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Book part
Publication date: 20 June 2008

Alan M. Rugman and Alain Verbeke

Internalization theory explains the existence and functioning of the multinational enterprise. It contributes to understanding the boundaries of the multinational…

Abstract

Internalization theory explains the existence and functioning of the multinational enterprise. It contributes to understanding the boundaries of the multinational enterprise, its interface with the external environment and its internal organizational design. Much work in the international strategic-management sphere has unfortunately not taken on board internalization-theory thinking and lacks the insights provided by this comparative institutional approach. In this chapter, we show how well-known international strategic-management models could be enriched and their normative implications altered by adopting an internalizing-theory lens.

Details

International Business Scholarship: AIB Fellows on the First 50 Years and Beyond
Type: Book
ISBN: 978-0-7623-1470-6

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Article
Publication date: 15 June 2012

Alain Verbeke and Liena Kano

This paper seeks to demonstrate that internalization theory, as a “complete” theory of the firm, is particularly well equipped to analyze multinational enterprise (MNE…

Abstract

Purpose

This paper seeks to demonstrate that internalization theory, as a “complete” theory of the firm, is particularly well equipped to analyze multinational enterprise (MNE) regional strategies, thanks to its joint transaction cost economics and resource‐based foundations.

Design/methodology/approach

This paper builds on recent work by Wolf, Egelhoff, and Dunemann to show that internalization theory's predictions on MNE regional strategy are superior to those suggested by several other conceptual frameworks. For each of the 11 hypotheses formulated by Wolf and his co‐authors, an alternative is proposed here that is consistent with internalization theory predictions.

Findings

MNE regional strategy is an important empirical phenomenon. Internalization theory, as a powerful conceptual framework with general applicability, simplicity and accuracy, allows in‐depth analysis of MNE regional strategies.

Research limitations/implications

Internalization theory scholars need to find new ways of operationalizing MNE firm‐specific advantages (FSAs), as well as MNE resource recombination trajectories, to predict accurately when and how MNEs will pursue regional versus global strategies.

Practical implications

MNE senior management should rethink international expansion strategies and realize that most large MNEs actually pursue regional, not global strategies.

Social implications

Even the world's largest MNEs have great difficulty engaging in novel resource recombination across the globe, and their alleged market power should therefore not be overestimated.

Originality/value

International business scholars should embrace internalization theory as the general theory of the MNE, rather than looking for insight from theories not intended – nor properly equipped – to study strategies of the world's most complex entrepreneurial organizations.

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Article
Publication date: 9 September 2014

Peter J. Buckley

The purpose of this paper is to review the key analytical principles of internalisation theory as a general theory of the multinational enterprise (MNE). It illustrates…

Abstract

Purpose

The purpose of this paper is to review the key analytical principles of internalisation theory as a general theory of the multinational enterprise (MNE). It illustrates the vitality, relevance and flexibility of the approach in explaining the continued evolution of the MNE. As a grounded social science theory, it provides, in combination with history and economic geography, satisfying and novel explanations of the key phenomena of the modern globalising economy.

Design/methodology/approach

This paper examines the origins and principles of internalisation theory as the foundation theory of the MNE. It considers internalisation theory in the context of current and mainstream theories and concepts in the field of international business.

Findings

Internalisation theory is equally valid for the MNEs of yesteryear as it is for those today. The theory continues to have strong explanatory power for MNE activity. Current research areas, such as multiple embeddedness, fine-slicing of the value chain, etc., and other theories, such as dynamic capabilities and the resource-based view, either are subsets of internalisation and thus explained by the theory, or contain weakness and/or inconsistencies not found in internalisation theory.

Originality/value

This paper coherently synthesises internalisation theory, its origins and evolution. It shows how commonly held and current concepts and theories are related to internalisation theory or have weaknesses, thus making internalisation theory a superior theory to explain the MNE, and identifies potential applications of the theory to novel research areas in the field of international business.

Details

Multinational Business Review, vol. 22 no. 3
Type: Research Article
ISSN: 1525-383X

Keywords

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Article
Publication date: 21 September 2015

Jenny Hillemann and Alain Verbeke

– This paper aims to apply internalization theory in the context of economic efficiency-driven institutions interacting with societal institutions that pursue broader goals.

Abstract

Purpose

This paper aims to apply internalization theory in the context of economic efficiency-driven institutions interacting with societal institutions that pursue broader goals.

