Research Handbooks in Business and Management series
Edited by Mehmet Demirbag and Attilia Yaprak
Chapter 1: The many faces of the ever-changing multinational enterprise
The phenomenon of multinational enterprises (MNEs) was an enigma for classical economists. There was no satisfactory explanation for their existence. Why do some firms erect plants in foreign countries and others not? Why and when do firms prefer foreign investments to exports? Indeed, international economic textbooks chose for many years to ignore the phenomena of foreign direct investment (FDI) and MNEs and concentrated instead on international trade. While most international economists ignored FDI, there were a few exceptions. John Dunning studied American investment in the British manufacturing industry (1958). In the 1960s, Raymond Vernon directed the Multinational Enterprise Project at Harvard Business School that assembled data on U.S.-based multinationals. Because his major concern was the relations of nation state governments and MNEs, Vernon defined a firm as being multinational if it was listed in Fortune 500 and had subsidiaries in at least six countries (Vernon, 1971). His doctoral candidates looked at these organizations in terms of finance, organization, production, marketing, and business–government relations. Stephen Hymer’s doctoral thesis of 1960 (published in 1976) was perhaps the first attempt of an economist to offer a theory of why a firm produces abroad rather than simply exports from its home country. His explanation assumed that such firms have some monopolistic advantage that allows them to overcome the additional costs of foreign operations – what Zaheer (1995) later termed “liability of foreignness” – and compete successfully against domestic firms.