ADDIS ABABA UNIVESITY

INTERNATIONAL BUSINESS AND STARATEGY(PhD)

INTERNATIONAL BUSINESS ENVIRONMENT COURESE

Article review- Individual Assignment
On
History and theory of Multinational Enterprise

Dec 25/2023
Tesfamaryam
 Content

1. The theory of international business pre-Hymer

Peter J. Buckley (2010)
2. 2. Reflections on the Hymer Thesis and the Multinational Enterprise
(Teece, D. J. 2006)
3. Forty Years of Internalisation Theory and the Multinational Enterprise
Buckly, 2014
4. Location and the Multinational Enterprise (John Cantwell, 2009)
5. Multinational Enterprise: The Old and the New in History and Theory
(Krugman, P.(1990)

6.
7.
8.
 The theory of international business pre-Hymer
Peter J. Buckley (2010)

1. The heritage of economics

Hymer (1960) wrote his thesis in the tradition of economics, but did not acknowledge
many intellectual debts
2. International economics
Premise of the international immobility of capital
3. Industrial economics
Industrial economics discusses industrial structure as made up of the size of firms, entry
conditions, concentration, vertical integration and diversification
Instance, the role of vertical integration in the creation of international companies was
extensively analysed in McLean and Haigh (1954) with respect to oil companies.
 …
4. Cartels—a neglected body of literature
Burns (1936, pp. 456–460) talks of the ‘‘territorial integration’’ of cartels, but by 1946
Hexner’s book is entitled International Cartels and Mason’s is Controlling World Trade:
Cartels and Commodity Agreements (Mason, 1946). E.g. Organization of Petroleum
Exporting Countries (OPEC)
5. International business as the logical intersection of industrial economics, international
economics and the theory of the firm
Casson (1985b) argues that ‘‘the theory of FDI is a logical intersection of three distinct
theories—the theory of international capital markets, the theory of the international firm,
and the theory of international trade’’
6. The literature on imperialism
Theories of imperialism also focus attention on (increasing) concentration among large
firms and oligopolistic competition.
…

7. International competitiveness
This illustrates the importance of distinctions between different kinds of migration
of industry and the need to integrate the theories of trade and foreign investment.
8. Managing foreign operations
‘‘Industrial migration involves not only the exportation of physical products and of
capital but also the transfer of managerial abilities and industrial techniques.
He lists ‘‘the influence of raw material resources’’, ‘‘production incentives’’
(relative cost of production abroad compared to home), ‘‘the effect of competition’’,
tariff
 Reflections on the Hymer Thesis and the Multinational Enterprise (Teece, D. J. 2006)

§ This paper examines the theory of international business before 1960 when Stephen
Hymer wrote his seminal thesis.

§ It is shown that there existed a considerable amount of theory, but this was uncodified,
unsystematic, fragmented and not institutionalized in a single academic discipline.

§ taking a 1960 date for the beginnings of a widely accepted theory of international
business provides a useful cut-off point.

§ Hymer and Dunning provided synoptic views of the multinational firm which have
been refined and improved upon since 1960.
…

• there was little conceptualization and theorizing in international business because

of confusion, or a lack of recognition, of levels of analysis

• This paper examines the truth of this claim and attempts to evaluate writings on
the multinational enterprise and foreign direct investment before 1960.

• Hymer (1960) made the crucial distinction between FDI (internalized

transactions) and licensing (externalized transactions).
•
…

v(Buckley & Lessard, 2005). Reviewed Careful distinctions were often not made
in the pre-1960 literature
übetween direct versus portfolio investment,
übetween different forms of foreign market servicing,
übetween ownership (internalised) and
ü non-ownership (arms length, contractual) international modes of doing
business and
ü between different forms of internal foreign operation (branch, subsidiary,
licensee).
The nature of the multinational enterprise as an institution was not explored in
depth.
vThe emergence of modern theory is traced from the 1950s up to the time of
Hymer’s thesis.
 Conclusion
v A great deal of previous theorising has been ignored because of its lack of conceptual
clarity and its non-cumulative nature.
v Pre- Hymer theorising has several virtues.
ü First, it is deeply empirically grounded.
üSecond, it integrates international business theorising on FDI and the MNE with
international management concepts such as cultural differences and methods of
operating in foreign environments.
üThird, it provides avenues for the reconsideration of theoretical advances such as
the relationship between FDI and trade at all levels (firm, region, industry, and
nation), the interaction between inflows and outflows of FDI and two-way
investment, and the external consequences and effects of FDI.
üHymer drew on a restricted range of sources and his virtue was to give the theory of the
multinational enterprise a clear analytical core.
…
The Managerial relevance early, pre-Hymer (1960) theorising on international
business and the strategy of the multinational enterprise has several insights for
current managers.
First, it is necessary to have a clear understanding of the role of cultural differences
and the impact that these are likely to have on operating strategies in particular host
countries both when considering entry and in the operating period.
Second, the modes of operating abroad are important and the subtleties of choice
go beyond simplistic views of export versus foreign direct investment.
v Finally, early international business theorising encourages managers to think
beyond immediate tactical decisions to the holistic relationship between the firm
and its external environments
Forty Years of Internalisation Theory and the Multinational Enterprise Buckly, 2014

