Dynamics of Globalization: Location-Specific Advantages or Liabilities of Foreignness?: Volume 24

Christian Geisler Asmussen is an assistant professor of strategic management and international business at the Department of Strategic Management and Globalization, Copenhagen Business School. His research revolves around globalization and the international expansion trajectories of multinational corporations (MNCs). Drawing on a background in formal economics but applying a multi-disciplinary approach to his research, he has focused in particular on the interaction between competitive advantage and geographic scope. His work has appeared in the Journal of International Business Studies, Management International Review and International Business Review. He also serves as an ad-hoc reviewer on numerous international journals including the Strategic Management Journal, Strategic Entrepreneurship Journal and Journal of Management Studies, and on the editorial review boards of Management International Review and Multinational Business Review. Christian received his PhD from Copenhagen Business School in 2007. In relation to his dissertation, he has been awarded the Barry M. Richman best dissertation award from the Academy of Management, the Haynes Prize for most promising scholar from the Academy of International Business, as well as several prestigious prizes from the Danish research community. He has been a visiting scholar at Indiana University, University of Victoria, Duke University and Temple University.

The first part of Volume 24 contains our annual feature from a leading scholar. Professor Stephen Kobrin was the recipient of the 2010 Booz & Co./strategy+business Eminent Scholar in International Management Award, given by the International Management Division of the Academy of Management, and in his acceptance speech gives us his view on the evolution of the nation state and global governance. This is a particularly salient introduction to this volume as Professor Kobrin's work very neatly addresses the question of what is the role of location when political power is now spanning traditional locational boundaries. Jonathan Doh and Ruth Aguilera provide commentaries that integrate Kobrin's work with that of stakeholder theory and transnational governance.

The Booz & Co./strategy+business Eminent Scholar in International Management is an annual award given by the International Management Division of the Academy of Management and sponsored by Booz & Co./strategy+business.

Virtually all of the literature of the MNC assumes that the modern or Westphalian international order of geographically defined sovereign states is the context in which international business takes place. I argue that we are in the midst of a deep-seated systemic transformation to a transnational or post-Westphalian world order characterized by a redefinition of space and geography, the fragmentation of political authority and a more diffuse distinction between public and private spheres. The emergence of a transnational order will have significant implications for the multinational firm in terms of the depth of its involvement in politics and how it formulates strategy. MNCs will both be subject to and a participant in governance, the latter in terms of hybrid public–private regimes. Strategy will have to be reformulated to incorporate a non-territorial context where firms function as actors in the international political process.

Stephen Kobrin's contributions to international management scholarship are highly influential to the field as it has evolved over the past four decades. They include important insights into political risk, business–government relations, FDI theory and corporate social responsibility. His most recent work has leveraged historical perspectives to inform the emerging nature of the global business environment, with particular attention to the emergence of a globally networked economy and its implications for the range of stakeholders – business, government, non-governmental organizations and citizens. In this chapter, I reflect on Kobrin's contributions from the past to the present, summarizing some of the most important and substantial contributions and offering personal reflections on how those insights have affected the field and leading scholars within it.

This chapter is a commentary on Kobrin's essay on the current transition to the transnational era where there is a shift in the balance of power from sovereign states to non-state stakeholders and what role the multinational corporation (MNC) plays in this transition. It celebrates Kobrin's long-established scholarship and discusses his recent thinking regarding the new reconceptualization of space, the fragmentation of political authority and the intermingling of public and private spheres, in the context of transnational governance. In his essay, Kobrin raises many interesting questions and opens new avenues for inter-disciplinary research on the MNC in the up-and-coming transnational era.

As the chapters in this volume emphasize, the access to local resources in a given host country is not a free-for-all. Although the LOF has traditionally been understood as a phenomenon related to firms' performance in local markets, implicitly evoking a market-seeking motivation for entry, it applies equally well to strategic asset seeking (Dunning, 1993). Hence, foreign firms might suffer from discrimination and uncertainty relative to incumbent firms also in their attempts to get access to local resources such as labor and knowledge. The first chapter in this second section, by Nachum (‘Home-based Advantages and a Hierarchy of Location Resources: Foreign and Local Firms Dependency on Location Resources’), demonstrates these points and estimates a hierarchy of resources that differ in their degree of accessibility to foreign firms and fungibility within internal MNE networks. If the LOF thus inhibits MNEs' attempts to use LSA as a source of local competitiveness, we might assume a relationship of the form LSAM = LSA0(1 − e LOF), where e 0 captures, for lack of a better term, the local ‘resource embeddedness’, i.e. the extent to which local incumbents have an unfair advantage in sourcing LSA. These local firms, in contrast, do not suffer a penalty like the MNEs do and can freely access the local resources, so that LSAL = LSA0.

