Internalization Theory and its Impact on the Field of International Business
Alan M. Rugman and Alain Verbeke
Internalization theory explains the existence and functioning of the multinational enterprise. It contributes to understanding the boundaries of the MNE, its interface with the external environment and its internal organizational design. Much work in the international strategic-management sphere has unfortunately not taken on board internalization-theory thinking and lacks the insights provided by this comparative institutional approach. In this chapter we show hoe well-known international strategic management models could be enriched and their normative implications altered by adopting an internalizing-theory lens.
In this chapter we examine several international strategic management models revisited through an internalization theory lens. Internalization theory explains the existence and functioning of the multinational enterprise (MNE), (Rugman 1981). It contributes to understanding the boundaries of the MNE, its interface with the external environment, and its internal organizational design.
Conventional internalization theory has focused primarily on explaining which parameters would stimulate firms to expand across borders, and on entry mode choice. More recent internalization theory extensions have focused on establishing linkages with strategic management perspectives on the MNE, and on describing differentiated network MNEs. The great strength of internalization theory is its comparative institutional approach to assessing the efficiency and effectiveness of MNE choices in the realm of choosing firm boundaries, establishing linkages with the external environment and selecting a specific organizational form.
Much work in the international strategic management sphere has unfortunately not taken on board internalization theory thinking, and lacks the insights provided by this comparative institutional approach. In this chapter, after a brief review of the history of internalization theory, we will show how four well-known international strategic management models could be enriched, and their normative implications altered, by adopting an internalizing theory lens.
The four international strategy models revisited include the globalization model advocated by Levitt (1983) and Yip (2002); the transnational solution model developed by Bartlett and Ghoshal (1989); the evolutionary model of the MNE popularized by Kogut and Zander (1993), and the S-curve model of the multinationality-performance relationship hypothesized by Lu and Beamish (2004) and Contractor, Kundu and Hsu (2003). We will briefly describe the conceptual limitations of each international strategy model. We will also demonstrate that the managerial prescriptions resulting from each model are valid only in very specific contexts. In contrast, internalization theory is a general theory of the MNE; building upon a limited number of foundational principles, it can easily be augmented to explain a wide range of recent international business phenomena.
The History of Internalization Theory
Internalization theory was conceptualized by Buckley and Casson (1976). Their short book consisted of several working papers prepared at the University of Reading in the preceding two-year period. Chapter 2 of the book is titled ‘A Long Run Theory of the Multinational Enterprise’. Chapter 3 is called ‘Alternative Theories of the Multinational Enterprise’. These two chapters provide the first clear statements of internalization theory. Briefly, Buckley and Casson demonstrate that the MNE organizes bundles of activities internally such that it is able to develop and exploit firm-specific advantages (FSAs) in knowledge and other types of intermediate products. The proprietary ownership of such FSAs serves to overcome the externality of knowledge being a public good. Given the presence of market failure, internalization, i.e.,...
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