International Business Strategy

This document discusses the concept of transaction costs in international business strategy and its impact on economic exchanges. It explores different entry modes for expanding overseas and the trade-off between control and resource obligations. The role of the transaction cost theory in determining the best method of entry for foreign markets is also examined.

International business strategy

According to Anderson and Gatignon, 1986, the transaction costs are the costs sustained in
creating economic exchanges at the time of the procurement of the goods and services
(Anderson and Gatignon, 1986). The transaction costs undertake several areas like duties for
communication like telephones, internet, fees charged and the costs for maintaining cars and
recompensing for public transportation. The transaction costs result from the economic trade
in a market. The theory of the transaction costs is centered on the view that people are
swayed by the modest self-interest.
As per the views of Acquier, Valiorgue, and Daudigeos, 2017, only market exists at the
highest level and the people in the economy are permitted to enter into the contractual
agreements. In such a situation, the company exercises complete control over the contract, it
led economist to consider that the contracts can be violated by the several parties when an
opportunity is found and alike. The transaction cost is having aim of controlling the power of
the contractual relationships (Acquier, Valiorgue, and Daudigeos, 2017). The transaction cost
is having the aim of clarifying why some markets are able to accommodate several
organizations whereas others are conquered by only a few identified as hierarchies. The
development of the organisations is ruled by the hierarchies’ and it is an effective way to
construct relationships. The elements compromised by the transaction cost are:
 The uncertainty and unpredictability in the domain make up the transaction cost.
 The organizations entering into the transaction cost find costly to leave. It is made
possible with the bargaining and asset precisely.
 The individuals own limited rationality which means that they obtain and process
limited information and therefore have fewer options to choose from. The economic

transactions are based on the bounded rationality. The bounded rationality is a
situation in which decision making and rationality of a person is limited by the
amount of information obtainable to them and vast amount of time which is required
to decide.
 The integral opportunistic behaviour of the persons in an economy makes tougher
contractual agreements to be imposed after a long time period.
As per the views of Holmes Jr, et al. 2018, the transaction cost is linked to both regulator
device and market defectiveness. The transaction theory describes the situations in which
possessions can be attained. The theory explains how resources can be united and planned
within the strategic coalitions (Holmes Jr, et al. 2018). In the economic outlook of the
organizations, transaction cost theory endeavours to elucidate how it is significant to the
official structures and can be competent in prevailing economic activities. According to
Wacker, Yang, and Sheu, 2016, the transaction cost theory compacts with the economic
organization by evaluating the elements of a transaction. A transaction takes place when a
good or service is relocated over the technology detachable edge (Wacker, Yang, and Sheu,
2016). One stage of the activity dismisses whereas another initiate. Kolk, 2016, views that the
transaction costs theory accepts that precise form of the economic organization will assist in
the lessening of the transaction cost and such systems are stated to as governance edifices of
the economic organization (Kolk, 2016). The low levels of the transactions are managed by
the market. On the other side, it has been realised that strategic associations comprise various
kind of cooperation contracts and joint venture appearances is one of it. There are several
contractual forms adopted to be viewed under certain conditions and in coherent retort to the
transaction cost, joint venture characteristics solve to the moral hazard problems. The equity
joint ventures have been also exploited by the companies as a method of organisational
hybrid when two situations are encountered. If there is chance of the possibility of the market
failure then in such a condition participating firm is required to offer goods in the market
substance to failure. Such complaint makes market exchange a less practicable method of
systematizing trades. In the 2nd condition, if the attainment of the asset is not competent then
there is attainment of right to use the asset. The transaction cost is not only apprehensive with
the appearance of the specific organizations to accomplish the transaction costs but also a
method in which transaction cost is reliant on the mean of exchanging deeds.
As per the views of Li, et al. 2017, deciding different modes for expanding overseas is one of
the crucial decisions MNEs have to make while determining the internationalism strategy.

