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The study of the multinational corporation has tended to be divided by perspectives ranging from economics, to organizational theory, and history and politics. These perspectives are complementary insofar that the multinational corporation is an economic organization that evolves from its national origins to spanning across borders. The cornerstone of this evolutionary approach is the treatment of the firm as a social community whose productive knowledge defines a comparative advantage.1
This approach shares similarities with and is yet distinct from, the standard economic treatment of the multinational corporation. A compelling explanation for the determination of the boundaries of the firm has rested on two observations. The first is that a necessary condition for trade among firms and among countries is comparative advantage: differences in productivity in carrying out economic activities make it desirable for firms and nations to specialize and trade the products and services that reflect their superior capabilities. A second observation is that the hazard or cost of relying upon the market necessitates the 'internalization' of trade (or transactions) within the firm. In the language used in the literature on foreign direct investment, the first observation concerns the ownership, or firm-specific, advantage; the latter observation concerns the 'internalization' of the market.2
These two observations provide an explanation for why economic activity should be organized within a firm and why foreign direct investment should occur when trade is transacted across national boundaries. There is no logical error in this argument, but we question the necessity of the second observation. Comparative advantage is the condition governing firm trade, direct investment, and growth. The question facing the firm is whether this advantage is more economically - in term of its costs and market effects - transferred to an affiliate subsidiary or to other firms. Hazard of the market need not be consequential in this calculation.
The question posed above presumes that the underlying knowledge can be packaged and transferred at a cost. It cannot always be. Consider the following example. Direct investment is the transfer of the organizational principles, or knowledge, of the firm from one country to another. Italy, despite its economic wealth, has a strikingly lower share of world direct investment than comparable countries. From the many studies on the more dynamic Italian...