Managing Multinationals in a Knowledge Economy: Economics, Culture: Volume 15

At the time of this writing, the medical and health-care professionals are joining forces worldwide trying to stop the global spread of SARS and avoid the devastating consequences that it brings to the affected areas. This event once again reminds us of the inter-connected world in which we all live and the importance of international collaboration to address pressing global issues. In this volume, we have included contributing chapters from authors based in Asia, Europe, and North America to examine an emerging topic in the international management field – managing multinationals in a knowledge economy. The chapters are selected to reflect the influences of three key factors – economics, culture, and human resources – on managerial decisions that affect multinationals and their effective operations. A review of these papers suggests that, despite all the technological advances in cross-border communication and coordination, social capital and human resources are the most critical factors possessed by multinationals.

One of my major research thrusts over the past 40 years – and particularly since the mid-1970s – has been to construct, and regularly update and refine, an eclectic paradigm (EP) which seeks to identify and evaluate the determinants of international business (IB) activity. Within this activity, a range of operationally testable and specific economic and business theories might be accommodated.

The eclectic paradigm is one of the most enduring frameworks in international business today. It is difficult to find a major area of international business thinking and research that has been unaffected, either directly or indirectly, by Dunning’s articulation of the nature of multinational enterprise (MNE) production and the factors affecting the distribution of MNE activity. His structuring of the factors underlying the choice of production location and internalization of intermediate product transactions laid the foundation for much of the research conducted over the last three decades on the distribution and character of the global operations of multinational corporations. More indirectly, the deeper questions raised by Dunning’s work, as well as the criticisms leveled at it, have spawned an ever widening array of research thought. The continuing importance of this work can be seen in the fact that, today still, even the earliest work on the eclectic paradigm continues to be cited by scholars at a fairly steady rate (see Chandy & Williams, 1994; Phene & Guisinger, 1998).¹

John Dunning’s Eclectic Model, introduced in 1976 (Dunning, 1977) and refined by him several times since then (1988, 1993), is a key contribution to the separation of international business studies (IBS) from international economics and trade theory and to the development of global strategy. Dunning’s proposed model was preceded by Stephen Hymer’s (1960) application of industrial organization economics to the study of international trade and investment, and Ray Vernon’s (1966) definition of an international product lifecycle, both critical steps for IBS away from macro-economic trade theory. He was contemporaneous with the work of McManus (1972) and Buckley and Casson (1976) that introduced Coasian economics to the study of international markets and multinational firms. He was also working at the same time that Stopford and Wells (1971) began the work that led to much of the modeling of global industries at Harvard University. These and related works were important to the development of IBS. However, these other models tended to take a narrowly defined perspective and therefore to examine only a part of the rapidly expanding phenomenon of the global firm. They also tended toward industry-level analysis. Dunning’s Eclectic Model, however, by its inclusive nature, opened up the study of multinational firms to broader influences from organizational studies and business strategy. Its strong grounding in economic theory provided a basis for further development and for the integration of strategic models based on similar theories, while its focus on firm-level characteristics provided opportunities to incorporate new ideas from organizational studies into the study of international strategy. For this reason, I see it as the key theoretical model in the process of turning IBS from a mix of macro-level theoretical approaches to national differences and case-based analysis of industry effects into theoretically grounded studies of business organizations functioning in extra-national markets. While Dunning himself makes the point that the Eclectic Model is aimed at the study of multinational firms (1988), not at evaluating individual firm decisions, it does provide a framework for both descriptive and normative studies of individual firms. This shift in emphasis brought much new insight to the study of international business and added considerable richness to developing theory in strategic management and other business disciplines. It has also led to the incorporation of IBS into most business disciplines and a concomitant decline in the study of international business as a separate area for scholarly endeavor – a sometimes disconcerting example of the law of unintended effects.

Professor Dunning offers a thoughtful paper (Dunning, 2002) concerning relational assets and international business activity. The work is sweeping in its scope and concepts. Given the breadth, my commentary inevitably will need to focus on some aspects at the expense of others. Rather than to critique the paper exhaustively, then, my goal is to identify intriguing aspects of the argument and to offer some tentative suggestions for extending and revising the argument.

