In the organization of production, a distinction can be made between production through the market and through the hierarchy. Transaction costs are decisive for the choice between these two forms of organization. When the transaction costs through the market are higher than through the hierarchy, it is best to organize production within the firm. The reverse is true for the choice of organization through. This philosophy is based on the pioneering work of firm behavior of Ronald Coase, Nobel laureate in economics in 1991, and in 2013 deceased at the age of 102. However, the choice between market and hierarchy is not the only strategic decision the management can make in the organization of production . Many intermediate forms are conceivable, so-called hybrid forms of organization. These include cooperative partnerships, alliances, licensing and franchising. The Netherlands seems to have some comparative advantage in organising production in the hybrid form of a cooperation. One of the largest banks in the country, the Rabobank, originated as a cooperation and also a large multinational in the dairy industry, Friesland-Campina, is organised as a cooperation. Moreover, the Netherlands is a world leader in the Dance industry, which owes much of its success on the flexible way of organising Dance events using various kinds of hybrid forms of organisation as is shown in a number of RITM studies. This skill in being cooperative, and not much hierarchical, in the way production of goods and services is organised in the Netherlands has to do with the tradition of being a trading nation where early in history citizens - “burghers” – and not monarchs were setting the rules. Yet it seems that making use of hybrid forms of organisation in modern times requires skills that are, at least partly, to be obtained through knowledge transfers. In that sense developing these skills and learning through experience to profit from these hybrid ways of organising economic activities brings about positive externalities. It implies that there is a role for the government to stimulate the development and transfers of this kind of organisational knowledge.
Olive trade, Morocco
Organizing relocation services in foreign countries
An example of such study of hybrid organization describes how transaction costs play a role in strategic decisions of an international relocation company on the way the services abroad are organized with or without local partners. There are four distinct ways for organizing relocation services in foreign countries, namely (i) through the market, (ii) through a strategic alliance, (iii) through franchising, and (iv) through an own subsidiary. The first and last of these ways of organizing correspond to the respective Coasian archetypes: the market versus the hierarchy. The other two modes of organization are hybrid forms between market and hierarchy. The finding is that in the international relocation industry all four types of organization are used depending on the circumstances. The company of the case study appears to have a flexible and dynamic management with respect to the choice of the organizational form. Changed circumstances may make it necessary to adjust the organization. It appears that in making these decisions the balancing the various types of transaction costs, as distinguished in transaction cost economics, plays an important role. But in practice decisions are mainly made by intuition: no real comparative calculations are made with respect to transaction costs when making decisions on the actual way of organizing the relocation service. Unique is that this case study considers a company from the business services sector and not, as in most previous cases, a company from the manufacturing industry.
Another new line of research relates to the so called ‘matching zones’. Complicated projects, policy plans and government regulation usually involve a number of stakeholders with diverging interests. A good infrastructure for the consultation of, and for the discussion between these stakeholders is needed in order to avoid high implementation costs. These implementation costs can be seen as transaction costs. This is especially relevant in Government-to-Business (G2B) and Government-to-Consumers (G2C) relationships where the projects and policy measures bring about (re)distribution problems. This line of RITM research discusses various ways to organise these consultations with the help of experts as intermediaries, so that a compromise agreement is reached on the solution of the (re)distribution problem. These institutionalised structures of consultation are referred to as matching zones. Practical experiences, mainly from the Netherlands, provide guidelines for the effective institutional setup of such matching zones. Specifically, the design of a matching zone should try to adhere to the following principles:
- there should be a common interest and ample incentives for reaching an agreement;
- there should be the prospect of long, repeated interaction;
- there should be a balance between representation and efficiency;
- the constraints should be clear from the onset of the matching zone;
- fairness should be strived for;
- IC technology should be utilised optimally; and
- informal contacts and an amicable atmosphere should be promoted. Independent experts appear to fulfil an important role in order to reach compromise agreements at sufficiently low implementation costs.
Knowledge on value creation through transactions in the era of globalization