Problems and Developments in the Core Theory of International Business
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658 JOURNAL OF INTERNATIONALBUSINESS STUDIES, FOURTHQUARTER 1990
PROBLEMS IN CORE THEORY
Decisions andMarketStructure The Relationshipbetween Internalisation
It has become fashionable for analysts to draw a distinction between theories basedon internalisation(as exemplified byBuckley and Casson by Hymer [1976; 1985]) andthose based on market power (exemplified [1976]). An exampleof this line of argument is Cantwell[1988]. The two need to be combined theories but are not mutually exclusive, competing, or to give a full and rich explanationof the growth of multinational firms. Such an explanation becomes complicated because of the interaction betweeninternalisation decisionsand market outcomes. is a surprising The sourceof clues on ways to integrate these approaches originally written in one-Hymer himself. In a recentlyrediscovered paper French [Hymer1968; Casson 1989],Hymer providesa heuristic explanation of the interactionof the internalisationof markets and market structure. iWo sets of processes are atwork:(1) internalisationdecisions, with industry size fixed, determine the number of firms in the industry; (i) governsthe opportunitiesfor horizontal expansion, (2) market structure so that highly concentrated industriesencourage diversification and in imperfectionsthat induce price (ii) particularmarket structures result distortions within multistage processes, thus providing incentives for forwardor backward integration.These outcomes then feed back to a furtherroundof internalisationdecisions.Thusa dynamicprocessof interaction is described.In a static or slowly evolvingworldthis interaction is likelyto convergeon an equilibrium.A crudeform of this model is shown in Figure1. This frameworkis capableof extensionand of encompassing many currenttheoreticaldevelopments.For example,the choice of diversification into new product areas at home or internationalisationin the sameproductareahas been discussedby Wolf [1977].There are alsopossibilities of an approachto business strategymore groundedin theory. The political economy implicationsof the differencein approachbetween internalisation-basedtheories and those that emphasise market power shouldnot be ignored.In work thatpostdateshis 1968paper, Hymerintegratedthe 'Lawof IncreasingFirm Size' with 'The Lawof Uneven Develenterpriseas an opment'to providea powerfulcritiqueof the multinational institution[Hymer1970, 1971].Paradoxically,the othermajorcontributor to theHymer-Kindleberger approachemphasisedthe roleof multinationals in improvingefficiency by increasing global competition,breaking up barriersto domestic monopolies and surmounting government-imposed freer competition[Kindleberger1969]. A synthesisof these views on the welfareimpact of multinationalsrecognises both welfare gains and welfare lossesfrom the establishmentand growthof multinationalenterprises.Welfaregains arisewhen the replacement of an
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