"Theories of the Multinational Enterprise: Diversity, Complexity and Relevance": Volume 16

The early research on multinational enterprises usually relied on traditional economic theory or relatively simple, but powerful, theories developed in the field of international business. They were developed to help us understand why firms entered international markets (e.g. Dunning’s eclectic theory). However, as the field of international management (and international business) has developed further, with more scholars from adjacent disciplines conducting research on issues of importance to international markets and multinational firms, newer, more diverse and complex theoretical perspectives have been developed and diffused. The purpose of this volume is to explore some of these important and newer theoretical perspectives. For example, herein, we examine the recent theoretical work on the metanational that emphasizes knowledge-sharing among subsidiaries on a global basis. We also explore theoretical issues related to international entrepreneurship, a new, important, and growing perspective in the field of international management. Additionally, we include work focused on the liabilities of foreignness and other critical issues in the management of multinational enterprises. As such, we believe that this volume provides a basis for future research on the multinational enterprise, and we hope that the work contained herein serves as a catalyst for such research using the different theoretical perspectives examined herein.

This introductory chapter presents a personal perspective on the challenges of building a managerial theory of the multinational corporation (MNC). By managerial theory, I mean a practice theory (Van de Ven & Johnson, in press); i.e. a theory that draws upon discipline-based knowledge to show how more general abstract conceptual analysis can be brought to bear on specific real-life managerial problems (Simon, 1996). Developing such a managerial theory is fraught with challenges and pitfalls. Such a theory has to provide a conceptual link between academic disciplines (traditional science or at least academic research) and practical knowledge (learning from action). Each follows very different theory building rules (Christensen et al., 2002; Cook & Brown, 1999;Van de Ven & Johnson, in press), and yet a managerial theory needs to incorporate both. It needs to be useful in the context of an evolving phenomenon: Today’s global companies neither carry the same activities nor draw their legitimacy or competitive advantage from the same sources as yesterday’s multinationals. A theory that attempts to bring theoretical disciplines to bear on practice also needs to be multidisciplinary and eclectic. Thus, there are three challenges addressed in this chapter.

An assumption underlying the concept of the metanational is that the necessary knowledge, ideas, and assets for creating new business opportunities are spread across the world. Most firms, even those that are multinational in scope, are not highly effective at accessing or making use of globally dispersed knowledge because they are deeply embedded in their home market, and their overseas subsidiaries (for the most part) act on the orders of their parent company rather than taking autonomous action.

My first exposure to Yves Doz’s work was his book Strategic Management in Multinational Companies (Doz, 1986). In 1988, I was in the first year of my Ph.D. program and was deep inside research methods, statistics, and special fields courses. I received an unsolicited copy of Yves’ book from the publisher. I was not familiar with his work and compared with much of the “normal science/positivist” research I was reading, this book was significantly different. In the introduction, Yves wrote that he “tried to avoid theoretical abstractions and the complex language that provides only the trappings of objectivity and not the essence of it” (Doz, 1986, p. 10). He also said that for students of the MNC, his objective was to “integrate several theories into a managerial understanding of the multinational company.”

Before I comment on the substance of the paper offered by Professor Yves Doz in this issue, I believe that a few comments on the author are appropriate, since this issue celebrates him as a distinguished scholar in international management. The importance of Yves to the development of international strategic management is evident in his discussion of the evolution of the theory of the MNC. The study of the interaction of international economics and management studies that has resulted in modern concepts of the multinational corporation is, to a significant degree, the consequence of his own work. The paper offered in this volume is a natural development from his stream of work and in many ways reflects the patterns that have made Professor Doz such an important scholar. As a management scholar, he is embedded in the tradition that he calls the phenomenon-driven approach to the MNC, and the distinct characteristic of most of his work is its grounding in the real world of organizations. However, the models with which he is most associated also display solid theoretical bases, removing them from the realm of small sample, case-based, observational empiricism, and providing the resonance for other studies that have made them classic. As one example, the Integration–Responsiveness model (Doz et al., 1981) is closely tied to observation of the strategies used by firms in different industries to pursue international markets. However, it also incorporates Industrial Organization theory to establish how the Structure-Conduct-Performance paradigm plays out in the international realm.

Firms competing in national contexts other than their own suffer from “the liability of foreignness” (Zaheer, 1995). This liability stems from their lack of in-depth knowledge relating to economic, cultural, social, and political factors that influence the operating environment in these countries. Without such knowledge, firms will incur greater risks than local firms who have detailed understanding of these factors, or other firms with more experience in such environments, thereby putting them at a competitive disadvantage. To compensate, firms expanding internationally need to develop, leverage, and deploy capabilities that provide them with advantages unavailable to their local competitors. For this reason, national context has been the foundation on which past theoretical treatments of the MNE rested, greatly influencing the formulation of international strategy.

