ABSTRACT
This chapter critically reviews what many scholars (e.g. Caves, 1996, 1998) see as the dominant explanation for the multinational enterprise (MNE), the transaction costs approach.1 An MNE is fundamentally an organization that extends employment contracts over national boundaries. In other words, the distinguishing characteristics of MNEs are their use of hierarchical methods of coordination (managerial directives) to organize cross-national interdependencies. Market prices are another method of organizing international interdependencies. To understand why MNEs exist, one must therefore explain why individuals located in separate countries are more efficiently coordinated when they are employees of an MNE than if they are independent entrepreneurs responding to market prices. This chapter argues that transaction costs theory provides the best and more parsimonious explanation of why this is the case, and hence the best reason for the existence and development of MNEs.
