Fifty Years of International Business
Theory and Beyond
Alan M. Rugman, Alain Verbeke &
Quyen T. K. Nguyen
Management International Review
Journal of International Business
ISSN 0938-8249
Volume 51
Number 6
Manag Int Rev (2011) 51:755-786
DOI 10.1007/s11575-011-0102-3
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Manag Int Rev (2011) 51:755–786
DOI 10.1007/s11575-011-0102-3
Focused Issue: 50 Years of MIR
Fifty Years of International Business Theory and Beyond
Alan M. Rugman · Alain Verbeke · Quyen T. K. Nguyen
Abstract: A
s the field of international business has matured, there have been shifts in the core unit of
analysis. First, there was analysis at country level, using national statistics on trade and foreign direct investment (FDI). Next, the focus shifted to the multinational enterprise (MNE)
and the parent’s firm specific advantages (FSAs). Eventually the MNE was analysed as a
network and the subsidiary became a unit of analysis.
We untangle the last fifty years of international business theory using a classification by
these three units of analysis. This is the country-specific advantage (CSA) and firm-specific
advantage (FSA) matrix. Will this integrative framework continue to be useful in the future?
We demonstrate that this is likely as the CSA/FSA matrix permits integration of potentially
useful alternative units of analysis, including the broad region of the triad.
Looking forward, we develop a new framework, visualized in two matrices, to show how
distance really matters and how FSAs function in international business. Key to this are the
concepts of compounded distance and resource recombination barriers facing MNEs when
operating across national borders.
0
0
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Keywords: Multinational enterprises (MNEs) · Firm specific advantages (FSAs) ·
Country specific advantages (CSAs) · Compounded distance · Subsidiary · Network · Regions ·
Resource recombination barriers · Theory
Received: 26.11.2010 / Revised: 30.03.2011 / Accepted: 13.09.2011 / Published online: 11.11.2011
© Gabler-Verlag 2011
Prof. A. M. Rugman () · PhD Cand. Q. T. K. Nguyen
Henley Business School, International Business and Strategy, University of Reading,
Reading, UK
e-mail: [email protected]
Prof. A. Verbeke
McCaig Chair in Management, Haskayne School of Business, University of Calgary,
Calgary, Canada
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Introduction
In this paper, we examine the literature on international business (IB) over the last fifty
years. We do this in the first three sections. In the second half of the paper, we develop
new frameworks to analyze unresolved issues in the theoretical and empirical literature
of IB that will require research in the future.
As the field of IB has matured, there have been shifts in the core unit of analysis. In
the pre-Hymer (1960) era, international economists dominated the field and focused on
national competitiveness at the country level, using national statistics on trade and foreign
investment. During the 1970s, the focus shifted to foreign direct investment by the multinational enterprise (MNE) and the transfer across borders of its firm specific advantages
(FSAs), both stand-alone competences (such as patented R&D knowledge and brand
names) and higher-order capabilities. As of the 1980s, more attention was devoted to the
MNE as a differentiated network with the MNE subsidiary as the unit of analysis. In addition, inside the MNE, substantial academic work was performed focusing on entrepreneurial growth in specific cultural, economic and institutional contexts. Finally, a number
of studies focused more on clusters and networks of independent companies.
The IB literature during the past 50 years has used various units of analysis. Mainstream neoclassical international economics builds upon the strong assumption that differences in factor endowments across borders will lead to international transactions,
whether transfers of capital or goods. In other words, it is assumed that there is not really
an organizational challenge to be addressed in creating an efficient system of international
exchange. Vernon (1966) and Dunning (1958) extend this work, but recognize the importance of firms in their pioneering IB studies, which represent the first stage of modern IB
analysis. Vernon’s product life cycle framework, published in 1966, basically argue that
the United States has a technology-related, country specific advantage (CSA) embedded
in US owned multinational enterprises (MNEs). These US parent firms create miniature
replicas (branch plants) in Canada and Western Europe such that technology would be
transferred from the parent firm to these foreign subsidiaries. This leads to an indirect
transfer of technology to host countries and to other benefits of foreign ownership. In the
UK context, Dunning (1958) observes that the UK subsidiaries of US MNEs upgrade
the macroeconomic infrastructure as they manufacture technologically intensive products
and services; they upgrade UK jobs; they pay taxes; they increase productivity and otherwise improve the CSAs of the United Kingdom. Rugman (1980b) confirms this outcome
in a Canadian context, with Canadian subsidiaries of US MNEs providing net economic
benefits to Canada.
Clearly, the underlying unit of analysis in the work by Vernon (1966), Dunning (1958)
and Rugman (1980b) is the country factors, even though their analyses really focus on how
these country factors interact with MNE activity as a conduit for their absorption at the
micro-level in the home country, and subsequent diffusion/exploitation internationally.
Hymer (1960), as the intellectual father of the second stage in modern IB studies, pioneered a fundamental change in the unit of analysis adopted in IB studies: he positions
the MNE and its FSAs at the core of his analytical approach. Hymer’s great insight is his
recognition of the MNE’s possession of FSAs, required to offset the liability of foreignness (LOF) when operating abroad (Hymer 1960; Zaheer 1995). Unfortunately, Hymer
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(1960) exaggerates the potential of MNEs to exploit their FSAs as monopolists by exerting efforts to close markets and exercising excessive market power. Structural market
imperfections as a result of government regulation and MNEs creating entry barriers, ultimately at the expense of consumer welfare, may exist but are now less common (Dunning
and Rugman 1985). The reality today is that few MNEs, even among the world’s largest
ones, actually benefit from uncontestable and uncontested monopolies. The absence of
such market power is demonstrated by the relatively uncommon occurrence of truly global firms, with a balanced distribution of their sales and assets across the triad of North
America, Europe and Asia: few firms appear able to emulate their home region success in
the host regions of the triad (Rugman 2005; Rugman and Verbeke 2004, 2008a, b, c).
The liability of foreignness, meaning the impact of various forms of distance (cultural, economic, institutional and geographic), explains why MNEs have difficulties operating in foreign markets, especially when facing rivals not hindered by such distance.
The Uppsala model of international expansion proposed by Johanson and Vahlne (1977)
essentially provides the mirror image of Hymer’s analysis. The Uppsala model suggests
that there are stages of internationalisation, whereby the potential benefits of exploiting FSAs abroad need to be weighted against the risks of operating in unknown foreign
environments and the costs of learning to do business there. Consequently, according to
the original 1977 model, firms initially expand in nearby geographic countries that may
have similar CSAs. As the firm learns to overcome the LOF it then expands into more
distant country markets, at which stage the unfamiliar cultural, economic, and political
environment will be offset against the firm’s ability of recombining its FSAs with host
country CSAs.
Recent work by Hennart (2009b) rethinks the nature of such recombinations of FSAs
and host country CSAs, and demonstrates that in many cases the boundary between CSAs
and FSAs becomes somewhat blurred. Indeed, if some of the CSAs leading to international expansion are actually not freely accessible, but access is controlled by host
country actors (e.g., closed distribution networks preventing sales to customers or local
monopolies on natural resources ownership and exploitation preventing purchasing these
resources), then the challenge for the MNE is to develop relationships, i.e., a type of location bound (LB) FSA with powerful local actors to open up access to the desired CSAs.
We define LB FSAs later.
The Uppsala model represents one intellectual approach to explain MNE entry mode
selection. Here the firm can choose to exploit its FSAs abroad, either through exporting,
FDI with wholly owned subsidiaries, licensing, or international joint ventures. In this
literature, the country remains as a co-unit of analysis, along with the MNE. However,
the nature of this research places more emphasis on MNE strategic management process
issues and the roles of managers in the parent firm.
In the third stage of contemporary work in IB, the unit of analysis has become the subsidiary of the MNE and the subsidiary manager. The clearest expression of this approach
can be found in Birkinshaw (1996, 1997, 2000). Refining work by Rugman and Bennett
(1982), and Rugman (1983b) on world product mandates in a Canadian context, Birkinshaw (1996) has developed the concept of subsidiary initiatives, whereby the focus is
really on innovative recombinations of both home and host country CSAs, and the FSAs
held (or being newly developed) by the MNE’s units in these countries. He observes that
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such innovative recombinations can ultimately generate new types of FSAs across the
MNE network and strengthen the MNE’s overall competitive advantage.
In summary, over the last fifty years, the literature of IB has developed from a somewhat basic focus on CSAs and FSAs that are clearly separate and distinguishable from
each other (Rugman 1981) towards a more nuanced understanding of the linkages between
them and the manner in which MNE managers in the home and host economies will interact to develop novel recombinations of home and host CSAs and the FSAs held by various MNE units, dispersed across borders. Overall, the unit of analysis has shifted from
the country-level, to the parent MNE, and now increasingly to the subsidiary level, often
with a focus of the subsidiary’s role in the internal MNE network. Below, we expand on
the implications of adopting alternative units of analysis in IB research.
