International Business and Institutions after the Financial Crisis

Y. Temouri, C. Jones, Y. Temouri, C. Jones

• Publisher: Palgrave Macmillan
• Year: 2014
• Print ISBN:
  9781137367198
• eBook ISBN:
  9781137367204
• Topic: Business
• Subtopic: Business Ethics
• Index: Business

The challenge in the post crisis world is how business, government and academia come together to foster conditions for sustainable economic development. Understanding this requires an examination of the fundamental principles of IB, including location decisions, returns to multinationality and links between government and business, and CSR.

Part I

Keynotes

1

Internationalization of Firms from Emerging Markets: Location Choice and the Impact of Institutions and State Ownership*

Saul Estrin

Introduction

Since its early days in the 1960s, the literature on foreign direct investment (FDI) has always sought to understand and explain observed phenomena (Caves, 1996; Dunning, 1980, 1998). Between the 1960s and 1990s, most actual FDI took the form of the creation of subsidiaries by American firms in Europe, or European firms in America. From the 1970s, investments by Japanese firms in both America and Europe also became significant (Yang et al., 2009). This might all be regarded as ‘north–north’ investments; and the theorizing to explain it focused on ‘ownership advantages’ (Dunning, 1980) of source firms, often based around technology or brands, or firm specific advantages (Rugman, 1982) that can be developed by careful corporate strategy. Even in this period, of course, there was also FDI, for example, between firms based in developed and less developed economies – ‘north–south’ investments – to exploit natural resources; captured by Dunning as resource seeking as a motivation for FDI (Dunning, 1980). However, the period between 1990 and 2008 saw increasing movements of FDI between developed and developing countries and for motives including efficiency seeking and market seeking. This was the era of emphasis on ‘emerging markets’, where growth and development was seen to be concentrated in a small group of countries termed the BRICs (Brazil, Russia, India, China) by Goldman Sachs economist Jim O’Neill (O’Neill, 2012). In 2010, the flows of FDI to developing economies for the first time exceeded the flows to developed economies. The FDI literature shifted from issues of ownership and internalization advantages towards also analysing in-depth location issues, in particular questions of institutional quality and risk (e.g. Habib and Zwawick, 2002; Khanna and Palepu, 2000; Khanna and Rivkin, 2001; Meyer et al., 2009).

In recent years, the pattern of FDI has begun to shift once again to reflect the increasing levels of wealth and maturity in emerging markets. We are now beginning to see yet another form of FDI influencing the literature, namely investment flows by companies domiciled within developing economies. These flows are both south–north and south–south; for example, widely reported activities by Chinese multinationals in African countries related to their needs for secure supplies of raw materials. In the same way that previous major shifts in the form of FDI have influenced the literature, it seems likely that these changes will impact greatly on our understanding of the FDI process and this is already reflected in the literature (e.g. Cuervo-Cazurra and Genc, 2008; Yiu, Lau, and Bruton, 2007). While the scale of FDI from emerging markets remains relatively small in comparison with north–north and north–south investments, it is very fast growing (UNCTAD, 2011) and likely to become increasingly significant over time as the BRICs and other emerging markets play an increasing role in the international division of labour (O’Neill, 2012).

There are many ways that the emphasis of research might change in response to this shifting FDI pattern, but I will focus only on two. The first concerns the global strategies of emerging market multinationals. Clearly, north–north and north–south FDI can be understood using traditional tools; for example, resource-seeking, market-seeking and efficiency-seeking motives. Emerging market multinationals may have resource-seeking motives, as noted already, but the latter two motives at first sight seem less convincing. These firms already operate in economies that are amongst the largest and fastest growing in the world. Moreover their growth has been driven to a significant extent by the exploitation of cost advantages, notably labour costs, which cannot easily be replicated in developed economy host environments. Indeed the fundamentals of the eclectic paradigm might be brought into question when one thinks about emerging market multinationals, because their ownership advantages for a global economy are not as clearly delineated in the technologies, brands, distribution networks and other intangible assets that can explain how developed economy multinationals have overcome the ‘liability of foreignness’ (Zaheer, 1995).

