Some antecedents of internalization theory
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Some antecedents of internalization theory John H Dunning1 1
Reading and Rutgers Universities, UK
Correspondence: Professor JH Dunning, School of Business, University of Reading Whiteknights Reading RG6 2AA. UK E-mail: [email protected]
Received: January 2003 Accepted: February 2003 Online publication date: 20 March 2003
Abstract This article reviews the main antecedents to Buckley and Casson’s seminal volume The Future of the Multinational Enterprise (1976). In particular it considers and evaluates two main approaches to understanding the nature and function of firms viz the exchange approach and the value-added approach. Journal of International Business Studies (2003) 34, 108 –115. doi:10.1057/ palgrave.jibs.8400010 Keywords: multinational enterprise; the firm; foreign direct investment; the exchange function; the value-added function; transaction costs; internalization theory
Introduction This brief review of the antecedents of The Future of the Multinational Enterprise argues that its contents represent the juxtaposition between two distinct evolutionary strands of economic theory. The starting point is that both strands take, as their unit of analysis, the firm as a coordinating unit of control of particular functions or valueadded activities. However, the raison d’eˆtre for the kind of coordination, and the relation between one mode of coordination and another, is treated very differently, and continues to be so in the literature. The two strands and their genealogy are set out in Figure 1. The first looks specifically at the function of exchange and particularly that of intermediate products in, or related to,1 the value-added process. For the most part, it assumes that there are alternative modes of transactions (be they domestic or cross-border). These may range from arm’s length (external) market exchanges to (internal) administrative fiat – and a whole set of cooperative ‘in between’ relationships. The Future of the Multinational Enterprise is concerned primarily with why single firms internalize intermediate product markets. In so far as benefits are gained, these take the form of a reduction in the transaction costs. The second strand looks at the firm as a value-adding unit. It is postulated that value is added by the firm engaging in a series of transformation functions, each of which, like the exchange function, requires some coordination of inputs, whether these be internally created or acquired from the market. Such coordination may involve single or multiple functions and activities. Firms may produce at different stages of the same value chain or at the same stage across value chains. In each case, the object is to increase value added in the most cost-effective way. However, the tasks performed (as opposed to the optimum mode of buying or selling intermediate products) are unique to the firm. The market itself cannot undertake the transformation function.
Some antecedents of internalization theory
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