A Critical Review Of The Internalization Approach

A Critical Review of the Internalization Approach---Toward a Knowledge-Based Synthesis of the theory of MNEThis paper is concerned with the notion of internalization and its relationship to the synthesis of the transaction cost approach and resource-based approach to the theory of MNE. It begins with the critical assessment of the internalization/TCE arguments by Buckley and Casson (1976), Rugman (1981, etc.), Hennart (1982, etc.) and Hymer (1990/1968). It is the springboard of the following analysis. The notion of internalization is discussed. Some rudimentary ideas on the unit of analysis, underlying principle and theoretical logic are identified and further explored in detail. It is argued that to build a better theory of MNE, the firm rather than the market or the transaction should be regarded as the unit of analysis. In addition, the organizational logic instead of the market logic should be applied and the introduction of the strategic management approach is necessary.Adopting the firm as the unit of analysis, organizational logic and a combination of the TCE and the strategic management approaches, the seemingly unsolved problems proposed in the synthesis of the transaction cost approach and resource-based approach are solved by specialization theory of the firm which is regarded as the underlying theory of the resource-based view of the firm. To reach a better synthesis, the knowledge-based view of the firm is introduced to provide a better understanding of the formation of the organizational capability in the production dimension and to supplement the TCE explanation on the tacit knowledge related issues in the organization dimension. The section in which knowledge-based framework is developed constitutes the core of the paper. Using this framework, policy implications on China's attracting FDI are discussed briefly.JEL Classification: D23, F23, L21...