Extending internalisation theory: From the multinational enterprise to the knowledge-based empire

Internalisation theory explains how the boundaries of firms are set at the margin where the advantages of internal coordination are just offset by the costs of supplanting external markets. Internalisation is a general principle that can be used to explain the boundaries of any institution in terms of the costs and benefits of alternative methods of coordination. As such, it applies to states as well as to firms. Within this broader context, multinational enterprises (MNEs) have an analogue in the imperial state. This paper develops a new theory of imperialism that is isomorphic to the internalisation theory of the MNE. This theory provides a set of insights which do not appear in any systematic way in earlier theories of imperialism. 1. Some states are more entrepreneurial than others because they provide strong incentives for individual discovery and innovation (e.g. promoting freedom, of travel, association and expression). 2. Newly discovered knowledge is a global public good; it is therefore efficient to apply it simultaneously in all territories to which it is relevant (e.g. apply the same mining technology in several different mineral-rich countries). 3. States have a role in supplying local public goods (e.g. law and order, transport and communications infrastructure, and certain types of health and education); they can also establish property rights and regulations under which private goods are provided by a private sector. Newly discovered knowledge about how to supply public goods can therefore be exploited by a state. 4. Although knowledge is a public good, there are obstacles to transferring it between locations. Foreigners may not accept the superiority of the knowledge; they may pass it on to the supplier's enemies; or they may not be able to absorb it because of limited education. A state may therefore encounter difficulty in exploiting its knowledge abroad through licensing agreements negotiated under treaty arrangements. 5. States possess military knowledge as well as civilian knowledge. The rule of law is weaker between states than it is within states. Superior military knowledge therefore permits a state to take over other territories by force. A knowledge-intensive state frustrated by barriers to knowledge transfer may therefore resort to force and take over (occupy or govern) territories controlled by other states (especially those that refuse to recognise its supremacy). 6. Knowledge obsolesces, and as it does so the strategic case for imperialism declines. These insights suggest that imperialism is a rational response to a specific set of circumstances. They suggest that in a world where opportunities to discover new knowledge arise continuously, imperialism emerges naturally wherever these circumstances prevail. Obsolescence too is a natural process, and this explains why empires decline. The decline of one empire may generate a gap that some other rising empire may be able to fill. The paper concludes by reviewing a panel of fourteen empires on which the theory can be tested using case study analysis.