This chapter seeks to explain cases whereby locationally advantageous countries do not give rise to internationally competitive national firms, as theory suggests. Rather, foreign firms enjoy equal access to the country resources and build strong competitive position based on them. It suggests that location resources vary in terms of the extent to which foreign firms experience liabilities in accessing them, and in the ability of MNE internal networks to provide substitute for them. It introduces a hierarchy of location resources along these two dimensions and suggests that the position of resources in the hierarchy determines variations between foreign and national firms in terms of their ability to access location resources. When critical advantages are based on location resources that are high on the hierarchy, that is, are exclusive to national firms, the latter are likely to take the lead in an industry, establishing strong competitive position based on these superior resources. In contrast, when critical advantages are based on location resources which foreign firms can access on similar terms to those of national firms, or else can rely on the MNE network for their provision, the leading firms in an industry are likely to originate in multiple countries and no apparent home country effect will be observed. This chapter outlines the implications of the findings for MNE location strategies and for policy makers.

This chapter investigates the role Regional Headquarters (RHQs) play in large multinationals and probes to what degree the establishment of RHQs provides hierarchy benefits according to the M-form principles. Nine large multinational corporations (MNCs) provided the empirical setting for 55 in-depth interviews with decision-makers at corporate, regional and local levels. Case reports were developed for each MNC and the industries they operated in. Observations, company documents, detailed workshops with managers and a follow-up survey within one of the MNCs complemented the data. We find evidence for benefits of hierarchy when RHQs are introduced very much along the lines of the classic M-form organisation with product divisions. However, M-form principles are taken ad absurdum by the fact that there seems to be constant reorganisation regarding the mandates and the geographic scope of the regions. The practical implications of the chapter show that MNCs need to be aware that RHQs and the regional divisions they manage seem to be more difficult to manage in a stable way than product divisions. A clear rationale needs to underlie regional groupings to minimise instability, dissatisfaction among subsidiaries and, hence, ruptures of the M-form principles. Further research is needed to compare the stability of product versus regional divisionalisation. Future research on organisational structures should focus on firm-specific definitions of regional scope.

In our chapter, we show how internationalisation-based performance outcomes can be amended by using a Regional Headquarters (RHQ) structure. We assume that ‘transnational corporations’ (TNCs) act restrained by a so-called GLOCAL dilemma caused by a coeval need for realising standardisation advantages and ‘location-specific advantages’ (LSA). Thereby, we believe that these opportunities are not necessarily linked to the same level of geographical aggregation. We further take into account that emerging ‘liabilities of foreignness’ (LOF) exert influence on the performance effect of cross-border transactions and highlight the important role information quality plays in this context. To back our general line of reasoning, we employ the information cost approach (Casson, 1998, 1999) as theoretical frame of our chapter. This approach enhances the common one-dimensional view on transactions costs (e.g. Williamson, 1985) by understanding these costs as two-dimensional phenomenon made up of ‘observation costs’ and ‘communication costs’. Additionally, the approach explicitly considers information quality, which is useful to our analysis. Against this background, we discuss how performance effects triggered by a use of RHQ evolve subject to basic types of organisational structures used by TNCs. We contribute to business research by providing a theoretically founded and widely new performance-based angle on the RHQ phenomenon. It combines different research streams that focus influences on cross-border business activities by relying on either the idea of LOF or the idea of LSA.

To what extent, why and where do multinational companies locate divisional headquarters (DHQs) abroad? This study of 30 of the largest listed companies in Norway over the 2000–2006 period shows that foreign-located DHQs have become relatively commonplace. A majority of DHQs located abroad are outcomes of foreign acquisitions, which suggests that obtaining legitimacy from local stakeholders such as customers, employees and investors is an important motivation. We also find that Norwegian companies emphasize efficiency and value creation in their location choices, as they tend to prefer other advanced and competitive countries as hosts for their DHQs. Distance from Norway is not significant. The off-shoring of strategic units such as DHQs is a phenomenon that occurs in advanced phases of companies' internationalization, beyond the point when familiarity and proximity still are key decision-making factors.

