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1 – 10 of over 6000This paper seeks to demonstrate that internalization theory, as a “complete” theory of the firm, is particularly well equipped to analyze multinational enterprise (MNE) regional…
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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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…
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.
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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.
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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.
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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 – political…
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”.
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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…
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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The purpose of this paper is twofold: to analyse what theories assume about multinational enterprises (MNEs) when they claim these are superior and to discuss possible…
Abstract
Purpose
The purpose of this paper is twofold: to analyse what theories assume about multinational enterprises (MNEs) when they claim these are superior and to discuss possible explanations for why MNE superiority seems to be dominant in the international business (IB) research field.
Design/methodology/approach
A common theme in mainstream IB theories is that multinational enterprises (MNEs) are superior in terms of cost efficiency and innovativeness compared with other types of organizations. A closer look at transaction cost economics (TCE)/internalization theory, evolutionary theory and dynamic capability theory reveal a bias toward MNE supremacy because of how MNEs are conceptualized as firms and therefore fail to explain the essence of “multinational advantage”. These revelations and the strong dependence on the benevolence to provide unbiased data means that MNE supremacy posited by mainstream IB theories is as much a rationalized myth as an empirical fact.
Findings
Although mainstream theories differ when it comes to the building blocks that constitute MNE supremacy, they have one attribute in common: they are silent as to why MNEs are superior compared with, for example, domestic firms or other types of economic agents. Irrespective of whether the focus is the strength of the hierarchy, the skill of managers or a common identity, nothing in the theories tells us that these factors are more pronounced in MNEs than in other types of economic actors.
Originality/value
The paper deals with the issue of multinational advantage. It claims that mainstream theories of MNEs tend to assume, explicitly or implicitly, that MNEs are superior in terms of cost efficiency and innovativeness compared with other types of economic agents. The analysis demonstrates that this tendency is a consequence of how MNEs are conceptualized as firms in the different theories as well as of the strong dependence in IB research on the benevolence of MNEs to provide unbiased data. It is concluded that MNE supremacy posited by mainstream IB theories is as much a rationalized myth as an empirical fact.
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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 on…
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.
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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 the…
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.
Outlines the three theories which link multinationality to share value (internalization, imperfect capital markets and managerial objectives), reviews the relevant research and…
Abstract
Outlines the three theories which link multinationality to share value (internalization, imperfect capital markets and managerial objectives), reviews the relevant research and hypothesizes that a multinational’s degree of internalization is positively related to its accounting value (q‐value). Tests this using 1994‐1998 data on French listed companies and presents the results which support the hypothesis, the existence of a size effect (smaller firms have higher q‐values) and leverage effect (higher debts are linked with lower q‐values), but sow no significance in the proportion of intangible assets; i.e. they support the imperfect capital markets theory but not the internalization theory. Considers consistency with other research and opportunities for further research.
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