The ‘Theory of the Firm’ consists of several aspects such as behaviour, structure, and relationship of companies in a market (Tsui, 2006). The Chinese firms which are capable of producing rare minerals or military arms have been utilising this technique very efficiently. The existence of a Chinese firm in the world market, decentralisation policies of the firms, size of the firms, and the internal equations are responsible for a flourishing Chinese export market.
USA has to be extremely vigilant in order to compete which the growth of Chinese companies at a rate of 12% per year (China Manufacturing – Facts, n.d.). The manufacturing industries and the mineral corporations are producing goods in a non-market environment which increases the efficiency. The price market system basically hinders the cost effectiveness of a firm so the ‘theory of the firm’ states that the decisions regarding the labour hiring and payments must be done on a long term basis (Tsui, 2006).
The different aspects of ‘theory of the firm’ such as transaction cost theory, behavioural theory, managerial theory are playing an important role in the world market dynamics (Chow, 2007). The Chinese firms have been implementing the cost effective theories to ultimately reduce the overall operational costs of the firm and thus the production of the Chinese companies is challenging the world powers such as USA and European countries. The power of a firm should lie on the shoulders of the management much more than the shareholders, and that is exactly what the ‘theory of the firm states’. China is a socialist country and so the nationalisation of the production area has been attained through tough measures. This not only enhanced the production of the country but made it the 4th largest producer of goods (China Manufacturing – Facts, n.d.).