Formal Contractual Agreements : An Exploratory Assessment of Transaction Cost Theory from Emerging Markets Perspective

This study aimed at exploring how formal contractual agreements are predicted by Transaction Cost Analysis (TCA) theory using firms from emerging markets. The setting of this study was Tanzania. Dependent variable was formal contractual agreement, while performance ambiguity and buyer asset specificity were used as key predictor variables. The study was conducted through surveying which included small, large and medium enterprises. N = 150 firms involved and all of them were engaging in to business-business relations (buyer-seller relations). The response rate was about 65%. Data analysis used ordinary least square regression analysis. This study found out that asset specificity still had strong determination on formal contractual agreement. Performance ambiguity itself found not to have significant positive effect on formal contractual agreement but its effect was dependent on asset specificity i.e. the interaction between asset specificity and performance ambiguity influence positively on formal contractual agreement. These findings do not contradict with other empirical studies from developed economies. This suggests the possibility for extending TCA theoretical predictions to firms in emerging markets, especially at this time when there is growing need for outsourcing in these markets. Again this has to take into account other variables like nature of firm, institutional and cultural differences. Such variables have not been used in this exploratory study