ØThe purpose of this paper is to highlight the contributions of internalization theory

to the understanding of the existence, persistence and strategy of MNEs
ØOver the past 40 years, MNEs have changed dramatically, and internalization
theory explains these changes and remains relevant to understanding
“networked, knowledge-intensive MNEs” (Buckley, 2007).
ØAn MNE may be defined as an enterprise that owns and controls activities in
different countries (Buckley and Casson, 1976).
Ø“An MNE is a firm that internalizes imperfect markets across national frontiers in
the services of an intermediate product owned or controlled by the firm”
(Buckley and Casson, 1976, p. 1).
• MNE is where the intermediate product is a knowledge-intensive flow
arising from an intangible asset.
• MNE can be viewed as a firm that builds a system to exploit a temporary
monopoly arising from an innovation.
 Origins of the theory

vDefinition: IT- Can occur when an individual or business decided to handle an issue in
house instead of outsourcing it in on unrelated third party.

vBuckley and Casson (1976) point out that there are several potential levels of analysis in
international business research: the firm, industry, region and nation. These were later
listed as: country, manager, firm, industry, plus networks and subsidiary (Buckley and
Lessard, 2005).

vIn Buckley and Casson (1976), national firms are treated as a special case of MNEs. A
national firm is simply one that has grown by internalizing markets that are purely
domestic.
…

vThe dynamics of the theory come from the integration of research and
development (R&D) with other activities, notably marketing and production.
v It is thus within firms or alliances that fundamental changes occur which affect
the location of the leading centers of growth, although market competition has a
role as well.
vThe locational elements of the theory similarly emphasizes the responses of
MNEs to external changes in factor endowments, transport costs, trade barriers,
and so on, and their role in developing locational advantages (Dunning, 1998).
1. Internationalisation – benefits and costs

q the theory examines the costs and benefits of internal versus external markets.
qThese interact with the optimal location of activities across which markets are
internalised.
qThe firm is naturally international where market links are cross-border.
qThe advantages/benefits of internalizing a market:
üThe advantages of internalising a market are the obverse/opesite of
outsourcing
ücoordination of multistage processes in which time lags exist but futures
markets are lacking;
ü efficient exploitation of market power through discriminatory pricing;
ü
…

üeliminating instability caused by bilateral concentrations of market power in

intermediate product markets;
üovercoming information asymmetries between buyer and seller (“buyer
uncertainty”); and
üexploiting lack of harmonization in international tax rates, by using internal
transfer pricing to reduce overall corporate tax liability.
üA classification of motives for internalisation (vertical integration)
• the business arrangement in which a company controls

different stages along the supply chain.

 The costs of internalizing a market

The costs of internalizing a market:

ØThe costs of internalizing a market must be set against the benefits

ØThese include communications costs (which will vary with cultural distance),
management costs (also variable according to context) and resource costs of
separating a single external market into several internal ones.
ØThe changing net benefits of internalization mean that the boundaries of the firm

change over time.

• The combination of the changing balance between outsourcing and
internalization and the reaction of MNEs to constantly shifting location
costs mean that the MNE is a moving target for analysts
2. Imperfect markets

qThere is no advantage In internalizing a perfect market.