From Country Level to Firm Level Analysis
Several theoretical approaches have been used to explain the MNE’s strategic investment motives, foreign entry mode, ownership, structure decisions and performance. This
section provides a reflective review and synthesis of the literature at firm level and the
interactions between country and firm level. Hymer (1960) explains why a firm engages in international operations by bringing the focus from the country level to the firm
level. Hymer moves towards an analysis of the MNE based upon industrial organization
theories by showing that the MNE is an institution for international production rather
than international exchange. He distinguishes between FDI and portfolio investment in
terms of the presence of firm-level control in the former and the absence thereof in the
latter. Hymer rejects country level portfolio investment theory with its simplifying (and
empirically incorrect) assumptions of the movements of capital as an explanation for FDI,
Dunning and Rugman (1985).
For Hymer, two conditions have to be fulfilled to explain the existence of FDI: (i)
foreign firms must possess a countervailing advantage over local firms to make such
investment viable, and (ii) the market for selling this advantage must be imperfect. Hymer
argues that for firms to own and control value-adding activities, they must possess some
kind of monopolistic advantages sufficient to outweigh the liability of foreignness (LOF),
arising from lack of knowledge about local customs, differences in local tastes, and unfamiliar legal systems, when competing with indigenous firms in host country production.
The MNE’s proprietary FSAs typically include elements such as product differentiation
ability, superior marketing and distribution skills, trade marks or brand names, access to
raw materials, economies of scale, access to capital, intangible assets such as proprietary
technology, patents, management skills, the ability to achieve vertical and horizontal integration, etc. Hymer focuses on imperfections in final output markets, as expressed in
monopolistic advantages held by individual MNEs and entry barriers leading to reductions in consumer welfare. Hymer’s pioneering views have been recognized as an influential contribution to the theory of the MNE and FDI. He was the first to contrast such
firm-level FDI with the prevailing orthodoxy by economists who explain FDI as a country
level financial (portfolio) investment decision determined by interest rate differentials
across national borders. Hymer recognizes that FDI is a firm-level strategy decision rather
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than a capital-market financial decision (Dunning and Rugman 1985). Hence, FDI will
occur mainly in imperfect markets.
Though also focusing on the firm as the unit of analysis, internalization theory has its
origins in the work of various scholars associated with the “Reading School”: Buckley
and Casson (1976, 2009), Rugman (1981), and Hennart (1982). Here, the MNE’s existence is not caused by monopolistic advantages leading to entry barriers and consumer
exploitation, but by its efficiency properties, i.e., its capacity to reduce transaction costs
when replacing an inefficient or non-feasible arm’s length transaction in the market by
an internal transaction, inside the firm, especially in the context of transferring intermediate (mostly knowledge-based) outputs across borders (Rugman 1980a, b; Rugman et
al. 1985; Grubaugh 1987). The MNE’s activities typically enhance rather than reduce
consumer welfare because efficiently coordinated transactions substitute for inefficient
ones.
Internalization theory economists (Buckley and Casson 1976; Rugman 1981) explain
why firms become involved in international production. Here, the emphasis switches
from the conventional act of FDI at the country level, to the level of the ‘institution’
making the investment, i.e. the MNE. The essential argument of internalization theory is
that firms aim at maximizing profit by internalizing their intermediate markets (typically
the markets for intangible assets such as technology, production knowhow, brands, etc.,)
across national borders in the face of various market imperfections (such as the public
goods externality associated with pricing an intermediate product like knowledge, the
lack of future markets, information asymmetries between buyers and sellers, government
intervention in the form of trade barriers or the ineffective application of the national
patent system).
Internalization theory extends to the MNE the central ideas of Coasian transaction
cost economics theory (Coase 1937), developed in a domestic context. Rugman (1980b,
1981) indicates that while Hymer (1960), Kindleberger (1969) and Caves (1971, 1982)
make market imperfections in final output markets the centre of their theory, none of
these authors specifically identify internalization of intermediate product markets as the
core of a theory to explain FDI and the existence of MNEs, in contrast to Buckley and
Casson (1976) and Casson (1979). Buckley and Casson (1976) show that when markets
for intermediate products are imperfect, there is an incentive to bypass them by creating
internal markets. Here, interdependent activities are brought under common ownership
and control. The internalization of markets across national boundaries de facto generates
an MNE.
Rugman (1981) argues that internalization theory is a general theory of the MNE. He
demonstrates that internalization encompasses within itself the reasons for international
(as well as) domestic production. He emphasizes the role of MNEs in overcoming imperfections in various external markets, as well as the policy implications thereof (Hennart
2009a). Rugman applies the theory of internalization to the public debate on foreign ownership in Canada and he sharply criticizes the inappropriate regulation of MNEs (Rugman
1980b, 1981). Rugman argues that the efficiencies resulting from internalization are not
acknowledged to their full extent, and instead regulatory measures imposed by government result from the unfounded assumption, in line with Hymer’s view, that MNEs nor-
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mally command monopolistic positions that they will systematically use to exploit the
consumer.
Eden (2005) suggests that Rugman’s most important contribution to internalization
theory revolves around two elements: first, his role in building the theory of internalization as a general theory of the MNE and second, his bridging of the gap between internalization theory with strategic management thinking, by developing the concepts of location
bound (LB) and non-location bound (NLB) firm specific advantages (FSAs) (Rugman
and Verbeke 1992, 2001, 2003).
Rugman (1981) emphasizes that each MNE commands an idiosyncratic set of FSAs,
which give it a competitive advantage relative to other firms. These FSAs arise when the
MNE has developed special knowhow or a capability that is unavailable to others and
cannot be duplicated by them, except in the long run at high costs. This thinking anticipates the modern resource based view (RBV) of the firm (Prahalad and Hamel 1990; Barney 1991) developed a full decade later. In many cases, such FSAs arise from upstream
research and development (R&D) expenditures that lead to new products or production
processes. In other cases, innovation occurs at the more downstream level, and can lead
to differentiated product lines, thereby generating an FSA in marketing or distribution.
The critical capability of the MNE can also be some unique element of its management
structure or core routines that confer an FSA (Rugman 1983a, 1985; Rugman and McIlveen 1985).
However, Rugman (1980b, 1981) notes that possessing FSAs is a necessary but not
a sufficient condition for FDI to take place. One MNE objective may be to establish
property rights over its FSAs so that these would not be dissipated to other firms. To the
extent that national institutional regimes, such as patent protection systems, are considered insufficient to prevent unwanted dissipation, then internal markets replace external
ones. The MNE transfers, deploys and exploits its FSAs through the use of foreign subsidiaries that monitor, meter and regulate the use of FSAs abroad. The internal market
of the MNE permits it to maximize its worldwide earnings without incurring the risks of
FSA dissipation by external actors such as licensing agents, franchisees, etc. (Rugman
1981). The great strength of the MNE is that it replaces exogenous coordination systems
prevailing in external markets (usually with pricing at their core) by coordination through
a balanced mix of hierarchical control, socialization and internal prices. In short, Rugman
(1981) shows that MNEs develop in response to imperfections in the goods and factor
markets. The CSAs of a nation that provide a basic level of comparative advantage are
augmented by FSAs, internal to the MNE, and conferring competitive advantage.
Hennart (1982) developed a slightly different version of internalization theory as compared to Buckley and Casson (1976) and Rugman (1981). He shows that for international
expansion to take place, setting up facilities abroad must be more efficient than exporting
to foreign markets (which entails domestic internalization) and a firm must find it desirable to own the foreign facilities. This is the case if the MNE can organize inter-dependencies between economic actors located in different countries more efficiently than markets.
Three conditions must be satisfied: first, interdependent actors must be located in different countries (otherwise, only domestic economic activity would occur); second, the
MNE must be the most efficient governance system to organize these interdependencies
(otherwise, only domestic actors located in different countries would be involved in inter-
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national transactions, and not an MNE); third, the costs incurred by MNEs to organize
these interdependencies in the market (as in the case of licensing) must be higher than
those of organizing them within MNEs (see Hennart 2009a).
Managing interdependencies refers to (a) accessing, (b) recombining, and (c) orchestrating the productive usage of various sets of resources that are dispersed geographically. Such resources may involve knowhow, raw materials and components, marketing
and distribution services, financial capital, etc. FDI takes place when firms internalize
markets for these resources. For example, an MNE that wants to exploit abroad its firmspecific knowledge will choose to transfer this knowledge internally rather than license
it to foreign producers if the market for this knowledge is subject to high transaction
costs (Hennart 1982), but the final decision on entry mode choice does not only depend
on the MNE’s FSAs. It also very much depends on the complementary resources needed
by the MNE from foreign actors to make the exploitation of its own FSAs feasible and
potentially profitable (which explains why IB is always concerned with managing interdependencies), Hennart (2009b)
The eclectic paradigm, developed and subsequently extended into five versions by
Dunning (1977, 1988, 1998), integrates several theory streams on cross border activities
at the country and firm levels to explain FDI (see Eden and Dai 2010 for a review of five
versions of the eclectic paradigm). Dunning proposes that three types of advantages influence FDI: (i) ownership (O) advantages, (ii) location (L) advantages and (iii) internalization (I) advantages.
