Internalization

Abstract

Internalization theory stands as a foundational framework within the realm of international business (IB). Its primary aim is to elucidate the reasons and methods behind a firm’s expansion across national boundaries. Pioneered and developed by eminent scholars, including John Dunning, Peter Buckley, Mark Casson, Jean-François Hennart, and Alan Rugman, internalization theory scrutinizes the underlying motives that drive firms to conduct transactions internally rather than resorting to external markets. Its central objective is to forecast why firms opt for internal transactions when venturing into the international arena, thereby influencing multiple facets of decision-making within organizations. Consequently, it offers invaluable insights into the structure and operation of multinational enterprises (MNEs). At its core, internalization theory delves into the dynamic interplay between the advantages and costs linked to the internalization of transactions. This analysis is pivotal in comprehending how firms tactically oversee their operations, especially within the context of the global economy. Crucially, the theory encompasses various substreams, as introduced by scholars such as Buckley and Casson, Hennart, and Rugman. Each of these substreams delves into specific aspects of internalization, collectively enriching the broader understanding of IB. Since the turn of the century, the discourse surrounding internalization theory has extended its scope to encompass concepts like the recombination of firm-specific advantages, the role of dynamic capabilities, and the impact of entrepreneurial actions in the operations of MNEs. A burgeoning concept within this theory is “quasi-internalization,” which signifies a hybrid governance approach. It amalgamates elements of both market and hierarchy, frequently relying on relational and reputation-based controls to facilitate international transactions. Thus, internalization theory remains highly pertinent in explaining the boundaries of MNEs across diverse eras and contexts, spanning from emerging economies to digital economies. It also serves as a valuable guide for other disciplines, such as strategy and management. When investigating new transaction types, firms, or governance methods, a prudent initial step involves assessing whether internalization theory can effectively elucidate them.