Factors Influencing a Firms Decisions

|Review and Analysis |

|of Factors Influencing |

|a Firms Decisions |

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|Subject: Managerial Economics |

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In the quest for growth or cost performance, every step along the vertical chain becomes a decision between vertical integration and the market. Transaction cost economics provides management with the tools to influence its decision to either “make” or “buy” and coordination facilitates its enablement. Put differently, every company has contractual agreements; the management decision is: whether these will be internal or external.

The advance of infrastructure has augmented the evolution of the firm. Today with improved communication, transport, financial structures allowing cross border transactions, a global community fuelled by the internet, governments attracting multinationals with favourable regulations, connectivity becomes common place and as such the firm seeks to expand to take advantage of these new opportunities. The information age has enabled the firm, as we know it, to evolve into a hub of connectivity and thereby exploit the benefits derived by the economies of its size.

Transaction Cost Economics

As these firms continue to grow, Shelanski and Klein (1995) explain that:

“transaction cost economics originally an explanation for the scale and scope of the firm, is now used to study a variety of economic relationships, ranging from vertical and lateral integration to transfer pricing, corporate finance, marketing, the organization of...