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E-commerce, transaction cost, and
the network of division of labour: a business perspective Heling Shi, Hayden Mathysen This paper examines the positive
impact of E-commerce on transaction efficiency that exist in market
exchange and within the firm. The E-commerce induced fall in transaction
costs is unleashing a revolution in the mode and conduct of market
exchange. The ease of information dissemination and the unique properties
of online trade have enabled more efficient and more informed market
behaviour. Understandably then, this smooth intermediary for the execution
of transactions has realised exponential growth. The decline in transaction
costs may well explain why, in the past few years, we have been observing
a spate of business restructuring characterised by vertical integration
and the concurrent phenomena of horizontal integration. Online trade
has also facilitated greater fluidity of labour exchange by eroding
the transaction costs that reside in the labour market. Moreover,
it is expected that E-commerce may fundamentally transform the nature
of international trade. 1. Introduction In the US and other industrialised
economies multinational conglomerates continue to dominate the economy.
The wave of corporate mergers and consolidations seemingly indicate
this trend may continue. Yet evidence exists of another phenomenon
that is emerging; these corporate leviathans are participating in
a spate of corporate downsizing and vertical disintegration. What
adds an element of paradox to this new phenomenon is that it is occurring
in an economy that has been booming for three years and expanding
for nine. After successive years of economic expansion since 1991,
the spate of corporate downsizing remains unabated. The paradoxical
incidence of downsizing in an economic boom has been explained away
by cyclical factors external to the economy such as an inflated dollar,
an Asian economic downturn and a Russian economic crisis. It is believed
these external factors may have fuelled the intensity of price competition
and cost cutting in the domestic economy, and thus has precipitated
a wave of downsizing. In early 1998, when cyclical induced downsizing
was highlighted in Business Week as the cause, it was also supplemented
by an explanation that firms expected slow profit growth throughout
1998. This supplementary explanation is advanced to reinforce the
conjecture that even the expectation of cyclical swings was enough
to initiate corporate downsizing during an economic boom. Research
by Budros (1999) supports this explanation. The attempt by many US
companies to enhance organisational efficiency and/or effectiveness
through downsizing has been discovered by Budros to be consistent
with expectations of poor growth prospects. However, in early 1998
Fortune¡¯s Business Confidence Index advances contradictory
evidence on expectations of growth and business confidence. Despite
tremors of an Asian downturn business confidence remained strong in
the early months of 1998. Given the contradictory evidence,
can expectations of slower growth satisfactorily explain why U.S.
corporations possess a renewed zest for downsizing? Probably not.
While the Asian downturn fuelled expectations of slower profit growth
and the Russian crisis dented business confidence in 1998, these concerns
were transitory and gradually paled into insignificance when U.S.
economic activity did not falter. In 1999, restructuring and downsizing
continued apace despite the boom. For instance, layoff announcements
were hitting record levels, which is evidence of business restructuring
(Melcher, 1999). Moreover, the American Management Association¡¯s
latest annual survey of nearly 1,200 major companies discovered that
in mid-1999 a quarter of respondents said they had actually downsized
in the prior 12 months (Koretz, 2000). The evidence suggests that structural,
and not expectational phenomena are at work, and these phenomena by
no means insignificant. Parallel to the spate of corporate downsizing
and vertical disintegration in the U.S. economy is the emergence of
the Internet Revolution. Net-driven growth is accelerating and may
well explain the structural transformation in the economy characterised
by a continuous wave of corporate downsizing. Not only are new online
firms entering the fray, but established brand name companies are
also embracing the net. The revolution of the Internet and the emergence
of E-commerce have induced companies to rapidly restructure their
operations to reach new operational efficiencies through their business-to-business
commerce over the Internet. The emergence of E-commerce has introduced
fundamental and dramatic changes to the way corporations conduct business.
