Economic Analysis of International Supply Chains: An Internalization Perspective

By Casson, Mark | Journal of Supply Chain Management, April 2013 | Go to article overview

Economic Analysis of International Supply Chains: An Internalization Perspective


Casson, Mark, Journal of Supply Chain Management


INTRODUCTION: OVERVIEW OF INTERNALIZATION THEORY

Offshoring and outsourcing in global value chains have been extensively analyzed from a strategic management perspective (Gereffi & Lee, 2012; Gereffi, Humphrey & Sturgeon, 2005; Mudambi & Venzin, 2010). This article examines these issues from an internalization theory perspective. Internalization theory is a branch of economics and is widely used in international business studies to investigate multinational enterprises (Buckley & Casson, 2011). Economists adopt a systems view of international business. Their basic unit of analysis is the entire global economy, and within this, they distinguish different industries. Within each industry, they distinguish different final products, and for each final product, they analyze the supply chain that delivers it to market.

From an economic perspective, every stage of production of every commodity must compete for the resources it requires. Many resources are localized. Each location tends to specialize in those activities that make the best use of its distinctive resources. Each location imports the raw materials and semi-processed products required for its specialized local production and exports a proportion of the finished and semi-processed products that it has produced. These imports and exports, taken collectively, constitute the structure of global trade.

Production requires intangible inputs such as knowledge as well as tangible inputs such as raw materials. Some knowledge is public and is freely disseminated through education and training. Other knowledge is proprietary; in particular, it is owned by firms that have carried out research and development (R&D). They protect their knowledge through patents, trademarks and commercial secrecy. Knowledge can be shared between locations. But it is often risky to license independent firms to use proprietary knowledge, and so knowledge is internalized--it is exploited by the firm that developed it. When a knowledge-intensive firm invests abroad to exploit local resources at other locations, it becomes multinational, namely it owns and controls activities in different countries. Internalization theory predicts which types of knowledge will be retained by firms and which will be supplied under license to other firms. It also predicts which stages of production will be subcontracted to other firms and which will not.

In contrast to strategy theory, internalization theory does not examine supply chains from the standpoint of an individual firm but from the standpoint of the economic system as a whole. Some supply chains may be coordinated purely by market transactions between independent firms, each of which is responsible for a single stage of production, while others may be coordinated by a single firm that controls every stage of production. In between are numerous configurations. Internalization theorists argue that in the long run, competition will drive down supply chain costs so that only the most efficient method of supply chain coordination can survive. This will typically involve some combination of market and management, rather than relying solely on one or the other. It is a mistake to suppose that some firm always masterminds or orchestrates a supply chain, as it is only under specific circumstances that this is the most efficient solution.

Internalization theory explains the growth of offshoring and outsourcing in terms of changing underlying economic fundamentals, rather than as a consequence of autonomous innovations in business strategy. Given geographical differences in natural resource endowments, offshoring is always worthwhile when impediments to trade (e.g., tariffs and transport costs) are low, and outsourcing is usually worthwhile when knowledge is public and contracts are easy to enforce. From an internalization perspective, recent growth in offshoring has been driven by trade liberalization, falling transport costs and faster communication, while outsourcing has been stimulated by the emergence of new suppliers and greater security of property rights.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Economic Analysis of International Supply Chains: An Internalization Perspective
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.