The theory of the multinational enterprise (MNE) has two foundational pillars that could be traced back as far as to Adam Smith’s contributions on the division of labor and intra-industry competition.One of the pillars, the contractual approach (Dunning, 2003), is mainly concerned with the efficiency of the firm’s division of labor, in terms of both materials flows and information flows (Casson, 1995). Consequently, MNEs are the result of an internalization of costly materials and information flows across borders with the goal of cost minimization. The second pillar, the value-added approach (Dunning, 2003), focuses on the competitive survivability of firms through efficient and differentiated production (Tolentino, 2001). Hence, MNEs are the result of profit seeking through the application of superior capabilities that result in potential monopolistic advantages. There have been calls to synthesize both views under an evolutionary umbrella (Foss, 1996; Dunning & Lundan, 2008). However, the pillars both lack an explanation of dynamics since the market is either seen as a (quasi-static) structure of transaction costs or as a structure of monopolistic market power. Moreover, while the value-added approach offers quite a different perspective on MNE activity than the contractual approach, it shares significant commonalities in seeing institutions as arbiters of exchange.
My research in this area aims to take a dynamic understanding of competition as its starting point to understand the role of institutions in MNE activity. For example, multinational oligopolists are operating under competitive dynamics that may cause fundamental uncertainties and, thus, require social institutions for strategic decisions, including cross-border investments. This view also suggests that institutions affect not only transaction costs but costs of labor and innovation as well as the appropriability of profits.
Casson, M. 1995. Enterprise and Competitiveness. Oxford University Press.
Dunning, J. H., & Lundan, S. M. 2008. Multinational enterprises and the global economy. Edward Elgar Publishing.
Dunning, J. H. 2003. Some antecedents of internalization theory. Journal of International Business Studies, 34(2), pp. 108-115.
Foss, N. J. 1996. Capabilities and the Theory of the Firm. Revue d'économie industrielle, 77(3): pp. 7-28.
Tolentino, P. E. 2001. From a theory to a paradigm: Examining the eclectic paradigm as a framework in international economics. International Journal of the Economics of Business, 8(2), pp. 191-209.