A second issue raised by the growth of south–north FDI is the role of home country characteristics in the internationalization process. Until now, this has been a less important issue for the literature because the variation in source economy characteristics is relatively modest when one considers either north–north or north–south FDI. Though developed economies clearly differ in many important respects (Hall and Soskice, 2001), these variations are rarely considered as important determinants of the nature and pattern of investment. Attention has instead been focused on host country characteristics, especially institutions such as corruption, when considering the locational choice of FDI, which is almost always implicitly assumed to derive from a developed economy. However it seems likely that the impact of the local institutional environment will be comparably important for the domestic internationalization process of emerging market multinationals as is it for the locational choice of developed economy multinationals. One example will suffice to make the point. When considering FDI choices by firms based in developed economies, we rarely if ever consider the impact of ownership and governance arrangements, for the simple reason that there is more or less no variation; multinational firms are typically privately owned by large numbers of shareholders. However such arrangements are not the norm in emerging markets (Morck, Wolfenson and Yeung, 2005). Rather we find ownership concentrated in family hands, often within complex business groups, or in the hands of the state (Young et al., 2008). Such arrangements are likely to imply that the standard principal–agent problems that bedevil incentive structures in developed economies will instead be replaced in emerging markets by principal–principal conflicts concerning the objectives of the organization. Firms may not therefore always follow the logic of the search for profit, instead seeking to satisfy the aims of their state or family owner. Thus the state as owner may pursue long-term development goals using their owner’s firms as proxies in the process, thereby introducing additional motivations for FDI.

The study of emerging market multinationals is likely to be a lengthy and fascinating process. My objective in this short chapter is simply to highlight a few issues about the theoretical issues raised by the phenomenon, as a pointer to future research, hopefully both theoretical and empirical. My comments will draw on research with Klaus Meyer (Estrin and Meyer, 2012) and with Klaus Meyer, Bo Nielson and Sabina Nielson (Estrin et al., 2013).

The strategies of emerging market multinationals

There is scope for researchers to reconsider the entire range of global strategies through the lenses of foreign multinational enterprises (MNE). Some scholars argue that MNEs from emerging economies (EEs) are systematically different from MNEs originating from a developed economy (DC) and thus call for the development of new theory to explain their characteristics (Child and Rodgriguez, 2005; Guillén and Garcia-Canal, 2009; Rui and Yip, 2008). In contrast, others propose that the established theories should not be prematurely abandoned since they retain the capacity to explain the principal features of EE MNEs (Hennart, 2009; Narula, 2012; Ramamurti, 2012).

As noted previously, most EE MNEs lack the famous brands and leading-edge technologies that are usually viewed as the drivers of MNEs’ overseas FDI. The location decision of a firm is usually argued to depend on the interaction of its firm specific advantages (FSAs) (Rugman, 1982) with the specific locational advantages at potential host locations (Dunning, 1998; Narula, 2012). Firms therefore expand internationally where they can redeploy their internationally-transferable proprietary resources and capabilities to both exploit and explore their resource base (Barney, 1991) and the choice of investment location is determined by the interaction of the firm with the host context.

The EE MNE literature suggests that two types of FSAs could be driving their internationalization. First, studies identify a range of operational capabilities of particular relevance to EE contexts (Verbeke and Kano, 2012). For example, EE MNEs may possess capabilities in ‘process innovations’ that allow them to lower production costs without necessarily reducing product quality (Zeng and Williamson, 2007) and ‘frugal innovation’ generating new products initially designed for the needs of an EE, but also enabling entry into niches in advanced economies. Other EE MNEs develop capabilities in managing dispersed value chains and labour-intensive manufacturing processes (Ramamurti, 2012), or ‘the ability to manage institutional idiosyncrasies’ (Henisz, 2003), which helps EE MNEs to compete in other EEs and provides them with a competitive advantage in those contexts (Cuervo-Cazurra and Genc, 2008).

Second, the FSAs of EE MNEs may be grounded in their preferential access to country-specific advantages of their home country (Hennart, 2012; Narula, 2012). This preferential access may arise from close network relationships in the home country, or from ownership and governance forms that provide access to external resources. As we have seen, many EE MNEs belong to business groups that share resources and internalize markets. Their FDI may be driven by their role within the business group and supported by resources shared within the group (Khanna and Rivkin, 2001). Other firms access resources through state ownership and other forms of association with the home country government, for example, by obtaining finance from state-owned banks on comparatively favourable terms. Therefore firms aligning themselves with governmental policy agendas are reportedly finding it easier to attract resources that facilitate outward FDI, notably in China (Buckley et al., 2007; Morck, Yeung and Zhao, 2008). This preferential resource access enables them to be less averse to political risk, and to seek resources of national rather than of purely corporate interest (Ramasamy et al., 2012).

