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Emerald Group Publishing Limited
Special issue on advances in IB theory
Article Type: Editorial From: The Multinational Business Review, Volume 22, Issue 3
As the field of international business (IB) has continued to evolve, a proliferation of new theories, frameworks and concepts have been developed and applied to explain IB phenomena. While new insights and research streams are essential to the vitality of any field, in the case of IB, it can, at times, appear as if the core theories are being forgotten or overlooked at best, and misunderstood at worst. To advance our thinking about IB theory, I commissioned Professor Mark Casson, one of the originators of the theory of the multinational enterprise (MNE), to invite and referee a set of state-of-the-art papers on this topic.
We did so because this journal has as its focus the MNE, the study of which has been the catalyst for the field of IB since the publications by Hymer (1960/1976), Buckley and Casson (1976) and Rugman (1981), as well as others. From such publications, internalization theory is recognized as the general theory of the MNE. In this special issue on the theory of IB, we are pleased to help refocus the field of IB on core theories by publishing five papers which revisit, consider and explain the MNE and the importance of internalization theory to its analysis.
The first paper by Mark Casson serves to offer an overview of the themes that are carried through the other papers in this issue. Casson argues that the economics-based theory of the firm, transaction costs and internalization theory, has been employed by researchers to explain particular actions of MNEs, e.g. entry mode choice, but has been eschewed in favor of alternative explanations for other questions. The paper revisits the Coasian explanation of the firm and discusses the conditions under which firms are established and eventually fail, and the associated economic costs that explain the behavior of MNEs.
While touching on a number of topics that explain the existence and growth of firms, including international production, Casson identifies the key additions to the Coasian theory of the firm that are crucial to the field of IB: knowledge (technological capability) and managerial capability. That is, the MNE exists primarily due to internalization of technological knowledge due to the public-good nature of knowledge, but the internationalization of the firm may be limited by the location-boundedness of complementary knowledge, e.g. the firm possesses local market but not foreign market knowledge. Likewise, a firm’s international growth is constrained by the managerial capabilities present within the firm to deal with the “complex division of labor” that accompanies both large size and geographic dispersion.
The subtext of this paper’s analysis of the economic theory of the firm is that IB researchers have too often strayed from internalization theory, which is a sound, integrating theory of the MNE, in favor of theories du jour, and in doing so have not only lost sight of the fundamentals, but have contributed in creating a hodge-podge of analyses of the MNE that weakens the field.
The second paper by Peter Buckley is important in two respects. First, it reviews the origins and evolution of internalization theory and illuminates the rationale for the theory as the general theory of the MNE. Equally as important, the paper engages with several generally accepted extensions of internalization theory, as well as contemporary concepts in IB research. The main thrust of the paper is that many other theories and concepts explaining multinational activity either have inherent weaknesses or can be explained by internalization theory, and the theory remains and will remain relevant to our analysis of the strategy and activity of MNEs.
Perhaps the most provocative assertion by Buckley is that a focus on ownership advantages and control is misplaced in explaining MNE activity, as control may be exercised without ownership. The subtlety of this point should not be misunderstood. A fundamental pillar of internalization as a general theory of the MNE is that firm-specific advantages (FSAs) are innovated within the firm, i.e. firm competitiveness is linked to advantages of innovation internalized in response to market imperfections. Thus, the concept of ownership advantages should not be separated from the concept of internalized advantages. Indeed this can be extended to Buckley’s engagement with “dynamic capabilities”, a concept which he argues is redundant to internalization theory, as the theory already explains the need to continuously innovate and internalize the results of innovation.
Finally, Buckley elaborates on the continued robustness of internalization theory going forward, showing how this general theory of the MNE is an essential component for new areas of research, including multinational networks, emerging market MNEs, topics in economic geography and the global factory, among others. In sum, internalization theory has been, and remains, a powerful and flexible foundation for the analysis of MNEs.
