The Comparative Performance of U.S. and European Multinational Enterprises, 1970--79.

This paper focuses on the application of a new theory of the multinational enterprise (MNE) to examine the performance of European and U.S. based multinationals. The new theory of the MNE is called the theory of internalization. The first premise of this study is that a theory of the multinational enterprise should be as applicable to European MNEs as to the MNEs based in other home nations such as the United States or Japan. The second premise is that the empirical propositions of a modern theory of the MNE should also apply equally well across the MNEs of all nations. The theory integrates elements from industrial organization and international economics. It is more efficient for a firm to create and use an internal market, rather than incur the prohibitive transactions costs of an outside market. Indeed, in some cases of market failure such a regular market may not exist, for example, in the pricing of proprietary information generated within a firm but taking on the attributes of a public good market. When either natural or unnatural market imperfections exist across nations, then there is an incentive for the MNE to create an internal market, in the same manner as a domestic firm responds to market failure and regulation. imperfections are exogenous. The potential differences in the theories arise only if the MNE is assumed to have the power to generate its own firm specific advantages over time, that is to endogenize them. In essence, this is not a substantive difference, merely a choice of the suitable assumption in modelling the MNE.