The transaction cost theory is the most frequently tool in deciding different modes of
international business organization (Li, et al. 2017). The globalisation process has altered the
opinion in which now days companies view international transactions. The international
markets do not seem too distant or unreachable. The multinational firms also pursue to offer
sufficient evidence to confirm that the companies also pursue to be involved in the
international activities such as MNEs. Add on, the foreign trade has also become a
considerable source of income whereas the local market economy suffers from recession.
When individual activities tend to be synchronise, the foreign activities can become
challenging and inadequate. This way, companies can go for the internationalisation as a tool
for the constant operations. The MNEs can freely choose from the wide range of the entry
modes with the liberalisation of the international trade. It even enables MNEs to redefine
their aims and strategies. Sometimes it also makes the process more challenging. It also
seems stimulating to differentiate and assess the factors which determine the company’s
decision. Due to the internal and external conditions, some specific factors can have impact
on the whole process.
Luo, and Bu, 2018, views that so much attention has been given to the international entry
modes but there is no specific approach for determining the set of critical entry mode factors.
The priority has been given to a particular variable deliberate to be decision maker in the
entry mode factors (Luo, and Bu, 2018). Consequently, the transaction cost theory is the most
recurrent and sometimes underestimated framework in terms of the internalisation process.
There are several models which has been introduced to expand the varied view for the
commonly issues faced. The transaction cost theory makes possible to understand the
economic theory. There is a debate also that it is not possible to comprehend the working of
the economic system, to evaluate problems in the useful way or to have a base for the
determining policy. The transaction cost puts additional burden of functioning in the specific
market. This cost is generally compared to the resistance which slows the smooth execution
of the contract (Thompson, Strickland, and Gamble, 2015).
According to Meyer, and Peng, 2016, the foremost issue faced in the international marketing
is the right method of entry mode in the global markets. The transaction cost framework have
great protagonist in probing the entry mode decision. An organisation pursuing to conduct a
business outside the local market is required to pick the best method of entry for the foreign
market (Meyer, and Peng, 2016). Such MNEs can confront a large group of choices
comprising a joint venture, a completely owned subsidiary or non-equity management like

licensing or a prescribed joint venture. The entry modes put impact on the accomplishment of
the foreign operations. The entry modes are even recognised as an edge concern in the global
marketing. The entry modes diverge greatly in the combination of the advantages and
shortcomings. The trade-offs comprised are stiff to appraise and little implicit (Hamilton, and
Webster, 2018). The surveys conducted by the companies enable entry mode decisions to
represent that a few companies only make a cognizant and cautious cost of the choices. The
decision of the best mode of entry can be reached after maximizing the risk adjusted return on
the investment. The classical tactics for the long term strategic decisions like entry made
choice focuses on opting the maximum risk adjusted return on investment in the practicable
conventions (Hitt, 2016). Control has a great influence on the future of a MNE. It is thought
to coordinate actions in the absence of control. It also makes tough to convey out strategies,
review strategies and determine the disagreements which arise consistently in the contract
made by the two parties. It happens due to the conflicting interest of the parties. Moreover,
the entrants make use of the control in order to attain a large segment of the foreign
initiative’s proceeds. In other words, control is a mode of attaining a greater return. However
control conveys a high price and is obviously desirable. In order to have control, MNEs are
required to assume accountability for the decision making. The firms may be unwilling to
conduct operations in an undefined foreign environment and grabbing control. The control is
also all about the commitment of the resource comprising high overhead (Giacobbe,
Matolcsy, and Wakefield, 2016). It in turn, forms switching costs dropping an organization’s
capability to modify its official procedure should be taken as a choice turn out to be
suboptimal. The resource obligation have also role in enhancing the organization’s disclosure
such as possibility of losses due to the change in the currency (Wiesner, 2017). This way,
assuming control is also to assume some customs of risks. As per the views of Morris, and
Tronnes, 2018, Control is given importance in the entry modes as it is the most significant
basis of risk and return. The high control methods are capable of increasing risk and return
(Morris, and Tronnes, 2018). On the other side, low control methods like licenses and other
contractual contracts minimises the resource obligation at the return expenses. The MNEs
practice various types of control for the lessening of the resource assurance in the anticipation
of dropping some forms of risk along with growing the returns. So the focus on the control is
constant with the classical risk adjusted return viewpoint (Fang, 2018).
The most important perspective in the global entry mode is a trade-off between the control
and the cost of the resource obligations. It undertakes the circumstances of the significant risk

