In the last blog we looked at an extension of TCT model by Ouchi, in today's blog we look at the application of TCT to Multinational Enterprises (MNEs).
The essential search by theorists studying this topic could be reframed - "why do MNE's exist?" Just like we began discussion on why does an organization exist; TCT was applied on MNEs to figure out which of the transactions would be internalized and which transaction would be driven by market exchange. It is in market imperfections that we find the answers. Markets for different assets and more so for knowledge are subject to imperfections. Research by Organization Theorists - Buckley and Casson as early as 1976 has concluded that markets are more efficient when there are large number of buyers and sellers. When the transaction has high uncertainty, is complex and is heterogeneous, and is catering to a small number of buyers and traders - internationalization is seen to be more effective.
Continuing on this initial work, Teece (in 1986) attempted to determine the boundaries of an organization. When trading of knowledge becomes difficult - generally due to the following reasons
- It would mean giving away the knowledge
- lack of necessary infrastructure capabilities, communication codes or even culture.
In such situations, firms tend to internalize the activities.
In many ways, when we look the application of TCT to MNEs it seems to be a special case of application of TCT to vertical integration.