nep-cse New Economics Papers
on Economics of Strategic Management
Issue of 2006‒10‒28
24 papers chosen by
Bernardo Batiz-Lazo
Bristol Business School

  1. Coordination and Lock-In: Competition with Switching Costs and Network Effects By Farrell, Joseph; Klemperer, Paul
  2. Alliances and industry analysis By Garcia-Pont, Carlos
  3. On the explanation of horizontal, vertical and cross-sector R&D partnerships – evidence for the German industrial sector By Uschi Backes-Gellner; Frank Maass; Arndt Werner
  4. Outsourcing, Contracts and Innovation Networks By Naghavi, Alireza; Ottaviano, Gianmarco I P
  5. Procuring Innovation By Cabral, Luís M B; Cozzi, Guido; Denicolo, Vincenzo; Spagnolo, Giancarlo; Zanza, Matteo
  6. Does business succession enhance firms’ innovation capacity? Results from an exploratory analysis in Italian SMEs By Andrea GANZAROLI; Gianluca FISCATO; Luciano PILOTTI
  7. Computing Abuse Related Damages in the Case of New Entry: An Illustration for the Directory Enquiry Services Market By Martinez Granado, Maite; Siotis, Georges
  8. The entrepreneur’s mode of entry: Business takeover or new venture start? By Simon C. Parker; C. Mirjam van Praag
  9. Who Are China's Entrepreneurs? By Djankov, Simeon; Qian, Yingyi; Roland, Gérard; Zhuravskaya, Ekaterina
  10. Investigating the Impact of Firm Size on Small Business Social Responsibility: a Critical Review By J. LEPOUTRE; A. HEENE
  11. Conditional Allocation of Control Rights in Venture Capital Firms By Gebhardt, Georg; Schmidt, Klaus M.
  12. Industrie hospitalière : les conséquences des réformes en ex-RDA By Irina Peaucelle
  13. Technology, Information and the Decentralization of the Firm By Acemoglu, Daron; Aghion, Philippe; Lelarge, Claire; Van Reenen, John; Zilibotti, Fabrizio
  14. Doing Business in Indonesia: Legal and Bureaucratic Constraints By Ross H. McLeod
  15. Viabilidad de las empresas familiares de tamaño medio en el sector español de alimentación y bebidas By Gallo, Miguel A.; Estape, Maria J.
  16. Openness and Industrial Response in a Wal-Mart World: A Case Study of Mexican Soaps, Detergents and Surfactant Producers By Keller, Wolfgang; Smarzynska Javorcik, Beata; Tybout, James R
  17. A.-R.-J. Turgot and the Construction of an Economic Agent called Entrepreneur By José M. Menudo; José Mª O’kean
  18. Non-Parametric Analysis of Efficiency Gains from Bank Mergers in India By Adrian R. Gourlay; Geetha Ravishankar; Tom Weyman-Jones
  19. Bigger is Better: Market Size, Demand Elasticity and Resistance to Technology Adoption By Desmet, Klaus; Parente, Stephen
  20. Strategic Patenting and Software Innovation By Noel, Michael D.; Schankerman, Mark
  21. Entrepreneurship: First Results from Russia By Djankov, Simeon; Miguel, Edward; Qian, Yingyi; Roland, Gérard; Zhuravskaya, Ekaterina
  22. Merger Simulations of Unilateral Effects : What Can We Learn from the UK Brewing Industry? By Slade, Margaret E.
  23. Strategy and Organization Improving Organizational Learning By Tarondeau, Jean-Claude
  24. The Theory of the Firm, the Theory of Competition and the Transnational Corporation By Janis Kapler

  1. By: Farrell, Joseph; Klemperer, Paul
    Abstract: Switching costs and network effects bind customers to vendors if products are incompatible, locking customers or even markets in to early choices. Lock-in hinders customers from changing suppliers in response to (predictable or unpredictable) changes in efficiency, and gives vendors lucrative ex post market power - over the same buyer in the case of switching costs (or brand loyalty), or over others with network effects. Firms compete ex ante for this ex post power, using penetration pricing, introductory offers, and price wars. Such 'competition for the market' or 'life-cycle competition' can adequately replace ordinary compatible competition, and can even be fiercer than compatible competition by weakening differentiation. More often, however, incompatible competition not only involves direct efficiency losses but also softens competition and magnifies incumbency advantages. With network effects, established firms have little incentive to offer better deals when buyers’ and complementors’ expectations hinge on non-efficiency factors (especially history such as past market shares), and although competition between incompatible networks is initially unstable and sensitive to competitive offers and random events, it later 'tips' to monopoly, after which entry is hard, often even too hard given incompatibility. And while switching costs can encourage small-scale entry, they discourage sellers from raiding one another’s existing customers, and so also discourage more aggressive entry. Because of these competitive effects, even inefficient incompatible competition is often more profitable than compatible competition, especially for dominant firms with installed-base or expectational advantages. Thus firms probably seek incompatibility too often. We therefore favour thoughtfully pro-compatibility public policy.
