Information Technology and Transnational Integration: Theory and Evidence on the Evolution of the Modern Multinational Enterprise

Reflecting the greater salience of transaction hazards in crossborder flows of proprietary intangibles, internalization has been central in MNE theory. This centrality notwithstanding, the fact is that internalization coheres with lower-powered incentives, and carries a consequent if implicit drawback, viz., higher realized production costs. With the emergence and deployment of information and communication technology (ICT), modern MNEs are re-shaping their transnational governance to address this cost. The modern MNE uses ICT to mitigate transactions costs, and evolves more to arm’s length exchange to incentivize lower production costs. A testable prediction is that MNEs in industries more susceptible to and employing more ICT will exhibit reduced propensity for transnational integration. The authors examine this hypothesis using available data from 1982-1997 for U.S. MNEs across all manufacturing sectors. Regression results and robustness tests are strongly congruent with the prediction. This study, a first to explore empirically the role of ICT in the evolution of transnational exchange, suggests that MNE theory, until now founded primarily on transaction cost economics and a crossborder control theory of value appropriation, is more likely to keep pace with developments in MNE practice by opening up to incentive theories of exchange governance and a crossborder coordination theory of value creation.