Chapter 4: Bounded Rationality, Meta-rationality and the Theory of International Business
with Nigel Wadeson 4.1 INTRODUCTION The concept of bounded rationality is often applied to international business behaviour (see for example, Kogut and Zander, 1993). It is a key element in Williamson’s (1975) version of transaction cost theory, and underpins Hedlund’s (1993) arguments in favour of the ‘heterarchy’ – otherwise known as the ‘network ﬁrm’. There is, however, no consensus over what exactly ‘bounded rationality’ signiﬁes. The term itself is a curious one. It indicates what it is not – namely full or substantive rationality – but not exactly what it is. There are a number of different views. As a result, a casual reference to bounded rationality is ambiguous, since it is not clear to which particular interpretation of bounded rationality it refers. The object of this chapter is to clarify the concept of bounded rationality by reinterpreting it in terms of information costs. This introduces muchneeded rigour and precision into the analysis of the organization of multinational ﬁrms. Many of the effects imputed to bounded rationality can be explained more simply in terms of a rational response to information costs. According to Simon (1947, 1982, 1992), bounded rationality involves the use of satisﬁcing routines. The concept of satisﬁcing indicates, ﬁrst, that decision-making involves a search for solutions, and, second, that the search is likely to terminate before the ideal solution has been found. The chosen solution is merely satisfactory – it is not necessarily the fully optimal one. The concept of routine indicates that satisﬁcing problem-solvers tend to follow...
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