Ownership advantages can be divided into asset advantages (Oa) and transactional variables (Ot). Oa include various tangible and intangible assets such as patented technology,
brand names, etc., whereas Ot refers to strengths in coordinating—and taking advantage
of operating—a network of geographically dispersed affiliates.
Location (L) advantages reflect foreign countries having some country-specific advantages (CSAs) vis-à-vis other countries, in terms of natural resources, factors of production, demand conditions, etc. Location advantages also include elements of the cultural,
legal, political and broad institutional environment in which the firm operates, and that
make some countries more attractive than other ones. In addition, Dunning (1977) identifies the market structure at the country level and government policies as being potential
location advantages. He also argues that the determinants of FDI may differ from one
industry to another.
Internalization (I) advantages refer to benefits of creating, transferring, deploying,
recombining and exploiting FSAs internally instead of via contractual arrangements with
outside parties. Here, the common governance of geographically dispersed value-added
activities within a single firm is comparatively more efficient and effective than governance by independent market actors or even by an equity joint venture where more than
one firm is the residual claimant. Firms decide to operate in foreign countries by considering the particular set of ownership and location advantages they face. The entry modes are
selected on the basis of internalization advantages (or the lack thereof).
In addition to its contribution as a synthesizing framework, the OLI paradigm allows
identifying the key location advantages of four types of international production: natural
resource seeking, market seeking, efficiency seeking, and strategic asset seeking (Dunning 1998). In contrast to the Hymer—Kindleberger—Caves approach, Dunning devotes
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some attention to managerial issues related to the FDI process, especially in terms of the
complex trade-offs to be made when weighing alternative modes of operating in foreign
countries and assessing the benefits thereof for the MNE itself and its various stakeholders in geographically dispersed jurisdictions.
Dunning’s eclectic paradigm, however, struggles to integrate country and firm level
interactions. From the firm’s viewpoint, the (O) and (I) are not independent parameters
in managerial decision making but need to be considered jointly, with (I) being the dominant consideration. The existence of the MNE itself, resulting from FDI, implies that (O)
needed to be internalized in terms of the processes of (O) creation, transfer, deployment,
recombination and profitable exploitation (Rugman 1985, 2010; Casson 1987). In this
context, Itaki (1991) has voiced the strongest criticism of the eclectic paradigm, and has
claimed that an (O) advantage could actually be derived from an (I) advantage, in which
case it would be redundant to consider these two variables as separate determinants. Itaki
has further pointed out the inseparability of the (O) advantage from the (L) advantage.
He argues that the (O) advantage in economic terms is unavoidably influenced by—and
inseparable from—location factors. Hence, (L) and (O) are simultaneously determined.
Despite the above shortcomings, which reflect a relative lack of theoretical parsimony,
Dunning’s eclectic paradigm undoubtedly represents the most comprehensive framework
to explain foreign entry mode choices and the economic efficiency implications thereof.
In parallel with the development of internalization theory, a group of Scandinavian
researchers, including scholars from Uppsala University, Sweden (Johanson and Vahlne
1977) and the Helsinki School of Economics, Finland (Luostarinen 1979) have attempted
to explain the process by which firms from small, domestic markets such as the Scandinavian countries, internationalize their activities.
Drawing upon the classic works of Cyert and March (1963), and Aharoni (1966), the
Scandinavian model proposes that internationalization is a cumulative, path-dependent
process whereby a firm’s international expansion pattern is a function of its past international experience and knowledge base (Johanson and Wiedersheim 1975; Johanson
and Vahlne 1977, 1990). Internationalization theory argues that a firm with little or no
international experience, typically enters a foreign market by exporting. It progresses to
establish a sales subsidiary and eventually to invest in production facilities. The driving
force of this internationalization process is ‘experiential market knowledge’ (Johanson
and Vahlne 1990).
Johanson and Vahlne (1977) also introduced the concept of ‘psychic distance’. Psychic
distance refers to the degree to which a firm is uncertain of the characteristics of a foreign market (Johanson and Wiedersheim 1975). Following the psychic distance concept,
firms undertake international expansion in an incremental manner. Here, the internationalization model postulates that firms will first enter the foreign markets with which they
are relatively familiar (i.e. geographically, culturally and institutionally proximate), and
then, capitalizing on the knowledge acquired from exporting to—or investing in—those
markets, successively progress to psychically and culturally more distant environments
(Johanson and Wiedersheim 1975; Johanson and Vahlne 1977). Several empirical studies have indeed shown that the MNE’s level of foreign experience directly influences its
selection of a market entry mode, see for example, Loree and Guisinger’s (1995) and Li
(1994).
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However, internationalization theory can be better aligned with the arguments of internalization theory. Rugman (1980a), and Fina and Rugman (1996) have pointed out that
an MNE engages in foreign production in order to avoid dissipation of the rents derived
from its FSAs that were created at considerable effort and costs. Therefore, internalization theory suggests that a firm consider explicitly the relative costs of servicing foreign
markets by first, exporting to foreign markets with the FSAs embodied in final products,
second, engaging in FDI or third, licensing a foreign producer. This last option becomes
attractive especially when the technology licensed is not any longer the technology on
which the firm’s survival and future growth depends.
The mode of entry changes over time as the relative costs and benefits associated with
each of these strategies change. The above stages in serving foreign markets are almost the
reverse of the internationalization stages, or the Aharoni (1966) approach, which use (1)
licensing as the first step, (2) exporting, (3) establishment of local warehouse and direct
local sales, (4) local assembly and packaging, (5) formation of joint venture, (6) foreign
direct investment (that is, full scale local production and marketing by a wholly owned
subsidiary). Furthermore, Rugman (2005) also questions internationalization theory in
that it lacks serious conceptual grounding and generalizability, especially in term of what
exactly constitutes geographic proximity or experiential learning, and the mechanisms
through which these concepts influence FDI decisions and geographic sales dispersion.
Similarly, Ruigrok and Wagner (2003) also question internationalization theory in their
study of German manufacturing companies. They argue that according to the principle of
initial foreign location based on the ‘psychic distance’ premise, German firms are likely to
target Switzerland and Austria (German—speaking countries). However, both countries
are very small markets and they have never been able to attract substantial German FDI.
Instead, the typical German firm expands early into other European, North American and
Asian countries. These nations are characterized by higher psychic distance. Thus, German firms appear to have pursued ‘high distance’ expansion strategies from the outset,
driven by the nature of the location advantages of these larger (high distance) markets and
possibly by the complementary resources offered by local actors in those environments.
The overall problem with the internationalization theory approach is that it largely
neglects two critical elements. First, the nature of the MNE FSAs, which determines to
a large extent the potential net benefits of internalization vis-à-vis alternative modes of
operating in foreign markets (e.g., the importance of tacit versus fully codified knowledge). Second, the presence or absence of natural and government-imposed market
imperfections (e.g., an ineffective patent protection system), which may make the use of
external markets a non-starter. For example, exporting usually takes place in the absence
of government-imposed market imperfections, i.e., when there are no barriers to free
trade, whereas FDI precisely occurs when such barriers exist. In turn, licensing takes
place when foreign markets are fully segmented, the firm no longer has much to lose by
sharing its FSAs, and credible licensees can be found with the requisite resources that
complement the MNE’s FSAs.
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From Firm Level to Subsidiary Level Analysis
Birkinshaw and Pedersen (2009) have summarized the research applying FDI theory and
theories of the MNE to the subsidiary level and the interactions between MNE head
office and its subsidiaries. Today, we recognize that while the relevant unit of analysis
for most IB theory is still the MNE as a whole, because most key strategic decisions are
taken at that level, there is often a problem in translating and applying firm-level theory
to the subsidiary unit. The subsidiary becomes the key building block of the MNE, which
is viewed as a differentiated network rather than a monolithic hierarchy. In other words,
no serious MNE network analysis can be conducted without understanding each subsidiary’s idiosyncratic resource base, strategy, assigned role inside the MNE, and linkages
with other subsidiaries. In this context, Birkinshaw (1996, 1997) has shifted focus to the
subsidiary manager and the possibility of having ‘subsidiary initiatives’ instrumental to
FSA development. The shift in focus from the parent firm to the subsidiary as a unit of
analysis has several origins.
