Emerging Economies and Multinational Enterprises: Volume 28

This chapter argues that international business has much to contribute to intranational business in helping develop a theory of the business enterprise in space. It makes its arguments by articulating four propositions about international business that appear to carry over directly to intranational business. According to the first three propositions, business activities of multiple types are dampened by borders and those that do cross them typically diminish with geographic as well as other types of distance. The fourth proposition supplements these general discussions of the landscape of business with a focus on a specific business application: it works through the case of business strategy by discussing how insights from the international domain can be applied to the intranational domain in that field of business.

Pankaj Ghemawat is honored not only for the breadth of his contribution to International Management as a scholar but also as an educator and passionate advocate of his ideas to practitioners. His work extends from industrial organization applications within the traditional strategy field all the way to international business insights into global strategy. The methodologies he employs straddle theoretical models, field-based cases, and even the creation of original databases. This suggests that in the hands of a true intellectual, there is value to an eclectic approach in academia. This is particularly true since the key insight of Pankaj’s work is that differences among countries remain central to global strategy and that it is those differences that can be arbitraged into competitive advantage.

This essay is a commentary on Ghemawat’s work on the reality of semiglobalization and its relevance to the International Business (IB) field and to the world of practice. It recognizes Ghemawat’s contributions to the IB field – at par with his earlier contributions to the competitive strategy area and highlights Ghemawat’s emphasis on well-grounded empirical research. This approach serves well to establish the case that markets are semi-integrated, and the world is semiglobal. Through his work, Ghemawat has brought back to center stage a central premise of the IB field: that locations and distance across locations matter.

Do multinational enterprises evolve differently in emerging and developed economies? Although one camp argues that emerging economy multinationals are different from their developed country counterparts owing to the underdeveloped institutions in their home countries, another camp counters that they are the same and the existing international business theories can fully explain their strategies. A third camp suggests a more nuanced perspective by finding value in both approaches. In this introductory chapter, we review this debate and offer new perspectives on how to extend existing theories by accounting for four specific aspects of the home country institutional environments of emerging economies: breadth, depth, timing, and duration of exposure to institutional development. We then discuss how the chapters in this volume extend these ideas.

I study the relationship between pro-market reforms and the expansion of emerging market multinational companies (EMNCs). Extending institutional economics, I propose a co-evolutionary process, whereby pro-market reforms in emerging markets induce the transformation of domestic firms into EMNCs, and the global expansion of EMNCs in turn facilitates the deepening of pro-market reforms in the home country. Specifically, I first explain how pro-market reforms lead to the emergence of EMNCs via international competitiveness, upgrading needs, and escape; I then explain how the global expansion of EMNCs leads to a deepening of pro-market reforms at home via learning, spillovers, and lobbying. I complement these explanations with a discussion of contingencies at the firm (private vs. state, domestic vs. foreign firms), industry (global vs. local industries), and country (developing vs. transition countries) levels.

Our study proposes a resource environment view (REV) of competitive advantage by unpacking the environmental origins of a firm’s competitive advantage. The key tenet of the REV is that the heterogeneity and imperfect mobility of strategic factor markets and institutions across countries explain how firms based in different countries would likely both create and sustain a competitive advantage. In particular, our study introduces the notion of “the paradox of environmental embeddedness.” The paradox lies in the fact that the same environmental conditions – in terms of strategic factor markets and institutions – that enable firms to create a competitive advantage can paradoxically also create a situation in which it is more difficult for these firms to sustain an advantage. Another important aspect of our study is that, to enhance our understanding of how firms manage the paradox of environmental embeddedness, our study specifies the resource environmental conditions under which firms’ internal and external resource-oriented strategies – that is, the development of dynamic capabilities and interventions in the country resource environment – are more beneficial when managing the environmental paradox. Overall, our theorizing has important implications for strategic management theory and practice.

We question whether the Chinese state has played an effective role in promoting outward foreign direct investment via its “Go Global” policies. Using the literature in International Management as our framing, we observe three inter-related stylized realities. First, it is state-owned enterprises (SOEs) – not private enterprises – that tend to principally benefit from the favorable “Go Global” policies. Second, SOEs tend to pay much higher acquisition premiums in outward FDI as compared to non-SOEs. Third, SOEs tend to be less effective as compared to non-SOEs in gaining synergies and enhancing competitiveness as a result of these cross-border experiences. These results yield clear policy implications for the Chinese government: first, more effective public policy would involve enhanced targeting of private enterprises as the recipients of policies promoting outward FDI; second, the Chinese government should continue along the path toward privatization of SOEs. The continued bolstering of economic and social development in China is contingent upon efforts to reduce the state’s active role in outward FDI.

