Emerging markets, comprising countries with a rapid pace of development and government policies that favor economic liberalization, are assuming an increasingly prominent position in the world economy, in the strategic activities of multinational enterprises (MNEs), and, consequently, in international business research, offering three broad areas for consideration by scholars: (1) where firms from developed economies enter emerging economies; (2) where firms from emerging economies enter developed economies; and (3) where firms from emerging economies enter other emerging economies.Footnote 1 The last two areas of research have been of particular interest to international business scholars over the past two decades, as the rapid rise of emerging-economy multinationals (EMNEs) has prompted the question—cleverly termed “the Goldilocks debate”—of whether (a) existing theories can accommodate this class of organizations, or (b) a significant adjustment to extant theory, or even an entirely new theory, is required to explain EMNEs.Footnote 2 To date, no consensus has emerged.Footnote 3 Several authors have argued that EMNEs represent a new class of firms, and it is therefore not appropriate to view their internationalization activities, nor their broader strategy and organization, through the theoretical lenses that have traditionally been applied in the study of developed-economy MNEs. These scholars argue that EMNEs’ motivations for internationalization, patterns and speed of expansion, and ability to compete successfully in the world's richest economies despite being disadvantaged by home-turf economic weaknesses defy the conventional theoretical approaches to internationalization. John Matthews writes about multinationals from the Asia-Pacific region in particular: “Their modes of internationalizing, their reasons for doing so, their organizational and strategic innovations—these are scarcely captured by existing theories and conceptual frameworks.”Footnote 4 Others have suggested that a contemporary paradigm of extant international business theory—namely, the new internalization theory—is well equipped to describe and explain EMNE internationalization patterns: while differences associated with emerging markets are duly acknowledged, “the principles upon which internationalization takes place are no different from their advanced economy counterparts.”Footnote 5 Yet, a third group of authors subscribes to a midpoint view: that EMNEs create “a laboratory for extending theory,” and thus, existing core theories can be applied to EMNEs provided that they are substantially revised and augmented.Footnote 6
We argue that the new internalization theory is sufficient to address the reality and complexity of MNEs from emerging economies, including both their successes and, in some cases, their lackluster economic performance. Moreover, we suggest that applying internalization theory to EMNEs highlights important ways in which we can enhance our understanding of all MNEs, whether from emerging or developed countries. Rather than a major theoretical overhaul, we need the infusion of a substantive business history perspective (and with it, some methodological rethinking) in order to better understand EMNEs. Our aim is to contribute to both the international business and business history research agendas in the realm of EMNE study. From the international business perspective, we will use historical evidence to counter erroneous assumptions about the alleged inability of internalization theory to address the EMNE phenomenon. From the business history perspective, we will advance a “transdisciplinary” research effort through linking contemporary management issues with relevant historical knowledge.Footnote 7 We will demonstrate that just as international business scholars would benefit from greater engagement with history, business historians involved in international business research could benefit from greater engagement with theory, in particular the new internalization theory—a powerful, balanced paradigm for both conceptual and empirical analysis of traditional and contemporary international business phenomena.Footnote 8
Two caveats should be noted. First, we do not claim that any international business–related theory could be applied successfully to the study of EMNEs as long as proper historical evidence is taken into account. We focus specifically on the new internalization theory as the dominant paradigm through which to explain MNEs’ international strategic governance. In contrast to conventional, mainstream internalization theory, the new internalization theory focuses on the dynamics of international governance, whereby value creation hinges on successful knowledge recombination and governance choices (e.g., foreign location and operating mode choices) are assumed to change over time.Footnote 9
Second, past excitement around the potential of EMNEs to “take over the world” has cooled off somewhat in recent years. Increasingly, scholars are pointing out that the emerging giants’ rising influence on the world stage may have been exaggerated—that their growing importance has remained largely unsupported empirically, in terms of both their alleged global reach and their long-term performance in host markets.Footnote 10 It is increasingly important that the true standing of EMNEs in the world economy be portrayed accurately, particularly in the face of Western media frenzies surrounding Chinese outward foreign direct investment (FDI).Footnote 11 Therefore, scholars in a variety of disciplines must (a) identify valid theoretical and methodological approaches to studying EMNEs and (b) view the phenomenon in its proper longitudinal, historical context.
In the following sections, we provide a brief history and overview of internalization theory. We then review the debate on the theory's capacity to address internationalization patterns of EMNEs. We demonstrate that, from a business history perspective, EMNEs are not actually a new phenomenon, and that labeling them as such obscures the true nature of their economic behavior. We conclude with a demonstration of internalization theory's applicability to a wide range of international business phenomena. We illustrate our argument by applying internalization logic to the expansion patterns of ten large EMNEs and showing that the theory's main tenets apply.
