Critically assess theories of Transaction Cost Economics and Resource Essay

Critically assess theories of Transaction Cost Economics and Resource Based View in terms of their usefulness in explaining firm - Essay Example However, in the modern approach, internationalization only explains the relationships existing between companies (Revilla, Cordeiro and Sarkis, 2011). Transaction cost of economics according to Williamson (1981) explains the cost incurred by a buyer or a seller to execute an economic dealing. It also explains the process via which the firm takes its decision to operate in the open market or in hierarchy. Transaction cost includes aspects of specificity, uncertainty and government mechanisms (Grover and Malhotra, 2003). Asset specificity is the primary explanatory factor of transaction cost theory (Williamson, 2008). Asset specificity refers to the transferability of the assets in business. The extent of asset specificity is directly proportional to the level of effectiveness of occurrence of an economic transaction. The resource based view explains that the firms may attain sustainable competitive advantage by using non-substitutable rare resources. And this advantage in turn helps t he firms to frame strategies for international business. Figure 1: Transaction Cost in Buisness (Source: Stephen, 2013) As shown in the above graph, the rise in the scale of business operations helps a firm to achieve competitive advantage and thereby helps it to reduce the cost the transaction cost of business. Thus competitive advantage facilitates internationalization of firms business by reducing their business operating costs. Application of the Theories The theories of transaction cost under the resource based view helps to justify the wide practice of internationalization in the modern world. In the last 30 years in the global economy, firms with large financial resources have turned into Multinational Corporations that undertook the process of foreign direct investment in business. These firms expand their competitive advantage by efficiently allocating resources in business and thereby reducing the cost of transaction. This has been facilitated after the emergence of global ization and liberalization in the world economy. The business firms in the modern world try to use unique resources in business to attain competitive advantage and thereby reduce the cost of any business transactions. These firms appoint the resources on the basis of VRIN analysis. The resources used by these companies are valuable, rare, non imitable and non-substitutable in nature. Weakness of the Theory However, there have been several weaknesses in the theory of transaction cost of economics under the resource based view. In reality, it becomes almost impossible to find a resource that suffices the conditions of Barneys VRIN analysis. It is also believed by analysts that resource that provided competitive advantage to a firm may be converted into a weakness if a sudden unfavourable change in the environment takes place. A resource cannot provide competitive advantage as that can easily be purchased by other companies. The concept of sustainability is highly versatile in nature. Today, the firms can only enjoy sustainable competitive advantage if its rivals in the industry do not imitate their competences. Alternative Perspectives According to the theory of transaction cost of resource based view, the modern business firms try to attain competitive advantage in their business activities in order to reduce the cost