ABSTRACT
One recent development in the analysis of multinational enterprises (MNE) focuses attention on their ability to overcome market imperfections through the internalization of transactions. This allows MNEs to set the prices on intra-firm transactions and, theoretically, to maximize global profits. Incentives to alter transfer prices arise from market imperfections caused by government regulations or 'natural' externalities in the transfer of knowledge and information. Government regulations have received the greatest attention in the literature on transfer pricing: Aliber (this volume), Bond (1980), Booth and Jensen (1977), Brean (1979a), Copithorne (1971), Diewert (this volume), Eden (this volume), Horst (1971), Plasschaert (1979, this volume), Rugman (1981) and UNCTAD (1978b). These market imperfections include tariffs, profit repatriation, tax rate differentials, exchange controls, intervention in currency markets, multiple exchange rates, price controls, investment barriers and perceived political instability.
