Internationalization of services: The case of intra‐multinational enterprise trade

• DOI: http://doi.org/10.1002/tie.22091
• Published date: 01 November 2019
• Date: 01 November 2019
• Author: Hrishikesh D. Vinod,P. M. Rao

RESEARCH ARTICLE

Internationalization of services: The case of intra-multinational

enterprise trade

P. M. Rao

1

| Hrishikesh D. Vinod

2

1

College of Management, Long Island

University, Post Campus, Brookville, New York

2

Department of Finance and Business

Economics, Fordham University, Bronx,

New York

Correspondence

P. M. Rao, College of Management, Long

Island University-Post Campus, Brookville, NY

11548.

Email: pmrao@liu.edu

Abstract

Increased tradability of services, made possible by the information and communications

technology (ICT) revolution, has been at the heart of the internationalization of services.

Although rapid growth of the services trade between parents of multinational enter-

prises (MNEs) and their overseas subsidiaries has contributed to the internationalization

of services, empirical studies examining the determinants of intra-MNE trade in services

are few. This article, using the ownership, location, and internalization (OLI)framework,

attempts to explain intra-MNE trade in services. The results provide strong support for

the OLI perspective, and posit a complementary relationship between manufacturing

foreign direct investment and intra-MNE services trade. The results also suggest the

importance of subsidiaries' absorptive capacity and breadth of global connectedness

for intra-MNE trade.

KEYWORDS

internationalization of services, intra-MNE services trade, services offshoring

1|INTRODUCTION

Although the U.S. private service sector accounts for about 70% of

gross domestic product (GDP) and employment, international trade in

private services—exports plus imports—accounts for only about a

quarter of the total trade in goods and services. This is because histor-

ically many services, especially services requiring face-to-face con-

tacts, are “nontradable”across national borders (U.S. Council of

Economic Advisers, 2018).

Recently, however, the information and communications technol-

ogy (ICT) revolution has not only turned many nontradable services or

less tradable business services into highly tradable services, but also

accelerated the global dispersion of goods production and internation-

alization of services (Borga & Koncz-Bruner, 2012; Grimm, 2016).

Thus, the offshoring of goods production and services to third parties

and to majority-owned MNE affiliates has grown (see Table 2). Empiri-

cal studies, however, have not quite kept pace with the growing

importance of intra-firm trade, much less intra-MNE trade in services.

The conceptual backdrop for this article comes from the literature,

which emphasizes that value creation by MNEs is becoming

increasingly dispersed around the globe in order to take advantage of

countries' cost, labor quality, knowledge base, infrastructure, proxim-

ity to customers and/or competitors, and the like. This strand of

research runs through the works of Carr, Markusen, and Maskus

(2001), Dunning (2008, 2009), Mudambi (2008), Cantwell (2009),

Jaclik, Cirjakovic, and Chidlow (2012), Yong, Martins, and Driffield

(2013), Castellani, Jimenez, and Zanfei (2013), Baaij and Slangen

(2013), Matysiak, Rugman and Bausch (2018, April) from the interna-

tional business (IB) discipline; and in Hanson, Mataloni, and Slaughter

(2001), Antràs and Helpman (2004), Markusen (2006), Keller and

Yeaple (2009, 2013), Feenstra (2010), Bernard, Jensen, Redding, and

Schott (2010), Jensen (2011), Bombarda (2013), and Antràs and

Yeaple (2013) from the discipline of international economics (IE).

This study examines intra-firm trade in services between parents

who are U.S. multinationals and their majority-owned foreign affili-

ates. Our broad research objective is to develop and empirically test a

model of intra-MNE trade in services from the perspective of IB, as

well as IE. Specifically, this article attempts to find if the ownership,

location, and internalization (OLI) model can explain intra-MNE trade

in services. Note that the OLI framework has been employed largely to

DOI: 10.1002/tie.22091

Thunderbird Int. Bus. Rev. 2019;61:947–960. wileyonlinelibrary.com/journal/tie © 2019 Wiley Periodicals, Inc. 947