Encyclopedia of International Strategic Management (Elgar Encyclopedias in Business and Management series) 1800884036, 9781800884038

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Encyclopedia of International Strategic Management

ELGAR ENCYCLOPEDIAS IN BUSINESS AND MANAGEMENT Elgar Encyclopedias in Business and Management represent the definitive reference works in the field. The Encyclopedias present an overarching guide to a wide variety of subject areas within business and management, and form an essential resource for academics, practitioners, and students alike. Each Encyclopedia is edited by one or more leading international scholars, and contains a broad collection of entries authored by key scholars within the field that collectively aim to provide a concise and accessible coverage of the essential subjects. The Encyclopedias cover discrete subject areas across management including, but not limited to, corporate governance, strategic management, human resource management, international business, family business, social innovation, and critical management studies. Equally useful as reference tools or high-level introductions to specific topics, issues, methods, and debates, these Encyclopedias are an invaluable contribution to the field. For a full list of Edward Elgar published titles, including the titles in this series, visit our website at www​.e​-elgar​.com​.

Encyclopedia of International Strategic Management Edited by

Christian Geisler Asmussen Department of Strategy and Innovation, Copenhagen Business School, Denmark

Niron Hashai Arison School of Business, Reichman University (IDC Herzliya), Israel and Alliance Manchester Business School, UK

Dana Minbaeva King’s Business School, King’s College London, UK; and Department of Strategy and Innovation, Copenhagen Business School, Denmark

ELGAR ENCYCLOPEDIAS IN BUSINESS AND MANAGEMENT

Cheltenham, UK • Northampton, MA, USA

© Christian Geisler Asmussen, Niron Hashai and Dana Minbaeva 2024

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2023951221 This book is available electronically in the Business subject collection http://dx.doi.org/10.4337/9781800884045

ISBN 978 1 80088 403 8 (cased) ISBN 978 1 80088 404 5 (eBook)

EEP BoX

Contents

11 Cosmopolitanism 37 Orly Levy and Hyun-Jung (HJ) Lee

List of contributorsix Introduction to the Encyclopedia of International xiii Strategic Management Christian Geisler Asmussen, Niron Hashai and Dana Minbaeva

12 Country-of-origin effect Paul N. Gooderham

40

13 Cultural agility Paula Caligiuri

43

14 Deglobalization Alexander Mohr

45

3

15 Diaspora Helena Barnard

47

3 Agglomeration Miguel A. Ramos and J. Myles Shaver

5

16 Distance Heather Berry, Mauro Guillén and Nan Zhou

51

4

Asset recombination Birgitte Grogaard

8

17 Divestment Gabriel R.G. Benito and Viacheslav Iurkov

56

5

Base of the pyramid Ted London

11

60

6

Born global firms Gary Knight and Huda Khan

14

18 Eclectic paradigm Rajneesh Narula and Jong Min Lee

64

7

Business groups Ajai S. Gaur

18

19 Emerging market multinationals Alvaro Cuervo-Cazurra and Annique Un

8

Centers of excellence Mats Forsgren and Ulf Holm

24

66

9

Comparative corporate governance32 Ilir Haxhi and Ruth V. Aguilera

20 Emerging markets Alvaro Cuervo-Cazurra and Annique Un 21 Expatriation Riki Takeuchi

68

22 Firm-specific advantages Alain Verbeke and Wenlong Yuan

71

23 Foreign entry mode Christian Geisler Asmussen and Bent Petersen

78

1 Adaptation–aggregation– arbitrage (AAA) typology Bodo Schlegelmilch and Michal Lemanski 2

Added distance Thomas Hutzschenreuter

10 Comparative human resource management Chengcheng Miao and Chris Brewster

1

35

v

vi  Encyclopedia of international strategic management

24 Foreign operation modes Christian Geisler Asmussen and Bent Petersen

87

25 Foreign ownership Bersant Hobdari

95

26 Foreign subsidiary management Tina C. Ambos

98

38 Global supply chain management 144 Masaaki Kotabe 39 The global system view Nigel Wadeson

147

40 Global talent management David G. Collings and Kieran M. Conroy

149

27 Foreign subsidiary networks Ulf Andersson and Paul Ryan

105

41 Global value chains Liena Kano and Ari Van Assche

153

28 Global boundary spanners Wilhelm Barner-Rasmussen and Kristiina Mäkelä

109

42 Global virtual teams Angelika Zimmermann

157

29 Global brands Vasileios Davvetas and Constantine S. Katsikeas

112

43 Home and host country Surender Munjal

161 164

30 Global careers Margaret A. Shaffer and Mihaela Dimitrova

115

44 HRM practice transfer Kieran M. Conroy 45 Informal networks Sven Horak

166

31 Global cities Anthony Goerzen

118

32 The global factory Peter Enderwick

121

46 Integration–responsiveness framework168 Sunil Venaik, David Midgley and Timothy Devinney

33 Global leadership Mansour Javidan, Rick Cotton, Amanda Bullough, Peter W. Dorfman, Medha Satish Kumar and Carolyn P. Egri

123

47 Intellectual property rights Marina Papanastassiou

174

48 Internalization Theory Peter J. Buckley

177 182

34 Global mindset Sabrina Goestl and Martha Maznevski

127

49 International acquisitions Anna Nadolska and Xena Welch 50 International control mechanisms Emma Stendahl and Esther Tippmann

191

51 International coordination Larissa Rabbiosi

194

35 Global mobility and firm innovation130 Anu Phene 36 Global nonmarket strategy João Albino-Pimentel, Gianni De Bruyn and Yu Li

133

37 Global R&D René Belderbos and Davide Castellani

138

52 International corporate social responsibility Günter K. Stahl, Christof Miska and Mary Sully de Luque 53 International diversification Stephen Tallman

197

206

Contents  vii

54 International experience A. Rebecca Reuber

209

69 Liability of foreignness 276 Pankaj Kumar and Srilata Zaheer

55 International finance Jonas Puck, Jakob Müllner and Igor Filatotchev

211

70 Location advantages Sarianna Lundan

279

71 Metanational company Yves Doz

283

56 International HRM 218 Helen De Cieri and Karin Sanders 57 International joint ventures Andrew C. Inkpen

222

72 Migrants and migration 285 Aida Hajro and Milda Žilinskaitė

58 International modularity Renato Kogeyama, Ronaldo Parente, Gerry McDermott, Ram Mudambi and Christian Geisler Asmussen

225

73 Multicultural teams Markus Pudelko

288

74 Multiculturalism Davina Vora

291

59 International non-governmental organizations Jonathan Doh

232

303

310

240

77 National innovation systems Mario Kafouros and Eva Mavroudi

314

251

78 Not-invented-here syndrome Andrea Fosfuri and Esther Roca Batllori

317

254

79 Offshoring Peter D. Ørberg Jensen and Torben Pedersen

259

80 Organizational culture in MNEs Carl F. Fey and Yian Chen

322

235

61 International standards Joseph A. Clougherty

237

62 International strategic alliances Juliane Engsig and Bo Bernhard Nielsen 63 International trade theory Maurício Prado

65 Knowledge-seeking FDI Grazia D. Santangelo

293

76 National culture Mark F. Peterson, Sjoerd Beugelsdijk and Juliette de Wit

60 International outsourcing Sun Hye Lee and Michael Mol

64 Knowledge-based theory of the MNE Nicolai J. Foss

75 Multinationality– performance relationship Yi Li, Ruosu Gao and Vikas Kumar

66 Language in international business 264 Rebecca Piekkari 67 Learning in and by MNEs Shaker A. Zahra

269

68 Legal distance Stav Fainshmidt and Daniel S. Andrews

274

81 Organizational legitimacy and MNEs Tatiana Kostova and João Albino-Pimentel

327

82 The Penrose effect Joe Mahoney and Danchi Tan

332

83 Political conflict Jennifer Oetzel and Chang Hoon Oh

334

viii  Encyclopedia of international strategic management

84 Porter’s diamond model Christian Ketels

337

90 State-owned enterprises Randi Lunnan and Asmund Rygh

364

85 Private international law Paul M. Vaaler

344

91 Strategic asset-seeking FDI Grazia D. Santangelo

368

86 Psychic distance Douglas Dow

348

92 Structure of the MNE 373 Phillip C. Nell and Benoit Decreton

87 Regional MNE André Sammartino

353

93 Temporal distance Lilac Nachum

88 Regional strategy André Sammartino

357

94 Transfer pricing and cross-border arbitrage Lorraine Eden

89 Repatriation B. Sebastian Reiche and Mila B. Lazarova

361

95 The Uppsala model Jan-Erik Vahlne

379

382 388

Index395

Contributors

Ruth V. Aguilera, Northeastern University, USA

Helen De Cieri, Monash University, Australia

João Albino-Pimentel, University of South Carolina, USA

Joseph A. Clougherty, University of Illinois at Urbana-Champaign, USA

Tina C. Ambos, University of Geneva, Switzerland

David G. Collings, Trinity College Dublin, Ireland

Ulf Andersson, Mälardalen University & BI Norwegian Business School, Sweden, Norway

Kieran M. Conroy, Queen’s University Belfast, UK Rick Cotton, University of Victoria, Canada

Daniel S. Andrews, Georgia State University, USA

Alvaro Cuervo-Cazurra, Northeastern University, USA

Christian Geisler Asmussen, Copenhagen Business School, Denmark

Vasileios Davvetas, Leeds University Business School, UK

Ari Van Assche, HEC Montréal, Canada

Gianni De Bruyn, University of South Carolina, USA

Helena Barnard, University of Pretoria, South Africa

Benoit Decreton, Nova School of Business and Economics, Portugal

Wilhelm Barner-Rasmussen, Åbo Akademi University, Finland

Timothy Devinney, University of Manchester, UK

René Belderbos, KU Leuven, Maastricht University and UNU MERIT, Belgium, the Netherlands

Mihaela Dimitrova, WU – Vienna University of Economics and Business, Austria

Gabriel R.G. Benito, BI Norwegian Business School, Norway

Jonathan Doh, Villanova University, USA

Heather Berry, Georgetown University, USA

Peter W. Dorfman, New Mexico State University, USA

Sjoerd Beugelsdijk, University of South Carolina, USA

Douglas Dow, University of Melbourne, Australia

Chris Brewster, University of Reading, UK

Yves Doz, INSEAD, France

Peter J. Buckley, University of Leeds, UK

Lorraine Eden, Texas A&M University, USA

Amanda Bullough, University of Delaware, USA

Carolyn P. Egri, Simon Fraser University, Canada

Paula Caligiuri, Northeastern University, USA

Peter Enderwick, Auckland University of Technology, New Zealand

Davide Castellani, University of Reading, UK, and University of Perugia, Italy

Juliane Engsig, TBS Education, France

Yian Chen, Aalto University School of Business, Finland

Stav Fainshmidt, Florida International University, USA ix

x  Encyclopedia of international strategic management

Carl F. Fey, BI, Norwegian Business School, Norway

Constantine S. Katsikeas, Leeds University Business School, UK

Igor Filatotchev, King’s College London, UK

Christian Ketels, Harvard Business School, USA

Mats Forsgren, Uppsala University, Sweden

Huda Khan, University of Aberdeen, UK

Andrea Fosfuri, Bocconi University, Italy Nicolai J. Foss, Copenhagen Business School, Denmark Ruosu Gao, University of Sydney, Australia Ajai S. Gaur, Rutgers Business School, USA Anthony Goerzen, Queen’s University, Canada Sabrina Goestl, Western University, Canada Paul N. Gooderham, Middlesex University, UK Birgitte Grogaard, Norwegian Business School Mauro Guillen, Wharton School of the University of Pennsylvania, USA Aida Hajro, University of Leeds, UK Niron Hashai, Reichman University, Israel Ilir Haxhi, University of Amsterdam, the Netherlands Bersant Hobdari, Copenhagen Business School, Denmark Ulf Holm, Uppsala University, Sweden Sven Horak, St. John’s University, USA Thomas Hutzschenreuter, Technical University of Munich, Germany Andrew C. Inkpen, Arizona State University, USA and Copenhagen Business School, Denmark

Gary Knight, Willamette University, USA Renato Kogeyama, Florida International University, USA Tatiana Kostova, University of South Carolina, USA Masaaki Kotabe, Waseda University, Japan, and University of Hawaiʻi at Mānoa, USA Medha Satish Kumar, Simon Fraser University, Canada Pankaj Kumar, Virginia Polytechnic Institute and State University, USA Vikas Kumar, The University of Sydney, Australia Mila B. Lazarova, Simon Fraser University, Canada Sun Hye Lee, University of Surrey, UK Hyun-Jung (HJ) Lee, London School of Economics, UK Jong Min Lee, Yonsei University, South Korea Michal Lemanski, University of Nottingham, UK Orly Levy, SOAS University of London, UK Yi Li, University of Sydney, Australia Yu Li, University of South Carolina, USA Ted London, University of Michigan, USA Sarianna Lundan, University of Bremen, Germany

Viacheslav Iurkov, Grenoble Ecole de Management, France

Randi Lunnan, BI Norwegian Business School, Norway

Mansour Javidan, Arizona State University, USA

Joe Mahoney, University of Illinois at Urbana-Champaign, USA

Peter D. Ørberg Jensen, Copenhagen Business School, Denmark

Kristiina Mäkelä, Aalto University School of Business, Finland

Mario Kafouros, University of Manchester, UK

Eva Mavroudi, University of Leeds, UK

Liena Kano, University of Calgary, Canada

Martha Maznevski, Western University, Canada

Contributors  xi

Gerry McDermott, University of South Carolina, USA

Rebecca Piekkari, Aalto University, Finland

Chengcheng Miao, University of Reading, UK

Maurício Prado, Copenhagen Business School, Denmark

David Midgley, INSEAD, France

Jonas Puck, WU – Vienna University of Economics and Business, Austria

Dana Minbaeva, King’s College London, UK Christof Miska, WU – Vienna University of Economics and Business, Austria Alexander Mohr, WU – Vienna University of Economics and Business, Austria Michael Mol, Copenhagen Business School, Denmark Ram Mudambi, Temple University, USA Jakob Müllner, WU – Vienna University of Economics and Business, Austria Surender Munjal, Leeds University Business School, UK Lilac Nachum, City University of New York, USA Anna Nadolska, Radboud University, the Netherlands Rajneesh Narula, University of Reading, UK Phillip C. Nell, Vienna University of Economics and Business, Austria Bo Bernhard Nielsen, University of Sydney Business School, Australia, and Copenhagen Business School, Denmark Jennifer Oetzel, American University, USA Chang Hoon Oh, University of Kansas, USA Marina Papanastassiou, University of Leeds, UK Ronaldo Parente, Florida International University, USA Torben Pedersen, Copenhagen Business School, Denmark Bent Petersen, Copenhagen Business School, Denmark Mark F. Peterson, Maastricht University, the Netherlands Anu Phene, George Washington University, USA

Markus Pudelko, University of Tübingen, Germany Larissa Rabbiosi, Copenhagen Business School, Denmark Miguel A. Ramos, University of Texas at El Paso, USA B. Sebastian Reiche, IESE Business School, Spain A. Rebecca Reuber, University of Toronto, Canada Esther Roca Batllori, Bocconi University, Italy Paul Ryan, Trinity College Dublin, Ireland Asmund Rygh, University of Manchester, UK André Sammartino, University of Melbourne, Australia Karin Sanders, University of New South Wales, Australia Grazia Santangelo, Copenhagen Business School, Denmark Bodo Schlegelmilch, WU – Vienna University of Economics and Business, Austria Margaret A. Shaffer, University of Oklahoma, USA J. Myles Shaver, University of Minnesota, USA Günter K. Stahl, WU – Vienna University of Economics and Business, Austria Emma Stendahl, Jönköping University, Sweden Mary Sully de Luque, Arizona State University, USA Riki Takeuchi, University of Texas at Dallas, USA Stephen Tallman, University of Richmond, USA

xii  Encyclopedia of international strategic management

Danchi Tan, National Chengchi University, Taiwan

Xena Welch, Rotterdam School of Management, the Netherlands

Esther Tippmann, University of Ireland Galway, Ireland

Juliette de Wit, University of Groningen, the Netherlands

Annique Un, Northeastern University, USA

Wenlong Yuan, University of Manitoba, Canada

Paul M. Vaaler, University of Minnesota, USA Jan-Erik Vahlne, University of Gothenburg, Sweden Sunil Venaik, University of Queensland, Australia

Srilata Zaheer, University of Minnesota, USA Shaker A. Zahra, University of Minnesota, USA Nan Zhou, Tongji University, China

Alain Verbeke, University of Calgary, Canada

Milda Žilinskaitė, WU – Vienna University of Economics and Business, Austria

Davina Vora, State University of New York at New Paltz, USA

Angelika Zimmermann, Loughborough University, UK

Nigel Wadeson, University of Reading, UK

Introduction to the Encyclopedia of International Strategic Management

The objective of this Encyclopedia is to serve as a comprehensive reference tool for students, scholars, and practitioners seeking to quickly access essential key concepts and terms within the realm of international strategic management (ISM). Unlike traditional research handbooks that may contain a limited number of lengthy chapters featuring new theoretical advancements and/or reporting recent empirical findings (see for example Rugman, 2009), this Encyclopedia contains a larger number (93) of shorter entries of 1,000 to 3,000 words, focusing on concise definitions, explanations, and compact reviews of key topics in ISM. As this is, to the best of our knowledge, the first encyclopedia in the field of ISM, this introduction offers an overview of the Encyclopedia, including details of the process involved in creating it, along with suggestions on how to make the best use of it. ISM is inherently a multifunctional and multidisciplinary field of research. Hence, it is important to establish clear definitions and conceptual boundaries regarding the scope of the topics included in this Encyclopedia, as well as those that are excluded. For managers to devise and implement international strategies effectively, they must comprehend challenges and opportunities that emerge across various functions within a multinational firm, such as finance, human resources, and marketing. Correspondingly, ISM is a research field that integrates management disciplines such as international finance, international human resources, and international marketing. Furthermore, ISM is a phenomenon that has been examined through a variety of theoretical lenses, and like much management research, draws on multiple research fields such as economics, sociology, and psychology. This broad understanding of the topic is well expressed in the editorial statement of one of the leading ISM journals, the Journal of International Business Studies, which welcomes “submissions from scholars in all practice areas of business and adjacent disciplines, including all the theoretical lenses and management practice areas of internationally

operating firms.” In this Encyclopedia, we adapt a similarly inclusive view of the field of ISM, as captured by our methodology detailed below. An essential point to note here is that this book does not aim to serve as an encyclopedia of strategic management (for an example of such volumes, see Augier & Teece, 2021). This has implications for the choice of topics that are included in this book and requires careful considerations on how to differentiate ISM from its broader “sister discipline”. In certain aspects, ISM can be seen as an application of strategic management in an international setting. For example, entry mode research has often constituted an ideal laboratory setting for testing transaction cost arguments. However, the international context itself also contributes with unique aspects that enrich the fundamental theories. For example, while strategic management scholars have studied mergers and acquisitions (M&As) in the domestic context, global M&As introduce opportunities and challenges that the domestic setting does not. The international context, in fact, is occasionally significant enough that comparable theories have evolved concurrently in ISM and strategic management. Two prominent examples are the internalization theory and Williamsonian transaction cost economics (Williamson, 1975). Finally, some fundamental topics in ISM do not appear at all in the strategic management literature, but only the field of ISM or perhaps in other research fields such as international economics and economic geography. This is particularly relevant for topics that are inherently linked to ISM, such as liabilities of foreignness and cross-national distance.

Methodology

The editorial team determined the selection of topics for this Encyclopedia using several inputs. First, each editor created a list of topics independently, relying on their own research and teaching experience, and deep expertise

xiii

xiv  Encyclopedia of international strategic management

in the field. Second, we also extracted a list of keywords from the latest volumes of the Journal of International Business Studies. These lists were then compared and merged into one. Additional topics were identified through a snowballing process. The final decision of which topics to include and exclude ultimately rested on a joint assessment by the editorial team, based on key criteria outlined below. The most important criterion for selection of a topic was a clear presence of an international dimension, related to the delimitations discussed above. To assess this, we used a test, where we added “global”, “international”, or “foreign” in front of the potential term and evaluated the theoretical relevance of the resulting expression. For example, strategic alliances are well described in the strategic management literature, but qualifying the term with “international strategic alliances” clearly identifies a distinct phenomenon with its own dedicated research literature, thereby warranting an entry in this book. In contrast, while bounded rationality is a term present in strategic management, adding “international” as “international bounded rationality” does not provide any meaningful distinction. Therefore, bounded rationality is not included as a separate entry, but is discussed in connection with related (ISM) concepts, such as internalization theory and national culture. The test described above was mainly applied to terms that overlap with strategic management. However, a few terms that did not pass this test were still included in the Encyclopedia if they capture concepts that are uniquely relevant to ISM, such as the not-invented-here syndrome, Porter’s diamond model, and the base of the pyramid. Finally, we set a minimum length for each entry in the book and at the same time aimed to avoid too much overlap between these entries, effectively putting an upper limit on the number of terms and concepts that have their own dedicated entry. In particular, if a term naturally fell under another entry, it was not given its own dedicated entry. For example, “double-layered acculturation” is a term that is best understood within the context of international M&As, and therefore it is not featured as a separate entry, but is instead included within the international acquisitions entry. With the interactive search functionality of the Encyclopedia, readers can identify and explore a vast number of ISM topics within their most meaningful

context. Therefore, rather than coming up empty, a search for “double-layered acculturation” will point towards the M&A entry. We strongly recommend that Encyclopedia readers take advantage of these search features. One definition that is important enough to warrant its inclusion in this introductory chapter is the central actor in ISM: the multinational firm. In some parts of the literature, it is the norm to refer to it as the multinational corporation (MNC), while in others the tradition is to call it the multinational enterprise (MNE). The same duality is reflected in the entries in this Encyclopedia; in respect of those traditions, the authors were not asked to harmonize this nomenclature. For users of this Encyclopedia, it is important to know that these two terms are essentially interchangeable. Both refer to a firm that has conducted foreign direct investment (FDI) and thereby owns operations in multiple countries (see the entry on foreign ownership for details). Additionally, several entries in the Encyclopedia revolve around the theories that aim to explain the existence of this firm – see in particular the entries on the eclectic paradigm and internalization. Having said that, it is noteworthy that the entries in this Encyclopedia are not limited to the multinational firm, and relate also to other modes of international operation. The contributors for each entry in the Encyclopedia were chosen based on their past familiarity and expertise with the respective topic. These authors were instructed to write a comprehensive, concise, and focused entry, including explicit definitions of the relevant concept(s) as well as an overview of the state-of-the-art of the pertinent research. Once the first draft was completed, each entry was reviewed by one of the editors of the Encyclopedia and, if required, by a peer contributor. The feedback from this review process was then sent to the contributors, who revised their entries and sent them back to a final review by one of the editors.

An overview of the entries in the Encyclopedia

To provide an organizing framework for the content of the Encyclopedia, we entered the finalized entries into NVivo, a qualitative data analysis software. We explored the text patterns using a clustering analysis that involved creating a cluster of entries based on the content similarities. We then analysed the

Introduction  xv

resulting clusters to identify potential synergies and relationships between the entries, revealing the interconnected nature of ISM as a research field. This process allowed us to better understand the content of this Encyclopedia and identify key themes of ISM, which we present below and shown in Table 0A.1. Foundational theories A group of entries describes the main pillars of international strategic management, touching upon the effects of the resources and capabilities possessed or sourced by the firm, the way in which these relate to its international expansion and are connected to home versus host comparative location advantages, and the extent to which they are internalized. The entry by Grogaard on asset recombination explains an important tenet of ISM, which is the idea that firms expand and succeed by recombining resources, including those that they control themselves, those that are controlled by other firms, and those that are specific to certain locations. Elaborating on the first category, Verbeke and Yuan describe the firm-specific advantages (FSAs) that enable or motivate firms to internationalize. Complementing this entry, Santangelo discusses the concept of foreign strategic asset seeking FDI and its implications for locating subsidiaries in host countries as means to improve the competitive advantages of MNEs. Moving outside the firm, Lundan explains the various location advantages that can be formed by local contexts, including institutional frameworks, and interact with the internationalization of firms. These advantages, in turn, stem from comparative and competitive advantages that accrue to nations or regions, as described in two other entries. Ketels discusses how national competitive advantages relate to dynamics that take place in the national or local business environment, captured in Porter’s diamond model. The entry on international trade theory by Prado shows how the idea of comparative advantages goes back to the classical trade theories and new trade theory. The entry by Buckley on internalization theory elaborates on the reduction of transaction costs by internalizing the foreign resources that internationalizing firms use, and the advantages and drawbacks of internalization for such firms. Finally, as explained by Narula and Lee, the eclectic paradigm combines these perspectives as it includes resources both specific to the firm

and to the location, as well as internalization, as prerequisites for FDI. Culture Culture holds a pivotal position within the field of ISM, and therefore the Encyclopedia contains numerous entries dedicated to this concept. Peterson, Beugelsdijk, and de Wit introduce the idea of national culture on which much of the literature is based, and discuss the various approaches to operationalize this concept. Fey and Chen then introduce the concept of organizational culture in MNEs and explore the challenges that arise when attempting to reconcile it with national cultural differences. Managing these tensions may require a great deal of cultural agility, which Caligiuri defines as an individual-level competence. Vora discusses a related individual-level characteristic, multiculturalism, and how MNEs can get the most out of employees with this characteristic. Barner-Rasmussen and Mäkelä describe an important role in the MNE, global boundary spanners, which can successfully be performed by individuals with these (and other) qualities. Moving from the individual to the team level, Pudelko provides an overview of the benefits and challenges of multicultural teams. Zimmermann delves into global virtual teams, which not only grapple with cultural differences but also require a high degree of digital collaboration to overcome geographic separation. Finally, Piekkari examines the significant role of language in international business, where linguistic differences were initially considered a subset of cultural differences, but are now acknowledged as presenting distinct challenges in the MNE context. Comparative management A group of entries relates to international differences in the management of organizations and people. Haxhi and Aguilera discuss comparative corporate governance, which includes the variation in ownership and governance across countries with different institutional frameworks. Gaur elaborates on a particular type of governance structure known as a business group, which displays different variations in different countries. Several entries address the significance of global diversity for human resource management (HRM). De Cieri and Sanders extract the implications for the MNE and describe the challenges of international HRM. In

xvi  Encyclopedia of international strategic management

the entry on comparative HRM, Miao and Brewster examine the fit between HRM practices and local context. Finally, Conroy discusses HRM practice transfer within the MNE as a specific aspect of an international HRM strategy. Collectively, these entries underscore the need for and importance of considering context when managing people and governance structures within MNEs. People Closely related to the previous cluster, some entries go deeper into the nuances and the context of managing people globally. Hajro and Žilinskaitė describe migrants and migration as a broad socio-geographic phenomenon. Barnard further examines diaspora as a related phenomenon that is particularly relevant for ISM, where groups of individuals establish global connections that may intersect with the internationalization of firms. Takeuchi shifts the focus onto expatriates as another category of (temporarily) migrating individuals who are stationed in foreign subsidiaries and contribute to the implementation of global strategies. Reiche and Lazarova explore what happens when these individuals return to their home countries, in a process of repatriation, focusing on both personal and strategic consequences. Shaffer and Dimitrova explore the more general concept of global careers, which encompasses expatriation and repatriation, but also consider these processes in the context of long-term career trajectories. Finally, Collings and Conroy elevate the discussion to a more strategic level, where these issues, along with others, are part of global talent management. Globalization A powerful force that is always in the background of the ISM debate is that of globalization, and several entries discuss how MNEs can leverage this force as well as contribute to it. Goestl and Maznevski introduce the idea of the global mindset as an important managerial cognitive frame, while Javidan and colleagues discuss global leadership as a related but more extensive range of competencies and processes. In combination, these qualities are crucial to the ability of MNEs to pursue global strategies. From a complementary marketing perspective, Davvetas and Katsikeas describe the powerful phenomenon of global brands as well as the challenges to MNEs that rely on such

brands. Goerzen describes how many of these phenomena come together in global cities, which co-evolve with the global expansion and organization of MNEs by virtue of their global connectedness. Finally, Levy and Lee discuss the phenomenon of cosmopolitanism, which is also a quality that characterizes global cities. Limits of the MNE In an interesting juxtaposition to the globalization entries, another group of entries focuses on the constraints to the international expansion and reach of MNEs. Mohr discusses the main forces that drive deglobalization, in the sense of decline in cross-border flows of goods and services, capital and information. As an MNE-specific manifestation of this, Benito and Iurkov discuss the reasons and consequences of divesting operations in foreign markets. Another aspect related to the limits of the MNE concerns geographic focus in specific regions. This theme reappears in two complementary entries by Sammartino, the first of which describes the regional MNE as a firm that pursues a regional presence based on FSAs that are neither location-bound nor global in reach but have an intermediate regional applicability. In a related entry, Sammartino then describes other aspects of regional strategy (besides the geographic footprint), including the use of regional mandates and regional headquarters. Distance Distance is probably the key distinguishing feature of ISM. It is a multifaceted concepted that has been extensively discussed in the literature. Berry, Guillen and Zhou lay out the theoretical underpinnings of distance as a concept, discuss its impact, and describe how it can be measured. Then, the Encyclopedia offers several entries on specific facets of distance. Hutzschenreuter discusses the concept of added distance, capturing the idea that distance should be measured relative to a focal firm’s current distance. Dow provides an entry on the concept of psychic distance, that is, the idea that distance is a subjective psychological artifact. Fainshmidt and Andrews discuss the role played by legal distance. Finally, Nachum introduces temporal distance – that is, the implications of operating in different time zones.

Introduction  xvii

Foreignness Clearly the need to deal with foreignness lies at the heart of international strategic management. Kumar and Zaheer discuss the key concept of liability of foreignness and how it influences firm internationalization. Relatedly, Hobdari discusses how foreign ownership matters for firms, and Gooderham discusses how the country of origin affects MNE international behaviour, entry mode, HRM practices, and marketing activities. Combining these views, Munjal explains how home and host countries jointly influence the international operations of firms and the complexities of drawing a border between the two. Kostova and Albino-Pimentel discuss the challenges for MNEs for obtaining legitimacy in foreign institutional environments. Finally, Stahl, Miska and de Luque present different approaches for international corporate social responsibility and the coordination and control challenges these approaches impose for MNEs. Learning and knowledge The concepts of learning and knowledge are pivotal in international strategic management. Zahra discusses learning and internationalization as two intertwined concepts in MNEs, and explores different facets and dimensions of learning by MNEs and the limits of such learning. Forsgren and Holm present the concept of centers of excellence and discuss their role with global value chains and for MNE subsidiaries with such mandates. Foss discusses the knowledge-based theory of the MNE and how the international creation and exploitation of knowledge has been argued to be a driver of internationalization. Doz expands this view and describes how an MNE can become a metanational company by prospecting, sensing, mobilizing, deploying, and leveraging knowledge across their foreign subsidiaries. Andersson and Ryan discuss how the dual network embeddedness of subsidiaries within the MNEs and within their host countries fosters learning and knowledge creation. Finally, Fosfuri and Roca Batllori discuss the confining effect of the not-invented-here syndrome on MNE learning. Innovation The concept of innovation plays a critical role in international strategic management. Papanastassiou discusses the role of MNEs in creating intellectual property and how they

strive to protect their intellectual property rights. Belderbos and Castellani lay out the benefits and costs of global R&D, including motivations for locating R&D activities abroad and the implications of global R&D networks on firm performance. Relatedly, Santangelo discusses the motivation for knowledge-seeking FDI, how host-country factors influence it, and its implications for locating R&D units abroad. In the entry on global mobility and innovation, Phene discusses how the mobility of skilled labour is related to the globalization of R&D activities and how it influences innovation. Taking a more external point of view, Kafouros and Mavroudi define the concept of national innovation systems and explain how they drive innovation. Finally, Ramos and Shaver discuss how co-location leads to agglomeration of firms, and how the resulting knowledge spillovers of such agglomeration drive innovation. Value chains Several entries discuss the role of managing value chains in ISM. Kano and Van Assche define the (increasingly prominent) phenomenon of global value chains, describe how they are governed and the implications of VUCA (volatility, uncertainty, complexity, ambiguity), as well as how ESG (environmental, social, governance) considerations influence the emergence of global value chains and their lead firms. Kotabe elaborates with considerations of global supply chain management. Wadeson presents the global system view, which suggests that location-specific costs and transaction costs determine the location of value chain activities and firm boundaries. Relatedly, Enderwick discusses the concept of the global factory as an overarching idea for the organization of international production systems characterized by task fragmentation and global dispersion of operations. Finally, Kogeyama and colleagues discuss the concept of international modularity across and within industries, at the firm level and at the component level, for different stages of value creation. Scope and expansion Several entries relate to the international expansion of firms and their international scope. Vahlne explains the evolution of the classical Uppsala model portraying the gradual international expansion of firms. In a contrasting entry, Knight and Khan discuss

xviii  Encyclopedia of international strategic management

the concept of born global firms, how it is defined, and how it relates to international entrepreneurship. Reuber shows how the international experience of individuals and organizations influences international expansion. Mol describes the concept of international outsourcing, while Jensen and Pedersen describe different offshoring strategies that internationalizing firms employ and their implications. Finally, Mahoney and Tan discuss the Penrose effect and the constraints that the lack of skilled managers impose on firm internationalization. Operation modes In their expansion into foreign markets (as described in the previous cluster), internationalizing firms can choose between different entry (or foreign market service) modes. Two complementary entries by Asmussen and Petersen discuss these choices, where foreign entry mode is the mode selected by the firm upon initial entry into a host country and foreign operation mode is a generalization that includes mode combination, dynamics, and configuration. Three other entries delve into the details and the research surrounding specific modes, with Welch and Nadolska discussing international acquisitions, Inkpen describing international joint ventures, and Engsig and Nielsen complementing the discussion of the formal modes with an entry on international strategic alliances. In combination, these entries provide an overview of an important ISM phenomenon, with a strong transaction cost flavour but also drawing on an eclectic set of other theories. Organization of the MNE Several entries concern the organization of the MNE. Venaik, Midgley and Devinney discuss the integration–responsiveness framework, which emphasizes the tensions and trade-offs caused by international heterogeneity across countries. Schlegelmilch and Lemanski present the adaptation–aggregation–arbitrage (AAA) typology, which is closely related to the integration–responsiveness framework but frames international heterogeneity more positively in terms of firms’ benefits. Moving to the organizational implementation of different MNE strategies, Stendahl and Tippmann describe the international control mechanisms used by firms, whereas Rabbiosi discusses how MNEs strive to achieve international coordination across their foreign activities. Nell

and Decreton describe the different organizational structures that MNEs can use. Finally, Ambos takes a closer look at the management of foreign subsidiaries and discusses their internal management, how it influences their strategies and initiative-taking, and how foreign-subsidiary-level strategy interacts with headquarters-level strategy. Institutions Institutions have wide influence on the ISM practices of firms. Several entries touch on this point. In two related entries, Cuervo-Cazurra and Un discuss the difference between emerging and advanced markets, as well as between emerging market MNEs and advanced market ones. London discusses the challenges imposed when operating in extremely low-income countries, denoted the base of the pyramid. Finally, Vaaler discusses the influence of private international law on the strategies of internationalizing firms. Government and governance An important body of ISM research focuses on the intersection between the private, public, and third sectors. Lunnan and Rygh describe the state-owned enterprise as a specific governance form found to various degrees in different countries, with distinct political objectives that have implications for its international strategies. Albino-Pimentel, De Bruyn, and Li explore the various types of global nonmarket strategies that MNEs pursue in their interaction with local and global institutions. Oetzel and Oh discuss the risks that stem from political conflict and how MNEs can design international strategies to navigate these risks. Moving from the public sector to the third sector, the entry by Doh on international non-governmental organizations explores the role of these organizations in ISM and their interaction with MNEs. Another alternative to both private (MNE) and public (government) compliance mechanisms are international standards, discussed in the entry by Clougherty. Finally, Horak describes how informal networks can serve as yet another mechanism based on trust and social capital. In combination, these entries inform on the plurality of alternative governance approaches discussed in ISM. Performance Increasing firm financial performance is one of the key considerations within ISM. The entry by Tallman introduces the concept of

Introduction  xix

international diversification and discusses its performance implications. Complementing this view, Li, Gao and Kumar discuss the multinationality–performance relationship under different contexts and the influence of different moderators on this relationship. Taking a more financial theory-based stance, Puck, Müllner and Filatotchev discuss the relationship between international finance and international strategy, giving special emphasis to the creation of international financial markets, corporate governance and the creation of competitive advantages as means to improve financial performance. Finally, Eden discusses how transfer pricing and cross-border arbitrage allow MNEs to improve their financial performance and how countries aim to limit the use of such transfer pricing and arbitrage.

Conclusion

We hope that the variety of the clusters above give an indication, to some degree, of the diversity of the ISM field. Despite the vastness of the territory covered, it is crucial to acknowledge (as also suggested in the descriptions of the clusters) that the field is also highly integrated and perhaps surprisingly internally cohesive. Therefore, it is not difficult to spot interlinkages between the clusters, and although these are too numerous to account for comprehensively, some of the more evident examples can be highlighted. For example, the dimension of distance includes cultural distance and, as such, relates closely to culture as a research area. Innovation is an inseparable part of the learning and knowledge strategies pursued by MNEs. Foreignness is a challenge that implies the limits of the MNE, and institutions provide the context for government and governance. These linkages and many more can be explored in this Encyclopedia by using the interactive features that provide links between the individual entries. Although the Encyclopedia aims to be as comprehensive as possible, it is inevitable that there will be emerging areas and ground-

breaking research streams in ISM that are not fully covered. As we discussed at the beginning of this introductory chapter, ISM is a field that continuously evolves in a dialogue between theory and context. As noted by Minbaeva (2016: 99; see also Whetten, 2009), “there are two types of studies: those aiming to contextualize existing theory (‘theories in context’, ‘context-embedded theories’ in Whetten, 2009) and those theorizing about the effects of context (‘theories of context’, ‘context-effect theories’ in Whetten, 2009).” We believe that the entries of this book more or less comprehensively cover context-embedded theories in ISM. However, we also contend that, despite acknowledging the heterogeneity of the context and its theoretical richness, the use of the context as a source for theorizing remains relatively infrequent. Hence, there is a clear need for future research that explores the potential of context-effect theories in ISM. In this regard, we hope that this book will not only be a valuable reference resource for scholars and students of ISM, but also spark curiosity and inspire researchers to explore uncharted territories within the field of ISM and expand its boundaries. Christian Geisler Asmussen, Niron Hashai and Dana Minbaeva

References

Augier, M., & Teece, D.J. 2021. The Palgrave encyclopedia of strategic management. Palgrave Macmillan. Minbaeva, D. 2016. Contextualising the individual in international management research: Black boxes, comfort zones and a future research agenda. European Journal of International Management, 10(1), 95–104. Rugman, A.M. (ed.). 2009. The Oxford handbook of international business. Oxford University Press. Whetten, D. 2009. An examination of the interface between context and theory applied to the study of Chinese organizations. Management Organization Review, 5(1), 29–55. Williamson, O.E. 1975. Markets and hierarchies: Analysis and antitrust implications. Free Press.

xx  Encyclopedia of international strategic management

Appendix Table 0A.1

Entries in the Encyclopedia of International Strategic Management

Cluster

Entries

Foundational theories

Asset recombination

Authors Grogaard

 

Firm-specific advantages

Verbeke & Yuan

 

Strategic asset-seeking FDI

Santangelo

 

Location advantages

Lundan

 

Porter’s diamond model

Ketels

 

International trade theory

Prado

 

Internalization theory

Buckley

 

Eclectic paradigm

Narula & Lee

Culture

National culture

Peterson, Beugelsdijk & de Wit

 

Organizational culture in MNEs

Fey & Chen

 

Cultural agility

Caligiuri

 

Multiculturalism

Vora

 

Global boundary spanners

Barner-Rasmussen & Mäkelä

 

Multicultural teams

Pudelko

 

Global virtual teams

Zimmermann

 

Language in international business

Piekkari

Comparative management

Comparative corporate governance

Haxhi & Aguilera

 

Business groups

Gaur

 

Comparative HRM

Miao & Brewster

 

International HRM

De Cieri & Sanders

 

HRM practice transfer

Conroy

People

Migrants and migration

Hajro & Žilinskaitė

 

Diaspora

Barnard

 

Expatriation

Takeuchi

 

Repatriation

Reiche & Lazarova

 

Global careers

Shaffer & Dimitrova

 

Global talent management

Collings & Conroy

Globalization

Global mindset

Goestl & Maznevski

 

Global leadership

Javidan et al.

 

Global brands

Davvetas & Katsikeas

 

Global cities

Goerzen

 

Cosmopolitanism

Levy & Lee

Limits of the MNE

Deglobalization

Mohr

 

Divestment

Benito & Iurkov

 

Regional MNE

Sammartino

 

Regional strategy

Sammartino

Distance

Distance

Berry, Guillén & Zhou

 

Psychic distance

Dow

 

Added distance

Hutzschenreuter

 

Temporal distance

Nachum

 

Legal distance

Fainshmidt & Andrews

Foreignness

Liability of foreignness

Kumar & Zaheer

 

Foreign ownership

Hobdari

 

Country-of-origin effect

Gooderham

 

Home and host country

Munjal

 

Organizational legitimacy and MNEs

Kostova & Albino-Pimentel

 

International corporate social responsibility

Stahl, Miska & de Luque

Learning and knowledge

Not-invented-here syndrome

Fosfuri & Roca Batllori

Introduction  xxi Cluster

Entries

Authors

 

Centers of excellence

Forsgren & Holm

 

Foreign subsidiary networks

Andersson & Ryan

 

Metanational company

Doz

 

Knowledge-based theory of the MNE

Foss

 

Learning in and by MNEs

Zahra

Innovation

Intellectual property rights

Papanastassiou

 

Global R&D

Belderbos & Castellani

 

Knowledge-seeking FDI

Santangelo

 

Global mobility and innovation

Phene

 

National innovation systems

Kafouros & Mavroudi

 

Agglomeration

Ramos & Shaver

Value chains

Global value chains

Kano & Van Assche

 

Global supply chain management

Kotabe

 

The global system view

Wadeson

 

The global factory

Enderwick

 

International modularity

Kogeyama et al.

Scope and expansion

The Uppsala model

Vahlne

 

Born global firms

Knight & Khan

 

International experience

Reuber

 

International outsourcing

Lee & Mol

 

Offshoring

Jensen & Pedersen

 

The Penrose effect

Mahoney & Tan

Operation modes

Foreign entry mode

Asmussen & Petersen

 

Foreign operation modes

Asmussen & Petersen

 

International acquisitions

Nadolska & Welch

 

International joint ventures

Inkpen

 

International strategic alliances

Engsig & Nielsen

Organization of the MNE

Integration–responsiveness framework

Venaik, Midgley & Devinney

 

Aggregation–adaptation–arbitrage (AAA) typology

Schlegelmilch & Lemanski

 

International control mechanisms

Stendahl & Tippmann

 

International coordination

Rabbiosi

 

Structure of the MNE

Nell & Decreton

 

Foreign subsidiary management

Ambos

Institutions

Emerging markets

Cuervo-Cazurra & Un

 

Emerging market multinationals

Cuervo-Cazurra & Un

 

Base of the pyramid

London

 

Private international law

Vaaler

Government and governance State-owned enterprises

Lunnan & Rygh

 

Global nonmarket strategy

Albino-Pimentel, De Bruyn & Li

 

Political conflict

Oetzel & Oh

 

International non-governmental organizations

Doh

 

International standards

Clougherty

 

Informal networks

Horak

International performance

International diversification

Tallman

 

Multinationality–performance relationship

Li, Gao & Kumar

 

International finance

Puck, Müllner & Filatotchev

 

Transfer pricing and cross-border arbitrage

Eden

1. Adaptation– aggregation– arbitrage (AAA) typology

an organizational structure with strong cross-country coordination remits, such as global headquarters, global business units, global product divisions, a global account management and the like. Finally, an arbitration strategy is usually associated with functional organizational structures that can manage vertical relationships in order to balance different demands within a supply chain. Ghemawat refers to the AAA triangle when depicting the interplay between the three global strategies. The AAA triangle (see Figure 1.1) turns his typology into a diagnostic tool, which guides managers in assessing the importance of adaptation, aggregation and arbitration for their respective settings. More specifically, he suggests looking at three ratios: advertising-to-sales, R&D-to-sales and labor-to-sales. A company with a high advertising-to-sales ratio, such as a fast-moving consumer good company, will most likely favor an adaptation strategy. When the R&D-to-sales ratio is high, companies need to spread the R&D investments over large volumes, i.e., need to achieve economies of scale through pursuing an aggregation strategy. Finally, companies with a high labor-to-sales ratio may seek to take advantage of labor cost differentials between countries and explore the merits of an arbitrage strategy. In this context, it is interesting to observe how recent political and health crises led companies to question their intense focus on the pursuit of cost advantages through labor-cost arbitrage. Instead, a more balanced approach between efficiency and security of supply chains has become the motto of the day. It has also been pointed out that advances in manufacturing technologies, such as robotics, will lead to a further decline in the importance of labor-cost arbitrage (Schlegelmilch, 2022). As a theoretical insight into international business strategy, the AAA typology belongs to the long tradition of scholarly inquiry, which elaborates on responses managers can take when facing heterogeneous global market environments. Notably, Ghemawat builds on research following the works of Doz (1980) and Bartlett and Ghoshal (1989), extending their frameworks by incorporating arbitrage, and simultaneously introducing a new perspective on the dilemma of global integration and local responsiveness (I-R framework). The transnational strategy would

The adaptation–aggregation–arbitrage (AAA) typology was developed by Pankaj Ghemawat (2007) and demonstrates how managers can take advantage of heterogeneity between international markets. Instead of framing international strategy development around the challenge to find the right balance between local responsiveness and economies of scale, and instead of assuming that global economies of scale are indicative of global strategies, Ghemawat encourages managers to view heterogeneity as an opportunity. This can be achieved by focusing on the revenue and market share potential connected to adaptation, aggregation and arbitrage. Adaptation seeks to increase profitability and market share through maximizing the local relevance of the firm. The creation of largely autonomous subsidiaries in each national market that manage their own supply chain would be an example. This strategy is frequently used by firms in the early stages of their international expansion. Aggregation refers to standardization of production or services, grouping of activities, or limiting of the offering, and leads to economies of scale or scope. Arbitrage seeks to exploit national or regional differences through locating separate parts of the value chain in different countries. This can lead to corporate networks with IT centers in one country, manufacturing units in other countries, and marketing or finance units located in still different geographies. While each “A” stands for one type of strategy, any combination of two As, or all As, is possible. That said, companies will usually prioritize one of the As, as any combination of two or three As increases managerial complexity. The reason for an increase in managerial complexity can be traced back to the classic principle proposed by Chandler (1962) that structure follows strategy. Thus, a company opting for an adaptation strategy most likely requires country-centered organizational units with considerable decision-making autonomy. In contrast, companies opting for an aggregation strategy tend to require 1

2  Encyclopedia of international strategic management

Source:  Adapted from Ghemawat (2007).

Figure 1.1

The AAA triangle as a diagnostic tool

then be an AA (adaptation and aggregation) strategy in Ghemawat’s terms, and could be further combined with various levels of arbitrage – for example, high aggregation, high adaptation, and low arbitrage. To this end, the AAA typology encourages managers to pay closer attention to the arbitrage strategy by exploiting national differences rather than adjusting to or trying to overcome them. In addition to labor arbitrage, examples include advantages arising from tax or knowledge differentials. Unlike the I-R framework, which indicates the preferred organizational approach based on the external globalization or localization forces, the AAA model suggests measuring the internal pressures that a company faces. As an analytical tool, the AAA typology has narrow prescriptive power: it can provide guidance to managers who plan strategies, or explain existing corporate behavior, but it does not prescribe what is the optimal strategy in a given market situation, or with the currently available resources. However, with these restrictions in mind, the AAA typology informs managers which dimensions are relevant, builds awareness, and provides relevant input for strategy planning. Further, the AAA typology can be effectively integrated with other frameworks constituting the core of international strategy research, such as CAGE and OLI (Fischer & Roy, 2019). In such combinations, AAA can become a more powerful tool for revising or developing new Bodo Schlegelmilch and Michal Lemanski

international strategies, even in fast-changing market conditions like those in transition economies. Consequently, the AAA typology has remained relevant over time and has been used widely in global marketing (Schlegelmilch, 2022) as well as in global strategy (Morschett et al., 2015) applications. Bodo Schlegelmilch and Michal Lemanski

References

Bartlett, C. & Ghoshal, S. (1989). Managing Across Borders. The Transnational Solution, Boston: Harvard Business School Press. Chandler, A.D. (1962). Strategy and Structure, Cambridge, MA: MIT Press. Doz, Y.L. (1980). Strategic Management in Multinational Companies. Sloan Management Review, 21(2), 27. Fischer, D., & Roy, K. (2019). Market Entry in India: The Curious Case of Starbucks. Rutgers Business Review, 4(2). Ghemawat, P. (2007). Managing Differences: The Central Challenge of Global Strategy. Harvard Business Review, 85(3), 58–68. Ghemawat, P. (2018). Redefining Global Strategy. Crossing Borders in a World Where Differences Still Matter (2nd edition), Boston, MA: Harvard Business Review Publishing. Morschett, D., Schramm-Klein, H., & Zeltes, J. (2015). Strategic International Management. Text and Cases (3rd edition), Wiesbaden: Springer Fachmedien. Schlegelmilch, B.B. (2022). Global Marketing Strategy – An Executive Digest (2nd edition), Switzerland: Springer International Publishing.

2. Added distance

i.e., learning from the experiences of others (Bingham & Davis, 2012). Learning from the experience of others includes indirect learning from an external source (i.e., imitative learning from competitors, or through the acquisition of another firm, or by making use of the knowledge of network partners) and the possibility of indirect learning from MNE internal sources, in the sense that subsidiaries can learn from other units of the MNE. Experiential indirect learning allows the firm to benefit from knowledge stocks previously accumulated in the MNE’s portfolio of subsidiaries. An MNE is a firm that has already gained international experience and thus has accumulated knowledge on how to compete in foreign contexts. Those stocks of knowledge differentiate MNEs from purely domestic firms as well as from one another. A global MNE differs from a local MNE in the volume and quality of knowledge about international activities and the environments within which those activities are successfully conducted (Rugman & Verbeke, 2001, 2004). When MNEs internationalize further, they can build upon already accumulated knowledge stocks inside the firm. Given the possibility of learning from different sources inside the portfolio of subsidiaries of an MNE, the resulting added distance that matters for the relevant outsidership in internationalizing is the smallest distance between the new/target context and a source of learning from inside the MNE. The added distance could be equal to the home–host country distance or smaller. Added distance is smaller if something relevant for the internationalization step can be learned that comes from a source inside the MNE that is closer to the new/target context than the home country. The impact of added distance has been introduced to the literature and empirically tested from a country-level perspective in the form of the “closest neighbor” distance (Hutzschenreuter & Voll, 2008), which measures the distance between the new/target country and the most similar country the MNE has already been active in. However, alternatives to the closest neighbor approach would be to use the MNE subsidiary portfolio or the relevant regional cluster as a distance reference point (Hutzschenreuter & Matt, 2017). In addition, the added distance implementations are not restricted to a country-level perspective but could also use a sub- or supranational perspective.

The concept of distance has become one of the cornerstones of international business (IB). The consensus is that firms, while crossing borders, are exposed to liabilities of outsidership (Johanson & Vahlne, 2009). To overcome the liabilities of outsidership, firms need to become an insider in local networks as well as learn and accumulate knowledge. A higher degree of outsidership means there is a greater knowledge gap that the firm needs to close. The knowledge gap is the difference between the experience and knowledge possessed and that needed in a new/target context, and is an expression of the distance between the contexts the firm is an insider in and the new/target context the firm is an outsider to. Thus, the challenge of successful internationalization is to become an insider, or, in other words, overcoming distances. What is distance, and what is the relevant distance when a firm internationalizes? Basically, distance refers to the inverse of the degree of closeness between two entities with regard to one or several dimensions (Deza & Deza, 2006). In the case of firm internationalization, this requires answers to: (1) What are the two entities to be considered? (2) What are the dimensions to be considered? In IB, the concept of distance has usually been defined as the difference between two countries (Håkanson & Ambos, 2010), and typically relies on the distance between an MNE’s home country and the new foreign (host) country. The home–host country distance has recently been substantially questioned. Tung and Verbeke (2010: 1268–1269) have reasoned that what “matters in the case of a new entry is not so much the distance between the home country A and the host country B, but between the newly entered host country B and the host country C, where the firm already has substantial experience and that shows the lowest distance to the newly entered country B.” To decide what concept of distance matters with regard to the selection of the two entities that are compared, it is crucial from which sources and how the company learns in order to overcome the liabilities of outsidership in the new/target context. Outsidership can be overcome by experiential direct learning, i.e., learning through own experience, and experiential indirect learning, 3

4  Encyclopedia of international strategic management

As already mentioned, a second important question is along which dimensions distance is being determined. The most used dimension in the literature is cultural distance. However, as Håkanson and Ambos (2010) have found, although cultural distance influences perceptions about distance, it is by no means the strongest determinant of such perceptions. Similarly, Ghemawat (2001) reasoned that the distance between two countries may manifest itself along four basic dimensions: cultural, administrative, geographic, and economic. Hutzschenreuter, Kleindienst and Lange (2014) tested for the differentiated effects of these dimensions and found that added administrative distance seems to explain the largest part of variation in firm performance, followed by added cultural distance. Thomas Hutzschenreuter

References

Bingham, C. B., & Davis, J. P. 2012. Learning sequences: Their existence, effect, and evolution. Academy of Management Journal, 55(3): 611–641. Deza, E. & Deza, M. M. 2006. Dictionary of distances. Oxford: Elsevier. Ghemawat, P. 2001. Distance still matters. The hard reality of global expansion. Harvard Business Review, 79(8): 137–147. Håkanson, L. & Ambos, B. 2010. The antecedents of psychic distance. Journal of International Management, 16(3): 195–210. Hutzschenreuter, T. & Matt, T. 2017. MNE internationalization patterns, the roles of knowledge

Thomas Hutzschenreuter

stocks, and the portfolio of MNE subsidiaries. Journal of International Business Studies, 48: 1131–1150. Hutzschenreuter, T., & Voll, J. C. 2008. Performance effects of “added cultural distance” in the path of international expansion: The case of German multinational enterprises. Journal of International Business Studies, 39(1): 53–70. Hutzschenreuter, T., Kleindienst, I., & Lange, S. 2014. Added psychic distance stimuli and MNE performance: Performance effects of added cultural, governance, geographic, and economic distance in MNEs’ international expansion. Journal of International Management, 20(1): 38–54. Johanson, J., & Vahlne, J.-E. 2009. The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies, 40(9): 1411–1431. Rugman, A. M., & Verbeke, A. 2001. Subsidiary-specific advantages in multinational enterprises. Strategic Management Journal, 22(3): 237–250. Rugman, A. M., & Verbeke, A. 2004. A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1): 3–18. Tung, R. L. & Verbeke, A. 2010. Beyond Hofstede and GLOBE: Improving the quality of cross-cultural research. Journal of International Business Studies, 41(8): 1259–1274.

3. Agglomeration

when firms are heterogeneous, they can benefit asymmetrically from agglomerating (Alcácer, 2006; Alcácer and Chung, 2007; 2014; Belderbos and Carree, 2002; Chung and Alcácer, 2002; Flyer and Shaver, 2003; Shaver and Flyer, 2000). As a result, agglomeration externalities can lead many firms to cluster on entry but can motivate the strongest companies to avoid co-locating with their competitors.

Agglomeration is the geographic concentration of economic activity. The main conceptual focus of this phenomenon in the international strategic management literature is positive externalities that stem from geographic clustering of specific industries. The primary focus is on production externalities, which affect firms’ production technologies and costs through knowledge spillovers between competitors, pools of industry-specific suppliers, and pools of industry-specific labor (Marshall, 1920). Although less applied in the international strategic management literature, clustering can lead to demand externalities, which arise when demand increases through creating shared infrastructure, lowering consumer search costs, and creating information spillovers for potential producers (e.g., Baum and Haveman, 1997; Chung and Kalnins, 2001). There exist additional drivers of agglomeration beyond externalities (e.g., accessing geographically bound inputs – Ellison and Glaeser, 1999); however, these arguments play a less salient role in the international strategic management literature. Empirically defining what constitutes an agglomeration requires choices with respect to two important reference points (Ellison and Glaeser, 1997). First, is economic activity best defined by density of employment, firms, or sub-units of firms (e.g., R&D labs)? Second, does one rely on predetermined geographic units (e.g., metropolitan areas or cities) or organically identified geographies of activity? The latter approach can be particularly useful in international settings because definitions of geographic units of analysis (e.g., cities or metropolitan areas) can vary across countries (Alcácer and Zhao, 2016).

Complexity of agglomerations

As mentioned, the literature largely focuses on industry clustering. However, agglomeration externalities need not be restricted to within an industry. Inter-industry knowledge spillovers can be important sources of new knowledge for firms (Jacobs, 1969). Empirical evidence suggests that industrial diversity is associated with higher levels of regional (e.g., Paci and Usai, 1999; van der Panne and van Beers, 2006) and firm innovation (e.g., Feldman and Audretsch, 1999; van der Panne and van Beers, 2006); and that firms can free-ride on R&D investments in different industries made by co-located firms in countries with weak property rights (Lamin and Ramos, 2016). Shaver (2018) demonstrates how labor mobility across industries can lead to the sharing of managerial practices.

Complexity of firms

Many studies of agglomeration abstract from the complexity of modern business organizations. For example, many companies – especially those that operate internationally – are multi-unit companies. They often operate across elements of the value chain (i.e., vertically integrated) and across businesses (i.e., horizontally integrated). Acknowledging this complexity, scholars examine how firms trade off between intra-firm agglomeration arising from same-firm geographic proximity and inter-firm agglomeration. Intra-firm agglomerations can emerge both within an activity (e.g., among manufacturing operations) and across activities (e.g., between sales and manufacturing operations) (e.g., Alcácer and Delgado, 2016; Chung and Song, 2004; Enright, 1995). Early work by Chung and Song (2004) provides evidence of intra-firm agglomeration driving state choice of foreign entrants in the electronics industry

Location choice

A large application of agglomeration research focuses on questions of location choice and foreign entry. Many studies show that firms co-locate with similar firms when entering foreign markets (e.g., Bartik, 1985; Carlton, 1983; Head, Ries and Swenson, 1995), with the hypothesized mechanism being access to production externalities. An insight from the international strategy literature is that 5

6  Encyclopedia of international strategic management

from Japan into U.S. states. Also unpacking firms’ value chains, later evidence by Alcácer and Delgado (2016), on the location of new establishments in the pharmaceutical industry in the U.S., shows that intra-firm agglomeration has a positive impact on location choice in economic areas. An additional factor that warrants research in the context of agglomeration research is the knowledge heterogeneity of multidivisional firms. As noted by Garg and Zhao (2018), firms most active in knowledge sourcing often include heterogeneous divisions, each having specialized knowledge and facing unique market prospects. However, firms are often depicted as highly monolithic with respect to their knowledge composition.

Connections between agglomerations

Clusters and city-regions can be connected by firms and relationships that span across them (Goerzen et al., 2013, Lorenzen and Mudambi, 2013; Lorenzen et al., 2020). These bridges across agglomerations can rapidly emerge through the acquisitions of multi-location firms (Ramos and Shaver, 2013). Internal firm linkages across locations not only help firms source knowledge, but also protect it (Zhao, 2006). Technologies with a high level of internalization, those intricately linked across a firm’s geographic footprint, are argued to be less prone to imitation as co-located competitors may only benefit from spillovers of portions of them in individual locations (Alcácer and Zhao, 2012).

Agglomeration evolution

Finally, a vast amount of anecdotal evidence suggests that agglomerations change over time. The economic externalities they provide can be eventually offset by congestion costs (Hanson, 2000). Moreover, the value of the knowledge externalities can depreciate over time (Lorenzen and Mahnke, 2004; Mansfield, 1985). Such mechanisms have led to research developing the notion of cluster lifecycles (e.g., Malmberg and Maskell, 2002; Menzel and Fornahl, 2010; Sonderegger and Täube, 2010). However, recent large sample evidence from Kim,

Miguel A. Ramos and J. Myles Shaver

Shaver, and Funk (2022) shows that regions rarely follow stylized lifecycle descriptions. Miguel A. Ramos and J. Myles Shaver

References

Alcácer, Juan (2006), ‘Location choices across the value chain: How activity and capability influence collocation’, Management Science, 52(10), 1457–1471. Alcácer, Juan and Wilbur Chung (2007), ‘Location strategies and knowledge spillovers’, Management Science, 53(5), 760–776. Alcácer, Juan and Wilbur Chung (2014), ‘Location strategies for agglomeration economies’, Strategic Management Journal, 35(12), 1749–1761. Alcácer, Juan and Mercedes Delgado (2016), ‘Spatial organization of firms and location choices through the value chain’, Management Science, 62(11), 3213–3234. Alcácer, Juan and Minyuan Zhao (2012), ‘Local R&D strategies and multilocation firms: The role of internal linkages’, Management Science, 58(4), 734–753. Alcácer, Juan and Minyuan Zhao (2016), ‘Zooming in: A practical manual for identifying geographic clusters’, Strategic Management Journal, 37(1), 10–21. Bartik, Timothy J. (1985), ‘Business location decisions in the United States: Estimates of the effects of unionization, taxes, and other characteristics of states’, Journal of Business & Economic Statistics, 3(1), 14–22. Baum, Joel A.C. and Heather A. Haveman (1997), ‘Love thy neighbor? Differentiation and agglomeration in the Manhattan hotel industry, 1898–1990’, Administrative Science Quarterly, 304–338. Belderbos, Rene and Martin Carree (2002), ‘The location of Japanese investments in China: Agglomeration effects, keiretsu, and firm heterogeneity’, Journal of the Japanese and International Economies, 16(2), 194–211. Carlton, Dennis W. (1983), ‘The location and employment choices of new firms: An econometric model with discrete and continuous endogenous variables’, The Review of Economics and Statistics, 440–449. Chung, Wilbur and Juan Alcácer (2002), ‘Knowledge seeking and location choice of foreign direct investment in the United States’, Management Science, 48(12), 1534–1554. Chung, Wilbur and Arturs Kalnins (2001), ‘Agglomeration effects and performance: A test of the Texas lodging industry’, Strategic Management Journal, 22(10), 969–988. Chung, Wilbur and Jaeyong Song (2004), ‘Sequential investment, firm motives, and agglomeration of Japanese electronics firms

Agglomeration  7 in the United States’, Journal of Economics & Management Strategy, 13(3), 539–560. Ellison, Glenn, and Edward L. Glaeser (1997), ‘Geographic concentration in US manufacturing industries: A dartboard approach’, Journal of Political Economy, 105(5), 889–927. Ellison, Glenn, and Edward L. Glaeser (1999), ‘The geographic concentration of industry: Does natural advantage explain agglomeration?’, American Economic Review, 89(2), 311–316. Enright, Michael J. (1995), ‘Organization and coordination in geographically concentrated industries’, Coordination and information: Historical perspectives on the organization of enterprise. University of Chicago Press, 103–146. Feldman, Maryann P. and David B. Audretsch (1999), ‘Innovation in cities: Science-based diversity, specialization and localized competition’, European Economic Review, 43(2), 409–429. Flyer, Fredrick and J. Myles Shaver (2003), ‘Location choices under agglomeration externalities and strategic interaction’, Geography and Strategy, Emerald Group Publishing Limited. Garg, Pranav and Minyuan Zhao (2018), ‘Knowledge sourcing by multidivisional firms’, Strategic Management Journal, 39(13), 3326–3354. Goerzen, Anthony, Christian Geisler Asmussen, and Bo Bernhard Nielsen (2013), ‘Global cities and multinational enterprise location strategy’, Journal of International Business Studies, 44(5), 427–450. Hanson, Gordon H. (2000), ‘Firms, workers, and the geographic concentration of economic activity’, The Oxford Handbook of Economic Geography, 477–497. Oxford University Press. Head, Keith, John Ries and Deborah Swenson (1995), ‘Agglomeration benefits and location choice: Evidence from Japanese manufacturing investments in the United States’, Journal of International Economics, 38(3–4), 223–247. Jacobs, J. (1969), The Economy of Cities, New York: Random House. Kim, Min Jung, J. Myles Shaver and Russell J. Funk (2022), ‘From mass to motion: Conceptualizing and measuring the dynamics of industry clusters’, Strategic Management Journal, 43(4), 822–846. Lamin, Anna and Miguel A. Ramos (2016), ‘R&D investment dynamics in agglomerations under weak appropriability regimes: Evidence from Indian R&D labs’, Strategic Management Journal, 37(3), 604–621. Lorenzen, Mark and Volker Mahnke (2004), ‘Governing MNC entry in regional knowl-

edge clusters’, Knowledge Flows, Governance and the Multinational Enterprise. Palgrave Macmillan, 211–225. Lorenzen, Mark and Ram Mudambi (2013), ‘Clusters, connectivity and catch-up: Bollywood and Bangalore in the global economy’, Journal of Economic Geography, 13(3), 501–534. Lorenzen, Mark, Ram Mudambi and Andreas Schotter (2020), ‘International connectedness and local disconnectedness: MNE strategy, city-regions and disruption’, Journal of International Business Studies, 51(8), 1199–1222. Malmberg, Anders and Peter Maskell (2002), ‘The elusive concept of localization economies: Towards a knowledge-based theory of spatial clustering’, Environment and Planning A: Economy and Space, 34(3), 429–449. Mansfield, Edwin (1985), ‘How rapidly does new industrial technology leak out?’, The Journal of Industrial Economics, 217–223. Marshall, A. (1920), Principles of Economics, 8th edn. Macmillan. Menzel, Max-Peter, and Dirk Fornahl (2010), ‘Cluster life cycles—dimensions and rationales of cluster evolution’, Industrial and Corporate Change, 19(1), 205–238. Paci, Raffaele and Stefano Usai (1999), ‘Externalities, knowledge spillovers and the spatial distribution of innovation’, GeoJournal, 49(4), 381–390. Ramos, Miguel A. and J. Myles Shaver (2013), ‘When individual locations affect the choice of multi-location acquisition targets’, Strategic Organization, 11(2), 125–155. Shaver, J. Myles (2018), Headquarters economy: Managers, mobility, and migration. Oxford University Press. Shaver, J. Myles and Fredrick Flyer (2000), ‘Agglomeration economies, firm heterogeneity, and foreign direct investment in the United States’, Strategic Management Journal, 21(12), 1175–1193. Sonderegger, Petra and Florian Täube (2010), ‘Cluster life cycle and diaspora effects: Evidence from the Indian IT cluster in Bangalore’, Journal of International Management, 16(4), 383–397. Van Der Panne, Gerben, and Cees van Beers (2006), ‘On the Marshall–Jacobs controversy: it takes two to tango’, Industrial and Corporate Change, 15(5): 877–890. Zhao, Minyuan (2006), ‘Conducting R&D in countries with weak intellectual property rights protection.” Management Science, 52(8), 1185–1199.

Miguel A. Ramos and J. Myles Shaver

4.

