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Internalization theory, despite criticism of its empirical deficiency, has dominated the industrial organization approach to the multinational enterprise and its foreign direct investment (FDI) decisions. Liu improves the empirical foundations of internalization theory, through the elaboration of the FDI signaling framework, which holds that a firm's direct foreign investment influences the perceptions of less-informed market participants. The signaling concept is derived from the premise that a firm's intangible assets in know-how cannot be correctly priced in a market with asymmetric information, and this motivates the firm's decision to undertake FDI. If the premise is correct, the firm's decision is based on inside information, and the firm's action reveals that information to the market. The firm's FDI internalization is evidence of management's confidence in its intangible assets, and its action may further influence market perceptions.
The hypotheses generated along this line of analysis are subjected to investigation, and the evidence supports the FDI signaling proposition. Moreover, the study represents an indirect test of internalization theory. As a result, internalization is transformed from a untested theory to an empirical result.
List of contents
Illustrations
Introduction
The Multinational and Foreign Investment: Issues and Previous Theories
The Internalization Research in Its Current Direction
The Signaling Framework of Foreign Direct Investment
Modelling the FDI Signaling Effects
Evidence on Relations between MNE's Internalization and Externalization
Announcement of Foreign Investment and Its Valuation Effects
Theory of the Multinational Enterprise: Summary, Evaluation, and Future Direction
Bibliography
Index
About the author
SCOTT X. LIU is a consultant for the World Bank, actively involved in Chinese projects, and also a consultant for several major Asian multinationals.
