TYPES OF COSTS IN INTERNATIONAL KNOWLEDGE TRANSACTION AND TRANSFER: AN INTEGRATED APPROACH

ABSTRACT Internalization theory in international business research is perhaps the most important theory that not only explains a firm’s international strategy decision but also provides the raison d'être of multinational corporations. Originally based on transaction cost theory, internalization theory has been proposed by important contributors in this field. The central notion of internalization theory is the public good nature of knowledge that a multinational corporation possesses. According to the theory, FDI occur to prevent market failure due to opportunism. However, evolutionary theory-based logic focuses on tacit nature of knowledge which causes transfer cost to rise. In this paper, both perspectives are reviewed and a comprehensive model which combines both transaction cost and transfer cost is presented. It is shown that the total cost will be the lowest when the characteristic of knowledge is neither public nor tacit. Finally, for practical purpose, the implication of theory is applied to different organizational functions such as marketing. Keywords Internalization Theory; Transaction Cost; Transfer Cost; Multinational Corporation