Asset recombination

play out differently as their recombination often focuses on the intersection of FSAs and CSAs. Recombination then occurs as through relationships with local governments and the local business communities, enabling the MNE to tap into important CSAs such as natural resources and local infrastructure. For example, when entering the Ghanaian oil and gas industry, the natural resource-seeking Norwegian MNE Aker actively engaged with the host government and local industry partners to share valuable experiences from the Norwegian context to support the development of the local regulatory framework. The relational FSAs resulting from this recombination helped its subsidiary Aker Energy to tap into local natural resources (Petroleum Commission Ghana, 2019; Adarkwah & Grøgaard, 2020). In other markets, Aker mainly focuses on transferring technology and competencies through established market mechanisms and partnerships. As these examples illustrate, even the same recombination patterns play out differently across firms. Indeed, MNEs often combine motives and patterns simultaneously. The important intersection of FSAs and CSAs has particularly been emphasized in internalization theory, focusing on its influence on the choice of entry modes. Hennart (2009) introduced a bundling model that supports MNEs in determining the optimal entry mode by assessing how easily the MNE and its local partner can combine complementary assets (i.e., ease of transacting complementary assets). The terms bundling and asset recombination are sometimes used interchangeably in the literature (Asmussen, Chi, & Narula, 2022). While closely related, asset recombination assumes a change – beyond a simple combination – of FSAs. For example, one could argue that a simple resource bundling occurs when an MNE with technical knowledge taps into natural resources through the local partner’s privileged access to such resources. In contrast, asset recombination occurs when the MNE develops new technical knowledge or uses the knowledge in novel ways by tapping into these CSAs. However, this distinction between asset bundling and asset recombination becomes increasingly blurry as we explore their complexities. For example, Verbeke and Kano (2016) conceptually connect bundling and recombination processes, arguing that MNEs’ recombination processes are directly influenced by bundling

Asset recombination reflects the development and exploitation of new or augmented firm-specific advantages (FSAs) by combining two or more existing FSAs in novel ways, or by tapping into new internal or external assets to augment existing FSAs (Rugman, Verbeke, & Nguyen, 2011). Asset recombination enables MNE flexibility in changing and dynamic contexts. There are multiple reasons for asset recombination. MNEs inherently face challenges of multiple embeddedness that create different contextual needs, pressures, and opportunities. It is rare that an MNE can successfully transfer FSAs and operate across contexts without any need for adjustments or changes. Asset recombination is therefore often needed to address specific local needs or tap into country-specific advantages (CSAs). In their seminal article on subsidiary-specific advantages, Rugman and Verbeke (2001) provide an excellent overview of ten common FSA patterns that shows the different trajectories and origins of asset recombination. The implications of this and types of recombination differ depending on the firms’ internationalization motives. For example, many market-seeking MNEs adapt or augment transferrable FSAs to satisfy local customer tastes and preferences. McDonald’s leverages standard processes across countries while simultaneously adapting menu offerings and customer experiences to cater to local tastes and preferences (McDonald’s, 2018). Other market-seeking MNEs recombine FSAs to adapt marketing and sales efforts, while value-creating FSAs such as technology may be the same across markets. Both examples illustrate one of the most common recombination patterns discussed by Rugman and Verbeke (labeled by the authors as pattern three). For strategic asset-seeking MNEs, the recombination focuses on learning and incorporating new knowledge from external relationships that can be combined with the MNE’s existing assets to develop new and innovative FSAs that the MNE leverages across multiple markets. This illustrates another common recombination pattern identified by Rugman and Verbeke (labeled as pattern seven). For natural resource-seeking MNEs, the same recombination pattern may 8

Asset recombination  9

decisions such as international strategies and the choice of entry modes. Through their capabilities-based model of internalization and quasi-internalization, Asmussen et al. (2022) illustrate that the MNEs’ recombination capabilities influence the choice of governance modes, and vice versa. Despite the recent extensions of internalization theory, researchers have to date focused more on the motives or patterns of asset recombination. We have less clarity around how firms recombine. Asset recombination has been labeled the “highest order” FSA (Scott-Kennel & Giroud, 2015; Verbeke & Lee, 2021), which suggests that MNEs develop recombination capabilities and processes to stay competitive. Recombination capabilities are inherently dynamic, which makes the dynamic capabilities perspective a fruitful lens to study recombination capabilities (Teece, 2014; Zahra, Petricevic, & Luo, 2022). The development of dynamic recombination capabilities is complex and costly and requires both learning and unlearning in the MNEs (Riviere, Bass, & Andersson, 2021). Successful recombination requires an entrepreneurial mindset to identify opportunities to combine existing assets with promising internal, external or network-based complementary assets (Lee, Narula, & Hillemann, 2021). Lee et al. (2021) point out that while regular FSAs help the MNE compete in the present, recombination FSAs enable the MNE to address future competitive challenges. Grøgaard, Colman, and Stensaker (2022) exemplify this by pointing to the central role of three dynamic recombination capabilities: the capabilities to legitimize changes, leverage existing FSAs and launch new initiatives. Developing these recombination capabilities provides the MNE with the needed flexibility to address diverse and shifting competitive pressures. It also shifts the MNE’s focus from overemphasizing the launch of new initiatives toward the capabilities needed to understand the link to current FSAs and barriers to recombination. Examples of identified barriers to recombination include compounded distances across countries and regions (Rugman et al., 2011), the organizational heritage and managerial capabilities (Grøgaard et al., 2022; Lee et al., 2021), entrepreneurial deficits in the MNE

(Grøgaard, Verbeke, & Zargarzadeh, 2011), and managerial governance (Kano, Narula, & Surdu, 2022). The above discussion illustrates that international business research is gradually moving beyond the treatment of recombination as a “black box” toward conceptual clarity and insights into how MNEs recombine. However, the field is still at an exploratory stage, with multiple authors calling for more research on recombination capabilities and the recombination process (Lee et al., 2021; Rugman et al., 2011). Our understanding of asset recombination becomes increasingly important and critical as the world continues to experience great levels of uncertainty related to global pandemics, wars, and a focus on transitioning to a sustainable future. Birgitte Grogaard

References

Adarkwah, G., & Grøgaard, B. 2020. Political connections and corporate political activities in high risk developing countries, Academy of International Business Annual Meeting Miami, USA. Asmussen, C., Chi, T., & Narula, R. 2022. Quasi-internalization, recombination advantages, and global value chains: Clarifying the role of ownership and control. Journal of International Business Studies, 53(8): 1747–1765. Grøgaard, B., Colman, H. L., & Stensaker, I. G. 2022. Legitimizing, leveraging, and launching: Developing dynamic capabilities in the MNE. Journal of International Business Studies, 53(4): 636–656. Grøgaard, B., Verbeke, A., & Zargarzadeh, A. M. 2011. Entrepreneurial deficits in the multinational enterprise. In A. Verbeke, A. T. Tavares-Lehmann, & R. Van Tulder (Eds.), Entrepreneurship in the Global Firm, Vol. 6. Bingley, UK: Emerald Group Publishing. Hennart, J. F. 2009. Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets. Journal of International Business Studies, 40(9): 1432–1454. Kano, L., Narula, R., & Surdu, I. 2022. Global value chain resilience: Understanding the impact of managerial governance adaptations. California Management Review, 64(2): 24–45. Lee, J. M., Narula, R., & Hillemann, J. 2021. Unraveling asset recombination through the lens of firm-specific advantages: A dynamic

Birgitte Grogaard

10  Encyclopedia of international strategic management capabilities perspective. Journal of World Business, 56(2): 101193. McDonald’s. 2018. Why is the McDonald’s menu different in different countries?, Vol. 2023. https://​www​.mcdonalds​.com/​gb/​en​-gb/​help/​ faq/​why​-is​-the​-mcdonald​-s​-menu​-different​-in​ -different​-countries​.html. Petroleum Commission Ghana. 2019. Aker Energy touches lives of Ghanaians. In P. C. Ghana (Ed.). https://​www​.petrocom​.gov​.gh/​ aker​-energy​-touches​-lives​-of​-ghanaians/​. Riviere, M., Bass, A. E., & Andersson, U. 2021. Dynamic capability development in multinational enterprises: Reconciling routine reconfiguration between the headquarters and subsidiaries. Global Strategy Journal, 11(3): 380–401. Rugman, A. M., & Verbeke, A. 2001. Subsidiary-specific advantages in multinational enterprises. Strategic Management Journal, 22(3): 237–250. Rugman, A. M., Verbeke, A., & Nguyen, Q. T. K. 2011. Fifty years of international business

Birgitte Grogaard

theory and beyond. Management International Review, 51(6): 755–786. Scott-Kennel, J., & Giroud, A. 2015. MNEs and FSAs: Network knowledge, strategic orientation and performance. Journal of World Business, 50(1): 94–107. Teece, D. J. 2014. A dynamic capabilities-based entrepreneurial theory of the multinational enterprise. Journal of International Business Studies, 45(1): 8–37. Verbeke, A., & Kano, L. 2016. An internalization theory perspective on the global and regional strategies of multinational enterprises. Journal of World Business, 51(1): 83–92. Verbeke, A., & Lee, I. I. H. 2021. International Business Strategy: Rethinking the Foundations of Global Corporate Success (Third ed.). Cambridge: Cambridge University Press. Zahra, S. A., Petricevic, O., & Luo, Y. 2022. Toward an action-based view of dynamic capabilities for international business. Journal of International Business Studies, 53(1): 583–600.

5. Base of the pyramid

enterprises (Godfrey, 2011; London et al., 2014). A definition of the BoP that emphasizes income levels can exacerbate the difficulties in developing successful enterprises. An overemphasis on income obscures a fundamental aspect of the BoP: they are impoverished across multiple dimensions of well-being (Chambers, 1983; London et al., 2014; Sen, 1999). In addition to low levels of economic well-being, the BoP face opportunities to enhance capability and relationship well-being (London, 2009). Understanding how products and services provided by BoP enterprises impact value creation from the perspective of the BoP thus requires assessing changes across multiple dimensions of well-being that extend far beyond income (London and Esper, 2014). A second definitional challenge, perhaps subtler yet even more troubling, is the potential for objectifying the BoP. This can occur through the use of the term “at the BoP” and the associated (and often implicit) assumption that the BoP refers to some place or location rather than a heterogeneous group of people. As some of the first articles on the topic used “at the BoP” in their titles, the origin of this terminology has a logical foundation (Anderson and Markides, 2007; London, 2009; Prahalad and Hart, 2002). Dehumanizing the BoP in this way presents the real risk of enterprise leaders adopt a paternalistic and top-down mindset. (London, 2016). These biases are addressed, at least, in the evolution of the BoP domain. Rather than emphasizing finding a fortune at the BoP (Prahalad, 2005), more recent work suggests focusing on creating a fortune with the BoP (Dembek et al., 2020; London, 2011, 2016). When using the former, enterprise leaders may view their business strategies as opportunities to help (or even save) the BoP. This mindset infers that the most valuable expertise, knowledge, and capabilities reside outside of the BoP, with the BoP as mere recipients of the wisdom and resources provided by those from the top of the pyramid. Instead, enterprise leaders must recognize that the individuals that constitute the BoP are as smart, hardworking, and creative as those from the top of the pyramid. If enterprise leaders emphasize co-creating with the BoP, they can innovate in ways that neither could do alone (London and Jäger, 2019). A mindset that objectifies the BoP ignores the

In the management literature, the base of the pyramid (BoP) denotes the most impoverished segment of the world’s population (London and Hart, 2004; Prahalad, 2005; Prahalad and Lieberthal, 1998). As with other broad-based categorizations of population segments, the BoP encompasses a heterogeneous group. As a result, efforts to explicitly define the BoP have encountered headwinds (Karnani, 2007). Since its earliest articulations, scholars have defined the BoP on one dimension—an individual’s annual income. Yet even on the income dimension, the definition has varied. Initial work delineated the BoP as those earning less than $1,500 annually (Prahalad and Hammond, 2002; Prahalad and Hart, 2002). Later empirical work by the World Bank and others identified the maximum income level as $3,000 per year (~$8/day), which is the standard now typically used by development agencies and governments (Hammond et al., 2007). While this income-based definition has limitations that can impact enterprise strategizing, the broader idea of seeing the BoP as an untapped market has captured the attention of business leaders interested in identifying new opportunities. The BoP represents approximately 4 billion potential consumers—more than half of the world’s population—with multiple unmet needs. If successful, BoP enterprises can both generate profits and reduce impoverishment. Indeed, fulfilling the BoP promise— building profitable enterprises that also generate net-positive poverty alleviation outcomes—has piqued the interest of management scholars and business practitioners alike (London, 2016). BoP enterprise development is difficult, however, as both BoP consumers and the environment in which they live and transact are impoverished (Dembek, Sivasubramaniam, and Chmielewski, 2020; Kolk, Rivera-Santos, and Rufin, 2014; Lashitew et al., 2021). Given their relatively low disposable incomes, BoP consumers have limited financial flexibility and face multiple constraints on their decision making. Additionally, underdeveloped infrastructure, informal and unfamiliar institutions, limited technological penetration, and inefficient capital markets are among the market-based challenges to sustaining and scaling BoP 11

12  Encyclopedia of international strategic management

agency of the BoP and the critical role they can play in their own development. In sum, while defining the BoP by income level has descriptive benefits, it also generates its own challenges. Fulfilling the BoP promise requires recognizing both the heterogeneity and agency of the BoP. Two research streams seem to offer particular promise in advancing BoP scholarship with these issues in mind. One focuses on developing tools, frameworks, and strategies that explicitly recognize the unique opportunities and challenges found in BoP market contexts. (Anderson and Markides, 2007; London, 2016; London and Jäger, 2019; Simanis, Hart, and Duke, 2008). This underlies the premise that researchers can develop best practices that provide actionable guidance on designing and scaling BoP enterprises (Halme, Lindeman, and Linna, 2012; Kistruck et al., 2012; Kistruck et al., 2011; London and Hart, 2004). A second stream considers how BoP enterprise development may offer some unique and important insights into efforts to alleviate poverty (Kistruck and Shulist, 2021; London, 2008). Combining the best from the top and the base – co-creating products, services, business models and new sources of value – offers a new perspective on market-based approaches to poverty alleviation. (Hammond et al., 2007; London and Anupindi, 2012). Both these research streams recognize not only the impoverishment, but also the agency and heterogeneity of the BoP. Scholars and practitioners should consider all three aspects when that engaging with the BoP. Ted London

References

Anderson J, Markides C. 2007. Strategic innovation at the base of the pyramid. MIT Sloan Management Review 49(1): 83–88. Chambers R. 1983. Rural Development: Putting the Last First. Prentice Hall: Harlow, England. Dembek K, Sivasubramaniam N, Chmielewski DA. 2020. A systematic review of the bottom/ base of the pyramid literature: Cumulative evidence and future directions. Journal of Business Ethics 165(3): 365–382. Godfrey PC. 2011. Toward a theory of the informal economy. Academy of Management Annals 5(1): 231–277. Halme M, Lindeman S, Linna P. 2012. Innovation for inclusive business: Intrapreneurial brico-

Ted London

lage in multinational corporations. Journal of Management Studies 49(4): 743–784. Hammond AL, Kramer WJ, Katz RS, Tran JT, Walker C. 2007. The Next Four Billion: Market Size and Business Strategy at the Base of the Pyramid. World Resources Institute and International Finance Corporation: Washington, DC. Karnani A. 2007. Misfortune at the bottom of the pyramid. Greener Management International 51: 99–110. Kistruck G, Sutter C, Lount R, Smith B. 2012. Mitigating principal-agent problems in base-of-the-pyramid markets: An identity spillover perspective. Academy of Management Journal 56: 659–685. Kistruck GM, Shulist P. 2021. Linking management theory with poverty alleviation efforts through market orchestration. Journal of Business Ethics 173(2): 423–446. Kistruck GM, Webb JW, Sutter CJ, Ireland RD. 2011. Microfranchising in base-of-the-pyramid markets: Institutional challenges and adaptations to the franchise model. Entrepreneurship Theory and Practice 35(3): 503–531. Kolk A, Rivera-Santos M, Rufin C. 2014. Reviewing a decade of research on the “base/ bottom of the pyramid” (BOP) concept. Business and Society 53(3): 338–377. Lashitew AA, Narayan S, Rosca E, Bals L. 2021. Creating social value for the ‘base of the pyramid’: An integrative review and research agenda. Journal of Business Ethics 1–22. London T. 2008. The base-of-the-pyramid perspective: A new approach to poverty alleviation. Proceedings of the Sixty-Eighth Annual Meeting of the Academy of Management (CD) ISSN 1543–8643. London T. 2009. Making better investments at the base of the pyramid. Harvard Business Review 87(5): 106–113. London T. 2011. Building better ventures with the base of the pyramid: A roadmap. In T London, S Hart (Eds.), Next Generation Business Strategies for the Base of the Pyramid: New Approaches for Building Mutual Value. FT Press: Upper Saddle River, NJ. London T. 2016. The Base of the Pyramid Promise: Building Businesses with Impact and Scale. Stanford Business Books: Stanford. London T, Anupindi R. 2012. Using the base-of-the-pyramid perspective to catalyze interdependence-based collaborations. Proceedings of the National Academy of Sciences 109(31): 12294–12301. London T, Esper H. 2014. Assessing poverty-alleviation outcomes of an enterprise-led approach to sanitation. Annals of the New York Academy of Sciences 1331: 90–105. London T, Esper H, Grogan-Kaylor A, Kistruck G. 2014. Connecting poverty to purchase in

Base of the pyramid  13 informal markets. Strategic Entrepreneurship Journal 8(1): 37–55. London T, Hart SL. 2004. Reinventing strategies for emerging markets: Beyond the transnational model. Journal of International Business Studies 35(5): 350–370. London T, Jäger U. 2019. Cocreating with the Base of the Pyramid. Stanford Social Innovation Review 17(3): 40–47. Prahalad CK. 2005. The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through

Profits. Wharton School Publishing: Upper Saddle River, NJ. Prahalad CK, Hammond A. 2002. Serving the world’s poor, profitably. Harvard Business Review 80(9): 48–57. Prahalad CK, Hart SL. 2002. The fortune at the bottom of the pyramid. Strategy + Business 26(First Quarter): 2–14. Prahalad CK, Lieberthal K. 1998. The end of corporate imperialism. Harvard Business Review 76(4): 68–79. Sen A. 1999. Development as Freedom. Anchor Books: New York. Simanis E, Hart S, Duke D. 2008. The base of the pyramid protocol: Beyond ‘basic needs’ business strategies. Innovations 3(1): 57–84.

Ted London

6.

Born global firms

Many born globals operate in niche markets (Knight et al., 2004), specializing in narrow product categories for which demand in their home country market is insufficient, which drives the firm to seek additional sales opportunities in foreign markets. Perhaps the key distinguishing characteristic of born globals is a paucity of tangible and financial resources, which is common to smaller firms (Knight and Cavusgil, 2004). This tendency increases the pressure on such firms as they expand abroad, especially since international business is often costly in terms of organizational resources. Such firms experience the liability of small size and the liability of newness. Not only do they endure the disadvantages of small size and the limited resources that result accordingly, but also, young firms are characterized by limited experience and underdeveloped managerial competences for pursuing international opportunities. Born global founders typically exhibit specific characteristics, including a strong international entrepreneurial orientation and possession of specific resources or capabilities suitable for international business (Cavusgil and Knight, 2015). Such founders may exhibit a borderless view of markets, and see the world as their marketplace. This attitude is common, for example, among digital platform firms that can interact easily with customers around the world. Other characteristics of born globals include flexibility (Cavusgil and Knight, 2009), which helps such firms navigate a diversity of markets and conditions abroad. Many born globals target their offerings to 20 or more countries. Many engage in a wide range of value chain activities around the world. For example, it is now common for even very small companies to source parts, finished goods, services, and other inputs from suppliers located worldwide. However, exporting is the most common entry strategy for born globals, as they market their products or services abroad. Among the foreign entry strategies, including joint ventures and foreign direct investment, exporting tends to be relatively low cost and low risk, a characteristic that suits resource-constrained smaller firms. As they export, born globals rely heavily on foreign market intermediaries (Knight and Cavusgil, 2004), who may perform a range of business activities on behalf of the born globals in

“Born global” refers to an organization that undertakes international business at or near its founding. The terms “international new ventures” and “global start-up” can also refer to the same concept (Oviatt and McDougall, 2005). Internationalization can occur all along firms’ value chains, including sourcing, manufacturing, marketing, and distribution. When speaking of born global firms (“born globals”), however, scholars usually refer to outward internationalization in order to market and sell products or services in foreign markets. While the concept “born global” has gained wide usage, in fact, such companies are rarely “global” from inception (Hashai, 2011). Such firms usually conduct business in a moderate number of countries, and the time period to initial expansion into foreign markets is typically three or fewer years, following the firm’s establishment in its domestic market (McDougall and Oviatt, 2000). The phenomenon of born globals is notable because, historically, most companies initiated international business substantially after their inception, often decades. The literature on international business has long been dominated by perspectives on large multinational enterprises (MNEs) (Zander et al., 2015). This has arisen because, historically, before the advent of globalization and advanced technologies, the costs of international business were typically considerable. Thus, traditionally, the vast majority of firms that undertook substantial international business were large MNEs. Consequently, the rise of born globals presents an interesting new development that has generated substantial scholarly interest. The historical literature in international business long regarded international expansion as incremental or gradual, most often because firms usually lack critical information or experience about foreign markets, and it takes time to acquire such knowledge. However, born globals have emerged in large numbers since the 1990s, and typically expand abroad at a very early age (Knight and Liesch, 2016). Born globals internationalize early for various reasons. Management may possess a strong international orientation or perceive substantial demand for the firm’s products abroad (Cavusgil and Knight, 2009). 14

Born global firms  15

foreign markets. Such activities include conducting market research, making important contacts, and developing local distribution channels. In other words, born globals tend to offset their lack of resources by subcontracting international activities to foreign distributors and other external agents. Given their youth, born globals are usually smaller firms, i.e., small and medium-sized enterprises (SMEs). Depending on the country, SMEs are defined as companies with 500 or fewer employees, or companies with 250 or fewer employees. Consequently, scholarly research on born global firms holds particular relevance to international business in the SME. Compared with large MNEs, young small firms enjoy certain advantages in international business. Such companies are usually more flexible and unencumbered by bureaucracy and established organizational processes (Cavusgil and Knight, 2009; Lewin and Massini, 2004). Possessing a smaller number of employees and less established structure, young firms are usually better situated to adapt their systems, routines, and collective employee mindset to pursue international opportunities. Indeed, management at many born globals do not strongly perceive national boundaries, and instead view the world as their marketplace from a very early stage (Madsen and Servais, 2017; Rennie, 1993). The phenomenon of born globals has engendered the emergence of a scholarly area of inquiry known as “international entrepreneurship,” which attracts scholarship from both the fields of “entrepreneurship” and “international business.” Accordingly, scholars focus on SMEs and the creation of new corporate ventures in the international context. The rise of born globals offers fertile ground for research and a groundbreaking perspective on traditional views in entrepreneurship and international business, and on widespread internationalization of SMEs. International entrepreneurship emphasizes the process of creatively discovering and exploiting opportunities outside the firm’s domestic market in pursuit of opportunities and advantages in company performance and other objectives. It reflects the proactive, innovative, and risk-seeking behaviors that born globals and similar firms may undertake to pursue international opportunities and achieve other goals in the global marketplace (Freeman and Cavusgil, 2007).

Scholars have classified international entrepreneurship across two streams of research: (i) the growing international role played by young entrepreneurial ventures (such as born globals), and (ii) the international, entrepreneurial activities of larger, established firms (McDougall and Oviatt, 2000). Thus, because international entrepreneurial behavior can occur in old as well as young firms, research on born globals has implications for older, larger internationalizing firms as well. Moreover, international entrepreneurial behavior can be examined at various units of analysis, including managerial, organizational, industrial, or even national levels. The field of international entrepreneurship offers rich opportunities to employ and integrate perspectives that enrich knowledge development on born globals. Born globals exist in most industries, in both goods (Jin et al., 2018) and services sectors (Taylor et al., 2021; Weerawardena et al., 2020). Born globals and research in international entrepreneurship also highlight other important recent phenomena in international business, including innovation, leveraging state-of-the-art technologies, the rise of digital platform companies and other digital firms that leverage online platforms to conduct business (Nambisan et al., 2019; Walton, 2022), and market conditions and capabilities (Madsen and Servais, 2017). Such businesses as well as those that operate in the services sector can expand internationally with great efficiency at or near the firm’s founding. The services sector comprises firms that offer professional services— fully intangible services that can be easily distributed via the Internet. For example, software, education and training, consulting, marketing services, certain services related to health care, insurance, travel, architectural and design services, finance and banking, accounting, and various other services can be offered online. Firms in such industries have a natural advantage to become born global firms—they can “go global” by simply building a website. A particular area in international entrepreneurship literature that remains underexplored is digital startups. For example, Oliva et al.’s (2022) work presents the analyses of possible risks and critical factors for born global startups, and highlights the importance of emergent digital solutions such as big data, internet of things, artificial intelligence, cloud Gary Knight and Huda Khan

16  Encyclopedia of international strategic management

computing and augmented reality for manufacturing. At the same time, while many born globals operate in the high-tech space, there are many born globals in low-tech sectors (Falay et al., 2007; Evers, 2011). Technology alone does not make born globals distinct from non-born globals (Dow, 2017). Hence, literature presenting answers to the question regarding whether born globals are more technologically intensive than non-born globals often lacks conclusive results (Hennart et al., 2021). A fundamental characteristic of born globals is their capabilities to overcome the barrier of internationalization without first establishing a strong foothold in their home markets (Rennie, 1993). This has led to the development of interest among governments of emerging and advanced markets (Ferguson et al., 2021). While early work on international entrepreneurship on born globals focuses mostly on developed markets, an important stream of recent contributions lies in the context of emerging markets. The innovation policies in emerging markets, along with their immature political institutions, present unpredictable challenges (Hoskisson et al., 2000; Marcotte, 2014). Hence, such context may restrict entrepreneurial activities (Marcotte et al., 2013). Consequently, over the last decade, scholars have been gaining interest in orientations and capabilities of born globals from emerging markets (Paul and Gupta, 2014; Falahat et al., 2018; Moen et al., 2022). For example, Prieto-Sánchez and Merino (2022) find that innovative entrepreneurs in emerging markets are more likely to become born globals compared with those in advanced markets. As entrepreneurs perceive a wide range of opportunities worldwide, the growth of born globals has accelerated. Such businesses can be an engine of growth for job creation and economic development (Cavusgil and Knight, 2009). For this reason, numerous nations now actively promote internationalization among SMEs and new startup firms. Globalization, advancing technologies, and other trends are facilitating the ability of companies to compete in international business from the earliest days after establishment of the firm. The born global phenomenon tends to challenge traditional views on the internationalization of the firm. Such perspectives viewed Gary Knight and Huda Khan

internationalization as a slow, incremental process due to the complexity and uncertainty of foreign markets and the inability of firms to develop sufficient knowledge and experience on internationalization, in a timely manner. Given that born globals succeed in international business despite scarce resources and other organizational shortcomings, even managers of large established companies can learn much from the success of these young firms. In various ways, born globals likely represent the future of international business. The rise of born globals indicates that youth, lack of experience, and limited financial and human resources do not constitute barriers to internationalization and global success. Traditional views of the large MNE as the dominant organizational form in international business appears to be evolving. Businesses that internationalize substantially at or near their founding—born global firms—are gradually becoming the norm among companies that engage in international business. Gary Knight and Huda Khan

References

Cavusgil, S. T. and G. Knight (2009). Born global firms: A new international enterprise, Business Expert Press. Cavusgil, S. T. and G. Knight (2015). ‘The born global firm: An entrepreneurial and capabilities perspective on early and rapid internationalization’, Journal of International Business Studies, 46, 3–16. Dow, D. (2017). ‘Born global firms and accidental internationalists: Has Hennart (2014) opened a can of worms?’, Review of International Business and Strategy, 27(3), 286–307. Evers, N. (2011). ‘International new ventures in “low tech” sectors: A dynamic capabilities perspective’, Journal of Small Business and Enterprise Development, 18(3), 502–528. Falahat, M., G. Knight and I. Alon (2018). ‘Orientations and capabilities of born global firms from emerging markets’, International Marketing Review, 35, 936–957. Falay, Z., M. Salimäki, A. Ainamo and M. Gabrielsson (2007). ‘Design-intensive born globals: A multiple case study of marketing management’, Journal of Marketing Management, 23, 877–899. Ferguson, S., M. Henrekson and L. Johannesson (2021). ‘Getting the facts right on born globals’, Small Business Economics, 56, 259–276. Freeman, S. and S. T. Cavusgil (2007). ‘Toward a typology of commitment states among managers of born-global firms: A study of accelerated

Born global firms  17 internationalization’, Journal of International Marketing, 15, 1–40. Hashai, N. (2011). ‘Sequencing the expansion of geographic scope and foreign operations by “born global” firms’, Journal of International Business Studies, 42, 995–1015. Hennart, J.-F., A. Majocchi and B. Hagen (2021). ‘What’s so special about born globals, their entrepreneurs or their business model?’, Journal of International Business Studies, 52, 1665–1694. Hoskisson, R. E., L. Eden, C. M. Lau and M. Wright (2000). ‘Strategy in emerging economies’, Academy of Management Journal, 43, 249–267. Jin, B., J.-E. Chung, H. Yang and S. W. Jeong (2018). ‘Entry market choices and post-entry growth patterns among born globals in consumer goods sectors’, International Marketing Review, 35, 958–980. Knight, G. A. and S. T. Cavusgil (2004). ‘Innovation, organizational capabilities, and the born-global firm’, Journal of International Business Studies, 35, 124–141. Knight, G. A. and P. W. Liesch (2016). ‘Internationalization: From incremental to born global’, Journal of World Business, 51, 93–102. Knight, G., T. K. Madsen and P. Servais (2004). ‘An inquiry into born-global firms in Europe and the USA’, International Marketing Review, 21, 645–665. Lewin, A. Y. and S. Massini (2004). Knowledge creation and organizational capabilities of innovating and imitating firms. Organizations as Knowledge Systems. 209–237. Springer. Madsen, T. K. and P. Servais (2017). The internationalization of born globals: An evolutionary process? International Business. 421–443. Routledge. Marcotte, C. (2014). ‘Entrepreneurship and innovation in emerging economies: Conceptual, methodological and contextual issues’, International Journal of Entrepreneurial Behavior & Research, 20, 42–65. Marcotte, C., S. A. Soussi and R. Molz (2013). Strategy implementation in emerging countries: Three theoretical approaches. The Multinational Enterprise in Developing Countries: Local versus Global Logic. 39–50. Routledge. McDougall, P. P. and B. M. Oviatt (2000). ‘International entrepreneurship: The inter-

section of two research paths’, Academy of Management Journal, 43, 902–906. Moen, Ø., M. Falahat and Y.-Y. Lee (2022). ‘Are born global firms really a “new breed” of exporters? Empirical evidence from an emerging market’, Journal of International Entrepreneurship, 20, 157–193. Nambisan, S., S. A. Zahra and Y. Luo (2019). ‘Global platforms and ecosystems: Implications for international business theories’, Journal of International Business Studies, 50, 1464–1486. Oliva, F. L., P. M. F. Teberga, L. I. O. Testi, M. Kotabe, M. Del Giudice, P. Kelle and M. P. Cunha (2022). ‘Risks and critical success factors in the internationalization of born global startups of industry 4.0: A social, environmental, economic, and institutional analysis’, Technological Forecasting and Social Change, 175, 121346. Oviatt, B. M. and P. P. McDougall (2005). ‘Toward a theory of international new ventures’, Journal of International Business Studies, 36, 29–41. Paul, J. and P. Gupta (2014). ‘Process and intensity of internationalization of IT firms—Evidence from India’, International Business Review, 23, 594–603. Prieto-Sánchez, C.-J. and F. Merino (2022). ‘Prevalence of the born-global phenomenon in different countries: An integrated perspective’, Multinational Business Review, 30(4), 471–498. Rennie, M. W. (1993). ‘Born global’, The McKinsey Quarterly, 45–53. Taylor, M., R. Jack, T. Madsen and M. Alam (2021). ‘The nature of service characteristics and their impact on internationalization: A multiple case study of born global firms’, Journal of Business Research, 132, 517–529. Walton, N. (2022). Digital platforms as entrepreneurial ecosystems and drivers of born-global SMEs in emerging economies. International Entrepreneurship in Emerging Markets. 84–106. Routledge. Weerawardena, J., S. Salunke, G. Knight, G. S. Mort and P. W. Liesch (2020). ‘The learning subsystem interplay in service innovation in born global service firm internationalization’, Industrial Marketing Management, 89, 181–195. Zander, I., P. McDougall-Covin and E. L Rose (2015). ‘Born globals and international business: Evolution of a field of research’, Journal of International Business Studies, 46, 27–35.

Gary Knight and Huda Khan

7.

Business groups

the quality of prevailing formal and informal institutions in a country. An absence of quality institutions creates what has been termed as ‘institutional voids’. Business groups exist as an efficient organizational arrangement to fill these voids (Chang & Choi, 1988; Khanna & Palepu, 1997, 2000a, 2000b; Leff, 1978). The sociological perspective on business groups, on the other hand, is built from the idea that firms, like any other organization, attempt to become isomorphic with the social structure surrounding them to gain legitimacy in their environment. Thus, depending on the extent and type of relationships in society (vertical, horizontal or reciprocal), firms evolve into particular forms. In a collectivist society, it may be a norm to do business with friends and family, resulting in a high incidence of business groups (Encarnation, 1989). This approach does not necessarily stand in contrast to the economic approach. In line with the rationale of economic theory, firms try to reduce transaction costs by doing business with friends and relatives, as opportunistic behavior in the brotherhood may have severe sanctioning. Related to the above, scholars have put forth two other explanations for the prevalence of business groups: business groups as a response to policy distortions, and a resource-based view of business groups. Business groups have come into prominence in many countries as a result of overt or covert support from the government, or as a means to avoid unfavorable government policies (Ghemawat & Khanna, 1998). These arguments are similar to the economic argument, in that policy distortions, favorable or unfavorable, create poor-quality institutions, resulting in inefficient market transactions, thereby creating an efficiency-based rationale for the emergence of business groups. The resource-based view of business groups (Guillen, 2000) suggests that business groups emerge when firms develop capabilities for repeated industry entry. Such a capability, however, remains a unique resource only under certain institutional conditions. The theoretical approaches discussed above also inform how we define business groups. In one of the early works on business groups, Leff (1978) defines a business group as a set of firms doing business in different markets but under common administrative and financial control. Granovetter

Business groups are an important feature of industrial organization in both developed as well as developing economies (Ghemawat & Khanna, 1998; Morck & Steier, 2004). While the specific features of business groups differ between countries, they are generally highly diversified organizational entities that are loosely coupled through ownership or other ties and operate in many unrelated areas. The origin and rationale of business groups also differ across nations. For example, while family ownership is a common feature of business groups in India, the Japanese business groups, also known as keiretsu, have cross-ownership by member companies with a bank at the core of the keiretsu network. Even within a country, there are important differences in the structure and organization of different business groups. Because of the heterogeneous nature of business groups around the world, there is no single definition of business groups or theoretical explanation of the prevalence of business groups globally. Instead, scholars have put forth multiple definitions that are rooted in specific theoretical perspectives, such as the resource-based view of business groups (Guillen, 2000), business groups as a response to market failure (Caves, 1989; Leff, 1976, 1978), institutional voids (Chang & Choi, 1988; Khanna & Palepu, 2000a, 2000b; Leff, 1978) and policy distortions (Ghemewat & Khanna, 1998); and business groups as maximizers of control through pyramidal ownership structures (La Porta, Lopez-de Silanes & Shleifer, 1999).

Definitions and theoretical perspectives on business groups

Much of the extant literature analyzes business groups from either an economics or a sociological perspective. Scholars arguing from an economics perspective rely on transaction cost theory as the basis for explaining the existence and potential efficiencies of a business group. Scholars have viewed business groups as a response to imperfect or missing markets (Caves, 1989; Leff, 1976, 1978). More recently, these views have been reinforced by arguments from institutional economics (North, 1990), which suggest that the efficiency of markets is determined by 18

Business groups  19

(1994) identifies a business group as a collection of firms bound together in formal or informal ways. Utilizing the institutional economics perspective, Khanna and Rivkin (2001) define a business group as a collection of legally independent firms, which share many formal and informal ties and take coordinated actions. Analyzing firms from a single country (India), Encarnation (1989) discusses various types of relationship shared by the member firms of a business group. These include social ties in the form of family, caste, religion, language, ethnicity and region, which reinforce financial and organizational linkages between the member firms. Despite the differences in the organizational form of business groups across countries, there are at least five common features that characterize business groups. First, group-affiliated firms are legally separate entities (Chang & Hong, 2002; Khanna & Rivkin, 2001). Thus, while the member firms are legal entities, the group itself is not. Second, the business groups are diversified (Ghemawat & Khanna, 1998). A business group comprises several firms, which may operate in more than one industry. Even when each of the affiliates operates in a single industry, the group itself becomes highly diversified as each of the affiliates would still be positioned in different industries. Third, group-affiliated firms are often related through some kind of shared ownership (Khanna & Rivkin, 2001). Even though this may not be a defining characteristic of a business group, scholars have found common ownership among affiliated firms in many countries (La Porta, Lopez-de Silanes & Shleifer, 1999). Fourth, group-affiliated firms are linked through common financial ties (Khanna & Yafeh, 2005). In some countries, such as Japan, many groups (horizontal keiretsu) have their own banks. While affiliation to a bank may be prohibited by law in some countries, such as India, intra-group loans and/or mutual guarantees may still be prevalent. Finally, group-affiliated firms share many informal linkages arising out of social and cultural aspects of society (Guillen, 2000). The informal linkages may be due to religious, ethnic, regional or family backgrounds. As Encarnation (1989) pointed out, such informal linkages reinforce the financial and organizational linkages between affiliated firms by creating an atmosphere of

interpersonal trust (Granovetter, 1994; Leff, 1978). Based on these features of business groups, we can define a business group as a set of legally independent entities, with formal (financial, common ownership, interlocking directorates) and informal (social) linkages, and operations in multiple product markets. The next section builds on this characterization of business groups to discuss their performance, strategic choices, and internationalization.

International diversification and performance of group-affiliated firms

Scholars have investigated the effect of group affiliation on various firm-level outcomes, such as a firm’s financial performance (Chang & Choi, 1988; Khanna & Rivkin, 2001; Guillen, 2000), its level of innovation (Mahmood & Mitchell, 2004) and the impact on innovation (Lee, Lee, & Gaur, 2017) and entrepreneurial activities of other firms (Pattnaik, Lu, & Gaur, 2018), the level of risk (Khanna & Yafeh, 2005), the growth in domestic (Singh et al., 2018) and international markets (Gaur & Delios, 2015; Kumar, Gaur & Pattnaik, 2012; Lamin, 2013), and performance in international markets (Gaur & Kumar, 2009; Gaur et al., 2019). A key assumption in these studies is that group affiliation brings certain advantages to the affiliated firms, such as access to resources, network, political connections, experience, etc. These advantages allow group-affiliated firms to compete more effectively against unaffiliated firms in both domestic and international markets. Thus, group-affiliated firms are more entrepreneurial when it comes to pursuing new growth opportunities in domestic markets, have a higher level of innovation, and experience greater success in international markets as compared with unaffiliated firms. The finding about performance difference in international markets suggests that not all advantages may be locally derived and some of them are transferable across geographic borders. For example, the international experience of an affiliated firm within a business group could be transferred to others through board interlocks or transfer of key personnel across affiliated firms (Lamin, 2013). Ajai S. Gaur

20  Encyclopedia of international strategic management

Business groups, thus, share several similarities with multinational firms when it comes to operating in international markets. Like multinationals, business groups rely on network orchestration advantages to exploit market imperfections. The ability to control and coordinate a diversified set of firms could be considered a first specific advantage of business groups that they are able to transfer and exploit across national borders. In an analysis of foreign subsidiaries affiliated with Korean business groups, Gaur et al. (2019) found that the positive effect of group affiliation on subsidiary performance gets weaker in countries that have more developed institutions, suggesting that as market imperfections reduce, the importance of network orchestration advantages to exploit the market imperfections also diminishes. However, when it comes to examining the performance implications of group affiliation, the results have been mixed at best, with some studies pointing towards a positive group affiliation premium (Khanna & Palepu, 2000a, 2000b; Makhija, 2004; Chang & Choi, 1988), while others identify a group affiliation discount (Bertrand, Mehta, & Mullainathan, 2002). In a study across 14 emerging markets, Khanna and Rivkin (2001) found a group affiliation premium for six countries, a group affiliation discount for three countries, and no significant effect for the remaining five countries. Scholars have also pointed out that presence of business groups could have harmful social consequences, such as crowding out of smaller firms from the industry (Pattnaik et al., 2018) and creating entry barriers for nongroup firms (Mahmood & Mitchell, 2004). These findings point to the highly context-specific nature of the benefits and costs of group affiliation. The findings vary as the contexts of studies change in terms of different countries, different time periods and different outcome variables. Scholars have argued that business groups may work as paragons or parasites depending on the prevailing institutional environment of the country (Khanna & Yafeh, 2005). In addition, the conflicting findings could also be a consequence of historical path dependencies in the evolution of business groups in different countries. Many business groups have adapted to the changing external environment by, for example, exiting legacy businesses and entering new industries to remain releAjai S. Gaur

vant. They have also attempted to establish new sources of competitive advantages by engaging in more innovation and partnering with foreign firms to gain access to technological and managerial know-how as well as access to foreign markets. In the case of Sino-Japanese international joint ventures (IJV), Lu and Ma (2008) found that local partner affiliation with a regional business group enhanced the performance of an IJV when the IJV operated in an FDI-restricted industry or location. Clearly, business group affiliation offers certain advantages that are contingent on the external institutional environment. However, given the diversity of business groups around the world, it may be difficult to generalize findings on group-level outcomes, even when such studies include data from multiple countries. One way to advance our understanding of the performance and other outcomes of business groups may be to appreciate and incorporate the context-specific features of different countries in theorizing and not aim for broad generalizations beyond a country context.

Institutional transition and the value of business group affiliation

Institutional environments are changing rapidly in many emerging economies. Even in the case of developed markets, there have been swings in the direction of pro-market reforms (Cuervo-Cazurra, Gaur & Singh, 2019). Given the context-specific explanations for the growth and dominance of business groups, scholars have examined how institutional transition impacts the performance and strategies of business groups (Zattoni, Pedersen & Kumar, 2009). In one of the early studies on Korean business groups, Chang and Choi (1988) found group-affiliated firms to be more profitable than the unaffiliated ones during 1975–1984. In contrast to this finding, studies using more recent data (late 1990s) on Korean chaebols report a relatively poor performance of group-affiliated firms (Chang, 2003). The effects of group affiliation are likely to change as the prevailing institutions develop and the economy becomes more mature (Mayer & Whittington, 2003). As an economy matures, institutional developments tend to support improvements in the efficiency of the various markets that underpin business transactions in an economy. In the

Business groups  21

early stages of development of an emerging economy, capital markets, product markets and labor markets may not be developed (Khanna & Palepu, 2000b). As a result, the group-affiliated firms may be in a better position to have a higher efficiency than unaffiliated firms as they internally transact what other firms must transact in highly inefficient markets. Group-affiliated firms can make use of internal capital and labor to start new projects without relying on external capital and labor markets. Such capabilities cannot be imitated by unaffiliated firms as there is a path dependency to the internal development of these capabilities, and a firm (group) requires a comparatively large size to internalize these markets in an efficient manner. As institutions evolve because the state changes its policies and becomes more market oriented over time, the efficiency of markets improves, and the net benefits of group affiliation are likely to decrease (Guillen, 2000; Hoskisson, Cannella, Tihanyi, & Faraci, 2004). Groups may no longer be able to make use of their political capital to receive favorable contracts, licenses and loans. The comparatively superior capability of groups to allocate capital internally may also dissipate with the development of the external capital market and the availability of cheap credit. More pro-market policies of the government are likely to increase the competitive intensity due to increased pressure from specialized firms (Toulan, 2002). There is some evidence supporting the contextual relevance of business groups. For example, in a longitudinal analysis of Indian business groups, Zattoni et al. (2009) found that the performance benefits of group affiliation were evident in the early phase of institutional transition but leveled out in the late phase. Chacar and Vissa (2005) compared firms in the U.S. and India and found no difference in the persistence of superior performance between firms in these two countries. However, poor performance persists longer in emerging economies and in firms that are affiliated to business groups. Collectively, these findings suggest that even though some benefits of business groups may persist over time and are transferable across national borders, the improvement in

external, market-supporting institutions tends to reduce the value that business groups offer to affiliated firms. To conclude, business groups continue to remain dominant organizational forms in many countries, despite some recent evidence that the value of group affiliation may reduce as the external environment becomes stronger. A possible reason for the continued success of business groups may be because of the endogenous nature of institutional evolution. As institutions change, so do business groups. The research on strategic choices of business group-affiliated firms with regards to diversification, internationalization, acquisitions, etc., highlights some of the ways through which business groups have adapted themselves to the changing external environment. Ajai S. Gaur

References

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Ajai S. Gaur

22  Encyclopedia of international strategic management reversals. Journal of International Business Studies 50(4): 598–632. Encarnation, D. J. (1989) Dislodging multinationals: India’s strategy in comparative perspective, Ithaca: Cornell University Press. Evans, P. (1979) Dependent development: The alliance of multinational, state and local capital, Princeton: Princeton University Press. Gaur, A. S. and Delios, A. (2015) International diversification of emerging market firms: The role of ownership structure and group affiliation. Management International Review 55: 235–253. Gaur, A. S. and Kumar, V. (2009) International diversification, firm performance and business group affiliation: Empirical evidence from India. British Journal of Management 20: 172–186. Gaur, A. S., Pattnaik, C., Singh, D. and Lee, J. Y. (2019) Internalization advantage and subsidiary performance: The role of business group affiliation and host country characteristics. Journal of International Business Studies 50(8): 1253–1282. Ghemawat, P. and Khanna, T. (1998) The nature of diversified business groups: A research design and two case studies. Journal of Industrial Economics 46: 35–61. Granovetter, M. (1994) ‘Business groups’, in J. N. Smelser and R. Swedberg (eds.) The handbook of economic sociology, Princeton: Princeton University Press, pp. 453–475. Guillen, M. (2000) Business groups in emerging economies: A resource-based view. Academy of Management Journal 43(3): 362–380. Hoskisson, R. E., Cannella Jr., A. A., Tihanyi, L. and Faraci, R. (2004) Asset restructuring and business group affiliation in French civil law countries. Strategic Management Journal 25(6): 525–539. Hoskisson, R. E., Eden, L., Lau, C. M. and Wright, M. (2000) Strategy in emerging economies. Academy of Management Journal 43(3): 249–267. Khanna, T. and Palepu, K. (1997) Why focused strategies may be wrong for emerging markets. Harvard Business Review 75: 41–51. Khanna, T. and Palepu, K. (2000a) Is group membership profitable in emerging markets? An analysis of diversified Indian business groups. Journal of Finance 55: 867–891. Khanna, T. and Palepu, K. (2000b) The future of business groups in emerging markets: Long-run evidence from Chile. Academy of Management Journal 43: 268–285. Khanna, T. and Rivkin, J. (2001) Estimating the performance effects of networks in emerging markets. Strategic Management Journal 22: 45–74. Khanna, T. and Yafeh, Y. (2005) Business groups and risk sharing around the world. Journal of Business 78: 301–340.

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Kumar, V., Gaur, A. S. and Pattnaik, C. (2012) Product diversification and international expansion of business groups: Evidence from India. Management International Review 52(2): 175–192. La Porta, R., Lopez-de-Silanes, F. and Shleifer, A. (1999) Corporate ownership around the world. Journal of Finance 54: 471–517. Lamin, A. (2013) Business groups as information resource: An investigation of business group affiliation in the Indian software services industry. Academy of Management Journal 56(5): 1487–1509. Lee, C. Y., Lee, J. H. and Gaur, A. S. (2017) Are large business groups conducive to industry innovation? The moderating role of technological appropriability. Asia Pacific Journal of Management 34(2): 313–337. Leff, N. (1976) Capital markets in less developed countries: The group principle, in R. McKinnon (ed.) Money and Finance in Economic Growth and Development, New York: Decker Press. Leff, N. (1978) Industrial organization and entrepreneurship in the developing countries: The economic groups. Economic Development and Cultural Change 26: 661–675. Lu, J. and Ma, X. (2008) The contingent value of local partners’ business group affiliations. Academy of Management Journal 51(2): 295–314. Mahmood, I. and Mitchell, W. (2004) Two faces: Effects of business group market share on innovation in emerging economies. Management Science 50(10): 1348–1365. Makhija, M. (2004) The value of restructuring in emerging economies: The case of the Czech Republic. Strategic Management Journal 25(2): 243–267. Mayer, M. and Whittington, R. (2003) Diversification in context: A cross-national and cross-temporal extension. Strategic Management Journal 24(9): 773–781. Morck, R. and Steier, L. (2004) The global history of corporate governance – An introduction, Working paper, National Bureau of Economic Research. North, D. (1990) Institutions, institutional change, and economic performance, Cambridge, UK: Cambridge University Press. Pattnaik, C., Lu, Q. and Gaur, A. S. (2018) Group affiliation and entry barriers: The dark side of business groups in emerging markets. Journal of Business Ethics 153: 1051–1066. Singh, D., Pattnaik, C., Gaur, A. S. and Ketencioglu, E. (2018) Corporate expansion during pro-market reforms in emerging markets: The contingent value of group affiliation and unrelated diversification. Journal of Business Research 82: 220–229. Toulan, O. (2002) The impact of market liberalization on vertical scope: The case of Argentina. Strategic Management Journal 23(6): 551–560.

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study of Indian firms. Corporate Governance: An International Review 17(4): 510–523.

Ajai S. Gaur

8.

Centers of excellence

arguing that CoE was typically arising organically over time through resource dependence and learning mechanisms in the subsidiary network, which would explain the extent to which some subsidiaries can have a role as CoE within the MNE (Forsgren, Johanson & Sharma, 2000; Andersson & Forsgren, 2000). In this context a distinction was made between unit of excellence and CoE, the latter being a foreign subsidiary defined not only in terms of the excellence of its local operations but also in terms of its importance for other units in the MNE as a giver of competence (Holm & Pedersen, 2000, see p. 6, Fig. 1). Hence, the quality of the local context in which the subsidiary is embedded became important as an explanatory factor. It was argued that a subsidiary’s ability to develop specialized competence is positively related to its embeddedness in a dynamic, local environment, but also that the higher such ability, the more it will be recognized by the rest of the MNE (Forsgren, Johanson & Sharma, 2000). The following research on what a dynamic, local environment actually means took different paths. One path is to emphasize the subsidiary’s local environments in terms of demanding business relationships (Andersson, Forsgren & Holm 2002; Schmid & Shurig, 2003; Phene & Almeida, 2008; Figueiredo, 2011). For instance, it was claimed that the more embedded the subsidiary was in customer and supplier relationships at the local level, the higher its possibility to pick up new knowledge from the local business network (Andersson et al., 2002; Forsgren, Holm & Johanson, 2005; see also the entry on foreign subsidiary networks in this volume). This feature was later stressed by, e.g., Narula (2014), who argued that effective competence-creation through a network of subsidiaries requires an appropriate balance between internal and external embeddedness and an effective distribution of these assets to other constituent parts of the MNE. Further studies subsequently showed how such subsidiaries contributed to intra-organizational knowledge flows (e.g., Lee, Jiménez & Bhandari, 2020). Another path was to focus on the characteristics of the local cluster in which the subsidiary is embedded (Tallman et al., 2004; Pedersen, 2006; see also the entry on Porter’s diamond model in this volume). For instance, it has been claimed that the possibility for

IB researchers have since long recognized that MNEs are heterogenous entities with subsidiaries having different roles (Hedlund, 1986; Forsgren, 1990; Ghoshal & Bartlett, 1993; Ghoshal & Nohria, 1997; Gupta & Govindarajan, 2000). The discussion of subsidiary roles stems from insights of subsidiaries having differentiated functions in the HQ–subsidiary relationship (Rugman, Verbeke & Yuan, 2011), which vary in relation to the heterogenous characteristics of their respective business environments (Birkinshaw & Hood, 2000). Received typologies subsequently describe how subsidiaries may hold roles that span from being receivers of HQ knowledge and implementors of HQ strategies, to their undertaking of more weighty strategic roles through control of critical resources and creators of new knowledge. Early phases of the research that observed how subsidiaries controlled their own resources tended to address this strength in terms of the ability to create autonomy in the HQ–subsidiary relationship. Later, due to the emergence of a more balanced view on dependence in their relationships with HQs, the discussion recognized that subsidiaries sometimes become important for strategy formulation of the whole MNC and/ or highly influential over strategic decisions. One aspect of the latter research, which accelerated through more systematic studies in the late 1990s, was how subsidiary knowledge development related to internal and external features of the MNC. This research suggested different but overlapping conceptualizations of extended subsidiary responsibilities, e.g., expressed as subsidiary global mandates, strategic leaders, strategic centers, centers of excellence (hereafter labelled CoE), competence-creating subsidiaries, etc. (Benito, Grogaard & Narula, 2003; Holm & Pedersen, 2000; Narula, 2014; see also Frost, Birkinshaw & Ensign, 2002, for a review). Some studies focused on HQs’ responsibility to design and appoint center roles (in various functions or for certain products) in relation to strategic challenges in the multinational organization, e.g., the choice to formally recognize a subsidiary CoE (Frost et al., 2002) and/or decision to distribute resources to it for the creation of value. Others focused on identifying factors behind these roles, 24

Centers of excellence  25

the subsidiary to learn from such clusters is dependent on the extent to which it takes part in different communities of practice in local clusters, i.e., conducting close interaction between individuals and groups in a small geographic area (Tallman & Chacar, 2011). However, to our knowledge, research is still inconclusive on this relationship, as it has not been tested extensively. While several researchers find no relation between clusters and knowledge spillovers (see, e.g., Benito, Grogaard & Narula, 2003; Frost et al., 2002), others find a positive relationship (e.g., Asmussen, Pedersen & Dhanaraj, 2009; Holm, Malmberg & Sölvell, 2003).

Center of excellence or excellent member of a global value chain?

In parallel to the research on factors behind CoEs in MNEs, there has been a growing interest in the contemporary MNE’s role in global value chains (Benito, Petersen & Welch, 2019). Often the MNE has been looked upon as an orchestrator of such chains (Rugman & Cruz, 2000; Dhanaraj & Parkhe, 2006; Buckley & Strange, 2015; Hernandez & Pedersen, 2017; Panond, Gereffi & Pedersen, 2020). In this sense the MNE’s subsidiaries are embedded, not in local clusters, but in a chain of complementary activities in which the individual MNE subsidiary represents a single step in the chain. In the literature on global value chains (GVCs) the role of the subsidiary as a real or potential CoE, based on its embeddedness in a dynamic local context, is downplayed. Instead, its role as a full-fledged, efficient partner in a global chain of complementary activities is emphasized. A subsidiary’s role as a partner in a value chain does not exclude it from possibilities to develop into a CoE within the MNE. However, it is obvious that the two subsidiary roles, a CoE role and a value chain role, are complicated to fulfill by one and the same subsidiary. There are at least two reasons for that. First, the literature on CoEs in relation to dynamic local clusters seems to assume that the subsidiary enjoys a certain degree of freedom when it comes to the interaction with other firms in the cluster (Tallman & Chacar, 2011). The literature on MNEs and GVC, on the contrary, tends to emphasize that there is an orchestrator or firm leader that to a large degree designs the value chain, including the

different roles of members (Kano, 2018). In that sense, it is not the freedom of the subsidiary to explore and pick up new knowledge from the environment that is focused but rather its efficiency to fulfill its role as a step in the value chain. Second, the subsidiary role differs substantially in terms of knowledge development and transfer within the MNE. A CoE is expected to learn by interacting with its local environment and transfer that new knowledge to other units within the MNE. The environment is mostly conceptualized as a cluster, consisting of firms with similar technologies, and the subsidiary, consequently, has much in common with these firms when it comes to knowledge development. The subsidiary in the GVC scenario is different. The value chain is founded on specialization and division of labor, which means that in terms of technology, the subsidiary has more of a non-similar relationship with other actors in the chain. Subsidiary learning by interacting in a GVC is therefore fundamentally different from learning in a CoE scenario. Below, we will elaborate on this second aspect of the difference between the subsidiary as a CoE and as a step in a GVC.

The MNE subsidiary in the global value chain

Although the general literature discusses different types of GVC depending on the governing structure and power relationships among participating firms (e.g., Gereffi, 1999; Gereffi, Humphrey & Sturgeon, 2005; see also the entry on global value chains in this volume), the conceptualization of MNE as an efficient orchestrator of the global value chain seems to be a dominating perspective among IB scholars. For instance, Pananond and colleagues conclude that “lead firm efficiency lies not only in the ‘make or buy’ decisions, but also in how lead firms can organize and drive the value chain of the entire industry” (Pananond, Gereffi, & Pedersen, 2020: 427). Irrespective of the role of the MNE in shaping the GVC, the subsidiary is embedded in a supplier–customer relationship with other firms, as seen in Figure 8.1. This is basically the raison-d’être for the subsidiary operation: to fulfill a role as a receiver and giver of (semi) products and services. Mats Forsgren and Ulf Holm

26  Encyclopedia of international strategic management

Figure 8.1

The subsidiary as a member of a global value chain

This is what Richardson would call a complementary relationship (Richardson, 1972). Although it is reasonable to argue that relationship embeddedness will facilitate exchange of fine-grained information (as opposed to “simple” and explicit information regarding aspects such as price and quality, amongst others), this information concerns the subsidiary’s knowledge about the partner’s capability to carry out a certain activity, but not learning about how to carry out the activity itself. It is primarily not about transfer of competence but exchange of fine-grained information of how to best coordinate activities, to solve mutual problems and adapt and develop each party’s (different) knowledge areas to reach as good a fit as possible between their respective products and processes. A complementary relationship is motivated primarily by the division of labor, specialization and consequently economizing on the transfer of knowledge, i.e., not equalizing capabilities (Postrel, 2002). Learning in a complementary relationship refers to one unit’s understanding of what its partner can do, without having any intentions of imitating it or doing the same thing itself. Such understanding is important in situations of problem-solving in the value chain. For instance, it seems obvious that communication across specialties is an important factor in making product development proMats Forsgren and Ulf Holm

jects more successful (Hoopes & Postrel, 1999), and that close relationships between customers and suppliers are conducive to mutual problem-solving (von Hippel, 1988; Håkansson, 1989). However, it has also been convincingly argued that there is a tradeoff between specializing in one own’s technology and understanding others’ technology across the value chain, that is, trans-specialist understanding. The basic reason for this is that specialization and trans-specialist understanding are substitutes for one another. In many cases, one specialist’s capacity buffers the other from needing to understand its problems, in a similar way as having a stock of inventory between two stages of production allows each stage to optimize its own work cycle without synchronizing the units. In some cases, though, trans-specialist understanding can compensate for inferior specialization capability (Postrel, 2002). Hence, strong ties in GVCs do not automatically imply picking up new knowledge, as illustrated in the study by Yli-Renko et al. (2001). In their study about the relationship between technology-based firms and their key customers, the authors found that relationship quality (in terms of trust) and knowledge acquisition as a consequence of customer relationships were negatively related. The authors suggest that one reason for this result would be that as

Centers of excellence  27 trust reaches a very high level, the expectation may exist that information will be provided when needed, so that the incentive to acquire external knowledge is reduced. In short, a high level of trust may allow a relationship to run smoothly and may reduce some of the transaction costs associated with managing the customer relationships but may not actually increase the knowledge acquisition. (Yli-Renko, Autio & Sapienza, 2001: 608)

The MNE subsidiary as a center of excellence

In the literature on CoEs, the quality of the local context in which the subsidiary is embedded plays an important role (Meyer, Mudambi & Narula, 2011). Economic geographers emphasize that knowledge flows are highly localized (Tallman & Chacar, 2011). It has also been demonstrated that firms will emerge in areas densely populated with competing firms or industrial clusters, to allow access to technology that is related to the firm’s own technology (Sorenson, 2003). Generally, it is argued that knowledge creation is related to spillovers in (and between) industry clusters, where agglomeration of industry actors in close geographic areas (in different countries) produce distinct profiles of knowledge, which infuse distinct knowledge creation into the linkages between competitors, suppliers and customers. This cluster-based effect has also been argued to

Figure 8.2

attract foreign investment and localizing of foreign-owned activities for the potential of achieving face-to-face contact with important partners, and, thus, greater likelihood of knowledge spillover (Cantwell & Piscitello, 2002). It has accordingly been argued that sharing technical and commercial commonalities will diffuse tacit knowledge of importance among partners for the sustenance of firms’ competitiveness (Håkanson, 2005). MNE subsidiaries located in clusters, where agglomeration of actors with strong specific knowledge is high, are therefore assumed more likely to develop higher levels of own competence (Holm et al., 2003; Asmussen et al., 2009) with the ability to spread knowledge within the MNE as CoEs. The MNE center of excellence is illustrated in Figure 8.2. In Richardson’s terminology this is a case of technological similarity rather than technological complementarity, as in the case of GVC (Richardson, 1972). Learning in the situation of similarity is primarily a question of picking up or developing new or improved technology through interaction in a network of cluster members which to a large degree are dependent on the same or similar technology. Consequently, the possibility of an MNE subsidiary to develop new knowledge which also will be of importance for the rest of the MNE – and in that sense becoming a center of excellence – is highly dependent

The MNE subsidiary as a center of excellence

Mats Forsgren and Ulf Holm

28  Encyclopedia of international strategic management

on the subsidiary’s embeddedness in such a cluster and its possibility to interact with other members in the cluster. In a way, that is a case of exploiting new knowledge on a larger scale by equalizing capabilities between units, somewhat analogous to a “teacher–student” situation in which the MNE subsidiary is learning how to apply and benefit from knowledge new to the subsidiary but located in the cluster (Lane & Lubatkin, 1998; Forsgren, 2008). So, in contrast to the GVC case in which the subsidiary is involved in a customer–supplier relationship, this is more a case of learning other firms’ technologies, and not only adapting to such technologies.

Concluding remarks

In contemporary theorizing on MNEs, the strategic roles of different subsidiaries are crucial issues. Above we have focused on two separate roles: the subsidiary as a CoE and the subsidiary as a distinctive step in a GVC. Generally speaking, both roles are important but seem to belong to different theoretical views on the MNE as an organization. The first approach highlights the advantage of the MNE in its ability to not only get access to different types of knowledge through its presence in different local contexts, but also to combine this knowledge in different ways and transfer it within the MNE (Madhok, 2015). Related to this approach is the assumption that some subsidiaries, due to their involvement in knowledge-intensive, local contexts, are especially capable of developing new knowledge and transferring that knowledge to MNE sister units. In short, the strategic role of the subsidiary is first of all being a CoE within the MNE with a high degree of discretion in interacting with other members of the local cluster. Developing new technology is an important part of such a role. The second approach is of a different kind. This strategic role is first of all not to become a developer of new knowledge through interaction with a local cluster, but to be an efficient step in a GVC governed by the MNE. It is a more constrained role in the sense that it is supposed to fulfill a certain task in a chain of different, but complementary, specialties. Even though this task is built on a specific competence, this competence is primarily a consequence of investing in the subsidiary’s own technology rather than on learning other Mats Forsgren and Ulf Holm

chain members’ technology, because the efficiency of a GVC is largely built on division of labor and specialization. This fundamental difference in subsidiary roles has a certain resemblance with the distinction made by Willamson concerning strategic approaches between strategizing and economizing (Williamson, 1991; Asmussen & Foss, 2022). Strategizing emphasizes the positioning of the firm in terms of developing its technology in relation to competitors, while economizing emphasizes the productivity of the firm’s own resources. A subsidiary as a CoE reflects an MNE strategy to become as competitive as possible when it comes to technology development, and in that sense position the firm in relation to competitors. A subsidiary as a link in a GVC, on the contrary, emphasizes its strategic role in using its specialized technology in such a way that it will optimize the efficiency of the “whole” value chain. The “economizing” strategy of the subsidiary in the GVC does not imply that there is no knowledge transfer going on between the subsidiary and other MNE units. For instance, the subsidiary might function as a link to external knowledge of importance for complementary corporate counterparts. But this is not the main role of the “economizing” subsidiary, and should not be, although it is free to disseminate knowledge to other GVC units. In the “strategizing” subsidiary, knowledge transfer is of major concern. Through interaction with a dynamic local cluster the subsidiary will enhance its possibility to be a unit of excellence. However, to be a CoE within the MNE, transfer of new technology to other MNE units is required. When it comes to knowledge transfer, the two roles include a paradox. On the one hand, we can expect that knowledge transfer is easier to accomplish by the “economizing” subsidiary, as such a subsidiary has no major reason not to share its knowledge with complementary corporate units. But the knowledge to share is often of minor importance, as specialization and division of labor is the main driver of GVC. On the other hand, knowledge transfer from the “strategizing” subsidiary is more critical but might be hampered due to the subsidiary being less motivated to share its technology with similar corporate units, which might be looked upon as (potential) competitors to the subsidiary (Andersson, Forsgren & Holm, 2021). In this

Centers of excellence  29

sense, “strategizing” at the subsidiary level might reflect internal power struggles and rent-seeking as much as maximizing value at the MNE level. It has been suggested that strategizing and economizing are in fact intertwined strategies rather than substitutes to each other (Asmussen & Foss, 2022). This is probably a reasonable assumption at the MNE level, but probably less reasonable at the subsidiary level. Or expressed differently, a subsidiary that in fact is both a CoE and a specialized member of a GVC tends to be an exception rather than a rule. In some later studies, though, it has been suggested that the subsidiary can concurrently be embedded in highly different contexts (e.g., Figueiredo, 2011; Ciabuschi, Holm & Martin, 2011). This idea opens up a challenge to future studies looking at under which circumstances it is possible to combine two strategic roles in one and the same subsidiary and what that means for developing and transferring new technology in the MNE as well as – at the same time – utilizing the subsidiary’s current assets in the most efficient way. Mats Forsgren and Ulf Holm

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Mats Forsgren and Ulf Holm

9. Comparative corporate governance

best practices, e.g., CG codes, leaving firms to decide on voluntary compliance levels (Haxhi & Aguilera, 2014). As self-regulation instruments of best practices with respect to boards, management, supervision, disclosure and auditing (Aguilera & Cuervo-Cazurra, 2004), codes are formally nonbinding, issued by expert committees, flexible in their application, built on the market mechanism for evaluation of deviations, and evolutionary in nature (Haxhi & van Ees, 2010). The voluntary self-regulatory nature of codes is exemplified in the widely used comply-or-explain principle, which entails that while compliance with code provisions is voluntary, the disclosure of noncompliance is mandatory (Haxhi & van Manen, 2010). Considered worldwide as the main CG regulatory tool, codes show similarities related to their objectives to improve the CG quality and accountability; however, unlike hard law, e.g., the Sarbanes-Oxley Act (2002), codes may not lead to the optimal CG, but reduce misconduct through self-regulation (Haxhi & Aguilera, 2012). The comparative CG literature distinguishes between two stylized dichotomous models of CG: the shareholder-oriented or Anglo-American model (strong shareholder rights, single powerful CEO, strong market for corporate control, flexible labor market, and disperse ownership), which prevails in Australia, North America and the UK, and the stakeholder-oriented or the continental European model (a broader power distribution among stakeholders, weaker shareholders’ rights, and a typical concentrated ownership), which prevails in most of the European continent (Aguilera & Jackson, 2010). The main difference between these two models of CG consists in the primary ownership purpose; while Anglo-American owners prioritize short-term shareholder value maximization, the longer time horizon for continental European firms allows to fulfill additional stakeholder demands, as both law and policy recognize to varying degrees the fundamental objective of advancing the interests of other stakeholders (employees, suppliers, creditors, customers, and community) that are expected to play a strong monitoring and disciplining role with regard to management (Haxhi, 2023). However, this schematic depiction of CG provides a relatively loose representation of both dichotomous models, which vary

Over the last three decades, systemic corporate misconduct, increased shareholder activism, and recurrent global financial crises have stirred an extensive academic, business, and societal debate over corporate governance (CG) and the way public corporations are directed and controlled (Haxhi, 2010). CG studies “the power and influence over decision making within the corporation” (Aguilera & Jackson, 2010), focusing notably on how to monitor managers, protect minority shareholders, enhance reporting and disclosure, and improve employee and other stakeholder participation in firms’ strategic decisions (Aguilera, Marano & Haxhi, 2019). This brief overview seeks to grasp the state-of-the-art of comparative CG by focusing on its definition, regulation and practices, alternative models, and its internal and external characteristics, and current debates and future trends. While the literature has focused on the cross-national diversity in CG, less consensus exists on a unifying CG classification, as each definition emphasizes different dimensions and their respective goals. For example, while social scientists and economists depict CG as “the institutions that influence how business corporations allocate resources and returns” (O’Sullivan, 2000), legal and finance scholars narrow it down to the ways in which corporate financial suppliers ensure their return on capital or investment (Shleifer & Vishny, 1997). Investors, managers and policymakers understand CG as an ecosystem of tools that shape the control and direction of corporations and that structure the power relations among its stakeholders (Aguilera & Jackson, 2003). These definitions encompass both formal and informal institutions of CG, but also capture the internal arrangements within each corporation as well as the national business context in which these corporations are embedded, such as the labor market, capital market, and legal system (Haxhi, van Ees, & Sorge, 2013). CG practices are regulated through hard- and soft-law approaches. The former, a one-size-fits-all form of statutory norms, entails following legal rules at the risk of penalty; the latter comprises standards of 32

Comparative corporate governance  33

across nations, and acknowledges many particularities and hybrid forms within and across the models. For instance, the Japanese CG case, which does not fit into the two stylized models, is characterized by business networks, enterprise unionism, a meritocratic seniority system and little transparency despite its strong capital market. Furthermore, within the stakeholder-oriented model, Haxhi and Aguilera (2017) identify three distinct CG models. The state capitalist hybrid model, which is present in Belgium and France and has a relatively strong capital, confrontational management–labor relations and an interventionist civil law state. The stakeholder-oriented consensus model, which prevails in Germanic and Scandinavian countries, is characterized by consensual and cooperative management–labor relations; however, unlike in Germany, it actually has a more permissive and less interventionist state. Finally, the mixed market economies model that is present in eastern and southern Europe, has less stringent legal standards and enforcement, where the complementarities between the limited capitalization and the civil-law tradition show the path-dependent and context-specific nature of this model. Beyond advanced economies, Aguilera, Judge and Terjesen (2018) classify two CG models: the state-owned model prevailing in Russia and China, and the family-owned model, present in India and most of southeast Asia. Similarly, Aguilera and Haxhi (2019) research CG in emerging markets and uncover the weak institutional enforcement as the common denominator of CG in BRIC (Brazil, Russia, India, China) countries, characterized by poor creditors’ rights, strong owners, lack of transparency, and low investment in human capital. While the CG systems described above have been traditionally conceptualized at the country level, comparative CG has also distinguished between internal and external CG practices at firm level (Aguilera, Desender, Bednar & Lee, 2015). The internal mostly encompasses the type of owner (e.g., institutional investor, family), the structure of the board, the managerial authority and the employee voice; while the external CG practices refer to those pressures exerted by actors outside the firm, such as rating agencies, auditors, the legal system, media, and social movements. Research has shown that corporations within the different national gov-

ernance systems often have ample discretion to, for instance, have a board with majority independent directors in a majority-owned firm in the continental model and have a firm without variable contingent pay in the shareholder-oriented model. What is clear is that there are certain global CG standards, such as those identified by the OECD rules, but firms tend to adopt those CG practices that best fit their strategy. Several CG debates have emerged in response to greater societal demands for transparency and accountability, in part supported by social media and overall digitalization. First, the worldwide Covid health crisis has brought owners, boards and managers closer as they had to quickly react to working remotely and shortages in the global value chain, challenges that require flexibility as well as agility in quickly adjusting. Second, increased shareholder activism, partly explained by additional tools for shareholders to express their voice and influence boards and managers, is illustrated by a boom in shareholder proposals dealing with compensation, diversity, sustainability and board renewal. Third, partly motivated by societal pressures on the role of corporations in addressing climate change and social inequalities challenges – and investors’ pressure on shareholder-oriented firms to spread the wealth – universal owners such as BlackRock’s CEO and 181 CEOs of the Business Roundtable have asked their investee firms to pay attention to corporate purpose. It is yet to be seen whether this social movement, started by Unilver’s CEO and followed by Danone’s CEO (subsequently fired), will change how firms relate to their stakeholders. Fourth, although often treated independently in the recent ESG movement, governance (G) is clearly the pillar that sustains what happens with the environment (E) and the social (S), as more boards spend strategic time to discuss how to incorporate ESG practices into their overall strategy. Finally, as the economy is moving from digital and virtual to big data and artificial intelligence, boards and companies are looking for experts and using these new technologies to be more informed and efficient in their decisions. A big challenge for companies is to assess the risk of cybersecurity breaches for their companies. To close, comparative CG examines the risk that corporations are willing to take in Ilir Haxhi and Ruth V. Aguilera

34  Encyclopedia of international strategic management

monitoring and advising their different stakeholders. Risk is mitigated or exacerbated by adopting myriad CG practices that are neither costly nor isolated from the broader ecosystem. The advantage of comparative CG is that it allows assessment to compare and apply these practices across firms, industries, countries or regions. Our last takeaway is that CG is not converging towards a single particular model, but it continues to evolve to adjust to societal needs. Ilir Haxhi and Ruth V. Aguilera

References

Aguilera, V.R. and Cuervo-Cazurra, A. 2004. Codes of good governance worldwide: What is the trigger? Organization Studies, 25 (3), 415–443. Aguilera, R. V., Desender, K., Bednar, M. K. and Lee, J. H. 2015. Connecting the dots: Bringing external corporate governance into the corporate governance puzzle. Academy of Management Annals, 9 (1), 483–573. Aguilera, R. and Jackson, G. 2003. The cross-national diversity of corporate governance: Dimensions and determinants. Academy of Management Review, 28 (3), 447–465. Aguilera, R. V. and Haxhi, I. 2019. Comparative corporate governance in emerging markets. In The Oxford Handbook of Management in Emerging Markets (eds.) R. Grosse & K. Meyer. Oxford University Press: Oxford: 185–218. Aguilera, R.V. and Jackson, G. 2010. Comparative and international corporate governance. Annals of the Academy of Management, 4, 485–556. Aguilera, R. V., Judge, W. Q., and Terjesen, S. A. 2018. Corporate governance deviance. Academy of Management Review, 43 (1), 87–109. Aguilera, R.V., Marano, V., and Haxhi, I. 2019. International corporate governance: A review

Ilir Haxhi and Ruth V. Aguilera

and opportunities for future research. Journal of International Business Studies, 50 (4), 457–498. Haxhi, I. 2010. Institutional contextuality of business best practices: the persistent cross-national diversity in the creation of corporate governance codes. PhD dissertation. University of Groningen Press, Groningen, the Netherlands. Haxhi, I. 2023. Comparative corporate governance. In Comparative International Management (eds.) A. Sorge, and N. Noorderhaven. Routledge: London. Haxhi, I. and Aguilera, R. V. 2012. Are codes fostering convergence in corporate governance? An institutional perspective. In Convergence of Corporate Governance: Promise and Prospects (eds.) A. Rasheed and T. Yoshikawa. Palgrave Macmillan: Basingstoke. Haxhi, I. and Aguilera, R. V. 2014. Corporate governance through codes. In Wiley Encyclopedia of Management 3rd edition, International Management (ed.) C. Cooper. Wiley-Blackwell. Haxhi, I. and Aguilera, R. V. 2017. An institutional configurational approach to cross-national diversity in corporate governance. Journal of Management Studies, 54 (3), 261–303. Haxhi, I. and van Ees, H. 2010. Explaining diversity in the worldwide diffusion of codes of good governance. Journal of International Business Studies, 41 (4), 710–726. Haxhi, I., van Ees, H., and Sorge, A. 2013. A political perspective on business elites and institutional embeddedness in the UK code-issuing process. Corporate Governance: An International Review, 21 (6), 535–546. Haxhi, I. and van Manen, J. 2010. Nationale cultuur en de wereldwijde verspreiding van corporate governancecodes. Goed Bestuur, 3. O’Sullivan, M. (2000) Corporate governance and globalisation, 570 ANNALS. AAPSS, 153, 154. Shleifer, A. and Vishny, R. W. 1997. A survey of corporate governance. Journal of Finance, 52 (2), 737–783.

