In the past few years a theory of multinational enterprise (MNE) has begun to emerge. The starting point for a blending of the various elements of the theory is a view of the MNE as an organization that internalizes various international transactions. Some general properties of markets and internal organization can be identified using a markets and hierarchies approach developed by Williamson (1975). An MNE may internalize aspects of various markets, intermediate product, proprietary know-how, and international capital. The first category will involve vertical foreign investment, the second will involve horizontal foreign investment, and the third category will involve either vertical, horizontal, lateral or conglomerate investment. The MNE appears to have both efficiency and market power propensities. The market power properties are more narrowly circumscribed than is usually supposed. The MNE is an organizational mode that is capable of establishing efficient vertical supply relations and of transferring technology in an efficient fashion. There is little evidence that the presumption in favor of free trade should be overturned.
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