Investigation of Chinese export trading companies: integrating institutional perspective into transaction costs analysis
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.