Internalization Theory For The Digital Economy

INTERNALIZATION THEORY FOR THE DIGITAL
ECONOMY
• By Elitsa R Banalieva and
• Charles Dhanaraj
• Summary by Efe Onomake

• Ton Duc Thang University (PHD)
• The Article talks about the internationalization of digital service multinational enterprises
• (SMNCs), focusing on how digitalization affects the internalization theory’s
• assumptions about the nature of firm-specific assets (FSAs) and the theory’s
• predictions about governance choices in cross-border transactions.
• It also postulated that digitalization has changed the way of doing international business It has
• Also forced international business to reexamine its prior assumptions or philosophies about
internationalization.
CHANGES MADE BY DIGITALIZATION TO INTERNATIONALIZATION
• .Reduced transaction Cost.
• Increase speed of doing business.
• Create user network economics
• Scalability
• Most importantly modification of the very nature of FSAs
• The major research question is How does digitalization alter internalization
• theory’s assumptions about the nature of FSAs
• and predictions about the governance choices in cross border transactions?
• What is Digitalization?
• Digitalization is the process of transforming the essence of an organization’s products,
services, and
• processes into Internet-compatible data packages that can be created, stored, and
transferred in bits and bytes, along with the information associated with them, for marketing,
sales, and distribution (Chen, Shaheer, Yi, & Li, 2018; Sambamurthy et al.,2003). Mobile
devices, big data analytics, cloud, social media, 3D printing, additive manufacturing,artificial
intelligence (AI), machine learning e.t.c
CONCEPTS USED IN THE ANALYTICAL PROCESS
• There made use of Simon’s (1962) concept of near decomposability (disaggregating complex
systems into a few broad-enough parts) to analyze the differential impacts of digitalization on
two FSA types: technology FSAs and human capital FSAs.
• There also build on Langlois’ (2002) and Hennart’s (2009) work on modularity, which allows
multiple firms to connect seamlessly through interfaces to deliver value to their customers. We
link these concepts to digital platforms, which are modular systems, that enable SMNCs to
leverage complementary assets from local firms. We further draw on Chi (1994), Kogut and
Zander (1993), and Teece (1986) to explore how these FSAs’ cross-border transferability and
appropriability hazards influence FSA governance choices.
• Claims made by the writers
• There claimed there have advanced internalization theory in 3 ways. “Firstly, by incorporating
digitalization explicitly into internalization theory, we bring the theory’s generalizability into the
digital era. Our framework connects the organizational design principles of near-
decomposability, modularity, skill complexity, and bundling to the phenomenon of digital
platforms. A key element of our formulation is the explicit analysis of technology and human
capital components of FSAs, which allows one to theorize on the asset-light internationalization
enabled by digitalization.
• Secondly, we develop governance choice predictions based on knowledge transferability and
appropriability and show the emergence of network platforms as the dominant mode in global
governance for digital SMNCs. We show that bundling becomes pervasive in such networks, as
dominant global firms establish their core technology with walled-in structures to protect their
proprietary know-how, while incorporating adaptable design interfaces to link with local
• firms’ capabilities.
• Thirdly, we propose that the network itself becomes a source of competitive advantage; with rising
digitalization, network size and quality emerge as an important resource. In addition to the
traditional asset-based (Oa) and transaction-based (Ot) advantages (Collinson & Narula, 2014;
Dunning, 1988; Lundan, 2009), digitalization introduces the network advantage (On). We shift the
traditional focus exclusively on the sociological arguments of network governance to include the
economics of increasing returns from the user networks of the SMNC.
The core concepts of internalization Theory
• The core tenets of the theory are: firms are profit maximizers in a world of imperfect markets; firms
have an incentive to create internal markets to bypass imperfect external markets for intermediate
products owned or controlled by the firm; and internalizing the market across national borders
creates the MNC (Buckley & Casson, 1976). Buckley (2016) provides an elegant review of the
advancement of the theory over the four decades since it was formulated. We review here three
