Self-Expansion or Internalization as the Two Processes of Vertical Integration: What Informs the Decision?

In vertical integration literature, the two processes leading to vertical integration, namely, (1) self-expansion of the scope of activities based on internal capabilities and (2) internalization of activities with external capabilities have not been distinguished. However, using internal capabilities or incorporating external capabilities is an alternative decision for managers and distinguishing them is crucial in practice. The purpose of this study is to distinguish self-expansion separated from internalization and to explain systematically when they likely occur. This study develops a unique vertical integration model by integrating transaction cost economics and the capability approach. With the model, we systematically analyzed the occurrence of (1) self-expansion and (2) internalization. Results reveal that the firm prefers self-expansion to internalization if it is easy to build the capabilities internally or difficult to procure them from outside the firm and if the costs of acquiring a firm or business with the required capabilities or the governance costs of the activities with external capabilities are high and vice versa. Our model leads to more understanding of vertical integration.

Effects of Fiscal Decentralization on Garbage Classifications

China has been promoting garbage classification in its rural areas, yet it lacks financial appropriation and fiscal decentralization to support waste processing projects. Though the existing literature has suggested fiscal decentralization strategies between different local government levels, few of the studies ascertain garbage classification efficiency from a quantitative perspective. To bridge the gap, this study examines the optimal fiscal decentralization strategies for garbage classification. It uses an optimization model while considering decision makers’ requirements regarding the fund allocation amounts at different government levels and the classification ratios in villages as constraints and decisions, respectively. A three-stage heuristic algorithm is applied to determine optimal landfill locations and efficient classification ratios for the garbage processing system in rural China, with an analytical discussion on the propositions and properties of the model. Our analytical results suggest that 1) the theoretically optimal solution is conditionally achievable, 2) the applied algorithm can achieve the optimal solution faster when the relationship between governance costs and classification ratios reaches some mathematical conditions, and 3) there is always a potential for increasing the retained funds between different government levels or for reducing the total appropriation from the county government. The numerical experiment on a primary dataset from 12 towns and 143 villages in the Pingyuan county of Guangdong province, China, does not only affirm the qualitative results, but it also provides insights into the difficulties encountered during the implementation of the garbage classification policy in China’s rural areas.

Environmental Governance Cost Prediction of Transportation Industry by Considering the Technological Constraints

In order to solve the problem of environmental governance investment planning in the transportation industry, a cost prediction model is proposed under technological constraints, where the input output indictors emphasizes the flexibility of prediction and its characters are asymmetric, while the constructs of prediction model focuses on the standardization and its characters are symmetrical. The basic principle of the cost prediction model is based on an extended belief rule-based (EBRB) system to model the input-output relationship in investment planning, and a parameter learning model to improve the accuracy of the EBRB system. Additionally, the technological innovation factors are also embedded in the cost prediction model to investigate the influence of technology-related outcomes on investment planning. Finally, based on the data of environmental governance in China’s transportation industry from 2003 to 2016, the cost of transportation industry environmental management in China’s thirty provinces from 2017 to 2033 is predicted under the constraints of technological innovation. Results show that: (1) the accuracy of the proposed cost prediction model is higher than some existing cost prediction methods; (2) the predicted environmental governance costs have a significant regional difference; (3) the upgrading of technological innovation is conducive to saving the future environmental governance costs of the transportation industry in some provinces. In addition to the above results, the present study provides model supports and policy references for government decision makers in transportation industry-related environmental cost planning.

From Hybrid Organizations to Social-purpose Hierarchies: Toward a Transaction Cost Economics of Social Enterprises

Building on Oliver E. Williamson’s work, this article lays the basis for a transaction cost theory of social enterprises. It is submitted that the more proprietary-centred the creation of value is, the lower the governance costs of economizing on bounded rationality to protect patrons from the hazard of opportunism. Since not all productive activities can be organized within the range of the lowest governance costs, a discrete structural analysis is developed, with different ranges of governance costs suitable for different purposes depending on the kinds of value creation intended and the class of patrons to be protected. Accepting higher governance costs is justified by preventing the exploitation of bargaining asymmetries at the expense of selected classes of patrons like disadvantaged customers and stakeholders at large, subject to what is feasible, or Williamson’s remediableness standard. JEL: D23, M14

Russia: Russia’s response to terrorism in the twenty-first century

The chapter explores how, despite earlier counterterrorism failures and two bitter wars in Chechnya, terrorism in Russia has declined in the 2010s. The Islamist-separatist terrorism problem that used to dominate national politics was degraded to a relatively peripheral issue that hovers at a level of persistent, but low-scale and increasingly fragmented violence, primarily in the North Caucasus. However imperfect, interim and incomplete, a ‘solution’ that has worked out in the Russian case was not ‘war’. This ‘solution other than war’ was made possible by certain developments outside Moscow’s direct control, such as the internal split within the insurgency catalyzed by its increasing jihadization, and resulted from a combination of the policy of Chechenization, shifts in federal security strategy towards smarter suppression and prevention, and massive reconstruction and development assistance. While this solution is no substitute for addressing the underlying structural causes of violent extremism and has involved enormous security, financial, human rights and governance costs for the nation, these costs are much lower than the cost of war. This is seen as one of the key broader lessons to be gleaned from Russia’s response to terrorism. It also explains why Russia has a genuine interest in ensuring that this degree of stabilization and decline in terrorism of North Caucasian origin is not distorted or reversed by new destabilizing factors, including transnational influences and connections.

The Equilibrium Relationships between Performance-Based Pay, Performance, and the Commission and Detection of Fraudulent Misreporting

ABSTRACT We develop an agency model in which managerial information manipulation creates pooling and entails ex post costs internal and/or external to the firm. We examine the implications of the strategic interactions between shareholders (who set internal governance and managerial incentive compensation), the manager (who exerts effort and reports on its outcome), and an external regulatory authority or RA (who investigates for fraud and levies penalties ex post). When the RA cannot pre-commit to an ex post investigation strategy, a fraudulent equilibrium obtains if the firm's internal governance costs are sufficiently high. Consistent with (so far fairly scant) post-SOX empirical evidence, but the opposite of the implications of signal-jamming models and equilibria with pre-commitment, the model implies an increase in minimum internal governance standards or ex post fraud penalties (as with SOX) results in decreased equilibrium pay-for-performance sensitivity and firm performance.

Governance costs and the problems of large traditional co-operatives

During recent decades, there have been many failures among large and complex agricultural co-operatives with a traditional organizational structure, that is, with mainly collective governance and collective ownership. Many co-operatives have been converted into the so-called hybrid co-operatives, owned together with external financiers. This article applies governance cost theory to explain this development. The results show that members are not able to govern a collectively owned firm that is large and complex; members are thus reluctant to invest in co-operatives; and members do not perceive that co-operatives benefit them economically. Thus, strong leaders take control and non-member investors gain ownership and influence.