along with the ambiguity. The viewpoint like conserving flexibility should be considered
more by the MNEs in making the trade-off. The flexibility is assumed as the ability of
changing systems and approaches rapidly and at a low cost (Dodgson, 2018). It is constantly
a significant deliberation mainly in the less known foreign markets. Here the MNEs are
anticipated to change systems and methods as learnt in the new environment. This
interpretation gives significance to the principal considerations such as risk, control and
flexibility. The classification of the modes of the entry defines the extent to which the degree
of control exploits the long run proficiency. The theory of the efficient entry modes depends
on the presence of a plotting to regulate dimension but not on any specific mapping. In this
discussion, it can be said that a mapping from the entry approaches to the amount of control
afforded is the applicant. There are several ways of gaining control and numerous disparities
with in the forms of the entry mode. For instance, a marginal partner can exercise influence
out of section to the ownership due to the several elements like an exceptional contractual
agreement, proficiency or status of a government body (Che, Peng, Lim, and Hua, 2015).
There is no well-known theory which can explain the significance of the control attained in
the entry modes. The management and the economic are participant advances over the actions
of a foreign business unit. The leading equity interests are anticipated to provide the highest
degree of resistor to the MNEs. The balanced interests are the medium control methods
centred on the view of a reliable commitment. MNEs creating a venture with the high
probability of trouble will have striving in tracing a apposite partner. In order to appeal a
partner, MNE may have necessity to put up somewhat to drop, a kind of good conviction
surety, identified as credible commitment (Yan, and Luo, 2016). For instance, in a marginally
unbalanced venture, 50% of the partner can acknowledge favourable contract sections. Such
sections can be so sympathetic that an organization can have more resistance with the 49%
share than the 51% share. The pledge can be the most precarious position in the overseas
entity. The MNEs can decide the mode coming from the everyday participation in the
operation and from proficiency. The modes comprise contractual management, contractual
joint ventures, restraining exclusive contracts and franchising (Castellani, et al. 2018). The
contract management is defined as an on-going relationship in which the entrants perform the
itemized functions. This way entrant has depiction on the management board which
supervises the venture’s accomplishments. The franchising is a practice of licensing and
purposes medium control as the typical arrangement comprises enticements to observe the
system’s rubrics and empowers a great degree for the checking of the franchisee’s activities.

The control which are exclusive but non-restrictive but restrictive. It gives control to the
MNEs through the various means. The restrictive contacts give the MNEs control through
various means. The restrictive contracts restrict the freedom action of other parties whereas
the exclusive contracts encourage other parties to cooperate (North, 2016). The low control
methods are the ways in which applicant has diffused interests. It comprises nonexclusive and
non-restrictive agreements along with the minor equity positions. There are several ways to
advance control, mainly the entrants can construct constant associations with other parties in
which the long term interests of both parties enables the progress of the customs. Turning to
the propositions, the degree of control is the most effective for the variety of conditions. The
entry models on the control are given ranking which makes potential to endorse an entry
mode for the specified entry situation (Amran, Ooi, Wong, and Hashim, 2016).
The transaction cost analysis for the entry modes maps out the governance erection to control
and views somewhat like a movement from the less unified to more unified. The degree of
unification ensues from complete non- unification to complete unification passing through
the transitional points (Abdelal, Blyth, and Parsons, 2015). The transaction costs theory
syndicates essentials of the industrial association whereas organization theory and contract
weighs the trade-offs to be made in the vertical incorporation. The market chosen for making
expansion by the MNEs should be capable enough so that the organization can recover the
overhead of a high control entry method. If it is not the case, then the high control methods
are not substance seeing. Although the markets are enormous enough to break even on the
fixed cost of a high control method so the entrants have preference to make. In such
circumstance the capability of the entry modes depend on the 4 constructs which define the
optimum degree of control by succeeding a transaction cost analysis. Such constructs are,
transaction specified assets, external improbability, internal ambiguity and free riding latent.
The transaction specific assets are the investments which are concentrated to one or a few
users. The external users reflect to the unpredictability of the MNEs outside environment
(Yan, and Luo, 2016). The internal uncertainty is all about the incapability to determine
agent’s enactment by observing the output measures. The free riding impending reflects to
the agent’s capability to attain benefits without bearing the linked costs (Richter, et al. 2016).
These four elements are thought to be completely linked with the entrant’s degree of control.
The justification of the elements along with the corresponding propositions is required to be
understood. The transaction cost analysis approaches the entry modes in order to be a low
level of ownership. The market outcomes bring the efficient results when the competition is

robust (Anderson, and Gatignon, 1986). The competitive pressure causes organizations to
perform efficiently at the low cost and to do dealings accompanied by fairness, integrity and
good faith. The MNEs are suggested to avoid factors like integrity when the supplier market
is competitive (Schermann, et al. 2016). This way MNEs can have a great return along with
the minimum risk. If the organization does not integrate then it evades the downsides of the
company’s dissection. The overhead get diminished so as company’s politics and the
exclusive division will become unproductive as it is safeguarded with the routine opposition.

