eWork and Regional Development: Background

Value chains and transaction costs

Modern economies consist of a complex system of value chains linking together the different steps in the economic process, so that each step adds new value to the whole process. For example, traditional steps include extraction, transporting, refining, transporting, production, transporting, assembly, transporting, consumption, etc. A basic hypothesis is that, whilst the Industrial Society was based on the use of technologies in specific steps in such a chain, in the Information Society, technologies (especially ICT) are used, in principle, in all steps of the value chain and (perhaps more important), in all transactions between the steps, such as management, marketing, administration, sales, R&D, etc. (Porter, 1985)

This can lead to the adoption of a flexible specialisation strategy, in which ICT enables new links between different steps, or functions, of a value chain, and new linkages between different chains, to be established. For example, the introduction of ICT may lead to vertical disintegration of the chain, so that one or more links in the value chain may be geographically removed from existing locations.

Important in understanding these changes is the concept of transaction costs, ie the costs of executing economic transactions either inside organisations or through outsourcing to other organisations. Transaction costs can fall sharply when ICT is introduced, thus making it cheaper to geographically concentrate certain functions within a group or network of companies, or to outsource such functions to a highly specialised unit or firm. By serving a large number of companies, such a unit or firm can achieve higher levels of productivity through specialisation, compared to a situation where these functions are separately retained in-house by each company (Williamson, 1986a and 1986b). In these cases, even though the business functions may be geographically separated, the ‘glue’ holding them together is ICT.

Identifying the optimal conditions for success in each link in a value chain and matching these to local resources can offer a way of identifying a niche in the global market.

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