Strategic Internalization and the Growth of the Multinational Firm

Abstract

The most readily available scenario for the early analysis of the Multinational Enterprise (MNE), rather than foreign direct investment (Hymer, 1960/1976), was the horizontally-integrated international firm. This involved the use of existing sources of firm-level competitive advantage (usually presumed to have been centrally generated) in the production of a fairly similar range of goods in a number of countries, in response to negative location characteristics (mainly restraints on trade). The invocation of internalization theory, in this case, then addressed the issue of why these existing sources of competitiveness were retained within the firm (in the process initiating or increasing its status as a multinational) when used in foreign countries. Thus the theory indicates failures in the markets for competitive advantages as intermediate goods as often preventing their marketing (through licensing, etc.) to local firms. Proprietary firm-level knowledge proved an ideal and relevant case for exposition of internalization, and was addressed systematically by Buckley and Casson (1976) in, for example, their invocation of buyer uncertainty. Throughout the book, though, their concern is with the MNE as both a ‘developer and transferor of various kinds of knowledge and skill’ (1976, p. 109). This chapter suggests that one of the crucial ways in which the MNE has developed away from a horizontally-integrated hierarchy, is in the form of increased use of decentralized learning processes that become key forces in driving their competitive development. Thus we adopt the concept (Papanastassiou and Anastassopoulos, 1997, p. 368) of strategic internalization, which ‘involves the absorption and development by the subsidiary of competitive advantages existing in the host environments.’