10. Comparative human resource management

be beneficial. Comparative HRM, on the other hand, is more critical, implying that people are, and need to be, managed differently in different countries or geographical regions. Comparative HRM looks not for a universalistic best practice of the kind often promoted by consultants, gurus and, in most cases, business schools, but for a contextually related best fit. What works in one context may not work so well, or may not work at all, in another context. Nor is comparative HRM just a reflection of different practices in different countries. Our understanding of the field of human resource management, and even more dramatically what is assumed to be ‘good’ HRM, varies by country. Further, there is evidence that the differences between the countries remain significant over time: although some practices may be converging between countries, many others are not; the way people are managed in different countries remains stubbornly idiosyncratic. Even multinational organisations that want to have the same HRM policies everywhere (many do not) find it impossible to ensure complete HRM practice transfer, so that the result is always some kind of hybridisation. So comparative HRM matters if we are to understand HRM fully. Why do these differences occur? There are two broad sets of theories: one, found in the cultural literature, argues that people have different values and ways of behaving in different countries. Travellers know the truth of this, as does anyone who works in a multinational team. For example, in some societies hierarchy is very important and it would be seen as extremely disrespectful to challenge a manager; in other societies hierarchy is less significant and managers want their employees to share their ideas. As another example, some MNEs opening up operations in China introduced a western-style individual employee performance management system in their subsidiaries. Chinese culture is built around subtlety and respect for modesty, and employees feel that boasting about their success is a sign of arrogance. Nevertheless, some local organisations tried to imitate the foreign ‘best practice’, encouraging their employees to complete peer appraisals or give timely feedback, even from subordinates to supervisors. But this has met with resistance from both the top and the bottom of the hierarchy: subordinates are unwilling

Comparative human resource management is concerned with comparing the different approaches to human resource management (HRM) found in different geographical entities – usually, though not always, countries. (International HRM deals with how multinational enterprises manage such differences.) There are, of course, other comparisons – we know that HRM varies with the size of the organisation and with the sector that it operates in. But country is the most powerful explanation of the differences between organisations in the way they manage their human resources. This matters not just for organisations operating across countries but also for understanding the nature of HRM within any one country: it is invariably a product of its own history, culture and institutions, as much as it is a product of advanced ideas about HRM. A specific advantage of comparative HRM is that it allows a clearer perspective on HRM in one’s own country; by noting how and why things are done differently in other countries, our own circumstances are thrown into greater relief. Thus, understanding that in some countries superiors are rarely subjected to questioning or that pay is invariably linked to groups rather than individuals helps those in countries where these things are unusual to appreciate or to challenge their own situation. Further, understanding a country’s specific forms of HRM can help organisations appreciate the location advantages (highly educated workforce; cheap labour, etc.) that they can benefit from in each location. The widespread universalistic approach to HRM implies that best practices can be identified irrespective of context, and, given that the subject itself was first established in the USA, and that much of our research knowledge of the topic comes from there, best HRM practice is to be found in the USA. Countries that have different approaches are seen by scholars adopting this universalistic approach to be ‘backward’ and needing to ‘catch up’. Much of the literature in both comparative and international HRM assumes that HRM practice transfer, so that other countries adopt universalistic practices, will 35

36  Encyclopedia of international strategic management

to give honest feedback and supervisors are uncomfortable with negative comments. For HRM, generally, cultural theories are problematic, partly because all cultures are normally distributed so that there will be a range of individuals in each society, partly because cultures are difficult to measure effectively, and partly because organisations can choose to manage or ignore local cultures. It is more difficult to manage or ignore institutional differences between countries and that is the other main explanation of differences in HRM between countries. Issues such as the educational system, the health system, the welfare system, and fiscal and other tax arrangements will have a profound effect that it is more difficult to ignore. On top of these baseline differences, more proximal differences in legislation, in employment regulation, and in trade unionism will impact directly on the way that people can be managed. Organisations are constrained in how they can manage their workers. There is a growing body of evidence of a link between the institutions of a country and the kinds of HRM practices that are typical of that country. For example, organisations embedded in liberal market economies (LMEs), where competition is seen as invariably positive and governments and business believe that businesses should be as free as possible, are more likely to use financial incentives and penalties to manage their employees’ performance. Organisations operating in coordinated market economies (CMEs), where collaboration between organisations and government support and control are more common, tend to prioritise long-term relationships where training and development for employees are highly valued.

Chengcheng Miao and Chris Brewster

Cultural and institutional differences embedded in nations have a significant impact on the behaviour of people and on the relationship between people and, therefore, on the management of people. Comparative human resource management provides an alternative approach that tries to find the most contextually related model of human resources management for each organisation. Chengcheng Miao and Chris Brewster

References and selected further reading

Brewster, C., Mayrhofer, W., & Farndale, E. (eds). (2018) Handbook of Research on Comparative Human Resource Management (2nd ed.). Cheltenham: Edward Elgar Publishing. Farndale, E., Ligthart, P., Brewster, C., & Poutsma, E. (2017) Institutional frameworks and HRM practices in Europe: The market economy effect over time. Journal of International Business Studies 48 (9), 1065–1086. Gooderham, P.N., Mayrhofer, W., & Brewster, C. (2019) A comparative institutional research agenda for HRM. International Journal of Human Resource Management 30 (1), 5–30. Lansbury, R.D., Wright, C.F., Bamber, G.J., & Wailes, N. (2020) International and Comparative Employment Relations: National Regulation, Global Changes. London: Routledge. Parry, E., Morley, M., & Brewster, C. (eds). (2021) Oxford Handbook of Contextual Approaches to Human Resource Management. Oxford: Oxford University Press. Sanders, K. & De Cieri, H. (2021) Similarities and differences in international and comparative human resource management: A review of 60 years of research. Human Resource Management 60 (1), 55–88.

11. Cosmopolitanism

experience “the global” within their daily life and are keenly aware of the world as a whole (Tomlinson, 1999). Further, it emphasizes that diversity of cosmopolitan individuals is associated with a variety of cosmopolitan dispositions, because the contemporary landscape promotes complex, multi-layered, and diverse enactments of cosmopolitanism (Levy, Lee, Jonsen, & Peiperl, 2019). Cosmopolitanism has been defined as a personal ability to make one’s way into other cultures, through listening, looking, intuiting, and reflecting (Hannerz, 1990), a cultural disposition involving an intellectual and aesthetic stance of “openness” toward peoples, places, and experiences from different cultures, especially those from different “nations” (Szerszynski & Urry, 2002), an identity horizon that transcends the conventional local boundaries of social entities such as nation states or countries of origin (Lee, 2014, 2015), and an embodied disposition characterized by high levels of cultural transcendence and openness that are manifested in and enacted along varied trajectories of cultural embeddedness in one’s own culture and cultural engagement with the cultural other (Levy et al., 2019). Across these definitions, two core characteristics are widely accepted: openness to the cultures of others and transcendence of conventional cultural boundaries (Levy et al., 2019). Many researchers consider openness to the cultural other a core attribute of cosmopolitan disposition (Hannerz, 1990; Szerszynski & Urry, 2002). Transcendence, on the other hand, captures the individual’s tendency to go beyond their own cultural habitus and thus reflect on it from a distance (Lee, 2014). While all cosmopolitans are characterized by high levels of openness and transcendence, the ways in which they enact these attributes may vary according to their level of embeddedness in their own culture (i.e., cultural embeddedness) and level of engagement (i.e., cultural engagement) with other cultures (see Levy et al., 2019, for the different types of cosmopolitans). A strand of empirical research investigates the intrapersonal outcome of experiential cosmopolitanism, predicting that individuals (constantly) define and redefine identity and belonging as a result of dynamic interactions with cultural others and the global (Beck, 2002; Lee, & Levy, 2023). Thus, the research question here is to understand individuals’

Introduction

Cosmopolitanism is a complex, multilevel, and multi-layered phenomenon manifested in a variety of social spheres (Lee, 2015; Levy, Peiperl, & Jonsen, 2016; Vertovec & Cohen, 2002). A vast body of literature on cosmopolitanism spans multiple disciplines (e.g., sociology, anthropology, political science, philosophy, management), and can be summarized under three distinct perspectives: political, moral, and cultural (Levy et al., 2016). Political cosmopolitanism, or cosmopolitics, discusses cosmopolitan democracy and governance that enables world politics to transcend the interests of nation states (e.g., Archibugi, 2004) and confronts global risks such as climate change and the COVID-19 pandemic in a transnationally coordinated manner (Beck, 2002). The moral perspective seeks to formulate universal or cosmopolitan ethics that could guide the world community and promotes a shared moral commitment to all humanity irrespective of race/ethnicity and citizenship/ country of origin (Nussbaum, 1994). Finally, the cultural perspective focuses on the interactions between the local and the global often manifested in cultural openness (e.g., Delanty, 2006), consumption of culturally diverse/foreign artifacts and products (e.g., Szerszynski & Urry, 2002), and enjoying and learning from different cultures (e.g., Hannerz, 1990). Cultural cosmopolitanism also underscores the powerful impact of culturally diverse systems of meaning that can destabilize and change the fabric of nation-state societies and the relations between self, other, and world (Delanty, 2006).

Cosmopolitanism as an individual-level characteristic

The growth and proliferation of global systems and transnational cultures have expanded the social bases of cosmopolitanism beyond the global elite (e.g., Kanter, 1995) and highly mobile professionals (e.g., Colic-Peisker, 2010) to include more “ordinary” cosmopolitans (Lee, 2014; Levy et al., 2016). Thus, cosmopolitanism highlights the increasing diversity of individuals who 37

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intrapersonal learning process that unfolds through encounters with competing systems of meaning and alternative cultural models (Delanty, 2006). For example, Bourgouin (2012) describes the lived experience of South African financial professionals through their cosmopolitanism lifestyle and identities, whereas Colic-Peisker (2010) explores the transnational knowledge workers’ identity and belonging through the cosmopolitanism lens. Bühlmann, David, and Mach (2013), on the other hand, show how the international managers of transnational networks could redefine cosmopolitanism as a legitimate capital in the Swiss financial sector. A second strand focuses on interpersonal processes and performance implications of high levels of cosmopolitanism in a context characterized by cultural diversity, multiplicity, and complexity. The key finding in this growing field of research is the positive role of cosmopolitanism in interpersonal and intergroup interactions (e.g., Lee & Reade, 2018; Sobré-Denton, 2016; Werbner, 1999). For example, Lee and Reade (2018) show Chinese employees’ cosmopolitanism is positively related to the levels of organizational commitment to foreign firms. Others show cosmopolitanism is related to active community-building (Sobré-Denton, 2016) and to creating transnational community (Werbner, 1999). We should note that cosmopolitanism is related to other individual-level constructs, such as global mindset and cultural intelligence, which are commonly viewed essential in a globalized environment. Cosmopolitanism conceptualized in terms of an orientation toward the external environment and openness is considered a key underlying characteristic of global mindset, a construct that focuses on cognition and information processing in a global context (Levy, Beechler, Taylor, & Boyacigiller, 2007). Cultural intelligence, conceptualized as an individual’s capability to adapt successfully to new cultural settings (Earley & Ang, 2003), could potentially facilitate the development of cosmopolitanism.

Key challenges for cosmopolitanism

Cosmopolitanism as a humanist ideal and as a social phenomenon currently faces significant challenges. In fact, cosmopolitan and anti-cosmopolitan sentiments have a long, intertwined history. ● Rise of nationalism: the rise of neo-nationalism engulfed much of the world over the past decade, from Modi’s Hindu nationalist party in India, to China’s and Turkey’s mission to restore their former imperial glory, Trump’s adoption of immigration and trade policies in the US, the upsurge of far-right politics and ideology in Europe, and the British, Catalan, and Scottish separatist nationalism. Consequently, cosmopolitanism as a political project of democracy and governance is increasingly viewed as utopian, irrelevant, or unrealistic. ● Anti-cosmopolitanism: there is a long tradition of anti-cosmopolitan sentiment dating back to Nazi Germany and Communist Russia propaganda against Jews and Bolsheviks. The current phase of anti-cosmopolitanism has been emphatically ushered by the former British Prime Minister Theresa May, who asserted that “if you believe you are a citizen of the world, you are a citizen of nowhere. You don’t understand what citizenship means” (The Telegraph, 2016). Further, anti-cosmopolitan attitudes also emerge across multiple locales and in various forms, for example, against immigrants and liberal-progressives. ● Identity and belonging: the core cosmopolitan properties of openness and transcendence, while signaling optimism for new, interesting, and inclusion of differences, also generate psychological costs for individuals due to their generally ambiguous cultural identity. If the societal and global political climate shift to scrutinize individuals’ coherent cultural identity and loyalty to their origin culture (or nation), their close affiliation with “others” gets penalized. Orly Levy and Hyun-Jung (HJ) Lee

Orly Levy and Hyun-Jung (HJ) Lee

Cosmopolitanism  39

References

Archibugi, D. 2004. Cosmopolitan democracy and its critics: A review. European Journal of International Relations, 10(3): 437–473. Beck, U. 2002. The cosmopolitan society and its enemies. Theory, Culture & Society, 19(1–2): 17–44. Beck, U. 2006. Cosmopolitan vision. Cambridge, UK: Polity Press. Bourgouin, F. 2012. On being cosmopolitan: Lifestyle and identity of African finance professionals in Johannesburg. Ethnos, 77(1): 50–71. Bühlmann, F., David, T., & Mach, A. 2013. Cosmopolitan capital and the internationalization of the field of business elites: Evidence from the Swiss case. Cultural Sociology, 7(2): 211–229. Cicchelli, V. & Octobre, S. 2017. Aesthetico-cultural cosmopolitanism among French young people: Beyond social stratification, the role of aspirations and competences. Cultural Sociology, 11(4): 416–437. Colic-Peisker, V. 2010. Free floating in the cosmopolis? Exploring the identity-belonging of transnational knowledge workers. Global Networks, 10(4): 467–488. Delanty, G. 2006. The cosmopolitan imagination: Critical cosmopolitanism and social theory. The British Journal of Sociology, 57(1): 25–47. Earley, P.C. & Ang, S. (2003). Cultural intelligence: Individual interactions across cultures. Stanford: Stanford University Press. Hannerz, U. 1990. Cosmopolitans and locals in world culture. Theory Culture & Society, 7: 237–251. Kanter, R.M. 1995. World class: Thriving locally in the global economy. New York: Simon & Schuster. Lee, H-J. 2014. Identities in the global world of work. In B. Gehrke, & M.-T. Claes (eds.), Global leadership practices: A cross cultural management perspective: 85–107. London: Palgrave Macmillan. Lee, H-J. 2015. Cosmopolitanism. Wiley encyclopaedia of management (3rd edition), 6:1–2. Lee, H.-J. & Reade, C. 2018. The role of yin-yang leadership and cosmopolitanism in employee commitment to foreign firms in China:

A paradox perspective. Cross Cultural & Strategic Management, 25(2): 276–298. Lee, H.-J., & Levy, O. (2023). Cultural intelligence, global mindset, and cosmopolitanism: A tale of three constructs. In Handbook of Cultural Intelligence Research (pp. 12-26): Edward Elgar Publishing. Levy, O., Beechler, S., Taylor, S., & Boyacigiller, N.A. 2007. What we talk about when we talk about “global mindset”: Managerial cognition in multinational corporations. Journal of International Business Studies, 38(2): 231–258. Levy, O., Lee, H.-J., Jonsen, K., & Peiperl, M.A. 2019. Transcultural brokerage: The role of cosmopolitans in bridging structural and cultural holes. Journal of Management, 45(2): 417–450. Levy, O., Peiperl, M.A., & Jonsen, K. 2016. Cosmopolitanism in a globalized world: An interdisciplinary perspective. In J. Osland, M. Li, & M. Mendenhall (eds.), Advances in global leadership. Volume 9: 279–321. Bingley, UK: Emerald Group Publishing. Nussbaum, M.C. 1994. Patriotism and cosmopolitanism. Boston Review, 19(5). Skrbis, Z. & Woodward, I. 2007. The ambivalence of ordinary cosmopolitanism: Investigating the limits of cosmopolitan openness. The Sociological Review, 55(4): 730–747. Sobré-Denton, M. 2016. Virtual intercultural bridgework: Social media, virtual cosmopolitanism, and activist community-building. New Media & Society, 18(8): 1715–1731. Szerszynski, B. & Urry, J. 2002. Cultures of cosmopolitanism. The Sociological Review, 50(4): 461–481. The Telegraph. 2016. Theresa May’s conferwww​ .telegraph​ ence speech in full. http://​ .co​.uk/​news/​2016/​10/​05/​theresa​-mays​ -conferencespeech​-in​-full/​. 5 October. Tomlinson, J. 1999. Globalization and culture. Chicago: University of Chicago Press. Vertovec, S. & Cohen, R. 2002. Introduction: Conceiving cosmopolitanism. In S. Vertovec & R. Cohen (eds.), Conceiving cosmopolitanism: Theory, context, and practice: 1–22. Oxford: Oxford University Press. Werbner, P. 1999. Global pathways: Working class cosmopolitans and the creation of transnational ethnic worlds. Social Anthropology, 7(1): 17–35.

Orly Levy and Hyun-Jung (HJ) Lee

12. Country-of-origin effect

COE and MNC entry mode

The MNC’s country-of-origin cultural values and institutional norms have been viewed as an influence on the process of strategy formulation and implementation, particularly in relation to entry mode. COE and MNC entry mode choice has a long history stretching back to, for example, Brooke and Remmers’ (1970) study of ownership patterns in subsidiaries of U.S. and European MNCs. They concluded that “preference for wholly-owned or majority-owned subsidiaries is a peculiarly American trait” (p. 262). Hofstede (1983) and Kogut and Singh (1988) also theorized a COE arguing that mode of subsidiary ownership was shaped by national culture. Hennart and Larimo (1998) distinguished two distinct reasons to expect a COE deriving from national culture in relation to subsidiary ownership strategies. The first they labeled the “national character” theory of subsidiary ownership. This argues that the cultural traits of the home bases of MNCs are a source of differences in subsidiary ownership policies. Thus, for example, Erramilli (1996: 241–242) argues that the degree of power distance and uncertainty avoidance in the MNC country of origin impacts the propensity to establish major wholly owned subsidiaries. The second reason proposed by Hennart and Larimo they referred to as “transaction costs theory and the role of cultural distance.” This contends that as cultural distance increases between home and host countries, it becomes more efficient for the MNC to enlist the help of a local partner to manage the foreign affiliate. Hence, there is a preference for joint ventures as opposed to wholly owned subsidiaries. While Hennart and Larimo’s findings appear to support a transaction cost-based interpretation and therefore an explanation that has an LoF connotation, subsequent COE research has criticized the underlying assumption of transaction cost theory explanations that cultural distance is necessarily negative (Shenkar et al., 2022).

Introduction

The country-of-origin effect (COE) proposes “that MNCs from a particular country are likely to exhibit profile similarities that are distinct from those of MNCs emanating from another country due to differences in home country factors” (Sethi & Elango, 1999: 285). Although both COE and liability of foreignness (LoF) view operating abroad as distinctive from operating in the home country of the MNC, they are distinctive perspectives. Whereas LoF has had a focus on foreignness as negative additional costs compared with local firms, i.e., “the institutional and relational costs of conducting business abroad” (Kumar & Zaheer, this volume), COE views the foreignness of country of origin as a potential source of competitive advantage (Sethi & Elango, 1999). However, particularly as LoF more recently has become more open to the notion of foreignness as a potential asset under certain conditions (Kumar & Zaheer, this volume), COE and LoF clearly do intersect.

COE and MNC behavior

A key contribution of COE is to provide an explanation for country-level variations in MNC behavior. Sethi and Elango (1999: 287) distinguish three components of COE: “(1) economic and physical resources and industrial capabilities; (2) cultural values and institutional norms; and (3) national government’s economic and industrial policies.” These three COE elements induce MNCs from different countries to exhibit differential behavior in their strategic choices and operational modes. Whereas the first and the third of these three elements refer to tangible country-of-origin competitive advantages – MNCs derive advantage from attributes of variable national level resources (Porter, 1990) and support stemming from the industrial policies of their governments (Sethi & Elango, 1999) – the second element is less tangible. The COE deriving from cultural values and institutional norms has figured so prominently in the international strategic management literature (Shenkar et al., 2022) that we now focus on this element of COE.

COE and HRM

COE is not confined to MNC entry mode. Starting with the observation in the field of comparative HRM that there are national differences in firm-level HRM (e.g., Gooderham et al., 1999), studies of COE have examined the national imprint of country of origin on 40

Country-of-origin effect  41

MNC subsidiary HRM practices. Using institutional theory rather than culture, researchers such as Kostova and Roth (2002: 215) have pointed to a potential “tension” arising from institutional duality, i.e., MNCs operating in “host” institutional settings whose requirements for attaining legitimacy differ significantly from those of their country of origin. Ferner et al. (2013) find that MNCs appear to opt for a country-of-origin approach where they seek to apply their country-of origin practices. However, Stavrou et al. (2023) find that the country-of-origin approach by MNCs depends on the HRM practice under consideration. Their study suggests that while MNCs use their agency to apply their country-of-origin approaches, MNC subsidiaries conform in areas of HRM where there are “persuasive” host-country norms.

COE and international marketing

COE has also received substantial attention in the field of international marketing (Lu, Ma & Xie, 2022). The notion is that host-country buyers have established perceptions of the country of origin that impact how they view the quality of products and services from its firms. Thus, for example, Sharma (2011: 285) observes that considerable extant research on the effects of country of origin on product evaluations indicates that “consumers perceive products made in developed countries to be of higher quality compared with products made in emerging markets.” However, it is not necessarily the case that the COE applies to all products and firms from a given country (Lu, Ma & Xie, 2022). Further, Kumar and Zaheer (this volume) suggest that “product exoticness” may even enhance product evaluation. COE continues to be employed as a key concept within international marketing. It also remains a feature of research into multiple aspects of MNC behavior, including the COE on staffing practices of MNCs (Lee, Yoshikawa & Harzing, 2022) and the COE on the relationship between HR practices and employees’ attitudes and behaviors (Zhang et al., 2016). Paul N. Gooderham

References

Brooke, M. Z., & Remmers, H. L. (1970). Strategy of Multinational Enterprise, Organization and Finance. New York, Elsevier. Erramilli, M. K. (1996). Nationality and subsidiary ownership patterns in multinational corporations. Journal of International Business Studies, 27(2), 225–248. Ferner, A., Bélanger, J., Tregaskis, O., Morley, M., & Quintanilla, J. (2013). US multinationals and the control of subsidiary employment policies. ILR Review, 66(3), 645–669. Gooderham, P. N., Nordhaug, O., & Ringdal, K. (1999). Institutional and rational determinants of organizational practices: Human resource management in European firms. Administrative Science Quarterly, 44(3), 507–531. Hennart, J. F., & Larimo, J. (1998). The impact of culture on the strategy of multinational enterprises: Does national origin affect ownership decisions? Journal of International Business Studies, 29(3), 515–538. Hofstede, G. (1983). The cultural relativity of organizational practices and theories. Journal of International Business Studies, 14(2), 75–89. Kogut, B., & Singh, H. (1988). The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19(3), 411–432. Kostova, T., & Roth, K. (2002). Adoption of an organizational practice by subsidiaries of multinational corporations: Institutional and relational effects. Academy of Management Journal, 45(1), 215–233. Kumar, P., & Zaheer, S. (2024). Liability of foreignness. Encyclopedia of International Strategic Management. Cheltenham, Edward Elgar Publishing. Lee, H. J., Yoshikawa, K., & Harzing, A. W. (2022). Cultures and institutions: Dispositional and contextual explanations for country-of-origin effects in MNC ‘ethnocentric’ staffing practices. Organization Studies, 43(4), 497–519. Lu, J. W., Ma, H., & Xie, X. (2022). Foreignness research in international business: Major streams and future directions. Journal of International Business Studies, 53, 449–480. Porter, M., 1990. Competitive Advantage of Nations. New York, Free Press. Sethi, S. P., & Elango, B. (1999). The influence of “country of origin” on multinational corporation global strategy: A conceptual framework. Journal of International Management, 5(4), 285–298. Sharma, P. (2011). Country of origin effects in developed and emerging markets: Exploring the contrasting roles of materialism and value consciousness.  Journal of International Business Studies, 42(2), 285–306. Shenkar, O., Tallman, S. B., Wang, H., & Wu, J. (2022). National culture and international busi-

Paul N. Gooderham

42  Encyclopedia of international strategic management ness: A path forward. Journal of International Business Studies, 53, 516–523. Stavrou, E., Parry, E., Gooderham, P., Morley, M., & Lazarova, M. (2023). Institutional duality and human resource management practice in foreign subsidiaries of multinationals. Human Resource Management Journal, 33(1), 69-94. Zhang, M. M., McNeil, N., Bartram, T., Dowling, P., Cavanagh, J., Halteh, P., & Bonias, D.

Paul N. Gooderham

(2016). Examining the ‘black box’ of human resource management in MNEs in China: exploring country of origin effects. The International Journal of Human Resource Management, 27(8), 832–849.

13. Cultural agility

the group. This is often achieved by creating cohesion, identity, and psychological safety within diverse groups and multicultural teams. As an individual difference variable, cultural agility comprises self-management, relationship management, and the three task management competencies just described. This three-part categorization of competencies has been established in the literature by review articles, meta-analyses and numerous other studies examining the success of global leaders and expatriates (e.g., Bird, Mendenhall, Stevens, & Oddou, 2010; Bird, 2013). In the context of cultural agility, the self-management competencies are tolerance of ambiguity, resilience, and curiosity, which collectively enable individuals to self-regulate in situations of cultural or contextual novelty. Tolerance of ambiguity is the ability to be calm and successful in situations which have uncertain and unpredictable elements. People with a high tolerance of ambiguity do not experience excessive anxiety or stress when situations are unknown. Resilience is the ability to cope with and not be deterred by obstacles and mistakes (which inevitably happen when one is unfamiliar with the context). Resilient people can remain committed to goals even after a setback or failure. Curiosity is the inclination to gain greater understanding of people, cultures, and the like. Individuals with high levels of curiosity are more likely to ask questions, seek clarity, research information, and so on. The relationship management competencies are perspective-taking, humility, and relationship-building. These competencies accelerate the ability to foster trust and enduring relationships across cultures. Perspective-taking is the capacity to see any given situation from multiple perspectives. People who have high levels of perspective-taking are better able to suspend judgment for a while to better understand diverse points of view. Humility is the ability that enables a greater receptivity to feedback, assistance, and advice. People who have a high level of humility are more likely to seek feedback, want to learn from others, and acknowledge that they need to learn the cultural context to be effective. Relationship-building is the capacity to create meaningful connections. People who are effective in relationship-building are more

Cultural agility is defined as a meta-competency enabling people to work comfortably and effectively in different countries and with people from different cultures (Caligiuri, 2012, 2013, 2021). A culturally agile professional can accurately read the cultural environment, select the correct cultural response, and execute that cultural response within the context. The three possible responses or task-related competencies are cultural adaptation, cultural minimization, and cultural integration. Culturally agile professionals can use each response when needed (Caligiuri & Tarique, 2016) depending on the task, role, or demands of the situation. Thus, culturally agile professionals understand that no one cultural response is better than any other, following the academic literature that, under certain situations, there are benefits to accepting countercultural business practices (i.e., practices that are not consistent with host-country cultural norms and values; Caprar, Walker, Kim, & Caligiuri, 2022). Possessing the competencies necessary to read the environments and execute the most appropriate response is the essence of being culturally agile (Caligiuri & Caprar, 2022). Those who are responding with cultural adaptation are behaving in a way that is consistent with expectations or norms of the context. Cultural adaptation requires the ability to effectively adapt one’s own approach to fit in the host culture by understanding and correctly using the host culture’s behavioral norms. Those using cultural adaptation effectively are likely higher in cultural intelligence and a global mindset. Those responding with cultural minimization are recognizing cultural differences but, instead of adapting, they are maintaining their way of doing things, which could be different from the norms in the culture (e.g., upholding safety or ethics standards and maintaining schedules). Cultural minimization requires the skills to maintain a certain way of behaving, working, reinforcing standards, etc., even when doing so is inconsistent with what is the norm for the group. When using the third response, cultural integration, people are neither adapting nor overriding cultural differences. Rather, they are integrating the diversity of multiple cultural norms into a new set of norms for 43

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sociable, desire more meaningful relationships, and welcome opportunities to connect with others. The self-management and relationship management cultural agility competencies are each unique in that they are a combination of relatively immutable factors (e.g., personality traits), abilities that can be developed through experience, and knowledge that can be acquired in training. This means that these self- and relationship management competencies can be compensatory for each other. For example, some individuals are very curious about cultures, researching and questioning about the cultures with which they will interact. Others have a high level of relationship-building and will build a supportive network in the host country of individuals who will be able to model and coach cultural norms. Both the curious person (who would likely learn about the cultural context through passive methods) and the relationship-oriented person (who would likely learn about the cultural context through people) could both possess similar levels of cultural agility. While the personality component of each cultural agility competency is relatively immutable or fixed, cultural agility can be developed, in part, through education, training, practice, or through international experience. Human resource managers need to understand the combined role of selection, training, and development to roll out a global talent management system to foster cultural agility. Any given individual rarely has a high level of each cultural agility competency unless they have both the genetic predisposition to certain personality traits and have experiences in novel environments to build on those competencies. Culturally agile individuals, often effective as boundary spanners and expatriates and in global leadership roles, have strengths within the

Paula Caligiuri

self- and relationship management competencies which they can leverage to accurately read the environment and respond as needed in different countries and with people from different cultures. Paula Caligiuri

References and selected further reading

Bird, A. (2013). Mapping the content domain of global leadership competencies. In M.E. Mendenhall, J.S. Osland, A. Bird, G. Oddou, M. Maznevski, G. Stahl, & M. Stevens (eds), Global Leadership: Research, Practice and Development, 2nd ed.: 80–96. New York: Routledge. Bird, A., Mendenhall, M.E., Stevens, M.J., & Oddou, G. (2010). Defining the content domain of intercultural competence for global leaders. Journal of Managerial Psychology, 25(8): 810–828. Caligiuri, P. (2021). Build Your Cultural Agility. London: Kogan Page. Caligiuri, P. (2013). Developing culturally agile global business leaders. Organizational Dynamics, 3(42), 175–182. Caligiuri, P. (2012). Cultural Agility: Building a Pipeline of Globally Successful Professionals. Hoboken, NJ: Jossey-Bass Publishing. Caligiuri, P. & Caprar, D. (2022). Becoming culturally agile: Accurately varying contextual responses through international experience and cross-cultural competencies. International Journal of Human Resource Management. https://​doi​.org/​10​.1080/​09585192​.2022​.2083​ 918 Caligiuri, P., Tarique, I. (2016). Cultural agility and international assignees’ effectiveness in cross-cultural interactions. International Journal of Training and Development, 20(4), 280–289. https://​doi​.org/​10​.1111/​ijtd​.12085 Caprar, D., Walker, B., Kim, S., & Caligiuri, P. (2022). “Doing as the Romans Do”: A review of research on countercultural business practices, Journal of International Business Studies. https://​doi​.org/​10​.1057/​s41267​-021​-00479​-2

14. Deglobalization

of goods and services may be restricted by protectionist government policies, in particular through the imposition of tariffs or limits on imports. The adoption of protectionist policies by one country often leads to the adoption of retaliatory protectionist policies adopted by the country’s trading partners. A decline in the relative volume of trade-facilitating measures as compared with new trade-restricting measures introduced by governments across the globe reflects protectionist government policies that reduce the cross-border flow of goods and services. Protectionist policies that limit the cross-border flow of goods and services manifest themselves in the failure to develop existing or ratify new multilateral trade liberalization agreements, such as the Transatlantic Trade and Investment Partnership (TTIP) between the United States and the European Union. Protectionist policies that drive deglobalization by limiting the cross-border flow of goods and services may be adopted for various reasons. A country may adopt protectionist trade policies because of geopolitical tensions, such as those between the United States of America and the People’s Republic of China; or as a result of military conflicts, such as the sanctions imposed on trade with Russia after the latter invaded Ukraine in 2022. Policymakers may adopt protectionist trade policies in response to concerns about the consequences of international trade, including, for example, the unequal distribution of the gains from international trade, or the CO2 emissions caused by transporting goods across the globe (Buckley & Hashai, 2020; Meyer, 2017). Protectionist policies that drive deglobalization by reducing the cross-border flow of goods and services may also be driven by populist governments’ desire to reduce economic dependence on other countries and prioritize the development of domestic industries and national self-sufficiency. These inward-looking policies as a driver for protectionism include the “America first” policy of various US governments, the United Kingdom’s referendum to leave the European Union, or protectionist policies adopted by the governments of China or India. The deglobalization reflected in a decline of cross-border flow of goods and services may also be caused by external shocks, such as pandemics, natural disasters, or industrial accidents. For example, the COVID-19 pandemic and the measures

Deglobalization refers to the decline of the social, political and economic interconnectedness between countries across the world. Economic deglobalization refers to a decline in the (aggregated) economic activity that takes place across international borders across the world through the reduction in the cross-border movement of goods, services, capital, people, technology, data and ideas. Economic deglobalization is the result of changes in firms’ international strategies in response to changes in their environment, such as the introduction of tariff barriers or restrictions on foreign direct investments. Two facets of economic deglobalization can be distinguished. The deglobalization of production refers to a decline in the international economic integration in the process of creating and manufacturing products and services, that is, a shortening of global value chains. Production activities that were geographically dispersed are moved to, or closer to, firms’ home countries, a process labelled re-shoring, home-shoring, near-shoring or friend-shoring, where production operations are shifted to “friendly” countries. The deglobalization of markets refers to the fragmentation of the global economy into increasingly distinct national markets, requiring firms to increase their responsiveness to specific national characteristics when selling their products and services in a particular market. This responsiveness relates to the adjustment of the characteristics of products and services, but also to the way in which these products and services are sold in overseas markets. Economic deglobalization—reflected in the decline of cross-border movement of goods, services, capital, information, technology, and knowledge and people—is triggered by various factors, such as policymakers’ reactions to public discontent with the process of economic globalization and its outcomes, geopolitical tensions, technological developments, or shocks, such as financial crises or global pandemics (Buckley & Hashai, 2020; Witt, 2019). Deglobalization may be reflected in a decline in the cross-border flow of goods and services, caused by increased protectionism, technological change, or external shocks to the global economy. The cross-border flow 45

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adopted by countries to fight the pandemic have led to a reduction in international trade. Similarly, the week-long blockage of the Suez Canal—one of the key transport routes for trade between Asia and Europe—by a container ship negatively affected trade between Europe and Asia. Although the effect of such external shocks on international trade may be temporary, they highlight firms’ vulnerability to supply chain interruptions and may lead firms to shorten these supply chains and create regional, rather than global, production networks (Witt, 2019; Buckley & Hashai, 2020). Deglobalization may be reflected in a decline in the cross-border flow of capital. The cross-border flow of capital may be restricted by protectionist government policies, in particular through government policies that discourage foreign direct investment, both incoming and outgoing, or encourage domestic firms to reduce overseas activities, for example through differential tax treatment of earnings generated by domestic versus overseas operations. Protectionist policies that drive deglobalization by limiting the cross-border flow of capital may be adopted for various reasons. Countries may restrict international capital flows due to national security concerns to prevent domestic assets and infrastructure in sectors that are crucial for national security, such as the telecommunication, transportation, defense or energy sector, from being controlled by foreign owners. A resurgent techno-nationalism (e.g., Cantwell et al., 2010; Petricevic & Teece, 2019) can lead countries to restrict the acquisition of domestic high-tech firms by foreign firms to prevent specific technology from falling into foreign hands. Restrictions on cross-border capital flows may also be driven by attempts to reduce economic dependence on foreign firms and stimulate the development of domestic firms. Deglobalization may be reflected in a decline of the cross-border flows of information, technology, and knowledge and people. Government policies may reduce these flows in different ways, such as establishing national walls around the internet (“Chinese firewall”), requiring the localization of data centers, or restricting the movement of employees, which are key conduits for the cross-border transfer of knowledge (Buckley & Hashai, 2020). Governments may adopt policies that lead to economic Alexander Mohr

deglobalization by limiting the cross-border flow of information, technology, knowledge and people for various reasons. These include the aim of eliminating foreign sources of information and controlling the information that the local population can access. The decline in the cross-border movement of goods, services, capital, information, technology, knowledge and people creates a generally more fragmented global economy. This greater fragmentation may occur at the level of nation states or at the level of regional or political groupings of nation states, creating a multi-polar global economy or resulting in a bifurcated global economy with the decoupling of the economies of the United States and China (Buckley, 2020; Petricevic & Teece, 2019). Deglobalization means that firms may need to adopt more locally responsive strategies, including greater adaptation of products, services, business models, operations and strategies. Deglobalization also implies a reduced potential for the global disaggregation and integration of firms’ value-adding activities and a relative increase in the importance of domestic firms and domestic markets (Buckley & Hashai, 2020). Deglobalization will thus affect, but also be affected by, firms’ international strategies. Alexander Mohr

References

Buckley, P. 2020. The theory and empirics of the structural reshaping of globalization. Journal of International Business Studies, 51: 1580–1592. Buckley, P. J., & Hashai, N. 2020. Skepticism toward globalization, technological knowledge flows, and the emergence of a new global system. Global Strategy Journal, 10: 94–122. Cantwell, J., Dunning, J. H., & Lundan, S. M. 2010. An evolutionary approach to understanding international business activity: The co-evolution of MNEs and the institutional environment. Journal of International Business Studies, 41(4): 567–586. Meyer, K. E. 2017. International business in an era of anti-globalization. Multinational Business Review, 25(2): 78–90. Petricevic, O., & Teece, D. J. 2019. The structural reshaping of globalization: Implications for strategic sectors, profiting from innovation, and the multinational enterprise. Journal of International Business Studies, 50: 1487–1512. Witt, M. 2019. De-globalization: Theories, predictions, and opportunities for international business research. Journal of International Business Studies, 50: 1053–1077.

15. Diaspora

be identified through objective measures, such as if there is a difference between the birth passport and subsequent passport or address details. In contrast, diasporans have not necessarily had personal experience of their “homeland,” for example in the case of the Irish where the diaspora consists of not only emigrants but also their descendants (Cummings & Gamlen, 2019), or the even more iconic Jewish diaspora. And because a diasporan is a person with a strong personal attachment to the “homeland,” not all migrants are diasporans: Some migrants may (deliberately or not) simply not have a homeland orientation. In other words, whereas studies of migrants can be based on sources like government records or addresses in patent databases, diaspora research requires finding out from individuals how they feel about themselves, their host country, and their homeland. For many questions, it makes sense to focus on the empirically more easily accessible category of migrants. Even if there is active engagement with the home country, for example through the payment of remittances (e.g., Vaaler, 2011), the attitude of the person engaging in that effort is not necessarily relevant. For example, there is likely little value in distinguishing between remittances paid by diasporans actively seeking to improve the homeland and by migrants seeing remittance payments as a residual obligation to (some people in) the home country. However, when there are global tensions, the situation is different. To understand how current global tensions can influence the role and study of diasporans in international strategic management, it is useful to use a historical perspective. Technology, specifically the telegraph, telephone and steamship, spurred the emergence of the multinational enterprise with hierarchical, intra-organizational controls (Wilkins, 1988). When those technologies were superseded by the digital revolution, digital communication technologies enabled cross-national business to increasingly take place within networks of trading relationships (Kobrin, 2017). The rise of global value chains (McWilliam et al., 2020) forms part of those changes, even though such value chains are often characterized by contested relationships between providers who wish to upgrade to higher-value-adding activities and buyers who are less keen to support such upgrading (Pipkin & Fuentes, 2017). Adding a political

“Diaspora studies,” conducted across a range of social science disciplines, have been growing in importance over the past decades. Concerned that the word was at risk of losing its meaning because the “diaspora” was used to refer to concepts as diverse as (inward or outward) migration, (loweror higher-skilled) guest-work or expatriate placement, refugees and others, Brubaker in 2005 identified three characteristics that indicate whether a person is a member of a diaspora: There has to be geographic dispersion, the presence of a “a real or imagined ‘homeland’ as an authoritative source of values, identity and loyalty” (Brubaker, 2005: 5), and active “boundary-maintenance,” i.e., an insistence on a distinct identity relative to the host country. In 2019, Grossman updated that work, and using a cross-disciplinary review of highly cited papers on the diaspora, suggested as a definition: A diaspora is a transnational community whose members (or their ancestors) emigrated or were dispersed from their original homeland but remain oriented to it and preserve a group identity. (Grossman, 2019: 1267)

Research on diasporans in international business has been growing. Especially the field of international entrepreneurship (Elo, 2016; Elo, Täube & Servais, 2022; Riddle & Brinkerhoff, 2011; Riddle, Hrivnak & Nielsen, 2010) has received attention. But other focus areas include knowledge transfer (Barnard & Pendock, 2013) and social networks (Elo & Riddle, 2019). In this body of work, the relational dimension of international business is central, often involving emotional and familial or kinship ties. But the topic has arguably not received the attention it deserves in international strategic management. This probably has to do both with how hard it is to define it accurately, especially large-scale quantitative evidence of diaspora engagement, and with the hitherto relatively unchallenged progression of globalization. Much of the scholarship on globally mobile individuals has been done on international migrants. Migrants are people who, simply said, live in a different country from where they were born and raised (Barnard et al., 2019). This means that migrants can 47

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science perspective to these technologically induced changes suggests increasing deglobalization, the process of weakening interdependence among nations (Witt, 2019). All these developments suggest at least challenges to the progression of globalization but also the potential for global tension. However, discussions tend to focus on changes in the organization of the global economy in terms of multinational enterprises, global value chains and/or nations. Yet one of the defining characteristics of the digital revolution is its “democratizing” nature. In contrast to the expense and rarity of, for example, international telephone calls a century ago, individuals can now easily communicate and coordinate across borders. This has seen the emergence of even micro-providers with a global footprint (Lehdonvirta et al., 2019). The prior neglect of the individual level of analysis in international business research has been noted (Cerar, Nell & Reiche, 2021) and is increasingly being addressed. Diasporas and migration can constitute another micro-level manifestation of global linkages, linking to other work in the field of international business using a micro-foundations approach (e.g., Elia et al., 2021; Liu et al., 2022; Vahlne & Johanson, 2020). In the extant work, migrants are understood primarily as “knowledge bridges” (Marino et al., 2020). This metaphor is useful for highlighting the assumption of “neutrality” that is implicit in much of the scholarship on migration: that the migrant can play a key role as an integrator of two sets of knowledge because the identity of the migrant is approximately evenly divided between the home and the host country. Such a view likely reflects the long period during which globalization progressed with very little resistance, but this is being challenged by rising global tensions. Should we treat a Russian national in Germany the same as one in India, or a Syrian in China the same as one in the UK? In other words, individuals are not only carriers of knowledge, but also of values and loyalties. To understand how the values, identities and loyalties of people are relevant for international strategy, it is useful to reflect on the international trading relationships that characterized the nineteenth century. Jones (2006) uses the term “ambiguous nationality” to refer to the merchants who had links back to their home countries as well as in the Helena Barnard

host country, with a clear conceptual link to diasporans. These people, often ethnically mixed, were far away from the home country, and operating before the development of the technologies and organizational structures that would subsequently enable direct control of operations abroad. Yet they were central in managing cross-border trading operations. They were trusted to do so in large part because they were seen as having an identity that incorporated both home- and host-country dimensions. The current global business environment is one where intra-organizational control mechanisms are increasingly replaced by contractually based trading networks. It is also one where managers are warned to expect tensions, jolts and jars in at least the medium term (Kobrin, 2017). It seems likely that issues of trust in cross-border business are heightened. With the growing awareness of the role of individuals in shaping the activities of multinational enterprises, the values, identities and loyalties of collaborators are likely also of increased relevance to firms. These developments have three implications for the usefulness of diasporans as a topic in international business strategy. First, it is important to be precise in differentiating between migrants and diasporans. While there is substantial overlap between the two categories, not all migrants are diasporans, and neither are all diasporans migrants. The field will be well served by being clear about whether a study is about people who are living in a different country from the one where they were born, migrants, or about diasporans, people whose homeland (albeit sometimes imagined) is an authoritative source of their identity and values. Second, while migrants are typically assumed to be forward looking, with assimilation into the adopted country a key goal (Waters & Jiménez, 2005), diasporans’ values, identity and loyalties are to a homeland. This means that the two groups are likely to behave differently when there are tensions between home and host countries, with migrants’ loyalties likely veering more towards the host country, and diasporans’ to their homeland. This insight means that it is important to consider whether the intent is to engage in and examine a “neutral” bridging activity between the home and the host country, whether of knowledge-sharing or creation, investment, marketing or others,

Diaspora  49

or in work when bridging is, for whatever reason, a more contested activity. Focusing on diasporans rather than migrants when an activity carries a heavy load of emotions or values is likely to uncover more useful insights. Moreover, the value of bridging is heightened when there are tensions. Diasporans are therefore a potential resource that can be used by multinational enterprises when they seek to achieve a workable degree of alignment between competing home- and host-country pressures (Khan et al., 2019). Understanding and using that resource is likely to increase in importance with growing technological and geopolitical changes and challenges. Helena Barnard

References

Barnard, H., Deeds, D., Mudambi, R., & Vaaler, P. M. (2019). Migrants, migration policies, and international business research: Current trends and new directions. Journal of International Business Policy, 2(4), 275–288. Barnard, H., & Pendock, C. (2013). To share or not to share: The role of affect in knowledge sharing by individuals in a diaspora. Journal of International Management, 19(1), 47–65. Brubaker, R. (2005). The ‘diaspora’ diaspora. Ethnic and Racial Studies, 28(1), 1–19. Cerar, J., Nell, P. C., & Reiche, B. S. (2021). The declining share of primary data and the neglect of the individual level in international business research. Journal of International Business Studies, 52(7), 1365–1374. Cummings, M. E., & Gamlen, A. (2019). Diaspora engagement institutions and venture investment activity in developing countries. Journal of International Business Policy, 2(4), 289–313. Elia, S., Greve, P., Vallone, T., & Castellani, D. (2021). The micro-foundations of industrial diversification through foreign acquisitions: The multifaceted role of CEO experience. Long Range Planning, 54(6), 102104. Elo, M. (2016). Typology of diaspora entrepreneurship: case studies in Uzbekistan. Journal of International Entrepreneurship, 14(1), 121–155. Elo, M., & Riddle, L. (Eds.). (2019). Diaspora business. Inter-Disciplinary Press. Elo, M., Täube, F. A., & Servais, P. (2022). Who is doing “transnational diaspora entrepreneurship”? Understanding formal identity and status. Journal of World Business, 57(1), 101240. Grossman, J. (2019). Toward a definition of

diaspora. Ethnic and Racial Studies, 42(8), 1263–1282. Jones, G. (2006). The end of nationality? Global firms and “borderless worlds”. Zeitschrift für Unternehmensgeschichte, 51(2), 149–165. Khan, Z., Wood, G., Tarba, S. Y., Rao-Nicholson, R., & He, S. (2019). Human resource management in Chinese multinationals in the United Kingdom: The interplay of institutions, culture, and strategic choice. Human Resource Management, 58(5), 473–487. Kobrin, S. J. (2017). Bricks and mortar in a borderless world: Globalization, the backlash, and the multinational enterprise. Global Strategy Journal, 7(2), 159–171. Lehdonvirta, V., Kässi, O., Hjorth, I., Barnard, H., & Graham, M. (2019). The global platform economy: A new offshoring institution enabling emerging-economy microproviders. Journal of Management, 45(2), 567–599. Liu, Y., Collinson, S., Cooper, C., & Baglieri, D. (2022). International business, innovation and ambidexterity: A micro-foundational perspective. International Business Review, 31(3), 101852. Marino, A., Mudambi, R., Perri, A., & Scalera, V. G. (2020). Ties that bind: Ethnic inventors in multinational enterprises’ knowledge integration and exploitation. Research Policy, 49(9), 103956. McWilliam, S. E., Kim, J. K., Mudambi, R., & Nielsen, B. B. (2020). Global value chain governance: Intersections with international business. Journal of World Business, 55(4), 101067. Pipkin, S., & Fuentes, A. (2017). Spurred to upgrade: A review of triggers and consequences of industrial upgrading in the global value chain literature. World Development, 98, 536–554. Riddle, L., & Brinkerhoff, J. (2011). Diaspora entrepreneurs as institutional change agents: The case of Thamel.com. International Business Review, 20(6), 670–680. Riddle, L., Hrivnak, G. A., & Nielsen, T. M. (2010). Transnational diaspora entrepreneurship in emerging markets: Bridging institutional divides. Journal of International Management, 16(4), 398–411. Vaaler, P. M. (2011). Immigrant remittances and the venture investment environment of developing countries. Journal of International Business Studies, 42(9), 1121–1149. Vahlne, J. E., & Johanson, J. (2020). The Uppsala model: Networks and micro-foundations. Journal of International Business Studies, 51(1), 4–10. Waters, M. C., & Jiménez, T. R. (2005). Assessing immigrant assimilation: New empirical and theoretical challenges. Annual Review of Sociology, 31, 105–125.

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50  Encyclopedia of international strategic management Wilkins, M. (1988). European and North American multinationals, 1870–1914: Comparisons and contrasts. Business History, 30(1), 8–45. Witt, M. A. (2019). De-globalization: Theories,

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predictions, and opportunities for international business research. Journal of International Business Studies, 50(7), 1053–1077.

16. Distance

approach within the international business literature focuses on differences in the institutional systems and structures within countries. Kogut and Singh (1988) offered one of the first empirical papers to analyze how perceived uncertainty about the characteristics of targeted foreign countries can influence the entry mode decisions of firms. They focused on how cultural differences across countries influence the decisions of managers on how to invest overseas. Research by Henisz and Williamson (1999), La Porta et al. (1998), and Kester (1996) highlighted differences in governance systems and how political stability, democracy, financial sector development and colonial ties influence relationships between firms and stakeholders and create institutional variation across countries. Along these lines, Whitley (1992) described how countries differ in their national business systems – which he defined as hierarchy– market relations and which influence corporate stakeholders in different ways within diverse systems. Research on national innovation systems (Furman, Porter, & Stern, 2002; Nelson & Rosenberg, 1993) has also concluded that countries differ in their abilities to produce technology and innovation, in addition to the extent to which firms can leverage knowledge within and across countries. Research that focuses on the quality of the institutional environment highlighted the context of emerging markets in particular (Kostova et al., 2020). The more underdeveloped and unstable the institutional structure and system within a country, the more difficult it is for firms to do business (Khanna & Palepu, 1997) because of difficulties of coordinating economic activity within such countries. Another influential approach which draws from sociology comes from Scott (1995), who focused on how regulatory, cognitive and normative elements within countries determine what is legitimate and acceptable. Regulatory elements refer to rules and laws, cognitive refers to established structures and norms that are often taken for granted, and normative elements refer to social values and cultures. When firms enter countries that differ along regulatory, cognitive and normative elements from their home country environment, they need to learn what is legitimate and how to conduct business within these countries (Kostova, 1996).

In the fields of strategy and international management, the term “distance” refers to the magnitude of the differences between two locations or countries in the world. Distance matters under the assumption that local companies know the local context better than foreign firms. This is the concept of the “liability of foreignness,” as originally formulated by Stephen Hymer (Hymer, 1960). When firms seek to establish themselves in a location, market or country other than their own, they need to possess some kind of advantage not related to location that enables them to compete effectively against firms that possess local knowledge and familiarity. It is important to note that the concept of distance is dyadic in nature. Locations or countries differ from one another along a potentially very large number of dimensions. Historically, scholars in this area focused on the importance of cultural distance between the home country of the firm, and the host country where the firm is planning to operate (Hofstede, 1980). However, it has long been recognized that differences in income and wealth, economic structure, administrative traditions, governance institutions, and geography can also influence competitive dynamics between local and foreign firms. Distance affects many different kinds of decisions that companies make when expanding abroad. The timing and location of foreign market entry are early decisions affected by distance. Companies tend to prefer less distant locations for entry, that is, those that are more similar to the home country, especially for first entries. Companies also choose entry mode depending on distance. For instance, as distance grows, they prefer to use entry modes that enable them to tap into local knowledge and political capital by involving local partners. The performance of international operations is also related to the distance between the home and host countries (Berry, Guillen, & Zhou, 2010; Kogut & Singh, 1988; Zhou & Guillen, 2015).

Theoretical approaches to studying distances

There are several theoretical perspectives that can be used to study the many ways in which countries differ from one another. One 51

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Across these approaches, countries may be different from each other along a number of dimensions, and there are many studies that examine the effects of different dimensions of country distance on firm, manager and policymaker decisions. We review several of the more highly cited studies next.

Impact and consequences of distance

Distance has been shown to have a profound impact on almost every strategic aspect of when, where, and how companies expand abroad, and the performance and success of foreign operations. Over 60 years ago, Hymer (1960) observed that liabilities of foreignness increase with the distance between the home and host country. Subsequent research has shown that different types of distance across countries can affect firm, managerial or individual decisions in different ways, depending on the distance dimension under examination (Berry et al., 2010). For example, Zhou and Guillen (2016) showed that different dimensions of distance lead companies to undertake different types of foreign investments. This is consistent with the prediction of the Uppsala model that companies only gradually enter more distant countries (Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975), after they have gained experience incrementally. At the same time, research has shown that companies invest in more distant countries to acquire resources. In particular, MNEs from emerging markets invest in developed countries to acquire strategic assets such as brand and technology (Li & Fleury, 2020; Luo & Tung, 2007). Distance has also been shown to influence entry mode through increased transaction and coordination costs (Choi & Contractor, 2016). Regarding entry mode choices, companies may prefer full ownership over partial ownership to avoid such costs when distance is large (Demirbag, Glaister, & Tatoglu, 2007), but it is also possible that they select partial ownership to share with a local partner the risk and uncertainty brought by large distance. Distance has also been shown to influence the choice between greenfield and mergers and acquisitions (M&As). Companies may choose greenfield over M&A when distance is large, because large distance increases the costs of post-M&A integration (Barkema & Vermeulen, 1998). Companies may also

choose M&As over greenfield when distance is large, because some of them are able to overcome such costs through various ways such as their experience and subsidiary autonomy (Slangen & Hennart, 2008) or hiring migrants (Useche, Miguelez, & Lissoni, 2020). Besides location and entry mode choices, distance also influences other strategic decisions. For example, Campbell, Eden, and Miller (2012) argued that large distance reduces the willingness and capability to engage in corporate social responsibility activities in a host country, while Salomon and Wu (2012) found that foreign firms choose a higher level of local isomorphism as the cultural, economic, and regulatory distances between the home country and the host country increase. Berry (2013) examined how country distance and differences impacted firm divestment decisions, showing different results for foreign subsidiaries that were in related versus unrelated product lines to the home country operations of their US parents considering country growth and policy stability. Large distances have been shown to harm company performance in a host country. For example, Datta and Puia (1995) found that cultural distance reduces shareholder value in cross-border acquisition. Tsang and Yip (2007) found that the hazard rate of foreign direct investments is negatively associated with economic distance. Such negative impact is particularly strong during marketing crises (Dinner, Kushwaha, & Steenkamp, 2019). At the same time large distances also bring in diversity and opportunities, and research suggests that companies can leverage such opportunities to learn and improve their performance (Lundan & Li, 2019). For example, Chakrabarti, Gupta-Mukherjee, and Jayaraman (2009) found that cross-border acquisitions perform better in the long run if the acquirer and the target come from culturally distant countries. Although scholars agree on its significant impact, it is difficult to reach a consensus over how country distance influences strategy and performance. The studies summarized above show that the relationship between distance and strategy or performance is impacted by the many different dimensions of country distance, and without both specifying the distance dimension and carefully operationalizing that dimension, it is difficult

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Distance  53

to form a consensus on the impact of the multiple facets of country distance. While country differences can be good or bad (or both) for firms and their expansion strategies and performance, we encourage future research to clearly identify the dimension of country distance under consideration to help resolve some of the conflicting findings in extant research and to better guide managers who need to respond to several dimensions of country distance as they expand their business across countries.

Measuring distance

Measuring dyadic distances can be accomplished using two main methods. Euclidian distance is intuitive because it essentially involves finding the shortest distance between two points in a given multi-dimensional space. However, when distance is measured using multiple dimensions, the Euclidian method has two ostensible disadvantages, namely, that it is not scale-invariant and it does not take into consideration the variance– covariance matrix among the different dimensions (which are often highly correlated). Recent research has proposed to use the Mahalanobis method of calculating distance in order to overcome those shortcomings (Berry, Guillen & Zhou, 2010). Once an appropriate method has been chosen, the next important research decision is to identify the relevant dimensions of distance. Kogut and Singh (1988) offered one of the earliest and most widely used approaches to measuring cultural distance across countries, using four of Hofstede’s cultural dimensions (individualism–collectivism, power distance, uncertainty avoidance and masculinity–femininity) to calculate the Euclidian distance between pairs of countries. Berry, Guillen, and Zhou (2010) focused on nine dimensions of distance (including economic, financial, political, administrative, cultural, demographic, knowledge and global connectedness, as well as geographic distance) and calculated dyadic distances across countries using the Mahalanobis method. (These data are available at https://​ whartonmgmt​.wufoo​.com/​forms/​distance​ -data​-downloads/​.) Researchers have argued that there needs to be less aggregation when creating distance measures (Berry et al., 2010; Dow & Karunaratna, 2006; Shenkar et al., 2022)

and less separation between the theoretical notions of distance and the empirical proxies we use for different dimensions of distance (Berry et al., 2010; Beugelsdijk, Ambos, & Nell, 2018; Beugelsdijk, Kostova, & Roth, 2017). When theory is concerned with knowledge distance, the empirics need to have something to do with knowledge differences across countries or firms. There are many different sources for data that can be used to find appropriate measures, including the World Values Surveys, World Development Indicators, the International Labor Organization, CEPII, Penn World Tables, the International Monetary Fund, the World Governance Indicators, the United Nations Databases, Corruption Indices and many more. Although the country unit of analysis is dominant in the international business field, there are actually multiple levels of analysis that are impacted by and that impact country distance. From firm managers making entry mode decisions to individuals transacting with third parties in foreign countries to regional policy-setting institutions, country distance is impacted and impacts individual, firm, industry, country, regional and global systems.

Is distance increasing?

In addition to how distance affects the international expansion of firms, scholars have also analyzed the effect of globalization on dyadic distances between countries. The concept of globalization highlights the integration of worldviews, products, ideas and cultures, and many scholars have argued that as countries develop, they become more similar. In contrast, dependency or world-system theorists argue that globalization is a fragmented, incomplete, discontinuous and puzzling process that is far from uniform or irreversible (Giddens, 1990; Gilpin, 2000). Berry, Guillen, and Hendi (2014) examined convergence or divergence across countries using multiple dimensions of distance and found that countries did not evolve significantly closer to one another along a number of dimensions over the last half century. They suggest that this lack of evidence for convergence highlights the importance of understanding the effects of different dimensions of country distance on managerial decision-making, firm expansion choices and

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policymakers, among other issues, to better understand how distance and differences impact the decisions and successes of individuals, firms and countries. Heather Berry, Mauro Guillén and Nan Zhou

References

Barkema, H. G. & Vermeulen, F. 1998. International expansion through start-up or acquisition: A learning perspective. Academy of Management Journal, 41(1): 7–26. Berry, H. 2013. When do firms divest foreign operations? Organization Science, 24(1): 246–61. Berry, H., Guillen, M. F., & Hendi, A. S. 2014. Is there convergence across countries? A spatial approach. Journal of International Business Studies, 45(4): 387–404. Berry, H., Guillen, M. F., & Zhou, N. 2010. An institutional approach to cross-national distance. Journal of International Business Studies, 41(9): 1460–80. Beugelsdijk, S., Ambos, B., & Nell, P. C. 2018. Conceptualizing and measuring distance in international business research: Recurring questions and best practice guidelines. Journal of International Business Studies, 49(9): 1113–37. Beugelsdijk, S., Kostova, T., & Roth, K. 2017. An overview of Hofstede-inspired country-level culture research in international business since 2006. Journal of International Business Studies, 48(1): 30–47. Campbell, J. T., Eden, L., & Miller, S. R. 2012. Multinationals and corporate social responsibility in host countries: Does distance matter? Journal of International Business Studies, 43(1): 84–106. Chakrabarti, R., Gupta-Mukherjee, S., & Jayaraman, N. 2009. Mars–venus marriages: Culture and cross-border M&A. Journal of International Business Studies, 40(2): 216–36. Choi, J. & Contractor, F. J. 2016. Choosing an appropriate alliance governance mode: The role of institutional, cultural and geographical distance in international research & development (R&D) collaborations. Journal of International Business Studies, 47(2): 210–32. Datta, D. K. & Puia, G. 1995. Cross-border acquisitions: An examination of the influence of relatedness and cultural fit on shareholder value creation in U.S. acquiring firms. MIR: Management International Review, 35(4): 337–59. Demirbag, M., Glaister, K. W., & Tatoglu, E. 2007. Institutional and transaction cost influences on MNEs’ ownership strategies of their affiliates: Evidence from an emerging market. Journal of World Business, 42: 418–34. Dinner, I. M., Kushwaha, T., & Steenkamp, J.-B. E. M. 2019. Psychic distance and performance

of MNCs during marketing crises. Journal of International Business Studies, 50(3): 339–64. Dow, D. & Karunaratna, A. 2006. Developing a multidimensional instrument to measure psychic distance stimuli. Journal of International Business Studies, 37(5): 578–602. Furman, J. L., Porter, M. E., & Stern, S. 2002. The determinants of national innovative capacity. Research Policy, 31(6): 899. Giddens, A. 1990. The political economy of international relations. Princeton, NJ: Princeton University Press. Gilpin, R. 2000. The challenge of global capitalism: The world economy in the 21st century. Princeton, NJ: Princeton University Press. Henisz, W. & Williamson, O. E. 1999. Comparative economic organization – within and between countries. Business and Politics, 1(3): 261–77. Hofstede, G. H. 1980. Culture’s consequences: International differences in work related values. Beverly Hills: Sage Publications. Hymer, S. H. 1960. The international operations of national firms: A study of direct foreign investment. Cambridge, MA: MIT Press. Johanson, J. & Vahlne, J.-E. 1977. The internationalization process of the firm—a model of knowledge development and increasing foreign market commitments. Journal of International Business Studies, 8(1): 25–34. Johanson, J. & Wiedersheim-Paul, F. 1975. The internationalization of the firm—four Swedish cases. Journal of Management Studies, 12: 305–22. Kester, W. C. 1996. American and Japanese corporate governance. In Berger, S. & R. Dore, (Eds.), National diversity and global capitalism. Ithaca: Cornell University Press. Khanna, T. & Palepu, K. 1997. Why focused strategies may be wrong for emerging markets. Harvard Business Review, 75(4): 41–51. Kogut, B. & Singh, H. 1988. The effect of national culture on the choice of entry mode. Journal of International Business Studies, 19(3): 411–32. Kostova, T. 1996. Success of the transnational transfer of organizational practices within multinational companies, Unpublished doctoral dissertation, University of Minnesota. Kostova, T., Beugelsdijk, S., Scott, W. R., Kunst, V. E., Chua, C. H., & van Essen, M. 2020. The construct of institutional distance through the lens of different institutional perspectives: Review, analysis, and recommendations. Journal of International Business Studies, 51(4): 467–97. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. 1998. Law and finance. Journal of Political Economy, 106(6): 1113–54. Li, J. & Fleury, M. T. L. 2020. Overcoming the liability of outsidership for emerging market MNEs: A capability-building perspective.

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Distance  55 Journal of International Business Studies, 51(1): 23–37. Lundan, S. M. & Li, J. 2019. Adjusting to and learning from institutional diversity: Toward a capability-building perspective. Journal of International Business Studies, 50(1): 36–47. Luo, Y. & Tung, R. L. 2007. International expansion of emerging market enterprises: A springboard perspective. Journal of International Business Studies, 38: 481–98. Nelson, R. R. & Rosenberg, N. 1993. Technical innovation and national systems. In Nelson, R. R, (Ed.), National innovation systems. New York: Oxford University Press. Salomon, R. & Wu, Z. 2012. Institutional distance and local isomorphism strategy. Journal of International Business Studies, 43(4): 343–67. Scott, W. R. 1995. Institutions and organizations. Thousand Oaks, CA; London: Sage. Shenkar, O., Tallman, S. B., Wang, H., & Wu, J. 2022. National culture and international business: A path forward. Journal of International Business Studies, 53(3): 516–33. Slangen, A. H. L. & Hennart, J.-F. 2008. Do multinationals really prefer to enter culturally

distant countries through greenfields rather than through acquisitions? The role of parent experience and subsidiary autonomy. Journal of International Business Studies, 39(3): 472–90. Tsang, E. W. K. & Yip, P. S. L. 2007. Economic distance and the survival of foreign direct investments. Academy of Management Journal, 50: 1156–68. Useche, D., Miguelez, E., & Lissoni, F. 2020. Highly skilled and well connected: Migrant inventors in cross-border M&As. Journal of International Business Studies, 51(5): 737–63. Whitley, R. 1992. Business systems in East Asia: Firms, markets, and societies. London; Newbury Park: Sage. Zhou, N. & Guillen, M. F. 2016. Categorizing the liability of foreignness: Ownership, location, and internalization-specific dimensions. Global Strategy Journal, 6(4): 309–29. Zhou, N. & Guillen, M. F. 2015. From home country to home base: A dynamic approach to the liability of foreignness. Strategic Management Journal, 36(6): 907–17.

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17. Divestment

after the Second World War, especially in the 1960s and early 1970s, after rulers and governments with nationalistic, socialistic, and communistic ideologies had risen to power in many of the new nations in the Global South. Numerous Western multinational enterprises had to leave the countries and saw their assets confiscated (Kobrin, 1980). Voluntary divestment can also be proactive and reactive (Makino et al., 2007). The key distinction between these two types is whether the company initiated the divestiture under financial pressure or not. Proactive divestment is a rapid response as soon as underperformance becomes apparent, while reactive divestment corresponds to a more delayed response after persistent underperformance over a long time. Most voluntary divestment is reactive, in response to mounting pressures on the parent company or the subsidiary unit.

Definition and terms

Divestment refers to the partial or full dismantling of a company’s ownership stake in a unit (Brauer, 2006). When a unit is domiciled in a foreign location, what is typically referred to as a foreign subsidiary, the phenomenon is known as foreign divestment (Benito, 1997; Berry, 2013). Foreign divestment is hence closely associated with foreign direct investment (see the entry on foreign direct investment). Substitute terms for divestment include disinvestment, divestiture, and exit.

Types of divestment

Divestment can occur in several ways: in the form of spin-offs, sell-offs, and closures. Spin-offs involve the proportional allocation of shares in a new (former subsidiary) company to the shareholders of the parent company (Feldman & McGrath, 2016). Sell-offs and closures are the most common forms of foreign divestment (Chang & Singh, 1999). Sell-offs entail transferring the ownership of the subsidiary to an outside party that acquires it, or in the case of a jointly owned unit, handing over ownership to the joint venture partner (Hennart, Kim, & Zeng, 1998), often a local company, individual, or owner group. Importantly, in either case, the unit itself remains operative, after perhaps some adjustments to increase its competitiveness. Closures involve shutting down the unit and discontinuing its operations altogether, perhaps after selling any assets with positive market value. Because closures imply that business activity ceases in the location, they are often looked upon more negatively by stakeholders such as employees and local authorities. Another important distinction is whether divestment is voluntary or not, that is, if it occurs due to a decision made by the (parent) company or because it has been imposed upon the company by other actors such as local authorities in a host country. In the latter case, the unit and its assets are typically seized with or without compensation, in part or full. Voluntary divestitures are now more common than involuntary divestitures. Historically, though, forced divestment has periodically been substantial. One such occasion was during the decolonialization period

Explaining divestment

Being a multifarious phenomenon, explaining divestment calls for an eclectic approach that allows for a variety of factors at different levels. At the unit/subsidiary level, several factors seem important. First, poor performance – due to adverse economic and political conditions or ‘bad’ management, overly optimistic performance projections, etc. – is a key consideration. However, there is some evidence that highly productive units are also more likely to be sold since they are attractive to other companies. Second, acquisitions are generally more prone to be divested than greenfield investments or ‘organic growth.’ One reason is problems related to post-acquisition integration. Another reason is that because acquisitions typically come in as a package (say, a particular unit), they make a perfect fit for the acquirer. So, parts and assets may be sold off to improve the fit, and even help finance the deal. Acquisitions are sometimes made precisely to restructure an industry or a particular market, that is, to bring down capacity and the number of competing actors. Third, ownership composition, especially minority ownership and joint ventures, may increase friction and disagreements between owner groups over operational and strategic issues. In turn, such issues may lead to poor performance and subsequent divestment, also the buy-out of the foreign partner (which 56

Divestment  57

also implies divestment), but the remaining local owners decide to continue the operation. Fourth, divestment decisions could be taken due to a subsidiary’s lack of fulfilling ‘synergy’ potential with other units. In other words, divestment is more likely to affect units that are not sufficiently related to other parts of the corporation. Several antecedents of divestment are at the parent or corporate level. Parent over-diversification is a major determinant of divestment. Highly diversified companies are more likely to divest, especially when uncertainty in product markets increases. As diversification increases, company management can lose the vision of potential synergies among businesses because of an excessive degree of complexity. Divestment helps achieve a more efficient allocation of capital resources between units. Divestment could also be a means to resource reconfiguration (Vidal & Mitchell, 2015). Companies are more likely to divest if they have an attractive core business, which requires additional resources to maintain performance trends. The greater the unrelatedness in resource profiles of a corporate parent and its unit, the more likely the unit is to be divested. A parent’s global corporate strategy, especially varying degrees of localization, coordination, centralization, and standardization, may create conditions that postpone divestment (Benito, 2005). Operations tailored for local foreign markets are harder to repurpose or relocate. Such irreversibility of foreign investment decreases its divestment propensity. The speed of prior international expansion increases the likelihood of divestment of international operations. Rapid internationalization may lead to suboptimal decisions, increasing coordination costs and hindering the assimilation of foreign operations. Divestment helps correct such suboptimal choices. Corporate governance and various types of corporate ownership can also influence divestment. Investors are powerful stakeholders that can encourage value-enhancing divestment and counteract managerial efforts to preserve the status quo. However, institutional investors, such as mutual funds or public pension funds, often have limited ability to intervene in how parent firms function. Conversely, activist investors accumulate ownership stakes in already mismanaged firms, thus pressuring their management to

divest (Chen & Feldman, 2018). In addition, divestment may simplify the organizational structure, improving access to capital markets, as a complex corporate structure may be more difficult for investors to categorize. Finally, there is a number of external determinants of divestment. Market growth, policy stability, and the absence of exchange rate volatility are negatively associated with divestment propensity. In turn, crises and wars trigger divestment. However, companies that have been involved in projects that benefitted society and built ties with social sector actors before a political crisis in a host country are less likely to terminate operations. Technological change exerts external pressure on companies by encouraging them to constantly reallocate resources, allowing them to stay innovative and offer competitive products. Industry cycles in an economy also affect divestment. Divestment, like acquisitions, occurs in what has been termed ‘industry waves.’ A company’s position in a divestment wave conveys information about whether managers act independently or imitate their industry peers. Pressure groups (for example, boycotts, political activism, etc.) can exert noneconomic pressures that urge company managers to divest from foreign operations, even if such actions are costly for shareholders.

