The transaction cost theory, developed by Williamson, Buckley & Casson and Hennart focuses on the problem of organising interdependencies between individuals. Transaction cost economics arises when MNCs are more efficient than markets and contracts in organising interdependencies between agents located in different countries.

   If a company intends to exploit a firm-specific asset in a foreign market and this exploitation has to be done in that market due to localisation factors (e.g trade barriers, high transportation costs or other country-specific factors), the company often tends to do this by investing abroad in their own facilities rather than through, for example a license. The more intangible the firm-specific asset is, the stronger this tendency will be. The reason is that intangible assets are difficult to do business with. The internalisation model and cost efficiency thinking have dominated the theoretical debate among economists during the last two decades. However, the internalisation approach has lately been questioned with reference to models dealing with how knowledge is used as a value-creating asset in the company. One critical argument is that multinational companies exist, because knowledge across borders can be transferred more efficiently inside the company than between independent companies, not because of market failure. This means that in general intangible asset can be treated as a sellable asset, but can seldom be detached from the firm itself and cannot be treated as a public good.

   The cost of organising a transaction varies with the two basic methods of organisation, the price system and hierarchy. The price system is dependent on agents' definitions and measurements to make an accurate estimation of the value of goods and services. Behavioural assumptions like bounded rationality and self-interest seeking are reasons that make some market participants take advantage of measurement difficulties to overprice and/or underperform. This kind of behaviour makes some agents develop a 'cheating' behaviour. Self-seeking attributes are variously described as opportunism, moral hazard and agency. In order to avoid this 'cheating' behaviour companies internalise and integrate the transactions.

   The benefits of integration and control must, however, be compared with the costs of control. The transaction cost theory states that companies integrate when asset specifity is high, to retain control over the specific advantages they offer to the market.