Thus EE MNEs internationalize with different sorts of FSAs than a typical DC MNE, be they internal to the firm (such as operational capabilities) or in the form of preferential access to country specific advantages of the home country. These differences in starting points are likely to affect their outward FDI strategies. Recent literature has proposed two innovative theoretical ideas to explain differences between MNEs from EEs and DCs respectively, namely strategic asset seeking (or springboard) perspectives (Li, Li and Shapiro, 2012; Luo and Tung, 2007) and institutional perspectives (Cuervo-Cazurra and Genc, 2008; Cui and Jiang, 2012; Holburn and Zelner, 2010). To date, empirical contributions in this literature are mostly based on single country studies, and hence provide insights regarding the distinct features of the particular country but offer limited advancement of knowledge into the comparative aspect of the research question. Finally I present a learning perspective (Li, 2010; Meyer and Thaijongrak, 2013), which suggests that lower levels of maturity in internationalization may be the distinguishing feature of EE MNEs.

Strategic asset-seeking perspective

A common thread in the empirical literature is the observation that EE MNEs tend to acquire strategic assets overseas by purchasing firms in DCs that are more advanced in terms, for example, of technology, distribution skills and even management than they are themselves (Deng, 2009; Peng, 2012; Rui and Yip, 2008). This observation led to theoretical work suggesting that FDI by EE MNEs primarily aims to create FSAs, rather than to exploit them (Rugman, 2009). These acquired assets are strategic in the sense that they strengthen the capabilities of the acquirer not only in the local market, but in its global operations, providing, for example, advanced technologies or international brand names that strengthen the firm’s competitive position vis-à-vis its competitors back home. Hence, the ‘strategic asset seeking’ or ‘springboard’ perspective (Li et al., 2012; Luo and Tung, 2007) suggests that EE MNEs would use such acquisitions to acquire resources abroad that are then combined with existing resources to create FSAs that enable them to compete more effectively both at home and abroad.

This motive mainly applies to FDI by EE MNEs into DCs, where such internationally transferable assets are likely to be found. It suggests that investments by EE MNEs in DCs are primarily designed to accomplish a catch up with global leaders, and target locations where complementary assets such as technology are most available (Li et al., 2012).

Institutional perspective

Firms in EE face business environments of extensive market imperfections, also known as institutional voids (Khanna and Rivkin, 2001; Meyer et al., 2009). Hence they develop practices and capabilities that enable them to fill or overcome such voids, and to succeed under such conditions. Once developed, such capabilities can become a foundation both for domestic diversification (Khanna and Palepu, 2000) and for international expansion into other EEs with similar market imperfections, and hence where such capabilities contribute to attaining competitive advantages locally. This institutional perspective thus suggests that the capabilities developed by EE MNEs in their domestic markets enable them to expand most easily where they find similar institutional conditions (Curvo-Cazurra and Genc, 2008; Henisz, 2003) and political risks (Holburn and Zelner, 2010).

A related institutional argument focuses on the close association of many EE MNEs with their home government. State ownership is relatively more widespread in emerging markets, in part because of former socialist legacies (Estrin et al., 2009) and the weakness of private capital markets (Globerman and Shapiro, 2002). Even where the state does not own firms, governments influence company decision-making directly through state ownership and more subtly through personal ties between managers and government officials (Lin, 2011). These relationships facilitate access to certain types of resources, but also create pressures to align firm strategies with government policy. For example, government-associated firms gain preferential access to guarantees, bank loans and information about the foreign business environment, as well as collaboration with research institutes and universities (Morck et al., 2008; Peng, 2012; Ramasamy et al., 2012).

As already noted, governmental support in the provision of resources comes at a price in terms of blurring corporate objectives, with SOEs in particular in a position of resource dependence and therefore required to align their FDI strategies to their government’s policy goals. These policy goals vary from country to country; in the case of China, scholars emphasize acquiring natural resources and advanced technologies (Luo et al., 2010). Governmental financial support also makes the strategies of MNEs from EEs less sensitive to institutional deficiencies in the local environment, such as political risk or corruption, because the additional costs that these conditions impose are offset by implicit guarantees or the attainment of the non-material goals. Both arguments suggest that EE MNEs may have capabilities that are particularly suited for competing in less advanced institutional environments and they may be able to accept higher levels of political and econom...

Table of contents

• Cover
• Title
• Introduction: International Business and Institutions after the Financial Crisis
• Part I  Keynotes
• Part II  Institutions and Foreign Direct Investment
• Part III  Knowledge Flows and Firm Performance
• Index