Journal of International Business Studies (2010) 41, 567–586
& 2010 Academy of International Business All rights reserved 0047-2506
www.jibs.net
An evolutionary approach to understanding
international business activity: The co-evolution
of MNEs and the institutional environment
John Cantwell1,
John H Dunning2 and
Sarianna M Lundan3
1
Department of Management & Global Business,
Rutgers Business School, Rutgers University,
Newark, USA; 2Department of Economics,
University of Reading, Reading, UK;
3
Department of Organization and Strategy,
School of Business and Economics, Maastricht
University, Maastricht, The Netherlands
Correspondence:
SM Lundan, Department of Organization
and Strategy, School of Business and
Economics, Maastricht University, PO Box
616, 6200 MD Maastricht, The Netherlands.
Tel: þ 31 43 3883776;
Fax: þ 31 43 3884893;
E-mail: [email protected]
Abstract
This paper examines the co-evolution of MNE activities and institutions external
and internal to the firm. We develop a theoretical framework for this analysis
that draws on the more recent writings of Douglass North on institutions as
a response to complex forms of uncertainty associated with the rise in global
economic interconnectedness, and of Richard Nelson on the co-evolution
of technology and institutions. We link historical changes in the character of
MNE activities to changes in the institutional environment, and highlight the
scope for firm-level creativity and institutional entrepreneurship that may lead
to co-evolution with the environment. We argue that the main drivers for
institutional entrepreneurship are now found in the increasing autonomy of
MNE subsidiaries. Thus MNE agency derives from more decentralized forms of
experimentation in international corporate networks, which competencecreating nodes of new initiatives can co-evolve with local institutions. Unlike
most other streams of related literature, our approach connects patterns of
institutional change in wider business systems with more micro processes of
variety generation and experimentation within and across individual firms. This
form of co-evolutionary analysis is increasingly important to understanding the
interrelationships between MNE activities and public policy.
Journal of International Business Studies (2010) 41, 567–586.
doi:10.1057/jibs.2009.95
Keywords: theory of FDI and the MNE; institutional theory; evolutionary economics;
historical adaptation
Received: 15 March 2008
Revised: 12 September 2009
Accepted: 21 September 2009
Online publication date: 24 December 2009
INTRODUCTION
This paper presents a theoretical framework to account for the
dynamic configuration of the activities of multinational enterprises (MNEs), and the interplay between such activities and the
evolution of institutions external and internal to the firm. We shall
argue that a driving force in this evolutionary process is the way in
which MNEs adjust their strategies and structures to counter
uncertainty and complexity in the development of their own
activities and in their environment.
At a general level, our argument follows the wider principles
articulated in various strands of the recent literature, which has
proposed that firms co-evolve with their environment. Organization theory has long explored the processes of adaptation and
selection, or the extent to which firms are selected in or out based
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John Cantwell et al
568
on their viability in a particular competitive
environment, and the extent to which firms engage
in adaptive responses to maintain or enhance their
viability. This literature has tended to approach
institutions in terms of isomorphism, that is, the
extent to which coercive, mimetic and normative
pressures push firms to adopt similar structures and
strategies, particularly in pursuit of legitimacy. The
contribution of co-evolutionary organizational theorists has been to suggest that there is not a clearcut choice between managerial adaptation and
environmental selection, but that both processes
occur simultaneously and influence each other
(Baum & Singh, 1994; Lewin & Volberda, 1999;
Volberda & Lewin, 2003).
In the international business (IB) context, Westney
(2009) has argued that weak selection regimes,
in which firms representing a wider variety of
organizational forms can learn and adapt sufficiently to survive, tend to increase the overall adaptability of a system when the environment changes
in ways that favor formerly niche activities. Meanwhile, social network analysts have shown how
firms react differentially to the opportunities
created by the network structure in their environment (Powell, Koput, & Smith-Doerr, 1996), including structural holes (Burt, 1992; Walker, Kogut, &
Shan, 1997), and in doing so change the structure
of the network. Literature in each of these different
streams has focused on the issues of adaptation
and co-evolution in relation to competitor firms
in an industry-specific environment, or between
populations or communities of firms in connected
industries (Aldrich & Ruef, 2006; Sørenson, 2004),
but it has generally not paid much attention to the
broader institutional environment within which
firms operate.
By contrast, the literature on business systems has
explored in detail how economies are organized in
terms of labor market institutions, capital market
institutions and patterns of ownership, resulting in
different typologies of ideal types of capitalism
(Hall & Soskice, 2001; Whitley, 1999). Much of
this literature has been focused on examining the
opportunities and constraints presented by an
uneven institutional landscape, and it has largely
ignored the active agency of firms, and particularly
that of MNEs, in adjusting to and affecting institutional change. The literatures on national
innovation systems (Dosi, 1999; Freeman, 1995;
Murmann, 2003), regional innovation systems
(Cooke, 2001; Freeman, 2002) and sectoral innovation systems (Malerba, 2004) likewise reason in
Journal of International Business Studies
terms of the interrelationships between firms and
their wider environments, but again they tend to
stress environment-level and collective determinants of systemic change, rather than the effects
of a variety of differentiated firm-level initiatives on
the wider environment.
In order to be able to present an integrative
framework for a topic as broad and complex as
the co-evolution of MNEs and institutions, we have
adopted an approach that borrows from the recent
contributions of two noted scholars: North (1990,
2005) in economic history, and Nelson (2002, 2003,
2007) in evolutionary economics. In both cases
we feel that while their earlier work is well known,
and has been recognized in the extant literature; in
their later work both scholars have considerably
deepened their ideas concerning the role and forms
of economic institutions, and how these interact
with the behavior of firms. As a result, they have
produced a body of work that shares striking
similarities in terms of the main tenets concerning
path dependence, institutional change and the
systemic nature of evolutionary change.1 Applying
these insights, we endeavor to situate in our
framework the relevant conceptual and empirical
contributions in IB and economics, political economy, sociology and organization theory, to the
extent that these are germane to the issue of crossborder institutional adaptation and co-evolution
by MNEs.
We present our framework in the context of the
OLI paradigm, which has been widely recognized
as the preeminent theoretical paradigm within IB.
However, this contribution is not intended as a
revision or application of the paradigm per se, and
efforts to incorporate institutional influences explicitly in the OLI paradigm have been made elsewhere (Dunning & Lundan, 2008a, b). Similarly,
since the present paper is intended as a broad,
synthesizing contribution, we are not in a position
to consider in detail the processes of selection,
retention and diffusion of new organizational
forms or other institutional innovations within
MNEs, or between MNEs and other organizations,
which have recently been examined by, for example, Volberda and Lewin (2003) and Dunning and
Lundan (2010).
We think that the paper makes a unique contribution in the following ways. First, we present an
integrative framework combining firm-level adaptation and creativity by MNEs and their affiliates
with institutional change at the macro level. In so
doing, we take into account interactions that
The co-evolution of MNEs and the institutional environment
John Cantwell et al
569
extend beyond the firm and any individual home
or host countries, including the institutions of
regional or supranational standard-setting and
regulation, and encompassing both market and
non-market interactions.
Second, by following North (1990, 2005), we
present an analysis that places as much emphasis
on informal institutions (such as norms and values)
as it does on formal institutions (such as laws,
regulations, codes or standards) as a source of
uncertainty confronting firms. MNEs are among
the focal entities that have come to co-evolve with
these unpredictable shifts in a continually emergent and uneven environment, and so they are
at the forefront of contributing to the emergence
of new institutions. By incorporating the contributions of Nelson, we are able to reinforce the
connection that exists between historical institutional analysis and the arguments of evolutionary
economists concerning the effects of cumulative
learning, path dependence and the difficulties in
articulating and transferring complex knowledge.
