Chapter 5: The Organization of the Multinational Enterprise: An Information Cost Approach
5.1 INTRODUCTION The object of this chapter is to summarize in a non-technical way some of the insights into the theory of the multinational enterprise (MNE) that can be derived from the theory of information costs. Information costs are not the same thing as transaction costs. While most transaction costs are information costs, the converse does not apply. Information cost is a more general concept than transaction cost. Consequently, there are many information costs that are not transaction costs, as that term is commonly understood. For example, information costs incurred in appraising investments, planning experiments and searching for new production locations are not transaction costs, but nevertheless attempts to minimize these costs have a signiﬁcant effect on the organization of the ﬁrm. The intellectual pedigree of the theory is different too. As explained in Chapter 4, information cost analysis derives from decision theory, and in particular from the theory of co-operative decision-making known as the theory of teams (Marschak and Radner, 1972). This theory provides useful techniques for formalizing some of the earlier insights of Hayek (1937) and Richardson (1960) into the nature of the co-ordination problem in economics. The process of co-ordination beneﬁts from a division of labour in which functionally-specialized organizations emerge. The MNE is one important organization of this kind. It co-ordinates on a global basis the decisions of households which supply labour (and of other factors of production) for the production of a given product with the decisions of households which consume that product....
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