Studies of divestment

Although the occurrence of foreign divestment has been noted for more than four decades (Boddewyn, 1979), very few empirical studies were conducted until more recently. Key studies include Belderbos and Zou (2009), Benito (1997), Berry (2013), Blake and Moschieri (2017), Iurkov and Benito (2017, 2020), Li (1995), Mariotti and Piscitello (1999), Mata and Freitas (2012), Mata and Portugal (2000), Song (2014), and Tan and Sousa (2018); see Arte and Larimo (2019) and Schmid and Morschett (2020) for recent overviews. A majority of these studies have focused on the characteristics of the parent company and host country. Institutional instability, the lack of economic growth, and exchange rate volatility are among the commonly studied host-country factors influencing foreign divestment (e.g., Belderbos & Zou, 2009; Benito, 1997; Song, 2014). More recent research has pointed to opportunities in the Gabriel R.G. Benito and Viacheslav Iurkov

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home-country environment as a source of resource reallocation and foreign divestment (e.g., Iurkov & Benito, 2017, 2020). At the parent company level, resources and intangible assets are among the most studied factors (e.g., Benito, 1997; Blake & Moschieri, 2017). These include host-country experience and market knowledge, along with R&D intensity and advertising intensity. Theoretically, the availability of intangible assets should reduce the probability of divestment, but the empirical evidence has sometimes resulted in non-significant findings, perhaps due to imprecise measures. In comparison, subsidiary- and, especially, industry-level factors remain less examined. Subsidiary factors include subsidiary performance, age, relatedness with the parent’s core business, and integration with other parent operations. Subsidiary performance – the most significant predictor of divestment – has been examined by numerous studies under different contingencies (e.g., Li, 1995; Mata & Freitas, 2012; Tan & Sousa, 2018; Song, 2014). For example, Berry (2013) shows that poorly performing subsidiaries in host countries with high economic growth and policy stability are less likely to be divested. Research on industry-level factors of foreign divestment remains limited. Technological dynamism in the industry can shape subsidiary performance and, as a result, its survival (Audretsch, 1995).

Consequences of divestment

Divestment is likely to have an effect on several important company-level outcomes. First, they trigger stock market reactions, influencing shareholder value. Voluntary divestment generally has a positive shareholder wealth effect. The gains in shareholder value depend on the type of divestment (for example, sell-off versus closure), its geography, and the timing of an industry divestiture wave. Feldman (2013) reports a positive stock market reaction to legacy divestment, especially when firms remove legacy businesses operating in declining industries. Divestments that destroy value tend to be those that are done for motives that lack a reasonable strategic grounding. Second, divestment affects accounting performance (for example, return on assets). Exiting from a poorly performing business may lead to real efficiency gains. Third, divestment can Gabriel R.G. Benito and Viacheslav Iurkov

result in higher innovation performance. Companies should be able to innovate more effectively post-divestment due to increased managerial attention and more resources at hand. However, while innovation quality is generally expected to increase, the number of innovations may decrease due to the movement of employees across the remaining units and locations. Divestments have consequences for the acquirer of divested assets and the divested units themselves. For the acquirer, shareholder value increases when companies acquire divested assets with improved asset fit and seller distress. Asset fit helps create value for the acquirer due to potential synergies, while the financial distress of the seller provides the acquirer a stronger bargaining position. In turn, post-divestment performance of the unit may depend on managerial involvement in the divesting process and the development of a new strategy and set of activities for the unit. Divestment has implications not only for the involved companies (both those divesting and those acquiring assets), but also for other stakeholders such as individuals, regions, countries, and possibly even industries. Closures and job losses can be highly controversial in the host country. The resulting implications will likely involve hostility from employees and their representatives, politicians, and the media. Foreign divestment involving significant job losses may involve obligations to consult with trade unions. There are legal country-specific requirements for employers to provide minimum periods of notice prior to closure.

Divestment and market re-entry

Once foreign assets are divested, some companies decide later to re-enter a market. Re-entering companies tend to have a greater propensity to increase commitment and gain more control over their operations upon a re-entry when the exit has been due to unsatisfactory performance (Aguzzoli et al., 2021). Moreover, favorable institutional changes in a foreign country increase the likelihood of higher commitment (Surdu, Mellahi, & Glaister, 2019). Gabriel R.G. Benito and Viacheslav Iurkov

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References

Aguzzoli, R., Lengler, J., Sousa, C.M.P., & Benito, G.R.G. (2021). Here we go again: A case study on re-entering a foreign market. British Journal of Management, 32(2), 416–434. Arte, P. & Larimo, J. (2019). Taking stock of foreign divestment: Insights and recommendations from three decades of contemporary literature. International Business Review, 28(6), 101599. Audretsch, D.B. (1995). Innovation, growth and survival. International Journal of Industrial Organization, 13(4), 441–457. Belderbos, R. & Zou, J.L. (2009). Real options and foreign affiliate divestments: A portfolio perspective. Journal of International Business Studies, 40(4), 600–620. Benito, G.R.G. (1997). Divestment of foreign production operations. Applied Economics, 29(10), 1365–1377. Benito, G.R.G. (2005). Divestment and international business strategy. Journal of Economic Geography, 5(2), 235–251. Berry, H. (2013). When do firms divest foreign operations? Organization Science, 24(1), 246–261. Blake, D.J. & Moschieri, C. (2017). Policy risk, strategic decisions and contagion effects: Firm-specific considerations. Strategic Management Journal, 38(3), 732–750. Boddewyn, J.J. (1979) Foreign divestment: magnitude and factors. Journal of International Business Studies, 10(1), 21–27. Brauer, M. (2006). What have we acquired and what should we acquire in divestiture research? A review and research agenda. Journal of Management, 32(6), 751–785. Chang, S.J. & Singh, H. (1999). The impact of modes of entry and resource fit on modes of exit by multibusiness firms. Strategic Management Journal, 20(11), 1019–1035. Chen, S.W. & Feldman, E.R. (2018). Activist-impelled divestitures and shareholder value. Strategic Management Journal, 39(10), 2726–2744. Feldman, E.R. (2013). Legacy divestitures: Motives and implications. Organization Science, 25(3), 815–832. Feldman, E. & McGrath, P. (2016). Divestitures. Journal of Organization Design, 5, article 2. Hennart, J.-F., Kim, D.-J., & Zeng, M. (1998). The impact of joint venture status on the longevity

of Japanese stakes in U.S. manufacturing affiliates. Organization Science, 9(3), 382–395. Iurkov, V. & Benito, G.R.G. (2017). Domestic alliance formation and the foreign divestment decisions of firms. Progress in International Business Research, 12, 517–538. Iurkov, V. & Benito, G.R.G. (2020). Change in domestic network centrality, firm-specific uncertainty, and the foreign divestment decisions of firms. Journal of International Business Studies, 51(5), 788–812. Kobrin, S. (1980). Foreign enterprise and forced divestment in LDCs. International Organization, 34(1), 65–88. Li, J. (1995). Foreign entry and survival: Effects of strategic choices on performance in international markets. Strategic Management Journal, 16(5), 333–351. Makino, S., Chan, C., Isobe, T., & Beamish, P. (2007). Intended and unintended termination of international joint ventures. Strategic Management Journal, 28(11), 1113–1132. Mariotti, S. & Piscitello, L. (1999). Is divestment a failure or part of a restructuring strategy? The case of Italian transnational corporations. Transnational Corporations, 8(3), 25–54. Mata, J. & Freitas, E. (2012). Foreignness and exit over the life cycle of firms. Journal of International Business Studies, 43(7), 615–630. Mata, J. & Portugal, P. (2000). Closure and divestiture by foreign entrants: The impact of entry and post-entry strategies. Strategic Management Journal, 21(5), 549–562. Schmid, D. & Morschett, D. (2020). Decades of research on foreign subsidiary divestment: What do we really know about its antecedents? International Business Review, 29(4), 101653. Song, S. (2014). Unfavorable market conditions, institutional and financial development, and exits of foreign subsidiaries. Journal of International Management, 20(3), 279–289. Surdu, I., Mellahi, K., & Glaister, K.W. (2019). Once bitten, not necessarily shy? Determinants of foreign market re-entry commitment strategies. Journal of International Business Studies, 50(3), 393–422. Tan, Q. & Sousa, C.M.P. (2018), Performance and business relatedness as drivers of exit decision: A study of MNCs from an emerging country. Global Strategy Journal, 8(4), 612–634. Vidal, E. & Mitchell, W. (2015). Adding by subtracting: The relationship between performance feedback and resource reconfiguration through divestitures. Organization Science, 26(4), 1101–1118.

Gabriel R.G. Benito and Viacheslav Iurkov

18. Eclectic paradigm

domestic firms. Hymer (1976) argued that the MNE’s success lies in its access to a ‘package (bundle) of resources,’ including technologies and management skills, that offer the owning firm monopolistic advantages to outcompete indigenous firms. Location (L) advantages (also termed country-specific advantages – CSAs), the second component of the eclectic paradigm, refer to location-bound assets associated with particular geographies (i.e., countries or regions) on which the MNE seeks to capitalize and with which to combine its O advantages. L advantages are ‘in principle’ accessible to all firms physically and/or legally established in that location. However, in reality, L advantages are not equally available to all firms, for two reasons. First, full information about L advantages associated with a specific location is not readily available to all firms. That is to say, different costs associated with accessing L advantages are imposed on firms. Second, some L advantages can be made available or denied by the government that seeks to encourage or restrict the business activities of a particular group of actors (e.g., domestic or foreign firms) by introducing barriers to their use of certain L advantages (Narula & Santangelo, 2012). The development of O advantages is clearly very closely related to the L advantages specific to the locations where firms operate. In particular, the L advantages of the home country normally give rise to the O advantages in the first place. When location-bound endowments to which firms require access (e.g., complementary assets) are present in a foreign location, they are more likely to choose to locate business activities in that location rather than a domestic location. The literature has emphasized that L advantages are best understood at different levels of aggregation, for example, country, industry, and firm levels, that have a certain degree of overlap (Narula & Santangelo, 2012). Internalization (I) advantages constitute the third building block of the eclectic paradigm. In the eclectic paradigm’s original formulation, I advantages built upon Buckley and Casson’s (1976) original formulation of internalization theory, as well as related developments by Rugman (1981) and Hennart (1982), among others. When firms have O advantages that they seek to utilize by bundling with L advantages of the foreign location (i.e., complementary assets),

The eclectic paradigm, first developed by John Dunning (1927–2009) and continually updated since, builds upon and integrates various relevant theories and concepts relating to the emergence, growth, and evolution of international value-adding activities that are under common control and coordination of a focal firm. The eclectic paradigm is a key building block of theories relating to the multinational enterprise (MNE) and the organization and spatial distribution of MNE activities. It builds upon three key components, referred to as ownership (O), location (L) and internalization (I) advantages. The eclectic paradigm is also known as the OLI paradigm, and it is widely embraced as a general framework to explain the activities of the MNE, their interaction with locations, and the choice of governance mode (Dunning, 1988). The eclectic paradigm was first developed as the eclectic theory (Dunning, 1977) but has long since been accepted as a meta-framework for the conduct of international business (IB) analysis and/or IB theory-building. It provides a structure or a platform in which various kinds of IB theories can be identified, compared, combined, and/or applied (Dunning, 2000). By doing so, the eclectic paradigm becomes a basis for understanding almost all aspects of IB activities. It is closely related to internalization theory, and it has been argued that the eclectic paradigm and internalization theory (as utilized by IB scholars in the 21st century) are simply variations on a theme (Narula, Asmussen, Chi, & Kundu, 2019). Ownership (O) advantages (also denoted as firm-specific advantages – FSAs) constitute the first variable of the OLI ‘triad.’ In its basic and most fundamental conception, O advantages refer to the proprietary assets of firms that provide rent-generating capabilities and competitive advantages to the owners. Ceteris paribus, the greater the ownership advantages of the firm that are primarily derived from its home-country origins, the more it is likely to be able to engage in foreign/international activities. The original understanding of O advantages in the field of IB was based on Hymer’s (1976) monopolistic advantage theory. The theory was developed following neoclassical theories in economics that were not able to effectively explain how foreign firms were able to compete against 60

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they must decide whether it is to their advantage to internalize these foreign activities, or not, and if so, to what extent they should do so (Asmussen, Chi, & Narula, 2022). Firms can serve foreign markets with several modalities ranging from market transactions (through exports, licensing, or franchise agreements), and collaboration with other firms (through establishing joint ventures or alliances, referred to as ‘quasi-internalization’), to organizing interdependencies within the MNE itself (‘full’ internalization). The greater the net benefits of internalizing foreign value-adding activities, or the greater the efficiency of exploiting their O advantages themselves (for example, to avoid potential knowledge leakages that are more likely to happen when using market transactions), the more likely firms will prefer to internalize their foreign value-adding activities. The eclectic paradigm combines these three building blocks together. Dunning likened the OLI paradigm to a ‘three-legged stool’ that is only functional if the three legs are evenly balanced (Dunning, 1998: 45), although Narula (2010) argued that the eclectic paradigm was more of a ‘Swiss knife,’ meaning that its three components could be utilized in different configurations, as well as in conjunction with various other frameworks, depending upon the objective of the analysis. An important contextual variable that concerns the OLI paradigm is the taxonomy of motives of the MNE to engage in international value-adding activities. Although there have been subsequent updates, the most commonly used taxonomy is the version proposed by Dunning (1993), which suggested four primary motives driving firms to organize cross-border value-adding activities under common control and coordination, namely, market-seeking, resource-seeking, efficiency-seeking, and strategic asset-seeking. Market-seeking investments are directed to a particular country or location to supply goods or services either to promote new markets or to protect existing markets. Resource-seeking investments are to gain access to particular and specific resources of a higher quality at a lower real cost than might be obtained elsewhere. Such resources include not only natural resources (e.g., minerals, metals, etc.) and agricultural products (e.g., rubber, sugar, etc.), but also cheap and well-motivated unskilled or semi-skilled

labor. Efficiency-seeking investments seek to rationalize the portfolio of established (foreign) investments in such a way that they can benefit from the common governance of geographically dispersed activities, including the economies of scale and scope, risk diversification, and the more efficient division of labor. Finally, strategic asset-seeking firms aim to augment their global portfolio of physical assets and human competence based on the long-term strategic objectives, which they perceive will either strengthen (or at least sustain) their competitive advantages or weaken those of their competitors. Many MNEs pursue multiple objectives that combine the characteristics of two or more of the above motives. There are also several secondary motives that complement the four primary motives, the most significant of which are escape investments, support investments, and passive investments. However, these motives have been less commonly utilized in the literature (Dunning & Lundan, 2008; Cuervo-Cazzura & Narula, 2015). Over the last decades, considerable details have been added to the basic OLI framework. Many scholars have enriched our understanding of the OLI triad of variables by incorporating new characteristics of the world economy. For example, there have been some discussions as to the new types and/or attributes of O advantages. IB literature has typically addressed a two-way classification of O advantages, namely asset-specific (OA) advantages and transaction-cost-minimizing (OT) advantages (Dunning, 1988). However, recent studies have advanced the importance of ‘recombinant O (OR) advantages’ that create new value by bundling, recombining, and/or reconfiguring the firm’s existing assets with complementary assets (Hennart, 2009; Verbeke, 2009). It is rather difficult to classify OR advantage into either OA or OT advantages, and it is more sensible to position OR advantage as a higher-order O advantage that straddles both OA and OT advantages (Lee, Narula, & Hillemann, 2021; Narula, 2014; Narula & Lee, 2020). Scholars have also stressed that L advantages and their components and influences are increasingly contextualized (Beugelsdijk, McCann, & Mudambi, 2010; McCann & Mudambi, 2004), and so do the related concepts of cultural and institutional distances across geographical (countries, regions, and cities), sectoral, and organizational levels (Dunning, 2009; Narula Rajneesh Narula and Jong Min Lee

62  Encyclopedia of international strategic management

& Santangelo, 2012). The effects of geographical clustering and networking of related value-added activities on the choice of location by MNEs are increasing, both between and within countries. Moreover, firm boundaries are becoming increasingly blurry in the 21st-century economy. The conceptualization of the MNE as a global factory (Buckley & Ghauri, 2004), a network of activities led by a flagship firm (Rugman & D’Cruz, 1997), or the global value chain (Gereffi, Humphrey, & Sturgeon, 2005) highlights the external business networks comprising MNEs and other global or local stakeholders based on non-equity modes of engagement (Narula et al., 2019). Researchers have noted that MNEs are increasingly able to fine-slice and modularize their value-adding activities, utilizing a richer variety of organizational modes that lie between the fully internalized MNE and the market. MNEs are increasingly utilizing ‘quasi-internalization’ in which the parties involved rely neither on spot market transactions nor on full internalization by equity ownership (Asmussen et al., 2022; Cantwell & Narula, 2001; Narula et al., 2019). Overall, there are many new questions to be answered, since the socioeconomic reality within which IB is undertaken continues to evolve, and IB research has evolved crossing so many disciplinary boundaries. The eclectic paradigm provides an essential guide to understanding the historical development of IB, and how it has changed and will change in the future. Rajneesh Narula and Jong Min Lee

References

Asmussen, C., Chi, T., & Narula, R. 2022. Quasi-internalization, recombination advantages and global value chains: Clarifying the role of ownership and control. Journal of International Business Studies, 53(8): 1747–1765. Beugelsdijk, S., McCann, P., & Mudambi, R. 2010. Introduction: Place, space and organization— economic geography and the multinational enterprise. Journal of Economic Geography, 10(4): 485–493. Buckley, P. J. & Casson, M. 1976. The future of the multinational enterprise. Palgrave: London. Buckley, P. J. & Ghauri, P. N. 2004. Globalisation, economic geography and the strategy of multi-

Rajneesh Narula and Jong Min Lee

national enterprises. Journal of International Business Studies, 35(2): 81–98. Cantwell, J. & Narula, R. 2001. The eclectic paradigm in the global economy. International Journal of the Economics of Business, 8(2): 155–172. Cuervo-Cazzura, A. & Narula, R. 2015. A set of motives to unite them all? Revisiting the principles and typology of internationalization motives. Multinational Business Review, 23(1): 2–14. Dunning, J. H. 1977. Trade, location of economic activity and the MNE: A search for an eclectic approach. In Ohlin, Bertil, et al., (Eds.), The international allocation of economic activity. London: Palgrave Macmillan. Dunning, J. H. 1988. The eclectic paradigm of international production: A restatement and some possible extensions. Journal of International Business Studies, 19(1): 1–31. Dunning, J. H. 1993. Multinational enterprises and the global economy. Wokingham, UK: Addison-Wesley. Dunning, J. H. 1998. Location and the multinational enterprise: A neglected factor? Journal of International Business Studies, 29(1): 45–66. Dunning, J. H. 2000. The eclectic paradigm as an envelope for economic and business theories of MNE activity. International Business Review, 9(2): 163–190. Dunning, J. H. 2009. Location and the multinational enterprise: John Dunning’s thoughts on receiving the Journal of International Business Studies 2008 Decade Award. Journal of International Business Studies, 40(1): 20–34. Dunning, J. H. & Lundan, S. M. 2008. Multinational enterprises and the global economy. Cheltenham, UK: Edward Elgar Publishing. Gereffi, G., Humphrey, J., & Sturgeon, T. 2005. The governance of global value chains. Review of International Political Economy, 12(1): 78–104. Hennart, J.-F. 1982. A theory of multinational enterprise. Ann Arbor: University of Michigan Press. Hennart, J.-F. 2009. Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets. Journal of International Business Studies, 40(9): 1432–1454. Hymer, S. H. 1976. The international operations of national firms: A study of direct foreign investment. Cambridge, MA: MIT press. Lee, J. M., Narula, R., & Hillemann, J. 2021. Unraveling asset recombination through the lens of firm-specific advantages: A dynamic capabilities perspective. Journal of World Business, 56(2): 101193. McCann, P. & Mudambi, R. 2004. The location behavior of the multinational enterprise: Some

Eclectic paradigm  63 analytical issues. Growth and Change, 35(4): 491–524. Narula, R. 2010. Keeping the eclectic paradigm simple. Multinational Business Review, 18(1): 35–50. Narula, R. 2014. Exploring the paradox of competence-creating subsidiaries: Balancing bandwidth and dispersion in MNEs. Long Range Planning, 47(1–2): 4–15. Narula, R., Asmussen, C., Chi, T., & Kundu, S. 2019. Applying and advancing internalization theory: The multinational enterprise in the 21st century. Journal of International Business Studies, 50: 1231–1252. Narula, R. & Lee, J. M. 2020. The theories of the multinational enterprise. In Rivera-Batiz, F. &

M. Spatareanu (eds.), Encyclopedia of international economics and global trade, volume 1: Foreign direct investment and the multinational enterprise. World Scientific Publishing. Narula, R. & Santangelo, G. D. 2012. New insights on the role of location advantages in international innovation. Handbook of Research on International Strategic Management: 291–309. Rugman, A. M. 1981. Inside the multinationals: The economics of internal markets. New York: Columbia University Press. Rugman, A. M. & D’Cruz, J. 1997. The theory of the flagship firm. European Management Journal, 15(4): 403–412. Verbeke, A. 2009. International business strategy. Cambridge, UK: Cambridge University Press.

Rajneesh Narula and Jong Min Lee

19. Emerging market multinationals

home countries that followed pro-market reforms and the associated liberalization of economies, deregulation of industries, and privatization of state-owned firms. Much of the literature focused on understanding their internationalization process, contrasting these with the processes typically followed by firms from advanced economies that underpinned the models of the multinational. This comparison led to the emergence of a theoretical debate on the novelty of their study, the so-called Goldilocks debate (Cuervo-Cazurra, 2012): some authors argued that emerging market multinationals were a hot topic that required new theories; other authors proposed that they were a cold topic because existing theories could explain them; a third set of authors posited that they were just right and that they could help extend existing models of the multinational by focusing on some of their unique conditions: the influence of the contextual conditions of their home countries. The third wave of studies emerged in the 2010s and 2020s and focused on understanding how the characteristics of the home country drove differences in their strategies, focusing on the processes that enabled these firms to upgrade their capabilities and sustained their foreign expansion (Gammeltoft & Cuervo-Cazurra, 2021). Thus, studies aimed to provide a deeper understanding of theory by identifying how some of the conditions of the home country altered the assumptions of models of the multinational and enabled their extension. This was particularly evident in the process that emerging market multinationals used to upgrade their capabilities, especially technological ones. Unlike firms in advanced economies that could rely on a sophisticated system of innovation and supportive protection of intellectual property rights, firms in emerging economies commonly lacked such supporting technological context. Thus, they had to undertake different upgrading processes, expanding into advanced economies to obtain more sophisticated technological capabilities to upgrade their home operations (Luo & Tung, 2007). The underdeveloped home-country context influences the driver of foreign expansion in novel ways. In addition to the traditional expansion in search of markets or factors of production common to advanced economy firms, emerging market multinationals face underdeveloped institutional and economic

Emerging market multinationals are companies that originate in emerging markets and that control value-creating activities in other countries. This definition needs some clarification. Emerging markets are countries that are in the process of development but have not reached the stage at which they are considered advanced. Value-creating activities abroad are any activities that enable the firm to create value, not just production, as commonly assumed, but also marketing, sales, technology, or even purchasing and financing. Control of foreign activities notes that the firm can direct how the activities are done in the foreign operation. What made emerging market multinationals surprising to academics and managers alike is that they hailed from countries considered too underdeveloped and unsupportive of firms’ competitiveness. However, despite this, some firms were able not only to invest abroad and become multinationals, but also to do so successfully. Emerging market multinationals are not a recent occurrence. Some emerging market firms became multinationals over a century ago. For example, Alpargatas, an Argentinean shoe producer, established a subsidiary in Uruguay in 1895 and another in Brazil in 1907. However, much of their foreign expansion is recent, with the literature reflecting their transformation through three waves. The first wave of studies, in the 1960s and 1970s, identified the existence of emerging market firms, calling them Third World multinationals (Wells, 1983). It noted that they operated in countries with high government intervention, many were state-owned, and benefitted from the support of their home governments when venturing abroad. It also noted that many operated natural resources and invested abroad to facilitate commodity exports. The second wave emerged in the 1990s and 2000s, analyzing the sudden foreign expansion of many firms from multiple emerging markets (Ramamurti & Singh, 2009). These firms, which some called developing country multinationals, were moving abroad thanks to deep transformations they undertook to adapt to the more competitive conditions of their 64

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conditions that drive their foreign expansion in new, competing ways (Cuervo-Cazurra & Ramamurti, 2014). On the one hand, the underdeveloped institutional context induces emerging market firms to learn how to operate in challenging countries. They use this learning to expand into other challenging economies in which they can use their knowledge and achieve an advantage over firms from advanced economies. Alternatively, when confronted with challenging home-country institutions, they escape and invest in countries with more supportive institutions. On the other hand, the underdeveloped economic and technological system also affects their expansion in two alternative ways. One is by forcing the firms to create innovations that are suited to the needs of poor consumers in emerging markets. Firms then use these innovations to achieve an advantage in other emerging markets, serving consumers with similar needs, and also in advanced economies to serve consumers who want simple and inexpensive products. Another is by leading these firms to seek sophisticated capabilities abroad, buying or allying with firms from advanced economies to access these advanced technological and marketing capabilities. The analysis of emerging market multinationals is gaining theoretical sophistication due to a more critical and sophisticated identification of their uniqueness. The research themes explain how these firms differ in their strategies because of their home-country conditions, rather than being a reflection of the globalization context or industry of operation (Ramamurti, 2012). Some of the drivers of

new insights on emerging market multinationals are the role of the government in internationalization, the processes of catch-up to advanced economy firms, and their integration into and development of global value chains (Gammeltoft & Cuervo-Cazurra, 2021). Alvaro Cuervo-Cazurra and Annique Un

References

Cuervo-Cazurra, A. 2012. Extending theory by analyzing developing country multinational companies: Solving the Goldilocks debate. Global Strategy Journal, 2(3): 153–167. Cuervo-Cazurra, A., & Ramamurti, R. (Eds). 2014. Understanding Multinationals from Emerging Markets. Cambridge, UK: Cambridge University Press. Gammeltoft, P., & Cuervo-Cazurra, A. 2021. Enriching internationalization process theory: Insights from the study of emerging market multinationals. Journal of International Management, 100884. Lall, S. 1983. The New Multinationals: The Spread of Third World Enterprises. New York: Wiley. Luo, Y., & Tung, R. L. 2007. International expansion of emerging market enterprises: A springboard perspective. Journal of International Business Studies, 38(4): 481–498. Ramamurti, R., 2012. What is really different about emerging market multinationals? Global Strategy Journal, 2(1): 41–47. Ramamurti, R., & Singh, J. V. (Eds.). 2009. Emerging Multinationals from Emerging Markets. New York: Cambridge University Press. Wells, L. T. 1983. Third World Multinationals. Cambridge, MA: MIT Press.

Alvaro Cuervo-Cazurra and Annique Un

20. Emerging markets

1978 World Development Report separated countries into industrialized countries, capital surplus oil exporters, middle income, low income, and centrally planned economies. By 1990, the classification changed to high income, middle income (which was subdivided into upper and lower), and low income. The boundaries among groups are revised annually to account for inflation, and countries move up or down as their gross national income per capita changes. An alternative to the single indicator classification is the use of a composite indicator; this enables a richer consideration of alternative dimensions of development. In this line, the United Nations Development Program uses a composite indicator of income, health and education to create a Human Development Index. Using this criterion, it started classifying countries into high, middle, and low human development, which later changed to four groups: very high, high, medium, and low human development (UNDP, 2023). Alternatively, some classifications are qualitative, employing a combination of criteria to group countries. The International Monetary Fund uses a composite criterion of income, export diversification, and financial stability to classify countries (IMF, 2023). Earlier it grouped countries into industrial, developing, and centrally managed or formerly centrally managed economies. It then used two terms: developed economies, and developing and transition economies. By 2023, the two groups were called advanced economies, and emerging market and developing economies. The United Nations Conference on Trade and Development groups countries into developed economies, developing economies, least developed countries, landlocked developing countries, and small island developing states in its World Investment Report (UNCTAD, 2023). This classification uses a qualitative criterion that evolved. For example, a new group of transition economies was added in the 2005 report but was dropped in the 2022 report. Some of the classifications of countries are unclear in their logic. For example, in the 1992–2001 editions of the World Investment Report, South Africa was classified as developed and as developing afterward; in the 2008 report, all transition economies that joined the European Union were classified as developed, and in the 2022 report, all countries in Europe were classified as developed, even though some have income

Emerging markets are countries that are in the process of development but have not reached the stage at which they are considered advanced. The term is commonly used to classify countries into broad groups by level of economic development. It provides a useful rule of thumb for classifying countries to facilitate their comparison. At the same time, such groupings can be critiqued for oversimplifying the wide diversity of countries that are considered emerging. The term emerging markets was coined by Antoine van Atgamel in 1981 to increase the attractiveness of a fund that invested in stocks of firms located outside advanced economies (Economist, 2008). The term is the latest iteration of a long tradition of alternative names that classify countries into groups to facilitate their comparison. An early term used to refer to emerging markets was Third World. This was based on the political separation of countries during the Cold War in the middle of the 20th century into three groups: a US-led block, called the First World, a Soviet-led block, called the Second World, and a set of countries that gained independence from their colonial masters and decided to maintain neutrality, which were called the non-aligned block, or Third World (Wolf-Phillips, 1987). A later term was developing countries. The political classification of countries morphed into economic groupings with the pro-market reforms and collapse of the Communist block in the 1980s. This resulted in the use of developed, transition, and developing country groups, based on the level and type of development. Although these groups roughly corresponded to the First, Second, and Third Worlds, they did not always include the same countries in each group. Country groupings have used alternative classification methods, creating confusion as to which countries can be considered emerging markets. Some classifications are quantitative and use one or several measurable indicators to group countries. An influential grouping has been done by the World Bank in its World Development Report, which classifies countries using only one indicator, the level of gross national income per capita using the Atlas method (World Bank, 2023). The original grouping of countries in the 66

Emerging markets  67

per capita levels well below countries classified as developing. Other groupings of countries have sometimes been used as synonymous with emerging countries, further complicating their identification. First, the Organization for Economic Cooperation and Development, which has been called the rich-world club, has been treated as synonymous with developed countries. However, countries that are not usually considered as developed, like Turkey, have belonged to it since its creation, and others like Hungary and Mexico since the mid-1990s. Second, the group of seven, G-7, was created in 1976 to include large, democratic, and industrialized countries. However, the inclusion of Russia into the group in 1997 to become the G-8 challenged its use in identifying developed countries. Third, the group of 77 (G-77) was created in 1964 to promote the interest of developing countries, and now includes 130 members, but this grouping is political rather than economic. Fourth, the BRICs was a term coined in 2001 by researchers at Goldman Sachs to refer to large, fast-growing countries and includes Brazil, Russia, India, and China (O’Neill et al., 2005), but sometimes South Africa is added to it. Fifth, the least developed countries is the term used by the United Nations to refer to countries that are not only developing, but also that have economic vulnerability and weak human development. Seventh, the term newly industrialized countries refers to economies that have moved from developing to developed in recent times, such as

Hong Kong, Singapore, and Taiwan, but its application to other Asian countries, such as Indonesia or Malaysia, was put into question by the 1997 crisis. Alvaro Cuervo-Cazurra and Annique Un

References

Economist. 2008. Acronyms BRIC out all over. The Economist, September 18. https://​ www​ .economist​.com/​special​-report/​2008/​09/​20/​ins​ -and​-outs. Accessed May 17, 2023. IMF. 2021. World Economic Outlook (WEO). Frequently Asked Questions. International Monetary Fund: Washington, D.C. https://​ www​.imf​.org/​en/​Publications/​WEO/​frequently​ -asked​-questions. Accessed May 17, 2023. O’Neill, J., Wilson, D., Purushothaman, R., & Stupnytska, A. 2005. How Solid are the BRICs? Global Economics Paper No: 134 Goldman Sachs. https://​www​.goldmansachs​.com/​intelli gence/archive/how-solid.html. Accessed May 17, 2023. UNCTAD. 2023. https://​unctad​.org/​system/​files/​ official​-document/​wir2023​_en​.pdf. Accessed May 17, 2023. UNDP. 2023. Human Development Index. https://​ hdr​.undp​.org/​data​-center/​human​-development​ -index​#/​indicies/​HDI . Accessed May 17, 2023. Wolf-Phillips, L. 1987. Why third world?: Origin, definition and usage. Third World Quarterly, 9: 1311–1327. World Bank. 2023. How does the World Bank classify countries? https://​datahelpdesk​.world bank​.org/​knowledgebase/​articles/​378834​-how​does-the-world-bank-classify-countries. Accessed May 17, 2023.

Alvaro Cuervo-Cazurra and Annique Un

21. Expatriation

which can have significant positive impact on the routines, practices and strategies of foreign subsidiaries. Even though there are equivocal findings (Chang, Gong, & Peng, 2012; Gaur, Delios, & Singh, 2007; Singh et al., 2019), most scholars would consider utilization of expatriates to be beneficial to the foreign subsidiary as well as the parent global enterprises. For the other, expatriation experiences typically focus on individual expatriates and their characteristics, including their family members, because most studies rely on survey methodology and data obtained through questionnaires. In terms of the empirical studies, Bhaskar-Shrinivas, Harrison, Shaffer, and Luk (2005) meta-analyzed the extant studies on expatriate cross-cultural adjustment, referring to the degree of psychological comfort, familiarity, and perceived ease with features of the foreign environment (Black, Mendenhall, & Oddou, 1991). Based on Black et al.’s (1991) model, Bhaskar-Shrinivas et al. (2005) found various factors to act as antecedents to three (general, work, and interaction) facets of expatriate adjustment, including but not limited to factors associated with individuals prior to moving abroad (having previous international experiences and host language proficiency), individual skills and competencies (self-efficacy and relational skills), job-related (role clarity, role discretion, role conflict), support provided by the organization (coworker and logistical support), and other factors (spouse adjustment and culture novelty). However, even the two “organizational” factors they included are perceptions by expatriates. This rather exclusive focus on the expatriate (and their families) has been noted by Takeuchi (2010) and Kraimer, Bolino, and Mead (2016) to be a problem in that it places undue burden on the expatriates and their families. With regard to international human resource management practices, in particular to selection and training of expatriates, less scholar attention has been paid to these aspects more recently, despite some earlier effort in determining valid criteria for selecting the right expatriates (Mendenhall, Dunbar, & Oddou, 1987) and generally agreed effectiveness of cross-cultural training (see meta-analysis by Chenyang, 2022), referring generally to a structured intervention in an educational setting to develop trainees’ cultural awareness, enhance proper

Company-sponsored expatriates, referring to “employees of business organizations, who are sent overseas on a temporary basis to complete a time-based task or accomplish an organizational goal” (Harrison et al., 2004: 203), have always been utilized by multinational enterprises (MNEs) to control and coordinate foreign subsidiaries as well as to develop managerial talent (e.g., Edström & Galbraith, 1977; Shay & Baack, 2004). While this is only one option for the MNEs to staff foreign subsidiaries, it is nonetheless a very important one for the MNEs as this international staffing has an impact on foreign subsidiary performance (e.g., Singh et al., 2019). In the international staffing literature, it is generally considered beneficial to employ expatriate parent country nationals to staff foreign subsidiaries’ top management positions (e.g., Gong, 2003; Kawai & Chung, 2019) for enhancing subsidiary performance. However, the extant research on international staffing of company-sponsored expatriates (or parent country nationals as expatriates) and their experiences (in terms of adjustment processes and outcomes) have developed independent of each other, due primarily to difficulties of accessing data that allows an integration of these two streams of research. For one, international staffing typically utilizes archival data aggregated at the foreign subsidiary level – i.e., the number of expatriates/percentage of expatriates. For instance, Gong (2003) utilized data collected by Japanese Overseas Investment and found the percentage of parent country nationals (i.e., expatriates) on the top management team was positively related to labor productivity of foreign subsidiaries for Japanese MNEs, even though cultural distance and foreign subsidiary operation experience moderated this relationship. Berry (2015) also found the percentage of parent expatriates to be positively related to foreign subsidiary performance (return on asset) when the host country possesses higher technological innovation capabilities for American MNEs. The explanations typically given for these findings are that expatriate employees serve as carriers of tacit knowledge and strategic capabilities from home country headquarters (Argote & Ingram, 2000; Stoermer, Davies, & Froese, 2021) to foreign subsidiaries, 68

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cultural norms and behaviors, and hone their cross-cultural competence to manage cultural differences (Black & Mendenhall, 1990). Perhaps new skills that are more pertinent to expatriates’ roles, such as cultural intelligence or paradoxical mindset (Wang, Vu, Freeman, & Donohue, 2022), for instance, may be used for selection purposes. Given the complex nature of global enterprises, the current state of the “expatriate” management literature that focuses on either individual(expatriation experiences), foreign subsidiary- (international staffing of expatriates) or parent company-level (selection and training international human resource management practices) is not surprising. However, to fully understand the challenges and difficulties as well as potential benefits associated with expatriate management, we need more empirical studies that link at least two (foreign subsidiary and individual) levels, if not more. Thus, in keeping with the current multilevel theorizing, explicating the antecedents as well as consequences associated at different and multiple levels (at the country, industry, parent firm, and foreign subsidiary) of analysis are needed. Related, having an expatriate as the CEO of the foreign subsidiary versus one of the top management team members, or in the general staff expatriate staffing (i.e., CEO, top management team, and workforce) are likely to be influenced by a somewhat different set of considerations (antecedents) and may lead to different consequences (e.g., Gong, 2003), which needs to be investigated further. The key idea is to start incorporating critical factors that could impact the relevant outcomes (e.g., expatriate adjustment and performance; foreign subsidiary performance; or effectiveness of selection and training practices) without overly complicating the research ideas (in terms of parsimony vs. comprehensiveness, moving little more toward comprehensiveness but not overly so). Adoption of such a multi-level, multi-foci theoretical lens as an organizing framework for the empirical investigation is likely to be fruitful in elucidating the important linkages across various levels. For instance, the approach may highlight the important role played by expatriates (Caligiuri & Colakoglu, 2007) at the foreign subsidiary (foreign subsidiary level) when the global enterprises (parent company-level) pursue global inte-

gration strategies or use a particular entry mode (e.g., wholly owned vs. joint ventures). Related, at the meso-level, headquarters– subsidiary relations (Lee, 2022) may provide additional insights about expatriates’ role in foreign subsidiaries. For future research, we may need to become more strategic in identifying opportunities to design studies that allow us to adopt multi-level and/or multi-foci perspectives. Such an endeavor is likely to further our understanding of various aspects associated with expatriate management in the future. Riki Takeuchi

References and selected further reading

Argote, L., & Ingram, P. (2000). Knowledge transfer: A basis for competitive advantage in firms. Organizational Behavior and Human Decision Processes, 82(1), 150–169. Berry, H. (2015). Knowledge inheritance in global industries: The impact of parent firm knowledge on the performance of foreign subsidiaries. Academy of Management Journal, 58(5), 1438–1458. Bhaskar-Shrinivas, P., Harrison, D. A., Shaffer, M. A., & Luk, D. M. (2005). Input-based and time-based models of international adjustment: Meta-analytic evidence and theoretical extensions. Academy of Management Journal, 48(2), 257–281. Black, J. S., & Mendenhall, M. (1990). Cross-cultural training effectiveness: A review and a theoretical framework for future research. Academy of Management Review, 15(1), 113–136. Black, J. S., Mendenhall, M., & Oddou, G. (1991). Toward a comprehensive model of international adjustment: An integration of multiple theoretical perspectives. Academy of Management Review, 16(2), 291–317. Caligiuri, P. M., & Colakoglu, S. (2007). A strategic contingency approach to expatriate assignment management. Human Resource Management Journal, 17(4), 393–410. Chang, Y. Y., Gong, Y., & Peng, M. W. (2012). Expatriate knowledge transfer, subsidiary absorptive capacity, and subsidiary performance. Academy of Management Journal, 55(4), 927–948. Chenyang, L. (2022). Meta-analysis of the impact of cross-cultural training on adjustment, cultural intelligence, and job performance. Career Development International, 27(2), 185–200. Edström, A., & Galbraith, J. R. (1977). Transfer of managers as a coordination and control strategy

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70  Encyclopedia of international strategic management in multinational organizations. Administrative Science Quarterly, 22(2), 248–263. Gaur, A. S., Delios, A., & Singh, K. (2007). Institutional environments, staffing strategies, and subsidiary performance. Journal of Management, 33(4), 611–636. Gong, Y. (2003). Subsidiary staffing in multinational enterprises: Agency, resources, and performance. Academy of Management Journal, 46(6), 728–739. Harrison, D. A., Shaffer, M.A., & Bhaskar-Shrinivas, P. (2004), Going places: Roads more and less traveled in research on expatriate experiences. In J. J. Martocchio (Ed.), Research in Personnel and Human Resources Management, 23, 199–247, Greenwich, CT: JAI Press. Kawai, N., & Chung, C. (2019). Expatriate utilization, subsidiary knowledge creation and performance: The moderating role of subsidiary strategic context. Journal of World Business, 54(1), 24–36. Kraimer, M., Bolino, M., & Mead, B. (2016). Themes in expatriate and repatriate research over four decades: What do we know and what do we still need to learn? Annual Review of Organizational Psychology and Organizational Behavior, 3, 83–109. Lee, J. M. (2022). MNCs as dispersed structures of power: Performance and management implications of power distribution in the subsidiary

Riki Takeuchi

portfolio. Journal of International Business Studies, 53(1), 126–155. Mendenhall, M. E., Dunbar, E., & Oddou, G. R. (1987). Expatriate selection, training and career‐pathing: A review and critique. Human Resource Management, 26(3), 331–345. Shay, J. P., & Baack, S. A. (2004). Expatriate assignment, adjustment and effectiveness: An empirical examination of the big picture. Journal of International Business Studies, 35(3), 216–232. Singh, D., Pattnaik, C., Lee, J. Y., & Gaur, A. S. (2019). Subsidiary staffing, cultural friction, and subsidiary performance: Evidence from Korean subsidiaries in 63 countries. Human Resource Management, 58(2), 219–234. Stoermer, S., Davies, S., & Froese, F. J. (2021). The influence of expatriate cultural intelligence on organizational embeddedness and knowledge sharing: The moderating effects of host country context. Journal of International Business Studies, 52, 432–453. Takeuchi, R. (2010). A critical review of expatriate adjustment research through a multiple stakeholder view: Progress, emerging trends, and prospects. Journal of Management, 36(4), 1040–1064. Wang, D., Vu, T., Freeman, S., & Donohue, R. (2022). Becoming competent expatriate managers: Embracing paradoxes in international management. Human Resource Management Review, 32(3), 100851.

22. Firm-specific advantages

always assessed against domestic opportunities, meaning that – at the margin and for the average firm – performance expectations in the home market versus the international market would be equal. Internalization theory shows how the nature of the MNE’s FSAs determines whether these resource bundles can best be exploited through exports (meaning that FSAs are embodied in products and services traded across borders), market contracts (meaning that FSAs are exploited through, for instance, international licensing agreements and production contracts with foreign partners), subsidiaries (meaning that the recipients of the international transfer of resource bundles are the firm’s own foreign operations) or cooperative operating modes (such as equity joint ventures with external parties, to create joint value). Each of these operating modes has expected costs and benefits, and according to internalization theory, the IBS challenge is to identify which mode is the comparatively more efficient one to exploit FSAs in any given external context, thereby creating and capturing value. A variety of barriers may make an MNE’s foreign entry in a host country prohibitively costly. Such barriers can be related to cultural, economic and institutional differences with the host country. In the institutional sphere, trade and investment barriers imposed by a host-country government or the forced transfer of proprietary knowledge to host-country actors can turn a foreign location into a no-go zone, in which case the MNE will decide not to deploy its FSAs there in any form (Hennart, 1989). One could argue that from the MNE’s perspective, the potential host nation lacks ‘country-specific advantages’ or CSAs (see also the location advantages entry in this book). More broadly, the external context for IBS that determines how FSAs will be exploited includes elements as varied as the presence or absence of trade and investment regulations, the regimes that govern intellectual property rights, the risk of expropriation by foreign governments, the risks of foreign strategic partners behaving opportunistically with this behavior remaining unpunished, etc. Microand macro-level elements will together determine MNE operating mode choices, and the extent to which FSAs can lead to value creation and capture across borders (see, e.g., Hillemann, Verbeke, & Oh, 2019).

The concept of firm-specific advantages (FSAs), defined as a firm’s unique resource bundles that permit successful international entry and operation abroad, has been a cornerstone of research in international business strategy (IBS) for at least six decades (Verbeke & Lee, 2021). Starting with Stephen Hymer’s doctoral dissertation (Hymer, 1960, published in 1976), the IBS field has viewed the multinational enterprise (MNE) as the principal actor engaged in cross-border economic transactions and as its main unit of analysis. The internationally operating company can only create and capture value in foreign markets if it owns, controls, or otherwise commands resource bundles (assets, skills and capabilities) that allow overcoming the additional costs of operating abroad, or more broadly, the liability of foreignness. These resource bundles represent its FSAs, and they feature prominently in mainstream IBS thinking, especially internalization theory (for classic references, see Buckley & Casson, 1976; Rugman, 1981) and the eclectic paradigm, also referred to as the OLI framework, with O referring to ownership advantages, L to location advantages and I to internalization advantages, i.e., the net benefits of producing abroad in subsidiaries as compared with using external market contracts (for classic references, see Dunning, 1980, 1988). Rugman (2010) explains the differences between the two frameworks, with internalization theory representing the broader approach that can explain MNE activities in home and host countries, whereas the eclectic paradigm focuses mainly on MNE activities in host environments. FSAs were originally conceptualized in internalization theory as idiosyncratic resource bundles, especially intermediate knowledge outputs that would permit companies to expand across national borders (Buckley & Casson, 1976). These FSAs would often reflect technological (upstream) or marketing-related (downstream) superiority over rival companies in industry, even though the theory does not predict any linkage per se between international diversification and financial performance. Investment opportunities abroad to exploit FSAs are 71

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IBS scholars have often utilized variables such as firm-level expenditures in R&D and marketing as proxies for an MNE’s FSAs. However, during the past few decades the concept of FSAs has been reexamined and extended, as we explain below. We also describe the differences between FSAs and the concepts of (a) valuable, rare, inimitable and non-substitutable (VRIN) resources from the resource-based view (RBV) (Barney, 1991); and (b) dynamic capabilities (Teece, 2014; Teece, Pisano, & Shuen, 1997).

Unbundling the concept of FSAs

IBS scholars have used a variety of terms to describe company-level strengths instrumental to value creation and capture across borders. These could be viewed as FSA subcategories and include, inter alia, ownership advantages (whereby the firm leverages its right of ownership over assets as the basis for its international expansion), core competences (whereby the firm builds upon its capacity to integrate complementary technologies and to deploy these across product lines and geographic markets), and oligopolistic advantages (whereby dominant firms in industry utilize their resources’ superiority to earn rents in foreign markets) (cf. Adarkwah & Malonæs, 2022). A public policy question that arises systematically in this realm is whether an MNE that transfers, deploys and exploits its FSAs ultimately benefits societal stakeholders at home and abroad, or whether unintended side effects cause harm (e.g., the crowding out of domestic firms in foreign markets; distributional effects at home and abroad; taxation income effects; undesirable environmental and social impacts; etc.). One answer is that MNE activity resulting from FSAs being transferred abroad typically fosters improved efficiency and allows a variety of parties to identify and engage with value-creating opportunities that would otherwise have remained unexplored. The more relevant question when assessing the societal impact of particular MNE activities that build upon these companies’ FSAs is, therefore: ‘As compared with which real-world alternative?’ It is then up to government institutions and non-market stakeholders to regulate FSA transfer, deployment and exploitation so as to avoid or mitigate material harms to society (cf. Rugman & Verbeke, 1998). Alain Verbeke and Wenlong Yuan

Rugman and Verbeke (1992: 763) made the critical distinction between location-bound and non-location bound FSAs. Both play an important role in IBS. Location-bound FSAs represent company-level strengths that permit value creation and capture in a restricted geographic zone only, typically the home country or more generally ‘proximate’ environments with limited cultural, administrative, geographic and economic distance vis-à-vis the ‘home’ environment. If location-bound FSAs are developed in a host-country environment, they typically reflect a firm-level strategy of national responsiveness in that environment. In contrast, non-location-bound FSAs can be transferred, deployed and exploited across borders. Value creation and capture occur as the result of the firm gaining scale economies, scope economies and benefits of exploiting national differences. Full non-location boundedness implies there is no need for substantial adaptation of the resource bundles involved or for recombining extant FSAs with complementary resources held by external actors. Verbeke and Asmussen (2016) further decomposed the geographic reach of non-location-bound FSAs: this reach can include proximate (low distance) countries or encompass an entire region (such as the European Union) or be geographically unconstrained (global). What makes IBS unique as a field of study is the general observation that senior executives in internationally operating companies tend to overestimate the non-location boundedness of FSAs and at the same time underestimate the need to adapt and augment these FSAs in foreign environments. The adaptation process, which implies deviating from successful practices at home and engaging in resources recombination, often requires enlisting complementary resources that other economic actors in foreign jurisdictions own or control, or over which they have some form of decision rights. These requisite complementary resources cannot always just be purchased or otherwise accessed in well-functioning, external markets. As a result, value creation and capture across borders will only occur if the MNE and the parties with which it shares interdependences in foreign markets bundle their resources to create value (Hennart, 2009; Hennart & Verbeke, 2022). In the context of such resource bundling, governance matters much: parties sharing interdependences (for

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instance the MNE and its foreign suppliers and distributors) must address the universal challenges of bounded rationality (scarcity of mind) and bounded reliability (scarcity of making good on open-ended promises). This is important especially when at least one of the parties involved commands FSAs that are vulnerable to appropriation or misuse by another party, and when the parties need to ‘co-specialize’ their extant resource bundles as a precondition for joint value creation (Asmussen, Chi, & Narula, 2022; Hennart & Verbeke, 2022). FSAs as resource bundles usually confer potential value only during a limited time (with notable exceptions, such as patented knowledge that may be protected for many years in institutional contexts providing strong protection of intellectual property rights). FSAs need to be enhanced, meaning recombined with other resources, when discovering and engaging with entrepreneurial opportunities across borders. In classic internalization theory, the focus was mainly on exploiting a pre-existing set of non-location-bound FSAs by expanding internationally, especially through establishing a network of foreign subsidiaries, rather than on the subsequent management of this internal network and the related external networks of stakeholders involved with the MNE (Buckley & Casson, 1976). In new internalization theory (Narula & Verbeke, 2015), other elements are important. First, once an international network of operations has been established, FSAs can be created outside of the MNE’s home base, especially in subsidiaries that are assigned – or have captured – lead roles in the firm. Second, different types of resources recombination will necessarily occur in various locations, as a function of the varied interdependences shared with a wide spectrum of parties the MNE needs to engage with. As a result, the MNE’s reservoir of FSAs will also be distributed unevenly across geographic space, with each subsidiary commanding a unique mix of location-bound and non-location-bound FSAs. To the extent that a subsidiary commands non-location-bound FSAs, the creation of which is structurally embedded in the local environment such as a knowledge cluster, the term ‘subsidiary-specific advantage’ should be used (Rugman & Verbeke, 2001). The difficulty for the MNE’s head office is that it can become more difficult over time to

maintain a comprehensive overview and full understanding of: (a) the company’s entire FSAs reservoir; (b) the linkages among these distributed FSAs that can support value creation and capture; and (c) the ongoing needs and opportunities for distributed innovation to augment the extant FSAs reservoir, and for creative resource bundling with external parties. Third, Singh and Kundu (2002) have introduced the concept of ‘network-based advantages.’ These stretch beyond conventional FSAs and include resource bundles that the MNE can access and utilize because of inter-firm linkages with external network partners. In a similar vein, Li et al. (2019) coined the term ‘ecosystem-specific advantages’, present especially in international digital commerce, whereby an MNE can perform the role of platform firm and cooperate with multiple, interdependent parties that form the ecosystem. Given the importance of resources recombination when the MNE expands internationally, it is unsurprising that many scholars have highlighted the entrepreneurial component in FSA development and enhancement processes: they sometimes view the company’s ability to recombine resources as a higher-order FSA in its own right (Grøgaard, Colman, & Stensaker, 2022; Rugman, Verbeke, & Nguyen, 2011; Verbeke & Kano, 2016; Verbeke & Lee, 2021). In this realm, Verbeke and Kano (2016) distinguished among various ways of recombining resources, ranging from straightforward ‘fast bundling’ to much more demanding processes of entrepreneurial resource orchestration.

FSAs, dynamic capabilities, and related concepts

The concept of FSAs has often mistakenly been viewed as the equivalent of VRIN resources or dynamic capabilities. All three concepts do relate to company strengths, instrumental to value creation and value capture. In each case, the focus is on idiosyncratic resource bundles that a company owns or controls, or over which it has some form of decision rights, and that contribute to this company’s ability to create and capture value. But FSAs differ in four ways from the two other concepts. First, the concept of FSAs in internalization theory was introduced specifically to explain the rise of MNEs with a special focus Alain Verbeke and Wenlong Yuan

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on international value creation and capture through foreign direct investment (FDI). In contrast, the RBV and the dynamic capabilities perspectives arose without specific reference to IBS, and with a focus on superior financial performance (Lessard, Teece, & Leih, 2016). Second, what matters most to contemporary IBS scholars is the location-boundedness versus non-location-boundedness of FSAs (Rugman & Verbeke, 1992), whereby the efficient governance of interdependences with foreign parties is critical to create and distribute value. Here, requisite resource recombination across borders almost automatically demands moving away from easy replicability of what worked well at home. Even when only the internal MNE network is involved in FSA exploitation and further enhancement, the spatial distribution of resources is important and thereby also the potential for conflict among spatially dispersed units. For instance, both the MNE’s budgets for innovation (FSA development and enhancement) and for capital expenditures (FSA exploitation) are finite, and often much smaller than the available pool of potential investment projects, so that some geographically dispersed units in the MNE will come out as ‘winners’ and others as ‘losers’ in a relative sense. In contrast, the RBV focuses on the attributes of resources as being valuable, rare, imperfectly imitable, and non-substitutable without paying attention to these complexities of place and space (Barney, 1991). The dynamic capabilities perspective, in turn, focuses on the processes of sensing, seizing and transforming, to achieve an ecosystem fit with the firm’s environment and to gain competitive advantage as a result, but again without viewing place and space as critical to the analysis. Third, and related to the two previous points, the concept of FSAs in IBS has always been analyzed in conjunction with two other parameters, namely location advantages (see also the entry in this book) and internalization advantages, thereby highlighting the interdependences with other economic actors across borders. Location advantages are important because FSAs do not arise in a spatial vacuum but critically depend upon a broad range of home-country characteristics and often host-country ones. For instance, home-country features have been modelled inter alia as the interplay among Alain Verbeke and Wenlong Yuan

factor conditions, demand conditions, related and supporting firms, and rivalry in industry, thereby defining a firm’s home-country ‘diamond’ (Porter, 1990). In many instances, FSAs also depend upon access to resources in other nations, as reflected in double and multiple diamond thinking (Moon, Rugman, & Verbeke, 1998). The particular international expansion trajectory of any company with non-location-bound FSAs does not occur in a vacuum either but is determined by the attractiveness of host-country markets relative to each other. Host-country attractiveness has many dimensions, but critical among these are the possibilities offered to the MNE to achieve the resources recombination instrumental to value creation and capture. The interactions between FSAs and CSAs, as modelled in the well-known ‘FSA–CSA’ matrix, have been studied extensively in the international business literature (Hillemann & Gestrin, 2016). In contrast, place, space and spatial interactions with other parties do not feature prominently in the foundational RBV and dynamic capabilities literature. Fourth, the usage of FSAs in IBS research is always heavily contextualized ex ante. Linkages with other variables and underlying mechanisms (behavioral conditions, organizational exigencies, and societal preferences) are generally proposed within the particular context studied. This context has geographic, cultural, institutional, industry-related, technological, and temporal dimensions, thus giving the conceptual models substantial explanatory and predictive power, which is largely lacking in empirical work using the RBV and dynamic capabilities approaches. For instance, much United States FDI in Europe in the 1960s resulted from American MNEs having technological and branding superiority vis-à-vis European firms. In contrast, much recent FDI emanating from emerging economy MNEs (EMNEs) occurred in a very different context. Here, it has sometimes mistakenly been argued that EMNEs do not command any FSAs at the outset but precisely internationalize to acquire FSAs. Admittedly, some EMNEs have motivations to internationalize that may be different from developed economy MNEs, and these motivations can include the desire to acquire FSAs abroad. Political motivations for international expansion because of linkages with state actors can also play a role in these firms’ international expansion trajectories (Buckley

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et al., 2007). But beyond being motivated to access FSAs from other companies abroad and beyond benefiting from privileged access to home-country location advantages, including government support, all MNEs must build upon some type of FSAs when expanding internationally. Verbeke and Kano (2015) analyzed 11 successful EMNEs and in each case identified the FSAs underlying this success. Location-bound FSAs included predictable elements derived from the home environment, such as privileged access to skilled labor and low-cost production; embeddedness in local networks (including distribution networks); government connections; knowledge of local markets, etc. More importantly, all these firms commanded non-location-bound FSAs, for instance entrepreneurial agility; commitment to innovation; access to global distribution networks; or higher-order management capabilities and sophisticated routines. Even when foreign knowledge was sought through acquisitions, some FSAs had to be present at the outset in the MNE to permit subsequent value creation with the acquisition target. Here, the governance structure set up to manage the complementary resources of the interdependent parties is again critical to value creation. The usage of the FSAs concept in empirical analyses using internalization theory is thus systematically associated with consideration of foreign entry motivations; institutional environments (including the developed economy versus emerging economy dimension); the need to develop or tap into complementary resources in foreign markets, etc. These contextual elements are described ex ante, thus making it possible to predict the critical resource interdependences among parties from different countries and the opportunities for jointly creating and capturing value. As another example of ex ante contextualization, international new ventures (INVs) can be considered. INVs’ distinctive characteristic is that they supposedly internationalize at inception or shortly thereafter, thereby often having insufficient time to build non-location-bound FSAs such as patented knowledge or brand names inside the company. Almost by definition, INVs also have little firm-level experience beyond the experience of their owner-managers, i.e., the founding entrepreneurs. Therefore, when reflecting upon these companies’ FSAs, the founding entrepreneurs’ knowledge, skills

and earlier experiences will likely loom large (Verbeke, Osiyevskyy, & Zargarzadeh, 2014). Again, ex ante contextualization matters much when using the concept of FSAs to explain value creation and capture across borders. On a positive note, many research efforts on FSAs and dynamic capabilities do share some similarities. In both cases, the entrepreneurial dimension is important. In IBS, resources recombination is required in most foreign market entries, thus necessitating continuous enhancement of FSAs (e.g., Lee, Narula, & Hillemann, 2021; Verbeke & Yuan, 2010). Similarly, with the dynamic capabilities perspective, achieving an ecosystem fit between the firm and its environment requires the flexible visible hand of senior management to respond to external change, as well as agile sensing and seizing processes (Teece, 2014; Verbeke, 2022). As to the RBV, a focus on the detail of resource attributes can help greatly to understand the actual processes of resource recombination when entering and operating in foreign markets and managing interdependences between parties in both the home and the host environments (Verbeke & Yuan, 2013). To conclude, FSAs, as a foundational concept in the IBS field, are critical to understanding the very existence and operation of the modern MNE (Narula et al. 2019; Verbeke & Lee, 2021). The concept has been used widely to describe and explain a large number of empirical phenomena at the heart of IBS, not only entry mode and location choices but also MNE network governance (Kano, 2018), family business internationalization (e.g., Kano, Ciravegna, & Rattalino, 2021), the rise of social media firms (e.g., Fraccastoro, Gabrielsson, & Chetty, 2021), just to name a few. The concept has also evolved from its initial conceptualization in classic internalization theory as FSAs being present and ready to be exploited across borders, subject to efficient governance, to a more elaborate conceptualization that emphasizes the need for ongoing resources recombination across borders. Resources recombination is a precondition for value creation and capture, and it focuses on interdependences with external parties abroad who hold complementary Alain Verbeke and Wenlong Yuan

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resources. With this latter conceptualization in mind, FSAs in governance (including for instance dimensions of organizational structure, systems and culture, and the strengths of top management teams, boards of directors, etc.) would appear critical to any MNE’s international business strategizing (e.g., Grøgaard, Rygh, & Benito, 2019; Verbeke & Yuan, 2021; Pongelli et. al., 2023). As a final point, contemporary MNEs need to cope with external stakeholder demands for corporate social performance (CSP) in the multiple jurisdictions where they operate (e.g., Bass & Grøgaard, 2021; Nippa, Patnaik, & Taussig, 2021). In the past, these demands were often viewed as relevant mainly in the distributional sphere, after economic value had been created. But it is becoming increasingly clear that structural interdependences now exist between especially the world’s largest MNEs and a variety of stakeholders in foreign environments, who are focused mainly on CSP. The new frontier in studying FSAs is whether MNEs can build unique strengths in managing such interdependences, as a precondition to gain a social license to operate. Only after securing such license can the MNE have some confidence that it will be able to create and capture value across borders, based upon its more conventional FSAs. Alain Verbeke and Wenlong Yuan

References

Adarkwah, G. K., & Malonæs, T. P. 2022. Firm-specific advantages: A comprehensive review with a focus on emerging markets. Asia Pacific Journal of Management, 39(2): 539–585. Asmussen, C., Chi, T., & Narula, R. 2022. Quasi-internalization, recombination advantages, and global value chains: Clarifying the role of ownership and control. Journal of International Business Studies, 53(8): 1747–1765. Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17(1): 99–120. Bass, A. E., & Grøgaard, B. 2021. The long-term energy transition: Drivers, outcomes, and the

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23. Foreign entry mode

With some elaboration, Root’s typology has been adopted in most International Business (IB) textbooks since then (e.g., Cavusgil, Knight, & Riesenberger, 2023; Czinkota, Ronkainen, & Gupta, 2021; Hill, 2023; Peng & Meyer, 2023; Welch, Benito, & Petersen, 2018). As an example, in the popular IB textbook by Charles Hill (2023), six modes that firms can deploy in foreign markets are described. The FEMs range from modes of low commitment and control (but also low risk) to high commitment and control (but high risk): Exporting is when the firm foregoes a physical presence (FDI) in the host country and keeps manufacturing activities at home, and ships its products to the foreign market, possibly to a local distributor, retailers, or directly to customers. Licensing also foregoes FDI as the firm gives a local firm (the licensee) the rights to some of its intangible assets, for example technologies and trademarks, for a specified time period. Franchising also includes licensing of intangible assets to the local firm (franchisee) but is usually of a downstream nature (for example, brands and trademarks in retail and fast food), more long term, and combined with extensive contracting on rules of conduct for the franchisee. These three modes are often called “non-equity modes,” while the next two are “equity modes” as they involve FDI. A joint venture is a local establishment that is jointly owned by the multinational enterprise (MNE) and another firm, most often a local firm, who share decision power and residual rights based on their ownership share. A wholly owned subsidiary, on the other hand, is owned and operated exclusively by the MNE. Finally, somewhat above this classification we find the international strategic alliance, which is when the firm collaborates with a local firm in some way. This can range from the formalized contractual arrangements described above, including exporting via distributors, licensing, franchising, and joint ventures, to more informal collaboration. The typologies as used in textbooks can best be described as a manageable and comprehensible categorization that highlights some commonly found FEM “archetypes,” hence leaving out more specialized FEMs such as management contracts, turnkey projects, purchasing offices, contract manufacturing, and contract research organizations (entries that imply the value chain activities

The first operation mode used by a firm in a new foreign country is referred to as a foreign entry mode (FEM). Hence, the foreign entry mode is the operation mode by which the firm initially enters a given foreign country. More specifically, it is a firm’s choice of value chain activities located in a host country, or production in its home country with the purpose of selling abroad (exporting), and the governance form by which these activities are operated. Entry mode research more or less explicitly assumes that mode shift is difficult and costly: “Channel choices, once made, are often difficult to change” (Anderson & Gatignon, 1986: 71). Therefore, choosing the “right” entry mode initially is considered strategically important and, in the overwhelming bulk of research on foreign operation modes, the focus has accordingly been on modes of entry rather than subsequent shifts of operation modes that might occur (see entry on foreign operation modes). Several overview articles (Brouthers & Hennart, 2007; Canabal & White III, 2008; Deepak et al., 2002; Slangen & Hennart, 2007) and meta-analyses (Morschett et al., 2010; Tihanyi et al., 2005; Zhao et al., 2004; Zhao, Ma, & Yang, 2017) have been published, indicating that this has become a mature field of research.

Foreign entry mode typologies

Most FEM typologies revolve around a configuration based on location (home or abroad), value chain activity, and governance form. Thus, one of the first FEM typologies (Root, 1964; Root, 1982) is a combination of these three dimensions. Franklin Root distinguished between three broad groups of FEMs: exporting; investment modes, and non-investment modes. Exporting meant manufacturing at home, the output of which was sold in foreign markets either directly to foreign customers, or indirectly via foreign intermediaries (i.e., sales agents or distributors). Non-investment modes comprised various business activities (using that term before the value chain concept had emerged) performed by a legally independent foreign operator, whereas investment modes included wholly or partially owned production subsidiaries (equity joint ventures in the latter case) established in foreign countries. 78

Foreign entry mode  79

of procurement, management, and R&D). However, wholly owned subsidiaries, joint ventures, and strategic alliances are governance forms that also may encompass a range of different value chain activities. Luostarinen (1979), as an example, in his large-scale empirical study of the internationalization of Finnish firms, defined 22 types of subsidiaries according to their activities (e.g., manufacturing, marketing, sales, purchasing, financing, holding, R&D, logistics, administration, etc.). Following this line of thinking, Petersen et al. (2008) and Asmussen, Benito and Petersen (2009) argued that firms in practice choose FEMs among an almost infinite number of mode configurations. However, adding more granularity to the FEM options also increases complexity at the expense of predicting firms’ choice between single, discrete FEM alternatives. So, and as we describe in the next section on mode combination, when researchers have engaged in predicting FEM choices, these choices have been modeled in a fairly simple way.

Mode combination

In order to keep things simple, empirical entry mode studies usually keep two of the three FEM dimensions – location, value chain activity, and governance form – constant. Hence, a few studies (Anderson & Coughlan, 1987; Chung & Enderwick, 2001; Patterson & Cicic, 1995; Ramaseshan & Patton, 1994; Vandermerwe & Chadwick, 1989) focus on the location choice and have a binary variable – production either in the home country (exporting) or in the host country – as the dependent variable and location (dis)advantages as independent variables. The value chain activity and governance form have been manufacturing and hierarchy, respectively. However, the bulk of entry mode studies have intended to predict the governance form. Here, the dependent variable has typically been a binary variable: contractual or investment mode (e.g., licensing or a wholly owned production subsidiary), or – in a few cases – a ternary variable (licensing, joint venture, or sole venture). The constant value chain activity has mostly been manufacturing and – less often – sales, whereas host-country location is given. It seems fair to say that FEM researchers have not been inclined to address the question of which value chain activities should be per-

formed in the host country at entry and which ones kept at home. Scholars studying the internationalization process of firms (Chang & Rosenzweig, 2001; Delios & Henisz, 2003; Guillén, 2003; Johanson & Vahlne, 1977; Johanson & Wiedersheim-Paul, 1975) have otherwise indicated that firms tend to introduce sales activities before manufacturing, and R&D activities even later. Obviously, this sequence makes less sense in those cases where other motives than market-seeking drive the internationalization of the focal firm (see Table 23.1). Showing a certain reservation towards high complexity, entry mode researchers have in general been hesitant about taking the value chain in its entirety as their level of analysis – as done by, e.g., Porter (1986) with his global value chain configuration template, or by Quinn and Hilmer (1994) in their approach to strategic outsourcing. When considering the whole range of value chain activities instead of focusing on one particular activity, the relevance of mode combination (Benito & Welch, 1994; Clark et al., 1997; Kedron & Bagchi-Sen, 2011; O’Higgins, Andreeva, & Goya, 2022; Putzhammer et al., 2018; Petersen & Welch, 2002; Welch & Luostarinen, 1988) increases significantly. Hence, the localization choice is not one of either exporting or local production, but, e.g., manufacturing at home and marketing, sale, and logistics (inbound and outbound) performed abroad. When multiple value chain activities are performed abroad, these activities may differ in terms of their optimal governance form. For example, these activities may vary in their degree of asset specificity and entrant firm competence, with heterogeneous FEM implications. The evidence of companies practicing mode combination is largely anecdotal or case-based (Akbar et al., 2018; Benito et al., 2011; Kedron & Bagchi-Sen, 2011; O’Higgins et al., 2022; Petersen & Welch, 2002). Moving beyond case evidence, Clark et al. (1997) undertook a systematic examination of 25 British MNEs’ entry (679 entries in total) and development (203 changes in total) paths in foreign countries. They reported that adding new modes in a market was the second most frequent change observed in their sample (18% of changes); switching from exporting to FDI being the most common change (51% of changes).

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Based on Israeli firm data, Hashai et al. (2010) found that the occurrence of mode combination (or “mode diversity” as it is called in this study) increases with the size of the host country, as large host countries provide sufficient scale and scope to link different ownership to different activities, as well as with the degree of technological intensity. In a conceptual study, Benito, Petersen and Welch (2021) aimed to explain the mode combination phenomenon more thoroughly. In addition to market size and the associated advantages of specialization (Stigler, 1951), the three authors relate mode combination to transaction cost factors, including hybrid governance modes, coordination cost, and coordination mechanisms (such as modularization – see, e.g., Baldwin & Clark, 2000, or Sanchez, 1999).

Entry mode choices in relation to different internationalization motives of the firm

Studies of FEMs have gone through a development in terms of assumed internationalization motives (Benito, 2015), starting with market-seeking, then supplemented with sourcing – comprising resource- and efficiency-seeking – and most recently augmented strategic asset-seeking. Market-seeking motives The first many FEM choice studies were more or less explicitly based on the assumption that the entrant firm needed to possess a firm-specific advantage vis-à-vis local firms that could compensate for the disadvantage (or liability) of foreignness (Hymer, 1960; Zaheer, 1995). Dunning’s OLI framework – also termed the eclectic paradigm (Dunning, 1980, 1988) – echoed the need for possessing a firm-specific advantage as a prerequisite for successful FDI. Given the ‘O’ (ownership advantage), the FEM choice was concentrated on the localization (‘L’) and internalization (‘I’) advantages. Assuming the MNE has ownership advantages (O) allowing foreign market entry, it should export if there are no localization advantages (L) and use contractual modes if there are no internalization advantages (I). Hence, the eclectic paradigm also offers a prediction of mode choice (Agarwal & Ramaswami, 1992; Hill, Hwang, & Kim, 1990).