First, a stream of research in Canada examined the extent to which Canadian subsidiaries of foreign MNEs can act autonomously with world product mandates (WPM). This
is partly a host country level interaction with subsidiary level management, but vetted
by the MNE’s head office in the home country. In particular, the Canadian government
wanted to see more R&D in the Canadian subsidiaries of US MNEs, Rugman and Bennett (1982), Poynter and Rugman (1982), Rugman (1983b), Rugman and Douglas (1986),
D’Cruz (1986). In a public policy context, Rugman (1980b, 1981) criticizes the lack of
effectiveness and efficiency associated with policy efforts to boost R&D spending in
Canadian subsidiaries. He finds that the Canadian subsidiaries of US MNEs indeed do
only half of the R&D per unit of sales as compared to their parent firms. However, the
R&D expenditures of a set of Canadian owned companies of similar size is also well
under half those of US parent MNEs. In other words, the relative lack of R&D found in
Canadian subsidiaries of foreign MNEs is largely due to country factors rather than firm
factors. Canada has poor CSAs as a location for R&D, and Canadian owned firms as well
as US subsidiaries in Canada both lack FSAs related to R&D outputs. Rugman’s conclusions on the inefficiency of attempts to boost artificial national R&D expenditures (which
always reflect a cost, but not necessarily any benefit to the firms and country involved)
have subsequently been validated by Moore (1996), Birkinshaw (1997) and others.
Second, research on the strategy and structure of the MNE moved from a focus upon
the centralized, hierarchical multidivisional form typology of the 1960s and 1970s (Stopford and Wells 1972; Williamson 1981; Egelhoff 1982) towards an understanding of the
linkages between the parent firm and its subsidiaries. This was a parent firm interaction with subsidiary managers. In particular, the popularization of the Prahalad and Doz
(1981, 1987) integration—responsiveness framework by Bartlett and Ghoshal (1989)
established the intellectual foundation for a differentiated internal network perspective
as the relevant organizational structure. This work builds on the conceptual insights of
Prahalad and Doz (1981, 1987) who show that subsidiaries can develop LB FSAs, albeit
sometimes associated with negative outcomes for the MNE, and therefore requiring recentralization, see Verbeke (2009) and also Mudambi and Navarra (2004) for an analysis
of dysfunctionalities. Much subsequent work on MNE networks was performed in Scan-
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dinavia. Perhaps the best-known network framework is Hedlund’s (1986). He argues that
the M-form, parent driven MNE would be replaced by the N-form, or network based,
MNE. The Scandinavian and Canadian interest in the subsidiary is a useful counterpoint
to the earlier US-led focus on centralized and hierarchical MNEs from large economies.
The most influential exponent of the view that subsidiary managers can develop FSAs
through subsidiary initiatives is Birkinshaw (1996, 1997, see also Birkinshaw and Hood
1998, 2001; Birkinshaw et al. 1998; Moore 2001; Moore and Birkinshaw 1998). Birkinshaw demonstrates that the subsidiary—and in some cases even the subsidiary manager as driver/facilitator of subsidiary initiatives—may represent a useful unit of analysis
when trying to understand innovation processes inside the MNE. Many strategic decisions critical to innovation may be taken at the subsidiary level and can lead to new FSA
generation.
In this context, Rugman and Verbeke (2009a) have suggested that CSAs of host countries may be used in a ‘leveraged’ way. MNEs make dual use of CSAs from the home and
host countries, and subsidiaries throughout the MNE network may be critical in resource
recombination efforts, a view consistent with the ‘double diamond’ framework of Rugman and Verbeke (1993). If MNE operations in various countries can be instrumental to
new knowledge generation, this opens the door for two-way flows of FDI, sophisticated
forms of parent-subsidiary relationships and complex network functioning inside MNEs
(Rugman and Verbeke 2001; Rugman and D’Cruz 2000).
Rugman and Verbeke (1992, 2001, 2003) have argued that FSAs can be created anywhere in the MNE network, both in the parent company at home and in the foreign subsidiaries. FSAs can be location-bound (LB) or non-location bound (NLB). The LB FSAs
reflect strengths deployable and exploitable in a limited geographic area, such as a single
country or a limited set of countries or region, but cannot be profitably exploited outside
of this area, whether as an intermediate output (e.g., managerial skills, R&D knowledge)
or embodied in final products. LB FSAs may include an excellent local reputation, a
well-positioned retail network, privileged relationships with domestic economic actors,
etc. In contrast, NLB FSAs represent company strengths that can easily be transferred
across locations at low cost, deployed and profitably exploited, with only limited need for
resource recombination. Such NLB FSAs typically include the upstream patented technological knowledge, and the downstream brand names. The actual transfer across borders
can again occur in the form of intermediate products or embodied in final outputs.
Rugman and Verbeke (2001) have shown that subsidiary initiatives may lead to the
development of LB FSAs (a resource-based expression of host country national responsiveness) but these can be transformed into non-location bound (NLB) FSAs, namely
when being augmented with best practice attributes inside the MNE network (e.g., as a
result of productivity increases and added differentiation). Indeed, in synthesizing the
literature on subsidiary initiatives, Rugman and Verbeke (2001) find ten generic types of
capability development processes inside MNEs, of which Birkinshaw had identified those
whereby subsidiary initiatives are critical.
This framework incorporates the thinking of Birkinshaw and Pedersen (2009) who
align the resource based view (RBV) of the firm with the resources and capabilities
developed and held in an MNE (Wernerfelt 1984; Rumelt 1984; Barney 1991; Mahoney
and Pandian 1992; Peteraf 1993; Teece et al. 1997; Rugman and Verbeke 2002). Some
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FSAs are likely to be held at MNE parent firm level while others are held at subsidiary
level.
Birkinshaw and Pedersen (2009) argue that if the subsidiary is a valid unit of analysis
in its own right, it should be possible to unbundle resources and capabilities between the
subsidiary and the MNE. Considering basic resources first, most tangible resources (plant,
equipment and people) are held primarily at the subsidiary level, while most intangible
resources (financial, organizational, and reputational) are held at the firm level. Capabilities are much harder to unbundle between firm and subsidiary levels of analysis. Some are
clearly held at the firm level and shared across subsidiaries, such as a particular organizational culture. Others are more likely to be specific to a particular subsidiary, such as
a particularly effective way of handling local labour relations or privileged relationships
with government agencies to secure commercial contracts. Most capabilities, however, sit
somewhere between the two levels. The criteria used to evaluate resources in the RBV in
terms of their contribution to competitive advantage (valuable, rare, non-imitable, nonsubstitutable) are not necessarily the most relevant at the subsidiary level. Thus, Birkinshaw and Pedersen (2009) suggest that rather than simply analyzing subsidiary level
resources in terms of their potential for competitive advantage, it is necessary to consider
recombining them with other resources, or leveraging them on a worldwide basis. This
process could generate NLB FSAs, in the spirit of Rugman and Verbeke (1992).
Essentially, Birkinshaw argues that subsidiary managers can develop both host country, LB FSAs but also NLB FSAs, through subsidiary initiatives. Subsidiary initiatives
that lead to NLB knowledge reflect the subsidiary and its managers moving beyond their
assigned charter, and gaining world product mandates or critical roles in international
value added chains inside the MNE’s internal network, or developing subsidiary specific
advantages (SSAs) (Rugman and Verbeke 2001).
Related work examining the role and function of subsidiary managers has been undertaken by Holm and Pedersen (2000), Andersson et al. (2002, 2007), Forsgren et al. (1995),
Foss and Pedersen (2002), Holm and Pedersen (2000), Malnight (1996) among others.
The above analysis suggests that research in the IB field has evolved over the last fifty
years. The unit of analysis has shifted from the country level to the firm level and finally
to the subsidiary level. MNE subsidiary strategy has received significant attention, especially in the context of the MNE as a differentiated network. Now we move on to explore
the evolution of IB theories from an equilibrium oriented theoretical focus to a more
dynamic oriented conceptualization. We show that the basic conceptual foundations of IB
theory remain as logical developments of internalization theory and its offshoots.
The Classic Framework for IB Theory
The three basic units of analysis can be analyzed in the classic CSA/FSA matrix of Fig. 1,
derived from Rugman (1981). Here the impact of country factors is depicted on the vertical axis, ranging from weak to strong CSA impact on IB transactions (see Rugman
and Verbeke 2009a for a comprehensive overview on location, competitiveness and the
MNEs). Conversely, on the horizontal axis, we depict the importance of the firm factors,
i.e., the FSAs, ranging again from a weak to a strong impact.
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Fig. 1: The CSA/FSA matrix.
(Source: Adapted from Chapter
8 in Rugman, Inside the Multinationals, New York: Columbia
University Press, 1981; 25th
anniversary edition, Basingstoke, UK and New York:
Palgrave Macmillan, 2006)
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Firm-specific advantages (FSAs)
Weak
Strong
1
3
2
4
Strong
Countryspecific
advantages
(CSAs)
Weak
In cell 1 of Fig. 1, only CSAs matter to explain the scope and direction of IB activities. In
cell 1, mainstream international economics explains how comparative advantage will lead
the home country to export goods and services which build upon its relatively abundant
factor inputs of labour, capital and natural resources. For example, Canada will export
newsprint, Saudi Arabia will export oil, and China will attract manufacturing assembly
through its abundant cheap labour. Cell 1 also captures cultural stereotypes, as popularized by Hofstede (1983) and the GLOBE (2006) studies by House et al. (2004), whereby
cultural characteristics and cultural distance vis-à-vis other nations are viewed as instrumental or detrimental to a country’s success in IB. In addition, cell 1 includes situations
whereby political and administrative rules greatly affect IB transactions. For example,
host governments may restrict and regulate both imports and exports, as well as inward
and outward FDI (Rugman 1980b; Rugman and Verbeke 2009b). In such cases, varied
and complex interactions may occur between MNEs and host governments (Vernon 1971,
1991; see Rugman and Verbeke 2009b for a comprehensive overview).
