When we think of the evolution of the modern firms, we can see that they have been continuously changing, just as the economic conditions in which they operate. Modern companies are not seen just as a collection of tangible and intangible assets, but as entities that organise and run various types of transactions. The differences in transaction costs which occur in these operations are considered to determine the structure of the modern firms and are responsible for the coexistence of various forms of organisations in economy nowadays.
Transaction cost economics (TCE) is used to explain phenomena such as vertical integration, outsourcing and corporate governance (Williamson and Masten 1995). Vertical integration or “make-or-buy” decisions are the main problem addressed by the transaction cost economics. According to researchers such as Globerman (1980) and Monteverde and Teece (1982), the greater the asset specificity (measured by various criteria, for instance by the engineering effort associated with the development of the automobile component), the higher are the expected quasi-rents and the greater the likelihood of vertical integration. Site specificity, dedicated assets, and the need for customized production facilities increase the vertical integration in a number of industries.
The concept of transactions costs was first described by Ronald Coase in his paper “The Nature of the Firm” in 1937. He identified governance costs as important determinants of firm boundaries, together with the costs of using the market. Transaction cost economics (TCE) studies how trading parties protect themselves from the hazards which arise from their relationships. As contracts are always incomplete due to bounded rationality, difficulties to specify and measure performan ...