Organizational Efficiency, Firm Capabilities, and Economic Organization of MNEs

Abstract

We argue that multinational enterprises (MNEs) not only strive to minimize transaction costs but also attempt to maximize transaction values when interacting with local firms in foreign markets. We put forth our thesis for the MNE governance structure, contingent on the institutional environment of the host country and the characteristics of the transaction. Specifically, we suggest that MNEs' choice of market, hierarchy or hybrid (joint ventures) form of governance depends on the interplay between the costs and the benefits or a transaction relationship. For high knowledge content products/services, MNEs choose hierarchy when institutional environment is not well developed. As institutional environment develops more, hybrid replaces hierarchy. However, in very strong institutional environment hierarchy again turns out to be optimal for MNEs. For low or no knowledge content products/services, the presence of market is possible in very advanced institutional environment.

Keywords: Transaction Costs, Transaction Values, Institutional Environment, Governance Structure, Multinational Enterprise