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4 J. L. Econ. & Org. 305 (1988)
The Multinational Corporation's Degree of Control over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation

handle is hein.journals/jleo4 and id is 313 raw text is: The Multinational Corporation's Degree of Control over Foreign Subsidiaries: An Empirical Test of a Transaction Cost Explanation HUBERT GATIGNON University of Pennsylvania ERIN ANDERSON University of Pennsylvania 1. INTRODUCTION Should a business function be vertically integrated? Increasingly, economists have acknowledged that this is the wrong question. The right question is to what degree a function should be integrated, whereby integration is a con- tinuum anchored by the options of market and hierarchy (Williamson, 1985). Movement along the continuum from market contracting to unified gover- nance is accompanied by an increased degree to which resources are placed at hazard. The firm is compensated for this by an increased level of control that it presumably will use correctly in order to generate superior profit outcomes. The central questions of transaction cost analysis are twofold: When will the firm need more control (that is, when do lower-control out- comes become less desirable), and when will the benefits of increased control more than offset the costs of resource commitment and risk? Oliver Williamson (1985) offers a theory to answer these questions. In this paper we examine empirically the theory's predictions in the context of the multinational corporation (MNC), which attempts to control the operations of foreign subsidiaries (business units) that it owns in whole or in part. We This project was funded by the Wharton Center for International Management Studies and the Marketing Science Institute. We thank Louis Wells of the Harvard Multinational Enterprise Project for access to the data base and William Davidson for assistance in using the data. The capable research assistance of Wujin Chu is gratefully acknowledged. Helpful comments were provided by Bruce Kogut, Jean-Frangois Hennart, Paul Green, Thomas Robertson, Oliver Wil- liamson, John Farley, and an anonymous reviewer. Journal of Law, Economics, and Organization vol. 4, no. 2 Fall 1988 © 1988 by Yale University. All rights reserved. ISSN 8756-6222

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