critical developments central to our framework. which are Knowledge Transferability across
Country Borders, Firm-Specific Advantages as Embodiments of Knowledge and Networks as
Effective Forms of Knowledge Governance.
CONCEPTUAL MODEL
PREPOSITIONS AND CONCLUSION
• Based on the research and analysis by the writers on the topic. Four prepositions were
made. Which are as follows.
• Proposition 1: Digitalization enables the near-decomposability of a firm’s FSAs into
technology and human capital components.
• Proposition 2a: Digitalization increases the crossborder transferability of a firm’s
technology FSAs by enhancing its modularity and the firm’s ability to bundle it with a local
firm’s FSA.
• Proposition 2b: Digitalization increases crossborder appropriability hazards for a firm’s
technology FSAs, but also enhances the firm’s ability to contain imitation by ‘‘walling-in’’
through integrating complex technology, proprietary components, encryption, and network
effects.
• Proposition 3: Digitalization increases a firm’s ability to bundle its advanced and generic
human capital FSAs with those in host markets through the digital platform. While
digitalization increases the specificity of advanced human capital skills, it reduces the firm
specificity of generic human capital skills.
• 4a: Digitalization enhances a firm’s ability to exploit its core (peripheral) technology FSAs
in foreign markets with a more (less) centrally controlled digital network.
• Proposition 4b: Digitalization enhances a firm’s ability to exploit advanced (generic)
human capital FSAs in foreign markets at lower costs by internalizing (externalizing)
them.
FUTURE RESEARCH VENUES
• While our discussion focused on the benefits from digitalization, future research can
complement ours and study the dark side of digitalization (New York Times, 2014). In
addition to its numerous benefits, digitalization also threatens job stability in traditional
sectors such as transportation, retail, finance, etc. (Hook, 2017). Brick-and-mortar retail
outlets are increasingly closing shop as consumer demand moves online. What should
the role of the state be in securing the socio-economic welfare of its citizens in the digital
economy, especially in emerging markets?
• A greater access of society to IT advances can spur economic growth by lifting rural
communities out of poverty (Kenny, 2017). Such IT and education skill set advances can
also help curtail backlash against globalization (Kobrin, 2017).
• Government-industry cyber security partnerships that aim to strengthen encryption and
increase awareness of MNCs’ staff about cyber security threats and various mitigation
mechanisms also been long advocated (Dunning & Wymbs,2001).
• Our study opens the possibility to bring SMNCs to the forefront of IB research. Services
contribute increasingly to employment and economic development in many countries
(Kundu & Lahiri, 2015). Yet, SMNCs face substantive challenges in internationalization as
they attempt to provide intangible, perishable, and experience-based services globally
• for profit (Pamnani, 2017)
CONCLUSION
• Digital networks would likely become the dominant organizational mode and a key feature of IB.As
the MNC becomes a spatially distributed entity,co-creating value with global partners, data and
information become even more central. Digitalization not only brings through communication
technologies but also heralds a more efficient way of coordinating within the network, depending
on the type of FSA –technology or human capital – that the firm leverages for its
internationalization.
• Our study paves the way to analyze how MNCs become digitally networked orchestrators not only
of their subsidiaries across countries but also of their global ecosystem partners, specializing in
connecting buyers with sellers instantaneously through digital platforms.
• IB as a field should be prepared to see more of asset-light internationalization enabled by
digitalization, ushering in co-owned and co-managed global networks. Indeed, the ‘‘globally
integrated enterprise’’ that Sam Palmisano, ex- Chairman of IBM, envisioned in the 2000s is
perhaps finally here, made possible by digitalization.

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How does digitalization affect the nature of firm-specific assets and governance choices according to the article?

What are some of the changes that digitalization has brought to international business according to the article?

INTERNALIZATION THEORY FOR THE DIGITAL

• Summary by Efe Onomake

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