Internalization Theory: Past, Present, and Historical Significance
Characterized as a general theory of the MNE, internalization theory has guided much international business research for almost forty years.Footnote 12 First conceptualized by Peter J. Buckley, Mark C. Casson, and Jean-François Hennart, internalization theory has its roots in the work of Ronald Coase, Stephen Hymer, and John McManus.Footnote 13 Internalization theory has extended the Coasean transaction cost approach—according to which a hierarchy supersedes the market if it can organize transactions more efficiently—to the MNE, which is viewed as an internal market operating across national borders.Footnote 14 The core argument of internalization theory is that exploiting and further augmenting a firm's knowledge-based assets across national boundaries is often more efficiently undertaken internally, within the MNE hierarchy, than through the use of market mechanisms. MNE internal organization enables exploitation and further development of firm-specific advantages in intermediate products, the proprietary ownership of which helps MNEs overcome the additional costs and risks of doing business abroad, i.e., the liability of foreignness.Footnote 15 MNEs resulting from the internalization process can thus be seen as a governance mechanism for developing and exploiting firm-specific advantages.Footnote 16
The idea of idiosyncratic bundles of firm-specific advantages, which relate to special knowledge or a capability unavailable to competitors and give the MNE the potential to compete in host nations, has its origins in the pioneering work of Edith Penrose.Footnote 17 Yet, in contrast to Penrose, who believed that constraints on a firm's growth resided entirely with the entrepreneur, internalization theory ascribes a more active role to the firm's environment, seeing it as either a constraining or enabling force. The concept of country-specific advantages illustrates this perspective.Footnote 18 Country-specific advantages (e.g., natural resources, low-cost labor) reflect the attractiveness of particular locations, in both the MNE's home country and potential host countries. International success ultimately depends on the firm's ability to achieve an efficient combination of country-specific and firm-specific advantages.
Internalization theory in its current, most modern, iteration took a while to develop. Almost immediately after its inception, internalization theory was subject to a number of useful refinements and extensions, eventually forming the new internalization theory exemplified by the work of Jean-François Hennart, Alan Rugman, and Alain Verbeke, Gabriel Benito and colleagues, Shih-Fen Chen, and Peter Buckley, among others.Footnote 19 Here, the emphasis shifted from (a) explaining the parameters that would stimulate firms to expand across borders, and investigating entry mode choice, to (b) the MNE's internal organization and their network capabilities. Hennart's work focuses on managing interdependencies between economic actors located in different countries, and draws attention to the role of complementary resources of foreign actors that the MNE may require in order to enable the exploitation of its own firm-specific advantages.Footnote 20 Like Hennart as well as Benito et al., Chen recognizes the role of complementary assets controlled by host country–based economic actors in the final choice of an operating mode; Chen focuses on alternative governance choices within the MNE and the dynamics of international governance.Footnote 21
Buckley's latest work on the “global factory” is consistent with the logic of new internalization theory in that it focuses on value creation through new knowledge recombination. The global factory is a complex organizational form characterized by the simultaneous use of internalization and external contracts in multiple geographies for fine-sliced economic activities, with the goal of minimizing the sum of production and contracting costs. From a business history perspective, the global factory concept can serve as “the key to understanding the changes in, and configuration of, the global economy,” including the rising prominence of emerging economies.Footnote 22
Rugman and Verbeke offer a critical extension of internalization theory by introducing the concept of location-bound versus non-location-bound firm-specific advantages.Footnote 23 Non-location-bound firm-specific advantages (e.g., technological, marketing, or administrative knowledge) are typically developed at headquarters and are easily transferable across borders to the entire MNE network—consider Toyota's manufacturing and quality-control capabilities. Conversely, location-bound firm-specific advantages are tied to select affiliates within the MNE, whether headquarters or subsidiaries, and can include stand-alone resources linked to location advantages in home markets (e.g., a network of privileged retail locations), resources that may lose value when transferred across borders (e.g., reputational resources), and local best practices and routines.Footnote 24 The concept of location boundedness of firm-specific advantages has invited an important shift in internalization-theory thinking, from the view of the MNE as a hierarchical organization steered by a firm-level head office toward a more realistic analysis of the MNE as a differentiated network.Footnote 25
It should be noted that internalization theory scholars have a longstanding tradition of engaging with business history. First, the transaction cost internalization argument has its roots in Alfred Chandler's historical accounts of the growth of the first large multidivisional corporations.Footnote 26 Second, prominent internalization theory scholars, such as Casson and Hennart, applied the theory to vertical and horizontal integration of resource-based and manufacturing MNEs, as well as cross-border entrepreneurship, while Buckley has argued that a longitudinal, history-based approach is well suited to the study of outsourcing and international contracts.Footnote 27 Likewise, business historians have taken note of internalization arguments. In her book The Maturing of Multinational Enterprise, Mira Wilkins indicated the relevance of R. H. Coase, to whose work Robert Aliber had directed her.Footnote 28 More generally, internalization theory can offer business historians the basis for “broad theoretical claims,” whose absence is currently forming a barrier to a greater business history–international business dialogue.Footnote 29
The issue of interaction between international business and business theory has occupied the minds of scholars in both fields for decades, yet the dialogue has been complicated by significant and entrenched epistemological differences between the two disciplines.Footnote 30 Tensions stem from diverging conceptual foundations, assumptions, aspirations, objectives, and methodological approaches guiding historical and business research. Methodology poses a particularly challenging obstacle. The general preference within the field of international business for large-scale quantitative studies has created “methodological roadblocks to further interaction with historical evidence.”Footnote 31 First, this pressure for quantification has discouraged qualitative research. Second, it has facilitated a rather narrow focus on variables that could reasonably be operationalized, resulting in the majority of mainstream internalization theory studies exploring only two types of firm-specific advantages as indicators of an MNE's resource strength: (1) technological or research and development (R&D) resources, as measured by the MNE's R&D spending; and (2) the value of the company's brand, as measured by advertising intensity. Field-wide acceptance of these methodological tools has led international business research, and particularly research on EMNEs, further from history—and, we argue, further from accurate portrayals of reality.
