Why might firms prefer internal organization over market reliance according to Transaction Cost Theory?

Firms may prefer internal organization over market reliance due to the desire to reduce dependency on external entities. Transaction Cost Theory posits that organizations face costs associated with using the market to obtain services and goods, such as negotiating contracts, monitoring performance, and enforcing agreements. By internalizing processes and resources, a firm can minimize these transaction costs associated with dependence on external suppliers or partners.

When a company controls its operations internally, it can streamline decision-making, safeguard proprietary information, and ensure a consistent supply of inputs tailored to its specific needs. Furthermore, reduced dependency on outside agents can lead to enhanced security and reliability in operations, making it easier to align resources with strategic goals without the disruptions that might arise from market fluctuations or changes in supplier reliability.

Ultimately, this strategic decision to internalize operations can contribute to greater efficiency and a stronger competitive position in the marketplace.