For instance, consider the impact of the Net on supply and distribution
networks. The chief economist at Morgan Stanley Dean Witter, Stephen
Roach, calculates that the E-commerce combination of business-to-business
and business-to-consumer will reduce the labour force in the distribution
sector of the economy by 35% over the next five years. This works
out to be marginally more than a 1% increase in the overall corporate
profit share of GDP (Farrell, 2000). Due to a precipitous decline
in transaction costs from Internet based commerce it may be efficient
for firms to restructure themselves around E-commerce. The radical
transformations in the conduct of business entail fundamental restructuring
of existing operations, which may involve downsizing and vertical
disintegration. The intuition behind the impact of E-commerce on transaction
costs and the concomitant wave of vertical disintegration and downsizing
is illustrated formally by Liu and Yang (2000) research into the size
of the firm and transaction costs. As transaction efficiency is higher
in the exchange of intermediate goods than that for labour, then organising
division of labour between more specialised firms and individuals
is more efficient than organising division of labour within the entity
of the firm. Consequently, with the increase in the level of specialisation
of firms and the rise in the division of labour between micro-businesses
and individuals, average employment of firms decline. The dynamics
of this model receive empirical support. If it is relatively cheaper to
conduct transactions internally the size of the firm grows larger.
However, if it is relatively cheaper to conduct transactions between
separate firm entities, firms remain small or shrink. The advent of
E-commerce drives the transaction efficiency in intermediate goods
higher, reducing to cost of inter-firm exchange and hence precipitating
a wave of downsizing and vertical disintegration. Internet commerce
permits the instant and inexpensive sharing and dissemination of information
among many people in many locations (Malone and Laubacher, 1998).
Centralised decision-making and expensive bureaucracies necessary
to collate, process and disseminate information, and coordinate actions
within a large conglomerate have become outmoded and inefficient.
Micro-entities even on an individual level can effectively manage
themselves, as electronic networks enable fluid coordination and exchange
between independent micro-entities. E-commerce not only permits fluid
business-to-business exchange but the electronic network allow microbusinesses
to tap into the global reservoirs of information, expertise and financing
previously enjoyed by only large firms, whilst retaining the beneficial
attributes of leanness, flexibility and creativity of being small. Despite the spate of vertical disintegration the large industrial organisation continues to dominate the economy. The life of these conglomerates appears to be sustained by a concurrent wave of horizontal mergers and acquisitions. The last two years abound with many examples of horizontal merger mania. For example, British Airlines allies with American Airlines who in turn allies with US airways, Compaq buys Digital Electronic Corporation, Citibank merges with Travelers, Daimler Benz acquires Chrysler, etc. The phenomena of vertical disintegration and horizontal alliances/mergers are occurring simultaneously. The latter can also be attributed to the evolution of online technology, which has produced a decline in agency cost within a firm. With the introduction of intranet or email within the entity of the firm there is far greater fluidity and less distortion in information flows between the CEO and the firm¡¯s employees. No longer must important pieces of information flow through the distortionary filters of each successive hierarchical layer before reaching the CEO. Information flows directly from employees to the top layer of management, via the intranet, which raises the efficacy of management control and performance monitoring. The diseconomies of large-scale production attributed to agency cost are now attenuated or eliminated. The enhanced ability of managers to control conglomerates effectively without the significant agency cost diseconomies has enabled a spate of alliances, mergers and acquisitions. Horizontally integrated firms, utilising the technology of the intranet, do not incur the substantial transaction costs in monitoring the performance of their employees. This enables stronger returns to horizontal alliances and mergers. This paper investigates the impact of E-commerce on market exchange and transaction costs. Section 2 provides a theoretical foundation ¨C inframarginal analysis, to investigate the impacts of E-commerce on the network division of labour. Section 3 examines the prospects of E-commerce, particularly its prospects for exchange facilitation. Section 4 underscores the impact of E-commerce on the many transaction costs that exist in goods and services market and in labor exchange. It also unveils therelationship between E-commerce, transaction costs and business restructuring. Section 5 concludes the paper by presenting some broad forecasts for E-commerce. Download
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