Rethinking procurement in the era of globalization

MIT Sloan Management Review

Volumn 50, Issue 1, 2008, Pages

  Den Butter, Frank A C ^a   Linse, Kees A ^b  

^a VU UNIVERSITY AMSTERDAM   (Netherlands)

^b SHELL GLOBAL SOLUTIONS INTERNATIONAL B V   (United States)

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EID: 57049186560     PISSN: 15329194     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (8)

1. Ronald Coase, winner of the Nobel Memorial Prize for economics in 1991, introduced the concept of transaction costs in economic theory: See R.H. Coase, "The Nature of the Firm," Economica 4 (1937): 386-405;
2. and R.H. Coase, 'The Institutional Structure of Production," American Economic Review 82, no. 4 (September 1992): 713-719.
3. Nowadays, transaction cost economics has become a major field: See O.E. Williamson, "Transaction Cost Economics: How It Works; Where It Is Headed," De Economist 146, no. 1 (1998): 23-58;
4. and D.C. North and J.J. Wallis, "Measuring the Transaction Sector in the American Economy, 1870-1970," in "Long-Term Factors in American Economic Growth," ed. S.L. Engerman and R.E. Gallman (Chicago: University of Chicago Press, 1986): 95-161.
5. Greif elaborates the fundamental problem of exchange by showing how various institutions provide different solutions to the problem.That brings about different types of transaction costs: See A. Greif, "The Fundamental Problem of Exchange: A Research Agenda in Historical Institutional Analysis," European Review of Economic History 4, no. 3 (December 2000): 251-284. For instance, the belief that the contract will be fulfilled may stem from a formal legal obligation, but it can also be based on the reputation of trustworthiness of the trading partner. In the first case, transaction costs will mainly depend on the quality of the legal system, and in the second case they will depend on the bonding of the trust relation.
6. A particularly noteworthy factor on the "soft" side of procurement is trust. On one hand, building trust and developing a reputation require investment, which leads to higher transaction costs. However, once suppliers and clients have established trust, they can anticipate lower transaction costs. Building trust and encouraging trustworthy behavior also has benefits for society as a whole, creating positive externalities. Damaged trust and reputation not only hurt companies in the form of high transaction costs; they harm society as a whole. See F.A.G. den Butterand R.H.J. Mosch, "Trade, Trust and Transaction Cost," discussion paper TI 03-082/3, Tinbergen Institute, Amsterdam, Oct. 13, 2003.
7. Informal trade barriers relate to red tape, tacit knowledge of how institutions work, uncertain and hazardous interpretation of rules and regulations, etc.
8. In this respect, Grossman and Rossi-Hansberg argue that the theory of international trade should consider the comparative advantages of trade in tasks rather than of trade in products and services: See G.M. Grossman and E. Rossi-Hansberg, "Trading Tasks: A Simple Theory of Offshoring," NBER working paper W12721, December 2006.