In earlier work in the economics of innovation,
firm-specificity (as represented in the IB field by
the view, of e.g., Kogut and Zander (1993) of firms
as individual social communities) and wider innovation systems had been treated as largely separate
topics. By drawing upon the latest Nelsonian
approach to the role of institutions in the process
of innovation we can now more fully understand
the co-evolution between individual firms and their
institutional environment.
Third, we provide a comprehensive overview of
the empirical IB literature illustrating various types
of co-evolutionary processes. In most cases, such
studies have not explicitly adopted a co-evolutionary
view, but by bringing them together in a unified
framework we are able to show the range of coevolutionary processes that shape public institutions and policy in the contemporary global
economy.
Our argument will proceed in the following
manner. We begin by clarifying our concept of
institutions, and present three propositions that
connect the structural transformation of MNEs
to the changes occurring in the institutional
environment. We then examine the conditions
under which MNEs are likely to engage in institutional entrepreneurship, and how this links to a
broader discussion on the tension between institutional embeddedness and active agency in the
social sciences. After a short methodological section, we take a contrasting look at the available
empirical evidence. First, we present a capsulated
historical account of the global economy that
illustrates how firm behavior has been conditioned
by changes in the external institutional environment. Then we move on to consider the evidence
concerning the co-evolution of MNEs and the
institutional environment, and distinguish it from
simple adaptation. We conclude by reflecting
on the contribution made by this paper and, by
extension, that made by institutional and evolutionary analysis to IB theory, particularly in light of
the institutional transformations initiated by the
recent financial crisis.
DEFINITIONS AND KEY PROPOSITIONS
In line with Dunning and Lundan (2008b), we
consider the MNE as a coordinated system or
network of cross-border value-creating activities,
some of which are carried out within the hierarchy
of the firm, and some of which are carried out
through informal social ties or contractual relationships. Thus an MNE is not defined solely by the
extent of the foreign production facilities it owns,
but by the sum total of all of its value-creating
activities over which it has a significant influence.
These activities may involve foreign sourcing of
various intermediate inputs, including the sourcing
of knowledge, as well as production, marketing and
distribution activities.
Value creation consists of the production and
distribution of goods and services, involving the
exploitation (and augmentation) of ownership (O)
specific advantages related to resources, capabilities
and markets (Dunning, 2006). Over the past two
decades or more, the value-creating activities of
MNEs have become increasingly influenced by
technological development, learning and innovation, where creative search efforts evolve over time.
This entails the development and use of physical
technology, such as tangible artifacts or devices,
and social technology, such as the capability to
coordinate the range of human activities needed
for the effective conduct of interrelated tasks
(Nelson & Sampat, 2001).
Both North and Nelson have sought to develop a
notion of institutions that is designed to address
the issues of long-term economic growth. According to Nelson (Nelson & Sampat, 2001), institutions
are patterns of human interaction that relate to
the division of labor and the mode of coordination
of human activity, or what he calls social technology. In particular, institutions arise as certain
social technologies become institutionalized or
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John Cantwell et al
570
standardized. This is also therefore the mechanism
for institutional change, and it follows that actors –
including existing organizations – can potentially
influence institutional change where they contribute to the emergence of new social technologies.
This offers a broad view of institutions, consistent
with various specific representations such as institutions as the ‘‘rules of the game’’, or as governance
structures (a notion in common usage in the IB
field).
This approach to institutions is also in tune with
what has become North’s view. North and Wallis
(1994) contend that social technologies are in some
ways similar to physical technologies, but they
involve patterned human interaction rather than
physical engineering. The process by which certain
aspects of social technologies happen to become
institutionalized, but not others, reflects North’s
(2005) argument that there is a variety of alternative institutional arrangements that are consistent with a given environment. As a result, the
process of institutional change is open and unpredictable, which is what makes the co-evolution of
organizations (e.g., MNEs) and institutions viable.
North (1990) himself defined institutions as
formal rules (e.g., constitutions, laws and regulations) and informal constraints (norms of behavior,
conventions and self-imposed codes of conduct).
Institutions (and their enforcement mechanisms)
set the ‘‘rules of the game’’, which organizations,
in pursuit of their own learning and resource
allocative goals, must follow.2 An institutional
system is complete only when both formal and
informal institutions are taken into account; and
institutional change may result from changes in the
character and content of either or both of these, or
their relevant enforcement mechanisms. An important insight of North (1990) is that it was the early
challenges in the physical environment3 that
initially led to an institutional infrastructure that
was characterized by collectivist beliefs and personal exchange, and in which cohesion and enforcement were based on personal ties. However, over
the subsequent centuries, advances in technology
and methods of communication challenged these
institutional forms, and eventually led towards
more impersonal forms of exchange, requiring the
creation of new types of institutions that enforce
cohesion in the context of impersonal ties.
In his later work, North (2005) delved deeper
into the factors concerning human cognition
and motivation that either impede or encourage
the emergence of new institutions. Here, the
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interconnections between informal institutions
and the effects of (extreme) uncertainty are at the
core of his argument. North argues that the
uncertainties that arise from interconnected global
markets originate primarily in the domain of informal institutions. This is because of the incommensurability and/or opaqueness of the norms and
values that guide decision-making, and which
provide the rationale for the design of the formal
institutional system. Moreover, owing to the interconnectedness of the global economy, such uncertainties grow more complex, resulting in what
North (2005) called a non-ergodic world of continuous change, in which it is often not possible to
forecast the future from past patterns in behavior.
Since the concept of non-ergodic uncertainty is
quite central to North’s argument, it is important
that we be clear about its meaning and implications. We are not suggesting that, measured on
some absolute scale, there is more uncertainty in
the global economy today in any given line of
activity than in the past. Rather, we are suggesting
that the kinds of uncertainties firms face today are
different from and more difficult to deal with than
those they faced only a few decades ago, owing to a
rise in global interconnectedness and hence in
complexity. Complex systems evolve in ways that
are at least partially unpredictable (Ramlogan &
Metcalfe, 2006). Because human actors exercise
choice, judgment and creativity when developing
new spheres of value creation or pioneering new
institutions in contexts that are fundamentally
uncertain, they may initiate a transformation of
the system of which they are part, as well as transforming themselves.
The outcome of evolutionary development is an
open and irreversible process that runs through real
historical time, rather than a closed and purely
deterministic process of transition from one received state of the world to another (Shackle, 1958).
We believe that the relevance of non-ergodic
uncertainty in this sense of genuine unpredictability from past structures and trends has been greatly
enhanced in recent times by a widening of the
complex interconnections and interdependencies
between MNEs, other firms, home and host governments and civil society. The extent of such interactions has been greatly expanded and reinforced
by improved communication and transportation
methods, and we think that the current financial
and economic crisis illustrates both of the elements
contributing to non-ergodic uncertainty. On the
one hand, there is uncertainty concerning human
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John Cantwell et al
571
values and motivations, which manifested itself in
the failure of both public and private regulatory
mechanisms, since these were no longer being
supported by an ethos of transparency and responsibility. On the other, the web of economic interconnections, whose full extent became known only
after the fact, brought about contagion effects that
spread rapidly through the global system.
The deepening of the interconnections between
parts of a system results in tensions that MNEs may
try to resolve by engaging in institutional entrepreneurship. Even in a world characterized by
‘‘classical’’ uncertainty (Knight, 1921), some institutional entrepreneurship of this kind would be
likely to occur. However, when faced with nonergodic uncertainty, an effective response requires
continuous experimentation in the creation and
adaptation of the institutions that sustain the
value-creating activities of firms and business networks. Here, an important difference between our
approach and that of North concerns the sources
of institutional transformation or reconfiguration.