    Keywords: coordination; indirect network effects; lock-in; network effects; network externalities; switching costs
    JEL: D42 D43 L12 L13 L14 L15
    Date: 2006–08
  2. By: Garcia-Pont, Carlos (IESE Business School)
    Abstract: Traditionally alliances have been left at of industry analysis. We have been focusing basically on the economic characteristics determining bargaining power on the relationships between the actors in a value system. The paper proposes a methodology to analyze industries from a very different perspective that incorporates alliances as one of the main drivers of industry structure.
    Keywords: Alliances; industry structure; networks;
    Date: 2006–09–11
  3. By: Uschi Backes-Gellner (Institute for Strategy and Business Economics, University of Zurich); Frank Maass (Institut für Mittelstandsforschung Bonn (IfM Bonn), (Institute for Small and Medium Size Enterprises, Bonn)); Arndt Werner (Institut für Mittelstandsforschung Bonn (IfM Bonn), (Institute for Small and Medium Size Enterprises, Bonn))
    Abstract: This paper investigates the determinants of inter-firm cooperation in research and development (R&D). We analyse the impact of structural and firm specific characteristics, market performance, access to resources and managerial techniques on different types of inter-firm R&D cooperation. Based on a survey of 886 enterprises in manufacturing and industry/business-related services located in Germany, we estimate several models with different types of R&D partnerships as a dependent variable to find out which types of enterprises are more or less likely to form or join either type of R&D partnership. The findings suggest that the availability and the quality of a firm’s own R&D resources are common factors driving R&D cooperation in general. Differentiating between cooperation activities in R&D among enterprises on the same production level on the one hand and vertical cooperation between enterprises and suppliers/customers or cross-sector alliances between enterprises and public research institutes on the other hand, we find cooperation type specific determinants of entry. The size of a firm, its location, access to financial resources and network experience seem to be most important.
    Keywords: cross-sector alliances, inter-firm cooperation; R&D cooperation; SME
    Date: 2005–02
  4. By: Naghavi, Alireza; Ottaviano, Gianmarco I P
    Abstract: We study the decision of firms between vertical integration and outsourcing in a dynamic setting with product innovation. In so doing, we model an industry in which R&D is performed by independent research labs and outsourcing production requires complementary upstream and downstream inventions. In the presence of search friction and incomplete outsourcing contracts, we show that the ex-post bargaining power of upstream and downstream parties at the production stage feeds back to R&D incentives, thus affecting the emergence and the performance of labs specialized in complementary inventions.
    Keywords: incomplete contracts; innovation; outsourcing
    JEL: F12 F23
    Date: 2006–05
  5. By: Cabral, Luís M B; Cozzi, Guido; Denicolo, Vincenzo; Spagnolo, Giancarlo; Zanza, Matteo
    Abstract: To stay on top of global competition, firms and governments often need to acquire innovative goods and services, including ideas and research, from their strategic suppliers. A careful design of procurement policy is crucial to make potential suppliers generate and sell the most suitable innovation. Moreover, procurement by public agencies and large firms often set the incentives for the development of innovations economy-wide. In this paper, guided by recent micro- and macro-economic research, we discuss vices and virtues of the many ways to induce potential suppliers to create and sell innovations. We consider a menu of procurement methods and policies for best procuring new knowledge and innovative products, discussing their costs and benefits in different possible scenarios and suggesting criteria to choose among them. We explain how to optimize the degree of competition between suppliers, as well as other more practical indirect ways to stimulate innovation. We discuss the effects of standard setting activities by large, often public, procurers on innovation races. We evaluate how public and large private firm’s procurement may induce innovation and growth at the national, industry or supply network level by affecting input market prices and the returns to human capital formation. Finally, we point out how risk management methods used in procurement should be modified when innovation is a central concern for a buyer.
