The Strategy and Transaction Cost Nexus Past Debates, Central Questions, and Future Research Possibilities

Nicolai Foss ()

No 02-04, DRUID Working Papers from DRUID, Copenhagen Business School, Department of Industrial Economics and Strategy/Aalborg University, Department of Business Studies

Abstract: The role of transaction cost economics in developing research in strategy has been a hotly debated topic over the last decade. This paper presents the radical argument that transaction cost insights are more than merely useful complements to existing approaches to strategy. Rather, they are necessary for adequately understanding the nature of strategizing. This is because transaction costs are essential aspects of processes of creating, capturing and protecting value. If transaction costs are zero, these processes do not pose any strategic problems; strategizing is trivialized in such a world. When transaction costs are positive, on the other hand, opportunities for value creation through the reduction of inefficiencies caused by transaction costs exist, and protecting and appropriating value are costly activities that dissipate value. Also, contracting and expectations enter as central aspects of strategizing. Arguments are provided for why economizing (with transaction costs) is more fundamental than strategizing (in the sense of exploiting market power). Thus, the paper argues that models in which the fullest possible account of transaction costs is made be used as the proper foundations and benchmarks for economics-based strategy research, rather than the patched-up competitive equilibrium models that are now used, more or less implicitly, as the benchmark in important parts of strategy research, most notably in the resource-based view.

Keywords: Transaction costs; firm strategy; industrial organization. (search for similar items in EconPapers)
JEL-codes: D23 D4 L1 (search for similar items in EconPapers)
Date: 2002
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