Design/methodology/approach

The analysis builds upon Buckley and Boddewyn’s (2015, this issue) recent work on the perceived need for multinational enterprises (MNEs) to supply public goods outside of their sphere of technical competences. This paper proposes a more restrictive approach: external markets will only be internalized if, on balance, the efficiency benefits of internalization outweigh its costs at the firm level, in line with orthodox internalization theory.

Findings

MNEs replacing the activities of failing (or even absent) public sector institutions is a business phenomenon commonly observed in less developed economies. However, positive distributional effects and societal externalities without the required efficiency benefits at the firm level are insufficient for MNEs’ supply to occur.

Practical implications

Managerial decisions in the internalization sphere will be guided by the transactional characteristics of the MNEs’ firm-specific advantages (FSAs) and the requisite complementary resources held by host country economic actors. Internalization theory thinking suggests applying various, specific principles to assess in a comparative institutional fashion whether “diversification” into supplying public goods will serve the MNEs’ efficiency goals, namely, the “cost of entry” test, the “better-off” test and the “value capture” test.

Originality/value

Internalization theory provides a solid, efficiency-driven rationale to guide MNE choices on which activities the firm will conduct internally. The nature of the MNEs FSAs and the most efficient, feasible option to bundle firm-level resources and locally held resources in host environments are critical to these choices.

Details

The Multinational Business Review, vol. 23 no. 3
Type: Research Article
ISSN: 1525-383X

Keywords

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Article
Publication date: 21 September 2015

Peter J. Buckley, OBE and Jean J. Boddewyn

The purpose of this paper is to show that the market-internalization framework can be applied to non-economic institutions because society’s non-market sub-systems …

Abstract

Purpose

The purpose of this paper is to show that the market-internalization framework can be applied to non-economic institutions because society’s non-market sub-systems – political, social and cultural – are subject to failures just like economic markets, and firms can contribute to their repair or replacement by selectively, strategically and responsibly internalizing the market and non-market arenas for these sub-systems’ functions.

Design/methodology/approach

Internalization theory is applied to a new area – that of societal failures.

Findings

Internalization theory can be applied to the joint failures of economic and non-economic institutions, and this helps explain the growing “political role” of multinational enterprises in economies in transition as well as the phenomenon of increasing multinational firm activity in underdeveloped economies.

Research limitations/implications

The limits and implications of internalization are drawn in terms of theory development, legitimacy and managerial strategies.

Originality/value

This paper is the first to analyze the selective internalization of societal failures by the multinational enterprises. It extends internalization theory and examines the contested notion of “public goods”.

Details

The Multinational Business Review, vol. 23 no. 3
Type: Research Article
ISSN: 1525-383X

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Article
Publication date: 1 April 2006

Christopher B. Malone and Lawrence C. Rose

To re‐examine empirically internalisation and transaction cost theories of firm FDI.

Abstract

Purpose

To re‐examine empirically internalisation and transaction cost theories of firm FDI.

Design/methodology/approach

Empirical analysis based on cross sectional multivariate regressions and the Fama‐French three factor event study procedure. In addition to the key explanatory variables the paper introduces and models several important control variables.

Findings

The paper finds evidence consistent with the internalisation and transaction cost hypotheses. Firms classified with internalisation advantages earn event period abnormal returns of 6.84 percent above firms that are classified without such advantages. In support of transaction cost theory the paper finds that FDIs generate an average abnormal event period return of −2.36 percent. Further, in line with transaction cost theory firms classified with intangible asset advantages also tend to engage in the more complex forms of foreign and industrial diversification.

Research limitations/implications

The paper does not determined if the effect linked to the possession of intangible asset advantages is temporary or permanent. FDI is costly, but firms that enjoy high market valuations tend to do well in M&A or FDI activity.

Originality/value

The study provides new and strengthened support for internalisation theory. The study provides new evidence in support of transactions cost theory.

Details

International Journal of Managerial Finance, vol. 2 no. 2
Type: Research Article
ISSN: 1743-9132

Keywords

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Article
Publication date: 17 June 2010

Alan M. Rugman

The eclectic paradigm of Dunning (1980) (with its OLI and four motives for FDI framework) can be reconciled with the firm and country matrix of Rugman (1981). However, the…

Abstract

The eclectic paradigm of Dunning (1980) (with its OLI and four motives for FDI framework) can be reconciled with the firm and country matrix of Rugman (1981). However, the fit is not perfect. The main reason for misalignment is that Dunning is focused upon outward FDI into host economies, whereas Rugman’s matrix is for firm‐level strategy covering MNE activity in both home and host countries

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Book part
Publication date: 4 January 2014

Jenny Hillemann and Alain Verbeke

The purpose of this chapter is to demonstrate that sound, mainstream international business (IB) thinking should be applied when assessing the economic opportunities…

Abstract

Purpose

The purpose of this chapter is to demonstrate that sound, mainstream international business (IB) thinking should be applied when assessing the economic opportunities available to multinational enterprises (MNEs) in Bottom of the Pyramid (BOP) markets.

