Thesis comments - Essay Example

Instead Coase focused on factors within the organization which impacted economic activity. Coasian theory later became the foundation for what is today called internalization theory, one of the most significant theories to emerge in the study of multinational enterprises (Rugman & Verbecke, 2008). This theory suggests that foreign production and sales of a multinational business take place in response to imperfections in the goods and services markets. Buckley and Casson (1976) established the modern conception of this theory by suggesting three premises: 1) firms maximize profit in a world of imperfect markets, 2) the imperfect nature of the markets for intermediate products motivates firms to bypass them by creating internal markets, and 3) internalization of markets across national boundaries generates multinational enterprises.

Thus, the multinational organization is seen as a device for raising efficiency by replacing external markets with an internal market within the company. Caves (2007) suggests that the establishment of a subsidiary by a multinational enterprise amounts to the entry into one national market based on needs created by another market. One type of entry is horizontal expansion whereby a subsidiary produces the same product (or product line) as the parent company. Another is vertical expansion or integration across national borders either backwards in order to obtain raw materials or other intermediate products needed by its main operations, or forwards to provide a distribution channel for its exports.

Consequently there are three types of organizations potentially relevant to multinational enterprises. The first is a horizontally integrated firm, meaning a firm which produces essentially the same product line for each of the geographic markets where it has a presence. The second is a vertically integrated firm, meaning a firm that produces outputs in some of its plants which serve as inputs to others of its plants. The third is a diversified company, whose plant outputs are neither horizontally nor vertically related to one another (Caves, 2007).

Hymer’s (1976) theory of international operations highlighted two major motivators of international operations, namely the exploitation of oligopolistic advantages and the removal of conflict between firms to strengthen market power by means of collusion. He states, It frequently happens that enterprises in different countries compete with each other because they sell in the same market or because some of the firms sell to other firms. If the markets are imperfect, that is, if there is horizontal or bilateral monopoly or oligopoly, some form of collusion will be profitable.

One form of collusion is to have the various enterprises owned and controlled by one firm. This is one motivation for firms to control enterprises in foreign countries. (Hymer, 1976, p. 25). Hymer emphasizes that direct foreign investment is not motivated by interest rates but rather by potential profits which can be derived by controlling a foreign enterprise. Vernon’s product cycle model (1966) is an important macroeconomic approach to understanding international business. This theory describes the product cycle as consisting of three primary phases: innovation, growth, and maturation.

During the last, maturation stage of the product, the