Investigation of Chinese export trading companies: integrating institutional perspective into transaction costs analysis
Abstract
Trading companies have played and continue to play significant and strategic roles in
international trade, supporting the export of manufacturers and the import of
purchasing companies. The transaction costs economics, indicated that the role of
trading companies is reducing the transaction costs during export. However, the rise
of transition economies, such as China, which has become one of the most important
players in international trade, leads to two gaps in existing studies. First, the trading
companies from these countries and regions have been kept as a “black box”,
compared with relative numerous studies on developed countries. Second, the local
institutions, which are considered as main determinants on business models in
transition economies, are most likely to affect the transaction costs during export,
and trading companies’ characteristics and their methods of reducing transaction
costs.
Therefore, the aims of this study were to explore these institution-related transaction
costs in China’s export market, and how Chinese ETCs operate one more efficient
indirect export market compared with one direct market between domestic
manufacturers and foreign buyers. Correspondingly, the main research questions
were: 1) what are the institutions, which generate transaction costs for domestic
manufacturers and foreign buyers, in China’s export market? And 2) how do Chinese
exporting trading companies respond to such institution-related costs as an
intermediary between domestic manufacturers and foreign buyers.
A qualitative multiple-case approach was chosen. Six Chinese ETCs were selected,
with their export processes as embedded units. The main sources of data included
semi-conducted interviews and in-depth field observation. In addition, secondary
data, such as newspapers, industrial reports, also contributed to the context of the
cases.
With one integrative analytical framework, this study identified a couple of
institutional constraints in China’s export markets, including the bureaucratic
procedures and administrative approvals, inefficient legal system and informal
contract obligation, and long-term OEM trading methods. These institutions were
involved in the whole procedure of export transaction, from the manufacturing by
domestic manufacturers to the purchase by the foreign buyers and generated
additional transaction costs in different steps, ranging from search, negotiation, to
enforcement.
Even though the transaction costs were greatly increased because of the export-related
institutional constraints, the findings further reveal that Chinese ETCs can
reduce these institution-related transaction costs by a series of effective methods,
such as acquirement of knowledge on administrative procedures, collection of
information on production, vertical integration, offering supplementary functions for
dysfunctional domestic manufacturers and so on. The relevant explanations are
twofold. As explained in traditional economic theories, Chinese ETCs’ also relied on
economies of scale to reduce institution-related transaction costs. Moreover, Chinese
ETCs adopted some approaches affiliated to export-related institutions, such as long-term
reselling system and monopoly of export authority in history in China’s export
market, and this is the first time that institutional perspective were applied to explain
the transaction behaviour of trading companies.
To sum up, this study extends our understanding of Chinese export trading
companies and export-related institutions in China’s export market, enhances
traditional transaction costs analysis on trading companies by adding the perspective
from foreign buyers, and integrates institutional perspective into transaction costs
analysis to better explain ETCs’ business model in transition economies. Last but not
least, the findings in this study are also helpful for practitioners and policy-makers
from transition economies in order to improve their export performance and local
export-related institutional arrangements.