Foreign Acquisitions: When Do They Make Sense? Available to Purchase

Why should a firm expand across national frontiers? The costs of operating under different tax systems, coping with different cultural traditions and dealing with multiple bureaucracies are substantial. A new view of international economics called the internalization theory proposes that successful multinationals possess special intangible assets such as a technological lead, a marketing advantage or perhaps superior organizational ability. Our work indicates not only that this is so, but that in the absence of such intangibles a multinational structure may well be a liability. The traditional reasons economists and business managers cite to justify foreign acquisitions (such as the ability to declare profits where the tax rate is lowest, the increased stability gained through international diversification, and the lower labor and raw material costs prevailing in some foreign countries) appear to be minor effects.