Market Failure, Relational Failure and the Nature of Advantage: Examining the Competitiveness of Multinational Enterprises

Abstract

In this article I make three main arguments. First, the appropriate governance choice for firms is one that reflects the tradeoff between market failure and relational failure or, in other words, between knowledge appropriability and knowledge accessibility. Second, through what may be considered as economies of common governance, the multinational enterprise is uniquely able to tap into a particular advantage that arises from its spatial dispersion of activities. More specifically, it is able to create and maintain select (organizational) mechanisms to promote ‘encounters’ between knowledge assets that are often too dispersed to meet freely through market mechanisms. Third, the notion of advantage itself -- a bedrock of the multinational literature -- may be a double-edged sword that is gradually losing its potency. In particular, it deters advantaged (multinational) firms from being entrepreneurial is an era where the emphasis may be shifting from ability to agility. This provides an opening to multinationalizing firms.