International Business in a VUCA World

The Changing Role of States and Firms

Rob van Tulder, Alain Verbeke, Barbara Jankowska, Rob van Tulder, Alain Verbeke, Barbara Jankowska

• Editorial: Emerald Publishing Limited
• Año: 2019
• ISBN:
  9781838672577
• Categoría: Business
• Categoría: International Business

This fourteenth volume in the PIBR series is dedicated to Professor Peter Buckley, OBE, whose creative contributions to IB theory and practice over many decades are unmatched. His scientific oeuvre has continued to grow, both in depth and breadth, and reflects an evolving level of scholarly resilience that has kept pace with the increasing Volatility, Uncertainty, Complexity and Ambiguity (VUCA) characteristics of the modern environment of international business.

The VUCA dimensions of the business environment that face both managers and policy makers are amplified by a wide variety of unpredictable social, economic, political and technological forces, such as: inter alia, the (post-great-recession) rise of populism; growing anti-European sentiment in the European Union; increasing protectionism; a slowdown in growth of emerging markets; the rise of the digital economy, and many more. These trends affect the competitive position of nations and firms. He present volume focuses on the threats and opportunities created by the VUCA-trends for multinational enterprises (MNEs), small and medium sized enterprises (SMEs), and international new ventures (INVs), along the following five headings:

• IB scholarship in a VUCA world.
• New Perspectives on the Interplay between Firms and the Non-Market.
• New Governance Challenges in International Business.
• New Contexts for Newly Internationalizing Firms.
• Contemporary Management Perspectives in IB Research.

PART I

INTERNATIONAL BUSINESS IN A VUCA ENVIRONMENT

CHAPTER 1

THE ROLE OF INTERNATIONAL BUSINESS THEORY IN AN UNCERTAIN WORLD

Peter J. Buckley

This chapter reviews my past contributions on “international business in a VUCA world.” Volatility and uncertainty are phenomena that have been important in my writings on multinational enterprises (MNEs), globalization and innovation. Complexity has been dealt with by attempts to use rational action modeling to achieve simplicity, both in analysis and in decision-making in entry strategy (Buckley, Devinney, & Louviere, 2007) as an attempt to model ambiguity by forcing manages to confront trade-offs. The “new” international environment in which pro and anti-globalization forces contest represents a challenge to analysis. It is my belief that the analytical apparatus to tackle the “new VUCA environment” is in place. Wielding that apparatus in an effective fashion is an urgent, and compelling task for international business (IB) academics. It is profoundly to be hoped that we are capable of meeting these challenges.

I believe that IB is best when it is a collective enterprise (Buckley, 2002). Several empirical and philosophical problems have been successfully confronted by IB scholars – the explanation of foreign direct investment (FDI), the MNE and the globalization of business (Buckley, 2002), the role of cooperation, alliances and joint ventures, “virtual firms” and emerging markets as locations (Buckley & Lessard, 2005) and the rise of MNEs from emerging economics (EMNEs), offshoring and global value chains (GVCs), and responses to social responsibility in MNEs (Buckley, Doh, & Benischke, 2017). This is a formidable list. It could, however, be argued that the elements of VUCA have been underplayed or even neglected in the mainstream IB literature. The chapter refers to both the light and the shade in these areas.

IB is an inherently complex subject because of its global context, the importance of innovation and the range of ownership and location factors that need to be examined (Buckley & Casson, 2019). Uncertainty is pervasive and international managers need to cope with both insurable and non-insurable risks. Volatility is inherent in the global economy and decision-making in MNEs is often subject to ambiguity. This makes IB an ideal domain to examine “the VUCA world.”

VOLATILITY

Real options provide a way of rationalizing many practical aspects of business behavior which until recently defied analysis: the seeming irrationality of procrastination and delay in committing resources to new foreign markets, and the cautious incremental approach to investment that is so often pursued once the market is entered (Buckley, Casson, & Gulamhussen, 2002).