In cell 4, the opposite situation prevails: here, country factors do not matter much, and
competitive advantage results solely from FSAs unaffected by geography, in terms of
locational impacts on their development, transfer across borders, deployability, recombination requirements and profitable exploitation. This situation is consistent with the view
espoused by most mainstream resource based view (RBV) scholars in strategic management. These authors focus on FSAs only (referred to, inter alia, as core competences and
capabilities), and do not recognize the importance of location and CSAs. Indeed, authors
such as Wernerfelt (1984), Rumelt (1984) and Barney (1991) developed the RBV in isolation of country effects. Examples of strong FSAs in cell 4 include the allegedly locationindependent brand equity of the firm, and the managerial resources and capabilities of the
top management team to grow the firm (Penrose 1959).
In cell 3, both CSAs and FSAs matter. This is the unique stage for IB theory. Here, the
firm being studied is an MNE, operating across multiple countries, and trying to coordinate various resource dependencies across borders. Both home and host country CSAs
may be important in terms of how the FSAs are managed. CSAs affect the processes of
developing, transferring across borders, deploying, recombining with other resources and
profitably exploiting FSAs, which are always internalized to some extent. Such FSAs can
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include higher order governance capabilities and core operating routines following the
firm’s dominant logic.
Cell 3 situations also allow for complex intra-MNE network linkages, sometimes with
sophisticated value chain relationships among the various subsidiaries involved, each
holding specific sets of FSAs in particular value chain functions and benefiting from
particular CSA bundles (Rugman et al. 2011). In each of these situations it is recombining resources across borders that matters, see Rugman and Verbeke (2001) and Verbeke
(2009). Importantly, the three units of analysis intersect and overlap here. The main focus
when studying resource recombination patterns may be the MNE, but useful analysis
also requires an understanding of which CSAs in the home and host countries can be
leveraged by the firm, as well as sufficient appreciation for the geographical dispersion of
MNE FSAs across the multiple units and subsidiaries in its internal network.
This CSA/FSA matrix is consistent with Meyer et al. (2009), who have advocated a
combination of institutional analysis (focusing on a subset of CSAs) and RBV thinking
(with the resource based view providing tools for studying the nature and strength of
FSAs). It is also consistent with the latest version of internationalization theory (Johanson
and Vahlne 2009), which is now focused on understanding the liability of outsidership
rather than the liability of foreignness. Outsidership is concerned with access to resources
or rather the lack of such access, mainly because of relational shortcomings. Resources
are needed to develop the requisite LB FSAs so as to link these with the MNE’s extant
NLB FSAs, and to take full benefit of the CSAs of the host countries entered. We now
turn to issues in the literature less resolved than discussed so far. These new issues are
likely to be the basis for future research.
The Future of Distance in Intra-Firm and Inter-Firm Networks
The key scholarly and managerial challenge in IB, irrespective of the unit of analysis
selected, is to understand properly how ‘distance’ affects the transferability, deployability, recombination and profitable exploitation across borders of (quasi-) proprietary
know-how, whether in the form of stand-alone competences or higher-order capabilities.
The main weakness of many scholarly analyses is the incorrect assessment of what distance really means when performing IB transactions. This leads to overestimates of the
non-location boundedness of extant FSAs and underestimates of the need for ‘melding
investments’ in host environments, so as to create new, LB FSAs, often in concert with
other economic actors. The outcome of such incorrect assessment in the IB literature is
structurally flawed theories of how MNEs really operate across borders.
Basically, there are three types of FSAs: stand alone FSAs (such as patented knowledge
or a brand name), routines (i.e., the way things are done inside the firm), and recombination capabilities (i.e., the capacity to augment in a productive fashion the MNE’s existing
resource base with newly accessible resources) (Verbeke 2009). Traditional thinking is
that each of these builds upon home country CSAs. Drawing upon home country CSAs
typically leads to LB FSAs, tied to the home country. A portion of these stand-alone
FSAs, routines and recombination capabilities can become internationally transferrable, deployable and profitably exploitable, i.e. this portion becomes non-location bound
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(NLB). FSAs in the NLB category typically include R&D knowledge, system integration
capabilities, managerial capabilities, easy access to capital, and sometimes brand names,
to the extent that foreign consumers confer value to these. However, upstream FSAs are
usually much more NLB than downstream ones.
NLB FSAs can be transferred internationally through the MNE intra-firm network.
However, in most cases, these must be complemented with investments in new LB FSAs
in the host countries where they are to be exploited. The MNE may need to draw upon
complementary resources held by external actors in the host country. It is only through
these complementary resources, and the ensuing LB FSAs that the MNE is able to access
host country CSAs (e.g., access to a large consumer market). If these resources can be
freely purchased on the market, the MNE will develop the new LB FSAs on its own. In
contrast, if these resources cannot be purchased, joint ventures and other types of alliances
may result, especially if the MNE wishes to keep some direct control over its own NLB
FSAs transferred abroad. In the case when there are strong imperfections in the markets
for resources and no satisfactory joint venture partners can be found, the only option is a
merger or acquisition. Here the MNE is forced to purchase not only the resources required
for accessing the host country market, but a local firm in its entirety, including possible
substantial unwanted assets and capabilities. Obviously, if the MNE can simply augment
its internationally transferrable NLB FSAs with self-created LB FSAs, fully controlled by
the MNE through its internal network, then FSA dissipation risks can be avoided.
However, host country subsidiaries may do much more than simply augment homebased, NLB FSAs with requisite local strengths. They may develop subsidiary specific
advantages (SSAs) as a result of their autonomous initiatives. Rugman and Verbeke (2001)
define SSAs as idiosyncratic strengths developed by host country subsidiary managers
building upon host country CSAs. However, SSAs may represent not just LB knowledge
but new, NLB strengths in the sense of having profit potential abroad. The challenge
associated with SSAs is that the actual capability (or more specifically the capability carrier, such as the management team mastering the relevant knowledge) cannot be simply
transferred across borders. In other words, the underlying knowledge is embedded in the
subsidiary and its linkages with local actors. As Rugman and Verbeke (2001) point out,
SSAs are often viewed with great skepticism by the corporate head office, as they do not
constitute network knowledge by definition. An unresolved question is whether SSAs can
somehow be ‘upgraded’ (e.g., through codifying knowledge and sending expatriates to
the subsidiary to learn about the new capability), so that they would become relevant to
the entire MNE subsidiary network.
Future research on geographic distance and SSAs might be usefully linked to recent
empirical and theoretical work analyzing the regional nature of MNEs (Rugman and Verbeke 2004; Rugman 2005). Given that the empirical data show that the world’s largest
500 firms operate mainly within their home region of the triad, it is apparent that SSAs,
as well as more conventional NLB FSAs, are difficult to exploit profitably outside of
their home region. The problem may not reside solely in technical difficulties associated
with international FSA transfer, but also in challenges of (a) effective deployment in a
host environment, depending upon the recipient’s absorptive capacity; (b) appropriate
recombination of the NLB FSAs with newly created or newly accessed LB FSAs; and (c)
managerial effectiveness in profitably exploiting the newly created FSA bundles.
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These challenges become compounded as ‘distance’ increases, whether economic,
cultural, institutional, or merely geographic. It becomes more difficult for senior MNE
managers at the head office to understand critical success factors and to act upon related
challenges (a bounded rationality problem). It also becomes more difficult to engage in
proper monitoring and correction of human behavior, especially when efforts are diverted
from engagement towards achieving company goals; this is a bounded reliability problem
(Verbeke and Greidanus 2009). Regional boundaries such as in NAFTA and the EU, as
well the boundaries separating Asia from the rest of the world, represent a useful first
cut at separating lower distance, intra-regional environments from higher distance, interregional ones. In other words, the location boundedness of FSAs is often mainly intraregional in nature: FSAs can be relatively easily transferred, deployed, recombined and
profitably exploited throughout the home region compared to between regions. The comparatively easier resource recombination challenge, as compared to what prevails in host
regions, is especially critical.
It remains somewhat of a puzzle as to why inter-regional distance remains so important, whereas the world economy otherwise appears to be moving towards greater integration with supporting political and institutional standardization being driven by improved
information technology and information accessing capabilities. In our view it is the compounded distance, more specifically the need to manage various distance dimensions
simultaneously, that really explains the regional nature of the world economy. The compounded distance is insufficiently captured in efforts to simply ‘add’ or otherwise aggregate various types of distance. Ghemawat (2001, 2007) has an introductory discussion of
this, though still adopting a largely additive approach. Future research should engage in
further careful reflection and testing of the compounded distance concept.
