Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman: Volume 11

This research volume honours Alan M. Rugman, who is the L. Leslie Waters Chair in International Business (IB), Professor of Management and Professor of Business Economics and Public Policy at the Kelley School of Business, Indiana University. The work contains a set of essays developed to celebrate the Academy of Management's (AoM) recognition of Professor Rugman as the ‘Booz Allen Hamilton Strategy and Business Eminent Scholar in International Management’ at the AoM 2004 Annual Meeting in New Orleans, Louisiana. Booz Allen Hamilton established this award to recognize eminent scholars whose research and writing have contributed significantly to international management scholarship and whose work has had an effect on the practice of international management. This great honour was not the only one Professor Rugman received in 2004. The European International Business Academy (EIBA) organized a special panel honouring Professor Rugman's 25-year old landmark study on international diversification and the multinational enterprise (MNE) at its 2004 Annual Meeting in Ljubljana, Slovenia. The 10 chapters included in this volume were presented at one of these events or written as a direct result thereof.

I am delighted to be here today to honor the work of Alan Rugman. Alain Verbeke (Calgary) and I will discuss Alan's contributions, with me focusing primarily on his contributions to the field of international business (IB); Alain, his contributions to international management (IM).

Alan Rugman, in the course of his professional career, has not shied away from controversy, whether the issues were international diversification versus internationalization, internalization versus use of the external market, double diamonds versus single diamonds or global multinational enterprises (MNEs) versus regional MNEs. Whatever was the bone of contention, he has formulated strong hypotheses and then engaged in empirical work to provide evidence for his position. He has taken the issues to a wide audience – scholarly, government and business. To each group he has hammered the ideas home until he was associated with a position on the issues. In fact, Alan seems to have relished being in the middle of storms of controversy as he beat the drums furiously for what he saw as right regardless of whether he offended others taking an opposite view. The result has been that he has had a huge impact on the field of international strategic management and an influence on government policy and business activity.

I think it would be fair to say that explaining the geography of multinational enterprise (MNE) activity has never been a major part of Alan Rugman's scholarly research and writings. Nevertheless, over the last 25 years, he has provided us with several useful nuggets of understanding and empirical evidence about the territorial expansion of firms, and its impact on their global competitiveness.

Alan Rugman was one of the first to examine in a systematic way the connection between the internationalization of the firm and the diversification of assets within the multinational enterprises (MNE). He has since moved on to deal with many other issues surrounding the MNE, but his major contribution to the subject of international diversification (Rugman, 1979) was for many years essential reading for anyone with serious pretensions to be or to become an international business scholar. Rugman (2005) himself sees the key idea in his early book as being an appreciation of the role of risk in foreign direct investment (FDI). MNEs in the place of individual investors, diversified their portfolio of assets, and thereby served as a vehicle for risk reduction. This argument can be applied especially before 1970, before advances in financial markets and international asset instruments enabled individual investors (or funds acting on their behalf) to directly conduct for themselves such strategies of international diversification to reduce risk.

We start by looking at the arguments put forth as to why having operations evenly spread in a large number of countries should make firms more profitable. Kim, Hwang, and Burgers (1993) argue, for example, that global market diversification, which they measure as the dispersion of a firm's business between seven global market areas, provides a series of advantages that should allow globally diversified firms to earn both higher return on assets and lower risk. Because their arguments are complex and multifaceted, I cite them in extenso.First, global market diversification offers possibilities for exploitation of economies of scale and scope above and beyond the potential of product diversification (Grant, Jammine, & Thomas, 1988). Second, the diversity of national markets exposes firms to multiple stimuli which provides [sic] with a broader learning opportunity and the ability to develop more diverse capabilities than are available to purely domestic firms…. Third, different nations have different factor endowments which, in the absence of efficient markets, lead to intercountry differences in factor costs. Global market diversification allows firms to gain cost advantages by configuring their value added chain in such a way that each link is located in the country which has the least cost for that link (Kogut, 1985a). Global market diversification thus provides firms with unique opportunities to increase returns by spreading its [sic] activities [emphasis in original] across multiple global market areas, rather than by choosing higher risk activities.At the same time, global market diversification endows firms with three unique options [emphasis in original] over domestic firms which are reasoned to reduce the level of corporate risk. First, global market diversification provides a firm with multiple national market bases from which it can retaliate against aggressive moves made by competitors (Hamel & Prahalad, 1985; Kim & Mauborgne, 1988). This option reduces the risk for the global firm of having to face aggressive challenges from its competitors. Second, the multiplicity of national markets allows firms to minimize the effect of adverse changes in a country's interest rates, wage rates, and commodity and raw material prices by providing the added option to more readily shift production and sourcing sites to other more favorable national markets (Kogut, 1983, 1985b; Porter, 1986). Finally, global market diversification releases firms from the mercy of supply and demand fluctuations of any one national market, smoothing the peaks and troughs of firms’ revenue streams. In sum, the spreading of activities across global market areas provides the firm with operational flexibilities that will serve to reduce earning and profit fluctuations. Taken together, the above discussions suggest that the unique opportunities and options of global market diversification may simultaneously increase firms’ returns and reduce their risk.” (Kim et al., 1993, pp. 276–277)