    Keywords: (procurement) risk management; auctions; competitiveness; contests; ideas; innovation; innovation policy; innovative supply; knowledge; prizes; procurement; R&D; sourcing; standards; supplier investment; technology
    JEL: D44 H57 L15 O31 O38
    Date: 2006–07
  6. By: Andrea GANZAROLI; Gianluca FISCATO; Luciano PILOTTI
    Abstract: Our main objective with this paper is to explore business transfer as as potential source of innovation in Small and Medium-sized Enterprises (SMEs). The literature on the subject has mainly focused to business succession as process through which ownership and control is transferred between generation of entrepreneurs. In this paper we argue that nowadays the aim of business succession should not only replace existing entrepreneurial resources, but enhancing firms’ innovation capacity. Our contribution moves into two major directions. The first explores the relationhip between business succession and innovation from a theoretical point of view. The second deepens such an understanding by assessing it on a sample of micro and small enterprises located in Emilia Romagna. We show that business transfer/succession in SMEs is not perceived as potential source of innovation. Business transfer still takes place mainly within the family. SMEs show little propensity to saparte ownership form management as way to enhance firms’ likelihood to survive to business transmission. Senior entrepreneurs’ show little propensity to invest on juniors’ training. As result juniors lack of an autonomous business vision and do not perceive themselves as the main driver of innovation. Such a perspective is even supported by seniors, who do not expect business succession to make any difference on the way business is currently managed
    Keywords: family business, succession, small and medium-sized enterprise, innovation
    JEL: G30 G32 G34
    Date: 2006–10
  7. By: Martinez Granado, Maite; Siotis, Georges
    Abstract: A number of European countries, among which the UK and Spain, have opened up their Directory Enquiry Services (DQs) market to competition. In Spain, both local and foreign firms challenged the incumbent as of April 2003. The latter abused its dominant position by providing an inferior quality version of the (essential) input, namely the subscribers’ database. We illustrate how it is possible to quantify the effect of abuse in situation were the entrant has no previous history in the market. We use the UK experience to construct the relevant counterfactual, that is the "but for abuse" scenario. After controlling for relative prices and advertising intensity, we find that one of the foreign entrants achieved a Spanish market share substantially below what it would have obtained in the absence of abuse.
    Keywords: abuse of dominance; competition policy; telecommunications
    JEL: C22 L41 L96
    Date: 2006–09
  8. By: Simon C. Parker; C. Mirjam van Praag
    Abstract: We analyse the decision to become an entrepreneur by either taking over an established business or starting a new venture from scratch. A model is developed which predicts how several individual- and firm-specific characteristics influence entrepreneurs'entry mode. The new venture creation mode is associated with higher levels of schooling and wealth, whereas managerial experience, new venture start-up capital requirements and risk promote the takeover mode. Entrepreneurs whose parents run a family firm are predicted to invest the least in schooling, since schooling reduces search costs and these individuals have the lowest probability of needing to search for a business opportunity outside their family. A sample of data on entrepreneurs from the Netherlands provides broad support for the theory; implications for policy-makers concerned about the survival of family firms lacking within-family successors are discussed.
    Date: 2006–10
  9. By: Djankov, Simeon; Qian, Yingyi; Roland, Gérard; Zhuravskaya, Ekaterina
    Abstract: Social scientists studying the determinants of entrepreneurship have emphasized three distinct perspectives: the role of institutions, the role of social networks and the role of personal characteristics. We conduct a survey from five large developing and transition economies to better understand entrepreneurship in view of these three perspectives. Using data from a pilot study with over 2,000 interviews in 7 cities across China, we find that controlling for institutional environment entrepreneurs in China are much more likely to have family members who are entrepreneurs as well as childhood friends who became entrepreneurs, suggesting that social environment plays an important role in entrepreneurship. Entrepreneurs also differ strongly from non-entrepreneurs in their attitudes toward risks and their work-leisure preferences, echoing Schumpeter. Finally, failed entrepreneurs score the worst on aptitude tests, but have the best self-reported performance in school and perceive the business environment as least favourable.
