Transaction Costs of Corporations
Экономическая теория и математическое моделирование
The majority of theorists studying transactional expenses and the institutional nature of a firm speak about a need of decreasing transactional expenses for the purpose of increasing the efficiency of a company and of transactions carried out by it. However it is possible to adduce a set of examples when a company that increases the transactional component of its expenses and achieves thereby a considerable expansion of sales markets an elimination of competitors and an access to cheaper resources. The types of transactional expenses which...
Transaction Costs of Corporations
7. Comparative analysis of transaction costs in large and middle-sized corporations in Russian industries
In the times of economic instability in most developed countries, a decrease is experienced in the effectiveness of many large public corporations. Such corporations are facing high expenditures (transaction costs mostly) and extremely low return on invested capital. Medium-sized businesses, on the contrary, prove to be more efficient: they show an acceptable level of profitability and total cost savings.
The majority of theorists studying transactional expenses and the institutional nature of a firm speak about a need of decreasing transactional expenses for the purpose of increasing the efficiency of a company and of transactions carried out by it. However, it is possible to adduce a set of examples when a company that increases the transactional component of its expenses and achieves thereby a considerable expansion of sales markets, an elimination of competitors and an access to cheaper resources.
The types of transactional expenses which have been the most fully described above, are represented in large, small and average corporations. Big transactional expenses, as a rule, arise in large corporations characterized by big turnovers and considerable profits. In modern economy, high expenses of transactional nature are mainly external and they themselves are subsequently accompanied by considerable benefits for a corporation (for example, costs of lobbying in the interests of a corporation). Internal transactional expenses associated with ensuring the effective functioning of intra-corporate institutions also take place, but most commonly not in such a volume, and a corporation does not expect such considerable benefits from them (for instance, expenditures on the simulation and creation of the most optimal organizational structures).
Types of corporations:
Large corporations are, as a rule, highly integrated companies which, apart from this fact, widely utilise outsourcing, network structures, which fact, unlike smaller structures, enables them to get additional benefits, including those obtained from decreasing transactional expenses. However, parallel to this, such companies bear a high burden of transactional expenses connected with the maintenance of corporate structure.
Thus, K. Verner and G. Weisss book (“Hidden champions”, 2007) describes the largest and most effective multinational corporations, such as Adidas, Bayer, Coca-Cola, Deutsche Bank, The Walt Disney Company, Kraft Foods International, McDonalds Corporation, Procter&Gamble and many others. Most charges brought against leader corporations are economic and social nature, such as: evasion of tax payment, use of child labor, violation of rules of commodity sale, environment destruction, speculative transactions, carrying out experiences on animals, repressions of members of trade unions, setting obstacles to sale of vital medicines in developing countries, extreme forms of exploitation at Chinese factories, dumping, etc.
From the description of transnational corporations, given above, it follows that the majority of actions (of illegal character) is directed towards an expansion of sales markets and a decrease in production expenses, for which purpose corporations endow huge amounts of money (transactional expenses) in the form of bribes, penalties, financing investigations, etc. An empirical analysis of data of western transnational corporations has showed that while having huge turnovers these corporations get a rather low margin of profit.
Medium and small businesses are represented by closed (nonpublic) companies, often family ones, with one or several owners. The main advantages of such companies, which favorably distinguish them from large business, are as follows: ability to discern a long-term prospect, a high level of responsibility, and trust, and flexibility in decision-making. In the period of a crisis, the least-effort principle becomes predominating in such companies, which helps them not only remain “afloat” under conditions of competition, but also show quite a good profitability. It is necessary to note that economizing occurs largely at the expense of a constant component of expenses, to which a considerable part of transactional expenses exactly relates.
Russian medium and small business has some features which, unfortunately, do not testify to its advantage. The historically formed features of Russian economy and of the private sector disclose a number of problems about which it was stated in a report by the PWC company regarding an investigation of private and family business (PWC, 2012). Among them the following challenges are noted: an insufficient support from the state, disinterest of the state in such companies (as small taxpayers), a lack of tax privileges, an existence of high administrative barriers (checks on the part of various agencies, complicities faced during registration, etc.), an absence of highly qualified specialists in a number of branches. However, despite the above-said difficulties, there are many highly effective and successful representatives even among Russian companies of medium business.