The present study develops an international joint venture (IJV) partner selection framework to explain the choice between state-owned or privately owned local partners in the context of emerging economies. We suggest that once an IJV is selected as the mode of entry, a multinational enterprise's strategic motivations – that is, efficiency seeking, market seeking and knowledge seeking – will influence its choice of IJV partner type: state-owned enterprise or privately owned firm. We argue that liability of foreignness and rule of law moderate the multinational enterprise's selection of IJV partner type.

Location-specific advantages (LSA) and the liability of foreignness (LOF) are key concepts in international business and management research. To combine these concepts in a systematic framework, I develop a two-by-two matrix focusing on the nature of International Business (IB) research using four key terms: firm, context, comparative and interactive. This framework serves as a heuristic device in describing three main challenges IB scholars face when advancing the role of LOF and LSAs. These challenges relate to our understanding of the nature of relative advantage, to the development of a dynamic (so-called non-ergodic) world view and to the inclusion of the relevant spatial heterogeneity.

Liability of foreignness (LOF) is a well-known concept in international business domain. At the core of LOF is the insight that firms face social and economic costs when they operate in foreign markets. Extant literature acknowledges that the ability of firms to overcome LOF in host locations varies; however, it does not discuss the possibility that the LOF itself could vary for different firms at the same location. We extend this literature by examining how a firm's interaction with the host and the home country environments affect the LOF that it faces in foreign markets.

We argue that there are two sources of LOF – environmentally derived LOF and firm-based LOF. The environmentally derived LOF has its source in home and host country environments. Firm-based LOF, on the contrary, derives from firm-specific characteristics including ownership structure, firm-specific resources, learning and network-based linkages such as affiliation to a business group. Furthermore, we argue that both the environmentally derived and the firm-based LOF are different for emerging market (EM) firms as compared to developed market (DM) firms. We develop testable propositions about how environment-specific and firm-specific factors affect LOF and suggest directions for future research.

This chapter provides a logical extension to the understanding of firm-specific advantages and disadvantages and the enabling role of existing and emerging country-specific advantages relevant to the process of Chinese firm internationalization. Its longitudinal perspective considers the changing objectives and actions of firms that enable them to compensate for disadvantages and create new or strengthen existing competitive advantages. The case study evaluation reveals that the evolution of strategic resources is the key motivator behind the internationalization of Chinese firms. Decisively encouraged by the Chinese government firms with corporate entrepreneurship aspire to alter themselves from home market leaders and regional players into globally competing multi-nationals. This process is made possible via the development of firm-specific advantages and continuous compensation for firm-specific disadvantages. The aspiration for strategic asset acquisition from developed countries combined with cost leadership and independent customer-centred innovation brought about strong firm-specific advantages stimulating the internationalization process of firms. The chapter focuses on the interdependence of country- and firm-specific advantages and disadvantages, thus recognizing the significance of the home country institutional context in Chinese outward foreign direct investment. It has been identified that corporate entrepreneurship is a significant firm-specific advantage for firm internationalization being a major force in gaining, accumulating, utilizing and leveraging resources for transforming firm-specific disadvantages into advantages. We argue that if the relational framework between governmental institutions and firms is more developed, the impact of country-specific advantages on firm-specific advantages is more favourable. This assumes that the government espouses an ideology that is favourable to corporate entrepreneurship.

Existing research in firm internationalization tends to adopt the perspective of relatively fixed country specific advantages and disadvantages. However, firms operating from small developing countries may experience rapidly shifting country-specific advantages due to industrial policy interventions. These changes influence the internal configuration and, ultimately, the internationalization paths of firms, a factor that is not captured by current theory. Using a combination of a country case study and nested multiple firm cases, data were collected on how organizations internationalized from Trinidad and Tobago, a small developing country. Unlike the relatively deterministic outward patterns predicted by existing theories, analysis revealed both evolutionary and co-evolutionary trajectories of development. These outcomes suggest that as a country moves to more open economic environment, network connections in the form of supplier and institutional relationships are of increased value for firms seeking to enter external markets.

The aim of the chapter is to identify the internationalization models of SME industrial district firms within a very integrated and dynamic Regional Innovation System (RIS) of Italy. By doing so, we investigate which are the strategies of firms embedded in a RIS to access global suppliers and markets. Accordingly, this chapter explores the role of SMEs firms' dynamic capabilities, its linkage with the industry investments in ICT (information and communication technologies) and the impact of the utilization of regional knowledge intensive business services (KIBS) in shaping the degree of internationalization of local firms.