    Date: 2006–06
    Abstract: The impact of smaller firm size on corporate social responsibility is ambiguous. Some contend that small businesses are socially responsible by nature, while others argue that a smaller firm size imposes barriers on small firms that constrain their ability to take responsible action. This paper critically analyses recent theoretical and empirical contributions on the size – social responsibility relationship among small businesses. More specifically, it reviews the impact of firm size on four antecedents of business behaviour: issue characteristics, personal characteristics, organizational characteristics and context characteristics. It concludes that the small business context does impose barriers on social responsibility taking, but that the impact of the smaller firm size on social responsibility should be nuanced depending on a number of conditions. From a critical analysis of these conditions, opportunities for small businesses and their constituents to overcome the constraining barriers are suggested.
    Date: 2006–06
  11. By: Gebhardt, Georg; Schmidt, Klaus M.
    Abstract: When a young entrepreneurial firm matures, it is often necessary to replace the founding entrepreneur by a professional manager. This replacement decision can be affected by the private benefits of control enjoyed by the entrepreneur which gives rise to a conflict of interest between the entrepreneur and the venture capitalist. We show that a combination of convertible securities and contingent control rights can be used to resolve this conflict efficiently. This contractual arrangement is frequently observed in venture capital finance.
    Keywords: control rights; convertible securities; corporate finance; venture capital
    JEL: D23 G24 G32
    Date: 2006–07
  12. By: Irina Peaucelle
    Abstract: Ce texte fait le point sur l'évolution du secteur hospitalier en Allemagne depuis 1990, selon trois cibles d'analyse. D'abord, sont examinés les raisons des réformes. Pour le faire, l'hôpital est placé dans l'offre des soins et dans la structuration des espaces industriels régionaux, appelés «professionnels» ou «l économie basée sur la connaissance». Puis, l'applicabilité de la théorie économique de santé à la politique médicale est analysée pour évoquer la succession des réformes sur le territoire de l'ex-RDA, les réformes de la convergence, celles qui remédient à des détériorations démographiques et celles qui sont provoquées par l'évolution de la situation économique générale dans la RFA. ### [english abstract: The paper reports on the evolution of the hospital industry in Germany according to three targets of analysis: first, I examine the reasons of the reforms; for that, I position the hospital in the offer of care and in the structuring the regional industrial spaces of Germany, called "professional" or "based on the knowledge" economy. Then I find out the applicability of the health economy improvements into the medical policy: I evoke the succession of the reforms in Germany and in particular on the territory of ex-GDR i.e. the reforms of convergence, those which remedy current demographic deteriorations, and those which are impelled by the evolution of economic situation.] ###
    Date: 2006
  13. By: Acemoglu, Daron; Aghion, Philippe; Lelarge, Claire; Van Reenen, John; Zilibotti, Fabrizio
    Abstract: This paper develops a framework to analyze the relationship between the diffusion of new technologies and the decentralization decisions of firms. Centralized control relies on the information of the principal, which we equate with publicly available information. Decentralized control, on the other hand, delegates authority to a manager with superior information. However, the manager can use her informational advantage to make choices that are not in the best interest of the principal. As the available public information about the specific technology increases, the trade-off shifts in favor of centralization. We show that firms closer to the technological frontier, firms in more heterogeneous environments and younger firms are more likely to choose decentralization. Using three datasets of French and British firms in the 1990s, we report robust correlations consistent with these predictions.
    Keywords: decentralization; heterogeneity; learning; the theory of the firm
    JEL: F23 O31 O32 O33
    Date: 2006–05
  14. By: Ross H. McLeod
    Abstract: The World Bank's new series of Doing Business reports attempt to measure the relative ease of doing business in countries around the world. The output of this research is a set of rankings that enable each country to see how it looks relative to the others from the point of view of private sector businesses. This paper highlights a number of concerns about the Doing Business methodology, and presents a critique of the 'law and finance' view regarding the influence of legal system origins on countries' economic performance, which was highly influential in the first of the Doing Business reports. Selected data from the 2006 report are used to explain why Indonesia is having difficulty getting back to Soeharto-era rates of economic growth. The report's findings in relation to Indonesia are then interpreted within the framework of an analysis of the way the Soeharto 'franchise' operated.
