Theories of the multinational enterprise

This article provides a critical survey of some of the theories that have sought to explain why multinational enterprises (MNEs) exist, with special emphasis on the transaction costs/internalization approach. While scholars have quibbled over the definition of an MNE (and whether it ought to manufacture in at least two countries to qualify for that title), this article defines it as a private institution that organizes, through employment contracts, interdependencies between individuals located in more than one country. Hence a domestic manufacturer who contracts at arm's length with local distributors abroad is not an MNE, but a domestic department store with its own overseas buying offices, but no foreign manufacturing, is. The first section briefly discusses early capital flow and industrial organization theories before turning to transaction costs/internalization theories, the now dominant theories of the MNE. It focuses on the author's own brand of the theory, developing first the basic foundations, then applying them to the MNE.