From the Theory of the Firm to FDI and Internalisation: A Survey

Abstract

This paper surveys recent contributions on the Internalisation issue, based on different theories of the firm, to show how the make-or-buy decision, at an international level, has been assessed through the opening up of the "black box" - traditionally explored by the theorists of the firm - and the simultaneous endogenization of the market environment - as in the International Economics tradition. In particular, we consider three Archetypes - Grossman-Hart-Moore treatment of hold-up and contractual incompleteness, Holmstrom-Milgrom view of the firm as an incentive system, Aghion-Tirole conceptualisation of formal and real authority in organisations - and show how they have been embedded in industry and general equilibrium models of FDI to explain the boundaries of global firms.

Keywords: FDI, Internalisation, International Economics, Incomplete contracts

JEL Classification: F1, F2, L1, L2