Integrating transaction cost and institutional theories in an emerging market context: the case of the Tiger Leaping Gorge, Southwest China

Abstract

The aim of this thesis is to explore the applicability of transaction cost theory to an emerging market context, and to complement it with institutional theory to achieve a closer fit. The research questions are: (1) Which causes of high transaction costs are perceived by firms in the research site? (2) How do they respond to these costs? The responses could range from internalisation, through cooperation, to the new concept of trading isolation, which is the first of two observed gaps in the literature. (3) Could an institutional perspective help to explain firms’ responses, if they differ from what is expected by theory? The consideration of informal institutions with regard to transaction costs in China addresses the second observed gap in the literature, which focuses mostly on formal institutions. Despite the strengths of transaction cost theory in identifying sources of friction in exchange and proposing resolutions, it has been criticised for making assumptions concerning behaviour and the strength of formal institutions that reduce the degree to which it applies in non-Western, emerging market research contexts. This thesis explores these limitations in the context of the inbound tourism sector in the Tiger Leaping Gorge, in rural Yunnan Province, Southwest China. The author’s exploratory study had suggested that some of these firms attempted to reduce transaction costs by decreasing the number of transactions conducted, resulting in their relative isolation from – rather than integration into – a trading network. This hinders the firms’ ability to develop and specialise, limiting their contribution to local economic growth in this relatively undeveloped region of China. In the principal field study, qualitative data were collected through interviews conducted with the proprietors of the population of tourism firms in the research site. The interviews sought to understand the transaction costs the proprietors perceived, their views of institutional strength or weakness (in areas including local government, legal system, financing, development of trust, kinship, guanxi and networks), and the ways they organised their firms. The data were explored first with a thematic analysis, then by coding into fuzzy sets for analysis with the Qualitative Comparative Approach to help identify causal associations between transaction costs, institutions, and responses of isolation from or integration into the market. The main causes of transaction costs were found to be opportunism, uncertainty and bounded rationality. High transaction costs were generally associated with a response of isolation, but they were not the sole causal factor: every isolated firm reported weak informal institutions combined with a variety of transaction cost and formal institutional conditions. The difficulty of establishing new trust relationships increased the isolation of the worst-affected firms, in an environment where weak formal protection from transaction risks confined many firms to personal exchange. A recommendation for local practice is made for firms to attempt to broaden the networks within which they develop trust, to reduce the constraint of personal exchange and consequent isolation. Two policy recommendations are made that could apply here and in emerging markets more generally: a mainstream recommendation to strengthen the enforcement of formal institutions, aiming to facilitate rule-based, impersonal exchange based on generalised trust, and an alternative approach deriving recommendations from the local context and including the consideration of informal institutions. This thesis contributes to theory by highlighting the critical influence of informal social structures on the cost and extent of exchange, and adapting transaction cost theory to better apply to this institutional context. It also constitutes a novel application of the Qualitative Comparative Approach to interview data.