Empirical studies assuming market-seeking proliferated, starting with the studies by Davidson and McFetridge (1985), Anderson and Coughlan (1987), Kogut and Singh (1988), and Hennart (1991). In these “classical” studies, the choice would be between contractual and investment governance modes, including sales intermediary versus wholly owned sales subsidiary (e.g., Anderson & Coughlan, 1987; Klein, Frazier, & Roth, 1990), licensing-out versus wholly owned subsidiary (WOS) (e.g., Arora & Fosfuri, 2000; Davidson & McFetridge, 1985), franchising-out versus company-owned outlets (e.g., Contractor & Kundu, 1998; Fladmoe-Lindquist & Jacque, 1995), and joint ventures (JVs) with local firm versus WOS (e.g., Chang, Chung, & Moon, 2013; Chowdhury, 1992; Makino & Neupert, 2000), see column 2 in Table 23.1. Resource- and efficiency-seeking With the surge in offshoring of manufacturing and service in the late 1990s, FEM studies assuming resource- and efficiency-seeking (Dunning, 1980) emerged. The entry mode choice related to localization was one between production at home versus importing (instead of exporting, as was the case of internationalization motivated by market-seeking). In these studies, the choice would be between contract manufacturing versus WOS, offshore outsourcing versus captive offshoring (Elia, Larsen, & Piscitello, 2019; Elia, Massini, & Rajneesh, 2019), or JV with local firm versus WOS – see column 3 in Table 23.1. Strategic asset-seeking With the fast-growing internationalization of emerging market firms – not least Chinese firms – in the 2000s and 2010s, the standard assumption that entrant firms possessed a firm-specific advantage was challenged by new views, such as the “springboard perspective” (Luo & Tung, 2007) and the “bundling model” (Hennart, 2012, 2018). In these views, a main driver for entering foreign countries was the search for, and acquisition of, new or complementary strategic assets, such as product and process knowledge, knowledge about marketing, organization, and management techniques, or proprietary brands and trademarks (Elia & Santangelo, 2017). In these studies, the choice would be between, on the one hand, licensing-in

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Foreign entry mode  81 Table 23.1

Entry mode choices in relation to different internationalization motives

INTERNATIONALIZATION MOTIVE

Market-seeking

Resource- and

Strategic asset-seeking

efficiency-seeking

→ FOCUS ↓

To create an FSA, the focal

Assumption made about the firm-specific

The focal firm possesses

The focal firm needs

advantage (FSA) of the focal firm

an FSA that can be

complementary resources and firm needs assets which are

leveraged by expanding

capabilities outside the home possessed by foreign firms

into foreign markets

country to leverage its FSA

Exporting vs. local

Importing vs. local

Licensed production

production

production

at home vs. contract

Entry mode choice related to

Sales intermediary vs.

Contract manufacturing vs.

manufacturing abroad Licensing-in vs. WOS

internalization

WOS

WOS

Franchising-in vs. WOS

Licensing-out vs. WOS

Offshore outsourcing vs.

JV with local firm vs. WOS

or embedded in clusters of foreign firms

Entry mode choice related to localization

Franchising-out vs. owned captive offshoring JV with local firm vs. WOS

outlets JV with local firm vs. WOS Entry mode choice related to acquisition/

Greenfield vs. acquisition

and franchising-in at home (in contrast to licensing-out and franchising-out entries in the case of internationalization driven by market-seeking) and, on the other hand, joint ventures or wholly owned subsidiaries in the foreign country – see column 4 in Table 23.1. Whereas internalization most often would take place through the establishment of greenfield subsidiaries when entries are driven by market-seeking (Brouthers & Brouthers, 2000), acquisitions would be the likely choice when the entrant firm is searching for strategic assets (Alon, Elia, & Li, 2020). Hence, the choice between greenfield and acquired subsidiaries as entries into foreign markets is to some extent contingent on the dominant internationalization motive of the entrant firm – see row 5 in Table 23.1 – but special circumstances may make exceptions to this general rule. For example, the need for access to local distribution channels may cause a preference for entry via acquisition also in the case of market-seeking entry (Barkema & Vermeulen, 1998; Larimo, 2003).

Theories and determinants of foreign entry mode choice

De novo captive offshoring

Greenfield vs. acquisition

vs. acquired local provider

merger

The choice between the modes described above can be explained using various theoretical perspectives. The early entry mode

literature relied on transaction cost economics (Coase, 1937; Williamson, 1975, 1985) which characteristically analyzed operation modes in terms of long-term strategic choices involving risk–control tradeoffs. For example, in their conceptual study, Anderson and Gatignon (1986) suggested that entrant firms should opt for a high control mode (such as a wholly owned subsidiary) over low control modes (such as licensing) under conditions of high asset specificity, uncertainty, and free-riding potential. In an empirical study, Klein et al. (1990) used transaction theory to predict the choice between independent, foreign intermediaries and sales subsidiaries. Other frequently cited entry mode studies using TCE are Kim and Hwang (1992), Erramilli and Rao (1993), and Brouthers, Brouthers, and Werner (2003). Even though entry mode researchers have introduced other theories (see below), TCE-related determinants of a firm’s entry mode choices still seem to dominate the literature (Cuypers et al., 2021; Schwens et al., 2018). Barney’s (1991) resource-based view inspired IB scholars to apply and test this new theoretical perspective in an entry mode setting, both conceptually (Peng, 2001) and later on empirically (Meyer, Wright, & Pruthi, 2009; Sharma & Erramilli, 2004). Later on, Sánchez, Pla-Barber, and Hébert (2007) and

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León, Villar, and Pla-Barber (2011) applied a holistic approach (in an entry mode setting of hotel service firms) and integrated various theoretical perspectives including transaction cost economics and the resource-based perspective. Institutional theory (DiMaggio & Powell, 1983; North, 1990; Scott, 1995) makes up a third important theoretical perspective adopted by entry mode researchers, motivated by the rapid internationalization of firms from emerging economies (Dunning & Lundan, 2008; Kostova, Roth, & Dacin, 2008; Peng, Wang, & Jiang, 2008). The uncertainty caused by institutional voids in emerging markets impelled firms from mature economies to arrange their entrant modes accordingly. Similarly, firms from emerging economies would tend to differ their choice of entry mode in accordance with the institutional environment. Yiu and Makino (2002), Brouthers (2002) and Lu (2002) pioneered this institutional perspective in empirical studies – the latter combining transaction cost economics and institutional theory (see also Brouthers, 2013). In addition to transaction cost economics, resource-based view and institutional theory, entry mode studies have alluded to organizational learning theory (e.g., Lane et al., 2001; Schwens et al., 2018), cultural theory (e.g., Kogut & Singh, 1988; Tihanyi, Griffiths, & Russell, 2005), and social exchange theory (e.g., Steensma & Lyles, 2000).

Performance implications of the entry mode choice

The connection between entry mode choice and performance has attracted a great deal of attention among IB scholars. Yet, this fundamentally important inquiry still remains a conundrum in international business research (Martin, 2013; Zhao, Ma, & Yang, 2017). A majority of empirical entry mode studies only include performance in an indirect way inasmuch as it is more or less implicitly assumed that strong market competition will drive out suboptimal entry modes (Hult et al., 2008; Martin, 2013). However, the absence of direct performance measures essentially excludes the researchers from spotting new, more optimal entry modes since these are not (yet) dominant governance forms and therefore considered “inferior.”

Even though most empirical entry mode studies only measure performance indirectly, there is still a substantial number of studies with direct performance measures. Hence, Zhao et al. (2017) in their meta-analytical reviews of research on the relationship between entry modes and performance included 45 studies published from 1986–2015. Hult et al. (2008) classified entry mode performance into (i) financial performance (e.g., RoI, RoA, M/S, stock price and Tobin’s Q), (ii) operating performance (including market share, efficiency, new product introduction and innovation, and product/service quality) and internal process outcomes (productivity, employee retention and satisfaction, and cycle time), and (iii) overall effectiveness, including reputation, survival, perceived overall performance, achievement of goals, and perceived overall performance relative to competitors. One of the conclusions of the study by Zhao et al. (2017) was that empirical studies founded on transaction cost economics had provided consistent predictions on the positive effects of high-control entry modes (including M&As, greenfield investment, WOSs, and majority JVs) on performance, whereas studies using other theories tended to offer contradictory reasoning. In sum, the FEM literature is a mature one, but also one in which unexplored avenues for future research exist. These include the impact of digitalization on the need for a physical presence (Brouthers, Chen, & Shaheer, 2021; Hennart, 2022), the potential multiplicity of value chain activities performed in the foreign country at entry (“mode combination”), and the dynamics of these choices after initial entry (“mode change”). The latter is explored in detail in the complementary entry on foreign operation modes. Christian Geisler Asmussen and Bent Petersen

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Foreign entry mode  83 ufacturing SMEs. Journal of International Management, 24(3): 257–270. Alon, I., Elia, S. & Li, S. 2020. Greenfield or M&A? An institutional and learning perspective on the establishment mode choice of Chinese outward investments. Journal of International Management, 26(3): 100758. Anderson, E. & Coughlan, A. 1987. International market entry and expansion via independent or integrated channels of distribution. Journal of Marketing, 51(1): 71–82. Anderson, E. & Gatignon, H. A. 1986. Modes of foreign entry: A transaction cost analysis and propositions. Journal of International Business Studies, 17(3): 1–26. Arora, A. & Fosfuri, A. 2000. Wholly owned subsidiary versus technology licensing in the worldwide chemical industry. Journal of International Business Studies, 31(4): 555–572. Asmussen, C. G., Benito, G. R. G. & Petersen, B. 2009. Organizing foreign market activities: From entry mode choice to configuration decisions. International Business Review, 18(2): 145–155. Baldwin, C. Y. & Clark, K. B. 2000. Design Rules: The Power of Modularity. Boston, MA: MIT Press. Barkema, H. G. & Vermeulen, F. 1998. International expansion through start-up or acquisition: A learning perspective. Academy of Management Journal, 41(1): 7–26. Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of Management, 17(1): 99–120. Benito, G. R. G. 2015. Why and how motives (still) matter. Multinational Business Review, 23(1): 15–24. Benito, G. R. G., Petersen, B., & Welch, L. S. 2009. Towards more realistic conceptualisations of foreign operation modes. Journal of International Business Studies, 40(9): 1455–1470. Benito, G. R. G., Petersen, B. & Welch, L. S. 2011. Mode combinations and international operations: Theoretical issues and an empirical investigation. Management International Review, 51(6): 803–820. Benito, G. R. G., Petersen, B. & Welch, L. S. 2019. The global value chain and internalization theory. Journal of International Business Studies, 50(8): 1414–1423. Benito, G. R. G., Petersen, B. & Welch, L.S. 2021. Dynamics of operation modes: Switches and additions. In Mellahi, K., Meyer, K., Narula, R., Surdu, I. & Verbeke, A. (Eds.), Oxford Handbook of International Business Strategy. Oxford University Press, pp. 273–295. Benito, G. R. G. & Welch, L. S. 1994. Foreign market servicing: Beyond choice of entry mode. Journal of International Marketing, 2(2): 7–27. Björkman, I. & Eklund, M. 1996. The sequence of operational modes used by Finnish investors in

Germany. Journal of International Marketing, 4(1): 33–55. Branstetter, L. & Feenstra, R. 2002. Trade and FDI in China: A political economy approach. Journal of International Economics, 58(2): 335–358. Brouthers, K. D. 2002. Institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies, 33(2): 203–221. Brouthers, K. D. 2013. A retrospective on: Institutional, cultural and transaction cost influences on entry mode choice and performance. Journal of International Business Studies, 44(1): 14–22. Brouthers, K. D. & Brouthers, L. E. 2000. Acquisition or greenfield start-up? Institutional, cultural and transaction cost influences. Strategic Management Journal, 21(1): 89–97. Brouthers, K. D., Brouthers, L. E. & Werner, S. 2003. Transaction cost-enhanced entry mode choices and firm performance. Strategic Management Journal, 24(12): 1239–1248. Brouthers, K. D., Chen, L., Li, S. & Shaheer, N. 2021. Charting new courses to enter foreign markets: Conceptualization, theoretical framework, and research directions on non-traditional entry modes. Journal of International Business Studies, 53(1): 1–28. Brouthers, K. D. & Hennart, J.-F. 2007. Boundaries of the firm: Insights from international entry mode research. Journal of Management, 33(3): 395–425. Canabal, A. & White III, G. O. 2008. Entry mode research: Past and future. International Business Review, 17(3): 267–284. Cavusgil, S. T., Knight, G. & Riesenberger, J. 2023. International Business – The New Realities. 5th edition (Global Edition). Harlow, UK: Pearson. Chang, S-J., Chung, J., & Moon, J. J. 2013. When do wholly owned subsidiaries perform better than joint ventures? Strategic Management Journal, 34(3): 317–337. Chang, S.-J., & Rosenzweig, P. M. 2001. The choice of entry mode in sequential foreign direct investment. Strategic Management Journal, 22(8): 747–776. Chowdhury, J. 1992. Performance of international joint ventures and wholly owned foreign subsidiaries: A comparative perspective. MIR Management International Review, 43(2): 115–133.  Chung, H. F. L. & Enderwick, P. 2001. An investigation of market entry strategy selection: exporting vs foreign direct investment modes—A home-host country scenario. Asia Pacific Journal of Management, 18: 443–460. Clark, T., Pugh, D. S. & Mallory, G. 1997. The process of internationalization in the operat-

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24. Foreign operation modes

very coarse-grained typologies, like that of Hill (2023), reduce the need for considering mode dynamics.

In this entry, we account for research on foreign operation modes (FOMs) with an emphasis on the dynamic aspect – i.e., the decisions to expand, switch and add operation modes in a foreign country after initial entry. As highlighted in the entry on foreign entry mode, the overwhelming bulk of research has focused on the mode chosen by a company at the moment in time when it decides to go into a particular location to pursue some business activity there. While research on initial entry mode choices has developed into a mature international business (IB) sub-field (Shaver, 2013; Hennart & Slangen, 2015), studies of firms’ post-entry decisions are somewhat fewer and in general of a newer date. The research has exposed considerable mode dynamics, such as within-mode changes, switches from one FOM to another, as well as addition of new modes to existing ones. Within-mode changes comprise, for example, substituting one intermediary with another (Petersen, Benito & Pedersen, 2000; Benito, Pedersen & Petersen, 2005) or expanding activities of a foreign subsidiary (Fisch, 2011; Petersen, Welch & Nielsen, 2001; Rivoli & Salorio, 1996). Various studies report that FOM switches are commonplace (Björkman & Eklund, 1996; Calof, 1993; Fryges, 2007; Clark, Pugh & Mallory, 1997; Putzhammer et al., 2018; Putzhammer, Puck & Lindner, 2020; Swoboda, Olejnik & Morschett, 2011). Similarly, a “messier” reality of multiple modes has been noted in studies such as Benito, Petersen and Welch (2011), Clark et al. (1997), Kedron and Bagchi-Sen (2011), Petersen and Welch (2002) and Putzhammer et al. (2018), which provide evidence of companies adding new operation modes to existing ones and thus using several different modes simultaneously. The analysis of FOM dynamics is to a large extent contingent on the typology used. All else being equal, the more disaggregated a typology used by the researcher, the more salient the FOM dynamics become. With a very fine-grained FOM typology, such as that of Luostarinen (1979), observations of mode expansion, switches, and additions become very likely even within a relatively short time horizon. Conversely,

The progression of studies on FOM dynamics

Various studies in the 1970s and 1980s indicated mode switches as companies progressed in their internationalization (e.g., Buckley, 1989; Johanson & Wiedersheim-Paul, 1975). Hence, Johanson and Wiedersheim-Paul (1975) brought forward the “establishment chain” concept according to which firms would begin their internationalization process with unsolicited, irregular export, then appoint foreign intermediaries such as sales agents and distributors, and eventually establish own subsidiaries. However, this sequential view was challenged by empirical evidence of internationalizing firms “leapfrogging” one or more of the early stages in the establishment chain (Benito & Gripsrud, 1992; Björkman & Eklund, 1996; Millington & Bayliss, 1990). Reasons included competitive motives (Hedlund & Kverneland, 1985), avoidance of costs involved in switching between modes of operation (Benito et al., 2005), entrepreneurial action (Andersson, 2000), or internationalization with the purpose of sourcing (Hagen & Hennart, 2004; Petersen & Pedersen, 1997). Another criticism of “stage theories” brought forward by several IB scholars (Beamish, Morrison & Rosenzweig, 1997; Bell, 1995; Benito & Welch, 1994; Erminio & Rugman, 1996; Luostarinen, Korhonen & Pelkonen, 1994; Petersen et al., 2001) was that the internationalization process literature usually presented operation modes as fairly broad-based stages in firms’ internationalization process, where they, in reality, consist of numerous sub-categories. Among the first empirical studies to specifically focus on mode dynamics was that of Calof (1993), who investigated mode switches and the decision processes associated with them by interviewing managers in 38 Canadian companies. In a subsequent article, Calof and Beamish (1995) identified 121 mode switches made by the 38 companies, most of the switches being the move from exports to FDI. At about the same time, a real option (RO) concept came to dominate IB research on mode dynamics, as described in a separate section below. 87

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Somewhat later, Benito et al. (2005; see also Pedersen et al., 2002) combined transaction costs and resource-based theories with internationalization process theory in their analysis of changes in international sales and distribution channels. Using data on 260 Danish exporters, following them over a five-year period, the authors found evidence of both within-mode switches (e.g., substituting one intermediary with another) and between-mode switches (e.g., moving from a contractual arrangement with a distributor to an in-house operation). More recently, Putzhammer et al. (2018) reported a study that tracks the operations of 80 Austrian Multinational Enterprises (MNEs) in central and eastern Europe over 24 years (1990 to 2013). They combine institutional and learning (internationalization process) theories to examine a total of 527 mode switches made by these companies. Switches were of two main types: (1) use of a mode that the company was already familiar with, and (2) use of a new (to the company) mode of entry. They found that using new modes is more likely when companies have substantial international experience. They also found that the type of change implemented depends on the institutional quality of the host country, thus supporting both theories. In comparison with the studies of mode switches, there has been more limited research on mode additions. The evidence of companies using several different modes simultaneously is largely anecdotal or case-based (Akbar et al., 2018; Benito et al., 2011; Benito et al., 2009; Kedron & Bagchi-Sen, 2011; O’Higgins, Andreeva & Goya, 2022; Petersen & Welch, 2002). Moving beyond case evidence, Clark et al. (1997) undertook a systematic examination of 25 British MNEs’ entry (679 entries in total) and development paths (203 changes in total) in foreign countries. They reported that adopting mixed modes in a market was the second most frequent change observed in their sample (18% of changes); switching from exporting to FDI was the most common change (51% of changes).

FOM dynamics in a real option perspective

A real option (RO) is a right (but not an obligation) to expand, hold, or abandon a direct investment involving tangible assets (such as

machinery, land, buildings, and inventory), as opposed to a financial instrument. Real option thinking has permeated the foreign operation mode literature since Kogut’s (1991) seminal study modelled equity joint ventures as “platform” or “toehold” investments. Kogut (1991) assumed that a firm entering a foreign market via an equity joint venture with a local partner received a call option – the right, but not the obligation, to buy out the partner and thereby establish a wholly owned subsidiary. If the foreign market conditions appeared favorable, the entrant firm could exercise that call option and derive a profit. At the time of entry, the joint venture partners would be uncertain about whether the local market would evolve favorably (Dixit & Pindyck, 1994). In addition, investments in the market would tend to be irreversible – a factor that would support adoption of a “wait-and-see” strategy (Rivoli & Salorio, 1996). In an RO context, a possible expansion of the activities in a foreign country does not necessarily imply a mode switch, e.g., from a joint venture to a sole venture (Kogut, 1991), or from a franchised to a company-owned outlet (Gorovaia & Windsperger, 2013); the expansion could simply occur as an expansion of an already established wholly owned subsidiary (Fisch, 2011; Petersen, Welch & Nielsen, 2001; Rivoli & Salorio, 1996). In this regard, Chung et al. (2010) and Fisch (2011) conceptualize low-investment sales subsidiaries as footholds in foreign markets amenable to rapid upscaling if positive expectations are met. It follows from the above that RO studies in an FOM context fall in two broad groups: those focusing on optional expansion through within-mode expansion and those studies in which an optional expansion implies a between-mode switch. In the latter category, quite a few studies have adopted Kogut’s (1991) interpretation of equity joint ventures as real options (Chi, 2000; Chi & McGuire, 1996; Cuypers & Martin, 2007; Folta & Miller, 2002; Kumar, 2005; Li & Li, 2010; Reuer, 2002; Reuer & Koza, 2000; Reuer & Leiblein, 2000; Reuer & Tong, 2005; Tong & Li, 2013; Vassolo, Anand & Folta 2004). Moreover, Kogut’s line of thinking has been extended to contractual entry modes, including licensing (Jiang, Aulakh & Pan, 2009; Ziedonis, 2007), franchising (Gorovaia & Windsperger, 2013), and (offshore) outsourcing (Alvarez & Stenbacka, 2006; Benito et

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Foreign operation modes  89

al., 2013; Jensen & Petersen, 2013; Jiang, Yao & Feng, 2008; McIvor, 2010). Most of the studies focusing on the options to switch operation mode deal with the possible exercise of a call option, i.e., the right of an entrant firm to take over the assets (buildings, machines, but also staff) held by the local partner. These studies generally do not address put options – the right, but not the obligation, to sell the relevant assets to the partner and pull out of the venture. One important exception in this regard is Chi and McGuire’s (1996) study, which models the conditions under which the entrant firm will prefer a call or a put option. Furthermore, the bulk of these studies examine entry-mode situations in which the entrant firm, rather than the local partner, holds the call option and therefore accrues any option value that might arise. Exceptions to this one-sided view are the studies by Tong and Li (2013) and Petersen, Benito and Welch (2021), which both apply a dyadic view by taking into account the assignment of call and/or put options to the local partner. Petersen et al. (2021) argue that in situations where the local firm is risk-averse and the entrant firm, a diversified MNE, is risk-neutral, the former may be interested in exchanging a call option for a put option at terms that are favorable for both parties given their different risk preferences. Hence, reciprocal use of call and put options where the relatively more risk-willing entrant firm gets a call option, and the risk-averse local firm receives a put option, prescribes a win-win situation in equilibrium.

Drivers of FOM dynamics

IB scholars have, over time, developed considerable insight about FOM dynamics and its drivers, but more so in relation to within-mode expansion and mode switch than to mode addition. The latter has been considered more of an anomaly, as it cannot readily be seen as a natural extension of entry mode research or internalization theory (Buckley & Casson, 1976; Hennart, 1982). Endeavors to explain the mode addition phenomenon, including what causes its occurrence, are therefore few (Petersen, Benito & Welch, 2021; Hashai et al., 2010; O’Higgins et al., 2022) and of relatively recent date. The studies revolving around the drivers of FOM dynamics can be said to fall into

three broad categories contingent on what the studies are focusing on: (i) Uncertainty, risk, and knowledge processes, (ii) Operating cost considerations, and (iii) Institutional changes. There might be other drivers of mode dynamics (e.g., Williamson’s [1985] “fundamental transformation”), but we only include those that so far have been dealt with in the IB literature. Uncertainty, risk, and knowledge processes A common baseline in IB is that firms typically are hesitant to commit resources to foreign operations in the early phases of a foreign market entry (Johanson & Vahlne, 1977). Without appropriate knowledge about a foreign market, decision-makers will inevitably have a strong sense of uncertainty and risk, which is likely to constrain the range of operation modes that are considered. Conversely, the greater the depth of knowledge about and experience in foreign markets, the more confident a firm tends to be about making commitments, and about its judgment of the degree of exposure to risk. As an example, MNEs possessing technology and marketing skills may form joint ventures with local firms that have market knowledge, access to distribution channels, and close ties to regulatory bodies. As the joint venture partners exchange knowledge, however, the complementarity vanishes and the MNE may experience a growing desire to replace the joint venture with a sole venture (Nakamura et al., 1996). Hence, consistent with the Uppsala model (Johanson & Vahlne, 1977), it is the accumulation of experiential knowledge about the foreign market that drives entrant firms towards high-commitment operation mode in foreign markets, such as wholly owned subsidiaries. Johanson and Vahlne’s learning-based internationalization process model, although widely adopted in the IB literature, has not escaped criticism – both in relation to the assumption of experiential market knowledge as the driving factor (Sullivan, 1990), and also concerning the ways market knowledge is acquired and the speed with which it is accumulated (Forsgren, 2001; Petersen, Pedersen & Sharma, 2003). The extensive IB literature looking at within-mode and between-mode expansion in a real option perspective (for a relatively recent overview, see Chi et al., 2019) builds on a basic assumption of initial uncertainty

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(as perceived by the entrant firm) about the prospects of the foreign engagement – an uncertainty that is expected to decrease over time as the entrant becomes more knowledgeable about the prospects of the foreign venture, leading it to either divest it or increase its commitment to it. In a recent longitudinal case study, O’Higgins et al. (2022) explain mode additions by unfolding knowledge processes. The authors use the knowledge-based view (Grant & Phene, 2022; Kogut & Zander, 1993) to explore why firms combine foreign operation modes and change these combinations. By studying a professional service firm’s engineering, architectural, and consulting operations in three Latin American countries during a 21-year period, the authors find that “mode combinations not only arise in response to external factors and the need to differentiate products and services (Benito et al., 2011), but also from the need […] to manage multiple intertwined knowledge processes simultaneously (Foss, Husted & Michailova, 2010; Tallman & Chacar, 2011)” (O’Higgins et al., 2022: 3). During the observed period, foreign operation modes including strategic alliances and subsidiaries were added to exporting. Besides, within-mode expansion occurred in relation to the subsidiaries; they developed from only executing sales activities to performing full-fledged service production. Operating cost considerations Buckley and Casson (1981) provide a cost-based rationale for why companies switch modes. Distinguishing between market, contract, and investment modes, they argue that the latter imply relatively high fixed costs due to setting up a subsidiary and administering it, but low subsequent variable costs. In contrast, market modes usually incur low fixed costs and high variable costs, while contracts have moderate fixed and variable costs. As well as defining optimal choices in a static sense, cost differentials also help explain how changes in volume may lead to mode switches over time. Growing market size drives internalization because, while market-based (e.g., exporting) and contractual operation modes (e.g., licensing) tend to be cost-efficient and more appropriate for small or medium-sized markets, large markets more readily support the use of investment modes.

Two studies, Hashai et al. (2010) and Benito et al. (2021), precede and supplement O’Higgins et al.’s (2022) knowledge-based explanation of the mode addition phenomenon. Both studies emphasize operating cost considerations as drivers of mode addition. Based on Israeli firm data, Hashai et al. (2010) found that firms tend to add operation modes with increasing foreign market size because high activity levels provide sufficient scale and scope to link different ownership to different activities. In a conceptual study, Benito et al. (2021) propose that companies’ propensity to combine modes depends on the magnitude of the costs associated with their coordination. Adopting Thompson’s (1967) classic distinction between pooled, sequential, and reciprocal interdependencies, they argue that pooled (or modular) interdependency is associated with the lowest coordination costs, and therefore is also the organizational design that best facilitates mode addition. Institutional changes Institutional contexts affect MNE operation mode choices because they reflect the “rules of the game” in the countries in which these firms operate (Meyer et al., 2009; North, 1990; Scott, 1995). Accordingly, mode change may occur as a function of (often formal) institutional change at particular points in time, which may then prompt corresponding adaptations in how companies operate in a country. For example, mode switches by European and UK companies were undertaken even before the Brexit process was completed (Moschieri & Blake, 2019). The transition from equity joint ventures to wholly owned subsidiaries as the dominant FDI form in China is another large-scale example of mode switches instigated by a regulatory shift; in the decade around the turn of the century, wholly owned subsidiaries replaced equity joint ventures as the dominant FDI form in China (Branstetter & Feenstra, 2002). During these years, FDI regulations in various Chinese industries became relaxed, not least in relation to China’s WTO accession in 2001, and many foreign investors, some of which, having encountered problems in collaborating with local partners (Puck, Holtbrügge & Mohr, 2009; Rosen, 1999), took advantage of these new options for full ownership. With annual observations of ownership shares for 53,625

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foreign affiliates in 125 countries from 2002 to 2012, Driffield, Mickiewicz and Temouri (2016) examine post-entry changes of ownership in the context of institutional voids – corruption in the host country and equity market development – as well as relatedness to the local partner and the parent. The authors find a change in ownership in 58% of all observed affiliates. Of these, 8% imply a switch from minority to majority ownership or vice versa. In a study of the Danish brewery Carlsberg’s entry and expansion into the Polish beer market, Meyer and Tran (2006) explain the stepwise, or “staged,” transition from an international joint venture to a sole venture as the combined result of institutional changes in an emerging market and the MNE’s learning about how to navigate in this kind of market. In sum, the literature on dynamics of foreign operation modes may be seen as a natural extension of the entry mode literature (see entry on foreign entry mode). Whereas the latter literature stream includes a number of studies examining the performance implications of different entry mode choices, researchers of FOM dynamics still remain to adopt a similar normative approach addressing questions such as how to accomplish smooth mode switches or how to combine and coordinate multiple modes in one and the same foreign country (Petersen et al., 2021). Christian Geisler Asmussen and Bent Petersen

References

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25. Foreign ownership

shares (IMF, 1993). By neglecting indirect ownership links between the investors and companies, the definition hugely understates the number of foreign firms and the associated degree of foreign ownership. Ownership structures of many multinational companies are characterized by several steps between the ultimate owner(s) and the subsidiaries, making it difficult to ascertain the degree of foreign ownership if focusing only on direct ownership links. Recent work shows that many firms that are categorised as domestic under the IMF-based convention are, in fact, controlled by foreigners (McGaughey et al., 2018). An alternative definition of foreign ownership is the one provided by the Organization for Economic Cooperation and Development (OECD), which is based on voting rights rather than share ownership (OECD, 2009). According to this definition, foreign ownership is defined if an investor resident in another country owns, either directly or indirectly, 10% or more of a company’s voting power. The possession of at least 10% of the voting power of the company is regarded as necessary for the investor to have sufficient influence and an effective voice in its management. Being the conduit of cross-border activity, multinational enterprises (MNEs) strategically decide the equity ownership stake in their foreign subsidiaries based on the trade-off between relative costs (such as commitment of resources or risks in the foreign market) and benefits (such as the degree of control in the foreign subsidiary). International business, management and strategy literatures have analyzed the determinants of equity decisions in internationalization strategies of MNEs through multiple theoretical lenses – organizational learning, transaction cost economics and institutional perspective. The conclusions of the rather extensive literature on the topic point to equity ownership decisions driven largely by the need to reduce institutional and transactional hazards, and, to a lesser extent, by behavioral approaches. Beyond direct benefits to companies and individuals who engage in foreign transactions, foreign investments and foreign ownership are also expected to generate tangible benefits to host countries’ firms. First, foreign ownership is expected to increase the productivity of firms where foreign owners invest. As stressed by Dunning (1977, 1980, 1988),

Ownership as a concept is defined as a set of rights and obligations related to assets, including the user rights, the profit rights, the control rights, and the disposal rights (Thomsen & Conyon, 2012). Many modern corporations, notably publicly limited companies, are characterized by the presence of multiple owner types, giving rise to diverse ownership structures. A key element of these ownership structures is owners’ identity, that is, who are the owners. Based on their preferences and objectives, the literature identifies several important owner groups such as individual (small) investors, institutional investors (further divided into financial and non-financial investors), corporate investors, managers, families, the government, and foreign investors. In simple terms, foreign ownership refers to the state of an asset or company being owned by a person or company from another country. The degree of foreign ownership globally has significantly increased, driven by the globalization of economic activity over the last several decades, which has resulted in increased cross-border activity, including cross-border investments through purchasing of shares of a company incorporated in another country, or through mergers and acquisitions with companies incorporated in another country, or by setting up new operations in another country. For instance, in 2021 the global flow of foreign direct investment reached $1.6 trillion (UNCTAD, 2022) driven by the post-pandemic surge in cross-border deals and project finance, but not in greenfield investment. The pattern continued in the first half of 2022, with $972 billion in global FDI flow, but dropped in the second half of 2022, primarily driven by increasing inflation and interest rates, rising energy prices and Russia’s full-scale invasion of Ukraine (OECD, 2022). Although the terms “foreign investment” and “foreign ownership” are conceptually clear, it has proven more difficult to exactly define what is meant by a “foreign” firm. A standard definition adopted in both academic and practical/policy literatures is the one provided by the International Monetary Fund, where a foreign firm is one where a single direct investor, who is resident in another economy, owns 10% or more of the 95

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MNEs possess valuable intangible assets, e.g., technological know-how, superior management practices, coordination with suppliers and customers, and overseas contacts, making them more competitive and productive than domestic firms. When investing in domestic firms, either through mergers or acquisitions, there are multiple possible channels through which MNEs affect firm productivity. Two such possible channels are increased innovation performance and improved access to finance (Beck et al., 2006; Ayyagari et al., 2011; Luong et al., 2017). Further, foreign ownership may also affect firm productivity by bringing new production technologies, cutting costs, reducing expenses, or tightening controls on production (Boubakri et al., 2013). The expectation of productivity improvements for firms that attract foreign investment is supported by numerous empirical studies documenting the superior performance of FDI-involved firms in the host countries (Javorcik, 2004; Yasar & Paul, 2007; Keller & Yeaple, 2009). However, care should be shown when interpreting the findings of these studies. The positive correlation between firm productivity and foreign investment may simply reflect endogenous decisions, i.e., foreign investors choose to acquire or start business with more productive domestic firms. In a study explicitly controlling for unobservable factors that influence ex ante acquisition decisions, Fons-Rosen et al. (2021) find that FDI has a very small effect on target firms’ productivity in their sample of advanced European economies. Similarly, Wang and Wang (2015) compare foreign to domestic acquisitions in China. After controlling for the acquisition effect that exists in domestic acquisitions, they find no evidence that foreign ownership can bring additional productivity gains to target firms, though both foreign and domestic acquisitions bring productivity improvements to target firms. Beyond productivity, a strong and robust finding is that foreign ownership significantly improves target firms’ financial conditions and exports relative to domestic-owned firms. A second channel through which host-country firms might benefit from foreign investment is positive spillovers. The term spillovers encompasses all impacts that local (purely domestic) firms experience from the presence of foreign-owned firms in their respective environment. Positive spillovers could be in terms of improved productivity, Bersant Hobdari

access to advanced technology or managerial practices and knowledge. The scale and scope of such spillovers vary with local firms’ characteristics (Sinani & Meyer, 2004) and the context in which they are interacting with foreign firms (Blomstrom & Kokko, 2003). Focusing on local firms’ characteristics, the likelihood of spillovers and their magnitude depend on local firms’ awareness, capability, and motivation to react to foreign entry (Sinani & Meyer, 2009). While the conventional wisdom argues for positive spillovers from foreign investment, most studies confirm the absence of positive horizontal (intra-industry) spillovers, or even negative effects (Aitken & Harrison, 1999; Javorcik & Spatareanu, 2008; Girma et al., 2015). Bersant Hobdari

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Bersant Hobdari

26. Foreign subsidiary management

consistent theory development and rigorous methodological approaches (see also Meyer et al., 2020; Andrews et al., 2022). The following sections cover the key themes of subsidiary management research: the HQ perspective on “subsidiary roles and management mechanisms,” the subsidiary perspective on “subsidiary strategy and initiatives,” and the relational perspective on “HQ–subsidiary relationships.” This entry concludes with a critical outlook on “multi-level theorizing on subsidiary management” and the “the future of foreign subsidiary management.”

The management of foreign subsidiaries is defined as the management or wholly or partly owned subsidiaries residing outside the home country. It has been important to strategic management ever since the idea of internationally differentiated firms has emerged, and even more so with the advent of network-like organizational models (Hedlund, 1986; Bartlett & Ghoshal, 1989; Doz et al., 2001). This importance is twofold. First, from a headquarters (HQ) perspective, subsidiaries can be seen as repositories of diverse knowledge and competences, which play different roles and require differentiated management approaches (also referred to as “coordination and control”) depending on their location, value chain activities and capabilities (Nohria & Ghoshal, 1997). Second, when conceptualizing the MNC as not uniform and not purely hierarchical, many subsidiaries contribute to strategy-making and influence the MNC beyond their host country. From a subsidiary perspective, this provides challenges for subsidiary managers in how to manage their local operations as well as their interactions with HQ and other peer units (Bartlett & Ghoshal, 2003). Based on these broad assumptions, a large stream of research emerged on “the managerial activities related to the development and implementation of subsidiary strategies and operations that involve the creation and utilization of resources to enhance subsidiary performance” (Meyer et al., 2020, p. 539). This research stream opened the path for the strategies and operations of subsidiaries to be studied from an MNC/HQ perspective as well as from the viewpoint of the subsidiary – and from various theoretical lenses, such as information processing (Egelhoff, 1982), internalization (Rugman & Verbeke, 2001), agency (O’Donnell, 2000), or resource dependence (Mudambi & Navarra, 2004). Methodologically, the stream has seen the use of quantitative panel data as well as qualitative interview analysis, with a primary focus on survey data. While the relevance of subsidiary management for practice is widely acknowledged, due to the breadth of perspectives and theories, subsidiary management research has often been criticized as lacking

Subsidiary roles and management mechanisms

During the last 40 years, several typologies of subsidiary roles have been developed which are defined by different theoretical dimensions (see Meyer et al., 2020, for a recent review). Subsidiary roles are also referred to as mandates or charters, and there is an ongoing discussion whether these are assigned by HQ, assumed by subsidiaries, or negotiated between them (Birkinshaw, 1996; Cuervo-Cazurra et al., 2019; Paterson & Brock, 2002). Early subsidiary roles were primarily based on FDI motives, such as market-seeking, efficiency-seeking, natural resource-seeking, and strategic asset-seeking (Cuervo-Cazurra & Narula, 2015; Dunning, 1993). Building on the integration–responsiveness trade-off (Doz & Prahalad, 1991), subsidiaries were also categorized according to their operations’ emphasis on global integration (or standardization) and local responsiveness (or adaptation) (Bartlett & Ghoshal, 1989; Jarillo & Martínez, 1990). Paralleling the emergence of knowledge as a critical resource in the MNC, researchers have distinguished subsidiaries according to their knowledge contribution (Asakawa, 2001; Cantwell & Mudambi, 2005; Gupta & Govindarajan, 1991; Harzing & Noorderhaven, 2006; Kuemmerle, 1999), particularly highlighting value-adding mandates such as the world product mandate (Birkinshaw & Morrison, 1995; Pearce, 1992) or the center of excellence (Andersson & Forsgren, 2000; Frost et al., 2002). More recently, subsidiary typologies have been described by their global value chain position following Buckley’s (2009) idea of the MNC 98

Foreign subsidiary management  99

as a global factory (Pananond, 2013; Rugman et al., 2016). As MNC subsidiaries vary considerably with respect to their role and objectives within the MNC, HQs use different management approaches to coordinate and control them. Choosing suitable management mechanisms for each subsidiary is a challenge, and MNCs often have nested and multi-layered control and coordination structures that contribute to the complexity of managing foreign subsidiaries (Hoenen & Kostova, 2015; Menz et al., 2015). Extensive research on coordination and control of foreign subsidiaries highlights the different control mechanisms, such as output control, process control and socialization and their fit with different roles (Egelhoff, 1982; Ambos & Schlegelmilch, 2005; Ambos et al., 2011; Harzing, 1999; O’Donnell, 2000). In recent years, the discussion on management mechanisms has shifted to the question of how headquarters “add value” to their foreign subsidiaries (Goold & Campbell, 2002; Ambos & Mahnke, 2010; Nell & Ambos, 2013).

Subsidiary strategy and initiatives

The MNC literature has long established that subsidiaries contribute to their parent organizations through their exposure to idiosyncratic networks of relationships and local opportunities (Ambos et al., 2010; Bartlett & Ghoshal, 1989; Birkinshaw & Hood, 1998), knowledge creation (Cantwell & Mudambi, 2005), strategic initiatives (Strutzenberger & Ambos, 2014), or problem-solving (Tippmann et al., 2012). Thus, subsidiaries can provide strategic directions for both HQ and other units. While MNC HQ ultimately controls and coordinates all organizational activities and determines corporate strategy (Nohria & Ghoshal, 1997), subsidiaries vary in their development of specific strategies to respond to and exploit local opportunities (Andersson et al., 2002; Birkinshaw et al., 1998; Birkinshaw et al., 2005). To highlight this issue, research has addressed the phenomenon of subsidiary strategy emphasizing subsidiary initiatives, as proactive entrepreneurial undertakings, which may result in subsidiary evolution (e.g., Birkinshaw, 1997; Birkinshaw & Hood, 1998). Subsidiary initiatives can be seen as a bottom–up process (Strutzenberger & Ambos, 2014; Schmid et al., 2014), where

subsidiaries stretch their role in the MNC to act entrepreneurially and develop new products or processes, often drawing on the network in the host country (Andersson et al., 2002; Lee & Williams, 2007). They create value for the entire MNC by developing new markets (Birkinshaw & Hood, 1998; Birkinshaw, 2000), enforcing change (Schumpeter, 1934; Kirzner, 1973), and modifying existing firm-specific advantages (Cantwell & Mudambi, 2005). Often, initiatives are related to augmentations of the subsidiary’s role in the MNC (Ambos et al., 2010; Birkinshaw, 1996). As organizations evolve, subsidiaries are sometimes terminated or change ownership from one firm to the other. However, to date, research has treated this role devolution, subsidiary divestment and exit more sparsely (Delios & Makino, 2003; Getachew & Beamish, 2017; Gillmore et al., 2021; Gillmore, 2022; Schmid & Morschett, 2020).

HQ–subsidiary relationships: attention, conflict and competition

Many studies on subsidiary management have taken the perspective of the HQ–subsidiary dyad and stressed that not only the structural and strategic dimensions, but also the relationship between the organizational units is a key ingredient for the performance of the subsidiary and the entire MNC (Kostova et al., 2016; Minbaeva et al., 2003). In other words, a subsidiary’s capacity to act strategically is not only determined by its structural context, such as its autonomy or decision-making responsibility, but also the quality of its relationships. Research demonstrates the positive effects of strong relationships for outcomes such as innovation importance, subsidiary performance and MNC competence development (Andersson et al., 2002; Monteiro et al., 2008; Ciabuschi et al., 2011), but there is also evidence of negative effects of close relationships, for example if they expose managers to too much knowledge diversity (Mors, 2010). Numerous variables have been used to conceptualize and study headquarters–subsidiary relationships, but three are particularly salient and have given rise to independent streams within the subsidiary management literature: attention, conflict and competition. Attention is defined as “noticing, encoding, interpreting, and focusing of time and effort by organizational decision-makers” on Tina C. Ambos

100  Encyclopedia of international strategic management

issues in their subsidiaries; recent research has particularly highlighted the importance of HQ’s attention as a key variable that shapes HQ–subsidiary relationships. Attention has been shown to provide learning potential for HQ (Nell et al., 2011) as well as being used to gain competitive advantage for the firm (Bartlett & Ghoshal, 1986). From the subsidiaries’ perspective, HQ attention boosts their influence within the MNC and opens up channels for development (Ambos et al., 2010; Galunic & Eisenhardt, 1996). While generally conceptualized as a valuable and fungible resource to manage subsidiaries (Ambos & Birkinshaw, 2010; Bouquet & Birkinshaw, 2008), literature has acknowledged that certain types of HQ attention may not always be perceived positively by subsidiaries Haq et al., 2017). As in all other relationships, HQ– subsidiary relationships are also characterized by conflict. Such conflicts have been portrayed as strategic bargaining processes (Mudambi & Navarra, 2004), agency conflicts (Björkman et al., 2004; Hoenen & Kostova, 2015), or boundary-spanning activities (Schotter & Beamish, 2011), and have been investigated from a behavioral perspective (Dörrenbächer & Gammelgaard, 2006, 2011; Lee & Williams, 2007) or a discursive view (Balogun et al., 2011). Collectively, these studies show that HQ–subsidiary relationships have a built-in goal conflict (Nohria & Ghoshal, 1997) and are in constant flux and negotiation. Consequently, subsidiary management faces tensions and needs continuous adjustment (Ambos et al., 2020). Analyzing such relationships mostly requires multi-nodal and longitudinal perspective, providing additional challenges for research design (Meyer et al., 2020). Another important perspective in subsidiary management is the role of peer units and intra-organizational competition. Based on the idea of network-like organizations, peer subsidiaries also play an important role as they may influence the focal subsidiary (Andersson et al., 2015; Conroy et al., 2019) or engage in competition (Birkinshaw & Hood, 1998; Birkinshaw & Lingblad, 2005). Studies on this issue emphasize the lateral relationships in the MNC, their interdependence in value chain activities (Ryan et al., 2020) as well as in knowledge transfers (Foss & Pedersen, 2019). All these nuanced features show the increasing complexity that Tina C. Ambos

modern MNCs must tackle in foreign subsidiary management.

Multi-level theorizing on subsidiary management

As mentioned above, research on subsidiary management has mostly taken an organization-level perspective drawing on organization-level theories. However, subsidiaries are managed by individuals with different characteristics and motivations (Bird & Mendenhall, 2016; Caligiuri, 2006), and subsidiaries are embedded in multiple networks, such as host countries or supra-national institutions (Andersson et al., 2002; Hartmann et al., 2022). In particular, the subsidiary general manager or CEO is seen as pivotal in driving their unit’s strategy and contribution, championing and sponsoring ideas and initiatives to position with headquarters to win new international responsibilities or mandates. Still, we know surprisingly little of the strategic activities of the subsidiary CEO (Dörrenbächer & Gammelgaard, 2006; Geppert & Dörrenbächer, 2014), and of their relationship to the subsidiary’s contribution to the MNC. To address this issue, several studies have recently investigated the micro-foundations of subsidiary behavior, advancing our understanding of this phenomenon theoretically and empirically (O’Brien et al., 2019; Foss & Pedersen, 2019; Santangelo & Phene, 2022), but there is ample room for further research and development of multi-level theories of subsidiary management.

The future of foreign subsidiary management

As the organizational model and management mechanisms of MNCs evolve due to globalization and deglobalization trends, new institutional boundaries and digitalization (Cuervo-Cazurra et al., 2020; Luo, 2022), there is a need for conceptual development to understand foreign subsidiary management. The traditional view of the “foreign subsidiary” as a unit with a mandate confined its host country has been criticized (e.g., by Edwards et al., 2022). Indeed, it remains to be seen which roles and responsibilities organizational subunits will play in MNCs of the digital age with accelerated information-processing needs, and where HQ

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(functions) might be dispersed or virtual. Future research needs to acknowledge this and model these complex realities, such as the integration of a multiplicity of actors, the multiplexity of their interactions, and the dynamism over time (Andrews et al., 2022). For example, institutional boundaries and opportunities may determine new subsidiary responsibilities (Phillips et al., 2021); different forms of internationalizing, such as digital enterprises (Banalieva & Dhanaraj, 2019) or scale-ups (Tippmann et al., 2022), will prompt us to rethink the roles of subsidiaries; and new types of organizations following dual logics, such as the multinational hybrid organization (Ambos et al., 2020), may challenge fundamental principles of subsidiary performance. Most critically, future subsidiary research needs to adapt to the changing models of MNC and define the roles and boundaries of the subsidiary concept clearly, such as its geographic scope, its structural position in the MNC, and its legal form. Tina C. Ambos

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104  Encyclopedia of international strategic management tage. Journal of International Business Policy, 4(2), 286–307. Rugman, A. M., & Verbeke, A. (2001). Subsidiary-specific advantages in multinational enterprises. Strategic Management Journal, 22(3), 237–250. Rugman, A., Verbeke, A., & Yuan, W. (2011). Re-conceptualizing Bartlett and Ghoshal’s classification of national subsidiary roles in the multinational enterprise. Journal of Management Studies, 48(2), 253–277. Ryan, P., Buciuni, G., Giblin, M., & Andersson, U. (2020). Subsidiary upgrading and global value chain governance in the multinational enterprise. Global Strategy Journal, 10(3), 496–519. Pananond, P. (2013). Where do we go from here?: Globalizing subsidiaries moving up the value chain. Journal of International Management, 19(3), 207–219. Paterson, S. L., & Brock, D. M. (2002). The development of subsidiary-management research: Review and theoretical analysis. International Business Review, 11(2), 139–163. Santangelo, G. D., & Phene, A. (2022). Knowledge sourcing by the multinational enterprise: An individual creativity-based model. Journal of International Business Studies, 53(3), 434–448. Schmid, S., Dzedek, L. R., & Lehrer, M. (2014). From rocking the boat to wagging the dog: A literature review of subsidiary initiative research and integrative framework. Journal of International Management, 20(2), 201–218. Schmid, D., & Morschett, D. (2020). Decades of research on foreign subsidiary divestment:

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What do we really know about its antecedents? International Business Review, 29(4), 101653. Schotter, A., & Beamish, P. W. (2011). Performance effects of MNC headquarters–subsidiary conflict and the role of boundary spanners: the case of headquarters initiative rejection. Journal of International Management, 17(3), 243–259. Schumpeter, J. A. (1934). The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle. Harvard University Press. Strutzenberger, A., & Ambos, T. C. (2014). Unravelling the subsidiary initiative process: A multilevel approach. International Journal of Management Reviews, 16(3), 314–339. Tippmann, E., Monaghan, S., & Reuber, R. A. (2022). Navigating the paradox of global scaling. Global Strategy Journal, gsj.1435. Tippmann, E., Scott, P. S., & Mangematin, V. (2012). Problem solving in MNCs: How local and global solutions are (and are not) created. Journal of International Business Studies, 43(8), 746–771. ul Haq, H., Drogendijk, R., & Holm, D. B. (2017). Attention in words, not in deeds: Effects of attention dissonance on headquarters-subsidiary communication in multinational corporations. Journal of World Business, 52(1), 111–123. Verbeke, A., Kano, L., & Yuan, W. (2016). Inside the regional multinationals: A new value chain perspective on subsidiary capabilities. International Business Review, 25(3), 785–793.

27. Foreign subsidiary networks Subsidiary networks are defined as webs of specific inter-firm and intra-firm relationships that a foreign subsidiary of an MNC has to host-country actors and units within the MNC, respectively. Network theory offers a pertinent view on critical resources and has shown that the most important resource is the web of specific relationships in which a unit (subsidiary) is embedded (Granovetter, 1985; Snehota, 1990; Grabher, 1993; Andersson, 1997). Economic actions and the product of such actions are influenced by the unit’s dyadic relationships and all connected relationships, as are all social activities (Grabher, 1993), which is why utilizing an embeddedness approach helps avoid the atomization of an actor when studying its behavior (Andersson, 1997). Embeddedness is defined as a subsidiary’s interdependence with its network partners and is often specified by distinguishing a subsidiary’s external embeddedness in the host-country environment and its internal embeddedness within the global MNE environment (Andersson, 1997; Andersson, Forsgren & Holm, 2002). The resources created in a subsidiary’s network have implications for how the subsidiary can develop its role both within the multinational enterprise (MNE) as well as in its external network. Relationships form complex configurations of technical, economic, and social interdependencies. The relationships are connected to each other and exchange in one is dependent or conditioned by exchange in others. Consequently, actors involved in business networks can exercise some control over each other. The more embedded a subsidiary is in its relationships, the more interdependent it is with its network. Considering a subsidiary as the focused network actor where its embeddedness influences its evolution begs for making a difference between sister units and headquarters (HQ), that is, the corporate network, on the one side and its external network of business partners on the other (Andersson & Forsgren, 1996). The different networks, the external and the corporate can be considered resources for the subsidiary in such a way that the original assignment with its relationships to

sister units and HQ gives the subsidiary resources to deal with the external business and non-business partners for further development of itself and its role in the external network. The development of new knowledge through the interactions and adaptations to the external network actors in turn will now be a resource in the subsidiary’s dealings with the corporate network. This constitutes the dual network embeddedness perspective in its internal MNE corporate and external host location networks. We now examine each network separately and then jointly.

Subsidiary relationships in its internal MNE network

Within the MNE, the subsidiary is embedded in a web of relationships with HQ and sister subsidiaries, from which it both draws and delivers strategic resources (Garcia-Pont, Canales, & Noboa, 2009). Internal network relations, primarily with HQ, are managed by the subsidiary to access valuable resources. The subsidiary is enmeshed in an internal competitive battle for resources with sister subsidiaries. The winner optimizes its survival prospects through the effective combination of internal resources with knowledge absorbed in its external local network for reverse transfer within the MNE. When valuable knowledge resources are transferred from HQ, a subsidiary has a duty of care to protect from leakage to co-located competitors in the host external network (Perri & Andersson, 2014; Perri, Andersson, Nell, & Santangelo, 2013) but at the same time the sharing of knowledge is a prerequisite for the subsidiary to absorb and develop new knowledge together with its external network partners. This constitutes a true dilemma for subsidiaries but is not something we will delve into in this entry. The subsidiary expands its knowledge-​ creation role through initiative-taking in its internal network to gain resources and mandates (Birkinshaw, 1997; Birkinshaw & Ridderstråle, 1999). Strategic initiatives in the internal network simultaneously enhance the subsidiary’s visibility at HQ and attract attention in the MNE from HQ (Birkinshaw & Ridderstråle, 1999; Dörrenbächer & Gammelgaard, 2010; Ambos, Andersson & Birkinshaw, 2010) in a complex political power game of legitimizing (Conroy & Collings, 2016). They sell initiatives and

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lobby HQ (Cantwell & Mudambi, 2005) to pursue and progress their own self-interests within the internal network. Internal network relations between HQ and the subsidiary are in a perpetual bargaining process (Andersson, Forsgren, & Holm, 2007; Bouquet & Birkinshaw, 2008), where the subsidiary endeavors to influence HQ’s assignation of contested resources and roles in the internal network, often to the detriment of sister subsidiaries (Ambos et al., 2010). The subsidiary that succeeds in influencing HQ to assign resources utilizes its added power to elevate its status as an attractive partner in the local knowledge network, to which we now turn our attention.

Subsidiary relationships in its external local network

The competence-creating subsidiary seeks out attractive knowledge-bearing partners in its external network at its host location (Cantwell & Mudambi, 2005, 2011). Knowledge absorbed from and developed with its external network engagements and activities may complement and even extend internal network knowledge. This not only adds to the subsidiary’s own knowledge distinctiveness from sister subsidiaries in the internal MNE network, but also may add to the competitive distinctiveness of the MNE (Scott-Kennel & Saittakari, 2020). The local external network consists of a set of actors interacting for knowledge creation and business development. The subsidiary both influences and is influenced by the specific web of counterparts with which it interacts in its external network relationships (Andersson, Björkman & Forsgren, 2005). Sometimes, due to strong dependence on certain resources and relationships, subsidiaries have been shown to rather adhere to external actors’ demands than headquarters’ guidelines (see, e.g., Andersson & Forsgren, 1996). The relationships between actors in the external network are both horizontal and vertical in nature and serve to create codified and tacit knowledge (Michailova & Mustaffa, 2012). For valuable knowledge creation, particularly in the guise of R&D, relations with partners in the external network ought to become deep, trusting, and enduring with ongoing mutual learning (Achcaoucaou, Miravitlles & León-Darder, 2014). The created knowledge absorbed from its external network Ulf Andersson and Paul Ryan

by the competence-creating subsidiary can be transferred back into the internal MNE network, known as reverse knowledge transfer (Rabbiosi, 2011; Najafi-Tavani, Giroud & Andersson, 2014). This entwining and reverse transfer of externally sourced knowledge with internal network knowledge is critical to subsidiary influence and strategic importance and overall MNE competitive advantage (Andersson, Forsgren & Holm, 2002; Gölgeci, Ferraris, Arslan & Tarba, 2019). We now turn to how this dual network embeddedness enables the competence-creating subsidiary to both prosper and contribute to global innovativeness for the entire MNE.

Subsidiary dual network embeddedness and strategic implications

The competence-creating subsidiary operates at the nexus of its external local host network and internal corporate MNE network (Figueiredo, 2011; Meyer, Mudambi & Narula, 2011; Yamin & Andersson, 2011; Ryan, Giblin, Andersson & Clancy, 2018). This dual embedded network position enables its knowledge-creation capability within the MNE yet represents a formidable strategic challenge for the subsidiary (Birkinshaw & Pedersen, 2008). Valuable knowledge creation from important external network collaborations can enhance a subsidiary’s importance and access to resources in its internal network, often leading to greater internal influence and an expanded strategic role within the MNE (Frost, 2001; Andersson et al., 2005; Bouquet & Birkinshaw, 2008; Ciabuschi et al., 2014). Meanwhile, there exists a tension for the subsidiary between achieving the autonomy to embed itself successfully in the local external network to create valuable knowledge, and still remain embedded in the internal MNE network to access resources and reverse-transfer created knowledge (Achcaoucaou et al., 2014; Isaac, Borini, Raziq & Benito, 2019). So external network embeddedness is critical to novel knowledge creation while internal network embeddedness enables knowledge acquisition for combination and useful reverse-transfer. This in turn affords greater political influence and strategic importance for the competence-creating subsidiary within the internal MNE network and cements its

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indispensability and thereby its prospects for survival. The subsidiary that, under rigid hierarchical control, becomes overembedded in its internal network may be well integrated within the MNE but constrained in its latitude for external knowledge-creating activities (Mudambi, 2011; Schotter, Mudambi, Doz & Gaur, 2017). It may play a restricted, but nonetheless important, role within the MNE as mandated by HQ to simply drive production efficiencies as a competence-exploiter (Cantwell & Mudambi, 2005). Therefore, it may miss or deliberately reject knowledge opportunities and resources that reside in its external network (Monteiro, Arvidsson & Birkinshaw, 2008). Contrastingly, a subsidiary that becomes underembedded in its internal network (commonly, but not necessarily, being overembedded in its external network), may become detached from and miss out on internal resources and ongoing novel knowledge transfers. It may struggle, or even fail, to meaningfully reverse-transfer its mobilized knowledge into the MNE, especially in the longer term as external network activities are misaligned with internal corporate objectives. Simply stated, the challenge for the competence-creating subsidiary is to achieve a position of optimal dual embeddedness so as not to be either under- or overembedded in either its internal or external networks (Andersson et al., 2005; Garcia-Pont et al., 2009). Strategic tradeoffs by the subsidiary are critical to avoid damaging excessive reliance on one or the other network for resources that may then limit its access to resources in the other network (Gammelgaard & Pedersen, 2010). In essence, the competence-creating subsidiary is in a perpetual struggle to optimize its dual network embeddedness. Consequently, since the competence-creating subsidiary’s knowledge capabilities are built on shifting sands, its dual network embeddedness requires agile strategic management. Ulf Andersson and Paul Ryan

References

Achcaoucaou, F., Miravitlles, P. & León-Darder, F. (2014). Knowledge sharing and subsidiary R&D mandate development: A matter of dual embeddedness. International Business Review, 23(1): 76–90. Ambos, T.C., Andersson, U. & Birkinshaw, J. (2010). What are the consequences of

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108  Encyclopedia of international strategic management headquarters. Journal of World Business, 51(4): 612–627. Dörrenbächer, C. & Gammelgaard, J. (2010). Multinational corporations, inter-organizational networks and subsidiary charter removals. Journal of World Business, 45(3): 206–216. Figueiredo, P.N. (2011). The role of dual embeddedness in the innovative performance of MNE subsidiaries: evidence from Brazil. Journal of Management Studies, 48(2): 417–440. Frost, T. (2001). The geographic sources of foreign subsidiaries’ innovations. Strategic Management Journal, 22(2): 101—123. Gammelgaard, J. & Pedersen, T. (2010). Internal versus external knowledge sourcing of subsidiaries and the impact of headquarters control. In U. Andersson & U. Holm (eds.), Managing the contemporary multinational: The role of headquarters, Edward Elgar Publishing: Cheltenham, UK. Garcia-Pont, C., Canales, J.I. & Noboa, F. (2009). Subsidiary strategy: The embeddedness component. Journal of Management Studies, 46(2): 182–214. Gölgeci, I., Ferraris, A., Arslan, A. & Tarba, S. (2019). European MNE subsidiaries’ embeddedness and innovation performance: Moderating role of external search depth and breadth. Journal of Business Research, 102: 97–108. Grabher, G. (1993). Rediscovering the social in the economics of interfirm relations. In G. Grabher (ed.), The Embedded Firm. London: Routledge. Granovetter, M. (1985). Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 91(3): 481–510. Isaac, V.R., Borini, F.M., Raziq, M.M. & Benito, G.R.G (2019). From local to global innovation: The role of subsidiaries’ external relational embeddedness in an emerging market. International Business Review, 28(4): 638–646. Meyer, K.E., Mudambi, R. & Narula, R. (2011). Multinational enterprises and local contexts: The opportunities and challenges of multiple embeddedness. Journal of Management Studies, 48(2): 235–252. Michailova, S., & Mustaffa, Z. (2012). Subsidiary knowledge flows in multinational corporations: research accomplishments, gaps and opportunities. Journal of World Business, 47(3): 383–396. Monteiro, F., Arvidsson, N. & Birkinshaw, J. (2008). Knowledge flows within multinational

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corporations: Explaining subsidiary isolation and its performance implications. Organization Science, 19(1): 90–107. Mudambi, R. (2011). Hierarchy, coordination, and innovation in the multinational enterprise. Global Strategy Journal, 1(3–4): 317–323. Najafi-Tavani, Z., Giroud, A. & Andersson, U. (2014) The interplay of networking activities and internal knowledge actions for subsidiary influence within MNCs. Journal of World Business, 49(1): 122–131. Perri, A. & Andersson, U. (2014). Knowledge outflows from foreign subsidiaries and the tension between knowledge creation and knowledge protection: Evidence from the semiconductor industry. International Business Review, 23(1): 63–75. Perri, A., Andersson, U., Nell, P.C. & Santangelo, G. (2013). Balancing the trade-off between learning prospects and spillover risks: MNC subsidiaries vertical linkage patterns in developed countries. Journal of World Business, 48(4): 503–514. Pu, M. & Soh, P-H. (2018). The role of dual embeddedness and organizational learning in subsidiary development. Asia Pacific Journal of Management, 35: 373–397 Rabbiosi, L. (2011). Subsidiary roles and reverse knowledge transfer: An investigation of the effects of coordination mechanisms. Journal of International Management, 11(2): 97–113. Ryan, P., Giblin, M., Andersson, U. & Clancy, J. (2018). Subsidiary knowledge creation in co-evolving contexts. International Business Review, 27(5): 915–932 Schotter, A.P.J., Mudambi, R., Doz, Y.L. & Gaur, A. (2017). Boundary spanning in global organizations. Journal of Management Studies, 54(4): 403–421. Scott-Kennell, J. & Saittakari, I. (2020). Sourcing or sharing in MNE networks? National headquarters and foreign subsidiaries as knowledge conduits in SMOPECs. International Business Review, 29(1): 1–16. Snehota, I. (1990). Notes on a Theory of Business Enterprise, Published Doctoral Dissertation, Department of Business Studies, Uppsala University. Yamin, M. & Andersson, U. (2011). Subsidiary importance in the MNC: What role does internal embeddedness play? International Business Review, 20(2): 151–162.

28. Global boundary spanners Global boundary spanners can be defined as individuals who are recognized by members of both their own in-group and/ or relevant out-groups for their long-term commitment to engage in and facilitate significant interactions between the groups, in order to integrate activities across cultural, institutional and/or organizational contexts (Barner-Rasmussen, Ehrnrooth, Koveshnikov, & Mäkelä, 2014; Roberts & Beamish, 2017; Schotter, Mudambi, Doz, & Gaur, 2017; Mäkelä, Barner-Rasmussen, Ehrnrooth, & Koveshnikov, 2019). Interest in how the organization is linked to its environment through individuals acting at the boundary is an offshoot of the broader organizational question of how organizational boundaries are maintained and managed (e.g., March & Simon, 1958; Katz & Kahn, 1966). Aldrich and Herker (1977) were early adopters of the label “boundary spanning” to denote these actions, arguing that boundary-spanning individuals performed two classes of functions: information processing and representation towards external parties. Their research focused on the role of boundary spanners as gatekeepers. Tushman and Scanlan (1981a, 1981b) broadened the gatekeeping perspective by highlighting that boundary spanners also play an important communication role. Building on empirical research in the R&D laboratory context, they argued that being engaged in external communication alone was a necessary but insufficient condition; to qualify as boundary spanners, individuals had to span across internal or external communication boundaries created by different language schemes and conceptual frameworks (Tushman & Scanlan, 1981b). Foreshadowing later research, these authors also questioned whether and to what extent boundary spanning is linked to formal status, and instead argued for perceived technical competence and communicative abilities as key drivers of boundary spanning. Research on boundary spanners, like other research on individuals in MNEs (see the entry expatriation), subsequently bifurcated into two distinct streams. One stream focuses on a closely intertwined set of functions

such as knowledge transfer (e.g., Kogut & Zander, 1993), coordination and control (e.g., Harzing, 2001). The other focuses on “the role and characteristics of specific individuals as boundary spanners and their effectiveness in operating across complex inter- and intra-organizational, socio-cultural and geographic boundaries” (Schotter et al., 2017: 404). Boundaries are here understood as organizational barriers characterized by difference (without which there is no boundary), dependence (without which the boundary is not meaningful) and novelty (which creates friction through unfamiliarity) (Carlile, 2002, 2004; Mäkelä et al., 2019). Our definition of global boundary spanners builds on the latter body of literature, which in the context of international strategic management grows out of a longstanding interest in inter-unit knowledge sharing as a condition for sustained competitive advantage of multinational enterprises (MNEs) (Bartlett & Ghoshal, 1987; Kogut & Zander, 1993). In the 2000s, this originally organizational-level work expanded to the individual level with the insights that most everyday inter-unit interactions take place at the interpersonal level (Argote & Ingram, 2000), and that these individual-level micro-foundations play an important part in organizational-level outcomes (Foss & Pedersen, 2004; Barney & Felin, 2013). Empirical work in this vein has subsequently specified different roles that individual boundary spanners perform in the MNE context. In the context of HQ–subsidiary knowledge sharing, Barner-Rasmussen et al. (2014) identified exchanging, linking, facilitating, and intervening as boundary-spanning roles. They found cultural and language skills to be important determinants of the extent to which individuals perform the more demanding facilitating and intervening roles. Similarly, Birkinshaw, Ambos and Bouquet (2017) identified four boundary-spanning roles that MNE HQ managers engage in: spearheading and facilitating connections across boundaries, and reconciling and lubricating differences in worldviews. Søderberg and Romani (2017), in turn, identified three generic boundary-spanning roles of vendor managers in the context of global IT development projects: managing boundaries through buffering and reflecting, forging common ground by connecting and mobilizing, and

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developing new frontiers through weaving and transforming. Recent research suggests that global boundary spanners recognized by both in- and out-group members are few and far between (Mäkelä et al., 2019), and questions the relevance of formal boundary-spanning positions. Successful boundary spanners seem to be distributed across different organizational levels and job roles, and often lack formal responsibility for boundary spanning (Yagi & Kleinberg, 2011). Boundary-spanning ability appears to be driven by personal skills (e.g., expertise or cultural/linguistic skills) or motivation, persistence and willingness (Barner-Rasmussen et al., 2014; Levina & Vaast, 2005; Roberts & Beamish, 2017) rather than job role or structural network position (e.g., Kostova & Roth, 2003; Richter et al., 2006). All in all, it seems that boundary spanning can be formalized only to a certain extent (Schotter & Beamish, 2011), and that individuals formally appointed to boundary-spanning positions are not always the most effective in performing these tasks (Levina & Vaast, 2005). The opportunities for boundary spanning also seem to be powerfully shaped by the organizational context, such as the MNE’s internal interaction structure (many contact points between units also provide opportunities for more boundary spanning to occur; Mäkelä et al., 2019), and by power issues such as those related to gender, race and class (Collien, 2021), which may boost or hamper boundary-spanning efforts. In terms of future research, recent calls have emphasized the need to study boundary spanning at the activity level; that is, in terms of the specific actions taken by boundary-spanning individuals, and their consequences (Birkinshaw et al., 2017; Søderberg & Romani, 2017; see also Schotter et al., 2017) to enrich and deepen the insights gleaned from extant interview-based and cross-sectional research. Recent research has also differentiated between potential boundary spanners, i.e., individuals who are involved in inter-unit interactions, and recognized boundary spanners who are experienced by relevant others on both sides of the boundary to actually facilitate and positively impact intergroup transactions and relations (Mäkelä et al., 2019). These findings suggest that boundary-spanning actions must be eval-

uated by others on both sides of the boundary. Are the actions of the boundary-spanning individuals actually experienced as helpful and beneficial by relevant others or not? This focus on recognized boundary spanners emphasizes aspects of identification and learning. How do boundary spanners themselves identify? How are they identified by others (Kane & Levina, 2017)? What role do they play in providing cognitive, relational and material support for learning about others’ practices (Roberts & Beamish, 2017)? All in all, assuming that business activities and global value chains continue to evolve towards increasing collaboration – even between competitors – as the external environment grows more turbulent, the importance of boundary spanning will also increase. To date, accumulated knowledge about global boundary spanners suggests that their interpersonal-level actions and interactions play an important role in helping MNEs overcome the barriers inherent in geographical, cultural and linguistic fragmentation, both internally and in relation to external partners. Wilhelm Barner-Rasmussen and Kristiina Mäkelä

References

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Global boundary spanners  111 product development. Organization Science, 13(4): 442–455. Carlile, P. R. 2004. Transferring, translating, and transforming: An integrative framework for managing knowledge across boundaries. Organization Science, 15(5): 555–568. Collien, I. 2021. Concepts of power in boundary spanning research: A review and research agenda. International Journal of Management Reviews, 23: 443–465. Foss, N., & Pedersen, T. 2004. Organizing knowledge processes in the multinational corporation: An introduction. Journal of International Business Studies, 35(5): 340–349. Harzing, A.-W. 2001. Of bears, bumble-bees, and spiders: The role of expatriates in controlling foreign subsidiaries. Journal of World Business, 36(4): 366–379. Kane, A. A., & Levina, N. 2017. Am I still one of them? Bicultural immigrant managers navigating social identity threats when spanning global boundaries. Journal of Management Studies, 54(4): 540–577. Katz, D., & Kahn, R. L. 1966. The Social Psychology of Organizations. John Wiley & Sons, New York. Kogut, B., & Zander, U. 1993. Knowledge of the firm and the evolutionary theory of the multinational corporation. Journal of International Business Studies, 24(4): 625–645. Kostova, T., & Roth, K. 2003. Social capital in multinational corporations and a micro-macro model of its formation. Academy of Management Review, 28(2): 297–317. Levina, N., & Vaast, E. 2005. The emergence of boundary spanning competence in practice, implications for implementation and use of information systems. MIS Quarterly, 335–363. Mäkelä, K., Barner-Rasmussen, W., Ehrnrooth, M., & Koveshnikov, A. 2019. Potential and recognized boundary spanners in multinational

corporations. Journal of World Business, 54(4): 335–349. March, J. G., & Simon, H. A. 1958. Organizations. John Wiley & Sons, New York. Richter, A. W., West, M. A., van Dick, R., & Dawson, J. F. 2006. Boundary spanners’ identification, intergroup contact, and effective intergroup relations. Academy of Management Journal, 49(6): 1252–1269. Roberts, M. J., & Beamish, P.W. 2017. The scaffolding activities of international returnee executives: A learning-based perspective of global boundary spanning. Journal of Management Studies, 54(4): 511–539. Schotter, A., & Beamish, P. W. 2011. Performance effects of MNC headquarters–subsidiary conflict and the role of boundary spanners: The case of headquarter initiative rejection. Journal of International Management, 17(3): 243–259. Schotter, A. P., Mudambi, R., Doz, Y. L., & Gaur, A. 2017. Boundary spanning in global organizations. Journal of Management Studies, 54(4): 403–421. Søderberg, A.-M., & Romani, L. 2017. Boundary spanners in global partnerships: A case study of an Indian vendor’s collaboration with Western clients. Group & Organization Management, 42(2): 237–278. Tushman, M. L., & Scanlan, T. J. 1981a. Boundary spanning individuals: Their role in information transfer and their antecedents. Academy of Management Journal, 24(2): 289–305. Tushman, M. L., & Scanlan, T. J. 1981b. Characteristics and external orientations of boundary spanning individuals. Academy of Management Journal, 24(1): 83–98. Yagi, N., & Kleinberg, J. 2011. Boundary work: An interpretive ethnographic perspective on negotiating and leveraging cross-cultural identity. Journal of International Business Studies, 42(5): 629–653.