While North (1990, 2005) sees institutional change
as the result of the reactions of organizations (the
players) to the prevailing institutions (the rules
of the game), his analysis largely ignores the firmlevel processes of evolution.4 We contend that there
are important systemic links involving the mutual
formation of expectations at the level of individuals, MNE affiliates and parents, that connect
the behavior of firms to changes in external
institutions.
We develop three propositions linking the evolutionary and institutional views:
(1) The institutional aspects of the environment for
IB activity have become steadily more important for MNEs over time, particularly since the
advent of the knowledge-based economy and
contemporary globalization. Economic growth
in the long run is a question of the development
of more complex institutions to deal with the
uncertainties that arise from more complex
forms of exchange, involving both market and
non-market actors (North, 1990, 2005). These
institutional aspects have also become increasingly interconnected over geographical space,
and MNEs both contribute to, and are affected
by, the contagion effects from the external
environment that are now capable of being
transmitted more rapidly and effectively from
one location to another.
(2) The rising significance of non-ergodic uncertainty, in the sense that we can no longer
satisfactorily predict the future by extrapolating
from the past, has placed more emphasis on
the development of new institutions that help
to better manage or reduce uncertainty in
the course of economic development. Within
the realm of value creation, this is related to a
tendency towards a growing disparity between
success in the development of the understanding of physical technology on the one hand,
and the adequacy of knowledge about the
accompanying social technology on the other
(Nelson, 2008; Nelson & Nelson, 2002). Taken
together, these considerations imply that the
only effective way of countering such uncertainties is through experimentation with new
approaches and institutional entrepreneurship,
which is likely to be manifested in a greater
variety of organizational forms and practices.
This experimental character of business is
central to the evolutionary perspective (Day,
1998; Eliasson, 1991).
(3) MNEs have responded to the more profound nature of uncertainty in part by shifting
towards more open business network structures
(Chesbrough, 2006) that provide greater flexibility in adapting to changes in the institutional environment.5 In so doing, MNEs have
developed solutions for dealing with the problems of impersonal exchange across multiple
markets, and the acquisition and recombination
of dispersed knowledge. The methods of organizing and structuring relationships within and
between firms, including in the conduct of
research and development (R&D), the design
and enforcement of contracts, and the management of cooperative relationships, evolve into
routines or best practices that are gradually
diffused to other firms, and become institutionalized. Thus, while the institutional environment is external to any individual firm, the
process through which new institutions are
created is often initiated through the experimental actions of individual firms. Since firms
(and especially MNEs) are increasingly interconnected with other market and non-market
actors, a variety of alternative experimental
directions across different network actors
raises the system-wide extent of institutional
experimentation and diversity, as well as
generating novelty from within the complex
system.
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INSTITUTIONS AND THE EVOLUTION OF MNE
ACTIVITY
Institutional Theory and the MNE
In a seminal article, DiMaggio and Powell (1983)
identified three mechanisms for institutional diffusion: coercive, normative and mimetic. Of these,
the influence of mimetic isomorphic pressures has
particularly attracted the attention of organization
theorists and sociologists within IB. Their work has
examined how MNE affiliates seek to gain legitimacy, both in the eyes of their parent companies,
and within the context of the institutions of the
host countries in which they operate (Kostova &
Zaheer, 1999). They have also investigated the
effects of institutional distance on the transfer of
O-specific advantages (including organizational
practices) by MNEs to their foreign affiliates
(Kostova, 1999).
However, in a recent article, some of the leading
institutional scholars in the IB field have begun to
re-examine the assumptions underpinning their
earlier work (Kostova, Roth, & Dacin, 2008). In
particular, they question whether the concept of
a coherent organizational field really applies in
the case of MNEs, and whether, as a consequence,
the expectations of isomorphism are borne out.
Although MNEs do indeed exhibit some signs of
isomorphism, this may be through choice, rather
than as a result of a need for legitimacy. In many
institutional contexts MNEs are as powerful as the
local institutional actors. In such circumstances
MNE subsidiaries may be valued for their differences from local actors, which increase local
variety, and not just for their capacity to conform
with or adjust to local norms of behavior.
Indeed, the issues raised by Kostova et al. (2008)
are part of a wider shift in the study of institutions
in the social sciences from a view that emphasizes
institutional embeddedness to one that is focused
on active agency. Scholars interested in comparative capitalisms (Hall & Soskice, 2001; Whitley,
1999) have begun to address the criticism that the
existing models of national economic systems are
overly static and top-down in their orientation
(Casson & Lundan, 1999; Jackson & Deeg, 2008).
In the analysis of macro-level institutions the
emphasis has been on the distinctive formal features of state systems and how these influence
value-creating activities, rather than on the norms
and values that led to the emergence of different
systems in the first place. The expectation of
convergence rather than divergence is based on
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the idea that there are ‘‘best practice’’ models of
governance that become diffused across borders.
A contrasting view that has gained more ground
recently is one that is focused more on the
persistence of seemingly inferior forms of institutions, which are grounded in the norms and values
underpinning the formal institutional system.
Consequently, recent empirical contributions in
this vein have began to pay more attention to the
processes of change at the meso level, and to
the role of MNEs as change agents (Kogut, Walker,
& Anand, 2002; Morgan, 2005; Morgan & Quack,
2005).
We think that MNEs are confronted with institutional tensions more frequently than are uninational firms for two reasons. First, because MNEs
operate across a wider variety of institutional environments, there is a greater variety of stimuli to
encourage them to engage in institutional entrepreneurship. Second, modern MNEs are characterized by an integrated network structure with highly
autonomous subsidiary units and knowledge creation at a decentralized level. This structure ensures
that the MNE has incentives to invest in the
transferability of innovations developed at the level
of a subsidiary as well as the corporate parent, and
to disseminate new routines or best practices inside
the firm.6 The latter aspect is important, because
it emphasizes that MNEs are not merely confronted
with more tensions than uninational firms, but
when they engage in institutional entrepreneurship they also have an incentive to invest in the
ability to diffuse new institutions within the firm
(Dunning & Lundan, 2010).
The eclectic or OLI paradigm now recognizes
three different kinds of ownership (O) advantages
(Dunning & Lundan, 2008a, b), including institutional ownership advantages (Oi) that incorporate
the firm-specific norms and values guiding decision-making, as well as an imprint of the institutional environment (L attributes) of the home
country. Such institutional advantages can be transferred (intentionally or unintentionally) alongside
other ownership advantages to host countries, and
may influence their institutional development.
Institutions and Evolution
The decline in the unitary or pyramid-like structure
of internal organization, and the changing character of the MNE from a multi-plant, multi-activity
firm to a network of cross-border value-creating
activities, is both an outcome of and a contributory
cause to the rise of vertical specialization (Langlois,
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John Cantwell et al
573
2003). The evolution of the MNE from an organization concerned primarily with the most effective
mode of exploiting O-specific proprietary advantages towards the coordination of a network of
value-creating activities places greater demands
on the relational capabilities of the firm, and on
the institutional assets (Oi) it has developed. Overall, the competitive strengths of firms have evolved
to become increasingly network- rather than firmspecific. At the same time, the degree of internalization (I) of the O advantages of firms is
increasingly dependent on their ability to transfer
certain kinds of knowledge effectively across borders. Hence, more than a firm’s ownership structure
as such, the tightness and continuity of its capability to coordinate the various assets it creates, or
to which it has access, are becoming critical to its
performance. Finally, the location (L) attractions of
countries have increasingly come to comprise some
endogenous (local) network-specific advantages, in
addition to the exogenous advantages that lie
beyond any given business network.