I would have thought that my recent appointment as Dean of the Chapman Graduate School of Business at Florida International University should have disqualified me as a serious commentator on this session. It is well known, of course, that deans have little capacity for critical thinking. I suppose that the organizers figured that since the appointment date was only three weeks ago, there may be some residual gray cells still careening off the walls of my brain cavity, cells not yet smothered by the mindless work of academic administration.

In order to be able to advance scientific knowledge, researchers should consciously explore and critically evaluate alternative explanations of the phenomena under investigation. We feel that research in the area of entry-mode choice has neglected these recommendations where it concerns the impact of cultural distance (CD) on entry-mode choice. In this article, we argue that sample idiosyncrasies, coupled with an almost blind confidence in one specific measurement of CD, have led researchers in this field to systematically overestimate the role of CD in entry-mode decisions. We argue that specific home and/or host-country characteristics are equally plausible explanatory factors for entry-mode decisions as CD and plead for a more sophisticated treatment of culture in the entry-mode choice literature.

Since the mid-1980s, much research attention has been devoted to top management teams and their impact on the strategic behavior and performance of firms. In particular, this research has focused on the role of top managers’ background, values, and experiences in explaining the choices they make. So far, this research has largely failed to address the national context in which top management teams are formed and operate. Empirical studies have typically involved top management teams of U.S. firms. Other studies are rare, and when they exist, they usually do not take the national context into account. This paper explores the impact of national context characterized by society-specific value systems and institutions, on the composition, organization, and functioning of top management. We address three topics in particular: (1) national variations in the structure and practices of top management and their implications for managerial choices; (2) national governance systems that define and constrain the tasks and functioning of top management teams; and (3) national institutions that help to define managerial selection, promotion, and career patterns.

The paper displays the cultural profile of the Russian management and explores the different roles of factors linked to the history of Russia and current transition to market and democracy. It further develops interpretation of empirical data collected through the Global Leadership and Organizational Behavior Effectiveness (GLOBE) research project. The survey of managers of multinational companies doing business in Russia tests the cultural profile of the Russian management and confirms the behavioral advantages (visible In-group and Institutional Collectivism) and disadvantages (low Uncertainty Avoidance and Assertiveness) of this culture.

This paper develops an integrative framework explaining multinational firms’ managerial staffing decisions in initial foreign-entry situations from resource-based theory, agency theory, and transaction-costs theory, and it offers a set of theoretically grounded, testable propositions concerning these staffing decisions. In particular, we maintain that managerial staffing decisions are influenced by: (1) the value that managerial expatriates and local hires could potentially add to the firm; and (2) the relative contractual risks associated with the use of managerial expatriates and local managers.

This paper indicates that the use of managerial expatriates can improve contractual efficiencies in at least four ways. First, the use of expatriates helps align the economic incentives between the headquarters and the foreign subsidiaries. Second, the headquarters knows better the characteristics of expatriates relative to local hires. The use of expatriates reduces the uncertainty of the headquarters in recruiting managers and mitigates the incomplete contracting problem. Third, expatriates are better equipped with firm-specific capabilities than local hires, reducing contractual (small-numbers) problems. Fourth, expatriates have committed greater sunk cost investments in the multinational firm than local hires. These investments support their cooperative relationships with the firm and mitigate potential bargaining problems in employment contracting. However, although managerial expatriates can potentially improve contractual efficiency and may relieve a firm’s concern over its limited control on managers, expatriates may not have adequate abilities in managing local idiosyncrasy.

This study evaluated the practical relevance of the academic literature on international human-resources management (IHRM). To this end, 304 IHRM articles published in nine academic and eight practitioner journals during 1991–2000 were examined. Results suggested that academics and practitioners varied in their focus on HR topics, geographical regions, and cultural vs. institutional variables. In addition, academics were interested in individual level outcomes as opposed to practitioners, who were primarily concerned with organizational performance. Finally, citation patterns revealed little interaction between academics and practitioners, and academics appeared to be unconcerned with discussing the practical implications of their work.