Corruption as a determinant of transaction governance structure

Abstract

Purpose -As companies move their businesses offshore to developing countries, how to estimate market costs and select transaction governance structures (TGS) accordingly has become a challenge. Based on transaction cost theory, the purpose of this paper is to propose that corruption is an influential factor, which can potentially increase market transaction costs and favor selections of hierarchy oriented TGSs. Design/methodology/approach -Data are collected from World Development Indicators database and the Corruption Perception Index 2006. In total, 154 countries are included in the study. A regression analysis is used to demonstrate the correlation between levels of corruption and selections of TGS. Findings -The results indicate a strong correlation between corruption and TGS. Practical implications -Low labor costs and other incentives should not be the only reasons for moving businesses into developing countries. Managers should take a closer look at levels of corruption and estimate transaction costs accordingly. If a company plans to enter into a highly corrupted environment, it should consider using a hierarchy oriented TGS. Originality/value -This paper applies transaction cost theory to strategic management of outsourcing and highlights corruption as an unfavorable factor for outsourcing to developing countries.

Government SME Development Programs in Sri Lanka: A Review in the Lens of Transaction Cost Economics

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Impact of Information Accessed Through Social Capital on Rational Ability of Owner Manager Small Enterprises in Sri Lanka

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“…Bounded rationality describes the limited extent to which people make rational decisions. Bounded rationality refers that the imitations in collecting, processing and assessing information in order to make rational decision [32]. Making a full rational decision requires unlimited intellectual capabilities.…”

“…Literature highlighted three types of mental bounds i.e. limitation of collecting information due to asymmetrical information (all parties to the transaction no longer possess the same levels of information because imperfect market mechanism generates imperfect information), limitation of processing information due to the lack of knowledge and mental capacity (human mind has only limited capacity to evaluate and process the information) and the limitation to make full rational decision (full rationality requires unlimited mental capabilities) [32]. Therefore, decision makers have limited cognitive capacity in solving complex problem.…”

The effect of inter-personal trusts on transaction costs of owner-managed small enterprises in Sri Lanka

“…Transaction Costs Economics: A business firm needs to incur costs in searching for new buyers and suppliers, negotiating with exchange partners, long-term contracting and monitoring transaction agreements due to the asymmetrical information generated by imperfect market mechanism (Dyer, 1997;Hobbs, 1996;Williamson, 1985). Those costs are termed as TC (Dyer, 1997;Williamson, 1979Williamson, , 1985Zhang, 2009). Classical economic theory assumes that transactions can be made without any costs where there is perfect knowledge about the market (Hobbs, 1996;Priyanto, Mazkie and Khusaini, 2014).…”