Using the specific case of EMNEs, we show how engaging with historical evidence can streamline the field-wide theoretical approach in international business and act as a deterrent against adopting erroneous theoretical assumptions. We do not attempt to conduct a business history study; rather, we espouse “historical theorizing,” suitable here because we are investigating a managerially relevant issue undergoing continuous change.Footnote 32 To international business scholars, we demonstrate how to position and explain theoretical arguments against the backdrop of history and how an expansion of international business research's methodological toolkit may help build better theory. To historians, we show how and when business history is relevant to international business scholars and how international business theory can be helpful in explaining history.
A Quest for New Theories in the Study of EMNEs
Outward foreign investment from emerging economies is hardly a new phenomenon. In fact, the first known multinationals appeared outside of the geography associated with the modern developed world: Wilkins writes of Sumerian merchants who started stationing men abroad to receive, store, and sell their wares as early as 2500 BCE.Footnote 33 In the current era, Asian business groups have been major regional economic players for over two centuries; the Hongkong and Shanghai Banking Corporation (presently HSBC) has been running international operations since the 1860s.Footnote 34
Yet, it is the most recent wave of economic growth in emerging markets—specifically, in the past two decades—that has invited an increasing number of research studies on the topic, perhaps in part because this growth coincided with slowing economic growth in advanced markets. This scholarly attention led to a vibrant debate in the international-business scholarly community over the following questions: can extant theory explain the existence and international expansion patterns of EMNEs, and can it be used to predict their profitability and survival?Footnote 35 A sizable group of international business scholars advocate development of a completely new theory, based on the following set of arguments.
First, extant theory—and particularly internalization theory—has been accused of producing one-sided, firm-centric explanations of international business activity, to the exclusion of the role played by institutional underpinnings in shaping the business environment, strategies, and performance of MNEs.Footnote 36 The fact that EMNEs operate in an institutional environment that differs significantly from that prevailing in developed economies has been argued to justify a new, institution-based theory.Footnote 37
Second, some authors have argued that EMNEs do not possess firm-specific advantages and thus internationalize to acquire new firm-specific advantages rather than to exploit existing ones.Footnote 38 These new firm-specific advantages, acquired through international expansion, are then used as a springboard for further internationalization.Footnote 39 The fact that EMNEs essentially lack the very feature supposed to drive internalization theory–based analysis is presented as evidence that a new conceptual lens is needed through which to study EMNEs.
Third, and related to the above point, the key motivation of EMNEs to internationalize—namely, to mitigate/eliminate relative competitive disadvantages, as opposed to exploiting advantages as developed-country MNEs do—is cited as a rationale for new theory development.Footnote 40 It is argued that, in some cases, noneconomic objectives produce completely different patterns of international expansion. Chinese state-controlled MNEs that may be pursuing a sociopolitical agenda (e.g., promoting industrialization, advancing technology, defending national interests) in addition to economic goals are often cited as examples; similarly, Russian MNEs, both state-controlled and private, are known for pursuing the government's political agenda through their foreign investments, as exemplified by the number of Russian MNEs that cut economic ties with Estonia after a grave of Soviet soldiers was desecrated in Tallin.Footnote 41 In addition, the internationalization decisions of EMNEs may be driven by personal motives, e.g., Russian business tycoons seeking the prestige and political rents of joining the “global business elite”—a foreign-expansion driver that is argued (erroneously, in our view) to be inconceivable in the context of a Western enterprise.Footnote 42
Unfortunately, the above contentions may be associated with a lack of critical analysis as to the real application potential of new internalization theory and the historical perspective embedded therein. We argue that rejection of internalization theory as a general theory of the MNE stems largely from a poor or incomplete understanding of the theory or from its improper application, as we demonstrate in the next section.
Internalization Theory as a General Theory of the MNE: Uncovering the Myths
The role of home economies and home institutions. We would like to remind the reader that, according to the logic of internalization theory, the competitiveness of firms across borders is contingent on their ability to successfully recombine their firm-specific advantages with location advantages of home and host countries. Home-country location advantages (as well as disadvantages) will hinder or promote development of a particular set of distinct firm-specific advantages and will influence internationalization motives and patterns. Here again, it is useful to turn to history to trace the influence of long-term differences between MNEs’ home-country environments on internationalization paths.
