Edited by Alain Verbeke and Hemant Merchant
Chapter 1: Twenty key hypotheses that make internalization theory the general theory of international strategic management
Internalization theory has over the past 35 years become central to our understanding of multinational enterprise (MNE) functioning. In this chapter, we discuss 20 key hypotheses that make internalization theory the general theory of international strategic management. These hypotheses synthesize the main insights we have gained from a large number of conceptual and empirical studies related to MNE strategic decision-making. Early contributions to internalization theory challenged the dominant neoclassical trade theories of international exchange by questioning the underlying assumption of efficient cross-border markets and the lack of attention devoted to firms. Seminal works by internalization theory scholars thus explored how market imperfections create differences in costs between activities conducted inside firms versus through external markets (Buckley and Casson, 1976; Hennart, 1982; Rugman, 1981). The early contributions improved our understanding of the nature of firms (Coase, 1937) and further extended Hymer’s (1970) work on why MNEs exist. These studies focused especially on the growth of large MNEs, exploring how external market imperfections create both opportunities and challenges when transferring technology and other knowledge-intensive assets or capabilities across borders (Buckley and Casson, 1976; Hennart, 1982; Rugman, 1981). Here, MNEs internalize intermediate markets (the range of activities needed to bring goods and services to the final output market) when internal organization (i.e. hierarchy) enables the more efficient creation, transfer, deployment and exploitation of proprietary assets and capabilities.
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