1.1 BACKGROUND TO THE STUDY
Economic development of countries is
shaped by the way they evolved. Although, transaction and production
cost is determined by their level of technological advancement and
industrialization. In this light, this study is examining the
relationship between the transaction costs and economic development in
A transaction cost is a cost incurred in
making an economic exchange of some sort, or in other words the cost of
participating in a market. Transaction costs can be divided into search
and information costs, bargaining costs and policing and enforcement
costs (Klaes, 2008). Search and information costs are costs such as in
determining that the required good is available on the market, which has
the lowest price, etc. Bargaining costs are the costs required to come
to an acceptable agreement with the other party to the transaction,
drawing up an appropriate contract and so on. On asset markets and in
market microstructure, the transaction cost is some function of the
distance between the bid and ask. Policing and enforcement costs are the
costs of making sure the other party sticks to the terms of the
contract, and taking appropriate action (often through the legal system)
if this turns out not to be the case. For example, the buyer of a used
car faces a variety of different transaction costs. The search costs are
the costs of finding a car and determining the car''s condition. The
bargaining costs are the costs of negotiating a price with the seller.
The policing and enforcement costs are the costs of ensuring that the
seller delivers the car in the promised condition (Dahlman, 2009).
The term transaction cost is frequently
thought to have been coined by Ronald Coase, who used it to develop a
theoretical framework for predicting when certain economic tasks would
be performed by firms, and when they would be performed on the market.
However, the term is actually absent from his early work up to the
1970s. While he did not coin the specific term, Coase indeed discussed
costs of using the price mechanism in his 1937 paper, The Nature of the
Firm, where he first discusses the concept of transaction costs, and
refers to the "Costs of Market Transactions" in his seminal work, The
Problem of Social Cost (1960). The term "Transaction Costs" itself can
instead be traced back to the monetary economics literature of the
1950s, and does not appear to have been consciously ''coined'' by any
particular individual (Kissell and Glantz, 2003).
Transaction costs are not only the
obvious cases of buying and selling, but also day-to-day emotional
interactions, informal gift exchanges, etc. According to Williamson
(2001), the determinants of transaction costs are frequency,
specificity, uncertainty, limited rationality, and opportunistic
behavior. At least two definitions of the phrase "transaction cost" are
commonly used in literature. Transaction costs have been broadly defined
by Cheung (2007) as any costs that are not conceivable in a Robinson
Crusoe economy. In other words, it can be defined as any costs that
arise due to the existence of institutions. For Cheung (2007), if the
term transaction costs were not already so popular in economics
literatures, they should more properly be called institutional costs
(Cheung, 2007). But many economists seem to restrict the definition to
exclude costs internal to an organization (Demsetz, 2003). The latter
definition parallels Coase''s early analysis of "costs of the price
mechanism" and the origins of the term as a market trading fee that can
determine economic development.
For the purpose of economic development,
it is important to understand the kind of institutions and factors
(firms, markets, franchises, etc.) that minimize the transaction costs
of producing and distributing a particular good or service. Often these
relationships are categorized by the kind of contract involved. Amount
of transaction cost is dependent on the type of contract involved.
1.2 STATEMENT OF THE PROBLEM
From time immemorial, the impact of
transaction costs on economic development was limited to an
acknowledgement of their influence on the decisions of firms between
market and internal procurement (Coase, 1937). Nowadays, theoretical and
empirical studies suggest that transaction costs are critical in
explaining not only the organizational structure of firms, but the
composition of industries and market emergence and functioning. As a
result, they are present not only in the industrial organization or
economics of the firm literature but in the development economics
literature as well. Nevertheless, there seems to be significant
differences between how transaction costs have been assessed depending
on the assumptions made about the degree of economic development in
which firms are circumscribed. Hence, the need for this study on
transaction costs and economic development in Nigeria.
1.3 OBJECTIVES OF THE STUDY
- To examine the relationship between the transaction costs and economic development in Nigeria.
- To determine the impact of transaction costs on economic development of Nigeria.
- To analyze the factors influencing transaction cost in Nigeria.
1.4 RESEARCH QUESTIONS
- What is the relationship between the transaction costs and economic development in Nigeria?
- What is the impact of transaction costs on economic development of Nigeria?
- What are the factors influencing transaction costs in Nigeria?
HO: there is no significant relationship between the transaction costs and economic development in Nigeria
HA: there is significant relationship between the transaction costs and economic development in Nigeria
1.6 SIGNIFICANCE OF THE STUDY
The following are the significance of this study:
- The results from this study will educate the entrepreneurs and
financial policy makers in Nigeria and the general public on the role of
transaction costs and an effective tool in enhancing economic
development in Nigeria.
- This research will be a contribution to the body of literature in
the area of the transaction costs and economic development in Nigeria,
thereby constituting the empirical literature for future research in the
1.7 SCOPE/LIMITATIONS OF THE STUDY
This study is limited to the
manufacturing sector of the Nigeria economy. It will also cover the
relationship between transaction costs and economic development in