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Purpose– This paper aims to argue that management capability is a complement to ownership advantage. Ownership advantage determines the potential of the firm, and management capability governs the fulfilment of this potential through overcoming barriers to growth. The economic theory of the firm is central to the theory of the multinational enterprise (MNE).Design/methodology/approach– Multinationals play an important role in coordinating the international division of labour through internal markets. The paper reviews the economic principles that underlie this view. The analysis is applied to a variety of issues, including out-sourcing, geographical dispersion of production and regional specialisation in marketing.Findings– The economic theory of the firm is central to the theory of the MNE. Recent literature on multinationals, however, makes only limited reference to the economic theory of the firm. Optimal internalisation equates marginal benefits and costs. The benefits of internalisation stem mainly from the difficulties of licensing proprietary knowledge, reflecting the view that MNEs possess an "ownership" or "firm-specific" advantage. The costs of internalisation, it is argued, reflect managerial capability, and in particular the capability to manage a large firm.Originality/value– The paper demonstrates the value of the economic theory of the firm in analysing the strategy, structure and size of multinational firms. It restates classic economic principles and applies them to contemporary issues, including the performance and survival of multinational firms in current times.

Demonstrating why economic modelling is so important in understanding international business, this stimulating and highly original book sets out a new and exciting research agenda in international business studies. The author explains what economic models are, how they are constructed and the way in which they can be used. It illustrates how models clarify important issues in international business - explaining empirical anomalies, analyzing strategies and evaluating government policies towards multinational firms. There are detailed discussions of monopoly and competition in the global economy; the international division of labour; supply chain coordination; and the strategic implications of sunk costs in R & D. Based on this discussion, the book proposes a radical reformulation of the theory of the firm as applied to international business. Mark Casson is Professor of Economics at the University of Reading, UK, where he researches international business, entrepreneurship and business and economic history. His recent books include The Multinational Enterprise Revisited (with Peter Buckley) and The Entrepreneur in History (with Catherine Casson).

This book integrates the work of economists, management scientists and business historians. It applies the related concepts of transaction costs, internalisation, corporate strategy and market structure to explain the historical process of corporate growth in the international economy. Each chapter is written by a scholar who has specialized in a particular aspect of the growth of international business