Transaction Cost Theory

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The purpose of this essay is to reinforce the idea that businesses are increasingly internationalising and to present as well as contrast different approaches or theories. More specifically the objectives are to introduce Transaction Cost Theory and enumerate several critiques brought to it, to review Hymer's work within the field, to analyze the Uppsala Model and ultimately to compare the economic approach represented by Transaction Cost Theory and the cultural approach represented by Uppsala Model. There are several theoretical approaches that give an answer to the question why businesses are internationalising, each of them with strengths and flaws, and this essay attempts to treat objectively the selected theories. With the point…show more content…
Companies eliminate conflict with local competitors by obtaining control over foreign assets and this is effectuated by providing more market power to the controlling firm and in this manner enhancing imperfections in the market’s structure. In his work, it is a prerequisite for a corporation's existence that it has a "firm specific advantage" allowing TNCs to compete successfully in foreign venues. This argument is entirely approved by neoclassical economics, but as opposed to neoclassical thinking, Hymer has taken into consideration that on the one hand, there was the assumption to be effective and well-managed, for that reason improving welfare. On the other hand, the market power acquired from the firm specific advantage can be transformed into political power without accountability. Jenkins (1987) affirmed that Hymer has somewhat paid more attention to the second aspect of the TNC, arguing that TNCs will use specific firm advantages to generate market imperfections and to eliminate competition and…show more content…
The model, introduced by Johanson and Vahlne (1977), basically provides a mirror for Hymer's research. The model suggests that there are phases of internationalisation where the potential benefits of exploiting the company's specific advantage abroad must be weighed against the risks of running in unknown foreign environments and the learning costs of doing business there. The model suggests that internationalisation begins in countries with a small psychic distance from the country of origin and is gradually expanding to more distant ones. Forsgren (2002) argues that learning not only includes experiential learning, underlying the fact that companies can learn from networking with each other without needing the similar experiences. In addition, imitative learning may be another pertinent knowledge acquisition mechanism. It is alleged that the model is excessively deterministic because it considers only Swedish firms and the information has been obtained by taking into account a rather limited number of firms cases. Despite the flaws of the model, an essential strength of the Uppsala model is its simplicity. The model provides explanations about the internationalisation of a significant number of companies, using only a few variables. It should be underlined that the model is strongly dependent on staff stability over

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