The efficiency and market‐power interpretations of the multinational enterprise: Two out of three ain't bad

Abstract

Research Summary We contend that contemporary scholarship must embrace the foundational approach in global business and strategy to consider the relevance of both efficiency and market‐power effects in factoring the implications of multinational activity. We empirically test the degree to which efficiency and market‐power effects manifest in a comprehensive sample of 4,370 cross‐border acquisitions materializing between 1986 and 2010. Specifically, we employ three different measurement approaches to distinguish efficiency enhancing from market‐power increasing cross‐border acquisitions. Empirical results indicate that efficiency enhancing transactions manifest in two‐thirds and market‐power increasing transactions manifest in one‐third of our sampled activities. Accordingly, our results affirm the literature's focus on efficiency effects, yet market‐power effects are sufficiently sizable to merit scholarly attention. Managerial Summary Contemporary wisdom generally considers multinational activities to be characterized by efficiency properties. While it is understood that market power may manifest in multinational activity, most observers implicitly assume that anti‐competitive effects are dominated by more‐healthy efficiency effects. Yet, the justification behind the prior that efficiency effects dominate market‐power effects is not evident, as multinational activities conceivably involve substantial market power. Accordingly, we test the received wisdom regarding the dominance of efficiency effects in an extensive sample of cross‐border investments. Our empirical results affirm prevailing assumptions as efficiency enhancing transactions constitute the majority of cross‐border investment activities. However, market‐power increasing transactions manifest as a sizable minority of cross‐border investments; thus, market‐power effects should not be neglected.

How can international business research contribute towards the sustainable development goals?

“…However, a more critical IB perspective would move beyond the assumption that MNEs always improve efficiency, and allow for negative effects in terms of externalities, market power, and even political power. This would imply taking a more balanced view on MNEs and IB, acknowledging the concerns expressed by early IB scholars such as Hymer (1970), but which have since played a minor role in IB literature, with some notable exceptions (Graham, 1998;Clougherty and Skousen, 2021).…”

“…The assumption seems to have been that in general, MNE activities are welfare-enhancing, with the explicit or implicit corollary that MNEs’ financial performance is a reasonable proxy for the contributions of MNE activities to society. This has contributed to a relative neglect of potential negative effects in terms of increased monopoly power (Clougherty and Skousen, 2021) and negative externalities such as pollution (Montiel et al , 2021). However, there are notable trends in IB towards more attention to social and environmental impacts, with several recent calls for their study (Buckley et al , 2017; Rygh, 2020).…”

“…Moreover, such issues have tended to be addressed from a predominantly strategic perspective, focussing on the effects on companies’ financial bottom line (Buckley et al , 2017; Park et al , 2014). Societal-level and environmental outcomes such as the SDGs have mostly been outside the scope of mainstream IB research, perhaps reflecting explicit or implicit assumptions that the activities of MNEs are generally efficiency-enhancing (Clougherty and Skousen, 2021) and by extension, welfare-enhancing for society (Jones et al , 2016).…”

What merits greater scholarly attention in international business?

“…While an in-depth survey of suitable methodological approaches is outside the scope of this Counterpoint, the theoretical mechanisms through which outcomes arise can be identified using either qualitative or quantitative methods (Reeb, Sakakibara, & Mahmood, 2012: 217). For instance, Clougherty and Skousen (2021) empirically demonstrate that, while the literature on cross-border M&As has implicitly assumed that most MNE activity is driven by efficiency motivations, market-power considerations actually account for one-third of MNE activity. We encourage further scholarly discourse that explores appropriate methodological approaches in relation to testing theoretical mechanisms.…”

Strategizing and economizing in global strategy

“…1 Thus, early work emphasized the importance of industrial organization insights in the exploitation of market power (ie, strategizing) as motives for firm behaviors in an international setting (Dunning & Pitelis, 2008;Hymer, 1960Hymer, , 1969Hymer, , 1972, but this increasingly gave way to an economizing approach, as the theory of the multinational firm became firmly based on, first, transaction cost economics (Buckley & Casson, 1976;Hennart, 1977Hennart, , 1982Teece, 1986) and, later, resource-and knowledge-based ideas (Kogut & Zander, 1993;Rugman & Verbeke, 1992). The theory of the multinational enterprise has remained fundamentally efficiency-based ever since (Clougherty & Skousen, 2021), and therefore sidesteps market and bargaining power motives in the explanation of such international business phenomena as entry into new markets and international competitive interaction. We argue that it is time to revisit strategizing approaches in international business theory.…”