3 - Organization and Growth of the MNE

Summary

Economic analysis traditionally has treated the firm as a single decision-making center, as if one mind were absorbing all relevant data and making all decisions on the basis of well-formulated objectives. In fact, decision making is decentralized within firms, and the decisions reached can be colored by the structure of internal organization chosen by the firm and the incentives and resources that it provides to its various groups of functional specialists. This coloration arises from precisely the costs of information and transactions discussed in Chapter 1. The multinational enterprise (MNE) enjoys certain advantages over the arm's-length market, but they must trade against the organizational costs and constraints that the firm encounters in coordinating multinational operations. Therefore, an examination of the MNE's internal structure is a logical extension of the transaction-cost model of the MNE's underlying rationale. This should aid understanding of how the firm will respond to both market stimuli and public policies.

Expansion of the Firm

An apt starting point is the process of the growth of the firm, as it pertains to the MNE. We can link the transaction-cost model of the MNE to constraints on the firm's process of growth and adjustment and to evidence on riskiness and turnover in multinational activities.

Adjustment Costs in Expansion of the MNE

The transaction-cost approach to the MNE can explain the course of the firm's development over time, as well as its pattern of activities at a given time.