Why Do Businesses Internationalise

Mainstream internationalisation theories

Mainstream Internationalisation Theories Instead of looking at the global strategy of the MNE from the viewpoint of management science, marketing, and decision theory, it is necessary to consider more explicitly the economics of the foreign investment decision.

International business activity is not a recent phenomenon.

The objective of this chapter is to provide a review of the mainstream literature on internationalisation. Given my research problem, the focus is on theories that consider transnational expansion at the firm level. Among others, the investment development path (IDP) concept and Ozawa's "tandom growth" treatment of the flying geese metaphor are popular frameworks for considering FDI. They are not included, however, since their research setting is that of the economy as a whole.

Internalisation Theory

A criticism raised in the 1970s about Monopolistic Advantage theory was that it did not differentiate between imperfections brought about by market structure (i.e., the number and size of enterprises on both the demand and supply sides) and those associated with transaction costs. By not doing so, Buckley and Casson (1976) and others argued Hymer had failed to incorporate the insights of Coase's (1937) concept of market failure.

Coase's theory of the firm contended that, contrary to the classical understanding in which price mechanisms optimally coordinate markets, market failure can occur as costs associated with the price mechanism develop (such as finding buyers and sellers, and the costs involved with negotiating, coordinating, monitoring, and enforcing contracts, and costs associated with government regulations and taxes). The operation of markets is therefore not costless, and the firm is an organising unit that supplants the price mechanism. Domestic firms would prefer to use internal prices in the face of excessive costs in the outside market. Firms therefore seek to avoid these costs by...