The key insight here is that the various distance dimensions typically measured in IB
studies are not independent of each other. For example, regional economic integration
fosters institutional coordination, and may contribute to lowering actual cultural distance
by increasing mobility of labour and managerial best practices. At the same time, improving the common transport infrastructure, adding transport connections (e.g., in air travel)
in terms of frequency and quality may reduce the impact of geographical distance. In
addition, one specific parameter related to distance dimension has been neglected systematically in large-scale studies analyzing the geographic scope of international expansion
patterns. This is the presence and the strength of the relationships between the MNE and
relevant actors operating in the host environment. As noted earlier, Johanson and Vahlne
(2009) have argued in their extension of internationalization theory that being an outsider in foreign networks may explain the absence of competitive success. The liability
of host region outsidership, meaning simply that most MNEs have few if any powerful
relationships with actors in host regions, may go a long way in explaining the absence
of international success in these host regions. Relationships may well be the key missing
factor (as a LB FSA) to overcome compounded distance and to allow access to coveted
CSAs in host regions.
At this time, it remains unclear as to the extent to which forces of global integration
can actually overcome the currently triad region barriers observed by Rugman (2005).
Researchers will need to continue to examine carefully the extent to which region-bound
FSAs, including SSAs held by MNE subsidiaries, can be transformed from their appar-
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ent current regional exploitability into NLB FSAs with a truly global reach, meaning
that they can easily be transferred, deployed, and recombined with other resources to the
extent necessary, and profitably exploited around the world.
The above analysis can be related to the earlier Fig. 1. The most interesting aspect
of Fig. 1 lies in cell 3, whereby the MNE successfully accesses and leverages CSAs in
home and host environments, and is able to put together bundles of LB and NLB FSAs
to achieve success in a variety of host environments. The requirements of this approach
go far beyond merely adapting homegrown FSAs to the host country environment, as
in the national responsiveness strategy of Bartlett and Ghoshal (1989). For example, in
the case where a Birkinshaw type SSA held by an MNE subsidiary in cell 3 is critical to
MNE international growth and profitability, the challenge for the MNE head office is to
provide sufficient resources to the subsidiary to allow global deployment and exploitation
(by allowing a world product mandate or providing the status of global centre of excellence). Alternatively, investments must be made to turn the SSA into a strength that can
be transferred inside the MNE network (e.g., through codifying knowledge, or by sending
subsidiary experts to other units to provide training, or by allowing direct interaction and
knowledge transfers among subsidiaries, etc.) and the subsequent, dispersed exploitation
out of many units.
Essentially this section has discussed potential combinations of home and host country
CSAs and associated FSAs. All of this provides sophisticated substance to cell 3 of Fig. 1.
The future for research in IB needs to expand upon this type of deep analysis of cell 3 in
Fig. 1. In particular, efforts are still in their infancy to understand the nature and extent
of recombination efforts, whereby extant FSA bundles are melded with complementary
resources in host environments, so as to access host country CSAs.
A critical feature of internalization theory is its focus on governance. In other words,
disciplined execution of the FSA-CSA recombination processes described above requires
much more than suggested by the rather simplistic case-based analysis of Bartlett and
Ghoshal (1989) and their broad integration—responsiveness framework. This framework
provides little guidance in terms of proper governance beyond some general suggestions
on how to improve normative integration, i.e., socialization, Rugman et al. (2011).
Similarly, limited case analysis on the so-called metanational by Doz et al. (2001), in
terms of building globally deployable NLB FSAs based on the CSAs of peripheral host
country environments, is not particularly useful. Doz and his co-authors place the future
of the MNE in the hands of small sensing and magnet units, almost the equivalent of US
Army Delta Force units. These units are supposed to work outside of the realm of the
MNE’s operating divisions. Sensors are supposed to identify and seek out geographically
dispersed, unique, and hitherto fully ignored bodies of valuable knowledge. Magnets are
then supposed to follow up the sensors’ activities, and to recombine the various unique
pieces of knowledge identified by the sensors into commercially viable products. In a
final stage, the MNE’s operating divisions must then implement the ‘new solutions’ put
forward by the sensors and magnets. The operating divisions’ role is simply to engage in
scaling up and ensuring the commercial viability of the products pushed onto the MNE
network by the sensors and magnets.
Verbeke and Kenworthy (2008) have argued, however, that the metanational form of
governance is unlikely to displace the conventional, hierarchical, M-form organizational
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structure, especially in terms of how novel resource recombinations are turned into actual
non-location bound FSAs. They have focused on the need to view resource recombination, i.e., the innovation process, ‘in its entirety’. This means that R&D or other efforts
to develop/access new knowledge cannot be structurally divorced from production and
marketing/sales. This is broadly consistent with the thinking of Buckley (2009) on the
global factory.
There are good reasons why most large MNEs are organized in divisions (typically
geographic and product divisions) and into national units with specific mandates in
tightly coordinated, international value chains: such governance is comparatively more
efficient and effective than alternative forms of organization. The modern M-form allows
economizing on bounded rationality and bounded reliability, and implementing innovation processes in their entirety, from technological FSA development to after sales service
to customers, a view consistent with Wolf and Egelhoff’s (2010) critical analysis of various forms of network organizations proposed by IB scholars who neglect the limitations
of networks as compared to, for example, modern matrix structures. Using an information
processing approach, Wolf and Egelhoff (2011) convincingly argue that decentralized
network organizations simply do not work as compared to M-form structures such as
matrix organizations, when the MNE operates in multiple high distance environments,
needs to focus at least partly on the efficiency of existing operations, and must balance
the exploitation of NLB FSAs with developing LB FSAs.
In other words, much of the traditional international management strategy literature
still makes simplistic assumptions that global strategies are feasible, and can be implemented without much attention devoted to governance. In fact, global strategies and truly
global NLB FSA bundles are likely to be extremely rare, as demonstrated, inter alia,
by the regional nature of MNEs in terms of their (limited) sales and asset dispersion,
and the regional elements in their governance structures (Rugman and Verbeke 2008a).
Future research will likely build upon the theoretical and empirical insights of Rugman
and Verbeke (2004) and hopefully recognize regional strategy and structure as an efficient alternative to non-feasible global approaches, especially in the context of internal
governance. Global governance sometimes does appear possible in the context of global
alliances such as in the airline industry, where individual airlines perform largely regional
roles, and select particular, narrow value chain activities where resources can be pooled
and recombined to create NLB alliance specific advantages (ASAs), which unfortunately
are lost to an airline when it decides to leave the alliance.
Other Units of Analysis and the Role of Distance in IB
In focused, contemporary IB studies, nine other units of analysis have been adopted,
in addition to the “big three” discussed in earlier sections. These sets include: first, the
entrepreneur; the MNE head office and the top management team; and the value chain;
Second, the expatriate; the centre of excellence; and the model factory. Third, the outsourcing agreement; the joint venture/strategic alliance and the cluster.
The first three additional units of analysis are really subsets of the firm as the main unit
of analysis, but with a focus on, respectively, who established the firm, what governance
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mechanism leads the firm and how the firm’s value added functions are dispersed across
space. The second set of three additional units is concerned mainly with what occurs at
the subsidiary level, but with a focus on, respectively, who is sent by the head office to
perform a number of tasks in the subsidiary, what unique role the subsidiary can perform
inside the MNE network and how it can be a model for exceptional value creation. The
third set explicitly looks at the complementary resources provided by external actors that
can be productively recombined with extant FSAs.
Here, the critical point to remember is that any serious IB analysis always considers
the CSAs of home and host countries, as well as bundles of LB and NL FSAs. The challenge is always to explain, predict or guide how competitive success can be achieved
outside of the home nation, or how such success is hampered by a variety of internal and
external constraints. For example, the strategic challenges facing an entrepreneur with
international expansion ambitions are similar to those facing a large MNE, especially in
terms of the bounded rationality and bounded reliability constraints to be overcome, and
the transaction costs related to these constraints (Casson 1982).
The above also holds for the analysis of networks. The problem with some of the strategy and IB literature is an exaggerated focus on the benefits of networks, but a relative
neglect of its costs. Network theory needs to be applied to IB with caution. When there
are intra-firm alignments the network approach is fully consistent with analysis at the parent and subsidiary level, as discussed above. However, inter-firm linkages, which include
joint ventures and strategic alliances do not relate easily to basic IB theory, especially
internalization theory. Here, the network literature largely ignores the ownership issue, in
the sense of required FSA protection against dissipation and the appropriate distribution
of the cooperation benefits and costs among the partners, who are all residual claimants
(Narula and Hagedoorn 1999; Gulati et al. 2006).
