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Transaction Costs and the Theory of the Multinational Enterprise

In: The Economic Theory of the Multinational Enterprise


  • Mark Casson


The theory of internalisation is now widely accepted as a key element in the theory of the multinational enterprise (MNE) (see Chapter 1). Internalisation is a general theory of why firms exist, and without additional assumptions it is almost tautological. To make the theory operational it is necessary to specify assumptions about transaction costs for particular products and for trade between particular locations. It is typically asserted that: (1) It is very costly to license unpatentable know-how, so that the market for know-how must be internalised. This leads to the vertical integration of production and R & D, and, because of the ‘public good’ characteristics of know-how, to the consequent horizontal integration of production in different locations. (2) It is difficult to specify and enforce long-term futures contracts, so that the market for raw materials used by capital-intensive production processes must be internalised by backward integration. (3) Ad valorem tariffs, international tax differentials and foreign exchange controls create incentives for transfer-pricing, which are most easily exploited through internalisation.

Suggested Citation

  • Mark Casson, 1985. "Transaction Costs and the Theory of the Multinational Enterprise," Palgrave Macmillan Books, in: The Economic Theory of the Multinational Enterprise, chapter 2, pages 20-38, Palgrave Macmillan.
  • Handle: RePEc:pal:palchp:978-1-349-05242-4_2
    DOI: 10.1007/978-1-349-05242-4_2

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    Cited by:

    1. Gilroy, Bernard Michael & Gries, Thomas & Naudé, Willem & Schmidt, Karl-Heinz & Bauer, Norbert, 2001. "Multinational Enterprises in Africa - A Study of German Firms in South Africa," MPRA Paper 17868, University Library of Munich, Germany.
    2. Javier Cuervo & Low Sui Pheng, 2005. "Significance of internalization factors for Singapore transnational construction corporations," Construction Management and Economics, Taylor & Francis Journals, vol. 23(2), pages 147-162.
    3. Randolph Luca Bruno & Riccardo Crescenzi & Saul Estrin & Sergio Petralia, 2022. "Multinationals, innovation, and institutional context: IPR protection and distance effects," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 53(9), pages 1945-1970, December.
    4. Fisch, Jan Hendrik, 2008. "Internalization and internationalization under competing real options," Journal of International Management, Elsevier, vol. 14(2), pages 108-123, June.
    5. José Campa & Mauro F. Guillén, 1999. "The Internalization of Exports: Firm- and Location-Specific Factors in a Middle-Income Country," Management Science, INFORMS, vol. 45(11), pages 1463-1478, November.
    6. Jean, Ruey-Jer Bryan & Tan, Danchi & Sinkovics, Rudolf R., 2011. "Ethnic ties, location choice, and firm performance in foreign direct investment: A study of Taiwanese business groups FDI in China," International Business Review, Elsevier, vol. 20(6), pages 627-635.
    7. Teresa da Silva Lopes & Mark Casson & Geoffrey Jones, 2019. "Organizational innovation in the multinational enterprise: Internalization theory and business history," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 50(8), pages 1338-1358, October.


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