Options reduce risk by providing the flexibility to respond to new information when it becomes available. The key to a successful exploitation of real options is to foresee the kind of information that is likely to become available, and plan the options to exploit this information from an early stage. Flexibility can take many forms: IJVs provide flexibility through contractual options, whereas small reversible investments in versatile assets provide flexibility in a non-contractual form. These forms of flexibility can be combined – for example, by holding a portfolio of IJVs, each of which operates versatile assets, and utilizes information by-products from other IJVs, as well as supplying its own information by-products to them. (Buckley & Casson, 2001)

Insights from these models can be used to construct “dynamic” versions of existing static theories. The real option perspective can be applied to standard IB theories, including classic theories such as the Product Cycle model and its variants (Vernon, 1966, 1974, 1979). The real option perspective can provide a formal analysis of the leads and lags in the internationalization process which is missing from many orthodox accounts of the subject.

UNCERTAINTY

Liesch, Welch, and Buckley (2011) reviewed the literature on risk and uncertainty in the internationalization and international entrepreneurship literatures and suggested that a more nuanced treatment of risk and uncertainty was required. They introduced dynamic concepts of uncertainty acclimatization and risk accommodation to analyze how these elements right evolve over time within internationalizing firms.

Much of this restructuring relies on the collection and synthesis of information within the (multinational) firm. Buckley and Carter (2004) examined the process organization needed to combine different types of knowledge within the MNE. This is an imperfect process where knowledge losses, decision losses and coordination losses lead to barriers to the effective combination of knowledge. Organizing the debate around knowledge as a “justified true belief” (Nonaka & Takeuchi, 1995, p. 58) helps to differentiate reduction of risk from the situation of uncertainty where belief (and strength) are based on incomplete information.

The organization of knowledge flows is critical within the MNE and within GVCs or global factories (Buckley, 2011). Knowledge flows imply resource costs of running an internal market in knowledge and these include the increased communication costs and increased costs of managing complexity (communication costs) (Buckley & Casson, 1976, chapter 2). Buckley and Carter (1996) examine these costs as motivation costs, information costs, and coordination costs. Thus high external transaction costs do not provide a sufficient motive by themselves for market internalization. This will only be true if internal transaction costs are lower. Knowledge flows in reaction to risk and uncertainty therefore help us to have not only a theory of market failure, but one of organization success.

As in many aspects of IB research, the level of analysis is critical. In examining how MNEs respond to host country risk, the organizational level account is built on the premise that “capability” is a pre-requisite for risk-taking, while the individual level account focuses on MNE managers’ intrinsic behavioral attitude (Buckley, Chen, Clegg, & Voss, 2016). Reconciling these elements to give a fuller account of risk taking in FDI led to the concept of risk propensity, analyzing international decision-making as a behavioral process taking account of manager’s preferences and the context of the individual firm (age, experience, size, diversification). (Buckley et al., 2016). This was tested for the interesting case of Chinese private foreign direct investors (Buckley, Chen, Clegg, & Voss, 2018) to develop an individual level relative risk propensity account of these firms reaction to host country risk. This research builds on prior ambiguous findings on the heterogeneous responses of emerging market (particularly Chinese) firms to host country risk (Buckley, Clegg et al., 2007) and uses quasi-experimental methods.

COLLECTING INFORMATION

It is often suggested that uncertainty is a basic “fact of life,” but this is not quite correct. Uncertainty can be dispelled by collecting information. Even if it cannot be dispelled entirely, its impact can be reduced by narrowing down the margin for error. It is therefore irrational to always passively accept uncertainty. How is it possible to know how much information is worth collecting? Rational action modeling provides an answer to this question. All that is required is that the decision-maker can estimate the cost of collecting relevant items of information and attach subjective probabilities to what the results of investigation will turn out to be. This allows the decision-maker to estimate both the costs and the benefits of collecting information, and therefore to arrive at a rational information strategy (Casson, 2000).