With experimental strategies for learning and
innovation on the part of firms, an inter-firm
heterogeneity of search paths and outcomes can
be expected. This variety-generating mechanism
has always been stressed in the evolutionary approach to understanding the growth and change
of business activities (Nelson & Winter, 1982).
Experimental search and learning processes in firms
(or teams) generate variety, which drives the
evolution of the technologies, production facilities
and organizational routines of firms. This process
is conditioned by selection mechanisms, within
firms and through the market, that in turn depend
upon the institutional environment. The outcome
of such an evolutionary process is fashioned by an
exploration of the comparative goodness-of-fit of
alternative organizational forms with a changing
environment. This is very different from the neoclassical behavioral assumption of an optimization
procedure that is undertaken by all firms, and
which is hypothesized to lead to a convergence
towards some new industry-wide equilibrium or,
at the firm level, to a smooth shift towards a
well-understood new target position. In the latter
case, inter-firm differences may be regarded as
unimportant, or at least as only second-order
issues, whereas in the evolutionary view firm heterogeneity is vital (Nelson, 1991), and continual
experimentation is needed to cope with a changing
institutional environment under conditions of
uncertainty.
We might also note that the emergence of
organizational coherence that facilitates the
(cross-border) transfer of knowledge or capabilities
is just one aspect of the firm-specific attributes of
the search strategies of MNEs. This feature has
understandably been emphasized in some evolutionary accounts of the growth and organization of
MNEs (Kogut & Zander, 1993; Nohria & Ghoshal,
1997), a central characteristic of which is the social
generation of shared values by their different subunits. However, this is only one side of the evolutionary story. The other side is that MNEs are
increasingly pursuing strategies of selected diversity
and differentiation within the cross-border networks of MNEs. Because search strategies are
inherently experimental, actors that operate across
different institutional environments have come
to rely more on a measure of internal variety in
their development. However, the two sides of the
evolutionary equation can be reconciled once it is
recognized that IB activities can be either asset- or
competence-exploiting (building upon some established area of specialization of the relevant MNE
group), or asset- or competence-creating (new to
the corporate group). With competence-exploiting
activities it is the organizational coherence and
commonality that matters, whereas in the case of
competence-creating activities it is innovation,
entrepreneurship and variety that are of the essence
(Cantwell & Mudambi, 2005). From the perspective
of the MNE, successful evolution requires the maintenance of a suitable balance between these two
types.
A METHODOLOGICAL NOTE
Our contribution is in the nature of what Nelson
(1994) has described as appreciative theory, rather
than formal theory. In the social sciences, appreciative theory allows scholars to examine a more
complex web of causal associations, by being
more historically grounded, closer to real-life situations, and by making greater allowance for variations in institutional and contextual specificities.
In a thriving area of inquiry, empirical research,
appreciative theory and formal theory tend to
interact in a complementary fashion. However,
appreciative theory also offers an analytical bridge
between empirical investigation and formal models, or the articulation of formal propositions.
In this paper we build theory through a critical
evaluation of some of the most significant trends
in the evolution of IB activities, rather than by
deducing hypotheses from formal theory that can
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John Cantwell et al
574
then be tested against empirical evidence. Our
appreciative theory of the co-evolution of IB
activities and the institutional environment relies
on a particular interpretation that is consistent
with a complex variety of experiences identified
and discussed in the literature. Although we clearly
cannot examine the full range of such historical
experiences in the light of this methodological
perspective, we shall endeavor to substantiate our
argument through reference to a number of illustrative examples drawn from the literature.
In the previous section we made reference to the
tension between institutional embeddedness and
agency in the social sciences. In their classic
monograph, Nelson and Winter (1982) provided a
fundamental critique of the methodologies and
ontology of economists who examine technological and other changes not as a process in historical
time, but through the comparative statics of
equilibrium positions. The contribution of Nelson
and Winter was to depict firms as non-optimizing
organizations, whose path of evolution required
them to learn through the trial and error of experimental search and exploration. They contrasted the
neoclassical objective of profit maximization with
their own concept of a continual process of search
for satisfactory but sustainable profits. Thus the
goal of profit maximization might be applicable in
a world in which there is no innovation, and in
which the technological and institutional environment remains relatively simple and unchangeable.
But in a world in which innovation occurs (and
indeed where it becomes the major potential source
for profits), the notion of an experimental and
uncertain search for higher profits is more applicable (Cantwell, 2002).
Apart from a relative lack of concern with the
process of change (as opposed to its end results), the
conventional methodology adopted in the social
sciences also tends to break the real world down
into simple and independently recognized components that are themselves sufficiently stable to
permit likely future behavior to be examined on
the basis of past evidence. Once this step has been
taken, we can apply the tools of standard logic, and
can construct mathematical models and/or formal
propositions. However, in such cases we generally
need to impose some methodological constraint on
the degree to which we can consider the evolution
in the qualitative character of the focal entity itself.
Thus, for example, in the conventional view, it
might be that in response to an exogenous shock
from its environment a firm may do more or less
Journal of International Business Studies
R&D, or become more or less international, but
otherwise its behavior remains unchanged. However, especially in a longer-term perspective, we are
more interested in analyzing the changing nature
of the firm itself, and the consequent changes in
the wider structure of its likely behavior. Consequently, we believe there is a need for IB scholars to
pay greater attention to the human environment in
which change is likely to occur (in the institutional
environment as well as within the firm), and to
make greater allowance for the effects of social
complexity, and the key role played by the dynamic
interaction between market and non-market
agents.
THE PROCESS OF CO-EVOLUTION
The resistance of disruption to previous patterns of
accustomed behavior, and organizational and societal inertia, may create a pattern of ebb and flow
and periodic institutional constraints in the pattern
of evolution over time (Freeman & Louçã, 2001;
Freeman & Perez, 1988). At the same time, pathdependent cumulative and mainly incremental
changes may also lead to a qualitative transformation at some point, and thus may induce a movement from one period to another (Mokyr, 2002).7
Table 1 presents a summary of some of the major
institutional developments that have impinged on
the value-creating activities of MNEs since the
beginning of the second industrial revolution. The
alterations to the broader institutional framework
we are primarily concerned with are those that
encourage (or inhibit) cross-border business activity, for example through the legal enforcement of
contracts and property rights, institutions that
discourage corruption and provide incentives for
investment in human capital, or institutions that
increase the incentives for productive innovation,
such as the patent system. We believe these are
largely self-explanatory, and serve to illustrate the
interplay between changes in the informal and
formal institutions. The periodization we have
adopted is similar to that employed by Dunning
and Lundan (2008b).
We then move to consider the role of MNEs as
change agents, and Table 2 distinguishes between
three forms of engagement involving MNEs and
institutions, and indentifies prominent studies
from the IB literature to illustrate their differences.