Business historians of the “global economy” period (i.e., from the nineteenth century on) distinguish among three categories of home economies in terms of timing of firms’ international business activities: persistent, erratic, and latecomer.Footnote 43 Persistent investors are characterized by sustained and substantial FDI that commenced in the nineteenth century and persisted in the face of economic instability; this category includes firms from the United States and the United Kingdom as well as some smaller European economies, such as the Netherlands, Sweden, and Switzerland. Erratic investors are characterized by intermittent FDI activity and include MNEs from France, Germany, and Japan. The latecomers, which began significant international investment in the late twentieth century, include but are not limited to MNEs from emerging economies; southern European countries such as Spain and Italy also belong to this category. These differences in the timing of outward investment flows can best be understood against the backdrop of history, which helps explain national differences in terms of, among other things, economic development patterns, culture, and political environments. For example, Western Europe and the United States have historically been at the forefront of economic development; this position facilitated early outward FDI in capital-intensive manufacturing industries, typically associated with technological leadership and innovation capabilities.Footnote 44 Further, the colonial past of Great Britain and the Netherlands accounts for these countries’ “strong outward looking commercial tradition.”Footnote 45 The English and Dutch East India companies, established in the early sixteenth and seventeenth centuries, are argued to be the earliest protomultinationals, sharing many important characteristics with modern MNEs.Footnote 46 Exogenous shocks such as the two world wars explain the erratic nature of German and Japanese foreign investment patterns, while Sweden and Switzerland were able to sustain their persistent investment due to their neutrality during the wars. The revolution of 1917 in Russia, and the consequent seventy years of the communist regime, stunted the development of the Russian economy as well as the economies of the Soviet bloc and created a number of ideological, political, and economic barriers to foreign investment flows from these countries until the fall of the Berlin Wall in 1989. Similarly, the Asian financial crisis of the late 1990s halted outward international investment from the Far East.
Our point here is that EMNEs do face a unique set of historical circumstances that have affected their internationalization patterns—but so do MNEs from developed countries. Moreover, advanced home economies, just like developing home economies, vary greatly in their historical paths, determining to some extent differences in capabilities, organizational forms, and internationalization patterns of their MNEs. In this sense, a division of MNEs’ home economies into emerging versus developed adds little value, in that this division does not fully address the complexity of individual home-country influences on MNEs, nor does it correctly differentiate among MNEs based on timing of international investment (recall that some developed economies from Southern Europe also fall into the latecomer category of international investors). This complexity can be addressed, however, by turning to historical evidence on how home-country economies have influenced the specializations and capability development of firms over time.Footnote 47 These influences are viewed as country-specific advantages—or, in some cases, disadvantages—in internalization theory.
Since institutional differences between emerging and developed home economies are most frequently cited as a reason for new EMNE-centric theory development, let us address home-country institutions separately. Institutions codevelop with home economies and are naturally rooted in history. Asian and Latin American business groups, recognized as institutional void-fillers in emerging markets, were inspired by nineteenth-century European business groups that formed around European protomultinationals trading in developing markets.Footnote 48 Efforts by the Swedish government in the nineteenth century to invest heavily in literacy is related to the later emergence of world-class technical and engineering schools, thus facilitating Sweden's international competitiveness in advanced engineering. Likewise, decisions by the Indian government to invest in higher education, even prior to the liberalization of 1991, made India into the technology powerhouse that it is today, and India's 1970 Patent Act and consequent 1999 Patent Reform supported international competitiveness of the country's pharmaceutical sector by allowing Indian pharmaceuticals to engage in reverse engineering.Footnote 49 England's historical leadership in international trade, along with its technological prowess, codetermined the emergence of the London Stock Exchange as the leading capital market institution. More generally, the capital-intensive nature of resource industries that characterized early European MNEs explains Europe's well-developed capital markets.Footnote 50
Thus, institutions do not operate in isolation but rather are part of a multilayered governance system wherein microlevel actions, firm-level strategies, and macrolevel policies coexist and interact.Footnote 51 Firm-specific advantages are necessarily codetermined by the home-country institutional environment and the home institutions’ ability to promote specific functional behavior and to discourage dysfunctional behavior in economic actors.Footnote 52 Consider the commonly accepted strengths of EMNEs in building networks and operating under adverse conditions in a macrolevel context typically characterized by institutional voids. Such “general” relationships with institutions may help explain the strong competitiveness of particular industries in emerging economies. Here, institutional voids and/or biases may lead to narrow “pockets of excellence” (e.g., the information technology [IT] and software industries in India) rather than to an elusive, across-the-board competitiveness of specific emerging economies.Footnote 53
While institutional differences between developed and emerging economies do exist, they do not warrant new theory development. As noted above, these differences are embedded in the notion of country-specific advantages or disadvantages, which historically codetermine the development of firm-specific advantages in MNEs. Institutions do matter in internalization theory; they can affect additional costs of doing business abroad, and they determine individual firms’ historical paths of capability development. The above brings us to our next point: EMNEs do possess firm-specific advantages.
