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Lower Transaction Costs for Greater Innovation

China’s special economic and cooperation zones bring together diverse economic actors to reduce transaction costs, attract talent, and foster entrepreneurship and innovation. But if they are to reach their full potential, access to global markets – and a stable world economy – are essential.

HONG KONG – A century ago, prevailing microeconomic theories defined economies as a continuous flow of spot transactions between individual buyers and sellers. But in practice, Nobel laureate economist Ronald H. Coase observed in the 1930s, 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 costless, 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.

In 2022, Apple’s R&D spending amounted to $26.25 billion7% of its total revenue, 57% of which came from overseas markets. Similarly, Huawei spent $21.95 billion25% of its total revenue, of which 37% came from overseas – on R&D. The benefits are enormous: according to Boston Consulting Group, the return on equity (ROE) for the world’s 50 most innovative companies surpasses that of the broader market by 3.3% per year.