Geography Reference
In-Depth Information
on the transactions costs which are external to the firm. Market imper-
fections are only considered as long as they are structural, with little or
no discussion regarding the role played by knowledge imperfections and
information asymmetries.
2.4.2
Internalization and Transactions Costs
The most influential set of contributions on the question of 'how' multi-
national activities are organized is based on the transactions costs theory
of the firm. The antecedents of this literature are to be found in Coase
(1937) and Penrose (1959), and the literature shifts the focus on the rela-
tionship between the
ownership
and the
organization
of multinationality.
Transactions costs approaches assume microeconomic and organizational
views of the firm (Buckley and Casson 1976; Teece 1977; Rugman 1981;
Hennart 1982). As international markets, and particularly those for inter-
mediates, technology and knowledge, are all characterized by considerable
transactional imperfections, the need arises for the creation of internal
markets. MNEs are perceived as being the result of the internalization
of cross-border operations (Buckley and Casson 1976). Internalization is
thus seen as the outcome of the comparison of the costs and benefits of
organizing transactions internally within the firm relative to conducting
external market transactions. The decision to internalize activities there-
fore provides a rationale for both the horizontal and vertical integration
of cross-border activities,
15
and the development and organization of
international production occurs via the creation of hierarchies rather than
markets. Moreover, a variety of outcomes are expected because hierar-
chical organizational costs relative to market transactions are seen to be
specific to the MNE, its industry and country of origin. The hierarchy con-
sequently implies that ownership, control and organization are considered
as an unbundled set of motives for multinationality.
Transactions costs economics in many ways provides a much richer
understanding of the multinational firm in terms of its behaviour, con-
tracts and asset specificity (Williamson 1985) than other approaches. Its
strength lies in the focus on the overall organizational capability of the
firm, and on the intra-firm linkages between different kinds of value-
added activities and economies of scope. As already mentioned, internali-
zation and integration become strictly intertwined. Teece (1980) expands
the vertical integration argument of Williamson (1975) to explain the
multi-product diversification, highlighting the fact that both vertical inte-
gration and diversification are ultimately related to the particular types of
cross-border transactions which are to be internalized.
As we shall see later in Chapter 4, however, one of the weaknesses of
