Theory and History
Internalization theory is usually applied at the firm level to analyse FDI, licensing and subcontracting, but this chapter extends it to the industry level. It synthesizes internalization theory and oligopoly theory. It analyses a global industry where firms innovate competitively, and freely enter and exit the industry. It presents a formal model that highlights the interdependencies between rival firms. Each firm responds to its rivals by jointly optimizing production and innovation through interdependent ownership and location decisions. The competitive outcome determines which firms serve which markets, which firms enter or exit the industry, and the internalization strategy of each firm.
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