EMNEs do possess firm-specific advantages. The misconception that EMNEs are necessarily resource poor may stem from the aforementioned methodological trend, whereby conventional empirical studies testing internalization theory have focused on quantifying two types of resources: technology and brand.Footnote 54 In the spirit of quantitative, big-data research, technological strength is measured by the R&D investments of MNEs, while brand value is operationalized as advertising expenditures. These very imperfect proxies for a firm's true technological and marketing capabilities may, in the past, have provided a reasonable approximation for an MNE's firm-specific advantages but are largely inapplicable in the emerging-economy context, where firms may utilize completely different approaches to building technological capacity (including technology purchases and early alliance formation) and may lack a history of advertising in a traditional sense (i.e., as measured by advertising spending). Technology and branding may indeed not be critical competitive strengths of an EMNE. Yet this does not mean that EMNEs do not possess firm-specific advantages—only that their firm-specific advantages may be different from those commanded by some developed-economy MNEs. These differences are, once again, better understood against the backdrop of history.
Emerging economies’ FDI has historically been tied to diversified business groups, which were “the mainstay of multinational growth” for Asian and Latin American countries throughout the twentieth century.Footnote 55 This suggests that internationalization depended on “nontraditional” (from a mainstream internalization perspective) firm-specific advantages such as networking and contact capabilities, relationship building, social capital, and government support.Footnote 56 Further, emerging markets were not located at the technological frontier; market research and advertising industries were still in their infancy at the turn of the twenty-first century, meaning that these countries have no history of building strong brand capabilities.Footnote 57 In the absence of a strong innovation and technology base and strong brands, deployment of other, higher-order firm-specific advantages became paramount, including the entrepreneurial quality of management, research capabilities, and innovative organizational structure.Footnote 58
A substantial number of scholars have acknowledged that EMNEs do possess firm-specific advantages, which, although different from those ascribed to developed-country multinationals, can be still exploited through internationalization.Footnote 59 Firm-specific advantages mentioned include a strong understanding of customers and an ability to adapt technology to develop products for special needs; cost innovations and operational excellence imposed by scarce resources; privileged access to home-nation country-specific advantages; adversity advantage (i.e., the ability to effectively function in difficult conditions); networking skills and political know-how; and fewer core rigidities and greater entrepreneurial freedom when compared with large, established MNEs.Footnote 60
Yet the argument that the different nature of firm-specific advantages requires a new theory with which to study EMNEs is deeply flawed. The EMNE firm-specific advantages listed above are examples of higher-order firm-specific advantages, referred to in the new internalization theory as recombination capabilities: that is, capabilities to recombine existing and accessed resources across borders in a way that creates value for the MNE.Footnote 61 The specific nature, or type, of firm-specific advantage, and the specific geography of the home economy, appear less important than the ability to engage in resource recombination. Historically, Japanese firms have had advanced capabilities in manufacturing systems and quality control. British firms, which business historians argue have had “a bias towards branded consumer goods from the late nineteenth century,” have honed their branding skills over time.Footnote 62 American firms’ historical preeminence in electronics explains the technological strength of U.S.-based MNEs. Sweden's historical emphasis on innovation, as noted above, has gradually turned the country into one of the world's innovation hot spots, home to such high-tech leaders as telecom software provider Skype and Minecraft creator Mojang (both subsequently acquired by Microsoft).Footnote 63 Yet it cannot reasonably be argued that a distinct, new theory must be crafted and applied separately to each of these countries in order to understand MNE internalization patterns. Rather, we need to, first, apply a general, parsimonious theory with high predictive capacity in order to explain and predict firm behavior based on the nature of its firm-specific advantages and the home- and host-country-specific advantages the firm can access and, second, study business history to understand why and how these firm-specific advantages and country-specific advantages have come to exist.
Motivations for internationalization are addressed in the context of recombination. Business historians argue that the main rationale for multinationals to internationalize has not changed over centuries and typically results from a need to economize on cross-border transactions. Ann Carlos and Stephen Nicholas, in their investigation of early chartered trading companies, argue that the “giants of an earlier capitalism”—namely, the Hudson's Bay Company, the Royal African Company, the Muscovy Company, and the British and Dutch East India Companies—undertook FDI in order to overcome information asymmetries and reduce the cost of cross-border transactions and are, in this respect, analogous to modern multinationals.Footnote 64 Similarly, Geoffrey Jones and Tarun Khanna argue that British trading companies of the nineteenth century closely parallel modern emerging-market business groups in their international diversification motives; these core motives can be summarized as economizing on transaction costs in the face of: (1) asset specificity, (2) uncertainty, and (3) bounded rationality and (4) bounded reliability of actors involved in transactions.Footnote 65 However, in addition to the overarching economizing objective, international expansion decisions always serve particular strategic goals (i.e., a search for strategic assets, new markets, efficiency, or natural resources), which then lead to particular desired firm-specific and country-specific advantage combinations, as well as to subsequent location choices and governance decisions.
