A general TCE model of international business institutions: Market failure and reciprocity

In this study I propose a general transaction-cost economics (TCE) model of international business institutions, in which cross-border transactions can be conducted at multiple market levels (e.g., output, asset, and equity), and the buyer–seller relationship can go both ways (A sells to B, and B sells to A). This general model addresses two major gaps in the literature. First, although market failure is the driving force behind the rise of multinational enterprises (MNEs), most researchers have focused on the failure of a single market without exploring the presence of substitute markets for cross-border transactions. Second, many previous studies have begun their analysis with a bilateral setup between an MNE and an indigenous firm (for example, a licensing agreement), but concluded with a unilateral decision made by the MNE to evade the indigenous firm (in the case of direct investment). In bridging the two literature gaps, I propose a general TCE model to integrate all institutional modes available to firms for governing international business, such as licensing, outsourcing, acquisitions, and joint ventures. Built on a multi-market framework, my analysis reveals that the choice of the optimal international business institution is tantamount to the selection of the most efficient market to conduct cross-border transactions. Drawing on a bilateral setup, it explicitly recognizes the power of reciprocity in solving the problem of market failure. This distinct approach points out promising directions for future researchers to advance international business studies, particularly after my transaction-level analysis has been expanded to also consider institutional contexts and firm capabilities.