Management for Professionals Chihiro Suematsu Transaction Cost Management Strategies and Practices for a Global Open Economy Management for Professionals For further volumes: http://www.springer.com/series/10101 ThiS is a FM Blank Page Chihiro Suematsu Transaction Cost Management Strategies and Practices for a Global Open Economy Chihiro Suematsu Graduate School of Management Kyoto University Kyoto Japan ISSN 2192-8096 ISSN 2192-810X (electronic) ISBN 978-3-319-06888-6 ISBN 978-3-319-06889-3 (eBook) DOI 10.1007/978-3-319-06889-3 Springer Cham Heidelberg New York Dordrecht London Library of Congress Control Number: 2014943950 © The Editor(s) (if applicable) and the Author(s) 2014, corrected publication 2021 Open Access This book was originally published with exclusive rights reserved by the Publisher in 2014 and was licensed as an open access publication in March 2021 under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence and indicate if changes were made. The images or other third party material in this book may be included in the book’s Creative Commons license, unless indicated otherwise in a credit line to the material or in the Correction Note appended to the book. For details on rights and licenses please read the Correction https://doi.org/ 10.1007/978-3-319- 06889-3_11. If material is not included in the book’s Creative Commons license and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Preface Over the course of human history, businesses and societies have desperately sought to reduce two types of costs: production costs and transaction costs. The recent proliferation of Internet-based innovations (e.g., online marketplaces) and the numerous ways in which IT can be applied have caused transaction costs to come under more critical consideration. To illustrate, consider that the development of nearly all IT applications features an exclusive emphasis on minimizing transaction costs. For example, the costs and efforts expended by the author and publisher to deliver this book to you (including those related to translation, advertisement, presentation, travel, delivery, and problem solving) were roughly 0.01 % relative to what doing so would have cost a century ago. These cost savings extend to the readers as well; the costs all the individuals incurred to procure this book are roughly 1 % of what they would have been a century ago. Clearly, transaction costs have dropped substantially in the last hundred years. In contrast, the gross domestic products of developed countries have increased only five to ten times during the same time period. It seems obvious that the rapid proliferation of the Internet and reductions in transaction costs are interconnected. Despite their continuous decline, transaction costs have never been acknowl- edged as a type of expense per se. Instead, transaction costs have traditionally been dismissed as a component of production costs. Financial accounting is useful for tracking the costs associated with physical goods, but not for human activities, which comprise the majority of transaction costs. Transaction costs are believed to account for at least 50 % of the gross domestic products of developed countries. Our research similarly shows that 98 % of all costs incurred by a distribution company are transaction costs. Even a software development subcontractor (and therefore, should have low transaction costs) is characterized by substantial transaction costs; up to 60 % of all costs incurred by this company are transaction costs. Although production varies by industrial sector, business type, company, depart- ment, and individual, transaction structures tend to be invariable. Therefore, it is possible to identify a universal procedure for measuring, analyzing, and streamlining transaction costs in a variety of contexts. By identifying such a procedure, we can enable routinization, systemization, and IT utilization. These outcomes can result in a significant increase in productivity for the company that implements them. v vi Preface Given the above, in this book, the universal structure of transactions is analyzed and new methodologies for management derived from a focus on transaction costs are proposed. The management of transaction costs is the key for promoting value- added activities and innovation in particular, which have played significant roles in the intensified competition around the globe. Our research has demonstrated the utility of the proposed methodologies for those companies that implement them. It is the author’s hope that the readers of this volume will adopt a new perspective to understand the simple structure of transactions, which have affected (and continues to affect) the open global economy, thereby allowing them to enjoy the same advantages. The author would like to thank Martin Op ’t Land, Jan Verelst, Junichi Iijima, Jan Dietz, Will Baber, Hawa Munisi, Shintaro Sengoku, Elias Sanidas, Aeon Karris, Stephen Boyd, Kenichi Ohmae, and Yoshiyuki Nunotani. Kyoto, Japan Chihiro Suematsu March 2014 The original version of this book was published with copyright Springer International Publishing Switzerland. This book has now been made open access under a CC BY 4.0 license. For details on rights and licenses please read the Correction https://doi.org/10.1007/978-3-319-06889-3 Introduction Understanding Globalization and the Internet from the Viewpoint of Transaction Costs Globalization is clearly interconnected with the spread of the Internet. Its influence is getting more intensive as well as extensive. Its advance is bringing about drastic structural changes around the world. This book aims to provide a unified account on these structural changes and a mechanism to cope in this environment using the viewpoint of transaction costs. The book also aims to show that what we normally see as drastic changes actually proceed according to a simple logic. To see this as such, it is necessary that we overcome old paradigms and adopt a new perspective. Japan is a typical example of the failure to adapt due to her successful experiences in the past. The Internet has encouraged numerous innovations. Almost all of these innovations have targeted producing creative ways in reducing transaction costs. In fact, we can understand globalization as the outcome of the continuous effort to reduce transaction costs. Before the advent of the Internet, many transactions were impossible to execute because of obstacles such as physical distance and institu- tional differences. Because of continuous reduction of transaction costs, however, many transactions have become possible. Companies and other organizations can access more sources with much lower prices for innovative parts and products, raw materials, and even workers, engineers, and professionals. As the transactions between new partners increase rapidly, new transaction costs are generated. New business opportunities also become available to make these transactions more efficient. Reducing transaction costs has become more important than before and its relevance continues to increase. As drastic reduction of the cost of transacting with the rest of the world has resulted in making business transactions around the world more convenient, divi- sion of business processes among different companies is even being advanced. The ease of transactions with many partners has enabled the shift toward modularity in product architecture. All emerging countries have pursued the development model of outsourcing pioneered by Taiwan, India, and China, which is considered to be a type of modularity. As transactions are considered as the blood of the economy, it is not vitalized in case of stagnation and vice versa. Activation of transactions makes impacts on economy unfathomably. vii viii Introduction Reduced transaction costs lower the cost and widen the breadth of transmitted information. This in turn accelerates the creation of de facto standards. Network externality effects, bandwagon effects, and economies of scale effects have further promoted standardization and therefore “winner-takes-all”—that is, market monop- oly. Profit accrues to a single company that captures the standard. On the other hand, it becomes difficult for companies even to survive if they find themselves in the second or third position. Companies therefore aspire to dominate standards creations. As such, they have to join a severe and endless competition