In this context, Mauro Guillén and Esteban García-Canal summarize nine motivations for FDI by EMNEs, as documented in the literature: backward linkage into raw materials; forward linkage into foreign markets; escape from home-country government-imposed quota allocations and export restrictions; spreading of risk; movement of personal capital abroad; following a home-country customer to foreign markets; investment in new markets in response to economic reforms in the home country; acquisition of intangible firm-specific advantages; and exploitation of intangible firm-specific advantages.Footnote 66 A close look at these “unique” motivations, however, reveals that (1) they are found in developed-economy MNEs as well—consider the pursuit of noneconomic goals by family firms, or the tendency of American and European banks to “follow the customer abroad”—and (2) these motivations fit into the four main foreign-expansion motivations described in the extant mainstream international-business framework: strategic-resource seeking, market seeking, efficiency seeking, and natural-resource seeking, as shown in Table 1.Footnote 67 Whether or not EMNEs need to upgrade their capabilities while achieving their international expansion objectives is a matter of matching firm-specific advantages with country-specific advantages—and is addressed fully by internalization theory.Footnote 68
Table 1 EMNE Motivation for International Expansion versus Existing Motivation Framework
Sources: John H. Dunning and Sarianna M. Lundan, Multinational Enterprises and the Global Economy (Cheltenham, U.K., 2008); Alain Verbeke, International Business Strategy (Cambridge, U.K., 2013); Mauro F. Guillén and Esteban García-Canal, “The American Model of the Multinational Firm and the ‘New’ Multinationals from Emerging Economies,” Academy of Management Perspectives 23, no. 2 (2009): 23–35.
The Case of World-Class Emerging Multinationals
To demonstrate the validity of the conceptual perspective developed above, we now turn to an analysis of the expansion trajectories of real-world EMNEs. We investigate whether EMNEs indeed possess firm-specific advantages, whether these firm-specific advantages are similar to or different from those of developed-country MNEs, and whether EMNEs’ supposedly unique motivations to internationalize indeed create distinct internationalization patterns. In the previous sections of this article, we used historical evidence to argue that principles of internalization theory hold for EMNEs. In the following sections, we apply these principles based on contemporary EMNE data to observe whether internalization predictions still hold.
As a starting point for our analysis, we looked at the twenty-five “world-class emerging multinationals” described in Antoine van Agtmael's classic book.Footnote 69 We then assessed the list of EMNEs to determine (1) which had been the subject of detailed business-school case analysis and (2) for which we could find additional, publicly available information to supplement case data. This led to the inclusion of ten EMNEs in our analysis: five based in Asia and five headquartered in the Americas. Table 2 lists the EMNEs studied, including the age and a brief description of each. We then analyzed a total of fifty-two formal teaching cases on the international expansion history of the selected EMNEs, supplemented by publicly available data from websites, press releases, books, news articles, and published interviews (see Appendix for the full list of cases). We looked for distinct firm-specific and country-specific advantage configurations, internationalization motives, and historical paths of firm-specific advantage development and international deployment. Combined, the materials analyzed span a period from 1868 (the year of formation of India's Tata Group, the oldest company in the sample) to the present.Footnote 70 Our primary focus, however, is on the last two decades—the period corresponding to increased international activity of EMNEs.
Table 2 List of EMNEs Analyzed
Firm-specific advantages. Our reading of the data clearly showed that all ten EMNEs possessed firm-specific advantages beyond access to home-country location advantages. Some firm-specific advantages were indeed based on preferential access to home-country location advantages (e.g., Infosys's and Tata's access to top engineering talent and cheap skilled labor in India; Concha y Toro's proximity to Chile's unique terroir and ideal conditions for winemaking). Yet the EMNEs in our sample relied on complex bundles of firm-specific advantages, whose paths of development were historically determined both by economic, political, institutional, and cultural landscapes of their home countries and by the firms’ own idiosyncratic characteristics. Starting with location-bound firm-specific advantages, we observed the following (described in a stylized fashion because of space constraints) as being most instrumental to domestic competitive success: embeddedness in local networks, including extensive distribution and sales networks; government connections, meaning ownership ties and/or extensive support; and knowledge of local markets and corresponding responsiveness to local consumer needs.
While the above location-bound firm-specific advantages accounted for the domestic success of EMNEs, non-location-bound ones were important to successful international expansion. We identified the following non-location-bound firm-specific advantages in our sample:
Entrepreneurial agility. Infosys's innovative model for delivering IT services and Haier's superior ability to identify and quickly fill vacant market niches stand out in respect to entrepreneurial quality of management.
Commitment to innovation. Embraer is known worldwide for its technological expertise and engineering prowess. Tenaris invests heavily in R&D. CEMEX has a long history of nurturing innovation, in both products and processes; its management claims to have a “technology fetish.”