In more general terms, the main challenge associated with the myriad of alternative
units of analysis adopted in the IB literature is that the authors sometimes lose track of the
continued relevance of distance and its various dimensions. One example is the study of
so-called ‘born globals’ whereby authors often simply assume that cell 3 of Fig. 1 opportunities are available to them across the world without understanding the challenges of
international expansion, especially outside of the home region. In many ways, a simplistic
use of cell 3 in Fig. 1 thinking represents a ‘born global illusion’ for international entrepreneurship, Rugman and Almodovar (2011).
Studies on another unit of analysis, namely the value chain, are often also associated
with a rather shallow understanding of the compounded distance concept. A value chain
dispersed across borders equates to a firm making strategic decisions to access particular
home and host country CSAs by deploying idiosyncratic FSA bundles in each country
and then coordinating these bundles. In this context, the often expressed view that MNEs
pursue ‘global sourcing’ and are engaged in a ‘global race for talent’, rather than pursuing
more focused and selective initiatives in these areas, such as ‘regional sourcing’ or ‘local
sourcing’, often leads to absurd conclusions, (Rugman et al. 2009). More specifically,
most of the literature on offshoring and outsourcing is largely a cell 1 in Fig. 1 phenomenon. Western firms have offshored manufacturing to China due to China’s CSA in cheap
labour. Similarly, IT has been offshored to India due to India’s relatively cheap, skilled
and educated labour.
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The relevant insight is that offshoring is difficult. The distance to countries such as
China and India may be large for Western MNEs, and therefore offshoring efforts are not
deployed globally but are very targeted, often towards large cosmopolitan centres. Within
these centres, widely available knowledge of business best practices, competent legal
and financial counselling, and a pool of experienced managers may alleviate the bounded
rationality and bounded reliability challenges to be overcome. In most cases, substantial
melding investments must be performed for the MNE to be successful in recombining the
MNE’s extant NLB FSAs with the FSAs of local resource providers. Here, the additional
distance challenge is that outside suppliers of offshoring services may want to work up
the ‘smiling curve’, i.e, move towards both more upstream and downstream value chain
activities as compared to typical component supply or basic ICT services, thereby creating more value added per unit delivered, Mudambi (2008). However, there is a danger
for the MNE in that it may ultimately lose its competitive edge in some of these activities
vis-à-vis offshoring services providers, especially in higher distance, peripheral markets.
Fortunately, much of the work on the ‘global factory’, which looks at the production
side of the value chain is consistent with the complexities of cell 3 in Fig. 1 thinking, see
Buckley and Ghauri (2004), Buckley and Hashai (2005), Buckley (2009). In examining
the changing location and ownership strategies of MNEs, namely, the ‘hub and spoke’
and the ‘global factory’, Buckley and Ghauri (2004) show the increasingly sophisticated
decision making of managers in MNEs to slice more finely the value added activities of
firms. In finding optimum locations for each closely defined activity, they are deepening
the international division of labour. Ownership strategies are also becoming increasingly
complex, leading many MNEs to apply a control matrix, whereby operating strategies are
decided upon location by location, and can range from wholly owned subsidiary units
via FDI to market relationships such as subcontracting, with joint ventures as options on
subsequent decisions in a dynamic pattern, Li and Rugman (2007). However, fully understanding cell 3 complexities, probably means that here again the so-called global factory
may be an illusion, and that the reality may be more one of ‘regional factories’.
The implication of the above is not only that distance still matters, but should never be
underestimated in IB studies (especially not the compounded distance), as suggested by
Fig. 2. The vertical axis of Fig. 2 lists the various possible units of analysis, whereby we
include here, for illustrative purposes only, four units of analysis, consistent with cell 3
in Fig. 1: the entrepreneur, the MNE, the MNE subsidiary with intra-firm networks, and
inter-firm arrangements. The horizontal axis dichotomizes the reach of MNE FSAs/capabilities into ‘global NLB FSAs’ versus ‘limited NLB FSAs’.
The relevance of Fig. 2 is that we can position a substantial number of contemporary
IB concepts on the left hand side. Cell 1 represents the so-called ‘born global firm’ with an
ambitious entrepreneur at its core who has worldwide growth ambitions. Cell 2 represents
the global MNE with sales and assets dispersed in a balanced fashion across the globe, of
which there are only nine examples, Rugman (2005), or the metanational with its sensors
and magnets gathering knowledge from the far corners of the planet. Cell 3 represents
the MNE subsidiary with a global mandate. Finally, cell 4 represents global outsourcing
networks and global alliances.
Unfortunately, the real world cases that can actually be placed in cells 1 to 4 are few
and far between due to the tyranny of compounded distance. Most ‘born globals’ are
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Fig. 2: Distance and the
nature of international business
studies
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Reach of Firm-specific advantages (FSAs)
‘Global’ NLB FSAs
‘Limited’ NLB FSAs
1
5
Entrepreneur
BORN GLOBAL
2
MNE
Unit of
analysis
6
REGIONAL MNE
GEOGRAPHIC
DIVISIONS
GLOBAL MNE
METANATIONAL
3
MNE subsidiary
intra-firm network
7
REGIONAL
MANDATE
GLOBAL
MANDATE
8
4
Inter-firm network
BORN REGIONAL
GLOBAL
NETWORK
REGIONAL
NETWORK
really ‘born regionals’ in cell 5. Most large MNEs have a home region sales and asset concentration, and operate with geographic divisions in cell 6, Rugman and Verbeke (2004,
2008a, b, c). Most MNE subsidiaries perform a regional mandate role in the internal MNE
network in cell 7. Finally, most outsourcing networks and alliances, even those designed
by the largest MNEs in the world, are again very selective in terms of geographic coverage, placing them in cell 8. Global outsourcing/offshoring in cell 4 is largely a non-starter,
because of the transaction costs associated with it. In short, in the future, much more
research needs to be done on the right hand side of Fig. 2; the IB field needs to move
beyond the left field of Fig. 2. We need to focus instead on the limits to globalization,
resulting from two sets of parameters, as shown in Fig. 3.
The essence of explaining the literature on global versus regional strategies can be
divined with reference to Fig. 3. As explained above, much of the literature in IB ignores
the complexity of geographic distance. Therefore, we place the complexity of the cultural, institutional, economic, and geographic components of ‘compounded distance’ on
the vertical axis. Essentially, each MNE needs to identify the relevant weighting of the
components of the compounded distance it faces. It then needs to build on its extant FSAs
base to further develop new FSAs which will overcome the ‘resource recombination barriers’ it faces. Therefore, on the horizontal axis of Fig. 3, we place the resource recombination barriers to the growth of the MNE.
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Fig. 3: MNE strategies for
growth in a complex world
Resource recombination barriers to growth
Low
1
High
3
METANATIONAL
TRANSNATIONAL
High
REGIONAL
Compounded
distance in
international
2
4
expansion
Low
GLOBAL
LOCAL
The presence of compounded distance means that it is not sufficient to ‘add’ the isolated
effects of cultural, institutional, economic and geographic distance components. There
may be multiplicative effects arising from these distance dimensions, especially in interregional as opposed to intraregional settings. In other words, rather than looking at CSAs
as sources of net benefits to the MNE, as suggested by Fig. 1, the focus should shift
instead to the challenge of accessing these CSAs.
The existence of resource recombination barriers demonstrates the difficulties of creating the right mix of FSAs that would guarantee competitiveness in, for example, a host
region market. In other words, it is important not simply to assume the presence of FSAs
in the MNE that would almost automatically confer competitive advantage, as suggested
by Fig. 1, but instead to recognize that, typically, NLB FSAs need to be melded with LB
FSAs, a process that may encounter severe implementation problems, inter alia, when
each segment of the firm’s value chain requires idiosyncratic resource recombination
efforts, Rugman et al. (2011). A similar approach to finding, and testing, several types of
LB FSAs appears in Lo et al. (2010).
In cell 1, there is a mix of high compounded distance and low resource recombination
barriers: this is the assumption of a complex world, combined with the MNE’s ability
to create the right FSA mix without too much difficulty. This is the main assumption
adopted in, for example the transnational and metanational illusions. In cell 2, a low compounded distance and low resource recombination barriers suggest a simple world where
all is global (global firms, born globals, global mandates, etc.). Cell 3 in turn shows the
regional solution, whereby firms face high compounded distance, and at the same times
struggle with important resource recombination barriers when entering into host regions.
Finally, cell 4 describes the often-observed position of smaller firms with mainly LB
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FSAs because of high resource recombination barriers. Such firms have great difficulty
overcoming even limited compounded distance (across the national borders of the home
region). These firms operate mostly on a local level.
