Internalization choices under competition: A game theoretic approach

A long‐standing void in international business literature is understanding whether and how the internalization choices of competing multinational enterprises (MNEs) affect each other. This paper presents a game‐theoretic, location‐allocation mathematical model that predicts the organizational boundaries of competing MNEs. Given multiple players in the market, the game analyzes the competition between MNEs with respect to market share, yielding Nash equilibria that determine how many MNEs will be left in the market, and whether their production and marketing sites are internalized or outsourced. Results of computational experiments suggest that the internalization choices of profit maximizing MNEs that compete with each other, sharply deviate from the internalization choices ignoring such competition.