Local responsiveness/flexibility. Beyond simple knowledge of local markets, this refers to specific processes and routines in place to respond to changing needs of diverse customer groups, within or outside of the home country. Tata routinely adapts its products and services to serve a particular client group. Haier translates its market research capabilities into product modifications in various markets. CEMEX has successfully combined a global business model of standardized processes and systems with serving the specific needs of local customer groups. Lenovo responds quickly to local market demands with product customization. Petrobras stands out from other state-owned oil companies in Latin America through its flexible and responsive management structure.
Access to a global distribution network. Haier's investment in logistics and distribution paid off in a successful global distribution system. Similarly, Tenaris boasts a sophisticated Techint commercial network—a direct global distribution program.
Higher-order management capabilities/sophisticated routines. CEMEX successfully integrated multiple international acquisitions as a result of its sophisticated postmerger integration methodology. Petrobras developed and followed an elaborate managerial decision-making process. Haier's “ZZJYT” (self-managed teams) exemplifies its innovative organizational structure, which is designed to foster entrepreneurial thinking and customer responsiveness.
In addition, we found substantial evidence of “traditional” firm-specific advantages in technology and branding in the EMNEs we studied: Tata's, CEMEX's, and Samsung's strong brands are powerful expressions of this point, as is the undeniable technological sophistication of CEMEX, Samsung, Embraer, and Tenaris. Yet, as we predicted, EMNEs’ ways of developing brand and technological strengths diverge from the traditional paths of advertising and R&D investment, due partially to the fact that emerging economies as a whole can be considered latecomers in technological and branding fields (see above). Lenovo's brand, for example, became internationally known through Lenovo's purchase of IBM's personal computing business (and the related acquisition of IBM's production lines, management expertise, and global distribution networks).Footnote 71 Concha y Toro built its world-class brand largely through developing tight relationships with distributors.Footnote 72 Likewise, Samsung's technological strength is not an exclusive result of proprietary R&D; in its early years, Samsung licensed much of its semiconductor technology and formed alliances with Japanese companies to access technological know-how. On the other hand, Embraer owes much of its technology investment to the Brazilian government's efforts to promote aeronautics. As such, our earlier contention holds: EMNEs do possess firm-specific advantages, both transferable and nontransferable. Some of these firm-specific advantages are different from those found in their developed-country counterparts, and some are very similar; however, the paths taken in developing firm-specific advantages may diverge from traditional ones (i.e., advertising and R&D investments) and therefore cannot always be measured by traditional proxies.
Recombination capabilities. In line with internalization theory's logic, the EMNEs in our sample did not owe their international success exclusively to home-nation country-specific advantages. (Haier, in fact, had an explicit strategy not to rely extensively on cheap labor as a source of competitive advantage, as low-cost advantage alone was seen as an unsustainable proposition.) Rather, competitiveness was determined by the ability of EMNEs to effectively bundle and recombine their firm-specific advantages with the country-specific advantages of home and host countries. Infosys, for example, built its entire strategic approach on recombination. Its “Global Delivery Model” involves sourcing capital from where it is cheapest, producing where it is most cost effective, and selling where it is most profitable. Likewise, Samsung was able to take advantage of its flexible manufacturing processes to establish a global manufacturing network and has a unique model for capturing and transferring knowledge among its diverse subsidiaries.Footnote 73 Tenaris gained experience in multicultural relations by navigating alliance relationships and later used this knowledge to manage its international network of subsidiaries. Haier was able to increase its host-country responsiveness by staffing its subsidiaries locally, conducting extensive market research in host countries, and entering into alliances to access relevant local knowledge. In all cases, resource recombination essentially determined the success of these EMNEs in international markets.
On the other hand, a lack of requisite recombination capabilities explains lackluster international performance. While much has been written about the explosive growth of Chinese dragons through their acquisition of foreign-owned firm-specific advantages, empirical data demonstrate that most Chinese MNEs have failed to realize stellar postacquisition performance.Footnote 74 The explanation lies in their failure to integrate acquisitions effectively and to engage in critical knowledge recombination in the postmerger stage.Footnote 75 Unlike CEMEX, whose pre- and postacquisition routines are sophisticated and deliberate, Chinese dragons internationalized rapidly while still being relatively inexperienced at integrating and managing international operations.Footnote 76 This situation is eerily similar to that of many cross-border megamergers in the developed world, described in classic international business literature.Footnote 77 The point here is that resource recombination is critical, and distance hinders recombination in similar ways for both EMNEs and their developed-country counterparts.
Internationalization drivers. Strategic-resource seeking was perhaps the most prominent initial motivation. This is not surprising given the historical context, namely, that emerging economies were late international investors, relative to Western Europe and the United States, and initially lacked a strong innovation base.Footnote 78 For example, Haier's stated objective of expansion into developed markets was to “observe, digest, [and] imitate” technology and processes. Similarly, one of Samsung's major goals for internationalization is to tap into top global talent. However, the creation of competitive advantage through firm-specific advantage exploitation and the elimination of competitive disadvantage through firm-specific advantage acquisition are not mutually exclusive. For example, Samsung was able to tap into international talent pools due to its innovative human resource management and promotion of a knowledge culture.
