ABSTRACT
This Chapter uses the economic theory of information costs to analyse the determinants of the organisational structure of the multinational enterprise (MNE). It offers a rigorous alternative to theories of organisational structure derived from sociology and political science. The theory explains the derivation of rules and procedures, the structuring of information flow and other aspects of organisation as a rational response to information costs. It represents a practical implementation of the research agenda set out in Richardson (1960). It shows, in particular, that bounded rationality need not be invoked to explain the internal mechanisms of the firm. The phenomena imputed to bounded rationality can be explained quite simply as a rational response to information costs. Furthermore, specific assumptions about the magnitude of information costs generate important predictions about the way in which organisational structure will adapt to changes in the environment.
