Studying the existence

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CHAPTER 2

Literature review

2.1. Theories on Multinational Companies: Review and Synthesis

2.1.1. Introduction

In the process of studying the existence, growth and business activities of multinational companies, various theoretical approaches have been developed in the past forty years, depending on the scholars` fields of specialization, perspective and objectives.

It is particularly important to distinguish economic approaches to the study of multinationals, strategic management approaches, and finally, cultural approaches to the study of multinational companies.

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Furthermore, the second part of the literature review will be dedicated to the study of various kinds of spillovers which multinational companies create while operating in the given country, a subject which is of particular importance for the topic of this thesis.

2.1.2. Economic Approaches to the Study of Multinational Companies

When reviewing the literature on multinational companies, it is evident that economists find themselves at the forefront of the research on multinational companies. According to Cantwell (1991: 17-18), they are approaching the topic from three perspectives: microeconomic (which deals with cross-border interactions of individual firms), mesoeconomic (which deals with the cross-border interactions of firms at the industry level), and macroeconomic (dealing with the growth and trend of multinationals at national and international level). All of these categories have one thing in common: they all tend to explain the existence of international production.

The economic approaches to the study of international business have been dominant in the fields of microeconomics, industrial economics and macroeconomics. These include the theory of the firm by Coase (1937, 1987), as well as internalization theory by Buckley and Casson (1976) and Rugman (1980, 1980 and 1982). Other famous theories on multinational enterprises refer to markets and hierarchies approach by Williamson (1975, 1985), furthermore, market power approach or the theory of international operations by Hymer (1960, 1976), and the approaches of industrial organization by Bain (1959), Caves (1971, 1982), Hirsch (1976), Johnson (1970) and Lall (1980a).

As a starting point for his research, Ronald Coase (1937) departed from the traditional microeconomic assumption which states that economic activity is determined freely by the price mechanism and that the economic system “works itself”. In practice this means that suppliers respond to demand changes, and buyers respond to supply changes through the open market system, which is viewed as an automatic, responsive process. According to him, opposed to the traditional thinking that the economic system is being coordinated by the price mechanisms, Coase argues:

“This coordination of the various factors of production is, however, normally carried out without the intervention of the price mechanism. As is evident, the amount of “vertical” integration, involving as it does the supersession of the price mechanism, varies greatly from industry to industry, and from firm to firm.

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