Market seeking was a prominent internationalization driver among the EMNEs studied. Lenovo's international expansion was a response to the maturation of the local personal computer market and increased competition from international retailers. Concha y Toro sought to escape from a small and unsophisticated domestic market for wine.
Efficiency seeking was one of the primary internationalization drivers for Infosys, which engaged in “nearshoring” by locating subsidiaries close to customers in order to serve those customers more efficiently. For CEMEX, internalization served as, among other things, a tool with which to manage the cyclical nature of the cement industry. Concha y Toro sought regions that had an attractive production capacity, allowing the company to diversify farming risk by operating wineries in various climate zones.
Finally, natural-resource seeking was a primary expansion driver for Petrobras, which sought to reach promising exploration areas in Latin America, and for Concha y Toro, which set up vineyards in Argentina due to that region's favorable farming conditions.
We have thus demonstrated that internalization theory's predictions are not affected by internationalization motives; rather, internationalization motives or bundles of motives dictate for EMNEs the location advantages sought and the location choices that follow. Further, a historical perspective on the above internationalization trajectories draws attention to the fact that internationalization is a dynamic process—in other words, “things change,” and so do motives.Footnote 79 The Taiwanese firm Acer's initial strategic-resource-seeking expansion into North America and Germany was followed relatively quickly by a range of efficiency-seeking and market-seeking investments that culminated in dozens of assembly plants and sales subsidiaries being established around the world.Footnote 80
Conclusion
Our study contributes to the fields of international business and business history in several ways. First, for the benefit of our international business colleagues, we demonstrate that internalization theory can be usefully deployed to study EMNEs, contingent upon the infusion of a business history perspective in order to understand more fully MNE behavior, whether the relevant firms originate in emerging or developed economies. Our view is that arguments against the use of new internalization theory in studying EMNEs result from an incomplete understanding of the theory and an overly narrow methodological and epistemological focus. We engage with historical evidence to demonstrate the fallacy of the idea that a new theoretical approach is required and to highlight similarities in the historical patterns and core drivers of internationalization between advanced and emerging economies. While we have positioned our arguments in a historical context, we used detailed examples from ten large, successful EMNEs to show that internalization theory predictions do hold in emerging economies.
An important insight yielded by our analysis is that distinguishing between firms based solely on their home country's current level of economic development is conceptually flawed. Both emerging- and developed-economy MNEs evolved as the products of their home economies, influenced by distinct national histories, cultures, and political environments as well as by external shocks: world wars, natural disasters, financial crises, the ebbs and flows of economic prosperity. Exploring what is different about emerging-economy MNEs led us to the conclusion that much is indeed different—not about EMNEs in particular, but rather about each multinational, whose idiosyncratic bundles of firm-specific advantages depend on the cultural, political, and economic trajectories of their home countries. Further, we concluded that the higher-order firm-specific advantages critical to a firm's international success cannot be captured through traditional research methods and proxies. A close look at EMNEs conveys a more general insight that historical evidence must be considered in order to understand multinational strategy, structure, and performance.
As such, we posit that no new theory is required to study EMNEs; rather, a major methodological rethink is recommended. This rethink will require the deployment of empirical tools uncommon in mainstream international-business research. Extant internalization theory–based empirical studies have shown that it is very difficult to capture the complex and intangible nature of higher-order firm-specific advantages through industry averages and statistical tests.Footnote 81 As suggested insightfully by Yair Aharoni over two decades ago, we would understand much more about MNEs if we relied more on the tools of the business historian than on those of the mainstream economist.Footnote 82 Whether studying EMNEs or advanced-economy MNEs, we are likely to improve the quality of our research by supplementing conventional statistical approaches with case studies and ethnographies. EMNE researchers concur that methodology is a critical issue in emerging-economy research, arguing that the historical method is the most underestimated approach, but perhaps the most valuable one.Footnote 83 Historians have identified rigorous methodologies that use historical data and may be of help to international business scholars, including qualitative and small-sample analysis, comparative analysis, and techniques for quantifying historical data (e.g., Kevin O'Rourke and Jeffrey Williamson's computational models, Charles Ragin's Boolean algebra, and Andrew Abbot's string analyses).Footnote 84
Second, we suggest to business historians that internalization theory can be useful in history research. We show how internalization theory can explain consistencies, or at least similarities, in international expansion patterns, principles, and motives across time and space. We argue that internalization theory allows researchers to bring historical information to a level of abstraction that will make history research relevant to international business scholars.
Third, and based on the above, we contribute to the dialogue between history and international business. We think that continued engagement between these two disciplines will advance our knowledge of complex international business phenomena further and faster—and will likely validate our main point that internalization theory indeed remains the general theory of the MNE, irrespective of the MNE's home country being a developed or an emerging economy.
Appendix Cases Analyzed for the Ten EMNEs
