The Multinational Corporation's Degree of Control over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation

Published on Jan 1, 1988in Journal of Law Economics & Organization
· DOI :10.1093/oxfordjournals.jleo.a036954
Hubert Gatignon27
Estimated H-index: 27
(UPenn: University of Pennsylvania),
Erin Anderson33
Estimated H-index: 33
(UPenn: University of Pennsylvania)
Should a business function be vertically integrated? Increasingly, economists have acknowledged that this is the wrong question. The right question is to what degree a function should be integrated, whereby integration is a continuum anchored by the options of market and hierarchy (Williamson, 1985). Movement along the continuum from market contracting to unified governance is accompanied by an increased degree to which resources are placed at hazard. The firm is compensated for this by an increased level of control that it presumably will use "correctly" in order to generate superior profit outcomes. The central questions of transaction cost analysis are twofold: When will the firm need more control (that is, when do lower-control outcomes become less desirable), and when will the benefits of increased control more than offset the costs of resource commitment and risk? Oliver Williamson (1985) offers a theory to answer these questions. In this paper we examine empirically the theory's predictions in the context of the multinational corporation (MNC), which attempts to control the operations of foreign "subsidiaries" (business units) that it owns in whole or in part. We
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