Kogut and Zander's Theory of Evolutionary Theory Versus Internationalization Theory
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There are many theories given by different group of researchers about the existence of multinational enterprises or MNE's. According to John Cantwell, it was in the 1970's and 1980's that many theories on MNE's were proposed. These theories were either general theories of MNE's which were called the main institution for international production or the theories on foreign direct investment, the means by which international production is done ( Pitelis, Christos N. and Sugden, Roger, The nature of the Transnational firm, Pg 10). Amongst the most famous are the Hymer's theory of international production, the internalization theory put forward by Buckley and Casson, Dunning's Eclectic Paradigm, and the evolutionary theory…show more content… In 1976, Buckley and Casson proposed that different production requires different combinations of inputs that can be best done in different countries. This depends on number of factors like cost, trade barriers, tax regime etc. For example the cost of setting up a software company in India will be much lesser than in California. Many countries give tax concession for MNE's and hence facilitate investment in their country.
There are many costs involved in internalization. These costs can be communication costs due to cultural differences, costs due to legal systems of the country which favors the local companies.
Buckley and Casson proposed that knowledge is a public good and hence can be transferred easily across the world. The basic assumption about this is that they consider everybody should have equal knowledge. They also stressed on the point that information is important as well and the cost related with information is a handicap for the firm.
Evolutionary theory was proposed by B Kogut and U Zander. The fundamental principle of this theory is that the firms are like social communities that specialize in creation and transfer of knowledge. MNE's are formed due to their enhanced efficiency as organizational vehicle to transfer knowledge across borders (Kogut, B and Zander U., Knowledge of the firm and evolutionary theory of multinational enterprises, Journal of International Business Studies, 2003, Pg