GSM Lecture 2

Management > Global Strategic Management > Comparative advantage > Hymer > Vernon > Product cycle > Buckley and Casson > Internalisation

Internalisation

(For more detailed analysis, see Understanding the Global firm, lecture 7)

Internalisation has a number of motivating factors:

If the MNE internalises its ownership advantage (OA), which is usually some form of knowledge or skill, the firm is motivated to enter the foreign market to exploit this advantage more efficiently
The market for OAs is imperfect, which can create complications for pricing, increasing transaction costs (See Understanding the Global Firm, technology transfer, lecture 7)
A high level of transaction costs results in the decision to internalise the transaction, with a subsidiary being considered more efficient.

Thus the motivational factors for internalisation revolve around the minimisation of transaction costs of exploiting an OA.

Madhok (1997) argues that the internalisation and transaction cost perspectives are concerned with the minimisation of transaction costs and the conditions underlying market failure.

Teece (1986) identifies that at one level the internalisation and transaction cost theories are one in the same. The main difference is that internalisation focuses on the market for OAs, while that of the transaction cost school is on more micro-level transaction characteristics.

Rugman (1986) argues that internalisation theory can be considered the transaction cost theory of the MNEs.