The theory of the multinational

Just as diversified corporations span their activities across different industries, multinational enterprises (MNEs) have a physical presence in several countries. The theory of the multinational explores why MNEs emerge to set and manage their international operations across geographical boundaries, and therefore can be regarded as a specific part of the theory of the firm. We now want to analyze why MNEs exist instead of managing cross-border interdependence of business activities through other governance arrangements such as exporting, licensing, or joint-ventures, which are often called modes of entry in international business literature.

Early approaches to the analysis of MNEs relied on the literature on trade. Prior to 1960, there was not a theory of the MNE that could be considered sufficiently consistent and developed, though there were some dispersed ideas about the reasons behind internationalization. For instance, the existence and benefits of international trade had already been studied by David Ricardo in his theory of comparative advantage and later developments. Ricardo showed that international trade would benefit two countries even if one of them was more efficient in manufacturing all types of products. Early trade theories focused on the MNE as one type of capital exporter, either of foreign direct investment (FDI) when the firm had control of foreign assets, or portfolio investment when investors did not. Because financial resources would presumably search for their most efficient use, differences in real interest rates should explain capital flows among countries.