Fisher Body would have no option but to supply the American automaker with the car bodies at the price stipulated by GM. They would resort to this option because of the high costs associated with searching for new customers and transporting the products to their location (Furrer 2010). The threat of exploitation from GM caused Fisher Body to default on the agreement because it knew that the transaction cost associated with the deal would be disadvantageous to the company. In response to this decision, GM decided to buy Fisher Body and internalise the transaction cost of undertaking business with it. Based on this analysis, we find that the transaction cost theory informed the internationalisation strategy of GM. It decided to buy Fisher Body not only because of its strategic role in the company’s operations, but also because of the transaction costs associated with the partnership.

Disney and Pixar

On January 2006, Walt Disney decided to buy Pixar in a transaction that had the same characteristics as that of General Motors and Fisher Body. The all-stock transaction was worth more than $7 billion (Furrer 2010). The acquisition agreement would combine Pixar’s pre-emptive, creative, and technological departments and internalise them in Walt Disney’s creative departments (Liker & Meier 2005). This acquisition created a vast potential for landmark creative outputs and technological innovations between the two companies. However, the acquisition deal was not a product of a deal made in good faith because it was a threat by Pixar to hold up Walt Disney (Afuah 2015). Pixar signed a billion dollar deal with Walt Disney to develop a series of computer-animated series. After the production of the first movie, both companies disagreed on the future of the production of subsequent movies (Afuah 2015).

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This disagreement emerged from the unwillingness of both parties to agree on the future of a movie Titled, “Toy story 2,” that was supposed to be a straight-to-video release, but instead was approved for a theatrical release. Since Pixar spent a lot of money producing the film, it argued that Disney should count “Toy Story 2” as part of its 3-movie deal (Afuah 2015). Disney Refused. Although Pixar’s films were profitable for both Pixar and Walt Disney by grossing more than $2.5 million, Pixar felt that its deal with Disney was unfair (Furrer 2010). In the first agreement, Pixar’s role was creating and producing the films, while Walt Disney was supposed to handle marketing and distribution issues (Furrer 2010).

Although the two companies were supposed to share the profits that emerged from the agreement equally, Disney owned the rights to the movies and, at the same time, collected royalties from the distribution agreement. Pixar was mostly concerned about the agreement clause that gave Walt Disney the rights to own the movies and, at the same time, collect royalties from their distribution (Furrer 2010). This was the main point of contention between both parties. In 2004, the two parties went to court with distribution being the main issue under consideration. In the agreement, Pixar wanted to control the production and distribution of the films.

The company also wanted to finance film production, collect all the profits from the same venture, and pay Disney only 10%-15% of the deal (Furrer 2010). At the same time, Pixar said that, for purposes of maintaining a cordial relationship with Walt Disney, the company demanded that it should maintain control of the films that were in production (Afuah 2015). Disney found these demands to be outrageous, but Pixar refused to reconsider its position. Based on these intrigues alone, Disney found that the transaction cost of doing business with Pixar was unsustainable. To solve the impasse, Disney acquired Pixar in 2006. This case study reveals how transaction costs could influence company decisions.

Conclusion

This paper shows that the transaction cost and resource-based theories influence company decisions to internationalise. Both theories show the motivations for companies to expand their operations beyond their primary locus of operations. To illustrate the influence of the resource-based view, this paper highlighted the internationalisation strategies of Apple and Toyota as two global companies that hinge their globalisation strategies on their ability to leverage their resources and capabilities in the international market. Toyota’s capability is its lean production system, while Apple’s capability is its superior product quality. Both companies leveraged these advantages in the international market to achieve global success and recognition.

This paper also used Disney vs. Pixar and the GM and Fisher body cases to explain how the transaction cost theory influences the decision by companies to expand. However, these two examples demonstrate the difficulty of investigating internal firm strategies because the motivations for companies to expand are often confidential to company directors and managers. Nonetheless, this paper showed that the decisions for Disney and GM to expand their operations were products of their quest to reduce transaction costs. These four examples, show that the transaction cost theory and the resource-based view have significant influences on the decisions of firms to internationalise.

References

Afuah, A 2015, Business Model Innovation: Concepts, Analysis, and Cases, Routledge, London.

Furrer, O 2010, Corporate Level Strategy: Theory and Applications, Routledge, London.

Liker, J & Meier, D 2005, The Toyota Way Fieldbook, McGraw Hill Professional, London.

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Martins, R, Serra, F, Leite, A, Ferreira, M & Li, D 2010, Transactions Cost Theory influence in strategy research: A review through a bibliometric study in leading journals 2010, Web.

Ramanathan, T 2009, The Role of Organisational Change Management in Offshore Outsourcing of Information Technology Services: Qualitative Case Studies from a Multinational Pharmaceutical Company, Universal-Publishers, New York.

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StudyCorgi. (2020, November 6). Transaction Cost Economies and Resource-Based View. Retrieved from https://studycorgi.com/transaction-cost-economies-and-resource-based-view/

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