Internalisation: ownership advantage as an intermediate good

Presents the essence of ‘internalisation’ theory as market failures for intermediate goods. Asserts that, in itself, internalisation has no innate ‘international’ component; its relevance in IB emerges when the transfer of the intermediate good (involving the internalising/externalising choice) will cross national borders. Thus internalisation theory invokes elements of the theory of the firm to analyse market failure for particular intermediate goods. As there are innumerable such intermediate goods the chapter offers a categorisation of these relevant to a positioning in IB. (i) Outward internalisation: relates to the international expansion of a firm, based around the internalised use of its current defining sources of competitiveness. Can be seen as ‘strategic’ in that it involves key decisions about the future nature of the firm’s operations as based around these established competences. (ii) Inward internalisation: relates to the internalisation of sources of supply of inputs to the firm’s already defined operations (for example, raw materials; components; services). Considered as ‘tactical’ since the aim is to optimise access to standardised intermediates whose need is determined by the firm’s in-place competitive objectives. (iii) Vertical internalisation: the internalisation of a sequence of intermediate good transfers positioned within the series of value-adding stages of a vertically integrated MNE. The chapter discusses the classic case of market failure for technology as an intermediate good, with particular emphasis on ‘seller uncertainty’, which is often relatively overlooked compared to ‘buyer uncertainty’.