The traditional view of the multinational firm, from the early analyses in the 1960s and early 1970s, is one of a large industrial company with operations in multiple countries and a centralized chain of command. By definition, a multinational firm has activities in more than two countries. Although this simple definition is not widely used, it is a reasonable baseline from which to begin thinking about such firms. If the firm has sales operations in multiple countries, production in multiple countries, or some other permutation of international business activities physically present in multiple countries, then it is multinational.

The increasing pace of global competition has recast the balance between multinational corporations’ (MNCs’) needs to protect the knowledge that underlies their competitive advantages and their needs to continually create new knowledge. This essay will discuss MNCs’ knowledge-seeking strategies as industry-level phenomena. I will argue that knowledge-seeking strategies demand a concept of industries both as arenas for competition and as global knowledge networks within which firms collaborate to innovate. Contemporary MNCs face challenges to function not only as self-contained production systems that internationalize in the search for efficiency and markets, but also as open systems globally seeking knowledge and innovations. Metanational strategies and organizations represent a new response to these challenges. I present empirical evidence of distinctive metanational industry opportunities and organizational responses from the emergence of the global flat panel display industry. The essay concludes with a framework that outlines the characteristics of a global knowledge-driven generic strategy as an alternative and synthesis of generic product-driven strategies of cost-leadership and differentiation.

Prior research on international diversification has focused primarily on multinational enterprises (MNEs) from developed economies, such as the U.S. and other developed nations. As an increasing number of MNEs are now located in emerging economies, new theoretical frameworks are needed to better understand the motivations of these MNEs to diversify internationally. This paper contributes to the theory development of MNEs by examining the characteristics of international diversification by business groups from emerging economies. Using the resource-based view (RBV) of the firm and organizational learning theory, we suggest that the international diversification motives of business groups from emerging economies vary by host country context. Business groups from emerging economies are more likely to enter developed economies (rather than other emerging economies) when their primary aim is exploring new resources and capabilities, and more likely to enter other emerging economies (rather than developed economies) when their primary aim is to exploit existing group resources and capabilities. We also suggest that these motives influence business-group performance. We identify two important moderators of these relationships: product diversification and social capital. Because of the importance of the business-group organizational form in emerging economies, understanding business-group international diversification may lead to improved MNE theory.

Yves Doz, Jose Santos, and Peter Williamson’s (2001) book about metanational processes emphasizes entrepreneurial behavior and briefly considers what they call metanational upstarts. We extend their exploration in this article through our focus on the rapid internationalization of new ventures. We present a multilevel model of new venture internationalization that highlights the importance of managing risk. The model specifies relationships between the general environment and venture entrepreneurs that are mediated by industry conditions, and relationships between industry conditions and the venture that are mediated by the decisions and actions of entrepreneurs. Complex interactions and simultaneous relationships are described among the entrepreneurs, the venture, and venture internationalization.

The costs of doing business abroad (CDBA) is a well-known concept in the international business literature, measuring the disadvantages or additional costs borne by multinational enterprises (MNEs) that are not borne by local firms in a host country. Recently, international management scholars have introduced a second concept, liability of foreignness (LOF). There is confusion in the two literatures as to the relationship between CBDA and LOF, as evidenced in a recent special issue on liability of foreignness (Journal of International Management, 2002). We argue that LOF stresses the social costs of doing business abroad, whereas CDBA includes both economic and social costs. The social costs arise from the unfamiliarity, relational, and discriminatory hazards that foreign firms face over and above those faced by local firms in the host country. Because the economic costs are well understood and can be anticipated, LOF becomes the core strategic issue for MNE managers. We argue that the key driver behind LOF is the institutional distance (cognitive, normative, and regulatory) between the home and host countries, and explore the ways in which institutional distance can affect LOF. We operationalize our arguments by showing how institutional distance and liability of foreignness can provide an alternative explanation for the MNE’s ownership strategy when going abroad.

Few studies have explored how multinational firms (MNCs) use their experience when expanding abroad. According to the “knowledge projection” model of the MNC, appropriately disseminating industry experience, country experience and mode experience can a priori increase the chances of success of new subsidiaries. However, with inconsistent findings, prior research is of limited assistance in understanding this relationship. We argue that this situation can be explained by a focus on firm’s potential for experience accumulation, rather than on the actual transfer of experience. Deploying expatriate managers enable MNCs to apply organizational experience in foreign markets. It should also have an impact on foreign subsidiary’s chances of success and survival. Therefore, this paper examines how the use of expatriates to transfer experience can affect subsidiary survival.