Information technology and transnational integration: Theory and evidence on the evolution of the modern multinational enterprise

Reflecting amplified hazards in cross-border exchange and imperfections in markets for intangibles, internalization has been central in multinational enterprise (MNE) theory. This centrality notwithstanding, the fact is that internalization coheres with lower-powered incentives and carries an implicit drawback, namely, higher realized production costs. With the emergence and deployment of information and communication technology (ICT), modern MNEs are reshaping their transnational governance to address this cost. The modern MNE uses ICT to mitigate transaction costs, and evolves more to arm's length exchange to incentivize lower production costs. A testable prediction is that MNEs in industries more susceptible to and employing more ICT will exhibit a reduced propensity for transnational integration. We examine this hypothesis using available data from 1982 to 1997 for US MNEs across all manufacturing sectors. Regression results and robustness tests are strongly congruent with the prediction. This study, a first to explore empirically the role of ICT in the evolution of transnational exchange, suggests that MNE theory, until now founded primarily on transaction cost economics and a cross-border control theory of value capture, is more likely to keep pace with developments in MNE practice by opening up to incentive theories of exchange governance and a cross-border coordination theory of value creation.