Wilhelm Barner-Rasmussen and Kristiina Mäkelä

29. Global brands Definitions and attributes

Global brands have been defined in multiple, yet often diverging, ways in the literature. Scholars take either a supply-side or a demand-side perspective when defining global brands. According to the supply-side perspective, global brands denote brands that operate in multiple countries around the world, brands that follow standardized strategies in terms of market segmentation, targeting, positioning and/or marketing mix elements (e.g., brand image, name, logo, pricing, promotional activities), or brands that generate a substantial share of their revenue from sales in major markets outside their country of origin (Özsomer and Altaras 2008; Özsomer et al. 2012). Acknowledging that consumers may not be cognizant of the extent to which a brand follows a standardized strategy or its performance in international markets, the demand-side perspective alternatively places emphasis on consumer perceptions and defines global brands as brands viewed as being internationally available, globally recognized and demanded by consumers in multiple countries around the world (Steenkamp et al. 2003). Although, in the past, global brands mostly originated in major developed countries (e.g., North America, Europe, Japan), most recently, brands originating in emerging markets such as India (Tata Motors) or China (Huawei) have developed into strong global competitors in their categories by taking over the market shares of their developed country rivals (Kumar and Steenkamp 2013). The growth of global brands has been facilitated by the forces promoting marketplace globalization over the past few decades, including global economic integration initiatives that minimize trade barriers (e.g., NAFTA), the ease of international travel and consumers’ exposure to global media that nurture the development of a shared global consumer culture, technological developments, increase of immigration flows, and the cross-cultural convergence of consumer needs (Ritzer 2007). These forces have allowed global brands to build colossal financial value, develop a global consumer base, and dominate the list of multinational corporations’ most valuable company assets.

Global brands top several brand valuation rankings across multiple industries, product categories and regions (e.g., Interbrand, Global Brand Finance). For instance, Global Brand Finance (2022) places exemplar global brands such as Apple ($355bn), Amazon ($350bn), and Google ($263bn) on top of their worldwide rankings across a wide range of performance metrics, such as shareholder value, brand growth, and market investments. Nowadays, global brands remain leaders in multiple industries, ranging from packaged foods (e.g., Nestlé) and durables (e.g., Siemens) to retailers (e.g., Aldi) and services (e.g., PayPal). Moreover, the development of information technology and the proliferation of social media have recently created a new type of global media brand (e.g., Netflix, Instagram, TikTok), which reshape traditionally local industries.

The sources and boundaries of global brand value creation

Global brands create value through strategic and consumer advantages. From a strategy viewpoint, global brand standardization creates cost advantages brought about by massive economies of scale and scope in production, sourcing, marketing, R&D and other areas. Global brands also benefit from a unified and consistent brand image that minimizes new product development costs, enables faster “time to market” cycles, leads to efficient product launching, and offers easier access to new markets and global distribution systems (Craig and Douglas 2000). From a consumer’s perspective, global brands are associated with higher quality standards and globally consistent performance expectations, enjoy prestige and social status perceptions, especially in status-signaling product categories (e.g., luxury products), facilitate consumers’ participation in an alluring global consumer culture and reinforce consumers’ ability to signal a cosmopolitan self-identity to their peers (Özsomer 2012; Steenkamp et al. 2003; Strizhakova et al. 2011). These benefits are particularly relevant for emerging market consumers who often lack high-quality local alternatives or view global brand ownership as “identity currency.” Nevertheless, global brands are often criticized for limited strategic differentiation, uniformity, losses in authenticity, and inability to adapt rapidly to changing local

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market environments and consumer needs. Moreover, consumers increasingly blame global brands for engaging in hegemonic marketplace tactics (e.g., takeovers of established local brands), creating an uneven competitive arena for local market players, hurting local economies and production structures, and promoting a uniform consumption culture that trivializes cross-cultural identities and disrespects local traditions (Davvetas and Halkias 2019). These concerns create global brand skepticism, especially among consumers of developed markets that have reconnected with their local roots and render apathetic toward global brand offerings.

Key challenges for global brands

Global brands currently face several challenges in a marketplace that has been reshaped following several global market shocks (e.g., the COVID-19 pandemic, geopolitical conflicts, climate change): ● Anti-globalization and revival of protectionism: Consumers become increasingly skeptical toward global economic and cultural integration and have doubts about the ability of globalization to improve their well-being (Witt 2019). Pro-global attitudes are falling around the world, consumers demand the reshoring of firms’ international activities to reignite local economic recovery, and political developments (e.g., Brexit) put economic protectionism back in the global political agenda. Being manifestations of an interconnected world, global brands thus face a hostile socio-political environment that needs to be carefully navigated to remain relevant. ● Sustainability and global corporate responsibility: Worldwide, institutional demands for environmentally sustainable practices have become stricter in light of climate change threats and global stakeholders put significant pressure on global brands to develop a sustainability agenda (e.g., respecting and reporting on SDG standards). Simultaneously, heightened consumer sensitivity toward environmental issues and calls for “cleaner,” “greener,” and “fairer” products creates not only risks but also opportunities for global brands to reinvent themselves by developing pro-environmental strategies

and new sources of sustainable global competitive advantage (Leonidou et al. 2019). ● Localization and transparency: The revival of consumers’ local identities and the resurgence of local brands push global brands to reconfigure their strategies and find ways to reconnect with consumers by localizing their strategies. Consumers demand transparency of global brand practices and traceability of sourcing and production. Global brands must respond to these changes through marketing hybridization, deep localization of marketing strategies, development of “glocal” brands, localization of procurement and supply chain processes, and engagement of local players in the production and distribution of products in ways that create positive local externalities (Schmidt-Devlin et al. 2022; Sichtmann et al. 2019). Vasileios Davvetas and Constantine S. Katsikeas

References

Craig, C. S., and Douglas, S. P. (2000). Configural advantage in global markets. Journal of International Marketing, 8(1), 6–26. Davvetas, V., and Halkias, G. (2019). Global and local brand stereotypes: Formation, content transfer, and impact. International Marketing Review, 36(5), 675–701. Kumar, N., and Steenkamp, J. B. E. (2013). Brand Breakout: How Emerging Market Brands Will Go Global (Vol. 18). New York: Palgrave Macmillan. Leonidou, L. C., Katsikeas, C. S., Samiee, S., and Leonidou, C. N. (2019). Socially Responsible International Business: Critical Issues and the Way Forward. Edward Elgar Publishing. Özsomer, A. (2012). The interplay between global and local brands: A closer look at perceived brand globalness and local iconness. Journal of International Marketing, 20(2), 72–95. Özsomer, A., and Altaras, S. (2008). Global brand purchase likelihood: A critical synthesis and an integrated conceptual framework. Journal of International Marketing, 16(4), 1–28. Özsomer, A., Batra, R., Chattopadhyay, A., and Ter Hofstede, F. (2012). A global brand management roadmap. International Journal of Research in Marketing, 1(29), 1–4. Ritzer, G. (2007). The Globalization of Nothing 2. Pine Forge Press, Thousand Oaks, CA. Schmidt-Devlin, E., Özsomer, A., and Newmeyer, C. E. (2022). How to Go GloCal: Omni-Brand

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114  Encyclopedia of international strategic management Orientation Framework. Journal of International Marketing, Ahead of Print, DOI: 10.1177/1069031x211070607. Sichtmann, C., Davvetas, V., and Diamantopoulos, A. (2019). The relational value of perceived brand globalness and localness. Journal of Business Research, 104, 597–613. Steenkamp, J. B. E., Batra, R. and Alden, D. L. (2003). How perceived brand globalness creates brand value. Journal of International Business Studies, 34(1), 53–65. Strizhakova, Y., Coulter, R. A., and Price, L. L. (2011). Branding in a global marketplace: The mediating effects of quality and self-identity brand signals. International Journal of Research in Marketing, 28(4), 342–351. Witt, M. A. (2019). De-globalization: Theories, predictions, and opportunities for international business research. Journal of International Business Studies, 50(7), 1053–1077.

Further Recommended Literature

branding literature and a research agenda. Journal of International Business Studies, 44(6), 622–634. Gürhan-Canli, Z., Sarial-Abi, G., and Hayran, C. (2018). Consumers and brands across the globe: Research synthesis and new directions. Journal of International Marketing, 26(1), 96–117. Holt, D. B., Quelch, J. A., and Taylor, E. L. (2004). How global brands compete. Harvard Business Review, 82(9), 68–75. Liu, H., Schoefer, K., Fastoso, F., and Tzemou, E. (2021). Perceived brand globalness/localness: A systematic review of the literature and directions for further research, Journal of International Marketing, 29(1), 77–94. Steenkamp, J. B. E. (2017). Global brand strategy: World-wise marketing in the age of branding. Springer. Steenkamp, J. B. E., and De Jong, M. G. (2010), A global investigation into the constellation of consumer attitudes toward global and local products. Journal of Marketing, 74(6), 18–40.

Chabowski, B. R., Samiee, S., and Hult, G. T. M. (2013). A bibliometric analysis of the global

Vasileios Davvetas and Constantine S. Katsikeas

30. Global careers A global career comprises a series of work experiences, one or more of which involves collaboration across national boundaries (McKouen et al., 2019). Although this definition recognizes that global work can entail activities that do not require international travel, most of the literature has focused on those who physically cross national borders. Historically, scholars have primarily confined their examinations of global work to the experiences of corporate expatriates whose career path involves a temporary assignment for several years to work and live in another country to achieve an organizational goal (Harrison et al., 2004) followed by repatriation to the home country (Feldman, 1991). During the last decade, however, other forms of global work have been recognized as also relevant to global careers (Shaffer et al., 2012). The ever-expanding range of global work experiences has evolved to include both organizational-sponsored experiences as well as those that are self-initiated (Shaffer et al., 2012). While corporate expatriates still dominate the types of global work within multinational corporations, other forms have come under the scrutiny of researchers. These include short-term assignees who travel to one or more countries for several weeks or months as well as international business travelers who travel for one to several weeks at a time. In contrast with corporate expatriates, short-term assignees and international business travelers are not accompanied by family members. As national borders have become more permeable, organizations have also looked to international commuters, who travel from their home country to a host country on a regular (e.g., weekly or biweekly) basis, as an alternate and more cost-effective form of global work (Mayrhofer et al., 2008). Organizations also offer global work opportunities that do not require international travel. With advances in technology, global virtual teams, which comprise members who are geographically dispersed and who communicate mainly through information and communication technologies to work together on tasks/projects (Maznevski et al., 2006), have become more commonplace; and, this trend has accelerated since the Covid-19 pandemic restricted travel. Within organizations, global

domestics are employees who, except for an occasional international business trip, remain in their home country but have jobs that require them to interact with individuals, such as suppliers and customers, in other countries. While the various global work roles described above are common across multinational corporations, other types of international organizations have global work roles that are unique to their institutions (Suutari et al., 2018). For example, organizations such as the United Nations and embassies employ international civil servants, who tend to have long-term international assignments that are frequently back-to-back. For these employees, commitment to a global career is a requirement for career success. Others who tend to have unique global work experiences include airline and cruise ship employees, missionaries, as well as military personnel. For some of these employees, their global work represents a calling or lifetime commitment; for others, it is only a portion of their overall career trajectory. In addition to global work roles within the context of international organizations, many global work experiences are initiated by individuals themselves. Self-initiated expatriates, on their own, relocate to a country of their choice to work with either a local or international organization. These global employees are generally motivated to enjoy cultural, personal, and career development experiences, and the move is usually temporary, lacking a specified timeframe (Tharenou, 2015). Recently, more attention is being paid to international immigrant employees who leave their country of origin to relocate permanently to a destination country (Harrison et al., 2021). International immigrants range from unskilled to professional workers, with many immigrants founding their own businesses. Another group of self-initiated global workers that is garnering increased research attention is global digital nomads, remote workers who travel to one or more different global locations and use modern technology to work (Nash et al., 2021). To better understand how the nature and type of these various global work experiences play an important role in the career decisions and career outcomes of employees, Shaffer and colleagues (2012) mapped global work experiences along three dimensions: physical mobility (i.e., international travel), cogni-

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tive flexibility, and non-work disruptions. International travel refers to the degree to which the work role requires an employee to cross national borders. Cognitive flexibility captures the extent to which the global work experience requires changes in thought patterns when interacting with culturally diverse others and meeting uncertain and complex cross-cultural demands. Non-work disruption is defined as the extent to which the work role interferes with the employee’s normal activities and routines outside of work. While this taxonomy of global work experiences provides important insights into understanding the necessary individual characteristics and the challenges associated with different types of global work, it does not fully capture dynamic interplay between global work experiences, individual employees themselves, and international organizations. Recognizing the increasing complexities of global careers in an often unpredictable and turbulent global environment, efforts have been made to advance a future research agenda that adopts a dynamic, systems-focused and context-sensitive view of global careers (Baruch et al., 2016). Mayrhofer and colleagues (2020) proposed three critical foundations for research on global careers. The first foundation has to do with contextualizing careers research by taking into consideration not only the individual employee but also the spatial (both country and organization) and temporal features of careers. The second foundation has to do with comparative studies across national contexts. Large-scale comparative studies are needed to understand what is meant by global career success and the role of different institutional environmental forces. The collaborative research effort across 25 countries under the 5C project is an example of such a cross-cultural careers study (Lazarova et al., 2018). The third foundation recognizes the importance of non-traditional forms of global work experiences that extend beyond the multinational corporation. Given differences between for-profit and non-profit organizations as well as differences in the motivations and experiences of global employees within these contexts, global careers research will benefit from more attention to non-traditional

global work experiences and comparisons of these with more traditional forms. Margaret A. Shaffer and Mihaela Dimitrova

References

Baruch, Y., Altman, Y., & Tung, R. L. (2016). Career mobility in a global era: Advances in managing expatriation and repatriation. Academy of Management Annals, 10(1), 841–889. Feldman, D. C. (1991). Repatriate moves as career transitions. Human Resource Management Review, 1(3), 163–178. Harrison, D. A., Harrison, T., & Shaffer, M. A., (2021). HRM challenges for immigrant employees: Status-laden transitions across cultures and workplace social environments. In M. R. Buckley, J. R. G. Halbesleben, A. R. Wheeler, & J. E. Baur (Eds.), Research in personnel and human resource management. Elsevier. Harrison, D. A., Shaffer, M. A., & Bhaskar-Shrinivas, P. (2004). Going places: Roads more and less traveled in research on expatriate experiences. In J. Martocchio (Ed.), Research in personnel and human resources management (pp. 199–248). Emerald Group Publishing Limited. Lazarova, M., Mayrhofer, W., Briscoe, J., Dickmann, M., Hall, D. T., & Parry, E. (2018). Comparative career studies: Conceptual issues and empirical results. In C. Brewster, W. Mayrhofer, & E. Farndale (Eds.), Handbook of research on comparative human resource management (pp. 257–282). Edward Elgar Publishing. Mayrhofer, W., Smale, A., Briscoe, J., Dickmann, M., & Parry, E. (2020). Laying the foundations of international careers research. Human Resource Management Journal, 30(3), 327–342. Mayrhofer, W., Sparrow, P., & Zimmermann, A. (2008). Modern forms of international working. In M. Dickmann, C. Brewster & P. Sparrow (Eds.), International human resource management: A European perspective (pp. 219–239). Routledge. Maznevski, M., Davison, S. C., & Jonsen, K. (2006). Global virtual team dynamics and effectiveness. In G. Stahl & I. Björkman (Eds.), Handbook of research in international human resource management (pp. 364–384). Edward Elgar Publishing. McKouen, K., Shaffer, M. A., & Reiche, B. S. (2019). From global work experiences to global careers: A review and future research agenda. In H. Guntz, W. Mayrhofer & M. Lazarova (Eds.), Handbook of global careers: Routledge

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Global careers  117 companion to career studies (pp. 310–327). Routledge. Nash, C., Jarrahi, M. H., & Sutherland, W. (2021). Nomadic work and location independence: The role of space in shaping the work of digital nomads. Human Behavior and Emerging Technologies, 3(2), 271–282. Shaffer, M. A., Kraimer, M. L., Chen, Y. P., & Bolino, M. C. (2012). Choices, challenges, and career consequences of global work experi-

ences: A review and future agenda. Journal of Management, 38(4), 1282–1327. Suutari, V., Brewster, C., & Dickmann, M. (2018). Contrasting assigned expatriates and self-initiated expatriates: A review of extant research and a future research agenda. In M. Dickmann, V. Suutari, & O. Wurtz (Eds.), The management of global careers (pp. 63–89). Palgrave. Tharenou, P. (2015). Researching expatriate types: The quest for rigorous methodological approaches. Human Resource Management Journal, 25(2), 149–165.

Margaret A. Shaffer and Mihaela Dimitrova

31. Global cities In response to technological advancements, the reduction in the costs of transportation and communication, and the deregulation of trade and investment (Buckley & Strange, 2015), multinational corporations (MNC) have dispersed their operations around the world (Goerzen & Beamish, 2005; Goerzen, 2007). Yet, a counterintuitive aspect of the process of globalization is that, rather than a balanced distribution of economic activity, particular locations seem to continue to attract much greater attention (Sassen, 2001; Storper & Scott, 2009). Chakravarty (2019), for example, found that over 50 percent of MNC operations were located in 23 global cities. Similarly, Beaudouin, Missoffe, and Scheidhauer (2018) indicated that a group of 35 global cities received as much as 45 percent of global investment. Further, Goerzen, Asmussen, and Nielsen (2013) indicated that 35 percent of MNC investment was centered on just 10 global cities, with 77 percent of that investment located in 55 global cities. These empirical results on the overwhelming preference for global cities as sites of foreign direct investment (FDI) are initially surprising since the information and communication technologies that earlier were predicted to diminish the importance of location appear, instead, to have enhanced it (Sassen, 2002). This observation has led to greater interest in the spaces and places of investment activity, with a focus on particular subnational locations such as regions and, more specifically, certain cities. In particular, large cities have become of interest across a variety of disciplines as their central roles of command and control in the global economy become increasingly evident (Cohen, 1981; Friedmann, 1986; Sassen, 1991). Research on large urban agglomerations such as cities can be divided into two perspectives: one functional and the other demographic (Beaverstock, Smith, & Taylor, 1999). The demographic approach considers the socio-political and environmental aspects of large populations in “mega-cities” (Gilbert, 1996). On the other hand, the functional approach considers the special characteristics of particular city typologies, often labelled as “world” or “global” cities (Friedmann, 1986; Sassen, 1991).

From a functional approach, the definition of global cities is a considerable literature, converging primarily on two perspectives. One is the “corporate organization” view that uses indicators such as the presence of advanced producer services (APS), which includes advertising, accounting, finance, and legal firms to create global city rankings (Beaverstock, Doel, Hubbard, & Taylor, 2002; Derudder & Taylor, 2005). The second view conceptualizes global cities through an “infrastructure” perspective by using indicators such as maritime, air, railway transportation as well as telecommunications (e.g., Cheng & LeGates, 2018; Otiso, Derudder, Bassens, Devriendt, & Witlox, 2011). These two perspectives were combined by the Globalization and World Cities (GaWC) Network project that put forward a validated global city hierarchy (Beaverstock et al., 1999; Taylor, 2001, 2005). Whereas the GaWC approach to global city identification has been used extensively by researchers, it also has its critics. Subsequent authors (e.g., Bassens, Derudder, & Witlox, 2011; Chubarov & Brooker, 2013) have suggested that this hierarchy is biased towards western, capitalist economies. Others have suggested that a more inclusive view on global cities is necessary that would take into account additional indicators of “globalness” (Boschken, 2008). More recent work has begun to examine alternative global city indicators that range in breadth and scope, such as the Mori Memorial Foundation’s Global Power City Index, MasterCard’s Global Power List, and A.T. Kearney’s Global Cities List, which consider complementary factors such as livability and the ease of doing business (e.g., Belderbos, Du, & Goerzen, 2017; Parnreiter, 2019). The research stream on global cities such as Tokyo, London, and New York has shown that these places are noticeably preeminent sites for MNC location choices, attracting a disproportionate share of global investment. Thus, in a virtuous cycle of mutual reinforcement (see Figure 31.1), global cities continue to rise as key actors in the process of economic globalization as they provide unique spaces for production as well as major avenues for critical resources required by MNCs to establish and operate their globally dispersed organizations (Chakravarty, Goerzen, Musteen, & Ahsan, 2021). Taken together, the stream of research on global

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Figure 31.1

Virtuous relationship between global cities and MNC investment

cities has converged on three key attributes that define them, including (1) the agglomeration of APS to facilitate the international FDI growth and operation of MNCs, (2) an extensive interconnectedness to both local/ national as well as global markets, and (3) a cosmopolitan atmosphere that derives both from their founding conditions as well as their continued evolution as high-status locations (Goerzen et al., 2013). The rich and longstanding literature on global cities in economic geography and urban studies also points to other important aspects of global cities. One is that global cities appear to be becoming more independent from the influence of their own nation-states (Alfasi & Fenster, 2005). Moreover, global cities such as London, New York, and Tokyo seem to have formed an economic stratum that is becoming disassociated from their own countries (Jacobs, 2016). In this way, global cities become unique subnational places with institutional environments that are distinct from their national compatriots. This observation has important implications for MNC location strategies given that the municipal governments of global cities would control significant resources and are likely to develop and implement policies, independent of their national governments, that attract MNCs and incentivize FDI (Alfasi & Fenster, 2005; Ma & Delios, 2007). Another important aspect is that, as global cities appear to evolve along similar development paths (i.e., APS, international connectedness, and cosmopolitanism), it appears that they are becoming more alike across a number of indicators (Bretagnolle & Pumain, 2010).

These greater resemblances are, in part, the result of physical and virtual interconnectedness via interfirm networks, physical infrastructure, as well as national and local institutions (Liu, Derudder, & García, 2013). Moreover, the socioeconomic and political convergence of global cities appears also to be related to the migration of transnational elites (i.e., usually highly mobile and skilled individuals) who import and/or adopt a “global city culture,” which is often understood as being a cosmopolitan, open, tolerant mindset (Beaverstock, 2002; Sassen, 1991). Based on these observations, global cities appear to form a global network of urbanized spaces with emergent attributes that do not emanate solely from agglomeration and are likely to remain critical places within the ongoing process of economic globalization. Anthony Goerzen

References

Alfasi, N. & Fenster, T. 2005. A tale of two cities: Jerusalem and Tel Aviv in an age of globalization. Cities, 22: 351–363. Bassens, D., Derudder, B., & Witlox, F. 2011. Setting Shari’a standards: On the role, power and spatialities of interlocking Shari’a boards in Islamic financial services. Geoforum, 42: 94–103. Beaudouin, N., Missoffe, A., & Scheidhauer, C. 2018. Global cities investment monitor: New rankings, trends and criteria. Paris: KPMG. Beaverstock, J. 2002. Transnational elites in global cities: British expatriates in Singapore’s financial district. Geoforum, 33: 525–538. Beaverstock, J., Doel, M., Hubbard, P., & Taylor, P. 2002. Attending to the world: Competition,

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120  Encyclopedia of international strategic management cooperation and connectivity in the World City network. Global Networks, 2: 111–132. Beaverstock, J., Smith, R., & Taylor, P. 1999. A roster of world cities. Cities, 6: 445–458. Belderbos, R., Du, H., & Goerzen, A. 2017. Global cities, connectivity, and the location choice of MNC regional headquarters. Journal of Management Studies, 54: 1271–1302. Boschken, H. 2008. A multiple-perspectives construct of the American global city. Urban Studies, 45: 3–28. Bretagnolle, A. & Pumain, D. 2010. Simulating urban networks through multiscalar space-time dynamics: Europe and the United States, 17th–20th centuries. Urban Studies, 47: 2819–2839. Buckley, P. & Strange, R. 2015. The governance of the global factory: Location and control of world economic activity. Academy of Management Perspectives, 29: 237–249. Chakravarty, D. 2019. Foreign direct investment in global cities and co-ethnic clusters: Characteristics, performance, and survival. Academy of International Business Insights, 19(3): 7–11. Chakravarty, D., Goerzen, A., Musteen, M., & Ahsan, M. 2021. Global cities: A multi-disciplinary review and research agenda. Journal of World Business, 56(3): 101182. Cheng, Y. & LeGates, R. 2018. China’s hybrid global city region pathway: Evidence from the Yangtze River Delta. Cities, 77: 81–91. Chubarov, I. & Brooker, D. 2013. Multiple pathways to global city formation: A functional approach and review of recent evidence in China. Cities, 35: 181–189. Cohen, R. 1981. The new international division of labour, multinational corporations and urban hierarchy. pp. 287–315. In Dear, M. & Scott, A. (Eds.). Urbanisation and urban planning in capitalist society. London: Methuen. Derudder, B. & Taylor, P. 2005. The cliquishness of world cities. Global Networks, 5: 71–91. Friedmann, J. 1986. The world city hypothesis. Development and Change, 17: 69–83. Gilbert, A. 1996. The mega-city in Latin America. Tokyo: United Nations University Press. Goerzen, A. & Beamish, P. 2005. Patterns of change in Japanese investment in Canada. Ivey Business Journal (April/May). Goerzen, A. 2007. Global cities and multinational corporation investment. pp. 229–244.

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In Tallman, S. (Ed.). International Strategic Management: A New Generation. Cheltenham: Edward Elgar Publishing. Goerzen, A., Asmussen, C., & Nielsen, B. 2013. Global cities and multinational enterprise location strategy. Journal of International Business Studies, 44: 427–450. Jacobs, A. 2016. The city as the Nexus model: bridging the state, market, societal, and geospatial contexts. Cities, 51: 84–95. Liu, X., Derudder, B., & García, C. 2013. Exploring the co-evolution of the geographies of air transport aviation and corporate networks. Journal of Transport Geography, 30: 26–36. Ma, X. & Delios, A. 2007. A new tale of two cities: Japanese FDIs in Shanghai and Beijing, 1979–2003. International Business Review, 16: 207–228. Otiso, K., Derudder, B., Bassens, D., Devriendt, L., & Witlox, F. 2011. Airline connectivity as a measure of the globalization of African cities. Applied Geography, 31: 609–620. Parnreiter, C. 2019. Global cities and the geographical transfer of value. Urban Studies, 56: 81–96. Sassen, S. 1991. The global city: New York, London, Tokyo. Princeton: Princeton University Press. Sassen, S. 2001. The global city: New York, London, Tokyo. Princeton: Princeton University Press. Sassen, S. 2002. Global networks, linked cities. London: Routledge. Storper, M. & Scott, A. 2009. Rethinking human capital, creativity and urban growth. Journal of Economic Geography, 9: 147–167. Taylor, P. 2001. Specification of the world city network. Geographical Analysis, 33: 181–194. Taylor, P. 2005. Leading world cities: Empirical evaluations of urban nodes in multiple networks. Urban Studies, 42: 1593–1608.

32. The global factory The global factory concept describes the organisation of contemporary international production systems characterised by task fragmentation, global dispersion of operations, participation of partner organisations, and coordination by a lead firm, often a multinational enterprise (Buckley 2011). Global factory structures reflect organisational evolution: they utilise leading-edge technologies to exploit extreme specialisation, locational advantage, and effective coordination to minimise costs while retaining control of critical competitive capabilities. The evolution of the global factory system reflects underlying changes in the international business environment. An era of economic liberalisation significantly increased locational choice, in particular the growing integration of emerging markets. Technological change enabled the fragmentation of specific tasks and the monitoring and control of value adding in diverse locations. Transport and logistics revolutions massively reduced the costs of reintegrating fragmented and dispersed production activities. Extreme specialisation was encouraged by the development of highly competent outside suppliers and contract manufacturers as a global market for transactions emerged (Liesch et al. 2012). Lower transaction costs resulting from global economic integration, pro-business government attitudes in many parts of the world, and growing confidence in intellectual property protection and the rule of law encouraged the outsourcing of non-key tasks to network partners. The result was the growth of networked international production systems characterised by the combination of tasks undertaken both in-house and through externalised contractual relationships, coordinated by a lead firm. Global factory structures offer significant strategic advantages in terms of cost, flexibility and the creation of competitive assets. Organisationally, the global factory optimises its value chain through the selective outsourcing of non-key tasks (assembly, logistics, applied marketing such as advertising), while controlling flows of information (market knowledge, innovation, etc.) through internalisation, providing global control with a level of local market responsiveness. Locational choices and shifts provide least-cost config-

urations with options for flexibility. Further flexibility is provided by choice of control modes: tasks can shift from in-house (make), to external providers (buy), managed through an array of contractual forms (Gereffi et al. 2006). The development of firm-specific capabilities in reintegrating dispersed value chains provides further opportunities for the lead firm to create advantages difficult for others to emulate. In essence, the MNE has progressed from a monolithic, hierarchically based and singular form to a firm–market networked structure controlling, but not necessarily owning, activities orchestrated to produce a value chain. Further flexibility and cost competitiveness result from the development of asset-light strategies that the global factory pursues. Contracting-out for assembly, production or business services reduces the commitment that the firm makes in investment, asset accumulation, and working capital, enabling rapid changes in product lines, supply sources and output levels in the face of changing conditions. The global factory approach builds on, and develops, work on global value chains (Ponte and Sturgeon 2014). While value chain theory highlights the role of the lead firm as a buyer, the global factory approach emphasises its role in coordinating cross-border transactions. This highlights the importance of strategic factors such as flexibility, quality and resilience, and not simply cost, in the choice of governance mode. Similarly, the global factory model distinguishes goods flows (which may be outsourced), from critical information flows that are generally proprietary to the firm. The growing value of “big data” and consumer analytics highlights the value of this distinction. The conceptualisation of the global factory also refines views on value capture along production chains. Where the global factory selects contractors not simply on cost, but also values flexible production or the rapid deployment of resources, value capture is more than a zero-sum game: value contribution in the form of quality, consistency or innovation may also be sought by the lead firm. This insight highlights the mutual gains of chain upgrading despite the costs that both parties might face (Gereffi and Lee 2016). The changes that characterise the global factory are fundamental, creating a need for new strategic management skills.

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Geographical dispersion of activities produces several gaps that must be bridged: spatial distance creates challenges in culture, language, trust, and institutional understanding. Effective communication is also likely to be impeded with specialisation splintering expertise, as well as creating more points of contact. Key sources of information may be more difficult to identify and verify, goal divergence between network members is likely, and compliance must be negotiated rather than being enforced through managerial fiat. Coordination within the global factory requires new skills. The ability to determine task fragmentation or fine-slicing combines both technological and commercial know-how, areas that some functionally trained managers may not possess. Global factory operations involve the management of both internal and external flows of goods and services, and such exchange is likely to be more diverse, encompassing knowledge, technology, people, and both intermediate and final goods and services. The terms of such trade must also be managed utilising both market and shadow prices. The effective management of such a mix of activities is likely to require an enabling management approach. The role of the organisation’s headquarters is likely to increase within a global factory system since they are crucial to key decisions on location and control, with knowledge management also central at this level. At

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the same time, responsibility for managing partner relations must be devolved to subsidiary managers, who play a vital role in ensuring the repatriation of critical knowledge from affiliate and partner ventures. Asset management approaches are also impacted in a global factory structure. While the ownership of productive capacity may decrease through outsourcing, the stock of intangible assets (innovation, brand equity, etc.) increases and is deeply embedded within the firm. They offer a sustainable source of advantage difficult for competitors to emulate. Peter Enderwick

References

Buckley, P.J. (2011) International integration and coordination in the global factory. Management International Review 51(2): 269–283. Gereffi, G., Humphrey, J., and T. Sturgeon (2006) The governance of global value chains. Review of International Political Economy 92(1): 78–104. Gereffi, G., and J. Lee (2016) Economic and social upgrading in global value chains and industrial clusters: why governance matters. Journal of Business Ethics 133(1): 25–38. Liesch, P., Buckley, P.J., Simonin, B.L., and G. Knight (2012) Organizing the modern firm in the worldwide market for market transactions. Management International Review 52(1): 3–21. Ponte, S., and T. Sturgeon (2014) Explaining governance in global value chains: a modular theory-building effort. Review of International Political Economy 21(1): 195–223.

33. Global leadership The world of business continues to rapidly globalize, as witnessed by the unprecedented growth in international trade and international connectedness, despite the rise of cultural nationalism and economic protectionism (Altman & Bastian, 2022; Brooks, 2022; Contractor, 2022). The field of global leadership has emerged alongside these developments as researchers have endeavored to explore challenges facing corporations as they pursue market opportunities around the world (Mendenhall, Reiche, Bird, & Osland, 2012). The underlying premise of this research is that global work has unique features that distinguish it from domestic work. Perhaps most challenging is that global leaders need to influence, motivate and collaborate with individuals and groups in different parts of the world that have diverse values, beliefs and leadership expectations (Posner, 2013). In the next section, we review alternative research approaches in the global leadership literature. Compared with scholarship to develop theoretical models and frameworks of global leadership, there has been little empirical research on global leadership at a global level (cf. Park, Jeong, Jang, Yoon, & Lim, 2018; Rickley & Stackhouse, 2022). One exception is the large-scale, multi-society, multi-phase GLOBE research project (globeproject.com). Hence, we provide an overview of GLOBE project findings that relate to global leadership.

Conceptualizing global leadership

In the global leadership literature, there are three primary approaches to delineating the global leadership construct: antecedents of global leadership; global leadership as an influence process; and global leadership effectiveness. The antecedents approach focuses on identifying global leadership competencies, pre-dispositional characteristics such as personality, attitudes, cognitive capabilities, knowledge bases, and motivations (Bird & Mendenhall, 2016). The list of global leadership competencies is long, with Bird (2013) cataloguing 160 competencies in this literature. Javidan, Teagarden, and Bowen (2010) proposed that global mindset is an umbrella concept that includes intellectual,

psychological, and behavioral characteristics. A subsequent review (Park et al., 2018) delineated five primary themes in global leadership competency models: intercultural; interpersonal; global; change and vision; personal traits and values. Although Park et al. (2018) found that Western perspectives are prevalent in global leadership competency models, their review of limited indigenous leadership research revealed ethics and openness/flexibility as additional culture-specific global leadership competencies. Another approach focuses on global leadership as an influence process. This is reflected in Reiche, Bird, Mendenhall and Osland’s (2017: 556) definition of global leadership as: “the processes and actions through which an individual influences a range of internal and external constituents from multiple national cultures and jurisdictions in a context characterized by significant levels of task and relationship complexity.” In global roles, task complexity refers to the context and conditions such as institutional structures within which global leaders perform their roles; while relationship complexity refers to the nature of specific relationships, such as social network structure, that are critical to global leaders’ success. Reiche et al. (2017) then use these two complexity dimensions to construct a typology of global leadership roles: integrative (high relationship and high task complexity), connective (high relationship and low task complexity), operational (low relationship and high task complexity), and incremental (low relationship and low task complexity). To illustrate the nature of these complexities, Table 33.1 shows a real-life typical day agenda for a German female executive who is in charge of a U.S.-headquartered company’s businesses in the Middle East and North Africa (MENA) with overall revenues of over $3 billion. Based in her hometown of Frankfurt, Germany, her global team of direct reports consists of 16 executives in 10 countries. The agenda shows the types of task and relationship complexity that this global leader deals with on a daily basis as she manages herself and others towards a positive future state. Examples of task complexity include the need to understand political, regulatory, cultural, and other contextual conditions in Egypt and UAE. Examples of relationship complexity include the need to build and

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A global leader’s typical day

07:00 – 08:00

Videoconference with the global team

08:00 – 09:00

Review of the proposal for a cross-border acquisition in Egypt

09:45 – 11:00

Meet with representatives of the UAE Government in Frankfurt to present plans for expansion there

11:30 – 12:30

Videoconference with the senior leadership of the largest client in the region

13:00 – 14:00

Lunch with the local head of the bank offering financial support

14:30 – 15:30

Meeting with the HR team to finalize a new employee engagement plan in the region

15:30 – 16:30

Budgeting meeting with three key groups in the region

16:30 – 17:30

Videoconference with global headquarters to receive an update on global strategy

17:30 – 18:30

Video townhall meeting with 250 managers and professionals in the region

19:00 – 20:30

Dinner with the head of the company’s largest supplier in the region

motivate global teams and build strong relationships with clients, suppliers and creditors located in different parts of the world. In terms of Reiche et al.’s (2017) typology, this executive is in an integrative global leadership role that has both high relationship and high task complexity. A third approach in this literature focuses on global leadership effectiveness, which has been defined as follows: “Global leadership effectiveness is the extent to which a leader is able to influence constituents from multiple national cultures given the contextual demands faced in his or her role toward achievement of individual, group, and organizational objectives” (Rickley & Stackhouse, 2022: 105). This definition highlights how a core element of global leadership effectiveness is a leader’s capability to influence at multiple levels in ways that are responsive to unique (and sometimes conflicting) expectations and requirements of various societal contexts. Based on the limited empirical research on global leadership effectiveness to date (Rickley & Stackhouse, 2022), effectiveness in global leadership roles includes: behaviors and characteristics such as building trusting relationships with people from other cultures (Javidan, Waldman, & Wang, 2021); influencing stakeholders (Szymanski & Kalra, 2021); performance in leadership tasks (Caligiuri & Tarique, 2009); and impact on followers (Liu, Jiang, Chen, Pan, & Lin, 2018). Javidan et al. (2021) recently showed that individual differences are not the only drivers of leadership effectiveness; the broader context in terms of the context of the global role and the context of the individual leader’s upbringing also plays an important tole.

GLOBE research program: A 30-year journey to understand global complexities

The GLOBE project (globeproject.com) is a multi-phase research study focused on two critical drivers of complexity and diversity: national culture and leadership ideals (i.e., behaviors or characteristics that inhibit and contribute to being an outstanding leader). Consistent with other conceptualizations of global leadership and effectiveness (e.g., Reiche et al., 2017; Rickley & Stackhouse, 2022), the GLOBE definition of leadership is “the ability of an individual to influence, motivate and enable others to contribute toward the effectiveness and success of the organizations of which they are members” (House et al., 2014: 17). Started in the early 1990’s, the GLOBE 2004 phase (House, Hanges, Javidan, Dorfman, & Gupta, 2004) is now considered a landmark study of societal cultures and prototypes of effective leadership (Lord, Epitropaki, Foti & Hansbrough, 2020). This research developed measures of six global leadership dimensions and nine dimensions of cultural practices and values in 62 societies (with over 17,000 middle manager participants). Some noteworthy findings were that of the 112 leadership attributes assessed, 20 were universally rated as positive (e.g., trustworthy, decisive), 9 were universally rated as negative (e.g., loner, dictatorial), and 37 were culturally specific (e.g., cautious, cunning). GLOBE 2014, the third phase of the GLOBE project, was the first large-scale study of CEOs and top management team members across cultures and countries (House, Dorfman, Javidan, Hanges, & de Luque, 2014). Based on data from over 1,000 CEOs and over 5,000 senior executives in

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24 countries, this study found that cultural values do not directly predict CEO leadership behavior. Instead, cultural values predict the kinds of leadership attributes and characteristics that are especially valued and expected in a society, and these in turn were directly related to the actual leadership behaviors enacted. While the overall fit between leadership expectations and CEO leadership behavior predicts success, this study also found that CEOs with superior performance exceeded their cultures’ expectations, while CEOs with inferior performance fell substantially short of societal expectations. GLOBE 2020 is the latest phase that focuses on cultural practices, leadership ideals, and bases of trust. Data collection involving over 52,000 managers and professionals in 144 countries/societies has been recently completed. This phase will further investigate and clarify how cultural context influences the attitudes and behaviors necessary for successful global leadership. This will involve: (a) mapping the cultural practices of 144 countries/societies, including areas of the world infrequently studied (e.g., Middle East and North Africa, sub-Saharan Africa); (b) determining the drivers of culture change; (c), investigating levels of individual, organizational and societal trust and how these manifest in diverse nations; and (d) determining how ideal leadership can be conceptualized and practiced so that leaders can target behaviors that exceed cultural expectations and thus excel in global environments while managing themselves and their organizations’ future in the midst of relationship and task complexities.

Conclusion

At its core, global leadership involves navigating task and relationship complexity while managing and leveraging diversity of thought and action driven by differences in the cultural and institutional systems that exist across countries. Global leaders need to influence diverse stakeholders across a variety of societal contexts. They need to lead global teams whose members are likely to have diverse expectations from their leaders. They also need to work in environments that represent a wide variety of cultural values and practices. There is evidence that leaders who excel in global leadership roles are quite

likely to succeed in domestic roles due to their ability to leverage diversity of thought and action regardless of its source. However, success in domestic roles is not a guarantee of effectiveness in global roles. Mansour Javidan, Rick Cotton, Amanda Bullough, Peter W. Dorfman, Medha Satish Kumar and Carolyn P. Egri

References

Altman, S. A., & Bastian, C. R. 2022. The state of globalization in 2022. Harvard Business Review, Digital Article, April 12. https://​ hbr​ .org/​2022/​04/​the​-state​-of​-globalization​-in​-2022 Accessed February 1, 2023. Bird, A. 2013. Mapping the content domain of global leadership competencies. In M. E. Mendenhall, J. S. Osland, A. Bird, G. R. Oddue, & M. L. Masnevski (Eds.), Global leadership: Research, practice, and development. London/ New York: Routledge. Bird, A., & Mendenhall, M. E. 2016. From cross-cultural management to global leadership: Evolution and adaptation. Journal of World Business, 51(1): 115–126. Brooks, D. 2022. Globalization is over. The global culture wars have begun. The New York Times, April 8. https://​www​.nytimes​.com/​2022/​04/​08/​ opinion/​globalization​-global​-culture​-war​.html Accessed June 13, 2022. Caligiuri, P., & Tarique, I. 2009. Predicting effectiveness in global leadership activities. Journal of World Business, 44(3): 336–346. Contractor, F. J. 2022. The world economy will need even more globalization in the post-pandemic 2021 decade. Journal of International Business Studies, 53(1): 156–171. House, R. J., Dorfman, P. W., Javidan, M., Hanges, P. J., & De Luque, M. F. S. 2014. Strategic leadership across cultures: GLOBE study of CEO leadership behavior and effectiveness in 24 countries. Thousand Oaks, CA: Sage. House, R. J., Hanges, P. W., Javidan, M., Dorfman, D., & Gupta, V. (Eds). 2004. Culture, leadership, and organizations: The GLOBE study of 62 societies. Thousand Oaks, CA: Sage. Javidan, M., Teagarden, M., & Bowen, D. 2010. Making it overseas. Harvard Business Review, 88(4): 109–113. Javidan, M., Waldman, D. A., & Wang. D. 2021. How life experiences and cultural context matter: A multilevel framework of global leader effectiveness. Journal of Management Studies, 58(5): 1331–1362. Liu, S., Jiang, K., Chen, J., Pan, J., & Lin, X. 2018. Linking employee boundary spanning behavior to task performance: The influence of informal leader emergence and group power distance.

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126  Encyclopedia of international strategic management International Journal of Human Resource Management, 29(12): 1879–1899. Lord, R. G., Epitropaki, O., Foti, R. J., & Hansbrough, T. K. 2020. Implicit leadership theories, implicit followership theories, and dynamic processing of leadership information. Annual Review of Organizational Psychology and Organizational Behavior, 7: 49–74. Mendenhall, M. E., Reiche, B. S., Bird, A., & Osland, J. S. 2012. Defining the “global” in global leadership. Journal of World Business, 47(4): 493–503. Park, S., Jeong, S., Jang, S., Yoon, S. W., & Lim, D. H. 2018. Critical review of global leadership literature: Toward an integrative global leadership framework. Human Resource Development Review, 17(1): 95–120. Posner, B. Z. 2013. It’s how leaders behave that matters, not where they are from. Leadership

& Organization Development Journal, 34(6): 573–587. Reiche, B., Bird, A., Mendenhall, M., & Osland, J. 2017. Contextualizing leadership: A typology of global leadership roles. Journal of International Business Studies, 48: 552–572. Rickley, M., & Stackhouse, M. 2022. Global leadership effectiveness: A multilevel review and exploration of the construct domain. Advances in Global Leadership, 14: 87–123. Szymanski, M., & Kalra, K. 2021. Performance effects of interaction between multicultural managers and multicultural team members: Evidence from elite football competitions. Thunderbird International Business Review, 63(2): 235–251.

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34. Global mindset Practitioners and academics agree that the present-day competitive landscape requires decision-makers to have a variety of skills and attributes to successfully navigate organizations in a globalized environment (Le, Ling, & Yau, 2018; Levy et al., 2007). In this context, researchers commonly use the term global mindset: the capacity to develop and interpret criteria for personal and business performance that are independent from the assumptions of a single country, culture, or context; and to implement those criteria appropriately in different countries, cultures, and contexts (Lane & Maznevski, 2019). Despite its broad popularity in academia and practice (Hruby et al., 2018), however, there is surprisingly little agreement on what exactly constitutes a global mindset (Andresen & Bergdolt, 2017). A review of the relevant literature reveals that most researchers conceptualize it as the capacity to manage two salient dimensions of the global environment: (1) Cultural and national diversity; and (2) the strategic complexity arising from an increasingly globalized world (Beechler & Javidan, 2007; Levy et al., 2007). The former conceptualization, which is referred to as the cultural perspective, is based on an early typology by Perlmutter (1969) that distinguishes between ethnocentric, polycentric, and geocentric companies. Ethnocentric companies are characterized by centralized authority in the headquarters, the application of home-country standards also in foreign subsidiaries, and the development of home-country employees for key positions worldwide. By contrast, polycentric enterprises distribute decision-making power relatively evenly between headquarters and foreign subsidiaries, and key organizational structures, such as evaluation, incentive systems, or staffing, are determined locally. Finally, geocentric companies – that build the foundation of the cultural perspective on global mindset – are characterized by headquarters and subsidiaries viewing themselves as parts of one global entity with ideas flowing freely from any country to any other country within the firm following both universal and local standards (Perlmutter, 1969). Consequently, the cultural perspective on global mindset highlights the importance of crossing national borders, interacting with

people from many different countries, as well as recognizing and managing cultural diversity (Beechler & Javidan, 2007). The strategic perspective, on the other hand, goes back to Bartlett and Ghoshal’s (1989) description of a “transnational mindset.” They state that people with such a mindset recognize the need for a simultaneous local and global viewing of organizational problems and for the development of multiple strategic capabilities in a globalized world. The resulting research stream in the area of international management focuses on the high cognitive and information processing capabilities that are necessary to navigate globalization complexities. According to this strategic perspective, the core skills of a global mindset include balancing between competing demands (Begley & Boyd, 2003), understanding complex global dynamics (Jeannet, 2000), reconciling tensions between local and global concerns (Arora et al., 2004), and integrating strategies across cultures and markets (Gupta & Govindarajan, 2002). To identify the components of a global mindset, researchers have developed different, mostly overlapping models, two of which are particularly popular in the literature (Osland, Bird, & Mendenhall, 2012). The first model, by Levy et al. (2007), establishes two underlying constructs of a global mindset: cognitive complexity and cosmopolitanism. While cognitive complexity refers to a person’s ability to generate several competing interpretations of events and their effects, cosmopolitanism describes a general openness and orientation towards the outside world (Levy et al., 2007). The second model comes from Beechler and Javidan (2007) and identifies the critical components of a global mindset as intellectual capital, psychological capital, and social capital. Intellectual capital refers to managers’ knowledge of the global industry, the global value network, and the global organization, as well as their cognitive complexity and cultural acumen. Psychological capital includes a positive psychological profile (i.e., self-efficacy, optimism, hope, resiliency), cosmopolitanism, and a passion for cross-cultural and cross-national encounters. Social capital refers to the relationships of a person inside and outside the firm (Beechler & Javidan, 2007). Having a global mindset has become increasingly important for managers of

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organizations to compete effectively in global markets (Hitt & Javidan, 2007). According to Friedman (2006), the new age of globalization is unique in that it goes beyond mere communication and interactions among governments, businesses, and people across the world. Instead, we have seen an impact on deeply ingrained aspects of global societies and an emergence of new political, social, and business models (Friedman, 2006). Consequently, the ways in which managers make sense of their organization in a global environment – their global mindset – is a critical success factor affecting a variety of organizational outcomes (Gupta & Govindarajan, 2002; Kyvik et al., 2013). More specifically, a global mindset can enhance a firm’s competitive advantage (Caproni, Lenway, & Murtha, 1992) and has been found as a key driver of internationalization performance (Nummela, Saarenketo, & Puumalainen, 2004). It holds several advantages for the global firm, including, for instance, lower failure rates of expatriate assignments, a higher alertness to non-traditional entrants into local markets, an early mover advantage in identifying new market opportunities, and more efficient best-practice sharing across global subsidiaries (Gupta, Govindarajan, & Wang, 2008). While some aspects of a global mindset, such as a large portion of cognitive complexity, may be genetic, researchers agree that this mindset can also form over time, and that some contexts are more beneficial to its development than others. Bhagat et al. (2007) develop a model of the evolution of a global mindset distinguishing between industry-specific, organization-specific, and person-specific antecedents within a cultural context. Examples for industry-specific antecedents are a fast product lifecycle, a rapid pace of globalization in an industry, or economic trade blocks. Organization-specific antecedents include, for instance, the organization’s administrative heritage, horizontal coordination mechanisms, and knowledge creation and diffusion. Person-specific antecedents are cosmopolitanism, cognitive complexity, cultural intelligence, universalistic thinking, and a supportive network of family and friends (Bhagat et al., 2007). As this model indicates, there seem to be measures that individuals and organizations can employ to foster the development of a global Sabrina Goestl and Martha Maznevski

mindset (Le, Ling, & Yau, 2018). Yet, the path towards its successful cultivation continues to be elusive (Bohas, Morley, & Kinra, 2021), with limited empirical studies and varying levels of analysis (individual versus organizational). Based on a review of the relevant literature, Osland, Bird, and Mendenhall (2012) hypothesize that a global mindset can be developed by taking formal education courses, undergoing immersive experiences such as expatriate assignments or cross-border teams, holding meetings and locating business unit headquarters in foreign locations, hiring diverse employees and managers, and fostering social networks across cultures. Beechler and Javidan (2007) additionally stress the importance of a valid and reliable form of assessment. Regardless of the deployed measures, an assessment of the current state is crucial to properly measure and enhance the global mindset. Sabrina Goestl and Martha Maznevski

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Andresen, M., & Bergdolt, F. (2017). A systematic literature review on the definitions of global mindset and cultural intelligence – merging two different research streams. The International Journal of Human Resource Management, 28(1), 170–195. https://​doi​.org/​10​.1080/​095​8​5​ 1​92​.2016​.1243568 Arora, A., Jaju, A., Kefalas, A. G., & Perenich, T. (2004). An exploratory analysis of global managerial mindsets: A case of U.S. textile and apparel industry. Journal of International Management, 10(3), 393–411. https://​doi​.org/​ 10​.1016/​j​.intman​.2004​.05​.001 Bartlett, C. A., & Ghoshal, S. (1989). Managing across borders: The transnational solution. Harvard Business School Press. Beechler, S., & Javidan, M. (2007). Leading with a global mindset. In Advances in international management (Vol. 19, pp. 131–170). Emerald Group Publishing Limited. Begley, T. M., & Boyd, D. P. (2003). The need for a corporate global mind-set. MIT Sloan Management Review, 10. Bhagat, R. S., Triandis, H. C., Ram, B. B., Billing, T. K., & Davis, C. A. (2007). On becoming a global manager: A closer look at the opportunities and constraints in the 21st century. In M. Javidan, R. M. Steers, & M. A. Hitt (Eds.), The global mindset (Vol. 19, pp. 191–213). Emerald Group Publishing Limited. https://​doi​.org/​10​ .1016/​S1571​-5027(07)19008​-2 Bohas, A., Morley, M. J., & Kinra, A. (2021). Perlmutter revisited: Revealing the anomic

Global mindset  129 mindset. Journal of International Business Studies, 52(9), 1695–1723. Caproni, P. J., Lenway, S. A., & Murtha, T. P. (1992). Multinational mindsets: Sensemaking capabilities as strategic resources in multinational firms. Division of Research, School of Business Administration, The University of Michigan. Friedman, T. (2006). The world is flat: A brief history of the twenty-first century. Foreign Affairs, 84. https://​doi​.org/​10​.2307/​40204208 Gupta, A. K., & Govindarajan, V. (2002). Cultivating a global mindset. Academy of Management Perspectives, 16(1), 116–126. https://​doi​.org/​10​.5465/​ame​.2002​.6640211 Gupta, A. K., Govindarajan, V., & Wang, H. (2008). The quest for global dominance: Transforming global presence into global competitive advantage. John Wiley & Sons. Hitt, M. A., & Javidan, M. (2007). The global mindset: An introduction. In Advances in international management (Vol. 19, pp. 1–10). Emerald Group Publishing Limited. Hruby, J., de, M. R. J., Samunderu, E., & Hartel, J. (2018). Unpacking the complexities of global mindset: A multi-lens analysis. In Advances in global leadership (Vol. 11, pp. 97–143). Emerald Publishing Limited. https://​doi​.org/​10​ .1108/​S1535​-120320180000011004 Jeannet, J.-P. (2000). Managing with a global mindset. Financial Times. Kyvik, O., Saris, W., Bonet, E., & Felício, J. A. (2013). The internationalization of small firms: The relationship between the global mindset and firms’ internationalization behav-

ior. Journal of International Entrepreneurship, 11(2), 172–195. https://​doi​.org/​10​.1007/​s10843​ -013​-0105​-1 Lane, H. W., & Maznevski, M. L. (2019). International management behavior: Global and sustainable leadership (8th ed.). Cambridge University Press. Le, Q., Ling, T., & Yau, J. (2018). Do international cocurricular activities have an impact on cultivating a global mindset in business school students? Journal of Teaching in International Business, 29(1), 62–75. https://​doi​.org/​10​.1080/​ 08975930​.2018​.1455942 Levy, O., Beechler, S., Taylor, S., & Boyacigiller, N. A. (2007). What we talk about when we talk about “global mindset”: Managerial cognition in multinational corporations. Journal of International Business Studies, 38(2), 231–258. Nummela, N., Saarenketo, S., & Puumalainen, K. (2004). A Global Mindset—A Prerequisite for Successful Internationalization? Canadian Journal of Administrative Sciences/Revue Canadienne Des Sciences de l’Administration, 21(1), 51–64. https://​doi​.org/​10​.1111/​j​.1936​ -4490​.2004​.tb00322​.x Osland, J. S., Bird, A., & Mendenhall, M. (2012). Developing global mindset and global leadership capabilities. In G. Stahl, I. Björkman, & S. Morris, Handbook of research in international human resource management, second edition (p. 14261). Edward Elgar Publishing. https://​ doi​.org/​10​.4337/​9781849809191​.00018 Perlmutter, H. V. (1969). The tortuous evolution of the multinational corporation. The Columbia Journal of World Business, 4(1), 9–18.

Sabrina Goestl and Martha Maznevski

35. Global mobility and firm innovation Introduction

Seminal thinking on innovation proposes that it is the result of recombinations of resources (Schumpeter, 1934). This thinking has led to a focus on the firm as a knowledge processing and managing institution that allows it to create innovations which in turn are critical to its global strategy and competitive advantage (Grant, 1996; Grant and Phene, 2022). Global mobility – defined as the international movement of skilled individuals, particularly scientists and inventors, either as a result of their own or the firm’s initiative – plays a critical role in influencing knowledge processing by the firm.

Challenges posed by global mobility

Global mobility has some negative consequences and poses challenges to realizing the opportunities for firm innovation. The social roots of mobile inventors’ knowledge in their distinctive national and social networks (Saxenian, 2002; Choudhury and Kim, 2019) can make the stock of knowledge of these inventors appear less coherent, consistent and clear to others who may not participate in the same networks (Schütz, 1944). This, then, poses challenges for the firm in managing interactions and knowledge transfers between mobile and non-mobile scientists, with dissonance in understanding and sharing knowledge. Indeed, diversity as a result of participation in different communities and networks appears to hinder the speed of innovation (Choudhury and Haas, 2018). Further, the challenges of these interactions may result in the mobile scientists’ over-reliance on their own networks, harming the quality of their innovation and further undermining firm innovative efforts (Almeida, Phene and Li, 2015). Naturally, these challenges impose costs for the firm in creating an appropriate structure and culture that facilitates and enables exchanges and interactions. Of course, these are in addition to the time and cost investments by the firm in recruiting and deploying mobile inventors across locations, such as navigating immigration requirements and

ensuring adequate support for the inventors and their families, in relocation. Whether at least some of these costs should even be incurred is a question for debate in the context of the Covid-induced shift as firms adopt work-from-anywhere and virtual collaborations (Choudhury, Foroughi and Larson, 2021). In particular, innovations created through global collaboration between inventors located in the U.S. and overseas appear to be as strong as or even better than those that are created through collaborations with inventor teams exclusively located in the U.S. (Kerr and Kerr, 2018). This suggests that benefits conferred by mobility for knowledge creation may be achieved through either virtual mechanisms or through brief mobile encounters that may reduce firm costs.

Opportunities offered by global mobility

At the same time, global mobility influences the opportunities for firm innovation through several mechanisms. It allows for an expansion of the horizons of knowledge search of the firm’s scientists and inventors. Knowledge tends to be less mobile across geographic locations, making it difficult for the firm to access without physical colocation (Jaffe, Trajtenberg and Henderson, 1993; Tallman and Phene, 2007). Mobile inventors offer an alternative to the firm for such knowledge access, by bringing with them knowledge, approaches and perspectives that are unique to their national domains and a result of their participation in distinct social networks, such as through close-knit ethnic communities (Saxenian, 2002; Choudhury and Kim, 2019; Almeida et al, 2015; Marino, Mudambi, Perri and Scalera, 2020). They also increase opportunities for accessing such knowledge by non-mobile inventors by virtue of organizational mechanisms, such as communities of practice or teams that enable interactions with globally mobile inventors, magnifying the gains for the organization. Indeed, the firm can use return migration to increase the innovation of its local scientists in host countries (Choudhury, 2016; Liu, Lu, Filatotchev, Buck and Wright, 2010). As a result, the firm can expand knowledge search by all its scientists, whether mobile or not, and in different locations, through increased global deployments that enable their exposure and access to knowledge

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outside proximate domains, overcoming the constraints of local search. Global mobility not only expands knowledge search but also enhances knowledge creation by the firm. Globally mobile employees can draw attention to, lobby for and gain access to resources from headquarters to support their innovation projects, which may lead the firm to interesting technological opportunities (Choudhury, 2017). Taken together, this expansion of the knowledge search and creation process has implications for the nature and quality of innovation created by the firm. Access to distinctive knowledge enabled by mobility and organizational facilitating mechanisms, as well as a diverse portfolio of innovation projects, enables exploration so that the firm is more likely to engage in breakthrough innovations (Uhlbach and Anckaert, 2021; Phene, Fladmoe-Lindquist and Marsh, 2006). As a result, the organization is able to cultivate a capability in creating innovations that allow it to keep up with technological changes. Further, organizational leveraging of global mobility through the hiring process also confers advantages for the quality of innovation. Research has documented the outsize role played by immigrant inventors from certain ethnic communities, notably Indian and Chinese, in enabling superior innovation in the U.S. (Stephan and Levin, 2001; Kerr, 2013). Firms that recruit these globally mobile inventors can utilize their skills to enhance organizational innovation (Laursen, Leten, Nguyen, Vancauteren, 2020). Mobility also influences firm innovation through consequences for strategic decisions, such as acquisitions, as well as their outcomes. Acquisitions are used by the firm to develop new areas of technological expertise as well as reinforce existing technological capabilities (Phene, Tallman and Almeida, 2012). Firms can harness the ability of its migrant inventors to better identify and integrate knowledge bases of cross-border acquisition targets in the migrant’s home country (Useche, Miguelez and Lissoni, 2020). The firm may therefore be able to derive greater value from acquisitions for innovation, through its pursuit of exploration or exploitation, because of this capability of globally mobile inventors. In sum, global mobility offers contrasting implications for firm innovation, offer-

ing a rich and exciting avenue for further exploration. Anu Phene

References

Almeida, P., Phene, A., & Li, S. (2015). The influence of ethnic community knowledge on Indian inventor innovativeness. Organization Science, 26(1): 198–217. Choudhury, P. (2016). Return migration and geography of innovation in MNEs: A natural experiment of knowledge production by local workers reporting to return migrants. Journal of Economic Geography, 16(3): 585–610. Choudhury, P. (2017). Innovation outcomes in a distributed organization: Intrafirm mobility and access to resources. Organization Science, 28(2): 339–354. Choudhury, P., Foroughi, C., & Larson, B. (2021). Work-from-anywhere: The productivity effects of geographic flexibility. Strategic Management Journal, 42(4): 655–683. Choudhury, P., & Haas, M. R. (2018). Scope versus speed: Team diversity, leader experience, and patenting outcomes for firms. Strategic Management Journal, 39(4): 977–1002. Choudhury, P., & Kim, D. Y. (2019). The ethnic migrant inventor effect: Codification and recombination of knowledge across borders. Strategic Management Journal, 40(2): 203–229. Fosfuri, A., Motta, M., & Rønde, T. (2001). Foreign direct investment and spillovers through workers’ mobility. Journal of International Economics, 53(1): 205–222. Grant, R. M. (1996). Toward a knowledge-based theory of the firm. Strategic Management Journal, 17(S2): 109–122. Grant, R., & Phene, A. (2022). The knowledge based view and global strategy: Past impact and future potential. Global Strategy Journal, 12(1): 3–30. Inkpen, A., Minbaeva, D., & Tsang, E. W. (2019). Unintentional, unavoidable, and beneficial knowledge leakage from the multinational enterprise. Journal of International Business Studies, 50(2): 250–260. Jaffe, A. B., Trajtenberg, M., & Henderson, R. (1993). Geographic localization of knowledge spillovers as evidenced by patent citations. The Quarterly Journal of Economics, 108(3): 577–598. Kerr, W. R. (2013). US high-skilled immigration, innovation, and entrepreneurship: Empirical approaches and evidence (No. w19377). National Bureau of Economic Research. Kerr, S. P., & Kerr, W. R. (2018). Global collaborative patents. The Economic Journal, 128(612): F235–F272. Laursen, K., Leten, B., Nguyen, N. H., & Vancauteren, M. (2020). Mounting corpo-

Anu Phene

132  Encyclopedia of international strategic management rate innovation performance: The effects of high-skilled migrant hires and integration capacity. Research Policy, 49(9): 104034. Liu, X., Lu, J., Filatotchev, I., Buck, T., & Wright, M. (2010). Returnee entrepreneurs, knowledge spillovers and innovation in high-tech firms in emerging economies. Journal of International Business Studies, 41(7): 1183–1197. Marino, A., Mudambi, R., Perri, A., & Scalera, V. G. (2020). Ties that bind: Ethnic inventors in multinational enterprises’ knowledge integration and exploitation. Research Policy, 49(9): 103956. Park, J. J., & Belderbos, R. (2022). Patent protection and foreign R&D investment location choices: Inventor mobility and policy convergence. Industrial and Corporate Change, 31(4): 1113–1136. Phene, A., Fladmoe-Lindquist, K., & Marsh, L. (2006). Breakthrough innovations in the US biotechnology industry: The effects of technological space and geographic origin. Strategic Management Journal, 27(4): 369–388. Phene, A., Tallman, S., & Almeida, P. (2012). When do acquisitions facilitate technological exploration and exploitation? Journal of Management, 38(3): 753–783. Saxenian, A. (2002). Silicon Valley’s new immi-

Anu Phene

grant high-growth entrepreneurs. Economic Development Quarterly, 16(1): 20–31. Schumpeter, J. A. (1934). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Harvard University Press, Cambridge, MA, (originally published 1911). Schütz, A. (1944). The stranger: An essay in social psychology. American Journal of Sociology, 49(6): 499–507. Stephan, P. E., & Levin, S. G. (2001). Exceptional contributions to US science by the foreign-born and foreign-educated. Population Research and Policy Review, 20(1): 59–79. Tallman, S., & Phene, A. (2007). Leveraging knowledge across geographic boundaries. Organization Science, 18(2): 252–260. Uhlbach, W. H., & Anckaert, P. E. (2021). In search for new knowledge: When does hiring foreign R&D workers foster exploration? In Academy of Management Proceedings (Vol. 2021, No. 1, p. 14960). Briarcliff Manor, NY: Academy of Management. Useche, D., Miguelez, E., & Lissoni, F. (2020). Highly skilled and well connected: Migrant inventors in cross-border M&As. Journal of International Business Studies, 51(5), 737–763.

36. Global nonmarket strategy Definition

Nonmarket strategy refers to firms’ design and implementation of actions and tactics beyond their market environment (Baron, 1995). These actions and tactics thus engage actors such as the government, civil society and the media, among others, and aim to improve firms’ overall performance in the nonmarket environment. Much prior research has focused on nonmarket strategies involving coordinated actions vis-à-vis actors in the public arena (Bonardi, Holburn, & Vanden Bergh, 2006) and documented the incidence and consequences of several types of so-called corporate political activities (CPA), such as campaign donations and lobbying (Hillman, Keim, & Schuler, 2004; McDonnell & Werner, 2016; Sun, Doh, Rajwani, & Siegel, 2021), as well as cooptation through political connections (Faccio, 2006; Hillman, 2005; Sun, Hu, & Hillman, 2016; Tihanyi et al., 2019). More recently, scholars are also paying more attention to nonmarket strategies aimed at a more diverse set of nonmarket actors, examining topics such as corporate social responsibility (CSR), social movements, and broader stakeholder relations, as part of the nonmarket strategy field (Bridoux & Stoelhorst, 2022; Dorobantu & Odziemkowska, 2017; Henisz, Dorobantu, & Nartey, 2014; Rathert, 2016; Reid & Toffel, 2009; Zhou & Wang, 2020). Insightful as this literature may be, it has primarily focused on single-country settings, leaving room for examining the additional nuance and complexity brought about by the fact that nonmarket environments are heterogenous across countries and that some firms, notably multinational enterprises (MNEs), have to design and implement nonmarket strategies that take these complexities into account. In this entry, we focus particularly on global nonmarket strategy, which we define as a firm’s pattern of nonmarket strategies designed and implemented at the global level aiming at complementing or leveraging the complexities of the firm’s global nonmarket environment, particularly regarding differences in institutional advantages and challenges. Our definition emphasizes nonmarket strategies as mechanisms to create

and appropriate value through leveraging the institutional environment (Dorobantu et al., 2017; Sun et al., 2021). We primarily focus on two dimensions of global nonmarket strategy: (i) nonmarket strategies of MNEs, and (ii) nonmarket strategies designed to address supranational institutions. First, MNEs are undeniably the most prominent actors relying on global nonmarket strategies. The nonmarket strategies of MNEs are shaped by the fact that they simultaneously face a variety of institutional costs and opportunities and thus need to design heterogenous nonmarket strategies at the global (MNE) level as well as at each unit (subsidiary) level. Second, the global nature of supranational institutions, even as they influence firms that may not necessarily be MNEs, is relevant for our definition. Firms’ institutional environments may not be circumscribed within nations and states but at the supranational level (Hartmann, Lindner, Müllner, & Puck, 2022). Additionally, though the nonmarket environment, and, as a result, nonmarket strategies, include a diverse set of actors, we will focus primarily on firms’ interaction with political environments and only offer insights on how to consider other actors in our suggestions for future research.

Overview

Global nonmarket strategy has a long history of academic research which can be traced back at least to the 1970s. Much early work examined how MNEs interact with host governments and focused on how they manage the political risks associated with the possibility that host government interference could result in expropriation (Fitzpatrick, 1983; Kobrin, 1979; Vernon, 1971). More recent work that we selectively revise here expands on this early focus and addresses global nonmarket strategies at three main levels at which firms may interact with nonmarket actors: the host-country level, the home-country level, and the supranational level. Regarding the host country, some work has used nonmarket strategy arguments to investigate the effect of host-country institutions on MNE entry decisions. This research shows that, for example, in regulated industries, MNEs might prefer investing in weaker host-country institutional environments to seize opportunities to shape the environment to their advantage (García-Canal & Guillén,

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2008). Other research has also suggested that MNEs can learn how to mitigate political risks through their past international experience in dealing with politically hazardous host countries (Delios & Henisz, 2003) or with violent conflict (Oh & Oetzel, 2017). Relatedly, a key strand of research has focused on the role of political connections with host governments in alleviating the effects of weaknesses of host-country institutions. For example, recent work suggests that foreign political connections create value for MNEs and improve their access to foreign markets (Sojli & Tham, 2017) and that MNEs can alleviate the liability of foreignness by engaging in lobbying in the host country (Kim, 2019; Shi, Gao, & Aguilera, 2021). However, research has also found that the benefits of foreign political connections are dependent on a variety of factors, such as the stability of a political regime (Darendeli & Hill, 2016; Siegel, 2007). When focusing on the home-country nonmarket environment, research mainly highlights how MNEs’ nonmarket capabilities gained in the home country can help them in the host-country environment. In other words, the literature started to also consider how MNEs’ home-country institutions can help them better deal with host-country institutions. For instance, some work suggests that MNEs from home countries with weaker institutions are more likely to conduct riskier international investments as a way to leverage their political capabilities (Cuervo-Cazurra & Genc, 2008; Holburn & Zelner, 2010). Additionally, growing research focuses on the role of home-country political connections in facilitating international expansion (Albino-Pimentel, Anand, & Dussauge, 2018; Fernández-Méndez, García-Canal, & Guillén, 2018). Further, growing research explores how other nonmarket capabilities MNEs develop in the home country, such as through political donations, public policy applications and social and environmental activities, interact with host countries’ institutions to shape firm market strategy and performance (Albino-Pimentel, Oetzel, Oh, & Poggioli, 2021; Georgallis, Albino-Pimentel, & Kondratenko, 2021). Finally, a growing strand of research explores bilateral ties between governments and the role of supranational institutions. Some of this work has explored how political strategies can help address weaknesses

in supranational safeguards. For example, research has shown that political strategies and capabilities reduce expropriation risk and can thus substitute for supranational safeguards, such as those created through bilateral investment treaties, in protecting foreign assets (Albino-Pimentel, Dussauge, & Shaver, 2018; Jandhyala & Weiner, 2014). Additionally, research suggests that MNEs with stronger ties to home governments can better leverage home–host government diplomatic connections to facilitate location choices (Li, Meyer, Zhang, & Ding, 2018). However, the backlash of domestic political connections is also documented. Sovereign wealth funds (SWFs) investing abroad tend to experience greater sensitivity to geopolitical tensions due to their closer connection with home-country governments (Wang, Weiner, Li, & Jandhyala, 2021).