    Keywords: business regulation, contract enforcement, law and finance, legal heritage
    JEL: K2 K4 L51 P14 P52
    Date: 2006
  15. By: Gallo, Miguel A. (IESE Business School); Estape, Maria J. (IESE Business School)
    Abstract: El sector español de alimentación y bebidas tiene características que lo hacen muy significativo para el estudio de la evolución a lo largo del tiempo de las empresas familiares. En este proyecto se ha diseñado un modelo de análisis ecológico de la evolución de las empresas desde el Tratado de Adhesión de 1992 hasta el momento actual. El propósito de este estudio es conocer los índices de supervivencia y vitalidad de las Empresas Familiares, y de esta manera descubrir cómo se hacen fuertes y continúan posicionándose exitosamente en los mercados. Las cuestiones que se plantearán en esta investigación son cuántas empresas familiares habían en el sector en 1992, en un determinado nivel de facturación, y cuántas continúan como familiares en el año 2001. Cómo son las Empresas Familiares que continúan: fuertes con una posición consolidada o, por el contrario, se han debilitado, tiene previstos cambios, etc. En el caso de las empresas que han dejado de ser familiares, conocer las causas de su proceso de transformación, así como también estudiar cuáles son las empresas que han desaparecido del mercado.
    Keywords: Empresa Familiar; Ecología; Supervivencia; Alimentación y bebidas;
    Date: 2006–09–07
  16. By: Keller, Wolfgang; Smarzynska Javorcik, Beata; Tybout, James R
    Abstract: This paper uses a case study approach to explore the effects of NAFTA and GATT membership on innovation and trade in the Mexican soaps, detergents and surfactants (SDS) industry. Several basic findings emerge. First, the most fundamental effect of NAFTA and the GATT on the SDS industry was to help induce Wal-Mart to enter Mexico. Once there, Walmex fundamentally changed the retail sector, forcing SDS firms to cut their profit margins and/or innovate. Those unable to respond to this new environment tended to lose market share and, in some cases, disappear altogether. Second, partly in response to Walmex, many Mexican producers logged impressive efficiency gains during the previous decade. These gains came both from labour-shedding and from innovation, which in turn was fuelled by innovative input suppliers and by multinationals bringing new products and processes from their headquarters to Mexico. Finally, although Mexican detergent exports captured an increasing share of the U.S. detergent market over the past decade, Mexican sales in the U.S. were inhibited by a combination of excessive shipping delays at the border and artificially high input prices (due to Mexican protection of domestic caustic soda suppliers). They were also held back by the major re-tooling costs that Mexican producers would have had to incur in order to establish brand recognition among non-Latin consumers, and in order to comply with zero phosphate laws in many regions of the United States
    Keywords: detergent industry; FDI liberalization; GATT; multinational enterprises; NAFTA; retail sector reform; technology transfer; trade liberalization; trucking; Wal-Mart; WTO
    JEL: F1 F2 L1 L6
    Date: 2006–09
  17. By: José M. Menudo (Department of Economics, Universidad Pablo de Olavide); José Mª O’kean (Department of Economics, Universidad Pablo de Olavide)
    Abstract: The entrepreneurial function as just one factor of production is actually being the point of a depth discussion in entrepreneurship research. It could be the cause of some confusion which impeders theoretical developments and it also makes difficult the effectiveness of pro-entrepreneurial programs. The aim of this article is to analyse the origin of this factor of production. For this purpose, we look back to the 18th century in order to analyze Turgot’s works (1727-1781) by means of a new conceptual framework that distinguishes between different productive agents. A series of analytical problems are exposed when the entrepreneurship is linked to a separate economic agent.
    Keywords: Entrepreneurship, History of economic thought, Turgot, methodology.
    JEL: M13 B1 B11 B41
    Date: 2006–10
  18. By: Adrian R. Gourlay (Dept of Economics, Loughborough University); Geetha Ravishankar (Dept of Economics, Loughborough University); Tom Weyman-Jones (Dept of Economics, Loughborough University)
    Abstract: This paper offers an insight into the effectiveness of economic policy reforms in the Indian Banking System by examining the efficiency benefits of mergers among Scheduled Commercial Banks in India over the post-reform period 1991-92 to 2004-05. It does this by using the methodology developed by Bogetoft and Wang (2005). We also provide a metric for judging the success or failure of a merger. Overall, we find that bank mergers in the post-reform period possessed Considerable potential efficiency gains stemming from harmony gains. Post-merger efficiency analysis of the merged bank with a control group of non-merging banks reveals an initial merger related efficiency advantage for the former that, while persistent, did not show a sustained increase this failing to provide merging banks with a competitive advantage vis-a-viz their non-merging counterparts.
    Keywords: Data Envelopment Analysis, Mergers, Banking, Intermediation Approach, Production Approach.
