Critique of the Internalization Theory and Eclectic Paradigm

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A Multinational Corporation (MNC) can be defined as “a single entity that controls and manages group of goal-disparate and geographically dispersed productive subsidiaries” (Triandis and Wasti, 2008, p. 2). Multinational corporations are entities that make Foreign Direct Investment (FDI) and produce added value in countries other than the country in which they are headquartered. One of the key objectives of the MNC is to obtain capital where is it cheapest and to invest FDI and undertake production in areas that yield the highest rates of return (De Beule and Van Den Bulcke, 2009). However, many theories have been advanced to account for the decision-making process that MNCs undertake in relation to FDI. The purpose of this paper is to explain the two main theories – internalization theory and OLI eclectic paradigm theory – and to critique these in relation to some of the other conceptual models that have been advocated. One of the most well accepted models of FDI is Buckley and Casson’s (1976) internalisation theory, who developed a model of MNCs and FDIs centered around the interrelationship between market imperfections, knowledge and the internalisation of production and consumption (Buckley and Casson, 2009). Specifically, the theory recognized that multinational corporations are both horizontally and vertically organized, and that the “the vertically integrated firm internalises a market for an intermediate product, just as the horizontal MNE [multinational enterprise] internalises markets for proprietary assets” (Caves, 1996: p.13). In addition, internalisation will occur, and multinational corporations will expand only as far as the advantages, including barriers to entry, are not offset by the costs of control, communi... ... middle of paper ... ...ect investment in the United States. Journal of International Business Studies 7(2), pp. 43-55. Gillies, G. (2005) Transnational Corporations and International Production. Concepts, Theories and Effects, Edward Elgar, Cheltenham Hennart, J-F (2001) Theories of the Multinational Enterprise, In Rugman A. M. and T. L. Brewer (eds.) (2001) The Oxford Handbook of International Business, OUP, Oxford Kogut, B. and Zander, U. (1993). Knowledge of the Firm and the Evolutionary Theory of the MNC, Journal of International Business 24(4), pp. 625-645 Magee, S. P. (1977). Multinational corporations, the industry technology cycle and development. Journal of World Trade, 11(4), 297-321. Triandis, H., & Wasti, S. (2008). Culture. In D. Stone, & E. Stone-Romeo, The influence of culture on human resource management processes and practices (pp. 1-24). Psychology Press

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