Extending internalization theory: a new perspective on international technology transfer and its generalization

Internalization theory suggests that multinational enterprises set up subsidiaries to exploit technology advantages abroad when licensing is too difficult to arrange with indigenous firms. This direct investment vs licensing trade-off, which is built on a business-to-business transaction, does not recognize the linkages with the final products market as a component of transaction cost analysis. By adopting a unilateral perspective on international technology transfer, neither does it consider the possible role of complementary assets (e.g., manufacturing capabilities) held by potential business partners in foreign countries. After taking into account the presence of such assets in indigenous firms, this article extends internalization theory by positioning the technology transfer transaction in the broader context of the entire value chain, including especially the manufacturing/marketing linkages with the final products market. More specifically, it demonstrates that conventional internalization theory neglects various alternative market governance mechanisms not captured by a licensing agreement. The analysis shows that the choice of an optimal governance structure is determined by the complementarity of strategic assets controlled by the economic actors involved, and by the linkages among the technology–manufacture interaction in two intermediate input markets, and the subsequent sales function in the final products market. Journal of International Business Studies (2005) 36, 231–245. doi:10.1057/palgrave.jibs.8400124