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Internalization Revisited

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  • George Norman

Abstract

This paper analyses how a firm chooses between direct ownership and licensing or franchising contracts in supplying distant markets. When contracts are incomplete we show that this choice must balance the moral hazard associated with appointing external agents against that associated with employing internal managers. We show that licensing contracts are preferred when the outside agent has limited opportunities for changing product technology or if there are few spillover effects from the licensee's market to the licensor's home market. Internalization is preferred when the advantages of the 357254201rm are knowledge-based and when reputational effects are strong.
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Suggested Citation

  • George Norman, 2000. "Internalization Revisited," Discussion Papers Series, Department of Economics, Tufts University 0013, Department of Economics, Tufts University.
    • Handle: RePEc:tuf:tuftec:0013
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    References listed on IDEAS

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    2. Thandar, Khine, 2008. "Foreign Direct Investment Relations between Myanmar and ASEAN," IDE Discussion Papers 149, Institute of Developing Economies, Japan External Trade Organization(JETRO).

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    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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