• As external markets change and become “more perfect”, outsourcing
replaces internalization.
• The possibility of outsourcing becomes easier and more efficient with an
increasing market for outsourced activities (Liesch et al., 2012).
• This needs to be balanced by the increasing ability of firms to manage
information and to communicate it internationally at a low cost.
• Thus, MNEs increasingly internalize knowledge but outsource
operations.
 Internalization of markets across national frontiers/boundary/borderline

ØFine-slicing and the global factory: global factory” – a network of firms centered on a
key orchestrator or brand owner (Hinterhuber, 2002) .
ØThe global factory uses a network structure and incorporates outsourcing and
offshoring as alternatives to internalization and central location (Mudambi and Swift,
2011, 2012, 2014).
ØThe example of Apple’s iPhone as a global factory could not be a more perfect match
of theory and empirical reality. The knowledge-intensive, high-value elements of the
value chain (“U curve” or “smile curve”) are internalized and located at head office.
• The next level of activities down each arm of the “U curve” are externalized by
contract and located in skills-rich locations. The lowest value-adding activity,
assembly, is outsourced to a Taiwanese company and further offshored in
southern China – a cheap labour area with a dexterous, diligent and
disciplined workforce.
Ø
…

The resource-based view of the firm

• a necessary condition for competitive advantages is imperfect factor
markets.
• In these special circumstances, firms can appropriate the difference
between the price of a factor and its value to the firm.

Ownership and control

§ Hymer clearly equates internal control (“the factory”) with “hierarchical and
authoritarian” decision-making.
..

• Thus then, Buckley, (2014) found that Internalisation theory is equally valid for
the MNEs of yesteryear as it is for those today.

• The theory continues to have strong explanatory power for MNE activity.
cont

ØThe internalization theory of the MNE is practical because it works to explain the
strategic decisions of MNEs, to understand them and to predict them.
ØBy having a clear idea of the changing locational costs of different activities, the
links between activities (through flows of intermediate products and services),
and the optimal configuration of locations and flows, the direction of growth of
MNEs can be predicted (Buckley and Hashai, 2004, 2005, 2009).
ØBy analyzing the opportunities to internalize markets in knowledge-intensive
products and services, and the counter-balancing attributes of productive
outsourcing, the strategic decisions of MNEs can be explained.
v International theory focused on ownership advantages (O) are necessarily
temporary – they can be copied, stolen, replicated or competed away. For this
reason, the rest of the MNE is built through internalisation to extend and protect
the returns from innovation (Rugman and Verbeke, 2003).
 Location and the Multinational Enterprise (John Cantwell, 2009)

vIn the early development of the international business field, the focus of attention
moved from the country level to the firm level, and interest in location issues
declined.
vMore recently, firm-based research has itself become increasingly concerned with the
study of firm–location interactions.
vWhen examining two-way knowledge flows or spill overs between multinational
enterprises (MNEs) and other actors in specific locations, the diversity or
heterogeneity of firm’s matters, as does the diversity of locational environments.
…cont

vMNEs now have a greater potential to benefit from a synergistic locational

portfolio of complementary sources of knowledge.
vThe locational composition of the international network for knowledge sourcing of
a given MNE depends upon the extent of institutional compatibility between the
locations in which the MNE is active.
v This compatibility between locations in turn affects the capacity of the MNE to
become an insider in local business systems, and to influence the local
institutional environment.
Multinational Enterprise: The Old and the New in History and Theory (Krugman, P.
(1990)
vthis historical paper reveals that international economic integration is neither new or
necessarily driven by technological change, and examines the traditional, pre-1940,
“vertical” multinational, which invested up- and downstream of their innovation, in
light of this fact.
v An analysis is given of how this older multinational relates to current, “horizontal”
firms, which produce a number of products in several places.
üHorizontal-when one firm acquires another firm operating in the same
industry or producing the same line of products. Companies that engage in
horizontal integration may realize economies of scale, reduced production
costs, synergy in marketing, increased revenue, among others. E.g banking
industry
vUsing the language of industrial organization theory, this paper shows that
technological discoveries of the late nineteenth century explain the shift in
multinational organization and the emergence of global oligopolies.
…

The transaction cost theory of the MNE argues that they arise to organize
interdependencies between agents located in different countries. This will occur

(1) when organizing these interdependencies within the firm is more efficient than
organizing them through the market and

(2) when the benefits of organizing interdependencies within the firm are higher
than their costs.
Lessons learned

• In the twenty-first century, a more nuanced policy response has emerged because
of a more balanced view of the benefits and costs of inward FDI suggested by a
more careful application of internalization theory (Rugman and Verbeke, 1998).
• More attention is now being paid to the comparative costs of different types of
contractual arrangements;
(wholly owned subsidiaries, subcontractors, joint ventures and non-equity
alliances) and the importance of matching appropriate contractual
arrangements to specific types of activity (as exemplified by Chinese
EMNEs).
• I suggest careful analysis of the type of activity and context will lead to more
successful finer-grained policies.
vMichael porter; Competitive Rivalry, Supplier Power, Buyer Power, Threat of
Substitution, and Threat of New Entry.
THANK YOU