Efficiency-driven, comparative institutional analysis in international business

Purpose – This paper aims to apply internalization theory in the context of economic efficiency-driven institutions interacting with societal institutions that pursue broader goals. Design/methodology/approach – The analysis builds upon Buckley and Boddewyn’s (2015, this issue) recent work on the perceived need for multinational enterprises (MNEs) to supply public goods outside of their sphere of technical competences. This paper proposes a more restrictive approach: external markets will only be internalized if, on balance, the efficiency benefits of internalization outweigh its costs at the firm level, in line with orthodox internalization theory. Findings – MNEs replacing the activities of failing (or even absent) public sector institutions is a business phenomenon commonly observed in less developed economies. However, positive distributional effects and societal externalities without the required efficiency benefits at the firm level are insufficient for MNEs’ supply to occur. Practical implications – Managerial decisions in the internalization sphere will be guided by the transactional characteristics of the MNEs’ firm-specific advantages (FSAs) and the requisite complementary resources held by host country economic actors. Internalization theory thinking suggests applying various, specific principles to assess in a comparative institutional fashion whether “diversification” into supplying public goods will serve the MNEs’ efficiency goals, namely, the “cost of entry” test, the “better-off” test and the “value capture” test. Originality/value – Internalization theory provides a solid, efficiency-driven rationale to guide MNE choices on which activities the firm will conduct internally. The nature of the MNEs FSAs and the most efficient, feasible option to bundle firm-level resources and locally held resources in host environments are critical to these choices.