Transaction cost economics and the roles of national culture: a test of hypotheses based on Inglehart and Hofstede

Transaction cost economics (TCE) is probably the most widely accepted theory on how firms can gain competitive advantage through efficient organization of their economic transactions. However, by focusing on the competitive environment in which companies operate, it abstracts from the cultural context in which governance decisions are made. We study the cultural boundedness of TCE using two seminal cultural theories: the political science/sociology framework of Inglehart and the management science framework of Hofstede. We use these theories to develop (main-effect) hypotheses about the cultural contexts in which TCE has higher predictive power as well as (interaction) hypotheses regarding particular cultural contexts that may inherently be more inclined than others to adopt certain non-market governance modes if the market “fails.” Hypotheses are tested using a meta-analysis on data collected from 128 studies from 12 countries on 3 continents, representing governance decisions of 60,926 companies. We find that TCE is a universal theory across all cultural contexts. This being said, we find that in societies low on power distance and in societies characterized by a strong emphasis on secular-rational and self-expression values, companies are more strongly guided in their governance decisions by economic, transaction-cost considerations than companies in societies high on power distance and in countries that are characterized by traditional and survival values. Further, TCE’s power to predict the specific type of non-market governance employed by the firm is systematically moderated by the national culture in which the firm operates. The power of TCE for predicting hierarchical governance is higher in countries that rate high on secular-rational values and on uncertainty avoidance and low on long-term orientation, whereas TCE is more diagnostic for predicting relational governance in countries high on self-expression values and low on power distance and on uncertainty avoidance. In sum, our meta-analysis provides support for our thesis that to fully understand governance choices made by firms, we need to integrate TCE and cultural theory. While managers around the world are guided by economic considerations, the cultural context in which they operate exerts a substantial—and predictable—contingent effect on their governance choices.