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Functionalism Revisited: A practice based Functionalism
Unformatted Document Text:  Functionalism Revisited 3 information/communication technologies, organizations nowadays set more concrete forms of templates as guidance of their business practices. Theories Rational Individual Model Rational individual model emphasizes individual and organizational (fully and partially) rationalized decision making, which resembles methodological individualism. Generally the approach is not concerned with environmental or systematic structural influences on individual actions since it focuses on individual attributes or rationalized choice as a compelling cause of organizational and economic behavior. Approaches in this model – e.g., Transaction Cost Economics (TCE) and Principal Agency Theory (PAT) -- have been utilized in studies of interorganizational relations and organizational structures. According to the model, a firm’s entering into interorganizational relations is an organizational choice of governance structures (Rindfleisch & Heide, 1997; Robins, 1987). This view basically addresses the problems of the firm dealing with interdependent relations and points out that that the firm should gain control over its internal and external environments. The problems of internal control focus on the firm’s hierarchy and motivation of employees. The problems of external control involve the management of interdependent relations with other types of firms (competitors, suppliers, capital markets, etc.). Management of stable, predictable relations with other firms is considered as the ultimate goal of the firm. This interdependency is not a unilateral problem. Rather, it involves various facets of coordination such as agency costs, transaction costs, power, population density, information, trust, knowledge, technology, and so on. TCE and PAT particularly pay attention to the first two elements – transaction costs and agency costs; and they are oftentimes labeled as approaches in New Institutional Economics (NIE). New Institutional Economics: Transaction Cost Economics and Principal Agent Theory In general, neoclassical economics theory views the firm as a producing function. It assumes that the firm processes non-problematic, often described as perfect, information about resources and markets, and operates in competitive product markets. NIE, on the other hand, sees the firm as a mechanism of governance (Barney & Hesterly, 1996; Fligstein & Freeland, 1995). One source of the earlier works of NIE is the work of Coase (cited in Williamson, 1996; Swedberg, 1991). He argues that a particular organizational structure emerges while controlling “transaction costs” which involves entering markets, seeking out suppliers, negotiating goods and services, and building and enforcing contractual agreement. Coase suggests that if the costs involved in such transaction activities in the market exceed the costs of doing the same transaction internally, the firm would internalize the process. From this view, the firm with minimal setup is a starting point of efficiency over market.

Authors: Kim, Hyo.
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background image
Functionalism Revisited 3
information/communication technologies, organizations nowadays set more concrete forms of templates
as guidance of their business practices.
Theories
Rational Individual Model
Rational individual model emphasizes individual and organizational (fully and partially)
rationalized decision making, which resembles methodological individualism. Generally the approach is
not concerned with environmental or systematic structural influences on individual actions since it
focuses on individual attributes or rationalized choice as a compelling cause of organizational and
economic behavior. Approaches in this model – e.g., Transaction Cost Economics (TCE) and Principal
Agency Theory (PAT) -- have been utilized in studies of interorganizational relations and organizational
structures. According to the model, a firm’s entering into interorganizational relations is an
organizational choice of governance structures (Rindfleisch & Heide, 1997; Robins, 1987). This view
basically addresses the problems of the firm dealing with interdependent relations and points out that that
the firm should gain control over its internal and external environments. The problems of internal control
focus on the firm’s hierarchy and motivation of employees. The problems of external control involve the
management of interdependent relations with other types of firms (competitors, suppliers, capital markets,
etc.). Management of stable, predictable relations with other firms is considered as the ultimate goal of
the firm. This interdependency is not a unilateral problem. Rather, it involves various facets of
coordination such as agency costs, transaction costs, power, population density, information, trust,
knowledge, technology, and so on. TCE and PAT particularly pay attention to the first two elements –
transaction costs and agency costs; and they are oftentimes labeled as approaches in New Institutional
Economics (NIE).
New Institutional Economics: Transaction Cost Economics and Principal Agent Theory
In general, neoclassical economics theory views the firm as a producing function. It assumes that
the firm processes non-problematic, often described as perfect, information about resources and markets,
and operates in competitive product markets. NIE, on the other hand, sees the firm as a mechanism of
governance (Barney & Hesterly, 1996; Fligstein & Freeland, 1995). One source of the earlier works of
NIE is the work of Coase (cited in Williamson, 1996; Swedberg, 1991). He argues that a particular
organizational structure emerges while controlling “transaction costs” which involves entering markets,
seeking out suppliers, negotiating goods and services, and building and enforcing contractual agreement.
Coase suggests that if the costs involved in such transaction activities in the market exceed the costs of
doing the same transaction internally, the firm would internalize the process. From this view, the firm
with minimal setup is a starting point of efficiency over market.


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