Transaction cost theory of the firm and community forestry enterprises

The share of production and processing acquired by community forestry enterprises (CFEs) in the forest products and service industries has increased considerably in developing countries. This paper is a review article that analyzes the importance of both vertical integration and governance of economic activity for communities aiming to benefit from commercial forestry. Transaction cost economic theory serves as a basis for the analysis. Organizational forms, also known as governance structures, set order and provide for mutual gain in commercial exchanges between parties. One of the most important tasks of economic governance is to reduce transaction costs stemming from opportunistic behavior from one or both of the transacting parties. Governance structures exist in a continuum with the market and the firm at opposite ends of the spectrum. A ‘firm-type’ organization is only one possibility in a continuum of enterprise governance structures. The Mexican experience with CFEs corroborates the existence of a range of governance forms that exhibit some of the characteristics described by TCE theory. The paper reflects on the transaction cost implications of these governance structures for a range of vertical integration levels in Mexican CFEs.