Outlook

Strategy and international business scholarship have made substantial progress to understand several facets of global nonmarket strategy, including studies focusing on firms’ interactions with nonmarket actors at the home-country, host-country and supranational levels. There are, however, many areas and research questions that still need deeper theoretical development and empirical analysis. We provide here a non-exhaustive list of such areas that align with our conceptualization of global nonmarket strategy. First, examining the impact of supranational institutions provides ample opportunities for future research. It would be particularly relevant to better understand how supranational institutional uncertainty influences firms’ global nonmarket strategies. For example, more research could examine how MNEs from different origins strategically react, particularly in terms of their nonmarket strategies, when supranational safeguards are renegotiated (e.g., trade agreements) or violated (e.g., Russia–Ukraine crisis, nuclear agreements, etc.). Are the effects of such changes limited to those firms originating in the involved countries, or do these supranational institutional changes generate spillovers to firms from third countries? The impact of geopolitics on firm nonmarket strategies also requires more attention. For example, we don’t have a systematic framework for understanding how geopolitical discontinui-

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ties, such as the US–China trade war, Brexit, bilateral peace agreements, and dyadic conflict, affect firms’ strategies and outcomes on a global scale (Phan, 2019). Researchers could explore how geopolitical tensions affect MNEs’ nonmarket strategy choices. It is reasonable to believe that geopolitical tensions will alter firms’ ability to choose and the efficacy of different types of nonmarket strategies. For example, with many Chinese firms having been sanctioned by the US government during the US–China trade war, research could examine whether and how competitors of these Chinese firms leverage this conflict as an opportunity to boost their operations in the US. Finally, researchers could study how MNEs proactively use their nonmarket strategies to influence the supranational institutional environment they face, rather than just how they adapt and react to such an environment. Second, more research is needed to examine how MNEs can help address grand challenges (Buckley, Doh, & Benischke, 2017; Montiel et al., 2021). Some scholars have taken the initiative to explore how MNEs can help solve challenges, such as poverty (Ansari, Munir, & Gregg, 2012; Maksimov, Wang, & Luo, 2017), climate change (Kolk & Pinkse, 2008), infrastructure deficit (James & Vaaler, 2018), and natural disasters (Oh & Oetzel, 2022). However, more can be done, particularly taking the MNE and global arena as the setting of investigation. When are MNEs’ ex ante activities, such as sustainable practices, or ex post activities, such as relief and reconstruction donations, more or less likely and effective (e.g., Ballesteros & Magelssen, 2022; Ballesteros, Useem, & Wry, 2017; Hornstein & Zhao, 2018)? In a similar vein, it is imperative to examine how different types of MNE nonmarket strategies, including strategic CSR, community empowerment, and inclusive market-building, may complement or substitute one another in how they create value for the firm and for society, and thus help address grand challenges. A third area of research relates to the potential dark side of global nonmarket strategy. Recent theoretical work provides a conceptual framework to understand the phenomenon of CPA concealment, suggesting opportunities for empirical testing and further theory development (Jia, Markus, & Werner, 2023). The notion of concealment indeed has been relatively understudied,

though its use may be particularly widespread in MNEs. These firms could benefit from their complex global presence to conceal activities across institutional environments. Research could explore the conditions under which MNEs choose concealment relative to other more overt strategies and whether concealment of global nonmarket strategies is always negative for society. For example, MNEs could try to conceal their identity in some locations where they face threats to their legitimacy. The mechanisms they use to do so, the extent to which these strategies are effective for the firm, and the broad societal impacts of these strategies are still unaddressed issues in the literature. Finally, the field could benefit from leveraging a more diverse set of methodologies. While much research in global nonmarket strategy has relied on large-sample econometric analyses, future research could draw on more in-depth analyses of smaller sets of cases to gain granular understanding of different phenomena. For example, the use of set theoretic approaches, such as qualitative comparative analysis (QCA) (Furnari et al., 2021), could provide insights on whether different configurations of market and nonmarket strategies combine with each other, and with the features of the institutional environments where MNEs operate, to equally determine multiple performance measures. Conversely, the advent of big data and novel analytical tools allow researchers to dig deeper into the data and uncover more nuanced relationships. For example, scholars may use text analyses and machine learning to extract data from archival sources like blogs, social media entries, internal company documents, press releases, and newspaper articles, to capture new variables that were previously considered ‘unmeasurable’ (Harrison, Josefy, Kalm, & Krause, 2023; Miric, Jia, & Huang, 2023). João Albino-Pimentel, Gianni De Bruyn and Yu Li

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37. Global R&D

business unit or division of large MNEs (von Zedtwitz & Gassmann, 2002).

Knowledge, innovation, and R&D have always been an integral part of the discourse and analysis of multinational enterprises (MNEs). The ‘knowledge-based view’ of the MNE considers (technological) knowledge as the most critical resource of the firm, and sees the capacity of the MNE to source and recombine technological and market knowledge in key markets globally as the essential driver of competitive advantage (e.g., Kogut & Zander, 1992; Almeida, Song, & Grant, 2002; Berry, 2014). Operating geographically distributed R&D activities is central to such resource development and competitive advantages.

Benefits

Two motivations

The traditional view of the MNE emphasizes its ability to transfer and exploit existing intangible assets such as managerial capabilities, knowledge and technologies abroad (e.g., Buckley & Casson, 1976; Caves, 2007; Dunning & Lundan, 2008) to expand successfully in foreign markets. In this view, global R&D activities employed by MNEs focus on supporting manufacturing activities of local subsidiaries or to adapt products and technologies developed in the home country to local market conditions (e.g., Vernon, 1979). These R&D activities are concentrated on development and design, less so on research (Kuemmerle, 1997; Narula & Zanfei, 2006). More recently, extant literature has placed emphasis on the second motivation: to create new technologies and knowledge overseas by accessing foreign R&D resources and local technological and scientific strengths (Cantwell, 1989). R&D activities in this case concentrate on research (Cantwell, 1995; Florida, 1997; Kuemmerle, 1997; Ambos, 2005; Shimizutani & Todo, 2008; von Zedtwitz & Gassmann, 2002; Song et al., 2011; Cantwell & Mudambi, 2005; Song & Shin, 2008; Chung & Yeaple, 2008; Chung & Alcácer, 2002). In practice, MNEs organize their global R&D by differentiating between the nature of R&D activities and their locations. Firms’ global R&D networks encompass a limited number of research (augmenting) facilities and a larger number of development (exploiting) units, with development activities usually organized per

Global competition, shorter product lifecycles, an increased worldwide distribution of technological capabilities, and the availability of scientists and engineers outside industrialized countries have provided an impetus for an increased global orientation of R&D. R&D by MNEs is organized to respond to increased product market competition, to access foreign pools of research talent, to reduce R&D costs, and to speed up the process of technology development (UNCTAD, 2005; Papanastassiou et al., 2019). Firms respond to the new challenges by increasing the geographic dispersion of their R&D activities to allow embedded participation in local R&D networks and facilitate access to tacit and specialized local knowledge (e.g., Frost, 2001; Lahiri, 2010; Phene & Almeida, 2008) and geographically dispersed knowledge hubs with specialized expertise (e.g., Belderbos et al., 2013; Chung & Yeaple, 2008; Penner-Hahn & Shaver, 2005). Firms go beyond the frontiers of their local networks because searching within well-known domains (local search) significantly lowers their chances of sourcing new knowledge (Rosenkopf & Almeida, 2003). Establishing linkages outside their traditional geographic regions can increase the breadth of search and improve the effectiveness of technological capability development (Lahiri, 2010; Castellani, Jimenez & Zanfei, 2013), allowing for knowledge recombination and cross-fertilization (Leiponen & Helfat, 2011; Nieto & Rodríguez, 2011).

Costs and disadvantages

Despite these forces, a major portion of corporate R&D is still conducted in the home countries of the multinational firms and many MNEs exhibit a ‘home bias’ in their R&D activities (Patel & Pavitt, 1991; Dunning & Lundan, 2008; Zanfei, 2000; Blomkvist et al., 2010; Belderbos et al., 2013). The most pronounced R&D internationalization strategies appear to be undertaken by more agile smaller firms rather than by large iconic MNEs, which tend to exhibit a stronger embeddedness in their home countries and

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face higher costs of global reorganization (Belderbos, 2001; Belderbos et al., 2013). The explanation for this apparent international R&D ‘paradox’ must be sought in the often underestimated costs and managerial challenges inherent to international R&D. These involve potential foregone advantages of scale and scope economies, greater appropriability (IP protection) concerns related to R&D dispersion, increased coordination costs, and difficulties and costs related to knowledge integration and transfer (Belderbos et al., 2013; Belderbos et al., 2021). The (partly) indivisible nature of R&D activities leads to economies of scale and renders it less effective for firms to expand their R&D to new laboratories because assets and personnel of existing R&D sites are not fully utilized (Pearce, 1999; Hirschey & Caves, 1981; Hewitt 1980). Firms’ R&D activities are also subject to economies of scope due to knowledge spillovers between R&D activities in different technology fields (e.g., Arora et al., 2011), making R&D dispersion a less effective strategy. Dispersion of R&D across multiple sites makes corporate control over external knowledge flows more difficult and is likely to increase the hazard of knowledge outflows (Belderbos et al., 2003; Belderbos et al., 2021; Pearce, 1999). The benefits of concentrating R&D at home can also be salient since, to an important extent, firms develop their technological strength by drawing on technological and organizational capabilities of their home countries through their strong embeddedness in and ‘fit’ with the local innovation system. The coordination of R&D activities between the R&D facilities of the MNE and with headquarters, business units and marketing and manufacturing operations may also become increasingly difficult and costly if the R&D facilities are globally dispersed. R&D creates knowledge that is partly tacit in nature and therefore requires a high level of communication and interaction between the parties involved in order to transfer it (Gupta & Govindarajan, 2000; Meyer & Mizushima, 1989; Nobel & Birkinshaw, 1998). Dispersion of R&D requires MNEs to engage in costly – and not always effective – international R&D management practices, such as international personnel mobility and co-practice, to facilitate effective international communication and knowledge transfer (Frost & Zhou, 2005; Singh, 2008; Lahiri, 2010). Even

when an international R&D organization is in place, this does not always lead to the required transfer and integration across units (Gupta & Govindarajan, 2000). These challenges become more salient the greater the geographic dispersion of R&D operations and the more nodes over which knowledge creation and transfer has to be coordinated (Lahiri, 2010). In practice, foreign affiliates often have to fight for recognition of their R&D capabilities and for ‘legitimacy’ in the broader R&D network of the MNE (Mudambi & Navarra, 2004).

Location and collocation

The dispersion of global R&D is related to a range of specific locational factors attracting cross-border R&D investments. These include market (size) related factors, (specialized) local R&D capabilities, and the availability and costs of human capital (scientists and engineers, and PhD graduates in particular). Academic research strength (the capabilities of local universities) also plays a role, in addition to corporate tax rates, R&D incentives and sufficient protection. There is also a strong tendency of foreign R&D activities to collocate with prior distribution and manufacturing activities of the firm. The most pronounced collocation tendency is in industries where R&D activities require close interaction with manufacturing (e.g., engineering industries) and for home base exploiting R&D (Defever, 2012; Ivarsson et al., 2015; Belderbos et al., 2016). Collocation of and centralization of foreign R&D in a limited number of locations is an option if firms lack the ability to coordinate complex and dispersed organizational structures (Castellani & Lavoratori, 2020). Factors found to influence R&D location choices include market demand and market growth, GDP per capita as an indicator of purchasing power and sophistication of demand, local physical infrastructure and the degree of local unemployment (e.g., Basile, Castellani, & Zanfei, 2008; Belderbos et al., 2014; Siedschlag et al., 2013). Studies have also shown that, unlike international trade and production, R&D investments are less affected by geographic distance owing to ability of MNEs to transfer knowledge over long distances. In contrast, MNEs do seek locations with proximity in language, culture and institutions (e.g., Castellani et al., 2013). René Belderbos and Davide Castellani

140  Encyclopedia of international strategic management

The strength of the knowledge base of the region or country, including both industrial R&D capabilities and academic research, is a key factor influencing R&D location choice (Siedschlag et al., 2013; Belderbos & Somers, 2015; Belderbos et al., 2014). The attractiveness of a location increases with the presence of other firms carrying out R&D activities, which generates knowledge spillovers and other agglomeraton externalities (Siedschlag et al., 2013; Castellani & Lavoratori, 2020), but investors may be discouraged by a concentration of local R&D activities due to the presence of regional technology leaders (Belderbos & Somers, 2015). As successful knowledge creation increasingly results from the combination of both ‘local buzz’ and ‘global pipelines’, access to knowledge sources located outside of an organization’s environs can magnify locally embedded learning processes. In this perspective, locations, such as global cities, that are more connected to geographically dispersed knowledge sources are very attractive for international R&D activities (Cano-Kollman et al., 2016; Castellani et al., 2022; Belderbos et al., 2022). The availability of skilled human capital and low costs of this skilled R&D personnel attract R&D investments (Lewin et al., 2009). Corporate taxes discourage while R&D tax incentives strongly attract R&D (Belderbos et al., 2014; Belderbos & Somers, 2015; Belderbos et al., 2007). Finally, MNEs are generally also attracted to regions with strong intellectual property rights protection (Branstetter, 2006; Belderbos et al., 2008). MNEs may still find it attractive to conduct R&D even at locations in weak IPR regimes (Zhao, 2006; Alcácer & Zhao, 2012; Belderbos et al., 2021), because they can utilize alternative mechanisms for protecting their intellectual assets in weak intellectual property environments. They can use their dispersed R&D network to partition the knowledge-generation process and distribute it across multiple locations, with internal collaborative linkages across units ensuring knowledge integration.

Firm performance effects

Foreign R&D focusing on home-based exploiting activities can be effective in increasing the performance and productivity of local manufacturing by aiding expanRené Belderbos and Davide Castellani

sion into foreign markets (Belderbos, Ito, & Wakasugi, 2008). Foreign R&D focused on home base augmenting activities allows MNEs to source relevant knowledge and technologies and to transfer this back to home-country operations (‘reverse knowledge transfer’), which improves MNEs’ innovation and productivity, but only under a number of contingencies (Castellani & Pieri, 2013; D’Agostino et al., 2013). These include effective cross-border collaboration and knowledge integration (Singh, 2008; Lahiri, 2010), embeddedness of foreign affiliates in local technology and R&D clusters (Griffith et al., 2006), locating R&D in places with the strongest R&D spillovers (Kafouros et al., 2012), top management teams with sufficient diversity and appreciation of the advantages of foreign R&D characteristics (Belderbos et al., 2022), MNEs’ absorptive capacity to assimilate and integrate technological knowledge sourced abroad (Penner-Hahn & Shaver, 2005; Bertrand & Mol, 2013). MNE benefits at home are most pronounced if the home country’s industry is relatively behind the global technology frontier (Belderbos, Lokshin, & Sadowski, 2015). In general, global innovation and R&D are most effective if knowledge is combined from various sources, leading to a potential mutual reinforcing performance effect of R&D at home and abroad (Belderbos, Lokshin, & Sadowski, 2015). René Belderbos and Davide Castellani

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the productivity of multinational enterprises: The role of international depth and breadth. Research Policy, 41(5): 848–861. Kogut, B., & Zander, U. 1992. Knowledge of the firm, combinative capabilities, and the replication of technology. Organization Science, 3(3): 383–397. Kuemmerle, W. 1997. Building effective R&D capabilities abroad. Harvard Business Review, 75: 61–72. Lahiri, N. 2010. Geographic distribution of R&D activity: How does it affect innovation quality? Academy of Management Journal, 53(5): 1194–1209. Leiponen, A., & Helfat, C. E. 2011. Location, decentralization, and knowledge sources for innovation. Organization Science, 22(3): 641–658. Lewin, A. Y., Massini, S., & Peeters, C. 2009. Why are companies offshoring innovation? The emerging global race for talent. Journal of International Business Studies, 40(6): 901–925. Meyer, A., & Mizushima, A. 1989. Global R&D management. R&D Management, 19(2): 135–146. Mudambi, R., & Navarra, P. 2004. Is knowledge power? Knowledge flows, subsidiary power and rent-seeking within MNCs. Journal of International Business Studies, 35(5): 385–406. Narula, R., & Zanfei A. 2006. Globalization of Innovation: The role of multinational enterprises, in J. Fagerberg & D.C. Mowery (eds) The Oxford handbook of innovation. Oxford: Oxford University Press. Nieto, M. J., & Rodríguez, A. 2011. Offshoring of R&D: Looking abroad to improve innovation performance. Journal of International Business Studies, 42(3): 345–361. Nobel, R., & Birkinshaw, J. 1998. Innovation in multinational corporations: Control and communication patterns in international R & D operations. Strategic Management Journal, 19(5): 479–496. OECD. 2007. Intellectual assets and international investment: A stocktaking of the evidence, Report to the OECD Investment Committee DAF/INV/WD (2007) 6. Paris: OECD. Papanastassiou, M., Pearce, R., & Zanfei, A. (2019). Changing perspectives on the internationalization of R&D and innovation by multinational enterprises: A review of the literature, Journal of International Business Studies, 51(4): 623–664. Patel, P., & Pavitt, K. 1991. Large firms in the production of the world’s technology: An important case of “non-globalisation”. Journal of International Business Studies, 1–21. Pearce, R. D. 1999. Decentralised R&D and strategic competitiveness: Globalised approaches to generation and use of technology in multi-

Global R&D  143 national enterprises (MNEs). Research Policy, 28(2): 157–178. Penner-Hahn, J., & Shaver, J. M. 2005. Does international research and development increase patent output? An analysis of Japanese pharmaceutical firms. Strategic Management Journal, 26(2): 121–140. Phene, A., & Almeida, P. 2008. Innovation in multinational subsidiaries: The role of knowledge assimilation and subsidiary capabilities. Journal of International Business Studies, 39(5): 901–919. Rosenkopf, L., & Almeida, P. 2003. Overcoming local search through alliances and mobility. Management Science, 49(6): 751–766. Shimizutani, S., & Todo, Y. 2008. What determines overseas R&D activities? The case of Japanese multinational firms. Research Policy, 37(3): 530–544. Siedschlag, I., Smith, D., Turcu, C., & Zhang, X. 2013. What determines the location choice of R&D activities by multinational firms? Research Policy, 42(8): 1420–1430. Singh, J. 2008. Distributed R&D, cross-regional knowledge integration and quality of innovative output. Research Policy, 37(1): 77–96. Song, J., & Shin, J. 2008. The paradox of technological capabilities: What determines knowl-

edge sourcing from overseas R&D operations. Journal of International Business Studies, 39: 291–303. Song, J., Asakawa, K., & Chu, Y. 2011. What determines knowledge sourcing from host locations of overseas R&D operations? A study of global R&D activities of Japanese multinationals. Research Policy, 40(3): 380–390. UNCTAD. 2005. World Investment Report: Transnational Corporations and Internationalization of R and D. New York: United Nations. Vernon, R. 1979. The product cycle hypothesis in a new international environment. Oxford Bulletin of Economics and Statistics, 41(4): 255–267. von Zedtwitz, M., & Gassmann, O. 2002. Market versus technology drive in R&D internationalization: four different patterns of managing research and development. Research Policy, 31(4): 569–588. Zanfei, A. 2000. Transnational firms and the changing organisation of innovative activities. Cambridge Journal of Economics, 24(5): 515–542. Zhao, M. 2006. Conducting R&D in countries with weak intellectual property rights protection. Management Science, 52(8): 1185–1199.

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38. Global supply chain management Companies have to deliver products to customers both efficiently and effectively (Kotabe, 1998; Hunt & Duhan, 2002). First of all, global supply chain management, also referred to as global logistics, has played a critical role in the growth and development of world trade and in the integration of business operations on a worldwide scale. The term supply chain management was coined by Keith Oliver, a British logistics consultant in the early 1980s. Its primary objective is to develop a cost-efficient delivery mechanism. In fact, the level of world trade in goods and, to some extent, services depends to a significant degree on the availability of economical and reliable international transportation services. Decreases in transportation costs and increases in performance reliability expand the scale and scope of business operations and increase the associated level of international trade and competition. Second, the use of appropriate distribution channels in international markets increases the chances of success dramatically. Its primary objective is to develop a task-effective delivery mechanism for customer satisfaction. As far back as 1954, Peter Drucker had said that logistics would remain “the darkest continent of business” (Drucker, 1954)—the least well understood aspect of business— and his prediction proved true until well into the twenty-first century. It is not too difficult to demonstrate the importance of the physical handling, moving, storing, and retrieving of material. In almost every product, more than 50% of product cost is material-related, while less than 10% is labor. Yet, over the years, this fact has not received much attention. For three consecutive years, from 2006 to 2008, the U.S. total logistics cost stayed at nearly 10% of the GDP. In the subsequent years, however, total logistics cost in the United States moderately declined to 7.7% of GDP in 2017. On the other hand, logistics spending in China was roughly equivalent to 13% of GDP. China was able to cut logistics costs by $14 billion in 2017 to relieve the burden on business. On the other hand, India’s logistics sector is highly defragmented and currently costs 14% of GDP (“The State of the

Logistics Union 2018,” Supply Chain Digest, www​.scdigest​.com, June 21, 2018). Since the 1990s, a variety of issues have been driving the increased emphasis on global supply chain and distribution management. It was epitomized in 1998 by General Motors’ lawsuit against Volkswagen over the defection of José Ignacio Lopez, the former vice president of purchasing at General Motors and one of the most renowned logistics managers in the automobile industry. His expertise is said to have saved General Motors several billion dollars from its purchasing and logistics operations, which would directly affect the company’s bottom line. The importance of distribution channels is further evidenced by the recent mergers in the auto industry, in which giant multinationals are gobbling up smaller manufacturers with strong brand names but inadequate global distribution, such as the acquisition of Volvo from Ford by China’s Geely. As firms start operating on a global basis, logistics managers need to manage the shipping of raw materials, components, and supplies among various manufacturing sites and suppliers at the most economical and reliable rates. Simultaneously, these firms need to ship finished goods to customers in markets around the world at the desired place and time. The development of intermodal transportation and electronic tracking technology has caused a quantum jump in the efficiency of the logistics methods employed by firms. Intermodal transportation refers to the seamless transfer of goods from one mode of transport (e.g., aircraft or ship) to another (e.g., truck) and vice versa without the hassle of unpacking and repackaging the goods to suit the dimensions of the mode of transport being used. Tracking technology refers to the means for keeping continuous tabs on the exact location of the goods being shipped in the logistics chain—this enables quick reaction to any disruption in the shipments because (1) the shipper knows exactly where the goods are in real time and (2) the alternative means can be quickly mobilized.

Definition and scope of global supply chain

Global supply chain is defined as the design and management of a system that directs and controls the flows of materials into, through, and out of the firm across national

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Global supply chain management  145

Source:  Kotabe and Helsen (2020, p. 507).

Figure 38.1

The global supply chain

boundaries to achieve its corporate objectives at a minimum total cost. As shown in Figure 38.1, global supply chain encompasses the entire range of operations concerned with products or components movement, including both exports and imports simultaneously. Global supply chain, like domestic supply chain, encompasses materials management, sourcing, and physical distribution. Materials management refers to the inflow of raw materials, parts, and supplies in and through the firm. Physical distribution refers to the movement of the firm’s finished products to its customers, consisting of transportation, warehousing, inventory, customer service/order entry, and administration. Sourcing strategy refers to an operational link between materials management and physical distribution and deals with how companies manage R&D (e.g., product development and engineering), operations (e.g., manufacturing), and marketing activities. Although the functions of physical distribution are universal, they are affected differently by the tradition, culture, economic infrastructure, laws, and topography, among others, in each country and each region. In general, in geographically large countries, such as the United States, where products are transported over a long distance, firms tend to incur relatively more transportation and inventory costs than firms in smaller countries. On the other hand, in geographically concentrated countries, such as Japan and Britain, firms tend to incur relatively more warehousing, customer service/order entry, and general administrative costs than in geographically larger countries. This is so primarily because

a wide variety of products with different features have to be stored to meet the varied needs of customers in concentrated areas. Although it is possible to attribute all cost differences to topography, customs, laws of the land, and other factors, the cost differences could also reflect how efficiently or inefficiently physical distribution is managed in various countries and regions. At the fundamental level, however, supply chain management as we know it today has been based on a “linear economy” (i.e., make, use, and dispose) paradigm in which the primary role of firms is to develop, manufacture, and distribute products downstream to final consumers at a minimum total cost. The disposition of those products after their service life has not been woven into supply chain management thought. Given the increased importance of resource sustainability in recent decades, the idea of a “circular economy” (i.e., make, reuse, remake, and recycle) has been advocated (Stahel, 2016). A circular economy would turn products that are at the end of their service life into resources for others by creating a closed-loop industrial system to minimize resource inputs and reduce waste, pollution, and carbon emissions. To enable this circular economy paradigm to work, the stakeholders in the globally dispersed supply chain are increasingly urged to develop ways to collectively manage resources (i.e., materials, components, and finished products) by reusing, refilling, reprogramming, repairing, remanufacturing, and upgrading technologically for improved efficiency. Masaaki Kotabe Masaaki Kotabe

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References

Drucker, P.F. (1954), The Practice of Management. New York: Harper & Brothers. Hunt S.D. & Duhan, D.F. (2002), “Competition in the Third Millennium: Efficiency or Effectiveness?” Journal of Business Research, 55: 97–102. Kotabe, M. (1998), “Efficiency vs. Effectiveness Orientation of Global Sourcing Strategy:

Masaaki Kotabe

A Comparison of U.S. and Japanese Multinational Companies,” Academy of Management Executive, 12: 107–119. Kotabe, M. & Helsen, K. (2020), Global Marketing Management, 8th ed. Wiley. Stahel, W.R. (2016), “The Circular Economy,” Nature, 531: 435–438.

39. The global system view To properly understand internalization theory, which is a central part of international business theory, it is necessary to appreciate its different levels of analysis. In particular, a failure to understand the global system view is a failure to understand the true scope and ambition of internalization theory. It would be easy to get the impression that internalization theory is focused only on the level of the individual firm. This is because, as typified by Dunning’s eclectic paradigm, international business research most often focuses on the level of an individual firm with given firm-specific advantages. Locations also have advantages so that it can pay to have one or more facilities needed to exploit firm-specific advantages located outside of the firm’s home country, for instance to avoid tariffs and international transportation costs. Internalization advantages can then lead to foreign activities being owned and controlled by the firm itself. For instance, imperfections in markets for knowledge may lead the firm to prefer to own a foreign factory itself, so incurring costs of doing business abroad, rather than incurring the costs of licensing a firm domestic to the foreign country to make a product incorporating proprietary technology for the local market. Note how such different costs represent trade-offs involved with alternative configurations of parts of the global system. The use of a firm-level analysis is, to a degree, natural for those teaching firm strategy or advising managers. A further approach, the ‘global factory’ (Buckley 2009, 2011), retains a firm-centred focus, but widened to consider the global value chain orchestrated by a lead firm. This recognizes, for instance, the importance of outsourcing to modern multinationals. However, taken in isolation, a firm-level view risks overlooking longer-term issues regarding the configuration of the global system, which the global system view seeks to address. Such issues can be crucial to the longer-term strategy of the firm. The global system view involves disaggregating the global production system into separate facilities, such as for production, marketing, and R&D (Casson, 2000). There

are alternative possible locations for each facility. Product and knowledge flows link the different facilities together. A pair of linked facilities could be both owned by the same firm. Alternatively, they could be owned by separate firms with a contract between them. The global system view is therefore wider than a firm-based view, being less constrained in that it takes less as given (Buckley, 2016). It follows Coase (1937) in assuming that the global system will be organized along cost-minimizing lines. This is supported by the argument that competition in markets for management and finance push the global system towards efficient organization. A number of models have been used to formally solve for optimal global system structures, determining the location and ownership of each facility. Casson (2000) considered the boundaries of the firm, as determined by the ownership of the different facilities. He argued that failing to take a systems view can mean ignoring the importance of knowledge flows in internalization decisions. Buckley and Hashai’s (2004) model involves a large developed economy, a small developed economy, and a developing one. It also involves economies of scale, knowledge intensity, and distance sensitivity as product attributes. Casson and Wadeson (2013) used a global system model to identify key trade-offs involved in the ownership and location of facilities. One of them is involved in the fact that alternative firms could organize integration. In the model, integration between R&D and marketing facilities in two different countries could be effected either by a firm headquartered in the country where R&D is located or by a firm in the country where the market is located. There is therefore a trade-off between the costs of foreign ownership of R&D and the cost of foreign marketing. They related this to an increased importance of asset-seeking investments in high-technology industries, given a falling cost of foreign ownership of R&D. This gives a perspective on the rise of emerging market multinationals, for instance, an area of international business research where too narrow a view of internalization theory has sometimes led to confusion (Casson and Wadeson, 2018). Nigel Wadeson

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References

Buckley, P. J. (2009). The impact of the global factory on economic development. Journal of World Business, 44(2), 131–143. Buckley, P. J. (2011). The impact of globalisation and the emergence of the global factory. In Ramamurti, R., and Hashai, N. (Eds.), The future of foreign direct investment and the multinational enterprise (pp. 213–250). Emerald Group Publishing Limited. Buckley, P. J. (2016). The contribution of internalisation theory to international business: New

Nigel Wadeson

realities and unanswered questions. Journal of World Business, 51(1), 74–82. Buckley, P. J., & Hashai, N. (2004). A global system view of firm boundaries. Journal of International Business Studies, 35(1), 33–45. Casson, M. (2000). Economics of international business: A new research agenda. Edward Elgar Publishing. Casson, M., & Wadeson, N. (2013). The economic theory of international supply chains: A systems view. International Journal of the Economics of Business, 20(2), 163–186. Casson, M., & Wadeson, N. (2018). Emerging market multinationals and internalisation theory. International Business Review, 27(6), 1150–1160. Coase, R. H. (1937). The nature of the firm. Economica, 4(16), 386–405.

40. Global talent management Global talent management (GTM) is defined as, The systematic identification of pivotal positions that differentially contribute to an organization’s sustainable competitive advantage on a global scale, the development of a talent pool of high-potential and high-performing incumbents who reflect the global scope of the MNE to fill these roles, and the development of a differentiate HR architecture to fill these roles with the best available incumbents to ensure the continued commitment to the MNE. (Collings, Mellahi & Cascio, 2019: 543).

Talent management emerged as “the most important term in the field of human resources in the early twenty-first century” (Cappelli & Keller, 2017: 23) and is a key priority for corporate leaders globally. This reflects the challenges that organisations have consistently faced over recent decades in attracting and retaining the skills and capabilities they require to deliver on their strategic objectives. While, owing to their scale and scope, multinational enterprises (MNEs) can potentially access more diverse employees across the globe, easing some of these tensions, wider challenges are amplified in the global context. One key challenge is that MNEs must balance constancy in deploying corporate GTM practices, reflecting organisational culture and values, with adapting those practices to account for local cultural and institutional influences (Stahl et al., 2012). More broadly, the cultural, linguistic, spatial and temporal distances associated with global work create challenges in coordinating work and managing employees (Reiche, Lee & Allen, 2019). Thus, while on one level the global environment offers opportunities for efficiency and superior access to talent, it also creates challenges in coordinating talent globally (Caligiuri et al., 2024).

Definitional clarity

The definition of GTM captures many of the more important differences between

1

GTM and the broader field of international human resource management.1 Indeed, key to the definition is the idea of differentiation (Collings & Minbaeva, 2022). This reflects the fact that GTM is focused on a subset of employees globally and does not apply to the entire workforce. This reflects pressures on costs within firms in the latter part of the last century where HR budgets came under pressure, compared with a greater understanding that investing disproportionately in employees with the greatest potential to add value can add disproportionate value (Collings et al., 2019; Delery & Shaw, 2001). While the initial focus was on individual employees as the locus of differentiation, as the literature matured, the focus shifted to critical or pivotal roles and the potential for differential performance in terms of increased quality or quantity of output in these roles (Collings, 2019). This recognises that human capital is of little economic value if it is not deployed consistently with the organisation’s strategic intent (Becker & Huselid, 2006; Collings et al., 2019). Once these pivotal roles are established, the definition calls for the development of a talent pool of high-performing and high-potential employees to fill these roles. The diversity of this talent pool should be determined by the MNE’s strategic orientation. For example, if the firm has a transnational orientation, it is likely to prioritise a diverse talent pool comprising employees with knowledge of both the headquarters (HQ) (parent-firm human capital) and local context (local-specific human capital) (Collings et al., 2019; Morris et al., 2016). However, it is important to recognise that individuals beyond the HQ often suffer from lower visibility and opportunity to access talent programmes compared with colleagues at HQ (Mäkelä et al., 2010). The final element of the definition is the differentiated HR architecture. This is premised on the recognition that while high levels of human capital (talent) are necessary for superior performance, it is not sufficient to deliver sustainable competitive advantage. Sustainable competitive advantage is leveraged through the appropriate leveraging of human capital, in this instance through well-aligned and differentiated HR architecture (Wright & McMahan, 2011). In

See entry on international HRM.

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other words, better management of this core employee workforce will have the greatest impact on value creation and sustainable competitive advantage (Collings et al., 2019; Delery & Shaw, 2001). The differentiated HR architecture should focus on building a relational psychological contract instead of a transactional focus on reward, for example.

Key issues in global talent management

One key challenge for MNEs is ensuring that international human capital can straddle different internal units within the MNE and external stakeholder. This could involve deploying high-potential talent, with international human capital that is relevant both internally in the MNE network and externally beyond its boundaries, in critical positions. An example of this approach to GTM takes place in international strategic management, where talented individuals are stationed in global boundary-spanning2 positions, and their international experience, skills and knowledge are leveraged to enhance the coordination of valuable knowledge and resources across a disintegrated subsidiary network. Global boundary-spanning roles can be critical positions that operate at the external boundary of the firm and require talented individuals with the capacity to navigate significant complexity, ambiguity and contradiction when building linkages, sharing knowledge and resolving conflicts with key stakeholders (Pedersen et al., 2019). Firms have yet to fully figure out how to design these roles in a way that ensures a balance between interdependence and autonomy to allow high-potential talent to flourish in the development of global competence for the MNE (Reiche, 2023). A comprehensive understanding of GTM also requires an integrative architecture that combines globally standardised practices and centralised talent pools from HQ with local human capital stocks in foreign subsidiaries. On the one hand, much GTM research examines the corporate GTM function and its role in identifying and exploiting top talent and best practices, which flow from the top–down (Farndale et al., 2010). However, there is less focus on understanding how GTM unfolds in 2



See entry on global boundary spanners.

David G. Collings and Kieran M. Conroy

local subsidiaries, with scholars suggesting that high-potential talent in foreign markets is often marginalised and therefore underutilised on a global scale (Mellahi & Collings, 2010). Top management teams in foreign subsidiaries represent important stocks of location-specific talent that are disintegrated from the broader GTM architecture, hindering the development of a highly overfed global workforce. Subsidiary managers are strategic leaders in the global MNE structure, engaging with HQ and a broader subsidiary network while building and leveraging skills, knowledge and resources in their local market. Research highlights the potential of subsidiaries as untapped repositories for HQ consisting of high-potential talent with diverse cultural backgrounds, and significant international experience who could serve as “cultural generalists” in institutionally distant markets (Rickley, 2019). In this sense, subsidiary talent with broader experiential portfolios should be redeployed more consistently to pivotal positions across the MNE as they can process and integrate knowledge, think strategically and remove themselves from any local biases. However, while subsidiaries are gatekeepers to culturally rich and differentiated local human capital, it is often in their best interests to try and retain their best talent rather than relocating them to HQ. Inpatriation, which is the reverse transfer of high-potential host-country nationals to the HQ, is a valuable way to leverage subsidiary talent with international experience in pivotal positions in the broader GTM architecture (Kim et al., 2022). Another way to balance the GTM portfolio is through the establishment of an intermediary structure such as a regional HQ, which may serve as a linchpin in reconciling frictions between HQ and subsidiaries’ divergent GTM approaches (Lee et al., 2022). Regional HQs may add value by channelling and deploying GTM practices from the home market across a region, while also operating as a springboard for nurturing high-potential host-country nationals to develop regional-specific human capital on their journey to global leadership positions (Preece et al., 2013). Looking more broadly at GTM and context, another increasingly important line

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of work considers GTM in, and from, developing markets. For instance, on the one hand, firms from developed economies operating in developing markets like China and India will rely on transferring their best practices without much adaptation or local autonomy for subsidiaries (Hartmann et al., 2010). As a result, it is well recognised that western firms in particular have struggled to tap into or build differentiated workforces in emerging markets, relying instead on standardised GTM practices or talent pools from within the firm’s network. On the other hand, the GTM approaches of firms coming from emerging or developing markets are often confronted with greater adaptation challenges, and hence they tend to have a more flexible GTM approach (Cooke et al., 2014). For instance, the GTM architecture of Chinese firms involves the exploitation of local human capital when operating in developed countries, but when entering developing markets, they will deploy human capital from the HQ (Zhu, 2019). However, scholars have suggested that the GTM practices of firms from the east, like China, Japan and Korea, are converging with western-style global best practices (Froese et al., 2020). The GTM perspective is still in its infancy, and there are many potentially rich directions to grow the field further. Integrating GTM with international strategic management, future research could explore how high-potential talent with international human capital can be leveraged in boundary-spanning positions. A micro-foundations perspective in this context would have the potential to combine the individual and role elements of GTM (Collings & Minbaeva, 2022). Relatedly, an overlooked area of research is the significance of bicultural or multicultural3 employees and how these represent a more strategic yet untapped group of high-potential talent with an abundance of international human capital (Furusawa & Brewster, 2015). Deploying these culturally intelligent generalists in pivotal boundary-spanning roles where they transcend the HQ–RHQ–subsidiary structure may reduce cultural friction or distance in a differentiated GTM architecture. A centralised talent pool of multicultural talent would



3

face fewer adjustment challenges operating in new markets and, as a result, need less intercultural training or support. There is also a need for a more inclusive approach to GTM where marginalised groups, particularly in emerging or developing markets, are provided with the appropriate mechanisms to undertake global leadership development opportunities across their firm. David G. Collings and Kieran M. Conroy

References

Becker, B. E., & Huselid, M. A. (2006) Strategic human resources management: Where do we go from here? Journal of Management, 32(6), 898–925. Caligiuri, P. M., Collings, D.G., DeCieri, H., & Lazarova, M.B. (2024) Global talent management: A critical review and research agenda for the new organizational reality. Annual Review of Organizational Psychology and Organizational Behavior, 11, doi. 10.1146/ annurev-orgpsych-111821-033121. Cappelli, P., & Keller, J. R. (2014) Talent management: Conceptual approaches and practical challenges. Annual Review Organization Psychology and Organizational Behavior, 1(1), 305–331. Cappelli, P., & Keller, J. R. (2017). The historical context of talent management. In D.G. Collings, K. Mellahi & W.F. Cascio (Eds) The Oxford handbook of talent management, Oxford, Oxford University Press. Collings, D. G., & Mellahi, K. (2009). Strategic talent management: A review and research agenda. Human Resource Management Review, 19(4), 304–313. Collings, D. G., Mellahi, K., & Cascio, W. F. (2019) Global talent management and performance in multinational enterprises: A multilevel perspective. Journal of Management, 45(2), 540–566. Collings, D. G. & Minbaeva, D. (2022) Building micro-foundations for talent management, in I. Tarique (Ed.) The Routledge Companion to Talent Management, London, Routledge. Cooke, F. L., Saini, D. S., & Wang, J. (2014) Talent management in China and India: A comparison of management perceptions and human resource practices. Journal of World Business, 49(2), 225–235. Delery, J. E., & Shaw, J. D. (2001) The strategic management of people in work organizations: Review, synthesis, and extension. Research in

See entries on multicultural teams and multiculturalism.

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152  Encyclopedia of international strategic management Personnel and Human Resources Management, 20, 165–197. Farndale, E., Scullion, H., & Sparrow, P. (2010) The role of the corporate HR function in global talent management. Journal of World Business, 45(2), 161–168. Froese, F. J., Shen, J., Sekiguchi, T., & Davies, S. (2020) Liability of Asianness? Global talent management challenges of Chinese, Japanese, and Korean multinationals. Human Resource Management Review, 30(4), 100776. Furusawa, M., & Brewster, C. (2015) The bi-cultural option for global talent management: The Japanese/Brazilian Nikkeijin example, Journal of World Business, 50(1), 133–143. Hartmann, E., Feisel, E., & Schober, H. (2010) Talent management of western MNEs in China: Balancing global integration and local responsiveness, Journal of World Business, 45(2), 169–178. Kim, H., Reiche, B. S., & Harzing, A.W. (2022) How does successive inpatriation contribute to subsidiary capability building and subsidiary evolution? An organizational knowledge creation perspective, Journal of International Business Studies, 53(7), 1394–1419. Lee, J. Y., Yahiaoui, D., Lee, K. P., & Cooke, F.L. (2022) Global talent management and multinational subsidiaries’ resilience in the Covid-19 crisis: Moderating roles of regional headquarters’ support and headquarters–subsidiary friction. Human Resource Management, 61(3), 355–372. Mäkelä, K., Björkman, I., & Ehrnrooth, M. (2010) How do MNCs establish their talent pools? Influences on individuals’ likelihood of being labeled as talent. Journal of World Business, 45(2), 134–142. Mellahi, K., & Collings, D. G. (2010). The barriers to effective global talent management: The example of corporate elites in MNEs. Journal of World Business, 45(2), 143–149. Morris, S., Snell, S., & Björkman, I. (2016) An architectural framework for global talent man-

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agement. Journal of International Business Studies, 47, 723–747. Pedersen, T., Soda, G., & Stea, D. (2019). Globally networked: Intraorganizational boundary spanning in the global organization. Journal of World Business, 54(3), 169–180. Preece, D., Iles, P., & Jones, R. (2013) MNE regional head offices and their affiliates: Talent management practices and challenges in the Asia Pacific. The International Journal of Human Resource Management, 24(18), 3457–3477. Reiche, B. S. (2023) Between interdependence and autonomy: Toward a typology of work design modes in the new world of work. Human Resource Management Journal. Reiche, B. S., Lee, Y. T., & Allen, D. G. (2019) Actors, structure, and processes: A review and conceptualization of global work integrating IB and HRM research. Journal of Management, 45(2), 359–383. Rickley, M. (2019) Cultural generalists and cultural specialists: Examining international experience portfolios of subsidiary executives in multinational firms. Journal of Management, 45(2), 384–416. Stahl, G., Björkman, I., Farndale, E., Morris, S. S., Paauwe, J., Stiles, P., & Wright, P. (2012) Six principles of effective global talent management. Sloan Management Review, 53(2), 25–42. Wright, P. M., & McMahan, G. C. (2011) Exploring human capital: putting ‘human’ back into strategic human resource management. Human Resource Management Journal, 21(2), 93–104. Zhu, J. S. (2019) Chinese multinationals’ approach to international human resource management: A longitudinal study. The International Journal of Human Resource Management, 30(14), 2166–2185.

41. Global value chains Global value chains (GVCs) are defined as governance arrangements that utilize, within a single structure, multiple governance modes for distinct, geographically dispersed, and finely sliced parts of the value chain (Buckley, 2009; Mudambi, 2008). Since the turn of the 21st century, GVCs have represented the core method of organizing international business (IB) operations by multinational enterprises (MNEs). The liberalization and deregulation of international trade and foreign direct investment combined with the rapid development of information and communication technologies has enabled the pattern of organizationally fragmented and geographically dispersed IB activity (Kano, Tsang, & Yeung, 2020), whereby production operations located in low-cost countries were linked with lead firms in North America and Europe (Coe & Yeung, 2015; Dicken, 2015; Gereffi, 2018). Over time, new MNEs from emerging economies established themselves as major strategic partners for traditional MNEs from advanced industrialized economies (Yeung, 2016), as well as lead firms in their own right (Buckley & Tian, 2017). Rather than managing internalized overseas investment, most modern MNEs act as lead firms, orchestrating (either internally or through outsourcing and non-equity arrangements) their geographically dispersed subsidiaries, strategic partners, specialized suppliers, and customers into complex structures that form GVCs, also referred to as global commodity chains, global production networks, or global factories (Buckley, 2009; Coe & Yeung, 2015; Funk, Arthurs, Treviño, & Joireman, 2010; Gereffi, Humphrey, & Sturgeon, 2005; Kano, 2018). A range of academic disciplines have addressed GVCs, including economic sociology, international economics, development studies, economic geography, international political economy, supply chain management, and IB (Kano et al., 2020). In this interdisciplinary body of research, several core themes that affect the functioning of GVCs can be identified.

Structural governance

Structural governance of a GVC includes the overarching principles, structures, and

decision-making processes that establish boundaries of the network, its geographic make-up, and control mechanisms for economic activities performed within the GVC, e.g., make-versus-buy decisions, organizational structure of the network (number of players, power balance, etc.), geographic and functional allocation of activities, and level of centralization of decision-making. Control decisions establish whether each value chain activity should be internalized, outsourced, or controlled through hybrid forms such as joint ventures. Control of critical knowledge and intangible assets is typically more important than ownership of physical assets (Buckley, 2011; Hilleman & Gestrin, 2016). Location decisions include such considerations as geographic dispersion versus co-location (Lampel & Giachetti, 2013), the regional effect (Rugman & Verbeke, 2004), and the role of industrial clusters (Turkina & Van Assche, 2018), and are linked to macro-level features of host and home countries such as levels of economic development, labour cost, and technological and institutional environments. Network structure refers to depth, density, openness, linkage heterogeneity, and the presence of structural holes (Capaldo, 2007; Rowley, 1997). These characteristics affect power relations in the GVC, the level of control afforded to the lead firm, knowledge flows, and, consequently, innovation and business performance (Gereffi et al., 2005; Henderson, Dicken, Hess, Coe, & Yeung, 2002; Lipparini, Lorenzoni, & Ferriani, 2014).

Strategic governance

Strategic governance is concerned with orchestrating the usage of resources within the GVC through codified and uncodified routines and managerial practices (Kano, 2018). It encompasses fine-grained mechanisms within the broader governance structure that lead firm managers use to orchestrate resources in the dispersed network, including decisions pertaining to learning and knowledge transfer, relationships, resource coordination, formal and informal contracting, coordination, monitoring, value distribution, and entrepreneurial judgement by the lead firm (Kano, 2018; Kano, Narula, & Surdu, 2022; Verbeke & Fariborzi, 2019; Verbeke, Hutzschenreuter, & Pyasi, 2021). This global orchestration know-how and entrepreneurial

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guidance by the lead firm are critical components of efficient GVC governance (Buckley & Tian, 2017; Kano et al. 2020). The lead firm’s ability to engage successfully in strategic governance determines the structure of the GVC, that is, the level of complexity that the lead firm is equipped to manage (Casson, 2013). Through skilful orchestration, lead firms can avoid and resolve bottlenecks in the system, and support supplier learning, capability development, and technological upgrading, which ultimately stimulates value creation in the GVC.

Digital globalization

Digital technology-enabled “platformization” has considerable yet complex implications for GVCs (Nambisan, Zahra, & Luo, 2019). On the one hand, digital MNEs can connect dispersed actors around the world in faster, more efficient, and flexible ways (Stallkamp & Schotter, 2021). Digitization facilitates decentralized and geographically dispersed innovation that enables the design and production of complex, dynamically innovative products at scale (Ambos, Brandl, Perri, Scalera, & Van Assche, 2021). Lead MNEs can quickly make structural changes to the GVC, adding or subtracting network units, adjusting multi-sided platforms, and modifying existing links (Nambisan et al., 2019). Advanced technology provides end-to-end GVC visibility and thus allows lead firms to anticipate disruptions and map out responses. On the other hand, increasing digitization puts at a disadvantage GVC actors located away from innovation hubs and makes suppliers more interchangeable and therefore vulnerable (Kano et al., 2020).

GVCs under VUCA conditions

Today’s global business environment is characterized by high volatility, uncertainty, complexity, and ambiguity (VUCA). Most recently, the COVID-19 pandemic delivered a profound shock to GVCs and exacerbated extant trends contributing to institutional, geopolitical, and ecological volatility, namely geopolitical tensions, renewed protectionism, increased digitization/automation, and growing pressures on MNEs to improve the social and environmental footprint of their GVCs. Some lead firms have responded to pressures and disruptions associated with Liena Kano and Ari Van Assche

VUCA by restructuring their GVCs through, e.g., partner reconfiguration, supply chain diversification, greater localization/regionalization, reshoring, and friendshoring. In some instances, however, GVC restructuring may be inefficient or not feasible; in these cases, lead firms may engage in strategic governance adaptations to increase GVC resilience; these include greater emphasis on relational governance, corporate diplomacy, investment into advanced analytics, and entrepreneurial resource recombination (Kano et al., 2022).

ESG performance and full-chain responsibility

Lead firms are under growing pressure to focus on environmental, social and governance (ESG) aspects of operations, which translates into a call for “full chain responsibility”: an approach whereby the lead firm must accept responsibility for social and environmental violations throughout GVCs, including by subcontractors with whom it does not have contractual obligations (Narula, 2019). To address this pressure, many MNEs have adopted a combination of supplier codes of conduct and audit-based monitoring systems to promote sustainability along their GVCs (Locke, Amengual & Mangla, 2009). By requiring suppliers to impose those same practices on their own suppliers, MNEs have attempted to cascade compliance requirements down the value chain (Narula, 2019). The modest and uneven success of the cascading compliance model, however, is requiring lead firms to exert renewed efforts (and costs) to address chain liability by restructuring their GVCs – especially when operating in high distance countries with poor institutional quality – and by developing new orchestration capabilities that promote sustainability throughout GVCs (Van Assche & Brandl, 2021).

Implications for IB policy

The organizationally fragmented and geographically dispersed nature of GVCs has elevated the importance of tasks, linkages, and firms in IB policy discussions (Pietrobelli, Rabellotti, & Van Assche, 2021). The ability of MNEs to fine-slice and geographically disperse GVCs has pushed locations to “hyper specialize” in GVC tasks instead of entire industries, generating important gains from

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trade, but also spurring discussions about new types of industrial policy (Gereffi, 2018). The sustained international linkages that local GVC activities have with foreign locations act as a powerful conduit for accessing foreign knowledge but may also worsen a location’s vulnerability to foreign economic or geopolitical shocks. The power of lead firms to drive the structural and strategic governance of GVCs is an asset that policymakers increasingly attempt to harness to further their own economic or non-economic policy goals (Van Assche & Brandl, 2021). Liena Kano and Ari Van Assche

References

Ambos, B., Brandl, K., Perri, A., Scalera, V. G., & Van Assche, A. 2021. The nature of innovation in global value chains. Journal of World Business, 56(4): 101221. Buckley, P. J. 2009. Internalisation thinking: From the multinational enterprise to the global factory. International Business Review, 18(3): 224–235. Buckley, P. J. 2011. International integration and coordination in the global factory. Management International Review, 51(2): 269–283. Buckley, P. J., & Tian, X. 2017. Transnationality and financial performance in the era of the global factory. Management International Review, 57(4): 501–528. Capaldo, A. 2007. Network structure and innovation: The leveraging of a dual network as a distinctive relational capability. Strategic Management Journal, 28(6): 585–608. Casson, M. 2013. Economic analysis of international supply chains: An internalization perspective. Journal of Supply Chain Management, 49(2): 8–13. Coe, N. M., & Yeung, H. W. C. 2015. Global production networks: Theorizing economic development in an interconnected world. Oxford: Oxford University Press. Dicken, P. 2015. Global shift: Mapping the changing contours of the world economy (7th ed.). London: Sage Publications. Funk, C. A., Arthurs, J. D., Treviño, L. J., & Joireman, J. 2010. Consumer animosity in the global value chain: The effect of international production shifts on willingness to purchase hybrid products. Journal of International Business Studies, 41(4): 639–651. Gereffi, G. 2018. Global value chains and development: Redefining the contours of 21st century capitalism. Cambridge: Cambridge University Press. Gereffi, G., Humphrey, J., & Sturgeon, T. 2005. The governance of global value chains. Review

of International Political Economy, 12(1): 78–104. Henderson, J., Dicken, P., Hess, M., Coe, N., & Yeung, H. W. C. 2002. Global production networks and the analysis of economic development. Review of International Political Economy, 9(3): 436–464. Hillemann, J., & Gestrin, M. 2016. The limits of firm-level globalization: Revisiting the FSA/ CSA matrix. International Business Review, 25(3): 767–775. Kano, L. 2018. Global value chain governance: A relational perspective. Journal of International Business Studies, 49(6): 684–705. Kano, L., Narula, R., & Surdu, I. 2022. Global value chain resilience: Understanding the impact of managerial governance adaptations. California Management Review, 64(2): 24–45. Kano, L., Tsang, E. W. K., & Yeung, H. W. C. 2020. Global value chains: A review of the multidisciplinary literature. Journal of International Business Studies, 51(4): 577–622. Lampel, J., & Giachetti, C. 2013. International diversification of manufacturing operations: Performance implications and moderating forces. Journal of Operations Management, 31(4): 213–227. Lipparini, A., Lorenzoni, G., & Ferriani, S. 2014. From core to periphery and back: A study on the deliberate shaping of knowledge flows in interfirm dyads and networks. Strategic Management Journal, 35(4): 578–595. Locke, R., Amengual, M., & Mangla, A. 2009. Virtue out of necessity? Compliance, commitment, and the improvement of labor conditions in global supply chains. Politics & Society, 37(3), 319–351. Mudambi, R. 2008. Location, control and innovation in knowledge-intensive industries. Journal of Economic Geography, 8(5): 699–725. Nambisan, S., Zahra, A., & Luo, Y. 2019. Global platforms and ecosystems: Implications for international business theories. Journal of International Business Studies, 50(9): 1464–1486. Narula, R. 2019. Enforcing higher labor standards within developing country value chains: Consequences for MNEs and informal actors in a dual economy. Journal of International Business Studies, 50(9): 1622–1635. Pietrobelli, C., Rabellotti, R., & Van Assche, A. 2021. Making sense of global value chain-oriented policies: The trifecta of tasks, linkages, and firms. Journal of International Business Policy, 4(3), 327–346. Rowley, T. J. 1997. Moving beyond dyadic ties: A network theory of stakeholder influences. Academy of Management Review, 22(4): 887–910. Rugman, A. M., & Verbeke, A. 2004. A perspective on regional and global strategies of multi-

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156  Encyclopedia of international strategic management national enterprises. Journal of International Business Studies, 35(1): 3–19. Stallkamp, M., & Schotter, A. 2021. Platforms without borders? The international strategies of digital platform firms. Global Strategy Journal, 11(1): 58–80. Turkina, E., & Van Assche, A. 2018. Global connectedness and local innovation in industrial clusters. Journal of International Business Studies, 49(6): 706–728. Van Assche, A., & Brandl, K. 2021. Harnessing power within global value chains for sustainable development. Transnational Corporations Journal, 28(3). Verbeke, A., & Fariborzi, H. 2019. Managerial governance adaptation in the multinational

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enterprise: In honour of Mira Wilkins. Journal of International Business Studies, 50(8): 1213–1230. Verbeke, A., Hutzschenreuter, T., & Pyasi, N. 2021. The dark side of B2B relationships in GVCs–Micro-foundational influences and strategic governance tools. Journal of Business Research, 135: 816–828. Yeung, H.W. 2016. Strategic coupling: East Asian industrial transformation in the new global economy. Ithaca, NY: Cornell University Press. Zaheer, A., & Venkatraman, N. 1995. Relational governance as an interorganizational strategy: An empirical test of the role of trust in economic exchange. Strategic Management Journal, 16(5): 373–392.

42. Global virtual teams Global virtual teams (GVTs) are work groups composed of internationally distributed members who communicate primarily through electronic media. In globally operating firms, GVT have the important functions of completing distributed tasks, leveraging local expertise and resources, sharing knowledge internationally, and combining local responsiveness with global coordination. Whilst the term ‘global’ emphasises the wide geographic and national distribution of team members, GVTs have also been assigned other labels, including transnational, international virtual, and multicultural geographically distributed teams. Due to their dispersion, GVTs have to work across multiple boundaries. Team members collaborate across time zones, diverse socio-political contexts, nationalities, and organisational affiliations, which typically create boundaries in contextual knowledge, educational background, language, cultural values, norms, identities, and modes of sensemaking. Further, differences in language capability and national development can result in status and power differences (Paunova, 2017). In complex global organisations, GVTs additionally tend to face unstable team membership and fluid team boundaries, sometimes spanning different organisations. These characteristics create specific issues, but also advantages for GVTs. Boundaries between members can act as fault lines, namely dividing lines along which groups split into subgroups with separate identities (Lau & Murnighan, 1998) that can impede collaboration. Geographic and divisional boundaries yield diverse local priorities for team members, and facilitate power struggles between locations (Conroy et al., 2019). Cultural differences can create ‘processes losses’ by increasing divergent processes (e.g., conflict) and reducing convergent processes such as social integration (Stahl & Maznevski, 2021). In the same vein, cultural differences have the potential to hamper relational processes in GVTs, including communication, knowledge exchange, shared understanding (e.g., of tasks, norms, and roles), trust, and team identity (see Zimmermann, 2011). Working across time zones and relying on virtual, asynchro-

nous communication can exacerbate these difficulties. On the other hand, member diversity and virtual collaboration offer certain advantages. Owing to the variety of knowledge, ideas, and approaches to problem-solving, GVT diversity has been associated with decreased ‘groupthink’ (the tendency to adjust to the majority view in the group), increased creativity (Stahl & Maznevski, 2021) and innovation (Hung et al., 2021). Global dispersion can be used to gain efficiency by ‘working around the clock’ and avoiding unnecessary, lengthy meetings. Communication through electronic media counteracts issues of language diversity, because written virtual communication (e.g., emails, chats) gives non-native speakers more time for formulating and comprehending messages, which facilitates equal participation. Written communication also helps to structure the task (Gibson et al., 2014) and provides a trail of documentation that facilitates mutual understanding, retrospective clarification, and individual accountability. Virtual communication also renders surface-level distinctions (such as accents and demeanours) less salient, which can reduce the perceived cultural distance between team members. Ample research has explored how the typical issues of GVTs can be avoided and how their advantages can be realised. A lot of this work uses the input–process–output (IPO) lens. Characteristics such as diversity and geographic dispersion are here seen as inputs that affect outputs (e.g., creativity, performance), mediated by processes (e.g., communication, cohesion). Explanations to variations in outputs are typically sought by identifying additional factors or moderators of IPO relationships, and by elaborating on the IPO variables. An alternative view is that GVTs do not function according to a linear IPO sequence, but are embedded in multiple, dynamic, and interlinking processes through which they continuously develop in a non-linear manner, explaining the various, changeable outcomes. In the IPO tradition, GVT member diversity is thought to affect team outcomes to a lesser extent when team tasks allow for little employee discretion, making them less sensitive to variations among team members (e.g., production tasks as opposed to decision-making tasks), and when tasks are less interdependent, whereby team per-

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formance is less reliant on the quality of member interactions (Kankanhalli et al., 2007). Moreover, complex tasks are seen to provide more opportunities for process gains through cultural diversity (e.g., enhanced creativity) whilst also impeding alignment (Stahl & Maznevski, 2021). The impact of cultural diversity is further moderated by team members’ and leaders’ cultural intelligence, which supports intercultural interactions (e.g., Presbitero, 2021). GVT leaders can also counteract the impact of boundaries, for example by promoting strong shared goals, shared understanding, and team identity. Formal and informal boundary spanners (for example multicultural individuals who are competent at communicating across cultures; Backmann et al., 2020) can support cross-boundary communication and knowledge exchange. A psychologically safe communication climate mitigates the effects of cultural diversity, geographical dispersion, and electronic dependence on innovation (Gibson & Gibbs, 2006), and a diversity-supporting organisational climate facilitates knowledge exchange in GVTs (Hajro et al., 2017). Several coordination mechanisms are also important. Formalisation of objectives, agendas, and meeting schedules (if implemented at certain stages) has been found to increase knowledge sharing, collective understanding of local contexts, and a meaningful team identity despite GVT members’ multiple affiliations (Gibson et al., 2019). Strong and repeating temporal patterns of interactions, for example by alternating between face-to-face and virtual collaboration (Maznevski & Chudoba, 2000), help to coordinate work across time zones. Matching the type of communication technology with the purpose of communication inhibits issues of electronic communication. For example, ‘richer’ media (e.g., videoconferencing) enable synchronous interaction and non-verbal communication that is suitable for complex decision-making, whilst less rich media (email, repositories) are more efficient for information exchange (Maznevski & Chudoba, 2000). To sustain the match between communication technologies and purposes, the use of technology has to change with the nature of the task. Gibson et al. (2021) propose that during cycles of accumulating, integrating, and implementing knowledge, effective GVTs recognise cues indicating Angelika Zimmermann

that change is necessary, and co-evolve a ‘symbiosis’ of new knowledge management activities, purposes for interaction, and uses of communication technologies. GVT research has also distinguished between different types of diversity, which have different impacts on GVT outcomes. For example, surface-level (country and ethnicity) and deep-level (value, perspective, cognitive framework) cultural diversity were found to have different effects on team creativity, varying also with the degree of task complexity and interdependence (Wang, 2019). Contextual diversity (e.g., economic development), in turn, was found to have a positive effect on task outcomes, whilst personal diversity (e.g., age, gender, language skills) had a negative effect on psychological outcomes (Taras et al., 2019). Research has also elaborated on the notion of virtuality. Objective distance has here been distinguished from ‘perceived proximity’, namely perceptions of closeness amongst GVT members, which were shown to have a greater impact on work relationships compared with objective proximity (O’Leary et al., 2012). GVT members can even feel closer to their remote compared with collocated team members, depending on their communication frequency and perceived shared identity (for example regarding age, gender, and personal values; O’Leary et al., 2012). Fostering communication and highlighting commonalities are thus crucial for strengthening perceived proximity. This may, however, have to take different forms dependent on GVT members’ language proficiency. Eisenberg et al. (2021) found that verbal communication contributes to GVT members’ proximity perceptions only when members have similar proficiency of the shared language, whilst synchronous written communication improves perceived proximity only in the case of diverse language proficiency. Deviating from the IPO perspective, several authors have emphasised that GVT teams are embedded in multiple interlinking, non-linear processes. Zimmermann (2011) proposes that the host of cognitive, behavioural, and affective aspects of relationships in GVTs (e.g., shared understanding, communication, knowledge exchange, and interpersonal affect) influence each other and thereby form typical ‘configurations’, shaped by the constellation of orchestrating factors in the team structure, organisation,

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and socio-political context. Cramton and Hinds (2014) describe multilevel structuration dynamics through which GVTs adapt to cross-cultural differences. Tensions between locations owing to differences in communication styles, approaches to organisational control and work-related knowledge and problem-solving were here nested in local norms, institutions, and conditions. GVTs addressed the tensions through dialectic adaptation processes, shaped by local demands as well as interdependence across sites. For example, cross-site learning led to individual adaptations, which were then discouraged by local management, requiring further iterations of adaptation as well as changes in local norms. Others have suggested that the very existence and nature of a GVT is subject to ‘teaming’ processes. Einola and Alvesson (2019) describe how GVTs are made and unmade as their members continuously make sense of their team’s task and identity, and of each other’s sensemaking, to reach shared understanding. Different, evolving combinations of sensemaking here enabled teams to work together towards common goals. Santistevan and Josserand (2019) in turn show how teaming in GVTs involves the creation of ‘meta-teams’ (fluid team-like structures that provide a shared space of reference through common mindsets and operational practices) with multiple and parallel substructures that constantly emerge and divest to adapt to the changing demands of global work. There is much potential for future research to delve deeper into the complexities of GVTs. Studying multiple, interacting types of diversity and virtuality, and combinations of factors, moderators, and mediators, will help to better understand how the possible benefits of GVTs can be achieved. Further longitudinal research is needed to gain a more nuanced understanding of team processes and their development over time. Finally, studies that move beyond the boundaries of the IPO approach will help to better capture the non-linear dynamics of GVTs. Angelika Zimmermann

References

Backmann, J., Kanitz, R., Tian, A. W., Hoffmann, P., & Hoegl, M. (2020). Cultural gap bridging

in multinational teams. Journal of International Business Studies, 51(8), 1283–1311. Conroy, K. M., Collings, D. G., & Clancy, J. (2019). Sowing the seeds of subsidiary influence: Social navigating and political maneuvering of subsidiary actors. Global Strategy Journal, 9(4), 502–526. Cramton, C. D., & Hinds, P. J. (2014). An embedded model of cultural adaptation in global teams. Organization Science, 25(4), 1056–1081. Einola, K., & Alvesson, M. (2019). The making and unmaking of teams. Human Relations, 72(12), 1891–1919. Eisenberg, J., Glikson, E., & Lisak, A. (2021). Multicultural virtual team performance: The impact of media choice and language diversity. Small Group Research, 52(5), 507–534. Gibson, C. B., & Gibbs, J. L. (2006). Unpacking the concept of virtuality: The effects of geographic dispersion, electronic dependence, dynamic structure, and national diversity on team innovation. Administrative Science Quarterly, 51(3), 451–495. Gibson, C. B., Dunlop, P. D., & Cordery, J. L. (2019). Managing formalization to increase global team effectiveness and meaningfulness of work in multinational organizations. Journal of International Business Studies, 50(6), 1021–1052. Gibson, C. B., Dunlop, P. D., Majchrzak, A., & Chia, T. (2021). Sustaining effectiveness in global teams: The coevolution of knowledge management activities and technology affordances. Organization Science, 33(3), 1018–1048. Gibson, C. B., Huang, L., Kirkman, B. L., & Shapiro, D. L. (2014). Where global and virtual meet: The value of examining the intersection of these elements in twenty-first-century teams. Annual Review of Organizational Psychology and Organizational Behavior, 1(1), 217–244. Hajro, A., Gibson, C. B., & Pudelko, M. (2017). Knowledge exchange processes in multicultural teams: Linking organizational diversity climates to teams’ effectiveness. Academy of Management Journal, 60(1), 345–372. Hung, S. W., Cheng, M. J., Hou, C. E., & Chen, N. R. (2021). Inclusion in global virtual teams: Exploring non-spatial proximity and knowledge sharing on innovation. Journal of Business Research, 128, 599–610. Kankanhalli, A., Tan, B. C., & Wei, K. K. (2007). Conflict and performance in global virtual teams. Journal of Management Information Systems, 23(3), 237–274. Lau, D. C., & Murnighan, J. K. (1998). Demographic diversity and faultlines: The compositional dynamics of organizational groups. Academy of Management Review, 23(2), 325–340. Maznevski, M. L., & Chudoba, K. M. (2000). Bridging space over time: Global virtual team

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160  Encyclopedia of international strategic management dynamics and effectiveness. Organization Science, 11(5), 473–492. O’Leary, M. B., Wilson, J. M., & Metiu, A. (2012). Beyond being there: The symbolic role of communication and identification in the emergence of perceived proximity in geographically dispersed work. MIS Quarterly, 38(4), 1219–1244. Paunova, M. (2017). Who gets to lead the multinational team? An updated status characteristics perspective. Human Relations, 70(7), 883–907. Presbitero, A. (2021). Communication accommodation within global virtual team: The influence of cultural intelligence and the impact on interpersonal process effectiveness. Journal of International Management, 27(1), 100809. Santistevan, D., & Josserand, E. (2019). Meta-teams: Getting global work done in MNEs. Journal of Management, 45(2), 510–539. Stahl, G. K., & Maznevski, M. L. (2021). Unraveling the effects of cultural diversity in

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teams: A retrospective of research on multicultural work groups and an agenda for future research. Journal of International Business Studies, 52(1), 4–22. Taras, V., Baack, D., Caprar, D., Dow, D., Froese, F., Jimenez, A., & Magnusson, P. (2019). Diverse effects of diversity: Disaggregating effects of diversity in global virtual teams. Journal of International Management, 25(4), 100689. Wang, J., Cheng, G. H. L., Chen, T., & Leung, K. (2019). Team creativity/innovation in culturally diverse teams: A meta-analysis. Journal of Organizational Behavior, 40(6), 693–708. Zimmermann, A. (2011). Interpersonal relationships in transnational, virtual teams: Towards a configurational perspective. International Journal of Management Reviews, 13(1), 59–78.

43. Home and host country Ever since the seminal works of Adam Smith’s (1776) The Wealth of Nations and David Ricardo’s (1817) “comparative advantage theory”, there has been a long tradition of disaggregating the world into nation states and examining the global economy by reference to the interaction between them. Scholars have used this idea extensively to develop theories of international business (IB) and define key terms – such as foreign direct investment (FDI), multinational enterprise (MNE), home country and host country – necessary to advance IB scholarship. Foreign direct investment (FDI) is generally defined as an investment undertaken by an enterprise in another enterprise in a foreign country with lasting interest. The enterprise that undertakes FDI is known as a multinational enterprise (MNE), the country from where it originates or where it has its headquarters is referred to as the home country of the MNE, and the country where FDI is undertaken is known as the host country. It is important to note that the Organisation for Economic Co-operation and Development (OECD) has set a benchmark for an investment to be classified as FDI. According to this benchmark, for any foreign investment to be classified as FDI, the enterprise undertaking investment must gain at least 10% of the voting rights via the investment in another enterprise in a foreign country. If an investment falls short of 10% voting power, the foreign investment made is classified as foreign portfolio investment (FPI) and not classified as FDI. Coming back to the concept of home and host countries, it is important to note that international business, that is, business across nation states, can be conducted with and without undertaking FDI – for instance, by exporting or importing goods and services to/from another country. In such cases, the enterprise that undertakes imports or exports is doing international business, the country with whom imports or exports are undertaken will be known as the host country, and the country from where the enterprise operates or where it has its headquarters will be known as the home country.

