Introduction

There are many theories given by different group of researchers about the existence of multinational enterprises or MNE's. According to John Cantwell, it was in the 1970's and 1980's that many theories on MNE's were proposed. These theories were either general theories of MNE's which were called the main institution for international production or the theories on foreign direct investment, the means by which international production is done ( Pitelis, Christos N. and Sugden, Roger, The nature of the Transnational firm, Pg 10). Amongst the most famous are the Hymer's theory of international production, the internalization theory put forward by Buckley and Casson, Dunning's Eclectic Paradigm, and the evolutionary theory …show more content…

It can be anything like knowledge of technology, production, marketing etc. They explain that firms exist to create new knowledge and replicate this knowledge to expand in foreign markets (Kogut, B and Zander U., Knowledge of the firm and evolutionary theory of multinational enterprises, Journal of International Business Studies, 2003, Pg 525). In a way firms create knowledge, they transfer knowledge, gains knowledge from their subsidiaries and evolve.

The evolutionary theory states that most of the knowledge is tacit knowledge which is not easy to transfer. The tacit knowledge, which is difficult to codify is difficult to transfer to third parties and hence tend to be transferred internally. Kogut and Zander designed a questionnaire to measure the attributes of knowledge. They mentioned three parameters namely, codifiability as to how much knowledge can be coded, teachability as to how much it is difficult to transfer the knowledge to the new workers and complexity of knowledge that is how much it is difficult to transfer the knowledge. Moreover their research suggests that this tacit knowledge is more easily transferred to wholly owned subsidiary at lower cost than to third parties. This is because firms are like communities with established set of rules of how to cooperate and communicate within. Another reason for this behavior is that the transfer is more through experience which are shared more easily