References
Abdelal, R., Blyth, M. and Parsons, C. eds., 2015. Constructing the international economy.
Cornell University Press.
Acquier, A., Valiorgue, B. and Daudigeos, T., 2017. Sharing the shared value: A transaction
cost perspective on strategic CSR policies in global value chains. Journal of Business
Ethics, 144(1), pp.139-152.
Amran, A., Ooi, S.K., Wong, C.Y. and Hashim, F., 2016. Business strategy for climate
change: An ASEAN perspective. Corporate Social Responsibility and Environmental
Management, 23(4), pp.213-227.
Anderson, E. and Gatignon, H., 1986. Modes of foreign entry: A transaction cost analysis and
propositions. Journal of international business studies, 17(3), pp.1-26.
Castellani, D., Narula, R., Nguyen, Q.T., Surdu, I. and Walker, J.T. eds.,
2018. Contemporary Issues in International Business: Institutions, Strategy and
Performance. Springer.
Che, T., Peng, Z., Lim, K.H. and Hua, Z., 2015. Antecedents of consumers’ intention to
revisit an online group-buying website: A transaction cost perspective. Information &
Management, 52(5), pp.588-598.
Dodgson, M., 2018. Technological collaboration in industry: strategy, policy and
internationalization in innovation. Routledge.
Fang, W.U., 2018. A Study of the Relationship between Customer Concentration and
Corporate Donation: Based on Resource Dependence Theory and Transaction Cost
Theory. Contemporary Finance & Economics, (1), p.9.
Giacobbe, F., Matolcsy, Z. and Wakefield, J., 2016. An investigation of wholly‐owned
foreign subsidiary control through transaction cost economics theory. Accounting &
Finance, 56(4), pp.1041-1070.
Hamilton, L. and Webster, P., 2018. The international business environment. Oxford
University Press.

Hitt, M.A., 2016. International strategy and institutional environments. Cross Cultural &
Strategic Management, 23(2), pp.206-215.
Holmes Jr, R.M., Hoskisson, R.E., Kim, H., Wan, W.P. and Holcomb, T.R., 2018.
International strategy and business groups: A review and future research agenda. Journal of
World Business, 53(2), pp.134-150.
Kolk, A., 2016. The social responsibility of international business: From ethics and the
environment to CSR and sustainable development. Journal of World Business, 51(1), pp.23-
34.
Li, C., Brodbeck, F.C., Shenkar, O., Ponzi, L.J. and Fisch, J.H., 2017. Embracing the foreign:
Cultural attractiveness and international strategy. Strategic Management Journal, 38(4),
pp.950-971.
Luo, Y. and Bu, J., 2018. Contextualizing international strategy by emerging market firms: A
composition-based approach. Journal of World Business, 53(3), pp.337-355.
Meyer, K.E. and Peng, M.W., 2016. Theoretical foundations of emerging economy business
research. Journal of International Business Studies, 47(1), pp.3-22.
Morris, R.D. and Tronnes, P.C., 2018. The determinants of voluntary strategy disclosure: An
international comparison. Accounting Research Journal, 31(3), pp.423-441.
North, D.C., 2016. Institutions and economic theory. The american economist, 61(1), pp.72-
76.
Richter, N.F., Sinkovics, R.R., Ringle, C.M. and Schlaegel, C., 2016. A critical look at the
use of SEM in international business research. International Marketing Review, 33(3),
pp.376-404.
Schermann, M., Dongus, K., Yetton, P. and Krcmar, H., 2016. The role of transaction cost
economics in information technology outsourcing research: a meta-analysis of the choice of
contract type. The Journal of Strategic Information Systems, 25(1), pp.32-48.
Thompson, A., Strickland, A.J. and Gamble, J., 2015. Crafting and executing strategy:
Concepts and readings. McGraw-Hill Education.

Wacker, J.G., Yang, C. and Sheu, C., 2016. A transaction cost economics model for
estimating performance effectiveness of relational and contractual governance: theory and
statistical results. International Journal of Operations & Production Management, 36(11),
pp.1551-1575.
Wiesner, E., 2017. Transaction cost economics and public sector rent-seeking in developing
countries: toward a theory of government failure. In Evaluation and Development (pp. 108-
131). Routledge.
Yan, A. and Luo, Y., 2016. International Joint Ventures: Theory and Practice: Theory and
Practice. Routledge.