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Functionalism Revisited: A practice based Functionalism
Unformatted Document Text:  Functionalism Revisited 5 Assumptions and Critics As discussed before, TCE assumes that information attained by the economic actors is not always perfect, which casts uncertain situations. Furthermore, an actor has limited capacity of information processing and communication ability, which is often identified as “bounded rationality.” Uncertainty comes from two organizational contexts – environmental and behavioral uncertainty. The consequence of the first is an adaptation problem. For instance, the firm might find difficulties in modifying the agreements or conditions of transaction under competitive market environment. Unless a comprehensive contract is devised beforehand, which also accrues costs, the firm may assume a significant amount of costs associated with the renegotiation. Behavioral uncertainty is related to the performance evaluation. The firm may find a constant need to affirm whether the contracted party (or employee in the organizational setting) abides by the established agreement. This may involve significant monitoring costs. This problem is also related to another behavioral assumption – opportunism. Opportunism refers to the assumption that an actor may unscrupulously seek to serve self-interests. Williams defines it as “self-interest seeking with guile” and illustrates that it may includes lying, cheating, or a subtle forms of deceit (1981a). However, a more problematic situation may occur if opportunism occurs in conjunction with asset specificity problems. Asset specificity refers to the degree to which certain values are limited outside of a specific transaction. If a firm acquires a specific knowledge or know-how from the continuation of a transaction, the firm may exert its influence over the other parties by indicating the possibility of using its know-how somewhere else. For example, a manufacturer might have invested a significant amount of resource in training its distributing party in order to provide valuable customer services. The distributor might attempt to exploit the situation later by demanding additional benefits just because it knows that replacing the distributing line requires the firm to pay significant amount of training cost. As the assumptions suggest, the dominant area of employing TCE has been organizational vertical integration, focusing on integration into suppliers or distribution channels, vertical interorganizational relations, and horizontal relations; and testing the relative constructs against various dependent variables. For example, studying the sales force in the U.S. electronic component industry, Anderson (1985; 1988) has developed measurement of (human) asset specificity, and found that higher levels of human (employee) asset specificity are positively related to opportunistic behavior. Heide and others also found that asset specificity is positively related to the various types of organizational behaviors (Heide & John, 1988, 1990, 1992). For example, Heide and John (Heide & Miner, 1992) found that buyers’ investment in specific assets had a positive influence over suppliers’ decision making when both share the same kind of norms. They (Heide & John, 1990) also found that both parties’ (manufacturers and suppliers)

Authors: Kim, Hyo.
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Functionalism Revisited 5
Assumptions and Critics
As discussed before, TCE assumes that information attained by the economic actors is not always
perfect, which casts uncertain situations. Furthermore, an actor has limited capacity of information
processing and communication ability, which is often identified as “bounded rationality.” Uncertainty
comes from two organizational contexts – environmental and behavioral uncertainty. The consequence of
the first is an adaptation problem. For instance, the firm might find difficulties in modifying the
agreements or conditions of transaction under competitive market environment. Unless a comprehensive
contract is devised beforehand, which also accrues costs, the firm may assume a significant amount of
costs associated with the renegotiation. Behavioral uncertainty is related to the performance evaluation.
The firm may find a constant need to affirm whether the contracted party (or employee in the
organizational setting) abides by the established agreement. This may involve significant monitoring
costs. This problem is also related to another behavioral assumption – opportunism. Opportunism refers
to the assumption that an actor may unscrupulously seek to serve self-interests. Williams defines it as
“self-interest seeking with guile” and illustrates that it may includes lying, cheating, or a subtle forms of
deceit (1981a). However, a more problematic situation may occur if opportunism occurs in conjunction
with asset specificity problems. Asset specificity refers to the degree to which certain values are limited
outside of a specific transaction. If a firm acquires a specific knowledge or know-how from the
continuation of a transaction, the firm may exert its influence over the other parties by indicating the
possibility of using its know-how somewhere else. For example, a manufacturer might have invested a
significant amount of resource in training its distributing party in order to provide valuable customer
services. The distributor might attempt to exploit the situation later by demanding additional benefits just
because it knows that replacing the distributing line requires the firm to pay significant amount of
training cost.
As the assumptions suggest, the dominant area of employing TCE has been organizational vertical
integration, focusing on integration into suppliers or distribution channels, vertical interorganizational
relations, and horizontal relations; and testing the relative constructs against various dependent variables.
For example, studying the sales force in the U.S. electronic component industry, Anderson (1985; 1988)
has developed measurement of (human) asset specificity, and found that higher levels of human
(employee) asset specificity are positively related to opportunistic behavior. Heide and others also found
that asset specificity is positively related to the various types of organizational behaviors (Heide & John,
1988, 1990, 1992). For example, Heide and John (Heide & Miner, 1992) found that buyers’ investment
in specific assets had a positive influence over suppliers’ decision making when both share the same kind
of norms. They (Heide & John, 1990) also found that both parties’ (manufacturers and suppliers)


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