The internalization theory of the multinational enterprise is a significant intellectual legacy of Ronald Coase. US direct investment in Europe became highly political in the 1960s, and neoclassical trade theory had no explanation. A theory of the multiplant enterprise was required, and internalization theory filled this gap. Using Coasian economics to explain the ownership of production plants, and the geography of trade to explain their location, internalization theory offered a comprehensive account of MNEs and their role in the international economy. This chapter outlines the development of the theory, explains the Coasian contribution, and examines in detail the early work of Hymer, McManus and Buckley and Casson. It then reviews the current state of internalization theory and suggests some future developments.
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