The purpose of this paper is to understand how institutional factors (countries’ digital readiness) and their interplay with behavioral factors (family firm governance) modify internalization theory’s predictions about multinational enterprises (MNEs’) governance mode orientation. For the purpose, the authors highlight how these two boundary conditions follow different types of non-efficiency-based logic – societal-based for countries’ digital readiness and affect-based for family firms – and how they alter the traditional efficiency-based assumptions and predictions of internalization theory.
The methodology used in this study is a mixture of survey-based and quantitative research.
A one standard deviation increase in countries’ digital readiness (i.e. +0.89) is associated with a 2.511 percentage point marginally significant decrease in the MNEs’ internalization orientation of the governance of their productive activities. The conditional effect of countries’ digital readiness on family firms’ governance mode orientation is +1.868, while the conditional effect of countries’ digital readiness on the non-family firms’ governance mode orientation is −2.886. Thus, family firm governance fully reverses the negative effect of countries’ digital readiness on firms’ internalization-dominant governance mode orientation.
First, the authors found that the behavioral extension to internalization theory is more dominant than the institutional extension and that future theoretical analyses focused on institutions should simultaneously account for the behavioral dimension of firms too (i.e. the type of firm: family vs. non-family). Second, the authors proposed that sometimes, transaction cost minimization is not the dominant reason behind some firms’ governance mode choices.
The findings of this study suggest that firms operating across countries with different levels of digital readiness may face different relative payoffs to outsourcing vs. internal production and that governance characteristics (e.g., family control) may shape how strongly firms respond to those institutional conditions.
We extend internalization theory by proposing how institutional factors (countries’ digital readiness) and their interplay with behavioral factors (family firm governance) modify internalization theory’s assumptions and predictions about MNEs’ governance mode orientation. We find that the behavioral extension to internalization theory, with its focus on family firms’ affect-based logic, is more dominant than the institutional extension, with its focus on societal-based logic.