    JEL: C14 G21 G34
    Date: 2006–10
  19. By: Desmet, Klaus; Parente, Stephen
    Abstract: This paper's hypothesis is that larger markets facilitate the adoption of more productive technology by raising the price elasticity of demand for a firm's product. A larger market, either because of population or free trade, thus implies a larger increase in revenues following the price reduction associated with the introduction of a more productive technology. As a result, technology adoption is more profitable, and the earnings of factor suppliers are less likely to be adversely affected. Firms operating in larger markets, therefore, have a greater incentive to adopt more productive technologies, and their factor suppliers have a smaller incentive to resist these adoptions. This is the case even when there is no fixed resource cost to adoption. We demonstrate this mechanism numerically and provide empirical support for this theory.
    Keywords: imperfect competition; Lancaster preferences; market size; technology adoption
    JEL: F12 O13
    Date: 2006–09
  20. By: Noel, Michael D.; Schankerman, Mark
    Abstract: Strategic patenting is widely believed to raise the costs of innovating, especially in industries characterised by cumulative innovation. This paper studies the effects of strategic patenting on R&D, patenting and market value in the computer software industry. We focus on two key aspects: patent portfolio size which affects bargaining power in patent disputes, and the fragmentation of patent rights ('patent thickets') which increases the transaction costs of enforcement. We develop a model that incorporates both effects, together with R&D spillovers. Using panel data for the period 1980-99, we find evidence that both strategic patenting and R&D spillovers strongly affect innovation and market value of software firms.
    Keywords: anti-commons; market value; patent thickets; patents; R&D spillovers
    JEL: L43 L86 O31 O33 O34 O38
    Date: 2006–05
  21. By: Djankov, Simeon; Miguel, Edward; Qian, Yingyi; Roland, Gérard; Zhuravskaya, Ekaterina
    Abstract: Studies of the determinants of entrepreneurship have emphasized three distinct perspectives: market institutions, social networks and personal characteristics. Using data from a pilot survey with over 2,000 interviews in 7 cities across Russia, we find evidence for a particularly strong effect of social networks: individuals whose relatives and childhood friends are entrepreneurs are more than twice as likely to be entrepreneurs. Mothers’ characteristics play a significant role in determining future entrepreneurs.
    Date: 2006–06
  22. By: Slade, Margaret E. (Department of Economics, University of Warwick)
    Abstract: I discuss the use of simulation techniques to evaluate unilateral effects of horizontal mergers and the pitfalls that one can encounter when using them. Simple econometric models are desirable because they can be implemented in a short period of time and can be understood by non experts. Unfortunately, their predictions are often misleading. Complex models are more reliable but they require more time to implement and are less transparent. The use of merger simulations and the sensitivity of predictions to modeling choices is illustrated with an application to mergers in the UK brewing industry. There have been a number of brewing mergers that have changed the structure of the UK market, as well as proposed but unconsummated mergers that would have had even more profound effects. I assess two of them: the successful merger between Scottish&Newcastle and Courage and the proposed merger between Bass and Carlsberg–Tetley.
    Keywords: Unilateral effects, horizontal merger simulations, UK brewing
    JEL: L13 L41 L66 L81
    Date: 2006
  23. By: Tarondeau, Jean-Claude (ESSEC Business School)
    Abstract: Living art organizations present a special interest in a research stressing cognitive processes and development of intangible resources like knowledge and capabilities. In living art organizations, production processes like rehearsals and tunings whose goals are to develop both tacit and tangible capabilities are readily observable and have undeniable effects on performance quality, revenues and costs. The observations of four opera houses support the conjecture that strategy and organizations could be preconditions for learning.
    Keywords: Cognitive Process; Learning; Living Art Organization; Organization; Strategy
    JEL: Z11
    Date: 2006–10
  24. By: Janis Kapler
    Abstract: se’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-1990s. These emphasized the problem of firms transferring intangible assets across national borders. Newer theories of the firm adopt resourcebased 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 TNC is flawed because it cannot explain the TNC without reference to competitive conditions. This leaves us with incomplete theories of multinational firms in their competitive environments, because they address transactioncost 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 creation of (investment in) the intangible or knowledge-based competitive assets by which firms transform their environments. For international firms, this has global consequences. 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 learningbased theories. This can help to explain the hierarchical division of labor both within and between firms.
    Keywords: Transnational Corporation, Theory of the Firm
    JEL: F23

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