Influence of Transaction costs and real options on firms’ own-or-rent decision for building resources in Mekelle, Ethiopia

Abstract

Commonsense suggests that buildings are the most primary resources that most organized business commends. Importance aside, firms however obtain building resources via two broad alternative paths or a combination of both: ownership and rental. Based on secondary data on 79 companies in Mekelle, Ethiopia, this paper investigates the influence of transaction cost and real option factors on firms’ own or rent decision for building resources. Empirical results suggest that both transaction cost and option factors have significant influence on firms’ own or rent decision. High asset specificity combined with sales uncertainty or high small numbers condition or high growth opportunities individually increase likelihood of ownership, while high sales uncertainty for firms’ products increase likelihood of rental.

Key words: transaction cost economics; real option theory; own-or-rent decision; business buildings