Knowledge, transferability cost, and transaction cost in MNC: A reconsideration of internalization theory

For several decades, the explanation of the existence of the Multinational Corporation (MNC) has been monopolized by transaction cost theory. The dominance of transaction cost theory in explaining the propensity of internalization was unchallenged until Kogut and Zander (1993) proposed that the superior efficiency of internalization could be explained by the nature of knowledge. Kogut and Zander claimed that the superior efficiency of knowledge transfer within the firm compared to between firms can sufficiently explain the propensity of internalization, and that market failure was not a necessary condition for internalization. Although their study is of considerably significant---they pointed out a new direction for considering the existence of MNC, the argument that market failure was not a necessary condition to internalization is logically and conceptually incorrect, and their empirical examination did not correctly support their argument.; The current study challenges the transaction cost theory explanation of internalization advantage by developing the construct of transferability cost, which is conceptually and empirically different from transaction cost. Transferability cost results from the dissemination and assimilation of knowledge, but transaction cost is a consequence of opportunism. The quantity of transferability cost is determined by the transferee's absorptive capability, the transferor's experience on knowledge transfer, the similarity between the transferred knowledge and the transferee's prior knowledge, and the nature of the transferred knowledge. However, transferability cost is determined by asset specificity, asymmetric information distribution, human self-interest nature, and the nature of transferred knowledge.; It was found that the tacitness of knowledge is positively related to the propensity of internalization, transferability cost, and transaction cost. The positive correlations between transferability cost and the propensity of internalization, and between the transaction cost and the propensity of internalization were found. Accordingly, both transferability cost and transaction cost are mediators between the tacitness of knowledge and the propensity of internalization, and transferability cost can independently explain the superior efficiency of internalization.; The identification of transferability cost provides us a convincing theoretical base to reconsider internalization theory. It is also helpful for managers to rationalize their decisions on several issues.