The third paper in this issue by Verbeke, Zargarzadeh and Osiyevskyy considers theoretically, and then empirically, the concept of international new ventures (INVs). A large literature surrounding this concept has developed in recent years, but further explanation of an INV is clearly needed. As internalization theory is the general theory of the MNE, its existence can be explained by the FSAs it develops at home and transfers abroad and its location-bound and non-location-bound (subsidiary-specific) advantages developed abroad. The concept of INVs calls into question what, exactly, the FSAs of a new venture are.
This paper sheds light on this conundrum theoretically be arguing that the FSAs of an INV lie in the characteristics of the founder. Specifically, the basis of the FSAs for INVs is in the entrepreneurship of the founder and other complementary, advantageous characteristics, e.g. the advantages of being an immigrant entrepreneur. This paper then tests whether these FSAs have an effect on the internationalization of the new venture, finding that immigrant entrepreneurship, number of other businesses created and education level are positively related to early internationalization of new ventures.
This is an important paper in that it identifies the FSAs of INVs using an internalization approach and finds the empirical relationship between those FSAs and internationalization.
The fourth paper by Scalera, Mukherjee, Perri and Mudambi is a longitudinal study of the evolution of innovation and its geographic dispersal of the Goodyear Tire and Rubber Company. Goodyear makes an interesting case study, as it operates in a mature industry, and this paper reveals the changes that have occurred in the nature and location of its innovation over the period of 1975-2005, a period in which substantial changes have occurred within the industry.
The first two papers in this issue have already underscored the importance of innovation to MNEs, and, thus, this case study complements those theoretical papers by applying an internalization theory lens to issues of time and space for innovation capabilities of firms.
This paper uses patents and trademarks as proxies for innovation, as, indeed, they can be seen as outputs of innovation activities. In doing so, it reveals the evolution of the type of innovation undertaken as well as its location. The authors find that, over the period in question, there is an increasing emphasis in design patents and trademarks, leading to the conclusion that Goodyear has evolved from featuring basic, technology-based capabilities to developing marketing-related capabilities for competitiveness. This also indicates the codification of knowledge that may previously have been tacit and, thus, hard to identify or measure. The authors also find that while the Akron, Ohio home base of Goodyear remains an important locus of innovation, the patent activity of the company is increasingly connected to foreign locations, primarily the Luxembourg innovation cluster, but also to others.
This case study is a useful exercise which sheds light on highly relevant issues of time and space for innovation activities of MNEs. Indeed it gives evidence not only of the development of new FSAs of MNEs, but the development of capabilities within subsidiaries of the MNE.
The last paper, by Hutzschenreuter, Kleindienst, Grone and Verbeke, draws attention to an area of research that has perhaps received less scrutiny than others. The paper leverages prospect theory to explain the strategic responses of firms to competitive threats in their home market from foreign firms. The authors develop a new conceptual model to propose that firms’ strategic responses will differ based on how they frame the possible strategic choices, and as a result will choose different diversification strategies depending on whether the threat comes from imports or foreign direct investment (FDI).
Based on a panel of US firms over the period 1983-2000, these authors find that firms choose different strategies to address threats from imports than from FDI. In particular, they find that in the face of import threats, firms tend to reduce diversification and concentrate on their core products and markets, as this is perceived to capture “sure gains”. Conversely, in the face of competitive threats from FDI, firms will diversify further (both geographically and by product) to respond to perceived “sure losses” that would occur if the status quo is maintained. In other words, import threats spur risk avoidance, while FDI threats encourage risk-seeking.
This paper is an interesting contrast to the economics-based focus of the others in this special issue, as it uses prospect theory to explain firm behavior. While prospect theory takes a behavioral perspective, it uses a different, but complementary, lens to examine the strategic decisions of MNEs, and other firms affected by IB.
Alan M. Rugman - Editor-in-Chief
Daniel E. O’Connell - Editorial Assistant