The article outlines the making of an explanatory theory for internationalisation of higher education (IoHE) in the emerging global knowledge economy. A grounded theory method with reference to a Theory of Practice is utilised to theorise IoHE in New Zealand. The pivotal features of IoHE are conceptualised as rationality and relationality, reflecting the global neoliberal agenda and national strategic priorities. The emergent theory is tested by investigating whether rationality and relationality are applicable for IoHE practices in the non-western context of Indonesia. The proposed theory results in a new definition for IoHE and revisits its role in the knowledge economy.