Internalization choices under competition: A game theoretic approach

• DOI: http://doi.org/10.1002/gsj.1333
• Author: Niron Hashai,Nicole Adler
• Published date: 01 February 2021
• Date: 01 February 2021

RESEARCH ARTICLE

Internalization choices under competition: A game

theoretic approach

Niron Hashai

1

| Nicole Adler

2

1

Arison School of Business, The Interdisciplinary

Center, Herzliya, Israel

2

Jerusalem School of Business Administration,

The Hebrew University, Jerusalem, Israel

Correspondence

Niron Hashai, Arison School of Business, The

Interdisciplinary Center, Herzliya 4610101, Israel.

Email: nhashai@idc.ac.il

Research Summary:A long-standing void in international

business literature is understanding whether and how the

internalization choices of competing multinational enter-

prises (MNEs) affect each other. This paper presents a

game-theoretic, location-allocation mathematical model

that predicts the organizational boundaries of competing

MNEs. Given multiple players in the market, the game

analyzes the competition between MNEs with respect to

market share, yielding Nash equilibria that determine how

many MNEs will be left in the market, and whether their

production and marketing sites are internalized or out-

sourced. Results of computational experiments suggest that

the internalization choices of profit maximizing MNEs that

compete with each other, sharply deviate from the internal-

ization choices ignoring such competition.

Managerial Summary:We present a game theory model

of the effect of competition between multinational enter-

prises (MNEs) on their decisions whether to outsource or

internalize production and marketing activities. Our model

predicts that, at the presence of even modest knowledge

transfer costs, such competition likely results in a monop-

oly outcome. The monopolistic MNE outsources produc-

tion and builds on the resources that are freed due to this

outsourcing to establish more research and development

units and internalize marketing units. In addition, our

model shows that when knowledge transfer costs are neg-

ligible, entry barrier reduce and more competitors arises.

These competing MNEs will split markets between them

in order to avoid direct competition, will have a greater

propensity to outsource their marketing sites, and will

need fewer marketing sites to control worldwide sales.

Received: 11 August 2017 Revised: 2 December 2018 Accepted: 4 December 2018

DOI: 10.1002/gsj.1333

© 2018 Strategic Management Society

Global Strategy Journal. 2021;11:109–122. wileyonlinelibrary.com/journal/gsj 109