This paper examines the extent to which different sources of ideas for innovation are associated with novelty of innovation outcomes. We measure the novelty of product innovation using three well-established categories, ranging from highly novel new-to-world products to new-to-firm products that are essentially imitative, with products that are new-to-country (but not the world) being an intermediary category. In turn we investigate how knowledge derived from different external and internal (within-firm) sources of ideas can help firms increase innovation with different degrees of novelty. Our empirical analyses are conducted on a large sample of manufacturing firms from the South American emerging market of Colombia and show that many of the same sources of knowledge – such as scientific sources, production departments and managers – are associated with higher innovation in all three categories of novelty. However, some sources – notably external clients and internal interdisciplinary groups – are more significantly associated with more novel innovation than imitation. The implications of these findings for the literatures on innovation and imitation, and innovation by emerging market firms are discussed.

To investigate the impact of knowledge-intensive FDI in the Chinese pharmaceutical industry, this study analyzes the activity of foreign MNEs operating in this context by exploring their innovative background, the organizational arrangements they use for local knowledge creation and the performance of their local innovative processes. Based on the analysis of the universe of USPTO pharmaceutical patents applied for between 1975 and 2010 and granted to foreign assignees utilizing the work of Chinese inventors, our results show that, while the presence of foreign MNEs in the Chinese pharmaceutical industry entails a strong potential for positive externalities that could enhance the performance of the local innovation system, such externalities do not completely materialize yet, likely because of local actors’ limited absorptive capacity.

Despite the growing interest in IJVs and their governance, systematic research is limited on the board of directors and their roles in international joint ventures in emerging markets. In this study, we draw from corporate governance research that suggests that the levels of control and collaboration by boards are influenced by organizational complexity. While joint ventures possess several similarities compared to unitary firms, they also have unique sources of complexity given the fact that two or more international partners collaborate within JVs under an incomplete contract. Based on a sample of 114 IJVs, we argue and show four separate conditions that influence the functions that boards undertake as well as how control and collaboration as two separate functions are interrelated. Our findings address calls for research to open the black box of what boards actually do as well as to bring corporate governance theory to new organizational forms such as joint ventures.

The extant literature on emerging market multinationals (EMNEs) suggest that they derive their advantages from factors such as economies of scale, and that they internationalise, in large measure, to access technology. However, support for this framework typically comes from analysis of static data, comparing EMNEs and OECD MNEs at a point in time. Little attention is paid to their development paths in a dynamic setting. We examine these propositions directly using an approach that enables us to decompose productivity growth of firms into its components, namely, changes in scale economies, technological progress and technical efficiency. We compare Chinese MNEs with their non-MNE domestic counterparts and developed country MNEs that have operations in China. We demonstrate that Chinese MNEs continue to derive much of their productivity growth from changes in scale economies, while developed country MNEs continue to have an advantage with respect to technical progress. Both these types of MNEs have a significant advantage over Chinese non-MNE domestic firms.

This study researched how corruption affects the attraction of foreign direct investment (FDI). With the help of a qualitative methodology, the results of the analysis show that firms headquartered in countries where corruption is high have an advantage when operating in a foreign country with a similar institutional environment. The reason for this advantage is that such firms may possess knowledge of how to cope with the arbitrary and pervasive dimensions of corruption at home. On the other hand, firms from countries with lower corruption levels than the host country are more affected by corruption in a highly corrupt host country. Finally, even though this study found evidence that all firms operating in a highly corrupt country might participate in corrupt deals, those headquartered in highly corrupt countries are more willing to do so. This claim is based on the fact that firms from less corrupt countries might face stronger pressures from their headquarters to not engage in corrupt deals, whereas firms from more corrupt countries might not encounter such pressures.

One of the more important and interesting phenomena in international business in recent times is the upgrading and catchup of firms from emerging economies. How do these firms upgrade and catchup? This paper reviews and synthesizes the literature on upgrading and catchup by emerging economy firms and develops a model and testable propositions to advance research on the topic.

Despite the seminal works of authors like Bartlett, Ghoshal, Nohria, Doz, Williamson, among others, because they focused on mature multinationals, newcomers in international markets find scarce information about the design and implementation of international operations networks. In this paper we analyze the internationalization process of Brazilian and Chinese firms to understand the evolution of their networks, a process influenced by factors inexistent in studies about developed country multinationals, namely global production networks (GPNs) and country-of-origin effects. The key characteristics of their international operations networks seem to be well described by a stage-based approach where emerging country multinationals start as local optimizers and then evolve by taking different strategic positions within the GPN to which they are connected. That upgrading is possible when the implementation of the international operations network reaches a certain level of maturity.

