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Internalization and the MNE: a note on the spread of ideas

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Abstract

This paper examines the reasons for the impact of Buckley and Casson's The Future of the Multinational Enterprise (1976) on research in international business (IB). Earlier work concentrated on ownership-specific advantages or locational determinants rather than the central concept of internalization. The few exceptions were incomplete or not well known. Internalization as applied to the MNE spread rapidly because of the appeal to IB researchers of an analytically powerful idea that was based on institutional economics and involved an accessible methodology. The spread was also helped by the parallel growth of transaction costs in the domestic theory of the firm, and the publication activity of the authors and their associates.

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Notes

  1. This is developed more fully in Buckley and Casson (1976, Chapter 3). In the critical section on the economics of internalizing a market, Buckley and Casson acknowledge their debt to Coase (1937), Kaldor (1934) and Penrose (1959), all of which are on the domestic theory of the firm.

  2. The dissertation was completed in 1960 and published posthumously in 1976. Page references are to the 1976 publication. Neither the dissertation nor the major articles based directly on it secured publication up to 1968. However, he wrote many articles, alone or with co-authors, before his untimely death in 1974. Although the dissertation was not published until 1976, it became widely known in the 1960s, thanks in part to Kindleberger's references to it in his own work (e.g. Kindleberger, 1963, 1968).

  3. In particular, he explains why firms choose FDI over exports or licenses as follows: ‘The firm is a practical institutional device which substitutes for the market. The firm internalizes or supersedes the market. A fruitful approach to our problem is to ask why the market is an inferior method of exploiting the advantage: that is, we look at the imperfections in the market’ (p. 48). He goes on to note several advantages of operating with a subsidiary, particularly in contrast to licensing.

  4. The Social Science Citation Index contains one reference only in each of the 1970s and 1980s. Aliber (1970), (1971) refers to Coase, and notes Hymer's 1968 publication, but the focus of Aliber's work lies elsewhere. Safarian (1972), in an article applying Coase to an analysis of policy towards MNEs, noted that Hymer had been exploring the implications of Coase's work. In a volume edited by Bertin (1973), Dunning refers to Coase, and both Michalet and Bertin refer to Hymer's 1968 article. No one picks up on the centrality of Coase (1937) and Hymer (1968) to FDI theory.

  5. The article was presented at a session of the Canadian Economics Association in 1969, published in French in 1971 and in English in 1972. McManus was aware of Hymer (1960) but not the 1968 article.

  6. Dunning notes that he became aware of the McManus paper, and thus of the concept of internalization, in the early 1970s (Dunning, 1995, note 7; Corley, 1992, 10). Buckley and Casson (1976) cite Coase but neither Hymer (1968) nor McManus (1971–1972). Casson appears to have become aware of the 1968 article from Acocella (1988); Horaguchi and Toyne (1990) translated and published the article independently. Hennart disseminated McManus's ideas in a variety of writings, beginning with his dissertation (1977, Chapter 2) which extended McManus's model.

  7. International trade models are the ones reflected above, as described in Neary (2001). There are exceptions: some important work is based on oligopolistic competition, for example, an industry structure more suited to the MNE than is monopolistic competition. However, unlike the latter, there is no general theory of oligopoly.

  8. The process noted here was, of course, borrowed in part from its extensive use in economics.

  9. One exception is Ethier (1986), where internalization is the focus –indeed, he argues that the other aspects of the OLI approach are already in trade theory. Partial equilibrium models of internalization also exist, as in Horstmann and Markusen (1987).

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Acknowledgements

I am grateful to an anonymous referee and particularly to the editor for his perceptive comments.

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  1. Joseph L Rotman School of Management, University of Toronto, Ontario, Canada

    A Edward Safarian

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  1. A Edward Safarian
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Correspondence to A Edward Safarian.

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Accepted by Tom Brewer; outgoing Editor, January 2003.

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Safarian, A. Internalization and the MNE: a note on the spread of ideas. J Int Bus Stud 34, 116–124 (2003). https://doi.org/10.1057/palgrave.jibs.8400011

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