The first type we have labeled institutional avoidance, in which MNEs take the external institutional
environment as a given, but in which they are able
to make choices between different institutional
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John Cantwell et al
575
Table 1
Institutional evolution in the global economy
Institutions
Formal
Informal
1870–1914
First (modern) global economy;
new technologies of transport,
communication and power
generation; broad openness
The British Empire; gold standard; lowering
of trade barriers (until 1890); lowering of
barriers to immigration; emergence of
university programs in business and
engineering; development of modern capital
markets; antitrust legislation; patent pooling;
cross-licensing; embryonic M-form
organizations
Internationalization; application of
science and technology to improve
standards of living; socialism; universal
suffrage
1914–1945
Retreat towards nationalism;
limited openness
Tariff barriers; cartel agreements; M-form
organizations; New Deal (US)
Self-sufficiency, nationalism
1945–1971
Economic recovery and second
main thrust to globalization;
Pax Britannica gives way to Pax
Americana; start of Cold War and
the space race; new technologies
of transport and communication
Bretton Woods institutions; fixed exchange
rates; GATT; modern welfare state; spread of
M-form organization to Europe; increasing
diversification via M&As (US); conglomerate
form organizations
Decline of colonialism; emergence
of modern environmentalism;
techno-optimism; movement for
racial and gender equality
1971–1980
New International Economic
Order; oil crisis; limited openness in
many developing countries and
center/left economic philosophies
of several developed countries
Floating exchange rates; import substitution
policies; performance requirements;
nationalization; state-owned enterprises;
continuing diversification and increasing
divestitures (US)
Techno-nationalism
1980–present
Third wave of globalization; decline
of communism; emergence of new
economic powers; return to broad
openness; new technologies of
communication; competition for
natural resources
Regional integration; IPR protection (TRIPs);
investor protection (TRIMs and BITs);
financial integration; privatization; market for
corporate control; private equity investment;
Plaza agreement; Kyoto agreement:
Millennium Development Goals; new
technologies of organizing work (TQM and
JIT); matrix structure; network organizations
Competitiveness; shareholder value
maximization; corporate social
responsibility; anti-globalization;
hacker/open source ethic; religious
and political fundamentalism
environments. Faced with a weak institutional
environment, characterized by a lack of accountability and political instability, poor regulation and
deficient enforcement of the rule of law, the response of most MNEs is likely to be characterized by
an ‘‘exit’’ rather than a ‘‘voice’’ strategy (Hirschman,
1970). Exceptions, however, may include naturalresource-seeking investment and some forms of
infrastructure investment, where the number of
alternative investment locations might be limited.
The prevalence of this type of behavior is evident in
the results of many studies confirming that the
more footloose forms of MNE activity are mostly
concentrated in countries characterized by good
governance (Dunning & Lundan, 2008b; Kaufmann, Kraay, & Mastruzzi, 2007).
The second form of engagement is institutional
adaptation. As in the previous case, the MNE treats
the institutional environment as essentially exogenous, but in this case it seeks to adjust its own
structure and policies to better fit the environment.
The means to achieve this objective include the use
of political influence and, in some cases, bribery,
but it may also involve efforts by the MNE to intentionally emulate the behavior, commercial culture
and institutional artifacts that are most desirable in
Journal of International Business Studies
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John Cantwell et al
576
Table 2
Forms of MNE institutional engagement
Examples from the empirical literature
Institutional
avoidance
K
K
Institutional
adaptation
K
K
K
Key characteristics
Strong/weak institutions and FDI attraction: institutions in
transition economies (Dunning, 2005; Meyer & Peng, 2005); in
developing countries (Globerman & Shapiro, 2002; Jensen, 2006);
the effects of corruption (Cuervo-Cazurra, 2006)
Choice of entry mode and sequence, particularly in emerging
economies (Delios & Henisz, 2003; Meyer, 2001; Meyer &
Nguyen, 2005; Uhlenbruck, Rodriguez, Doh, & Eden, 2006)
K
Use of political influence and bribery, particularly in connection
with resource-seeking and infrastructure investments (Doh,
Teegen, & Mudambi, 2004; Ramamurti & Doh, 2004); the
obsolescing bargain (Grosse, 2005)
Legitimacy through isomorphism (Kostova & Roth, 2002); seeking
to become a market insider (Mason, 1992)
Imitation, learning and post-entry changes related to entry mode
(Chang & Rosenzweig, 2001; Davis, Desai, & Francis, 2000;
Guillén, 2003)
K
K
K
K
K
K
K
Institutional
co-evolution
K
K
K
K
K
Transfer of organizational forms, such as the M-form (Chandler,
1990; Kogut & Parkinson, 1998)
Transfer of organizational routines and best practices that have an
institutional basis: transfer of employment practices from US to
Europe in the 1950s and 1960s (Kipping & Bjarnar, 1998; Zeitlin &
Herrigel, 2000); Japanese ‘‘transplants’’ in the US (Westney, 2001)
and in the UK in the 1980s (Dunning, 1986; Oliver & Wilkinson,
1988); workforce diversity policies in UK affiliates of US MNEs
(Ferner, Almond, & Colling, 2005); employment discrimination in
MNE affiliates (Wu, Lawler, & Xiang, 2008)
Adoption of best practices directly connected to institutions in
another country: adoption of the arm’s length accounting
standard internationally (Eden, Dacin, & Wan, 2001); adoption of
aspects of the Sarbanes–Oxley Act by German MNEs (Hollister,
2005); adoption of board diversity policies by Swedish and
Norwegian MNEs (Oxelheim & Randøy, 2003); contribution of US
MNEs to the institutional transformation in Japan (Ozawa, 2005);
similarity of corporate governance laws and divergence of
governance practices (Khanna, Kogan, & Palepu, 2006)
Firm sponsorship of common technology or regulatory standards:
Sun Microsystems’ sponsorship of Java (Garud, Jain, &
Kumaraswamy, 2002); the role of Pfizer in the TRIPs agreement
(Ramamurti, 2005); promotion of TRIPs-plus provisions in US BITs
by MNEs (Heath & Kamperman Sanders, 2005); sponsorship of
ISO 9000 standard for quality management (Guler, Guillén, &
Macpherson, 2002) and ISO 14001 for environmental
management (Christmann & Taylor, 2001)
Firm self-regulation, particularly in areas related to CSR: programs
to bring affordable medications to developing countries (Vachani
& Smith, 2004); to confront climate change (Brewer, 2005); to
improve labor standards (van Tulder & Kolk, 2001)
Journal of International Business Studies
K
K
K
K
K
Institutional environment is
exogenous to firms
Firms choose between different
institutional environments
Firms react to poor institutional
quality by adjusting their entry mode
Institutional environment is
exogenous, but firms adapt their own
behavior to achieve a better fit
Firms may try to influence local
institutions, but only to a limited
extent
Firms seek legitimacy by adapting to
local isomorphic pressures
As a result of local learning and
adaptation, firms gain strategic
options
Embeddedness in an institutional
context
Institutional environment is partly
endogenous
Firms adjust to different institutional
environments by a process of
co-evolution
Firms introduce new institutions that
are adapted to the local context
Unintentional institutional spillovers
occur as a result of local imitation
Active agency and institutional
entrepreneurship
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John Cantwell et al
577
the host country context. At the extreme, the MNE
may wish to ‘‘go native’’, and to become an insider
in the host country market, possibly even hiding
the aspects that make it appear foreign.8
In contrast to the first two cases, in the third
one the institutional environment is assumed to be
partly endogenous, and the MNE is engaged in a
process of co-evolution. In institutional co-evolution,
although firms may employ some of the same
tactics they used under the previous scenario, their
objective is no longer simply to adjust, but to affect
change in the local institutions – be they formal
or informal. For example, an MNE might engage in
political activities to advance specific kinds of regulation or market structure that give it an advantage
over its competitors. In doing so, the MNE might
also align itself with domestic firms in lobbying the
government for economic protection or support.9
While it could be argued that this last form of
institutional response represents merely a difference in degree rather than in kind when compared
with the adaptive scenario, there are a variety of
forms of co-evolution that may be observed, each
involving a different balance between adaptation
and co-evolution. These include the introduction
of new organizational routines and best practices
that the affiliates of MNEs have either developed
locally, or which are transferred to them from elsewhere within the MNE network. They also embrace
the transmission of home-country institutional
practices that are adopted by the MNE parent, and
transferred within the MNE network. Co-evolution
may also involve activities in which the MNE
engages to affect institutional change at the supranational level. These include various efforts to
influence the standards being promoted and/or
enforced by existing supranational bodies, as well
as proactive institutional entrepreneurship to selfregulate specific aspects of corporate behavior.
