China is lowering transaction costs for greater innovation

A century ago, prevailing microeconomic theories defined economies as a continuous flow of spot transactions between individual buyers and sellers.

But Nobel laureate economist Ronald H. Coase observed in the 1930s that, in practice, market economies are organized into firms, which consist of individuals coming together to conduct economic activities according to plans and priorities set by management. The reason, he concluded, is that market transactions are not without costs and firms are better equipped than individuals to minimize those costs.

As any multinational well knows, the reduction of transaction costs not only leads to higher profits, it also facilitates greater investment back into the firm. Many companies — especially technology giants, such as Apple and Huawei — direct a significant share of such investments toward research and development in order to produce more profitable innovations.