Internalization theory for the digital economy

Abstract

We study the internationalization of digital service multinational enterprises (SMNCs), focusing on how digitalization alters internalization theory's assumptions about the nature of firm-specific assets (FSAs) and the theory's predictions about governance choices in cross-border transactions. We invoke Simon's (Proc Am Philos Soc 106(6):467-482, 1962) near-decomposability concept to explain how digitalization enables two distinct types of FSAstechnology and human capital. Applying the ideas of modularity and skill complexity, we further distinguish between core versus peripheral technology FSAs and between generic versus advanced human capital FSAs. Building on the transferability and appropriability of these strategic assets, we theorize on the FSAs' internalization propensity in the digital age. We propose that with rising digitalization, the network plays a dual role-as a governance mode and as a strategic resource. Integrating insights from network economics, particularly increasing returns to scale, we propose that network advantages (O n) emerge as a distinct strategic resource that merits separate investigation from the traditional asset-based (O a) and transaction-based (O t) advantages.

Applying and advancing internalization theory: The multinational enterprise in the twenty-first century

“…At the same time, there is always a need for prudence and commensurability in developing new theories. First, even though it was originally developed to explain the emergence of large manufacturing MNEs in the post-WWII era, the basic analytical approach of the theory is arguably still applicable to explaining the boundary choices by other types of MNEs in different time periods such as those from emerging economies (Verbeke & Kano, 2015), sponsored by the state (Grøgaard et al, 2019), run by a single family (Hennart et al, 2017), or focusing on digital services (Banalieva & Dhanaraj, 2019;Hennart, 2019). Therefore, a judicious approach to studying a seemingly new type of transaction or firm is perhaps first to assess carefully whether internalization theory still has substantial explanatory power to effectively explain the 'new' governance mode, transaction, or firm.…”

“…Finally, the complex relationship between ownership and control, and the advent of quasi-internalization, has become more evident than ever with the advent of digital technologies, as debated in an exchange in this special issue. Banalieva & Dhanaraj (2019) argue that digital networks (such as that operated by Uber), can be considered as distinct modes of governance. Hennart 2019vehemently disagrees, arguing that digital service MNEs as a category (as used by Banalieva & Dhanaraj) is too broad a grouping, since these firms pursue a variety of new business models and that much of what they describe is simply hybrids that can be explained well by the existing theories.…”

“…Finally, an additional reason why transactional FSAs have gained importance is that some of them are facilitated by technologies that have developed rapidly in recent years. The fusion or configuration of internal and external governance modes observed in digital networks is based on technological FSAs that, according to Banalieva & Dhanaraj (2019), reduce transaction costs. They also propose that network-type FSAs are a resource distinct from traditional asset-type and transaction-type FSAs.…”

Managing the MNE subsidiary: Advancing a multi-level and dynamic research agenda

“…For example, e-businesses are internationalizing based on platforms and ecosystems to reach markets beyond national borders (Li, Chen, Yi, Mao, & Liao, 2019;Stallkamp & Schotter, 2019). New business models enable firms to sell services abroad without a physical presence in the country (Brouthers, Geisser, & Rothlauf, 2016;Chen, Shaheer, Yi, & Li, 2019), which changes the nature of firm-specific advantages in IB (Banalieva & Dhanaraj, 2019). Moreover, big data in combination with blockchains, artificial intelligence or additive manufacturing (known as 3D printing) enable realignment of the geographic scope of global value chains (e.g., Laplume, Petersen, & Pearce, 2016) and new forms of supply chain coordination across organizational and geographic boundaries (Kim, Jean, & Sinkovics, 2018;Strange & Zucchella, 2017).…”

Ecosystem-specific advantages in international digital commerce

“…Since the Internet can in many cases substantially reduce the cost of deploying FSAs across national borders, many digital firms may be characterized as Born Globals (Hennart, 2014), although some scholars specify that the internationalization of digital firms is constrained by reliance on locally embedded complementary resources (Verbeke, Coeurderoy, & Matt, 2018). Recent IB research demonstrates that platforms offer important opportunities for extending theory (Banalieva & Dhanaraj, 2019); scholars contend that the internationalization of digital firms may be beyond the scope of firm-centric logic, being driven more by user interaction than by unilateral firm commitment (Brouthers, Geisser, & Rothlauf, 2016;Chen, Shaheer, Yi, & Li, 2019;Coviello, Kano, & Liesch, 2017;Shaheer & Li, 2018).…”