Effective management of the firm’s non-market
environment (Boddewyn, 2003) is likely to require
both adaptation and active agency on the part
of the MNE. For example, NGOs and firms can
become partners in creating and legitimizing new
standards (Teegen, Doh, & Vachani, 2004). Indeed,
in the area of social responsibility, MNEs often
prefer to pre-empt future regulation by proposing
to regulate themselves by creating codes of conduct, or by being active in endorsing other forms of
standards, such as the UN Global Compact or the
Dow Jones Sustainability Index. In other cases, new
institutions gain prominence and legitimacy
through the process of isomorphism. For example,
in the legal area the concentration of large clients
to a handful of New York and London law firms can
be seen as a risk minimization response by firms in
cases that involve very large financial stakes.
Similarly, the spread of US-style commercial arbitration has been argued to be an outcome of the use
of these practices by MNEs (Dilling, Herberg, &
Winter, 2008).10
The room that is available for MNEs to influence
the process of standard-setting can be considerable,
and such influence occurs at multiple levels. At one
end is private self-regulation, where MNEs create
and enforce the criteria that are applied to assess
their own conduct (Kolk & van Tulder, 2002; van
Tulder & Kolk, 2001). At the other end are various
kinds of negotiations and political influence strategies to change the form and content of public
regulations that have an impact on the firm’s
activities (Boddewyn & Brewer, 1994; Ramamurti,
2005).
These three forms of engagement are not
mutually exclusive, and MNEs are likely to exhibit
both adaptation and co-evolution with institutions
in different home and host countries, in different
industrial sectors, and at different points in time.
We would expect, however, that adaptation would
be more likely to occur in relatively stable environments and in less innovative sectors, whereas more
dynamic environments are likely to both allow and
require innovation and a continuous co-evolution
for the firm to sustain a competitive advantage. In
a comparatively settled local environment it is
likely that, conforming to the expectations of the
neo-institutionalist approach, subsidiaries would
mainly adapt to their local surroundings. The variety they introduce is likely to be accepted by other
local actors, but it is unlikely to have much impact
on their behavior. By contrast, in a faster-moving
environment, perhaps associated with a process of
political and institutional reform, the co-evolution
of MNE subsidiaries and the institutional environment is more likely, and the variety they introduce
to the local environment is more likely to influence
(as well as be influenced by) the behavior of other
agents.11
In particular, an institutional system that is in
flux is likely to exhibit ‘‘institutional voids’’12 that
offer opportunities for institutional entrepreneurship and co-evolution. Consequently, in emerging
markets, MNEs might be welcomed in part because
they introduce institutional elements that are
missing in the local environment (Hoskisson, Eden,
Lau, & Wright, 2000; Meyer, 2004; Peng, Wang, &
Journal of International Business Studies
The co-evolution of MNEs and the institutional environment
John Cantwell et al
578
Jiang, 2008). By the same token, in such dynamic
environments MNEs are more likely to be seen as
legitimate if they contribute to a transformational
process that is already ongoing. New practices
introduced by MNEs can become a part of the
wider process of changing values and institutional
structures in the host country, but even in such
cases institutional entrepreneurship by MNEs is
likely to contribute only one element of the broader
restructuring under way.
Seen from an evolutionary perspective, all institutional systems represent adaptations to specific
circumstances, with some features more deeply
rooted than others, and no expectation that the
system is in any sense optimal. When new practices
become adopted by local firms and embedded in
the institutional fabric of particular countries, it is
unlikely that such practices will remain unchanged.
The ease with which indigenous firms in the
countries hosting the affiliates of MNEs are able to
absorb new practices, and to fit them to the local
context, is analogous to the concept of absorptive
capacity, which has been found to be an important
determinant of technology creation and diffusion
(Cohen & Levinthal, 1990). As in the case of
technology transfer, there are also likely to be spillovers that arise as a result of the deliberate transfer
of institutions by MNEs. Such spillovers occur
through demonstration and learning effects, the
transfer of employees, and ‘‘leakage’’ from the training provided by MNEs to bring local suppliers
or distributors in line with their global practices.13
The market structure in the host country has an
impact on the keenness of local firms to imitate
new practices, but overall, such spillovers are an
unavoidable consequence of the efforts undertaken by MNEs to make best practices transferable
within the firm.14
The centrality of the agency of the MNE to the
cross-border transfer of technology is itself partly
attributable to the need for the implementation of
technology to be supported by the development of
complementary institutions. Having already developed relevant organizational routines, and the tacit
knowledge that has become embedded in those
routines, it is often easier for the MNE to extend
these practices into the host-country environment
than it would be for an independent agent operating under license (Teece, 1977). By adapting its
technology and associated routines of behavior
for the local environment, the MNE also extends
its own range of competence, and hence its
overall innovation potential (Cantwell, 1989). This
Journal of International Business Studies
Nelsonian conceptualization of the innovative
MNE therefore implicitly assumes a co-evolution
of the MNE and the varied international institutional environment.
At the level of the MNE subsidiary, the evolution
of its competence-creating activities relies upon
the dynamism of the location in which it is situated, while also contributing to that dynamism
(Andersson & Forsgren, 2000; Cantwell & Mudambi,
2005). Consequently, as selected subsidiaries begin
to take up innovation in fields that are new to
their corporate group, this facilitates increasing
specialization of locations in line with their greatest underlying areas of competence or innovative
traditions (Cantwell & Piscitello, 2000). This in turn
helps to reinforce the institutional differentiation
of host locations, as well as the distinctiveness
of the technological structures of their national
(or regional) systems of innovation (Cantwell &
Vertova, 2004).
Limits to Co-evolution
While differences in informal institutions play a
central role in our argument, we might note
that institutional distance does not simply equate
to cultural distance. For example, the research by
Orr and Scott (2008) on global projects demonstrates that what they label institutional exceptions
(instances of institutional ignorance or unawareness) may arise as much from the normative and
regulatory elements, as they do from the culturalcognitive elements in the host country. The ability
of MNEs to adjust to and to go beyond such exceptions gives them the capacity to operate in a variety
of host-country environments, and by engaging in
institutional co-evolution MNEs may thus reduce
their ‘‘liability of foreignness’’.
At the same time it should be acknowledged that,
owing to time and resource constraints, firms also
frequently respond to uncertainties in an ad hoc
manner (Winter, 2003). Engaging in institutional
entrepreneurship incurs substantial costs that are
non-recoverable, and which are likely to result in
path-dependent lock-in effects for the firm. While
MNEs can learn to transcend the ‘‘imprinting’’ of
their home country, owing to the path dependence
of their investment and search strategies, they are
limited in their ability to adjust to the institutional
systems of host countries. Thus while the crossborder differences in institutions offer potential
opportunities for MNEs to choose the most conducive environment for their activities, the legacy
of home-country institutions may result in firms
The co-evolution of MNEs and the institutional environment
John Cantwell et al
579
preferring a similar (rather than superior) institutional context (Cuervo-Cazurra, 2006).
Indeed, we think that the finding of Rugman and
Verbeke (2004), that some of the world’s largest
multinationals are regional rather than global in
terms of their sales, is in large part due to institutional differences that are a combination of
differences in formal market institutions, and the
societal norms and expectations that underpin
those institutions.15 In the words of Kogut (2005),
‘‘direct investment is the extension of the organizing principles and capabilities of the firm across
countries’’. Without detailed knowledge of the
market, and of the quality and quantity of information available to other firms and customers
throughout the value chain, it is difficult to assess
whether the business model the firm has adopted
in its home country is transferable abroad. For
example, Jacobides (2008) has argued that the
failure of US financial institutions (prior to the
current crisis) to expand abroad was due to a lack
of understanding of the extent to which their
business models relied on a particular division of
labor and the presence of specialized intermediaries
within the domestic market.
