The Transaction Cost Approach to New Forms of International Investment (NFII)

“It can be assumed that the distinguishing mark of the firm is the supersession of the price mechanism.” (COASE 1937:389). This is a very pragmatic position and does not mean that the existence of firms is a response to market failures. Rather “the main reason why it is profitable to establish a firm would seem to be that there is a cost of using the price mechanism.” (COASE 1937:389). In other words, the utilization of the market simply has its own costs. ALIBER (1983:248) argues that COASE has identified the motive for a firm’s growth: “Firms expand and grow because the costs of avoiding the use of the market are less than the costs of using the market.”