Overview

Internalization theory, despite criticism of its empirical deficiency, has dominated the industrial organization approach to the multinational enterprise and its foreign direct investment (FDI) decisions. Liu improves the empirical foundations of internalization theory, through the elaboration of the FDI signaling framework, which holds that a firm's direct foreign investment influences the perceptions of less-informed market participants. The signaling concept is derived from the premise that a firm's intangible assets in know-how cannot be correctly priced in a market with asymmetric information, and this motivates the firm's decision to undertake FDI. If the premise is correct, the firm's decision is based on inside information, and the firm's action reveals that information to the market. The firm's FDI internalization is evidence of management's confidence in its intangible assets, and its action may further influence market perceptions. The hypotheses generated along this line of analysis are subjected to investigation, and the evidence supports the FDI signaling proposition. Moreover, the study represents an indirect test of internalization theory. As a result, internalization is transformed from a untested theory to an empirical result.

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Scott Liu's book is a cogent review of the theory of the multinational firm. It provides fresh perspectives on the internalization decision. Professor Liu's work provides an important additional consideration to the foreign investment decision, namely its signaling value, not just for further internalized investment, but also for further expansion by other methods such as exporting and alliances. This is a significant theoretical and practical insight for global strategy. Professor Liu provides a good counterpoint to theory, with several practical company cases and illustrations. -Farok J. Contractor Professor of International Business Rutgers University In this pathbreaking book, Professor Scott X. Liu makes one of the most important contributions to the literature on foreign investment since the 1960 dissertation of Stephen Hymer was published in 1976....This book is the first one to integrate signaling theory into the mainstream internalization paradigm of international business. It is full of useful insights and is a valuable contribution to the literature on the theory and operational management of the MNE. As such, it is an indispensable addition to the library of any serious researcher in the field of international business. -From the foreword, Alan Rugman

Scott Liu's book is a cogent review of the theory of the multinational firm. It provides fresh perspectives on the internalization decision. Professor Liu's work provides an important additional consideration to the foreign investment decision, namely its signaling value, not just for further internalized investment, but also for further expansion by other methods such as exporting and alliances. This is a significant theoretical and practical insight for global strategy. Professor Liu provides a good counterpoint to theory, with several practical company cases and illustrations. -Farok J. Contractor Professor of International Business Rutgers University

Author Information

SCOTT X. LIU is a consultant for the World Bank, actively involved in Chinese projects, and also a consultant for several major Asian multinationals.

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