Twenty years ago, Kenichi Ohmae (1985) published Triad Power, a path-breaking book, which has become a classic in the international business literature. Ohmae concluded that the world was far from global, but rather regionally organised, with the United States, Europe and Japan as the ‘triad powers’, dominating world trade and investment. Extending this line of thought, Rugman demonstrated that the vast majority of trade is intra-regional (meaning it takes place within either North America, the European Union or Asia), rather than inter-regional (Rugman, 2000, 2005). The following statement on the automotive industry is illustrative:… more than 85% of all the automobiles produced in North America are built in North American factories owned by Japanese and European MNEs as well as by General Motors, Ford and Daimler-Chrysler. In Europe the story is the same, as it is in Japan. (Rugman, 2000, p. 2)

In his article ‘Regional strategies of service sector multinationals’, Rugman (2003) came to the conclusion that most MNEs in service industries are home region-based, i.e., they have more than 50% of their sales in the home region. In a more recent article, Rugman and Verbeke (2004) found that the vast majority of MNEs included in the Fortune 500, are home-region based. That was a surprising result, as the increasing economic interdependence among nations, the presence of substantial demand for high knowledge intensive goods and services throughout the triad of North America, the European Union and Asia, and the presence of large MNEs in each of the triad regions, all suggest that fierce rivalry for market share would take place throughout the triad. A transaction-cost economics explanation offered by Rugman and Verbeke (2005a) was that the required, location-specific linking investments are far more substantial when firms establish activities outside their home region than inside the home region. Linking investments are critical to permit the profitable deployment of the MNE's non-location bound FSAs across borders. Linking investments are necessary to develop or access location-bound FSAs in host countries (thus permitting national responsiveness), and sometimes to create new, recombined bundles of non-location bound FSAs (permitting increased economies of scale, scope or exploitation of national differences).

In evaluating Alan Rugman's work on MNE environmental strategies, the subject of this chapter, it is too tempting not to start with a 2×2 matrix. Fig. 1 is meant to roughly indicate four different types of work that might characterise an academic's research portfolio. Obviously, all the well-known caveats of such a scheme apply, and perhaps more than usual. However, the main purpose is, by way of introduction, to situate Alan's output on environmental issues and the MNE, compared and related to other topics. While the horizontal axis of Fig. 1 refers to a regular division into theoretical and empirical work, the vertical axis differentiates main foci of research from other, more sideline, areas. Applied to Alan Rugman's research portfolio, the latter category characterises his work on environmental strategies of MNEs best, particularly quadrant 2, although some of it (generally more exploratory work) can be placed in quadrant 4 as well.

I am honored to receive the Booz Allen Hamilton/strategy+business Eminent Scholar Award in International Management. I am even more honored to follow in the footsteps of such distinguished previous recipients of the AOM-IMD (Academy of Management-International Division) Distinguished Scholar Award as: John Child, Christopher Bartlett, Sumantra Ghoshal, John Dunning, and Yves Doz. Like them, I shall reflect here on my past contributions to scholarship, and then use this work as a building block for the major part of this paper, which is on the need for new and relevant theory in the field of international management.

My first book was published in 1979 while I was a visiting professor at the Graduate School of Business at Columbia University. However, the book, International Diversification and the Multinational Enterprise, consisted of materials prepared from my doctoral dissertation of 1974 at Simon Fraser University and a set of articles prepared subsequently while I was in my first job as a professor at the University of Winnipeg in Canada.