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The Multinational Enterprise

Theory and History

Mark Casson

This book summarises Mark Casson’s recent research on the multinational enterprise. This work is firmly rooted in history and examines the evolution of the internalisation theory of the multinational enterprise over the past forty years and, in the light of this, considers its potential for further development. The book also explores internationalisation theory in respect to marketing and brands, the supply chain, risk management as well as methodology.
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Mark Casson

This chapter is based on an unpublished paper presented at a plenary session on 40 years of internalization theory at a conference in Vienna  in December 2016. It examines the evolution of the internalization theory of the multinational enterprise over the past 40 years and, in the light of this, considers its potential for further development. The existing theory represents a synthesis of different strands of research, underpinned by a common set of economic principles. Its focus is on the global economy, and a representative global industry, rather than just the individual firm. The chapter shows how the existing theory can be extended to fulfil the ultimate ambition of early theorists, which was to analyse the boundaries of firms in an oligopolistic global industry.

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Mark Casson

Offshoring and outsourcing in global value chains have been extensively analysed from a strategic management perspective. This chapter examines these issues from an internalization theory perspective by summarizing the contribution of internalization theory to supply chain analysis; considering how a division of labour is coordinated and comparing coordination by management with coordination by the market; and discussing the formal models of supply chains developed by economists. Supply chain researchers possessing an interest in economic principles and good mathematical skills can make an important contribution to internalization theory, and it is hoped that this chapter will encourage them to do so.

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Mark Casson

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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Mark Casson

The economic theory of the firm is central to the theory of the multinational enterprise. Recent literature on multinationals, however, makes only limited reference to the economic theory of the firm. Multinationals play an important role in coordinating the international division of labour through internal markets. The chapter reviews the economic principles that underlie this view. Optimal internalization equates marginal benefits and costs. The benefits of internalization stem mainly from the difficulties of licensing proprietary knowledge, reflecting the view that MNEs possess an ‘ownership’ or ‘firm-specific’ advantage. The costs of internalization, it is argued, reflect managerial capability, and in particular the capability to manage a large firm. The chapter argues that management capability is a complement to ownership advantage. Ownership advantage determines the potential of the firm, and management capability governs the fulfilment of this potential through overcoming barriers to growth. The analysis is applied to a variety of issues, including outsourcing, geographical dispersion of production, and regional specialization in marketing.

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Mark Casson

This chapter argues that the intellectual contribution of Alan Rugman reflects his distinctive research methodology. Alan Rugman trained as an economist, and relied heavily on economic principles throughout his work. He believed that one good theory was sufficient for international business (IB) studies, and that theory, he maintained, was internalization theory. He rejected theoretical pluralism, and believed that IB suffered from a surfeit of theories. Alan was a positivist. The test of a good theory was that it led to clear predictions that were corroborated by empirical evidence. Many IB theories, Alan believed, were weak; their proliferation sowed confusion and they needed to be refuted. Alan’s interpretation of internalization was, however, unconventional in some respects. He played down the trade-offs presented in Coase’s original work, and substituted heuristics in their place. Instead of analysing internalization as a context-specific choice between alternative contractual arrangements, he presented it as a strategic imperative for firms possessing strong knowledge advantages. His heuristics did not apply to every possible case, but in Alan’s view they applied in the great majority of cases and were therefore a basis for management action.

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Mark Casson

This chapter provides an economist’s perspective, discussing some of the strategic problems that arise in an organization or society where different members have different ideological perspectives. It considers how far values of tolerance and debate can prevail in the presence of strong commitments to opposing opinions. In particular, it considers critically, in the light of the previous chapters, whether an ethic based on the common good is of any help. The chapter argues that some ideologies cannot accommodate dissent better than others because they provide opportunities for dissenters to contribute constructively to the welfare of others. Other ideologies, by contrast, encourage critics to become disruptive. The chapter concludes by considering some practical applications of this analysis.

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Mark Casson