Transaction Cost Economics, International Business, and International Trade

By Joanne Oxley*

The story of Oliver Williamson’s relationship to scholarship in international business and international trade in many ways mirrors the story of his relationship to the field of economics writ large. But, it does so in a way that perhaps even more starkly illustrates the journey from skepticism (or outright rejection) to incorporation, and highlights the power of transaction cost economics to spur important and productive new research trajectories.

At the time Williamson began work on Transaction Cost Economics (TCE), firms were almost entirely absent from models of international trade, where the primary focus was squarely on the direction and content of (implicitly arms-length) trade flows between countries. To the extent that firms were considered at all in this field, they were as vehicles of foreign direct investment, and these were very much the ‘black boxes’ of economic orthodoxy. Not surprising then, when it first emerged, TCE was to a large extent dismissed as orthogonal to the issues of central concern to international economists.

Meanwhile, in a seemingly separate-but-parallel universe, work by a community of applied international business (IB) scholars gave a starring role to the multinational firm in the global economy. Adopting a Coasian approach, these researchers explored how imperfections in intermediate product markets created incentives for internalization by multinational firms through foreign direct investment, counterbalanced by the liability of foreignness that naturally disadvantaged multinational firms, relative to their local counterparts in host countries. Because internalization theory was developed independently (and apparently without knowledge) of Williamson’s work, TCE was at first seen by international business scholars as merely ‘old wine in new bottles.’ Over time, researchers in the IB field nonetheless came to appreciate the granularity and comparative rigor of TCE, and a large swath of international business research now draws explicitly on TCE concepts. This process of incorporation accelerated further with Williamson’s introduction of the ‘shift parameter framework,’ which provided a vehicle for thinking more systematically about the influence of differences in institutional environment on the organization of international operations.

Mainstream international economists were much slower to appreciate the value of TCE but, given that increasing proportions of world trade take place within multinational corporations, it was inevitable that considerations of firm scope and organization should eventually come to the fore. And when this happened, as in the broader discipline, researchers began to incorporate insights from TCE, and make them their own. Thus, when commenting in the New York Times on the announcement of Williamson’s 2009 Nobel Prize, Paul Krugman expressed the view that almost all attempts to model multinational corporations “rely to some degree on Williamson’s ideas.” Moreover, international economists now appear to increasingly embrace Williamson’s orientating question of “What’s going on here?” This, along with the greater discipline that the application of TCE has brought to international business research, has, in my view, led directly to much more productive interactions between these previously insular fields. And, as a result, we are currently witnessing a flowering of exciting new developments in both theory and empirical work that is pushing our understanding of the multinational corporation and its role in the global economy to new levels. I feel sure that Olly would approve.


*Joanne Oxley is McCutcheon Professor of International Business at the Rotman School, University of Toronto, former Board member of SIOE, and student of Oliver Williamson.