Decision-making becomes a two-stage procedure: in the first stage, the decision-maker decides how much information to collect; and in the second stage, he uses the information he has collected to take the decision. These two stages are interdependent, and the rational decision-maker arrives at his strategy by considering them in reverse order. He knows that it would be a waste of time collecting information that would not influence his decision. He therefore needs to determine in advance how he would use any item of information if he had it. If he would not use it whatever it turned out to be, then it is a waste of time collecting it. Only once he has decided how he would use it is he in a position to decide whether he wants to collect it or not (Casson, 1995).

Research is not the only way of augmenting the information set. If decision-makers wait long enough, the information they require may reveal itself anyway. Deferring a decision may save the cost of collecting the information at the outset. The reason why firms do not delay decisions is because there is a cost involved. For example, if market entry will be profitable right away, profits will be lost if entry is deferred. Furthermore, there is a risk that another firm may enter the market and pre-empt the profit opportunity. Comparing deferment with research, therefore, there is a trade-off between saving information costs on the one hand, and losing revenue on the other.

If market entry decisions were fully reversible, then there would be no need to defer a decision at all. A provisional decision would be made on the basis of the information that was freely available at the outset, and when additional information became available this decision would be changed as appropriate. The revenue stream would therefore commence immediately, and the cost of information would be avoided altogether. The only losses would relate to errors made at the outset, and corrected later (Buckley & Casson, 2001).

In practice, of course, most decisions are not reversible. If the firm invests in a foreign production plant, for example, it will not be able to sell it off for as much as it cost to build. The “illiquidity” of the plant means that the firm incurs a capital loss. Similarly, if the firm adapts the plant to some alternative use then adjustment costs will be incurred. Some investments are more readily reversed than others. Strategies that involve reversible investments afford more flexibility than those which do not. High levels of uncertainty favor the selection of flexible strategies, since mistakes are easier to put right (Buckley & Casson, 1998b).

Where internalization theorists have argued for sequential entry is has generally been in terms of the “Penrose” effect – that simultaneous internationalization of the firm will overstretch its managerial resources. (Penrose, 1959) The Penrose argument is, however, quite distinct from the argument for sequential internationalization based on economies of scope available from the learning process. The two approaches are, in principle, rival explanations of the sequential expansion of the firm, although they can be regarded as complementary and mutually reinforcing within a synthetic view.

The whole area of “foreign market entry and expansion strategies” has much to gain by the more explicit treatment of uncertainty. Both internalization models (Buckley & Casson, 1981, 1998a) and internalization sequencing models such as the Uppsola Model (Johanson & Vahlne, 1977; Johanson, Vahlne, & Wiedersheim-Paul, 1975) can benefit from more explicit treatment of VUCA issues (Allen & Pantzalis, 1996; DeMeza & Van Der Ploeg, 1987; Hirshleifer & Riley 1992; Kogut & Kulatilaka, 1994).

COMPLEXITY

Rational Action and IB

During the 1980s and 1990s, the concept of strategy came to occupy an important role in the IB literature, although the term was hardly used at all before then (Porter, 1991). None of the key theoretical developments of the 1970s invoked the concept of strategy at all. It is interesting to note that very few of the writers who use the concept of strategy most regularly ever bother to define the term. Sometimes they employ it simply as a synonym for “chosen course of action,” while in other cases they use it to signal that some particular decision is of crucial importance.

The rational action approach clearly implies that some decisions are more important than others, and indicates why this is the case (Buckley & Casson, 2001). A strategic decision may be defined, in rational action terms, as a decision with the following characteristics:

(1) long-term perspective creates a need for inter-temporal planning;

(2) uncertain environment;

(3) information needs to be collected in the most efficient and reliable manner;

(4) irreversible commitment of resources;

(5) determines the context in which future tactical (short-term) decisions are taken: the implications for tactical decisions need to be considered before strategic decisions are made; and

(6) inter-action with other strategists: either competition, co-operation, or both (Buckley & Casson, 2001).

There is now a “critical mass” of rational action technique that can be used to analyze strategic issues. These techniques address strategic complexity through clarification and simplification of the decision problem (see e.g., Kreps, 1990).

AMBIGUITY

The location and control (internalize or outsource) decisions of...