Transaction costs theory and its impact on strategies of multinational enterprises

The theory of internalization currently seems to be generally accepted as a possible explanation of multinational enterprise. The issue of the theory is that a multinational enterprise has developed a firm-specific advantage in its home market, usually in the form of intangible assets, giving the firm some superior production, product, marketing or management knowledge. If these assets are not exploited through market or contractual transactions, an "internal" market has to be created. Expansions outside the firm's domestic market will then take form of horizontal and vertical integration. The firm either establishes or buys manufacturing plants outside its home market. The multinacional enterprise thus exists because of "market failures" or high "contracting costs". The firm wants to protect its intangible assets and to be able to control the price, which others pay for the use of these assets. The internalization theory has also much to say about the modes of cross border resource transfer. We come to the conclusion that the internalization theory can be considered as a useful tool to describe and advice the governance structures in MNE even in recent days, especially regarding the management of innovation and knowledge transfer between subsidiaries and corporate centre and subsidiaries themselves. We conclude that a mix of autonomous and corporate induced activities has to be created, in order to respond to the local market and in the same time to look for an international economy of scope. What will be needed for the future research in this aspect is an "inside behaviour" research of the differentiated network MNE.

Keywords: transaction costs theory, internalisation theory, differentiated network, location-bound knowledge, firm-specific knowledge