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The basic concept of transaction cost theory is that firms like to conduct transactions in a channel with lower transaction costs. Therefore, the purpose of this paper is to use the transaction cost perspective to identify which conditions cause companies to choose between outbound open innovation (hierarchy governance) and inbound open innovation (market governance).

Accordingly, transaction cost economics was used to relate the choice and implementation of open innovation using a sample of 250 electronics and information start-ups in China. Structural equation modeling was used to conduct confirmatory factor analysis to evaluate measurement model, while logistic regression analysis was used to test the hypotheses.

As expected, the dedicated asset specificity, human asset specificity, behavioral uncertainty, transaction frequency, and small number exchange were positively associated with outbound open innovation.

The contribution of this paper lies in explaining the role played by transaction cost economics in the process of open innovation for start-ups through empirical analysis.