International Firms Use Internalization and Market Imperfections to Their Advantage in International Business Competition

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International firms use Internalization and Market Imperfections to their advantage in International Business competition. Introduction Internalization is a general principle that explains the boundaries of organizations; its application to the MNE is just one of its many spin-offs. It is a highly specialized principle, targeted specifically on explaining where boundaries lie, and how they shift in response to changing circumstances. By itself, it does not explain other aspects of organizations. Progress in internalisation theory is achieved by combining this core approach with other principles to generate a wide range of predictions about different aspects of organizational behavior. As indicated above, it can be combined with trade theory to explain the location of the firm's operations, with organization theory to explain international joint ventures (IJVs), and with theories of innovation to explain the kinds of industry in which a firm will operate. It applies not only to the geographical boundaries of the firm, but also to other boundaries, such as the boundary of a firm's product range, which is normally studied as a separate subject, namely product diversification. Combination with theories of entrepreneurship allows an analysis of culture to be developed by the theory. Most organizations purchase inputs from independent suppliers, and so the question naturally arises as to whether they should produce these inputs for themselves. In management studies this is often called the “make or buy decision”; in economics it is referred to as the “backward integration” issue. Backward integration by MNEs is exemplified by “resource-seeking investment”. In economics, a market imperfection is a situation where in the allocation of production or use of goods and services by the free market is not efficient. Market failures can be viewed as scenarios where

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