In conclusion, Fig. 3 helps us to build upon the tension between the literature on simplistic aspects of globalization and global strategies, as compared to the realities of more
complex decision making required by MNEs dealing with the realities of compounded
distance and resource recombination barriers. In cell 1 of Fig. 3, the world is complex,
in terms of compounded distance but the literature on metanationals and transnationals
simply assumes that firms can overcome this. In reality, there are complexities facing the
firm in developing new FSAs to overcome resource recombination barriers. In the future,
IB research needs to engage with cell 3 rather than continuing to be bogged down in cell
1. In a similar manner, much of the literature over the last fifty years has dealt with cell 2
of Fig. 3. This has led to simplistic work on global firms, global mandates and born global
firms which basically assume that the world is simple as both compounded distance and
resource recombination barriers are ignored. In reality, even if compounded distance is
not a critical challenge, there remain firms that operate in cell 4, developing mainly LB
FSAs, and operating domestically. These firms lack the motivation to expand internationally, for example, because of an uncontested domestic market. In summary, future
research in IB needs to distinguish much more carefully between the four cells of Fig. 3.
In the concluding section, we suggest that such future research may well benefit from a
focus upon the regional nature of IB.
Conclusions—Regional versus Global Strategies
We have shown that the three key units of analysis in IB theory over the past fifty years
have been the country, the firm (MNE) and the subsidiary. The most promising area for
further IB theory development is in essence the study of the interactions among these
three parameters, with the subsidiary as the key building block. In particular, we have
shown that the subsidiary has emerged as a new unit of analysis due to the importance
of network thinking from strategic management. Here, the SSA concept represents the
culmination of fifty years of IB analysis. An SSA results from (a) recombining knowledge
transferred from the network with newly created knowledge; (b) autonomously assumed
(extended) subsidiary roles; and (c) subsidiary knowledge embedded in idiosyncratic host
country locations. Paradoxically, the SSA concept is conceptually almost the opposite
to conventional network thinking in mainstream strategy, with its exaggerated focus on
knowledge sharing.
Looking ahead, it is apparent that, irrespective of the unit of analysis chosen, the
region—as an expression of how distance matters in IB—has emerged as an important
parameter. Here, theoretical work is in its infancy as the focus of recent research on the
nature and extent of regional versus global activity by MNEs has been largely empirical. This research only became possible due to changes in accounting standards in the
late 1990s, which required firms to identify the broad regions of the triad in which their
sales and assets take place, Rugman (2000, 2005). There is confirmation of the lack of
global firms and the importance of the region as a unit of analysis in Fisch and Oesterle
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(2003); Asmussen (2009); Collinson and Rugman (2008); Rugman and Oh (2008); Hejazi
(2007); Kolk (2010); Sethi (2009); Yin and Choi (2005); Rugman and Verbeke (2008a,
b, c); Grosse (2005).
There needs to be more conceptually driven inquiry to solve the empirical puzzle that
most of even the largest MNEs appear unable to move beyond their home region and go
global. A transaction cost economics (TCE) based analysis may be particularly useful
here, Rugman and Verbeke (2005). Such analysis would recognize the barriers to recombining extant NLB FSAs held by the MNE, with LB FSAs to be provided by third parties
(in the absence of well functioning external markets for the resources underlying these
LB FSAs). This resource recombination process, in turn, may be a precondition to accessing the coveted CSAs in host markets, such as a large customer base at the downstream
end or a highly skilled and productive workforce at the upstream end of the value chain,
but requires overcoming resource recombination barriers.
Currently there appears to be a liability of interregional foreignness facing even the
largest MNEs, though this concept has only been sketched by Rugman and Verbeke (2004,
2007). If the great majority of the world’s 500 largest firms grow their sales and assets
mainly within their home region, this suggests that their business models and strategies
are home region based. There must be prohibitive resource recombination barriers associated with adapting or changing their business models to achieve truly global sales in the
other two regions of the triad. Thus, IB theory must redirect thinking at the country level
on the liability of inter-regional foreignness caused by compounded distance and move
this towards a focus upon regional strategy. In other words, the country level of analysis
may need to move towards a regional level when assessing the impacts of differences in
culture, political regulation, economic and financial institutions etc. New research on the
multinationality and performance relationship needs to incorporate this regional dimension, Rugman and Oh (2007, 2010), Lee (2010), Oh (2010), Wolf et al. (2008), Li and Li
(2007), while avoiding the pitfalls of the past research on this topic (Verbeke and Brugman 2009).
In related work, Fisch and Oesterle (2003) point out that the term ‘globalization’ has
become overused, and has apparently replaced the term ‘internationalization’. There are
both conceptual research gaps concerning the difference between globalization and internationalization, and a lack of empirical knowledge about the actual level of globalization
of MNEs. In the spirit of Rugman (2000), Fisch and Oesterle (2003) present a new quantitative tool, which combines geographic spread and cultural diversity measures, so as to
integrate multiple dimensions of internationalization into a globalization index instead of
a simple internationalization measure. Fisch and Oesterle (2003) apply this measure to
assess the globalization of the most internationalized German MNEs, among the top 100
non-financial MNEs from developed economies. The results suggest that these MNEs
are neither globalized nor show a straightforward path towards globalization in the past
decade. This outcome contradicts the common assumption of global MNEs. This new
construct can be operationalized to measure the degree of internationalization (Glaum
and Oesterle 2007). More research like this needs to be undertaken on the metrics of
internationalization, not globalization.
In terms of international human resource development and cross-cultural studies, a
regional focus will require fundamental rethinking of the traditional country focus. If
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MNEs operate regionally, then what is the use of Hofstede (1983), House et al. (2004),
GLOBE (2006) and the Kogut and Singh (1988) metrics? These traditional empirical
shortcuts for cross-cultural analysis may need to be revised at a regional level. For example, Tung and Verbeke (2010) have suggested recently that analysis of expatriates and the
training of senior executives for Chinese firms may be subject to an ‘inverse resonance’
and that there may be a need to adopt a regional focus, e.g., an Asian-Asian perspective
rather than the traditional Western-Asian perspective. In many ways, the ten theoretical problems in cross-cultural research identified by Shenkar (2001) remain unresolved,
mainly because research in this area is poorly embedded in IB theory. In this context,
Wolf et al. (2008) examine the economic, psychological, and sociological reasons for
home-region oriented MNEs (Rugman and Verbeke 2004; Rugman 2005).
In terms of political integration, the experiment of the EU offers many insights into the
benefits of economic integration on a regional level with common institutions and regulations. But does this apply to NAFTA, in which the extent of social and political integration is much less than in the EU? Or to Asia, where at best a NAFTA type set of loose
integration is more likely to arise than the tightly regulatory structure of the EU? Why
is it that North American and Asian MNEs are nearly as home region based as European
ones, without the same degree of political and social integration?
A final example of the need for better theoretical analysis, building upon the regional
phenomenon, is the work on international entrepreneurship and so-called born global
firms. Close scrutiny of the ‘born global’ phenomenon, whereby companies internationalize near or at their founding (Knight and Cavusgil 1996), suggests that these firms actually achieve their exports sales largely within the ‘home region’. For example, Knight et
al. (2004) investigate the 292 ‘born global’ firms in Denmark and the United States. Their
findings are that Danish firms generate on average of 71% of their total sales from abroad,
mainly in Europe, compared to 47% for the American sample. This reflects the small
size of the Danish domestic market and Denmark’s proximity to numerous neighbouring
countries in Europe, of which Germany accounts for 50% of their sales. The American
firms generate 53% of their total sales in the United States. To be more accurate, these
firms can be described as ‘born regional’, not ‘born global’, (Rugman 2000; Fisch and
Oesterle 2003).
There appears to be no robust empirical evidence of any ‘born global’ firms other
than a few IT firms from India and possibly some small firms from Israel, Rugman and
Almodóvar (2011). Instead, there are born regionals (Lee 2010; Lopez et al. 2009). Further, when a small firm makes opportunistic foreign sales, these are usually in the form
of exports, not FDI. Yet, the classic article on international new venture (born globals)
by Oviatt and McDougall (1994) uses Dunning’s OLI framework of MNEs to explain
born global activity, instead of maintaining a more appropriate focus upon exports and
international marketing. Again, this area of research is still very weakly embedded in
basic IB theory.
In conclusion, future theoretical work in IB must continue to study the linkages among
the key units of analysis adopted in the previous fifty years, with a focus on the subsidiary as the key building block, taking into account the reality of regional strategy and
structure for most MNEs. We need to avoid being sidetracked by ill-conceived concepts
such as the metanational and empirically illiterate subfields of research such as the born
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global literature, which ignores the costs of distance. We should focus instead on the limits to globalization, resulting from severe frictions, i.e. resource recombination barriers,
occurring when attempts are made to conduct business beyond the home region, where
compounded distance may be high. It is only by linking brave new empirical work on
emerging issues, such as the regional solution, with good basic theory, i.e. sophisticated,
comparative institutional analysis, as provided by internalization theory, that the field of
international business will continue to prosper in the future.
Acknowledgements: We are pleased to acknowledge helpful comments from two referees, and
from Professors Peter Buckley, Mark Casson, Michael-Joerg Oesterle, and Joachim Wolf. We
also received helpful comments from participants at seminars at the University of Leeds, York
University and the University of Reading.
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