The nature of multinational firm boundaries: Transaction costs, firm capabilities and foreign market entry mode

Under the rubric of internalization theory, transaction cost-based arguments have been dominant in addressing multinational firms' mode of foreign market entry decisions. Another line of argument addresses this decision by focusing more closely on firms' capabilities. This paper presents, and empirically tests, the arguments underlying the mode of foreign market entry decision from these two perspectives. Stronger support was found for the organizational capability perspective. The results suggest that it is the considerations related to the efficient and effective development and deployment of a firm's capabilities, under the constraint of bounded rationality, rather than the level of transaction costs and the efficiency of the transaction under the assumption of opportunism which is increasingly critical in determining the entry mode choice. This shifts the main focus of attention away from market failure due to high transaction costs and demands greater attention to capability-related issues. It appears that, in the quest to remain competitive in the dynamic and global economy of today, firms may oft need to trade off transaction cost-related concerns against capability-related ones in making firm boundary decisions.