An analysis of medium business in countries of Europe has showed that there is a multitude of quite effective companies, part of which has an access to the worlds commodity markets, and parallel to this they do their legal business. G. Simon's books “Hidden champions” (Simon, 1998, 2007) describes middle-scale companies which are world leaders in their areas and which are successful and profitable thanks to their high intellectual concentration in their work with clients, a lack of extensive expenditures on promotion and advertising. These companies possess unique structures and principles of management. Among them there are Baader, Webasto, Stihl, Brita, etc. One of the most important characteristics of these companies is their narrow specialization and concentration in a certain grocery niche. It enables companies occupy upto 70-80% of the market, which can be comparable only to large transnational giants. As a rule, these are companies with a turnover of upto 300 thousand dollars, having specialised business in various branches mechanical engineering, metal working, chemical, food, electronic industry, etc.
Transaction costs - costs of institutional support of business. Transaction costs appear in number of forms in corporations. Among them:
To measure the transactional expenses indicators of accounting reports of companies is used. An indicator of the level of transactional expenses does not reflect their actual volume in a company - the accounting of all arising transactional expenses is extremely difficult - but is an aggregated relative indicator enabling one to compare transactional expenses of certain economic entities. In order to assess the level of transactional expenses, uses data of accounting reports of companies. Out of these records the calculation includes both factually incurred expenses (for example, business and other expeditures, etc.) and relative indicators which indirectly indicate an existence of transactional expenses (the duration of a turnover of assets, a share of reserves in assets).
The results of accessing of transaction costs level presented on slides. The level of transactional expenses of large companies throughout the whole studied period (2004-2012) practically twice as much exceeded this indicator in the event of medium-sized companies. It is important to compare efficiency indicators (profitability of sales) for the companies and their transaction costs. The value of profitability of medium-sized companies was insignificantly lower than the similar indicator in the event of large companies (by 2-3%). And on the average, this indicator did not exceed 9% for the branch in the studied period. After 2010, profitability of medium-sized companies somewhat exceeded that of large companies, which may testify to the fact that medium-sized companies got out of the crisis more successfully.
And if one takes into account the fact that medium-sized and small companies generally incur only the most necessary expenses, then it is probable to assume that these are the very transactional expenses without which the efficiency of a company will fall. On the other hand, large corporations often “inflate” the budget of their expenses on non-productive needs, which tells negatively on their results.
So the form of ownership and the size of a company play an important role in the formation of the structure of expenses, which further determines the size of profit. In companies, where property and supervision are not separated (as a rule, in medium business), the existence of market competition stimulates managing directors to economize on expenses. But in large corporations (especially public companies) a lack of rigid supervision on the part of owners demotivates managers to decrease expenses. As a result, such corporations show efficiency at the level of medium-sized companies, in this case they bear twice as big transactional expenses alone (and this is so even without considering that share of incomes, which hired managers stow away “in a shadow”).
In large corporations, considerable transactional expenses arise due to a need of implementing the following expenses:
1. enormous expenses on marketing and advertising;
2. expenses associated with an entrance of companies to stock markets;
3. high costs of maintaining institutions of corporate governance;
4. high expenses on hiring and personnel training;
5. costs of making illegal transactions (by managers both in relation to a corporation, and with regard to the state and society).
Unlike large corporations medium-sized companies economize on transactional expenses for a number of reasons:
1. companies incur rather low expenses on marketing;
2. companies do approach the stock market and have no expenses connected with it (besides, this reduces risks of unfriendly take-overs);
3. companies strive to draw highly qualified specialists and maintain low turnover rate of personnel, therefore expenses on hiring and training of personnel are low;
4. low costs of corporate governance.
Thus, small and medium business actively uses economizing factors with respect to transactional expenses and demonstrates an efficiency at the level of large corporations which, in their turn, are compelled to bear a huge burden of expenses for maintaining this level.