The Theory of the Firm,the Theory of Competition and the Transnational Corporation

Abstract

Coase's 1937 paper on ‘The Nature of the Firm’ formed the basis of the transaction-cost and internalization theories of transnational enterprises in the 1970s through 1990s. These emphasized the problem of firms transferring intangible assets across national borders. Newer theories of the firm adopt resource-based Penrosian, knowledge-based, capabilities and evolutionary perspectives, yet most continue to explain the international firm as a function of transaction-cost economizing. It is argued that Coase's intention was to present a theory of the firm abstracted from its competitive environment. The application of this approach to a theory of the transnational corporation (TNC) is flawed because it cannot explain the TNC without reference to competitive conditions. This leaves us with incomplete theories of multinational firms, because they address transaction-cost problems and solutions to the exclusion of many other competitive considerations that must influence the transnational step in the firm's evolution. The newer knowledge-based theories of the firm represent progress because they focus on the institutional details of dynamic firm investment in the intangible or knowledge-based competitive assets by which firms transform their environments. Most recently, theory has begun to emphasize the advantages and not just the costs of internationalization. Additionally, the necessity to address the juxtaposition of internalization and externalization by global firms provides a context for creating a dynamic explanation of both. The key is to recognize the process of standardization as a part of the process of innovation at the heart of learning-based theories. This can help to explain the hierarchical division of labor both within and between firms.