Furthermore, successful transfer presumes that
the MNE has the ability to generate a sufficient
variety of practices, to select those that are the most
viable and to codify them to the extent that they
become transferable within the firm. Even if this is
achieved, as a consequence of the increased autonomy gained by subsidiaries that evolve towards
a higher share of competence-creating activities,
problems of motivation and control may impede
subsequent transfers of knowledge within the firm
across disparate or potentially competing sub-units
(Andersson, Forsgren, & Holm, 2007; Mudambi &
Navarra, 2004; Verbeke & Kenworthy, 2008).
CONCLUSIONS AND IMPLICATIONS FOR IB
THEORY AND RESEARCH
We made three assertions earlier in this paper. The
first was that economic growth is increasingly
dependent upon the development of more sophisticated institutions, which are needed to cope with
the uncertainties of a dynamic physical and human
environment. Furthermore, the resource-related
and institutional challenges that have shaped the
contemporary global economy have often been
accompanied by higher transaction costs associated
with operating in complex markets that are underpinned by different cultural and social mores.
Our second assertion was that such uncertainty
is likely to be non-ergodic, or incapable of being
countered by designing and implementing corporate strategies simply by reference to past
patterns or trends. Both evolutionary and institutional theory suggest that experimentation by firms
is the only way to embrace such fundamental
uncertainties. In particular, we argued that such
experimentation would most likely be seen in the
emergence of a greater variety of firm strategies and
their supporting organizational structures and practices. Our final contention was that, given the first
two factors, as the entities most directly affected by
the increasing uncertainties and complexities in
their external environment, MNEs are required to
engage in institutional innovation to counter such
uncertainty. As a result, MNEs have evolved more
decentralized governance structures, involving
more locally responsive, yet internationally connected, relationships.
Building on this foundation, we presented a
framework for the analysis of MNE co-evolution
that made a contribution in three ways. First, we
noted that while most approaches to the coevolution of firms and their industry-specific
environment have stressed inter-firm variety, they
have tended to take as a given the wider institutional environment within which industries or
populations of firms are embedded. Conversely,
studies on the institutional characteristics of business or innovation systems have tended to focus on
collective patterns of change amongst the firms
engaged in a given system, and not on the potential
variety of firm-specific responses and initiatives
that may arise within a particular system. Here we
have proposed instead that a better understanding
of the co-evolution of firms with their institutional
environment must be grounded upon the variety
of firm-level creativity and experimentation in the
context of the profound uncertainty surrounding the direction and implications of institutional
change.
Second, in order to develop this theme, we have
drawn most closely on the recent work of North
and Nelson on the role of institutional change in
economic development and growth. These contributions have not been widely recognized in the IB
literature, but they have enabled us to join together
the micro- and macro-level processes of change
into one unified framework. In particular, North’s
view of institutions as responses to uncertainties
stemming mainly from the human environment,
and that of Nelson on managerial decision-making
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The co-evolution of MNEs and the institutional environment
John Cantwell et al
580
under conditions of profound uncertainty, share
some core ideas concerning the role of experimentation and path dependence that enable the
integration of these different but interconnected
levels of analysis.
Third, by applying the framework to the extant
empirical evidence, we have been able to demonstrate how the changes in the structure of MNEs
from ownership-based organizations to a nexus of
interrelated entities represents an evolution
towards increasing flexibility, which is essential
for experimentation to take place. The purposeful
experimentation undertaken by MNEs at the corporate and subsidiary levels can be thought of as
a variety-generating engine, and dynamic institutional environments put pressure on MNE subsidiaries to develop novel responses in their local
operating environment. Using this raw material,
MNEs employ their resources and capabilities to
develop new transferable routines, which can then
be shared within the MNE network, and which may
ultimately become appropriated by external parties.
The empirical literature we examined provided
illustrations of the ways in which MNEs have
responded to uncertainties by the development of
new institutions and open network structures, and
how such innovations in turn impact on the wider
institutional environment.
The changes in the strategies and structures of
MNEs towards open networks and more operational flexibility suggest that IB scholars should
revisit their thinking about how MNEs respond
to changes in their OLI configurations, and how
such configurations evolve over time. This does
not mean that organizational structures favoring
flexibility and non-equity ties necessarily require
changes to our received paradigms and theories
because they are new. Quite the contrary; there is
mounting evidence to suggest that such structures
were already quite common a century ago.16 But
by examining in what ways the balance of endogenous and exogenous institutional change has
evolved over time we are able to demonstrate that
while, at some points in time, the ability and
incentives of firms to adopt flexible organizational
structures have been curtailed by exogenous institutional change, at others firms have had more
room to implement their internal solutions to
uncertainty. We believe that an evolutionary
and history-friendly approach to theorizing about
the MNE allows us to appreciate the importance
of institutions and institutional change to the
resource-allocative process, and to separate the
Journal of International Business Studies
endogenous processes of change from those that
are (or become) exogenous. This also allows us to
bring the burgeoning but separate literatures on
firm- and country-level analyses of institutional
effects in IB within a single unifying framework.
Echoing the call by Morgan (2005) that a dynamic view of firms needs to be matched with
a dynamic view of institutions, we believe that
this paper has also helped to enhance and extend
both North’s analysis of institutional change and
Nelson’s examination of the significance of institutional adaptation and adjustment in the evolutionary processes governing technology development.
In terms of North’s analysis, which sees firms as
organizations that primarily respond to exogenous
incentive structures and enforcement mechanisms,
we think that what is missing is the active involvement of firms in the process of generating new
forms of (formal) institutions, which may replace
the need to develop the corresponding institutions
at the national or supranational level. Furthermore,
the presence of MNE affiliates in a host country
may act as a catalyst to changing the informal
institutions and mindsets of people, as for instance
has been the case in recent years in Japan.17 Thus
our analysis has highlighted that firms, and MNEs
in particular, may and often do play an important
role in generating new ‘‘rules of the game’’.
In terms of evolutionary analysis, we believe our
contribution may be useful in emphasizing how the
open network structure and the flexibility
embedded in it allow the MNE and its affiliates to
engage in multiple cross-border experiments in
unfamiliar and uncertain environments. The evolving structure of the MNE is itself a manifestation
of the difficulties attached to technological development, particularly in the realm of social technologies. We believe that the considerable research
currently undertaken on knowledge generation and
transmission within the MNE network can offer
important insights into the process of experimentation and the diffusion of structural solutions to
address the problems created by complexity and
uncertainty.
Like other scholars interested in co-evolutionary
analyses, we advocate an approach that is historical, contextual and multidisciplinary in nature
(Lewin & Volberda, 1999; Redding, 2005). The
pervasiveness of equifinality and nonlinearities
in the evolutionary process in complex systems
does not permit one to make causal predictions
concerning the relationships between specific variables (Andriani & McKelvey, 2007; Sullivan &
The co-evolution of MNEs and the institutional environment
John Cantwell et al
581
Daniels, 2008). Furthermore, the existence of an
optimal path of co-evolution is antithetical to the
basic idea of a systemic evolutionary process.
Instead, the aim of such analysis is to achieve a
better understanding of the multiple relationships
and feedback mechanisms that both affect firm
evolution and induce changes in the institutional
environment. Indeed, owing to its holistic nature,
we believe that co-evolutionary analysis is particularly promising in the contribution it can make to
the assessment of the impact of MNEs in the area of
public policy, which has been of central interest to
the IB field since its inception.
Our analysis points to many unanswered questions that only rigorous empirical research can
answer. These might include questions such as:
What makes some firms better able to co-evolve
with their institutional environment than others?
