The multinational enterprise as a global factory

There have been significant changes in the organization and configuration of MNEs. The balance between internalization and externalization has shifted partly because of reactions to increased volatility and opposition to monopoly (Buckley and Casson, 1998b), and partly because of management learning and improved techniques of managing through contracts. Managers compare external (transactions) costs - the costs of using the market - with internal (agency) costs - the costs of carrying out operations under their own managerial control. The balance of these two sets of costs determines the scope of the firm at any given point of time. Managers endeavour to reduce agency costs. It is only when agency costs are falling relative to transaction costs that the scope of managerial control and therefore the size of the firm will increase (Buckley, 1997). Transaction costs exist in assembling the business processes of the firm (collections of activities that are technologically or managerially linked) so that they jointly contribute to value added. The overall costs of organization are determined by losses due to the imperfect motivation of process members, imperfect information and coordination losses resulting from the architecture of the firm (the allocation of responsibilities among individuals and groups and the communication between them), and the resource costs associated with incentives and organization. Identifying transactional links within ‘the black box’ of the firm enables us to trace the costs and benefits of combining activities within the firm.