Internalization of Multinational Firms: The Role of Productivity

This thesis investigates how firm heterogeneity shapes internalization decisions of Multinational Firms. We develop a theoretical analysis studying and comparing four different theoretical frameworks which describe how firms with different levels of productivity choose the optimal organizational form. We show that, addressing the topic under different approaches, multiple determinants may impact internalization decisions, namely contractual frictions, governance costs, wage differentials among countries, shipment costs, firms’ bargaining power. In presence of sequential production, we demonstrate the relationship between integration of an activity and its position along the value chain. All our models demonstrate that according to their productivity level, firms determine whether to internalize or outsource a specific activity, and that most productive firms tend to internalize more stages of production, even in multiple locations.