Buckley and Casson (1976) made important contribution to the theory of FDI when they introduced the concept
of internalization. According to them, the market of intermediate goods is highly imperfect with information
asymmetry, and contract enforcement and bargaining costs. The decision of a firm to internalize depends upon
industry-specific factors such as type of product, the structure of market, the economies of scale, factors specific
to a region such as differences due to distance and culture, factors specific to nations such as political and
financial factors and factors specific to firm such as management skills. According to them, MNE’s that were
high on research and development activities were high on the factor of internalization. Caves (1971) emphasized
on differentiation of products as monopolistic advantage. According to him, in an imperfect market, MNE’s
engaged in product differentiation and were induced in horizontal FDI. This is because FDI was preferred over
export or licensing when knowledge was employed in differentiation of products.