We combine insights from the strategic management and international business literatures in order to explore the moderating role of business group characteristics on the link between innovation and internationalization in the context of the pharmaceutical sector in India. We test our three hypotheses on a sample of 219 Indian pharmaceutical firms affiliated with business groups, over a five-year period (2005–2010) in a panel of 1,096 firm-year observations. Results indicate that, contrary to our contention, research expenditure is negatively associated with export intensity, implying that firms in the Indian pharmaceutical sector may face a trade-off between investing in innovation and international expansion. As expected, business group characteristics significantly impact the strength of the relationship between innovation and internationalization. Theoretical and practitioner implications are discussed.

In this paper, we conduct a conceptual and bibliographic analysis of the literature that deals with the international strategy of state-owned enterprises (SOEs), with particular attention to SOEs from emerging economies (EEs). We first review the state of the art in defining the concepts of EEs and SOEs. We then conduct a detailed bibliographic analysis of the literature pertaining to SOEs’ involvement in international activities, whether as outward foreign investors or as potential local partners of inward-investing multinational enterprises. The analysis covers general trends in the literature, prominent research questions and outcome variables, use of theories, and choices pertaining to methodology (type of research and effects, empirical contexts). We document a literature that is fast-growing and well balanced in some respects. In other respects, we advance recommendations pertaining to (a) consistency and precision in the use of the concepts of “state-owned enterprise” and “emerging economy”; (b) search for specific evidence on the outward activities of EE SOEs in less-developed economies and even in other EEs, and on their performance; (c) understanding of relative propensities of local SOEs and inward investors to collaborate, and what happens when SOEs encounter each other across borders; (d) opportunities to strengthen the theoretical foundations and contributions of this research; and (e) minding the mix of home and host countries in studies and avoiding undue generalization from what has become a predominantly China-centric literature.

Outward foreign direct investments (FDI) by Turkish firms in the new millennium show intriguing geographic distribution pattern and unlike the predictions of classical theories of FDI. In this study we contribute by linking the observed pattern of outward FDI with Turkish firms’ motivation for investment across national borders. We enrich research by collecting and analyzing FDI motivation data at the firm-level for a very important but less researched developing country: Turkey. Content analysis of text material on the foreign investments made by 211 Turkish firms reveals that Turkish firms primarily perform FDI in European developed countries for reasons other than conventional, namely, market- and strategic-asset-seeking motivations. More importantly, Turkish firms seem to be using the European countries to (1) present themselves as a European Union company, (2) make use of special features of these countries to expand their businesses within and to other countries and, (3) make use of the favorable tax treatment policies available to foreign investors. Surprisingly, our analysis shows that in spite of its small size, the Netherlands is a preferred destination for Turkish FDI over other Western European countries due to its strategic location and favorable investment policies.

This paper introduces a conceptual framework to assess the foreign market entry behavior of emerging market multinationals (EMMs). By introducing strategic cognition as the underlying theoretical perspective, this paper postulates that different levels of institutional voids in home markets shape the strategic cognition of EMMs, influencing their market entry behavior due to the prevalence of organizational imprinting in the early stages of internationalization. The paper aims to contribute to the strategic cognition literature by introducing emerging markets as a relevant context in which to apply and extend current thinking. Additionally, it aims to contribute to the institutional voids literature by providing a cognitive framework of behavioral patterns that is rationalized by institutional voids. Finally, the paper contributes to the entry mode literature by proposing strategic cognition as a relevant moderator for foreign entry mode choices, particularly those of EMMs.

Emerging market MNEs often seek to advance their domestic competitive advantage through a springboard FDI strategy, which typically takes the form of an acquisition into a developed market (DM) for knowledge resources. We argue that if this strategy is effective and beneficial, then an emerging market parent firm would seek for higher ownership and control in its later domestic acquisitions. Such benefits would be higher if there are richer knowledge resources in a DM subsidiary or in a DM local network. Such benefits would also increase over time because of the accumulation of new knowledge back home. Using a sample of 1,303 complete domestic acquisitions made by 713 Turkish firms over the period of 1987–2013, including 196 deals involving a springboard FDI strategy, we have found highly supportive empirical evidence. It is found that holding a DM subsidiary by a Turkish parent firm is associated with 33.047% higher ownership in a later domestic acquisition. Both research and practical implications are discussed.