A Multiple Case Study of the Effect of Social Capital on Transaction Costs of Small Enterprises in Sri Lanka

Market mechanism particularly in developing countries provides asymmetrical information which leads to create opportunism and bounded rationality that are the root causes to generate Transaction Cost (TC). Therefore, Small Enterprises (SEs) face serious difficulty in governing TC that discriminates particularly against SEs. Instead, SEs develop informal and personal relationships, inter-personal trust and norms (i.e. social capital) with external actors expecting information which facilitates SEs to minimize TC through the mitigation of opportunism and bounded rationality. Therefore, the paper attempts to study how does social capital facilitate to mitigate TC particularly in SEs in Sri Lanka? Case study method was mainly applied to collect data from six SEs purposively selected from Ratnapura District in Sri Lanka. Data was analysed employing directed approach to content analysis.Results of multiple case study show that SEs have ability to access low cost, reliable and quick information and information about exchange partners together with their reliabilities using their Social Capital (SC). Such information facilitates SEs to improve their rationality in decision making process. SEs usually get support from network members to assess information which leads to improve the rationality in decision making on transactions. Accordingly, SC on one hand facilitate SEs to access and assess information that affect the mitigation of bounded rationality and on the other hand provide information about exchange partners that helps SEs to mitigate opportunism. Thus, SC affects the decrease of TC of SEs through the improvement of access and assess information which lead to mitigate bounded rationality and opportunism.