Design/methodology/approach

We describe and evaluate critically the key points made in the BOP literature about the alleged attractiveness of BOP markets, and the alleged strengths of MNEs to penetrate these markets successfully. We revisit the managerial implications from the BOP literature using an internalization theory lens.

Findings

We demonstrate the weak conceptual grounding of conventional BOP thinking, which suggests that MNEs from developed economies should be very entrepreneurial and should systematically serve BOP markets with new products and business models. We also show the fallacy of the idea that a “success template” in one BOP market would be easily replicable in other BOP markets and would allow the MNE to earn economies of scale and scope.

Research implications

IB researchers should start conducting serious studies on the attractiveness of BOP markets for MNEs. They should also analyze seriously the micro-foundations of successful knowledge recombination in BOP markets and the limits to the transferability of success templates. Mainstream IB theory, namely internalization theory, is particularly well equipped to analyze the costs and benefits of entering BOP markets, building upon a comparative institutional logic.

Practical implications

Senior MNE managers should not allow themselves to be blinded by BOP gurus, advocating the alleged great benefits of penetrating BOP markets. BOP markets may be especially challenging international expansion targets for MNEs because of large institutional voids, high uncertainty, high “distance” vis-à-vis the home country market and the difficulties of transferring relevant knowledge from one BOP market to another.

Originality/value

This chapter is the first to show that mainstream IB research can be usefully applied to analyze the “real” attractiveness of BOP markets for MNEs. Comparative institutional analysis is proven to provide substantially more insight to make BOP market penetration work than past guru-talk on BOP markets.

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Article
Publication date: 9 September 2014

Alain Verbeke, M. Amin Zargarzadeh and Oleksiy Osiyevskyy

The aim of the article is to establish robust linkages between internalization theory and the empirical phenomenon of international new ventures (INVs). Here, the focus is…

Abstract

Purpose

The aim of the article is to establish robust linkages between internalization theory and the empirical phenomenon of international new ventures (INVs). Here, the focus is on firm-specific advantages (FSAs) critical to early new venture internationalization.

Design/methodology/approach

On the conceptual level, we explain how the INV literature can easily be accommodated using an internalization theory lens, and we formulate hypotheses to that effect. On the empirical level, we use the Kauffman Firm Survey (KFS) dataset, which includes a panel of 4,928 US-based new businesses founded in 2004, tracked over their early years of operations. We use logistic regressions building upon pooled cross-sections, and including lagged dependent variables.

Findings

INV-type foreign expansion is a special case of international growth, easily and credibly predicted by internalization. No new theory beyond internalization theory is needed to explain this phenomenon.

Originality/value

The early stages of the Uppsala model, in terms of requisite resources accumulation and recombination, may have been undertaken at the individual level, by founding entrepreneurs, in the pre-stage of the new venture, and are “invisible” when focusing on organizational experience built up in the new venture. Here, particular founding entrepreneurs’ characteristics function as FSAs.

Details

Multinational Business Review, vol. 22 no. 3
Type: Research Article
ISSN: 1525-383X

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Article
Publication date: 1 February 1990

Alan M. Rugman and Alain Verbeke

The capital budgeting decision for a multinational enterprise needs to take into account concepts of business policy and competitive strategy. From the modern theory of…

Abstract

The capital budgeting decision for a multinational enterprise needs to take into account concepts of business policy and competitive strategy. From the modern theory of the multinational enterprise, i.e., the theory of internalisation, it is recognised that proprietary firm specific advantages yield economic rents when exploited on a world‐wide basis. Yet the multinational enterprise finds these potential rents dissipated by internal governance costs of its organisational structure and the difficulty of timing and sustaining its foreign direct investment activities. This paper examines these issues by a focus upon parent‐subsidiary relationships and the strategic nature of the capital budgeting decision for a multinational enterprise.

Details

Managerial Finance, vol. 16 no. 2
Type: Research Article
ISSN: 0307-4358

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