Do successful firms generate more variety, or do
they have better selection and retention routines?
Is institutional entrepreneurship within the firm
usually associated with an ability to co-evolve with
the institutional environment? What factors contribute to the absorptive capacity of local firms in
connection with institutional innovation? How
should we evaluate the contribution of MNEs to
the transformation of the host countries? How do
institutional entrepreneurship and co-evolution
affect the home country of the MNE?
The co-evolution of MNEs with their environment is part of a broader shift in the balance
between the public and private spheres that is
ongoing in most economies today (Hurrelmann,
Leibfried, Martens, & Mayer, 2007). In some
countries and sectors, deregulation and publicprivate partnerships have given more room for
firms to become the de facto guardians of regulatory
standards. In others, the encroachment of private
practices into the public realm has not been by
design, but has happened as a consequence of the
processes of market liberalization and globalization. Institutional theory would suggest that while
one form of governance is not necessarily superior
to another, both public and private institutions are
liable to fail if the informal institutions cease to be
congruent with the formal institutions they support. Consequently, we think that further research
into the kinds of questions we have posed here
should contribute to better-informed public policy
that appreciates the positive transformational role
of MNEs, as well as the vulnerabilities inherent in
the development and enforcement of both public
and private institutions.
ACKNOWLEDGEMENTS
The origins of this paper lie in a conversation between
John Cantwell and John Dunning in April 2007, in
which we agreed to collaborate on a paper on an
evolutionary theory of international business activity in
a longer-term historical perspective. In October that
same year Sarianna Lundan joined the conversation,
and we decided that we needed to focus as our central
theme on the co-evolution of MNE activity and the
institutional environment. The three of us worked
closely together on the paper, despite the diagnosis of
John Dunning’s illness in January 2008. John continued
to be involved in all our discussions of the paper
through to the sad event of his death in January 2009,
which was during the second round stage of revision
and resubmission. Thereafter, the two remaining
authors completed the final version of this paper,
and we take full responsibility for the form in which it
finally appears. We are grateful for the helpful comments that we have received from the reviewers and
participants at the AIB conference in San Diego, to the
three anonymous referees of the journal, and to the
editors of JIBS.
NOTES
Although we might note that there is almost
no evidence of explicit cross-fertilization between the
two.
2
These correspond broadly to the three pillars
introduced by Scott (2001), except that the informal
institutions cover both the normative and the culturalcognitive domains.
3
By the physical environment we mean the realm of
the resources and markets exploited by profit-maximizing firms, where little attention is being paid to
non-market actors and institutional differences. By
contrast, the human environment is concerned
more with the mindsets and motivation of the actors
involved in resource allocation, where non-market
actors and institutional differences figure prominently.
4
This is partly because organizations in North’s
(1990) analysis include not only firms but also political
parties, educational organizations, and social and
cultural organizations.
5
Another stream of the IB literature that has
emphasized the need for MNEs to adopt more flexible
(and experimental) strategies is that involving real
options. This literature has been particularly concerned
with the effects of irreversibility on investment, and
how a piecemeal approach might allow the firm to
realize additional option value from its investments
(Buckley & Casson, 1998; Kogut & Kulatilaka, 1994).
1
Journal of International Business Studies
The co-evolution of MNEs and the institutional environment
John Cantwell et al
582
See also Hamel (2006) on management innovation
and corporate resilience.
6
Recognizing of course that some best practices may
be very difficult to imitate or transfer owing to causal
ambiguity or social complexity, even within the firm,
let alone by other firms (Kogut & Parkinson, 1998;
Martin & Salomon, 2003; Szulanski, 1996).
7
In passing, we might note that the view of
structural inertia in the literature on population ecology, such as Hannan and Freeman (1984), is not the
same as the meaning of inertia in our sense here, or
that in Freeman and Perez (1988). We are concerned
here with impediments to institutional change in
the environment largely beyond specific industries
and the competitive interactions that may play out
within industries. Yet these are impediments that
may be overcome with varying degrees of success
or failure across different firms and different countries.
In contrast, Hannan and Freeman (1984) think of
structural inertia as implying an inability of firms to
adapt to their environments, so that the selection
in or out of specific firms is largely unaffected by
their strategic decisions or actions. In other words, in
this alternative context of the evolution of populations of firms in an industry, firms need not co-evolve
with their environment. However, the ideas of
Freeman and Perez and of North on cross-country
differences in institutional inertia, and hence in the
ability of firms to adapt to or take advantage of
changes in physical technology, can rightly be traced
back to the much earlier contribution of Veblen
(1899).
8
Historically, this was the case for example with US
manufacturing investment in Europe in the 1920s and
1930s (Wilkins, 1974).
9
The work of Oliver (1991, 1997) is extremely
instructive in outlining the range of different strategic
responses of firms, albeit in a non-IB context.
10
Civil society groups have also found inventive
ways to introduce new institutions, for example,
by using the Alien Tort Claims Act to make MNEs
accountable for human rights violations (Muchlinski,
2001).
11
Although the OLI factors are fundamentally interdependent, it is particularly in this kind of dynamic
context that their interconnections are likely to be
most evident.
12
However, not all such voids can be filled in by
MNEs, and there is often no compelling reason for the
inefficient parts of an institutional system to be
replaced.
13
The distinction between linkage effects and spillovers, and the different channels for their dissemination, are discussed in Dunning and Lundan (2008b).
See also Spencer (2008).
14
It is also reasonable to assume that initial imitation
occurs for somewhat different reasons than later
imitation, since initial imitation carries a high signaling
value, whereas subsequent imitation may exhibit
bandwagon effects.
15
The British Empire, which spanned the globe,
provides a historical counter-example. In this case the
comprehensive transfer of institutions, including systems of education, made it easier for firms to engage
in cross-border activities within the Empire. This resulted in a pattern of sustained high levels of trade and
investment within the Commonwealth (Lundan &
Jones, 2001).
16
See for example the work by Jones on the
evolution of trading companies, and on the historical
prevalence of the group or network structures of MNEs
(Jones, 2000; Jones & Khanna, 2006).
17
Ozawa (2005) has examined how US MNEs
have contributed to the institutional transformation
ongoing in Japan. In his words, ‘‘foreign multinationals
which are now eagerly welcomed in Japan to revitalize
its corporate business sector are serving as renovators
that can remodel Japan’s inner set of institutions
more closely in accordance with the norms of the
outer set’’.
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ABOUT THE AUTHORS
John Cantwell ([email protected])
is Professor of International Business at Rutgers
University, Newark, NJ. He received his PhD from
Reading University in the UK. His research focuses
on technological innovation and multinational
enterprises. He has been Program Chair of the AIB
and President of EIBA, and he is an elected AIB
Fellow. He is a UK citizen and a US permanent
resident.
Journal of International Business Studies
The co-evolution of MNEs and the institutional environment
John Cantwell et al
586
John H Dunning, OBE, was Emeritus Professor
of International Business at the University of
Reading, UK, and at Rutgers University, US. He
was a British citizen. He earned his doctorate in
Economics from the University of Southampton,
and received six honorary doctorates. He was an
ex-President of both the Academy of International
Business and the International Trade and Finance
Association.
Sarianna M Lundan (s.lundan@maastrichtuniversity
.nl) is Associate Professor of International Business
Strategy at Maastricht University in the Netherlands.
She is a Finnish citizen, and received her PhD from
Rutgers University in New Jersey, US. Her current
research focuses on applications of institutional
theory, particularly in connection with the role of
MNEs in the economic, political and social transformation of nation states.
Accepted by Geoffrey Jones, Consulting Editor, 21 September 2009. This paper has been with the authors for three revisions.
Journal of International Business Studies
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