The analysis is based on a survey addressed during 2004 to entrepreneurs or managers of a sample of 125 SMEs firms operating in 7 industrial districts (biomedical, ceramics, shipbuilding, footwear, textile, plastics and packaging) of the Emilia Romagna.

The results coming from a structural equation model revealed factors that impact on firms' degree of internationalization in the input (relocalization of foreign purchases through global value chains) and in the output dimension (export sales). Some interesting insights on what lies beneath the internationalization of firms in a very dynamic regional innovation system like that one of Emilia Romagna are provided.

The chapter adopts the international production typology offered by the OLI paradigm whereby firms are classified principally as market seekers, efficiency seekers, natural resource seekers or partner seekers. These motives to reach overseas are tested against 26 location factors, categorised under ‘business climate’, ‘market conditions’, ‘local resources’ and ‘incentive packages’, and three sets of control variables: industry, age and entry mode. The empirical analysis based on firm-level data from 15 sub-Saharan countries shows that, for all types of firm, the presence of local markets, regional markets and key clients are the positive determining location factors, followed by business climate factors, such as labour costs, the availability of skilled labour, raw materials and local suppliers. For market-seeking MNEs, the political and economic stability, infrastructure, country's legal framework and the transparency of investment all rate high. Importantly, the implication for host-nation promotion agencies is that once the motive to enter their economies is clear, they can – and should – play a skilful negotiation game with MNEs at the entry point itself. Based on the empirical analysis, a conceptual two-step approach to understanding FDI decisions, intimately linked to the liability of foreignness concept, is suggested.

The purpose of this chapter is to contribute to research in the field of international entrepreneurship by complementing existing levels of analysis with a network perspective that captures how the pursuit of international opportunities at the foreign market level unfolds through processes ingrained in the network structures that firms are embedded in. By performing a multilevel review of 50 studies within the international entrepreneurship research field, the chapter contributes with an analysis of the evolvement of the international entrepreneurship field between the years 1994 and 2010, a discussion of the field's current status and where it is going from here. The results of the review show that whereas early work in the field of international entrepreneurship is primarily concentrated on individual entrepreneurs or individual firms, network-level-focused studies dominate among the later publications. Studies that adopt explicit network approaches have the potential to contribute to international entrepreneurship research by being able to shed light on the actual mechanisms and processes by which foreign market opportunities are exploited.

This research examines the differential impact of the importance of internally and externally sourced information and knowledge and their relationship to absorptive capacity and firm performance. In addition, this analysis deals directly with the unobservable heterogeneity amongst firms that is generally viewed as the raison d'être for a unique resource-based perspective of organizational performance. Latent class, finite mixture regression models are used that show that a single model relating knowledge sourcing, absorptive capacity and firm performance is inadequate in explaining even a minor portion of the variation which is seen between firms.

The role of knowledge, organizational learning and innovation as levers of competitive advantage is now a commonly acknowledged insight in research in international management, specifically in the emerging ‘knowledge-based view’. However, this view has not yet developed into a unifying framework and there are significant holes in the understanding of how knowledge may be turned into a source of competitive advantage for MNCs. In order to advance the knowledge-based view of the MNC – and particularly of the metanational company – we develop the notion of the MNC as a global knowledge system that links local knowledge structures and combines local knowledge elements that are complementary in order to achieve strategic advantage. These ideas are used to frame the changing environments, strategic intents and learning stances that characterize MNCs, and to derive a set of research challenges for MNC research.

Ruth V. Aguilera is an associate professor and a Fellow at the Center for Professional Responsibility for Business and Society at the College of Business at the University of Illinois at Urbana-Champaign. She also holds courtesy appointments at the School of Labor and Employment Relations, the College of Law and the Department of Sociology at Illinois. She received MA and PhD degrees in Sociology from Harvard University. Her research interests fall at the intersection of economic sociology and international business, specifically in the fields of comparative corporate governance, foreign location choices and corporate social responsibility. She has published in the leading journals in International Business and Management. Dr. Aguilera currently serves as a member of an associate editor of Corporate Governance: International Review and is a member of the Editorial Boards of the following peer reviewed top tier journals: Academy of Management Perspectives, Global Strategy Journal, Journal of International Business Studies, Journal of Management Studies, Management International Review, Organization Studies and Strategic Management Journal. She also serves in the board of IMDEA Social Sciences (Madrid) and CSR IMPACT Project (Brussels).