This paper is intended to propose a relationship-based theory of the firm (R’BT), an
alternative to the transaction cost theory. The R’BT takes relationship disharmony
(rather than transaction costs) as its basic unit of analysis of the nature of the firm, and
argues relationship disharmony derives from conflict of interests, a problem faced by
any human organizations; to reduce the conflict of interests, the best way is to
harmonize relationships by mutually accommodating or internalizing the other party’s
interests into its own consideration; the degree of harmony or disharmony in the
relationships will in turn determine the performance of the organization in question.
This paper provides a completely different explanation from the transaction cost
economics when addressing issues such like the existence, boundary and internal
organization of the firm. Also discussed are its implications for organizational
management and economy.
This paper argues that the existing four major theories of the firm, i.e., the transaction cost theory, resource-based view, the entrepreneurial theory, and the stakeholder theory, are all insightful yet partial because each of them has a particular focus on the phenomenon of the firm. To better understand the nature and behaviors of the firm, we need a comprehensive yet integrative theory. Toward this end, this paper proposes a relationship-based theory of the firm (R’BT) which claims that it is the relationships between the entrepreneur and other individuals or firms that determine the existence, boundary, internal organization and competitive advantage of the firm.