Internationalization Theory and Its Impact on the Field of International Business

7496 Words30 Pages
Internalization Theory and its Impact on the Field of International Business

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 MNE, 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 hoe well-known international strategic management models could be enriched and their normative implications altered by adopting an internalizing-theory lens.
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In more general terms, Buckley and Casson (1976) demonstrate that any type of market imperfection (across both goods and factor markets) can lead to pressure for internalization by the MNE. Buckley and Casson (1976) is a rare original contribution to thinking in the field of international business. The core idea that the MNE can replace the market, was developed completely independently of the thinking by Oliver Williamson (1975). Indeed, the linkage of internalization theory to the markets and hierarchy approach of Williamson was not resolved until publication of Hennart’s 1977 dissertation, Hennart (1982). In many ways the book by Hennart is a far superior explanation of internalization theory principles within the Williamsonian context that builds upon concepts such as buyer uncertainty, asset specificity, and bounded rationality. In particular, Hennart (1982) is able to develop models that distinguish between vertical and horizontal integration and to explore in greater depth the alternatives of firm contracting versus market exchange. Whereas the intellectual origins of Buckley and Casson’s (1976) internalization theory do not lie with Williamson (1975), they are deeply embedded in Hymer’s work (1960, published in 1976). Hymer developed the concept of firm-specific advantages (FSAs). He also demonstrated that foreign direct investment only takes place when the
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