Let us take a few examples to illustrate the concept of home and host country. Sam Walton, the founder of Walmart, opened the first Walmart store in Rogers, Arkansas, on 2 July 1962, and currently Walmart has approximately 10,500 stores, operating in 24 countries (Walmart, 2023). The United States of America (USA) is the home country for Walmart because Walmart originates from the USA and it is headquartered in the USA. Mexico, Canada, China and other countries (other than the USA) where it operates (see Figure 43.1 for details), either by undertaking FDI or by undertaking imports or exports, are its host countries. Similarly, the United Kingdom (UK) is the home country for British Petroleum (BP), where it has its headquarters (HQ), and all other countries from where it sources crude oil and countries where it sells petroleum products are its host countries. The HQ is the main office through which an enterprise controls and coordinates its foreign operations. Often HQs function like a hub through which other offices are connected. HQs can be called the central processing unit (CPU) of the enterprise, as it is the central place for making critical decisions. HQs are considered particularly important for MNEs, because top managerial teams operate from there and all the vital resources and knowledge held by the MNE are managed from HQs. Scholars emphasize the vitality of HQs in controlling and orchestrating resources and knowledge, which ultimately influence performance of the MNE, both in terms of creating efficiencies and synergies across its different units (Doz & Prahalad, 1981; Collis, Young, & Goold, 2007). Traditionally, HQs are set up in the home country of the MNE. This provides an ease in controlling and managing MNE affairs to the top managerial teams (Meyer & Benito, 2016), and an opportunity to associate corporate identity with its home country. Suter, Munjal, Borini, and Floriani (2021) suggest MNEs tend to relate to the home country because this can be a source of competitive advantage. For instance, Germany is known for its specialization in advanced engineering, and therefore German MNEs, such as Bosch, Siemens and Volkswagen, proudly associate their identity with their home country. Nevertheless, it has been observed that MNEs sometimes relocate their HQs to

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Figure 43.1

Home and host countries for Walmart

foreign countries for many strategic reasons. This allows the MNE to meet the demand of external stakeholders, such as shareholders (Birkinshaw, Braunerhjelm, Holm, & Terjesen, 2006), to minimize tax liability by shifting their base to a low-tax host country (Laamanen, Simula, & Torstila, 2012), as well as to disguise their country of origin (Munjal, Budhwar, & Pereira, 2018). HQs that operate from outside of the home country are commonly known as overseas HQs. Moreover, in the case of very large MNEs, who have presence across the globe, it has been observed that these firms have more than one HQ. For instance, Toyota has one HQ in Aichi (Japan) and another in Texas (USA), Nestlé has one HQ in Vevey (Switzerland) and another in Virginia (USA). Having multiple HQs allows these MNEs to control operations in different regions (Holt, Purcell, Gray, & Pedersen, 2008). Bouquet, Birkinshaw, and Barsoux (2016) report the case of Irdeto B.V., a Netherlands-based developer of security software for digital media who set up two HQs, one in Amsterdam (Netherlands) and one in Beijing (China). The authors suggest that having another HQ facilitates delegation of power that makes decision-making faster and ultimately improves performance. While there are advantages of having multiple HQs, sometimes this can cause social identity issues for the MNE. More than one HQ is more common in the case of cross-border joint ventures or international joint ventures (IJVs). An IJV is a typical organization that is formed out of partnership Surender Munjal

between two or more existing organizations. COMPAS (Cooperation Manufacturing Plant Aguascalientes) is a 50:50 joint venture between two automobile giants – Daimler and Nissan. The joint venture has been formed to build a manufacturing plant to produce next-generation premium compact vehicles in Argentina for the South American market, and it is led by international management team from Daimler and Nissan, with their respective HQs (Mercedes-Benz, 2023). The number of home and host countries is an indication of the degree of internationalization for any organization and its size. From the perspective of competitive advantages, a larger number of home and host countries may allow the organization to amass variety of resources and capabilities and improve its performance. This belief is based upon the fact that resources and capabilities are spread across the globe and organizations need to venture to various locations to build the pool of their resources and capabilities (Grant, 1991). Nonetheless, venturing into a variety of countries is likely to bring several challenges because every country is likely to have their own set of regulations and cultural norms – broadly called institutions (Scott, 1995). Some may have similar institutions while others may have dissimilar institutions, but whatever the degree of similarity and dissimilarity, organizations need to conform to local institutions to legitimize and survive (Patnaik, Munjal, Varma, & Sinha, 2022). Surender Munjal

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References

Birkinshaw, J., Braunerhjelm, P., Holm, U., & Terjesen, S. (2006). Why do some multinational corporations relocate their headquarters overseas? Strategic Management Journal, 27(7), 681–700. Bouquet, C., Birkinshaw, J., & Barsoux, J. L. (2016). Fighting the “headquarters knows best syndrome”. MIT Sloan Management Review, 57(2), 59. Collis, D., Young, D., & Goold, M. (2007). The size, structure, and performance of corporate headquarters. Strategic Management Journal, 28(4), 383–405. Doz, Y. L., & Prahalad, C. K. (1981). Headquarters influence and strategic control in MNCs. Sloan Management Review (pre-1986), 23(1), 15. Grant, R. M. (1991). The resource-based theory of competitive advantage: Implications for strategy formulation. California Management Review, 33(3), 114–135. Holt, J., Purcell, W.R., Gray, S.J., Pedersen, T. (2008). Decision factors influencing MNEs’ regional headquarters location selection strategies. In: Lewin, A.Y., Cavusgil, S.T., Hult, G.T.M., Griffith, D.A. (eds), Thought leadership in advancing international business research. Palgrave Macmillan, London. https://​ doi​.org/​10​.1057/​9780230594234​_6 Laamanen, T., Simula, T., & Torstila, S. (2012). Cross-border relocations of headquarters in

Europe. Journal of International Business Studies, 43(2), 187–210. Mercedes-Benz. (2023). https://​group​-media​ .mercedes​-benz​.com/​marsMediaSite/​en/​ instance/​ko/​Daimler​-and​-Renault​-Nissan​ -Alliance​-Start​-Manufacturing​-Joint​-Venture​ -in​-Mexico​.xhtml​?oid​=​9914993 Meyer, K. E., & Benito, G. R. (2016). Where do MNEs locate their headquarters? At home. Global Strategy Journal, 6(2), 149–159. Munjal, S., Budhwar, P., & Pereira, V. (2018). A perspective on multinational enterprise’s national identity dilemma. Social Identities, 24(5), 548–563. Patnaik, S., Munjal, S., Varma, A., & Sinha, S. (2022). Extending the resource-based view through the lens of the institution-based view: A longitudinal case study of an Indian higher educational institution. Journal of Business Research, 147, 124–141. Ricardo, D. (1817). Principles of political economy and taxation. New York: Dutton. Scott, W. R. (1995). Institutions and organizations. Thousand Oaks, CA: Sage. Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. Glasgow: Edinburgh Research Archive. Suter, M. B., Munjal, S., Borini, F. M., & Floriani, D. (2021). Conceptualizing country-of-origin image as a country-specific advantage: An insider perspective. Journal of Business Research, 134, 415–427. Walmart. (2023). https://​corporate​.walmart​.com/​ about

Surender Munjal

44. HRM practice transfer The transfer of HRM practices in MNEs is one of the dominant topics of interest in international HRM4 and comparative HRM studies.5 The central idea is that commonalities and differences exist among HRM practices within MNEs and between countries. Transfer is a process, which involves the flow of HRM practices from one unit (transferring unit) to another (receiving unit) in the MNE. These units typically involve the HQ and foreign subsidiaries. The main reason for transferring HRM practices is because it enhances the performance and competitiveness of MNEs and their subsidiaries. Yet, HRM practice transfer is a complex process. This is because it is influenced by an intricate interaction of internal and external factors, such as home- and host-country contexts and HQ–subsidiary relations. The transfer of HRM practices can be looked at as a holistic system or as a collection of bundles of practices. Alternatively, a focus on individual HRM practices sheds light on the significant variability in the adoption of these practices. Examples of individual HRM practices that scholars have examined include performance management, talent management, training and development, staffing, career management or remuneration and compensation. The direction of practice transfer is also important to consider. It may occur vertically from HQ to subsidiary, horizontally from subsidiary to subsidiary, or in reverse from subsidiary to HQ. Some scholars suggest the ‘transfer’ of best practices from HQ to subsidiaries is different from the ‘diffusion’ of HRM practices from a subsidiary back to the HQ or the rest of the MNE. Transfer is therefore more akin to a one-off event, whereas diffusion implies the gradual flow or dissemination of practices over time (Chiang et al., 2017). In any case, these terms are generally used interchangeably where diffusion is part of the broader transfer process.

7 4 5 6

There are many factors which influence the transfer process. One of the more heated and prominent debates looks at transfer from an organisational-level perspective, referred to as the standardisation versus differentiation of HRM practices (Rosenzweig & Nohria, 1994). This debate aligns with broader ideas in international strategy on global integration and local adaptation dilemma.6 Standardisation argues that the design of HRM practices should reflect corporate-level strategies that are driven by the HQ and adopted across subsidiaries. The reasons for this are largely due to cost efficiencies, a common corporate culture, and the smoother transfer and diffusion of practices globally. Standardised HRM practices represent a major source of ownership advantage in overseas markets and should be exploited by subsidiaries. This ‘forward diffusion’ of home-country practices is common in MNEs from developed countries, particularly when entering developing markets. Standardised HRM practices are often transferred, and monitored, through corporate expatriates7 that control foreign subsidiaries. For instance, US MNEs’ performance management practice uses individual employee appraisal schemes rather than the group. Others have added that standardised practices may resemble HQ in the home country, or they can resemble global ‘best’ practices that originate from anywhere in the MNE network. Alternatively, differentiation focuses on host-country subsidiaries with the autonomy to adapt practices from HQ to account for local idiosyncrasies. In this respect, subsidiaries’ HRM practices are more likely to be local in design and implementation. Equally, local subsidiaries may play a significant role in the development of new HRM practices, but only if they can be diffused within the MNE. A differentiation perspective emphasises the importance of host-country nationals leading subsidiaries who are local experts capable of creating new practices that are culturally relevant. The deployment of subsidiary individuals on inpatriate assignments can allow for the reverse diffusion of local practices at HQ. Expatriates may also be able to identify

See the entry on international HRM. See the entry on comparative HRM. See the entry on integration–responsiveness framework. See the entry on expatriation.

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which local practices are potentially relevant for diffusion. MNEs from emerging markets (EMNEs) are known to use a more adaptive approach of practice transfer to subsidiaries in developed countries. The reasoning here is that EMNEs leverage the knowledge sourced from developed countries to ‘reverse diffuse’ ‘best’ practices to the HQ. A more balanced perspective proposes a hybridisation of HRM practices. This approach sees subsidiaries as capable of balancing institutional duality through internal pressures to standardise HRM practices as well as external pressures to differentiate. One of the key advantages of having a balanced approach is it increases the degree of knowledge flow within and across the MNE. In this sense, hybridisation can involve both partial adoption and partial adaptation of HRM practices. Firms from newly industrialised economies like South Korea tend to take a more nuanced approach by modifying each individual practice through subsidiary discretion. Hybrid HRM practices show that the transfer process may be less linear than current studies portray and more iterative in nature. In this sense, HRM practice transfer is often executed and influenced through negotiation between the HQ and subsidiary. This may involve back-and-forth adjustment and refinement of HRM practices to satisfy both the transferring and receiving units. This can often lead to various political interactions during the initial creation of a hybrid practice all the way through to when it is implemented. Scholars have also looked at HRM practice transfer from the country-level perspective, i.e., convergence or divergence of HRM practices. The central question here is: do HRM practices follow the dominant model in their home country of origin, or do they adhere to their country of domicile? On the one hand, convergence scholars argue that, due to globalization, HRM practices will be homogeneous across countries. This outlook deems that ‘best practices’ exist which are transferrable and universal, and transferring these practices gives MNEs a competitive advantage. For instance, there is an abundance of research that evidences the successful compatibility of a US-based HRM model to different regions

(Japan, Korea, EU, New Zealand) (Fan et al., 2021). On the other hand, a divergence perspective views the transferability of best practices as constrained by a diversity of contextual issues such as cultural, institutional, and geographical distance. This approach sees the transfer process as particularly sensitive to social context. It is commonly accepted that the best practice transfer approach is most pronounced in US firms, which have an ethnocentric orientation, while firms from other countries are generally more flexible. Alternatively, some scholars have suggested a crossvergence approach that is essentially a hybrid or mixed HRM model that combines the advantageous traits of each (Farndale et al., 2017). HRM practice transfer is ultimately a complex social process that is influenced by a variety of organisational and institutional factors across MNEs and national contexts. Kieran M. Conroy

References and selected further reading

Chiang, F.F., Lemański, M.K., & Birtch, T.A. (2017). The transfer and diffusion of HRM practices within MNCs: Lessons learned and future research directions. The International Journal of Human Resource Management, 28(1): 234–258. Edwards, T., Sanchez-Mangas, R., Jalette, P., Lavelle, J., & Minbaeva, D. (2016). Global standardization or national differentiation of HRM practices in multinational companies? A comparison of multinationals in five countries. Journal of International Business Studies, 47(8): 997–1021. Fan, D., Zhu, C.J., Huang, X., & Kumar, V. (2021). Mapping the terrain of international human resource management research over the past fifty years: A bibliographic analysis. Journal of World Business, 56(2): 101185. Farndale, E., Brewster, C., Ligthart, P., & Poutsma, E. (2017). The effects of market economy type and foreign MNE subsidiaries on the convergence and divergence of HRM. Journal of International Business Studies, 48(9): 1065–86. Rosenzweig, P.M., & Nohria, N. (1994). Influences on human resource management practices in multinational corporations. Journal of International Business Studies, 25(2): 229–251.

Kieran M. Conroy

45. Informal networks Definition and framing

Selected examples of informal networks

Informal networks are formed by informal ties between actors. They can be defined as channels embedded in the respective culture that provides the general behavioral norms and ideals for interpersonal exchange. Network members have the privilege of access to favors. They can rely on mutual support and goodwill and the sharing of opportunities, which gives them a relational advantage over non-members (Minbaeva et al., 2022; Horak et al., 2020). While informal networks exist in every country, they differ in their extent, intensity and shape. Typical examples of informal networks include guanxi (China), yongo and inmaek (South Korea), wasta (Arab world) or blat and svyazi (Russia and the post-Soviet states). By contrasting and comparing informal and formal networks, Minbaeva et al. (2022) describe informal networks as having a tendency to form as biographical by-products than purposefully accumulated social capital. While informal networks have unique characteristics, many tend to be affective in nature but simultaneously instrumental in usage. Often, they are based on affect and/ or a common base first and are instrumentalized later. Affect and a common base can lead to ad hoc trust that is granted to personally unknown network members and can be rooted in having attended the same educational institution (e.g., high school or university) or originating from the same city or region, amongst others (Horak, 2014; Luo, 2020). Typical of informal networks is their ambivalence, as they have strengths and weaknesses. While some see informal networks as a source for cronyism, favoritism or corruption, their strengths are often overlooked. They play an important role in organizations and in society. Through informal networks, tasks can be more quickly executed so that transaction costs can be reduced. Due to peer pressure, they efficiently curtail free riding and opportunism. Empirical research shows that they help to improve organizational performance (Peng & Luo, 2000).

Among the many informal ties and networks that are known (for an overview, see Ledeneva, 2018), prominent examples include guanxi, wasta and yongo. These are culturally embedded social structures that characterize important relationships in the respective society. For cultural outsiders, they are not easy to understand and are in general difficult to define. Nevertheless, guanxi can be described as a personalized connection between people that are subjectively close and potentially resourceful. With the economic rise of China and its institutional development, scholars assumed that people would draw less on informal guanxi ties, but empirical studies have proven that guanxi has not lost its power today (Bian, 2019). In business, a company cannot go far unless it develops an extensive guanxi web to draw upon for support and favors (Luo, 2020). In Arab countries, wasta is described as a way of life for Arabs. It is a relational contract that obliges relatives (family, clan, tribe or sect), close friends or acquaintances to provide favorable treatment to group members. Wasta pervades many aspects of life in Arab countries. In business, when it comes to recruitment and promotions, wasta can be more influential in decision-making than a candidate’s competence and fit to the position or past job performance (Alsarhan et al., 2021). Since family, clan, tribe or sect membership defines group membership and who benefits from wasta, an important question in international management remains how foreign managers, i.e., expatriates, can manage effectively in Arab countries when the chances of becoming an ingroup member are low. The latter question is also relevant in relation to yongo networks in South Korea. While the word inmaek describes a conventional social network, yongo is distinct. The term is used to describe “personal relationships in Korea that are attached to an affiliation to an informally organized group. (…) Yongo derives its main cohesion power from strong particularistic ties, based on kin, educational institution (school/university) and region” (Horak, 2014: 87). These ties are seen as immutable and irreversible as one is quasi born into these ties (education-based ties are an exception). Loyalty between yongo ingroup members is higher than an employee’s loyalty towards

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a corporate code of conduct and, similarly to wasta ties, a foreign manager will not be able to acquire yongo and engage in yongo networking, which can have serious implications for expatriates’ job performance and wellbeing. Informal networks are therefore vital for firm relational strategies that translate into competitive advantage, as shown by Lee et al. (2022). Typically, subsidiaries of multinational corporations (MNCs) operating abroad face the challenge of becoming socially integrated in a foreign environment. This is necessary to receive market- and competitor-relevant information, establish cohesion within distribution or supply chain channels, understand sociocultural trends early or develop a connection to the respective government, among several other items where informal relationships help to facilitate the exchange or are a precondition for a business relationship. Since networks differ in their openness and accessibility for outsiders, Lee et al. (2022) suggest, by using the example of yongo networks in South Korea, that MNCs either consider a proactive or reactive strategy or a mix of both. In a nutshell, a reactive strategy would focus on hiring and harnessing a local manager’s yongo network. While this may temporarily solve the problem, there is a risk of losing the relational network once the manager leaves the firm, and there is also a high dependence on the manager making the firm dependent. A proactive strategy is a long-term strategy that refrains from taking advantage of yongo ties and instead develops its own instrumental ties based on a firm’s competitive strength and reputation by deeply engaging with local institutions. This may take time, but the dependence on single managers would be reduced. Utilizing both approaches in parallel and shifting at a later stage from a reactive to a proactive strategy may be an option to optimally take advantage of local informal networking opportunities. Sven Horak

References and suggested further reading

Alsarhan, F., Ali, S. A., Weir, D., & Valax, M. (2021). Impact of gender on use of wasta among human resources management practitioners. Thunderbird International Business Review, 63(2), 131–143. Bian, Y. (2019). Guanxi, how China works. Cambridge, UK: Polity Press. Georgiadou, A., & Syed, J. (2021). The interaction between gender and informal social networks: An East Asian perspective: Gender diversity management in East Asia. Human Resource Management Journal, 31(4), 995–1009. Horak, S. (2014). Antecedents and characteristics of informal relation-based networks in Korea: Yongo, Yonjul and Inmaek. Asia Pacific Business Review, 20(1), 78–108. Horak, S. (ed.) (2022). Informal networks in international business. Bingley, UK: Emerald Publishing. Horak, S., Afiouni, F., Bian, Y., Ledeneva, A., Muratbekova-Touron, M., & Fey, C. (2020). Informal networks: Dark sides, bright sides, and unexplored dimensions. Management and Organization Review, 16(3), 511–542. Ledeneva, A. (ed.) (2018). The global encyclopaedia of informality (Vol. 1 and 2). London: University College London Press. Lee, J. M., Paik, Y., Horak, S., & Yang, I. (2022). Turning a liability into an asset of foreignness: Managing informal networks in Korea. Business Horizons, 65(3), 351–364. Luo, Y. (2020). Guanxi and business. Word Scientific: Singapore. Minbaeva, D., Ledeneva, A., Muratbekova-Touron, M., & Horak, S. (2022). Explaining the persistence of informal institutions: The role of informal networks. Academy of Management Review, forthcoming. doi: http://​dx​.doi​.org/​10​ .5465/​amr​.2020​.0224 Minbaeva, D.B. & Muratbekova-Touron, M. (2013). Clanism. Management International Review, 53(1), 109–139. Peng, M.W., & Luo, Y. (2000). Managerial ties and firm performance in a transition economy: The nature of a micro-macro link. Academy of Management Journal, 43(3), 486–501.

Sven Horak

46. Integration– responsiveness framework The integration–responsiveness (IR) framework of Prahalad and Doz (1987) has been used extensively in international business (IB) to represent the diverse and conflicting environmental pressures confronting multinational corporations (MNCs) as they expand worldwide. Essentially, Prahalad and Doz (1987) adapted the classic differentiation and integration concepts of Lawrence and Lorsch (1967) into the IR framework as we know it today. As per the IR framework, firms are confronted with two broad types of pressures: the pressures of global integration (GI, or I) and the pressures of local responsiveness (LR, or R). The GI pressures – such as the need to reduce cost through large-scale investments, and the presence of global competitors in the firm’s target markets – impel firms to conduct their activities on a global basis. In contrast, the LR pressures – such as diverse government regulations, and differences in customer needs and preferences across countries – require firms to manage their activities on a country-by-country basis. Combining these two pressures, there are

four possible types of business environments that firms operating in international markets may confront: (1) an international environment in which both GI and LR pressures are low; (2) a global environment with high GI pressures and low LR pressures; (3) a multinational environment with high LR pressures and low GI pressures; and (4) a transnational environment in which both GI and LR pressures are high (Ghoshal and Nohria, 1993) (see Figure 46.1). Besides identifying the four types of business environments, the IR framework provides normative guidelines about the strategy and organization structure that best fits each of these four international business environments. In the next section, we briefly present the wide range of applications and extensions of the IR framework in the literature, before discussing the various critiques of and possible future directions for the IR framework.

Applications and extensions

The earliest applications of the IR framework fall into three broad categories: those that operationalize IR as different aspects of the business environment pressures (as per the original IR framework), those that consider IR as firm responses to the business environment, and a study that considers IR

Source:  Adapted from Bartlett and Ghoshal (1989), and Prahalad and Doz (1987).

Figure 46.1

Integration–responsiveness (IR) framework

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as managerial mindset. Roth and Morrison (1990) and Johnson (1995) fall into the first category, as each measure the environment pressures with a set of 14 items. On the other hand, Jarillo and Martinez (1990), Martinez and Jarillo (1991), Taggart (1997, 1998), and Harzing (2000) characterize IR in terms of firm strategies, decisions, and responses to their environment rather than the environment pressures per se. Murtha, Lenway and Bagozzi’s (1998) study falls into the third category, as it is distinctive in focusing on managerial mindset rather than pressures or firm response. Besides the traditional applications of the IR framework illustrated above, several studies extend the IR framework in new directions. Devinney, Midgley, and Venaik (2000) added a third dimension labelled transactional completeness to capture the pressures to outsource or internalize the various stages in the firm’s value chain. Whereas the extended IRC framework parallels Dunning’s ownership, location, and internalization (OLI) paradigm, the third dimension in both models (completeness and internalization) is related more to the broad theory of the firm and therefore relevant for both domestic and international firms. Lin and Hsieh (2010) extend the IR framework by incorporating a new construct of procedural justice. They show how procedural justice varies across the different subsidiary roles, and how the degree of fit between subsidiary roles, operational capabilities of coordination and configuration, and procedural justice affects subsidiary performance. While the focus of the IR framework is on the business environment, strategy, and performance of the MNC as a whole, there is growing interest among MNC scholars and practitioners to understand the factors that influence the strategy and performance of the various country subsidiaries of MNCs. To address this challenge, Tian and Slocum (2014) integrate the IR framework with contingency theory to show how the subsidiary-level business strategy may vary from the overall MNC strategy in response to the specific contingencies facing the MNC subsidiary in a host country. In general, the aim of the IR framework is largely on the market strategies of MNCs. However, societies are increasingly interested in the non-market activities of MNCs, in order to understand the extent to which

they fulfil their roles and responsibilities in achieving the goals of other stakeholders beyond the company shareholders. To address this important issue, Banerjee, Venaik and Brewer (2019) extend the IR framework to incorporate the non-market corporate political strategies of MNC subsidiaries and examine the effect of both market and non-market strategies on achieving the twin goals of subsidiary legitimacy and performance in host countries. As originally envisaged, the IR framework focused on MNCs from developed countries expanding into other developed and developing countries, and did not adequately capture the strategies of MNCs from emerging markets. To overcome this limitation, Fan and Zhu (2014) extend the IR framework to examine the strategy of MNCs from emerging markets and their subsidiaries in advanced economies. Chakravarty et al. (2017) further extend the IR framework to incorporate the regional aspect of MNCs, to complement the current focus of the framework on the firm’s corporate- and subsidiary-level strategies. And Li, Yu, and Seetoo (2010) go deeper into the regional strategy debate and demonstrate how the subregional headquarters in host countries are closely involved in the decisions made by the MNC subsidiaries, and their parent and regional headquarters, to finely balance the global integration and local responsiveness imperatives in host countries. The scope of the IR lens has also been extended beyond the original aim of examining the overall strategy and structure of MNCs, to include specific business functions, decisions, and activities of international firms, such as divestment strategies of different types of MNCs (Benito, 2005), market segmentation and brand loyalty (Maderer & Holtbrügg, 2019), ambidexterity in HRM strategies (Malik et al., 2019), and knowledge-sharing among the headquarters and subsidiaries of MNCs (Kasper et al., 2009). Overall, the wide variety of extensions of the IR framework have enriched the application of the framework to a broader range of historical and contemporary IB phenomena.

Critiques

One of the earliest critiques of the IR framework was presented by Venaik, Midgley, and Devinney (2004). Given the high level of diversity, dynamism, and complexity in the

Sunil Venaik, David Midgley and Timothy Devinney

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international business environment and the industries in which MNCs operate, Venaik et al. (2004) proposed the need to expand the domain of the IR pressures confronted by multinational firms. In addition, they question the way we conceptualize, operationalize, and analyse the IR pressures confronting MNCs. Most studies use the traditional, reflective approach, wherein the item measures of the IR pressures are considered to be highly interrelated and hence assumed to jointly constitute the IR pressures. However, as Venaik et al. (2004) demonstrate, the various components of the IR pressures are distinct in nature and there is no theoretical rationale to assume that they are interrelated and hence reflect some higher-order IR constructs. In fact, as Venaik and Midgely (2019) show, the IR dimensions are best conceptualized as multilevel constructs. At the first level, the items used to measure the various components of the IR pressures, such as cost, competition, customers, governments, etc., are reflective in nature. At the second level, these components are aggregated as formative constructs to create the IR dimensions. Thus, a two-level hybrid approach is better suited for conceptualizing and measuring the IR pressures, rather than a purely reflective or a formative approach. Another important issue in both the theorizing and practical application of the IR framework is the high level of confounding between the IR pressures, and MNCs’ strategic response to these pressures. At a simple level, using the same nomenclature, such as international, global, etc., to label both the fit strategies and their respective business environments creates considerable confusion in research and pedagogy. Moreover, according to the fit logic underpinning the IR framework, MNCs pursue strategies that have a good fit with their respective business environments. Following the logic of isomorphism between the business environment pressures and the firm’s strategic response to these pressures, researchers often measure firm strategy, and infer the IR pressures confronting firms from their strategy. However, the fit perspective fails to recognize heterogeneity in strategies, resources, and capabilities among the MNCs operating in the same business environment, for example, Apple versus Samsung in the mobile phone industry. To overcome this conceptual weakness, it is important to measure the various com-

ponents of firm strategy, and the business environment pressures as distinct, separate phenomena, and not infer one from the other using the fit logic. The strategy and environmental constructs should then be related empirically to verify if the theoretical logic of fit is supported or refuted with data from the real world of practice. It is important to recognize that the theory of fit in the IR framework operates at two levels. One is the assumption of fit between the IR pressures and the firm’s strategy and structure response to these pressures, as mentioned in the previous paragraph. The second is the contingency-based fit perspective which posits that firms with a good environment–strategy/structure fit perform better than firms that do not have a good fit. However, in most cases, neither of these fit ideas are explicitly tested with data. As Venaik and Midgley (2019) show, MNC strategy does not always have a good fit with its IR pressures. Moreover, firms that have a good fit do not necessarily outperform those that do not have a good environment–strategy fit. In other words, there is strong evidence of both fit and equifinality operating in the marketplace. Many MNCs combine their idiosyncratic resources and capabilities to perform well, even though their strategy does not, in theory, have a good fit with their business environment. The idea of equifinality recognizes the myriad pathways that MNCs can pursue to operate successfully in the marketplace and provides an important extension to the fit-based IR framework. Unfortunately, unlike the popular idea of fit, the notion of misfit or equifinality has not received due attention in the broader IB strategy literature. Notwithstanding the extension of the IR framework to examine subsidiary strategy and performance, and to understand the non-market strategies of MNCs (as discussed above), some scholars have expressed concern with such extensions due to their incompatibility with the logic of the MNC-centred IR framework. For example, Haugland (2010) questions the appropriateness of the IR framework for studying subsidiary management. Kujala and Sajasalo (2009) highlight the shortcomings in the IR framework from an ethical standpoint. And Barkemeyer and Figge (2014) argue against the applicability of the IR framework to examine subsidiary-level Corporate Social Responsibility (CSR) strategies. However,

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Integration–responsiveness framework  171

we believe IB scholars should continue to refine and adapt the IR framework in the light of continuing changes in the global business environment and strategy landscape of MNCs. Extensions and adaptations of the IR framework to explain IB-related phenomena are welcome additions to the IB toolkit and should be embraced by the scholarly community. In the next section, we suggest additional directions for the IR framework to evolve in future.

Future directions

While there are many new directions in which the IR framework could evolve in future, we focus on five key areas that capture the opportunities and challenges for international businesses. Two of these relate to environment pressures, two refer to firm responses to the business environment pressures, and one is a hybrid combining both pressures and responses. We believe pursuing these new directions would maintain and enhance the relevance and currency of the IR framework for future MNC-related research and practice. The first important area is the need to comprehensively cover within the IR framework the myriad macro-environment pressures confronting MNCs. In addition to the traditional IR pressures related to cost, competition, customer, and country factors, MNCs are subject to several new, and as-yet unknown, forms of IR pressures that MNCs need to respond to as part of their international operations. Some recent examples of these global, macro-economic pressures include: the Covid-19 pandemic, the rise of China as an economic superpower, geopolitical tensions due to the war in Ukraine, global terrorism, etc. There is also growing concern that these new pressures will force MNCs to reverse the long-term course of globalization, resulting in increasing regionalization and localization of firm supply chains and associated functions and activities. The second important change in the global business landscape is the need to incorporate a broader stakeholder perspective in MNC operations worldwide, and which goes beyond the traditional shareholder maximization perspective that has dominated the business landscape in the past. There is growing pressure on firms to incorporate UN Sustainable Development Goals as part of their global strategy. Similarly, the need

to pursue sustainable strategies to manage the adverse impact of climate change are increasingly dominating the MNC agenda worldwide. In response to these new pressures, MNCs need to take a more proactive role in CSR and climate change mitigation related activities, and incorporate local, community development as part of their foreign investment goals in addition to shareholder returns on foreign investment. The third trend is technological, and the growing role of IT in internationalizing MNC operations. We consider this to be a hybrid of both pressures and responses, since the two co-evolve, and it is difficult to clearly demarcate between the IT pressures and firm response to these pressures. With rapid developments in both IT hardware and software, MNCs increasingly use large-scale IT systems, including AI-related automation, to enhance productivity. However, there are also serious concerns, including lack of societal trust in firms acting responsibly as custodians of personal information about individuals and organizations. The IR framework also needs reframing to accommodate new forms of online, platform-based firms such as eBay, Amazon, etc., since the original IR framework was conceived based on brick-and-mortar firms. The fourth important aspect of the IR framework that needs fine-tuning is the core idea of fit that is at the heart of the framework. As mentioned in the previous section, fit in the IR framework refers to both the environment–strategy fit, and the notion that fit firms outperform those that do not pursue strategies consistent with the IR fit perspective. However, it is important to recognize that MNCs are open systems operating in complex, diverse, and dynamic business environments. MNC managers, like all humans, have natural biases and cognitive limitations. In addition, firms within the same industry vary widely in their resources and capabilities. All these idiosyncrasies open a wide range of strategic and structural possibilities for MNCs to operate successfully in the marketplace. In other words, MNC researchers and practitioners need to consider both fit and equifinality perspectives for designing optimal organizational strategy and structure that is most efficient and effective for the firm to serve global markets. The fifth aspect that needs to be explicitly captured in the IR framework is that of

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Source:

Adapted from Bartlett and Ghoshal (1989) and Prahalad and Doz (1987).

Figure 46.2

Proposed extended integration–responsiveness–learning (IRL) framework

organizational learning. Knowledge creation and dissemination is a critical imperative for the MNC network. However, in the original IR framework, the idea of learning is incorporated within the transnational environment characterized by high pressures of both global integration and local responsiveness. We believe the pressures for organizational learning apply universally across all four quadrants of the IR framework, albeit the nature and degree of the learning pressures may vary across the four cells. Accordingly, we propose that a third dimension of organizational learning (OL) should be added to the traditional, two-dimensional IR framework, resulting in a new, extended, three-dimensional integration–responsiveness–learning (IRL) framework (see Figure 46.2). We believe our proposed extension will comprehensively capture the broad range of pressures confronting MNCs now and in the future. To conclude, since its conception over 35 years ago, the IR framework has been applied in IB theory and practice to understand the forces that drive MNCs to design appropriate strategies for their global operations. Our chapter provides an introduction to the IR framework, how it has been applied, extended, and critiqued in the literature, and how it could be expanded in future to keep

it salient and in tune with the new business landscape. Given the rapidly changing international business environment, it is important to update and refine the IB frameworks to better reflect the contemporary reality of international business. Sunil Venaik, David Midgley and Timothy Devinney

References

Banerjee, S., Venaik, S., & Brewer, P. (2019). Analysing corporate political activity in MNC subsidiaries through the integration-responsiveness framework. International Business Review, 28(5), 101498. Barkemeyer, R., & Figge, F. (2014). CSR in multiple environments: The impact of headquartering. Critical Perspectives on International Business, 10(3), 124–151. Bartlett, C. A., & Ghoshal, S. (1989). Managing Across Borders: The Transnational Solution. Boston: Harvard Business School Press. Benito, G. R. G. (2005). Divestment and international business strategy. Journal of Economic Geography, 5(2), 235–251. Chakravarty, D., Hsieh, Y., Schotter, A. P. J., & Beamish, P. W. (2017). Multinational enterprise regional management centres: Characteristics and performance. Journal of World Business, 52(2), 296–311. Devinney, T., Midgley, D., & Venaik, S. (2000). The optimal performance of the global firm:

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Integration–responsiveness framework  173 Formalising and extending the integration– responsiveness framework. Organization Science, 11(6), 674–695. Dunning, J. H. (1988). Explaining International Production. London: Unwin Hyman. Fan, D., & Zhu, J. C. (2014). How do Chinese multinationals perceive factors affecting the integration-responsiveness framework? International Journal of Emerging Markets, 9(2), 181–204. Ghoshal, S. & Nohria, N. (1993). Horses for courses: organizational forms for multinational corporations. Sloan Management Review, 34(2), 23–35. Harzing, A. W. (2000). An empirical test and extension of the Bartlett and Ghoshal typology of multinational companies. Journal of International Business Studies, 31(1), 101–120. Haugland, S. A. (2010). The integration-responsiveness framework and subsidiary management: A commentary. Journal of Business Research, 63(1), 94–96. Jarillo, J. C., & Martinez, J. I. (1990). Different roles for subsidiaries: The case of multinational corporations in Spain. Strategic Management Journal, 11(7), 501–512. Johnson, J. H. (1995). An empirical analysis of the integration-responsiveness framework: US construction equipment industry firms in global competition. Journal of International Business Studies, 26(3), 621–635. Kasper, H., Lehrer, M., Mühlbacher, J., & Müller, B. (2009). Integration-responsiveness and knowledge-management perspective on the MNC: A typology and field study of cross-site knowledge-sharing practices. Journal of Leadership & Organizational Studies, 15(3), 287–303. Kujala, J., & Sajasalo, P. (2009). Reforming the integration-responsiveness framework: A business ethics perspective. Journal of International Business Ethics, 2(1), 59–72. Lawrence, P. R., & Lorsch, J. W. (1967). Organization and Environment: Managing Differentiation and Integration. Boston, MA: Harvard Business School Press. Li, G., Yu, C., & Seetoo, D. (2010). Toward a theory of regional organization: The emerging role of sub-regional headquarters and the impact

on subsidiaries. Management International Review, 50(1), 5–33. Lin, S., & Hsieh, A. (2010). International strategy implementation: Roles of subsidiaries, operational capabilities, and procedural justice. Journal of Business Research, 63(1), 52–59. Maderer, D., & Holtbrügge, D. (2019). International activities of football clubs, fan attitudes, and brand loyalty. Journal of Brand Management, 26(4), 410–425. Malik, A., Sinha, P., Pereira, V., & Rowley, C. (2019). Implementing global-local strategies in a post-GFC era: Creating an ambidextrous context through strategic choice and HRM. Journal of Business Research, 103, 557–569. Martinez, J. I., & Jarillo, J. C. (1991). Coordination demands of international strategies. Journal of International Business Studies, 22(3), 429–444. Murtha, T. P., Lenway, S. A., & Bagozzi, R. P. (1998). Global mind-sets and cognitive shift in a complex multinational corporation. Strategic Management Journal, 19(2), 97–114. Prahalad, C. K., & Doz, Y. L. (1987). The Multinational Mission: Balancing Local Demands and Global Vision. New York: Free Press. Roth, K., & Morrison, A. J. (1990). An empirical analysis of the integration-responsiveness framework in global industries. Journal of International Business Studies, 21(4), 541–564. Taggart, J. H. (1997). An evaluation of the integration-responsiveness framework: MNC manufacturing subsidiaries in the UK. Management International Review, 37(4), 295–318. Taggart, J. H. (1998). Strategy shifts in MNC subsidiaries. Strategic Management Journal, 19(7), 663–681. Tian, X., & Slocum, J. W. (2014). What determines MNC subsidiary performance? Evidence from China. Journal of World Business, 49(3), 421–430. Venaik, S., & Midgley, D. F. (2019). Archetypes of marketing mix standardization-adaptation in MNC subsidiaries: Fit and equifinality as complementary explanations of performance. European Journal of Marketing, 53(2), 366–399. Venaik, S., Midgley, D. F., & Devinney, T. M. 2004. A new perspective on the integrationresponsiveness pressures confronting multinational firms. Management International Review, 44(1), 15–48.

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47. Intellectual property rights According to the World Intellectual Property Organization (WIPO), intellectual property (IP) “refers to creations of the mind, such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce” and is protected by law (World Intellectual Property Organization, n.d.a). In turn, the World Trade Organization (WTO) deliberates that intellectual property rights (IPRs) “usually give the creator an exclusive right over the use of his/her creation for a certain period of time” (World Trade Organization, n.d.). IPRs usually fall under two broad categories, namely copyright and rights related to copyright and industrial property. The latter embraces trademarks, patents, industrial designs and trade secrets. The aim of the time-limited protection of intellectual property is to both encourage creativity and protect financially the creator and at the same time to secure public welfare. The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) reflects the need for flexibility in patent rights (TIR, 2021). Multinational enterprises (MNEs) are considered to be the main drivers of global research and development (R&D) activities, with companies such as Amazon, Alphabet, Samsung, Huawei, Microsoft dominating in the top 20 of global R&D spenders (WIR, 2019). R&D internationalisation by MNEs has been expanding in the last 50 years, with countries like China and India playing an increasingly important role as generators and recipients of R&D alongside major OECD economies (Dachs & Zahradnik, 2022). Cross-border knowledge-sourcing strategies, the evolving geography of R&D with the rise of emerging markets and emerging market MNEs (EMNEs) as well as the fragmentation of production through the “global factory”, global value chains (GVCs) and/ or global production networks (GPNs) have transformed the innovation strategies and influenced the location of foreign R&D of MNEs, which are under pressure to address the challenges created by weak IPRs in many of the countries in which they operate (Papanastassiou, Pearce & Zanfei, 2020; Zhao, 2006).

The expansion of the “global factory” is a reflection of MNEs’ concerns to safeguard knowledge through internalised activities at a global scale in response to weak IPRs (Buckley, 2009). Hannibal and Knight (2018) also emphasise how IPRs and intellectual property status influence the decision of where to locate production activities, reshaped by new and disruptive technologies such as additive manufacturing (AM), while they acknowledge how, for example, digitalisation puts further pressure on security concerns regarding patent and trademark violations. However, as most of GVCs are MNE-driven, it is becoming evident that their context extends beyond internalisation into a complicated network of external stakeholders (Buckley et al., 2020). Thus, MNE-driven GVCs rely on a complex and interdependent network of both externalised (outsourced) and internalised activities, not only in production but also in technology-generation (Enderwick & Buckley, 2019). Upgrading and governance in GVCs are consequently very much dependent on the institutional quality of economies they are present in and thus on the existence or not of “institutional voids” (Lee & Gereffi, 2021; Khanna & Palepu, 1997). IP policies and legislation can both drive forward countries towards knowledge-intensive activities, contributing to the upgrading of the local component of the GVC (Yang, Zhang & Yu, 2020). At the same time, strong IPRs safeguard MNEs’ fears of potentially undesired technology leakages and misappropriation (Jaax & Miroudot, 2021; Albino-Pimentel, Dussauge & El Nayal, 2022). When this is happening, i.e., when IPR infringements occur, forces of reshoring or repatriation of direct investments by MNEs can happen, as explored for US and UK manufacturing GPNs in Vanchan, Mulhall and Bryson (2018). In conclusion, in most cases, emerging and developing economies are the ones with weak IPRs and it is thus not surprising that MNEs can be deterred to invest in such economies (Estrin, Meyer & Pelletier, 2018). Weak IPRs compromise the ability of MNE subsidiaries to innovate and thus deprive the host economy of developing high value-added activities and skills through spillovers and technology transfers (Konara, Batsakis & Shirodkar, 2022; Smeets & de Vaal, 2016; Oetzel & Doh, 2009). The need for institutional reforms in developing econ-

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omies concerning the variability in quality IPR regimes and their implementation has been at the centre of policymaking debate of whether strong IPR regimes only promote the MNEs’ competitiveness at the expense of local companies or whether they encourage more inward FDI, benefiting the domestic economy (Khoury, Cuervo-Cazurra, & Dau, 2014; Markusen, 2001). At the same time, MNEs, apprehensive about the negative impact of IPRs’ heterogeneity at a national level, pursue a more homogeneous international policy agenda reflecting mainly a transformation of their international knowledge-sourcing strategies, from demand-oriented innovation strategies (of an ethnocentric origin) to supply-oriented innovation strategies, prioritising asset-augmentation and access to talent (Ramamurti, 2004; Kuemmerle, 1999). The reforms of the Paris Convention for the Protection of Industrial Property reflect WIPO’s support for stronger IPRs that would encourage more inward FDIs in emerging and developing economies contributing to their developmental prospects and their integration with the global economy (Khoury & Peng, 2011; World Intellectual Property Organization, n.d.b). Similarly, a series of recommendations and legislation initiatives have been addressing the sensitive balance between right holders and users, in particular in R&D-intensive sectors such as pharmaceuticals, which are dominated by MNEs (Ghauri & Rao, 2009; WIR, 2020). The impact of the COVID pandemic and the role of technology in responding to the pandemic has accentuated global economic disparities, resulting in policies that either positively respond to these disparities or that are further deepening the gap between developed and developing countries in a protectionist manner. The recent decision of the WTO Ministerial Conference to adopt a partial TRIPS waiver for COVID-19 vaccines is an example of the policy measures taken at an international and national level to respond to the challenges created by the pandemic (WIR, 2020; Balfour, 2022). However, the digitalisation of GVCs, the servicification of manufacturing, and the increased sensitivity of high-technology industries such as biotechnology and financial services may result in further hardening of IPRs at the expense of

investment and trade in R&D (WIR, 2020). Such occurrence could hinder sustainable innovation and the effective implementation of the Sustainable Development Goals (SDGs), leading to further inequality globally (Pandey, de Coninck, & Sagar, 2022). Further research on the post-pandemic impact of IPRs on sustainable development will allow us to further understand how the quality of institutions contribute to equitable global economies (TIR, 2021). Marina Papanastassiou

References

Albino-Pimentel, J., Dussauge, P., & El Nayal, O. (2022). Intellectual property rights, non-market considerations and foreign R&D investments. Research Policy, 51(2), 104442. Balfour, H. (2022, June 17). WTO waives intellectual property rights for COVID-19 vaccines. EPR. https://​www​.european​pharmaceut​ icalreview​.com/​news/​172329/​breaking​-news​ -wto​-waives​-intellectual​-property​-rights​-for​ -covid​-19​-vaccines/​. Buckley, P. J. (2009). The impact of the global factory on economic development. Journal of World Business, 44(2), 131–143. Buckley, P. J., Strange, R., Timmer, M. P., & de Vries, G. J. (2020). Catching-up in the global factory: Analysis and policy implications. Journal of International Business Policy, 3(2), 79–106. Dachs, B., & Zahradnik, G. (2022). From few to many: Main trends in the internationalization of business R&D. Transnational Corporations Journal, 29(1), 107–134. Enderwick, P., & Buckley, P. J. (2019). Beyond supply and assembly relations: Collaborative innovation in global factory systems. Journal of Business Research, 103, 547–556. Estrin, S., Meyer, K. E., & Pelletier, A. (2018). Emerging economy MNEs: how does home country munificence matter? Journal of World Business, 53(4), 514–528. Ghauri, P. N., & Rao, P. M. (2009). Intellectual property, pharmaceutical MNEs and the developing world. Journal of World Business, 44(2), 206–215. Hannibal, M., & Knight, G. (2018). Additive manufacturing and the global factory: Disruptive technologies and the location of international business. International Business Review, 27(6), 1116–1127. Jaax, A., & Miroudot, S. (2021). Capturing value in GVCs through intangible assets: The role of the trade–investment–intellectual property

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176  Encyclopedia of international strategic management nexus. Journal of International Business Policy, 4(3), 433–452. Khanna, T., & Palepu, K. G. 1997. Why focused strategies may be wrong for emerging markets. Harvard Business Review, 75(4), 41–51. Khoury, T. A., & Peng, M. W. (2011). Does institutional reform of intellectual property rights lead to more inbound FDI? Evidence from Latin America and the Caribbean. Journal of World Business, 46(3), 337–345. Khoury, T. A., Cuervo-Cazurra, A., & Dau, L. A. (2014). Institutional outsiders and insiders: The response of foreign and domestic inventors to the quality of intellectual property rights protection. Global Strategy Journal, 4(3), 200–220. Konara, P., Batsakis, G., & Shirodkar, V. (2022). “Distance” in intellectual property protection and MNEs’ foreign subsidiary innovation performance. Journal of Product Innovation Management, 39, 534–558. Kuemmerle, W. (1999). The drivers of foreign direct investment into research and development: An empirical investigation. Journal of International Business Studies, 30(1), 1–24. Lee, J., & Gereffi, G. (2021). Innovation, upgrading, and governance in cross-sectoral global value chains: The case of smartphones. Industrial and Corporate Change, 30(1), 215–231. Markusen, J. R. (2001). Contracts, intellectual property rights, and multinational investment in developing countries. Journal of International Economics, 53(1), 189–204. Oetzel, J., & Doh, J. P. (2009). MNEs and development: A review and reconceptualization. Journal of World Business, 44(2), 108–120. Pandey, N., de Coninck, H., & Sagar, A. D. (2022). Beyond technology transfer: Innovation cooperation to advance sustainable development in developing countries. Wiley Interdisciplinary Reviews: Energy and Environment, 11(2), e422. Papanastassiou, M., Pearce, R., & Zanfei, A. (2020). Changing perspectives on the internationalization of R&D and innovation by multinational enterprises: A review of the literature.

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Journal of International Business Studies, 51(4), 623–664. Ramamurti, R. (2004). Developing countries and MNEs: Extending and enriching the research agenda. Journal of International Business Studies, 35(4), 277–283. Smeets, R., & de Vaal, A. (2016). Intellectual Property Rights and the productivity effects of MNE affiliates on host-country firms. International Business Review, 25(1), 419–434. TIR (2021). Catching technological waves: Innovation with equity. Geneva: United Nations Conference on Trade and Development. Vanchan, V., Mulhall, R., & Bryson, J. (2018). Repatriation or reshoring of manufacturing to the US and UK: Dynamics and global production networks or from here to there and back again. Growth and Change, 49(1), 97–121. WIR. (2019). World Investment Report 2020: Special Economic Zones. Geneva: United Nations Conference on Trade and Development. WIR. (2020). World Investment Report 2020: International Production beyond the Pandemic. Geneva: United Nations Conference on Trade and Development. World International Property Organization (n.d.a) What is Intellectual Property? Retrieved www​ .wipo​ .int/​ August 21, 2022 from https://​ about​-ip/​en World International Property Organization (n.d.b) Summary of the Paris Convention for the Protection of Industrial Property Retrieved www​ .wipo​ .int/​ August 22, 2022 from https://​ treaties/​en/​ip/​paris/​summary​_paris​.html World Trade Organization (n.d.) What are Intellectual Property Rights? Retrieved www​ .wto​ .org/​ August 21, 2022 from https://​ english/​tratop​_e/​trips​_e/​intel1​_e​.htm​#:​~:​text​ =​Intellectual​%20property​%20rights​%20are​ %20the​,a​%20certain​%20period​%20of​%20time Yang, G., Zhang, Y., & Yu, X. (2020). Intellectual property rights and the upgrading of the global value chain status. Pacific Economic Review, 25(2), 185–204. Zhao, M. (2006). Conducting R&D in countries with weak intellectual property rights protection. Management Science, 52(8), 1185–1199.

48. Internalization theory Internalization is defined as a general principle that explains the nature and boundaries of organizations; its application to the multinational enterprise (MNE) is just one of its many applications (Coase, 1937; Buckley, 2009). It is a highly specialized principle, targeted specifically at explaining where boundaries lie and how they shift in response to changing circumstances. By itself, it does not explain other aspects of organizations. Progress in internalization theory is achieved by combining this core approach with other principles to generate a wide range of predictions about different aspects of organizational behaviour. It can be combined with trade theory to explain the location of the firm’s operations, giving a theory of the MNE based on least-cost location of the elements in the firm’s value chain, with organization theory to explain international joint ventures and with theories of innovation to explain the kinds of industries in which a firm will operate. It applies not only to the geographical boundaries of the firm, but also to other boundaries, such as the boundary of a firm’s product range, which is normally studied as a separate subject – namely product diversification. Combination with theories of entrepreneurship allows an analysis of culture to be developed (Casson, 1995). The growth of the firm is explained by internalization of imperfect external markets. Firms grow until the costs of further internalization outweigh the benefits – the use of the market then becomes optimal. Limits to the growth of the firm are set by barriers to entry of industries, along value chains, and to individual countries and regions, which may be protected by cost considerations or by regulation. Most organizations purchase inputs from independent suppliers, and so the question naturally arises as to whether they should produce these inputs for themselves. In management studies this is often called the ‘make-or-buy decision’, contrasting internal control with outsourcing; in economics it is referred to as the ‘backward integration’ issue, in modern international business the theory applies to orchestration of the global value chain (GVC) by a combination of internal control and external contracting. Backward integration by MNEs is exem-

plified by ‘resource-seeking investment’. Similarly, many organizations use independent agents to distribute their product, or to add further value to it before it is passed through the GVC to the final user. This is the ‘forward integration’ issue; in the context of distribution management, for example, it is related to the ‘channel leadership’ issue, and in particular to whether a producer should also control the wholesalers and retailers that handle its product. In the context of international trade, the question arises as to whether producers should establish overseas sales subsidiaries to monitor and control distribution operations in foreign markets. In general, most organizations use a range of intermediate inputs, and generate a range of intermediate outputs. It is the markets for these intermediate inputs and outputs that may be internalized. Markets for factor inputs and final products cannot normally be internalized by firms, as this would be tantamount to enslaving households, but households can internalize these markets, and to some extent they do. The classic example of household internalization is ‘do it yourself’ production, where the owners of a household employ themselves to do a job that independent workers would normally do instead and then purchase the output from themselves instead of selling it on to others. The popularity of the ‘do it yourself’ principle illustrates the practical importance of internalization decisions, not only for large MNEs, but for individual households carrying on the ordinary business of life. Internalization theory assumes rational action. Rational agents will internalize markets when the expected benefits exceed the expected costs. The profit-seeking managers of a firm will internalize intermediate product markets up to the margin where the benefits and costs of internalization are equalized. Within this margin, firms will derive an economic rent from their exploitation of the internalization option, equal to the excess of the benefit over the cost. Two distinct forms of internalization are identified: operational internalization, involving intermediate products flowing through successive stages of production and the distribution channel; and knowledge internalization – the internalization of the flow of knowledge emanating from R&D (Buckley and Casson, 1976). The gains from knowledge internalization can be substantial. The most important of these gains stems

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from what is nowadays called ‘asymmetric information’. In particular, the ‘buyer uncertainty’ problem means that licensees are reluctant to pay for technology that might be flawed, or that might not be as novel as is claimed. Licensors could increase the price at which they could sell the technology by providing detailed evidence to a potential licensee, but this would be tantamount to sharing the knowledge with the licensee before any contract had been made. Unless they held a patent on the knowledge, the licensee could then exploit the knowledge free of charge. Even if the licensor held a patent, a potential licensee might be able to ‘invent around’ it. Furthermore, if a patent were granted, the licensee might sell the knowledge on to a third party in competition with the licensor, or might make some improvement to the technology and patent it in their own name, thereby rendering the original technology obsolete. In the absence of such problems, licensing would be a very attractive option. A firm that employed a creative R&D team could specialize in developing new knowledge and licensing it to independent production firms that were better equipped to exploit the technology themselves. The research-oriented firm could therefore concentrate on what it did best, and avoid diversifying into complementary activities in which it had no particular skill. By comparing the types of industry in which knowledge flows were intensive with those in which they were not, it is possible to identify a set of industries in which knowledge internalization gains could be substantial. Within this set, it is then possible to compare types of knowledge for which internalization gains were high – for example, un-patentable knowledge – with those in which it was low – for example, patentable knowledge. It is then relatively straightforward to demonstrate that the knowledge-intensive industries with substantial internalization gains are the ones in which MNE operations were most commonly found (Buckley and Casson, 2009). Buckley and Casson (1976) suggested that MNEs were ‘a two-edged sword’, improving welfare by seeking and replacing imperfect external markets with more perfect internal ones but potentially reaping rewards by reducing competition. This assessment paid particular attention to the role of MNEs in the creation and diffusion of knowledge. The indivisibility and public good aspects Peter J. Buckley

of knowledge make the replication of knowledge-producing activities inefficient. In the absence of free competitive auctioning of knowledge, MNEs represent a second-best solution but one that is likely to outperform alternative, more wasteful institutional choices. The welfare implications derived from internalization theory are therefore contingent on a number of factors which the theory itself identifies. It is therefore a mistake to claim, as some writers have done, that internalization strategies are unambiguously ‘good’ or ‘bad’ from a welfare point of view. Internalization theory analyses the choices that are made by the owners, managers or trustees of organizations. The theory assumes that these choices are rational ones. In this context, rationality signifies that the decision-maker can identify a set of options, has an objective by which these options can be ranked, and an ability to identify the top-ranked option and select it. The assumed form of rationality is instrumental, in the sense that it does not concern the rationality of the objective, but merely the process by which the best option is identified, irrespective of the nature of the objective (Buckley, Devinney, and Louviere, 2007). Rationality does not imply complete information. When confronted with search costs, a rational decision-maker will collect only sufficient information to make the risks surrounding the decision acceptable, recognizing that mistakes are always possible. In a similar vein, the theory does not assume that the decision-makers can identify all available options; indeed, in rational action models, the number of options that decision-makers consider is often restricted in order to simplify the model. In the context of market entry, for example, only a limited number of entry strategies is usually appraised, as explained above. However, the theory always makes the set of options considered fully explicit. Thus, while rationality may be ‘bounded’ in the sense that information is incomplete, behaviour is not irrational, in the sense that the information collected is a rational response to the information available.

Internalization as a general theory of the firm

It might well be asked why these different activities located in different countries’ activ-

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ities needed to be coordinated by a firm. Why not use Adam Smith’s (1776) ‘invisible hand’ to coordinate these activities through impersonal markets? Why is the ‘visible hand’ of management preferred to the ‘invisible hand’ of the market? Indeed, why not coordinate the operations of an ordinary domestic firm using market forces? If a small firm employs two people, they could make contracts directly with each other instead of through a third party – their employer. Economies of internalization provide the answer. Employment with a firm provides an independent monitor – the employer – who ensures that the workers do not impede each other. The employer has an incentive to monitor well, because the stronger the cooperation, the higher the profit. Furthermore, the monitoring need not be intrusive; loyalty to the firm may encourage spontaneous hard work. This is an example of operational integration in a small firm. Knowledge internalization may be important, too. The employer may have discovered a new product and, while they cannot license their knowledge of this product to their workers because they do not share the employer’s good opinion of the product, they can employ them for a wage and then direct them to produce it. Working for a fixed wage insures them against a loss should their employer’s judgements turn out to be incorrect. Internalization, therefore, holds the key to the formation, not only the boundary, of any firm, whether multinational or not. Typically, an entrepreneur recognizes a product market opportunity, hires a team of workers to exploit it (knowledge internalization), coordinates the work of the team, possibly through a manager or supervisor (operational internalization), and makes a profit if their judgement is correct. A team can be configured in all sorts of ways. It does not have to be concentrated in a single plant, or even a single country. The most appropriate configuration depends upon the entrepreneur’s idea and the best means of exploiting it. This line of argument goes back to Coase (1937). Coase had noticed that in lectures on price theory, markets were said to coordinate the economy, and in lectures on business studies, managers were said to coordinate the economy. Furthermore, he might have added, in lectures on socialism, planners were said to coordinate the economy. There seemed to be ‘overkill’ where coordination was concerned.

Coase concluded that, given the existence of alternative coordination mechanisms, economic principles suggested that the cheapest form of coordination would be selected in any given circumstances (Coase, 1937). In arriving at this verdict, he assumed that the economy was basically market-driven, and that firms would only arise when managerial coordination proved itself superior to the market. A key insight of the systems view is that the internalization decisions are interdependent. Furthermore, they are interdependent in two distinct ways. First, firms are typically involved in multiple internalization decisions. These decisions are interdependent; the outcome of one decision cannot be fully understood without reference to other decisions. Consider, for example, an MNE that operates three facilities – R&D, production, and marketing. Internalizing one linkage, say between R&D and production, involves the firm in the ownership of two facilities, but internalizing a second linkage – say between production and marketing – automatically internalizes a third – between marketing and R&D. While acquiring a second facility internalizes only one linkage, acquiring a third facility internalizes two. This demonstrates that internalization decisions taken as part of a restructuring operation need to be analysed holistically. Focusing exclusively on a single linkage, such as the link from R&D to production, rather than the full set of linkages, can create a misleading picture. The second interdependency concerns the internalization decisions of different firms. From a systems perspective, a facility that is wholly owned by one firm cannot be simultaneously wholly owned by another firm, because the principle of private property rights does not permit this. As a consequence, if one firm internalizes a linkage to a given facility, other firms cannot internalize linkages to that facility because to do so they would have to own it as well. They may have linkages to it – but only external ones. Thus, the internalization decisions of different firms are interdependent when they compete to internalize linkages to the same facility. The key issue is that the underlying theory does not change but the actions of firms respond to changing circumstances. The balance between externalization and internalization has shifted, but the principles underlying the decisions determining the boundaries Peter J. Buckley

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of the firm have remained. These may be listed as advantages and disadvantages of internalization (or conversely the costs and benefits of using the market).

The advantages of internalizing a market

The general advantages of internalizing an imperfect or missing external market can be listed as follows: 1. Coordination of multistage process in which time lags exist but futures markets are lacking. 2. Discriminatory pricing in internal markets allows efficient exploitation of market power. 3. Bilateral concentration of market power – internalization eliminates instability. 4. Inequalities of knowledge between buyer and seller (‘buyer uncertainty’) removed. 5. Internal transfer pricing reduces tax liability on international transactions (Buckley and Casson, 1976: 37–39). These factors drive the consolidation of firms and account for both large uni-national and multinational firms.

The costs of internalizing a market

In every case the advantages of internalizing a market must be compared with the costs: 1. Higher resource costs when a single external market becomes several internal markets (can be reduced by partial internalization). 2. Communication costs in internal markets rise (vary with psychic distance). 3. Political problems of foreignness. 4. Management costs in running complex multi-plant multicurrency operations (Buckley and Casson, 1976: 41–44). The costs of internalization are often underemphasized, or even ignored, leading to an unbalanced view of the theory. Where costs exceed benefits, markets will not be internalized and market solutions (external licensing, outsourcing) will be sought. The (changing) choices of foreign market entry and development and the generalized shift to outsourcing as the market for market transactions (Liesch, Buckley, Simonin, and Knight, 2012) has expanded are key features of the internaliPeter J. Buckley

zation approach (Buckley and Casson, 1981, 1996, 1998, 2001).

Transaction costs minimizing configurations in the firm

Transaction costs exist in assembling the business processes of firms – collections of activities which are technologically or managerially linked so that they jointly affect value added (Hennart, 1982). The overall costs of organization are determined by losses due to the imperfect motivation of process members (which result, in part at least, from the incentive structure) and imperfect information and coordination which flow from the architecture of the firm (the allocation of responsibilities amongst individuals and groups and communication between them), together with the resource costs associated with incentives and architecture (Buckley and Carter, 1996). Thus transactional links within the firm enable us to split up the ‘black box’ and trace costs and benefits of combining activities within intra-firm processes. Further, it is possible to specify losses from imperfections in motivation, information and coordination and to balance these against the costs necessary to correct these imperfections. Views about the nature of human behaviour and actions will influence how an outsider might feel about the likelihood of these costs being significant; for example, motivation loss (and the cost of correcting it) will be greater, the greater the degree of opportunism (‘self-seeking with guile’). However, if we believe that individuals naturally seek and appreciate team-working, motivation costs will be low. Buckley and Casson (1988) applied internalization theory to international joint ventures (IJVs). IJVs are conceptualized as arising from three key factors: internalization economies in one or more intermediate goods markets, indivisibilities, and barriers to merger. Under certain environmental conditions, IJVs can be an optimal organizational solution (Buckley and Casson, 1996). In joint ventures, mutual trust can be a substitute for expensive legalism. Joint ventures can provide an ideal institution for the exercise of mutual forbearance, leading to a commitment to cooperation and to the creation of reputation effects where a reputation for cooperative behaviour can lead to further coordination benefits. These effects can be

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good substitutes for ownership. Skills in joint venturing and the learning effects that arise can lead to widespread non-ownership forms of cooperation, as in many global factories. To conclude, what makes internalization theory unique is the encompassing nature of its theorizing – its generality. In the internalization theory of the multinational enterprise, the international firm is the general case and the national firm is a special case (Buckley and Casson, 1976). Internalization theory avers that the firm internalizes markets until the costs of further internalization outweigh the benefits (to the firm). An MNE is created when markets are internalized across national boundaries. The uni-national firm exists because the markets it has internalized (so far) are purely national in scope (Buckley, 2018a: 344). There are special cases of this general argument – strong examples include the internalization of R&D, knowledge (invisible assets), control of raw materials and vertical integration. The theory has also been found to apply to small MNEs, MNEs from emerging markets (Buckley, Clegg, Cross, Zheng, Voss, and Xin, 2007) and networked MNEs (‘the global factory’, Buckley, 2018b). Peter J. Buckley

References

Buckley, P.J. (2009). Internalisation thinking – from the multinational enterprise to the global factory. International Business Review. 18(3): 224–235. Buckley, P.J. (2018a). How theory can inform strategic management education and learning. Academy of Management Learning & Education. 17(3): 339–358. Buckley, P.J. (2018b). The Global Factory: Networked Multinational Enterprises in the Modern Global Economy. Cheltenham: Edward Elgar Publishing. Buckley, P.J. & Carter, M.J. (1996). The economics of business process design. International Journal of the Economics of Business. 3: 5–25. Buckley, P.J. & Casson, M.C. (1976). The Future of the Multinational Enterprise. London: Macmillan. Buckley, P.J. & Casson, M.C. (1981). The optimal timing of a foreign direct investment. The Economic Journal. 91: 75–87.

Buckley, P.J. & Casson, M.C. (1988). A theory of cooperation in international business. In Cooperative Strategies in International Business, eds. F. J. Contractor and P. Lorange. Lexington, MA: Lexington Books, D C Heath & Co. Buckley, P.J. & Casson, M.C. (1996). An economic model of international joint ventures. Journal of International Business Studies. 27: 849–876. Buckley, P.J. & Casson, M.C. (1998). Models of the multinational enterprise. Journal of International Business Studies. 29: 21–44. Buckley, P.J. & Casson, M.C. (2001). Strategic complexity in international business. In The Oxford Handbook of International Business, ed. A. M. Rugman and T. L. Brewer. Oxford: Oxford Press. Buckley, P.J. & Casson, M.C. (2007). Edith Penrose’s theory of the growth of the firm and the strategic management of multinational enterprises. Management International Review. 47: 151–173. Buckley, P.J. & Casson, M.C. (2009). The Multinational Enterprise Revisited: The Essential Buckley and Casson. Basingstoke: Palgrave. Buckley, P.J., Clegg, L.J., Cross A., Zheng, P., Voss, H., & Xin, L. (2007). The determinants of Chinese outward foreign direct investment. Journal of International Business Studies. 38(4): 499 – 518. Buckley, P.J., Devinney, T.M., & Louviere, J.J. (2007). Do managers behave the way theory suggests? A choice theoretic examination of foreign direct investment location decision making. Journal of International Business Studies. 38(7): 1069–1094. Casson, M. (1995). Entrepreneurship and Business Culture. Cheltenham: Edward Elgar Publishing. Casson, M. (2000). Enterprise and Leadership: Studies on Firms, Networks and Institutions. Cheltenham: Edward Elgar Publishing. Coase, R.H. (1937). The nature of the firm. Economica. 4: 386–405. Hennart, J-F. (1982). A Theory of Multinational Enterprise. Ann Arbor, MI: University of Michigan Press. Liesch, P.W., Buckley, P.J., Simonin, B.L., & Knight, G. (2012). Organizing the modern firm in the worldwide market for market transactions. Management International Review. 52(1): 3–21. Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Oxford: Clarendon Press.

Peter J. Buckley

49. International acquisitions Mergers and acquisitions (M&A) can be defined as corporate transactions that combine companies or parts of their business assets through ownership transfer. Then, international M&A can be defined as M&A where the involved firms are located in different countries, such that the transactions involve foreign direct investment. As global M&A volumes continued to increase over recent decades, the amount of M&A research grew in parallel, developing a number of distinct sub-streams in the literature. In this entry we summarize the M&A literature, with particular emphasis on the international dimension. We structure our entry along six main topics: We start with (1) target selection, reviewing how acquirers assess potential targets for quality and fit. We then examine (2) acquisitions as a mode of foreign market entry, a line of inquiry which received particular attention in the international business literature. We move on to summarize research on (3) stock market reactions and public perception following the announcement of mergers and acquisitions. Our next section is devoted to (4) post-merger integration, which is a particularly important determinant of acquisition performance. We then cover the dynamics related to (5) culture and acculturation in acquisitions and finally review the literature on (6) learning in M&As. Our overall objective is to define the relevant concepts and provide a brief overview of the state of the art of global M&A research.

Target selection

An acquisition typically starts with the process of target selection. While it can be initiated from the target-side, the acquirer-side, or even from third parties, most research has examined the acquiring firm as a key decision-maker in this process (Welch, Pavicevic, Keil, & Laamanen, 2020). Acquiring firms attempt to select targets that help them to obtain certain resource positions (Kaul & Wu, 2016). A large proportion of research therefore has built on resourceand capability-based perspectives. This research has shown that firms with strong patent portfolios (Ransbotham & Mitra,

2010) or R&D capabilities (Heeley, King, & Covin, 2006) are attractive M&A targets. Acquirers have been found to select targets that have resources, products, and R&D pipelines similar to their own (Kavusan, Ates, & Nadolska, 2022; Schildt & Laamanen, 2006; Yu, Umashankar, & Rao, 2016); targets with complementary capabilities (Kaul & Wu, 2016); targets with geographically overlapping operations (Chen, Kale, & Hoskisson, 2018); or targets that produce network synergies (Hernandez & Shaver, 2019). A central theme in the literature on target selection is information asymmetry. Information asymmetry makes it difficult for acquiring firms to accurately assess the value of a potential target firm (Coff, 1999). Trying to alleviate the potential problems of information asymmetries, acquirers tend to choose targets with which they share some sort of connection or proximity. Research for instance found that firms have a higher likelihood to buy firms that are geographically proximate (Chakrabarti & Mitchell, 2013), targets that are former alliance partners (Zaheer, Hernandez, & Banerjee, 2010) or with whom they are connected through common clients (Rogan & Sorenson, 2014). To overcome information asymmetries, acquirers may also try to observe and imitate target selection decisions of their competitors (Baum, Li, & Usher, 2000; Ozmel, Reuer, & Wu, 2017). Related to the problems of information asymmetry, national culture and institutions play an important role in target selection. Research for instance has found that acquirers are less likely to select targets in culturally distant contexts due to the anticipated difficulties in integration (Ahern, Daminelli, & Fracassi, 2015). A recent study found that firms from countries that regularly vote for each other in the Eurovision Song Contest (ESC) also have a higher likelihood to engage in M&As with each other (Siganos & Tabner, 2020). Other studies suggest that economic nationalism restricts the target choice of international acquirers when governments prefer targets to remain domestically owned rather than foreign owned (Dinc & Erel, 2013). Other factors related to the institutional context, such as the strength of anti-director rights (Maas, Heugens, & Reus, 2018), labor market regulations (Alimov, 2015), and the strictness of antitrust laws

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(Clougherty, 2005), have also been found to shape target selection.

Acquisitions as foreign market entry

In the international business literature, acquisitions have frequently been studied as a mode of foreign market entry, opposing other entry modes like joint ventures, greenfield operations, or contractual arrangements, such as exporting, licensing or franchising (Agarwal & Ramaswami, 1992; Anderson & Gatignon, 1986; Brouthers, 2002, 2013; Brouthers & Hennart, 2007; Kogut & Singh, 1988). While partially overlapping with the target selection process, we review this literature separately, as it developed into a distinct line of inquiry and builds on a different set of theories. A sizable body of research examined the determinants and performance implications of entry mode choices from different perspectives. Research taking the transaction cost perspective focuses mainly on determinants of entry mode choices such as asset specificity, international and host-country experience, behavioral uncertainty, industry concentration, and cultural distance (Brouthers, Brouthers, & Werner, 2003; Hennart & Park, 1993; Hennart & Reddy, 1997; Zhao, Luo, & Suh, 2004). For instance, Hennart (1988) argues that a firm will favor acquisitions over joint ventures when the assets it needs are not commingled with other unneeded assets within the firm that holds them, and hence can be acquired by buying the firm or a part of it. Balakrishnan and Koza (1993) see joint ventures as a mechanism to reduce the transaction costs incurred when acquiring other firms and predict acquisitions will be preferred if the acquirer and the potential target are active in the same industry. More recently, Slangen and Hennart (2008) find that MNEs prefer to enter culturally distant countries through greenfields rather than acquisitions, but that this preference is lower when the companies have little international experience, or plan to grant the focal subsidiary considerable autonomy in marketing – in which case they opt for an acquisition. While transaction cost economics remains the most widely adopted lens in entry mode research (Hennart, 2022; Hennart & Slangen, 2015), other theoretical perspectives have been adopted as well. For instance, Barkema

and Vermeulen (1998) build on an organizational learning perspective and suggest that the choice between greenfield and acquisition is determined by the firm’s strategic posture in terms of its multinational diversity and multiproduct diversity (for a recent replication, see Tsang & Yamanoi, 2016). Other studies adopt an upper echelon perspective and examine the impact of CEO and board characteristics such as tenure, functional background, and international orientation on entry mode choices (Datta, Musteen, & Herrmann, 2009; Herrmann & Datta, 2002; Nielsen & Nielsen, 2011). One of the latest comprehensive reviews of the literature on the choice between acquisitions and greenfields has been conducted by Dikova and Brouthers (2016).

Stock market reactions and public perception

Mergers and acquisitions typically attract significant public attention, not just among stock market participants but also among various stakeholders, legislators, and media outlets. This is particularly the case when national interests are perceived to be at stake (Riad & Vaara, 2011). Negative public perception can have a range of negative implications. They can jeopardize the much-needed endorsement of key stakeholders, hamper the successful implementation of the deal (Luo, 2005), and even cause leadership dismissal (Lehn & Zhao, 2006). The antecedents of the perception of M&A announcements, both on the stock market as well as among the wider public, therefore have been a key issue in acquisition research. For a long time, stock price reactions to acquisition announcements have been considered as the key performance indicator for M&As. Building on the assumption of the market efficiency hypothesis, this body of research considered the abnormal returns to M&A announcements, which are empirically captured through event study methodology, as a reflection of future value creation. Summarizing decades of research, two meta-analyses by King and colleagues (King, Dalton, Daily, & Covin, 2004; King, Wang, Samimi, & Cortes, 2021) identify a number of factors that have been consistently shown to be associated with higher abnormal returns: the relatedness between target and acquirer, a high prior performance Anna Nadolska and Xena Welch

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of the acquirer and a low prior performance of the target, cash payment, and acquirer debt. High acquisition premia, and large cultural distance, in turn, have consistently been shown to be negatively associated with abnormal returns. Studies in the IB field examined how country context matters for abnormal returns. Levine and colleagues examined how labor regulations in cross-border acquisitions affect acquirer returns and found that firms enjoy smaller abnormal returns with targets in countries with stronger labor protection (Levine, Lin, & Shen, 2020). Li and colleagues found country-dyadic military conflicts to hamper market reaction to cross-border acquisitions (Li, Arikan, Shenkar, & Arikan, 2020). Other studies examine how political affinity (Fieberg, Lopatta, Tammen, & Tideman, 2021) and cultural attractiveness (Li, Brodbeck, Shenkar, Ponzi, & Fisch, 2017) influence the stock market responses to M&A announcements. Research later on started questioning the suitability of abnormal returns as an objective performance indicator of M&As, highlighting that abnormal returns frequently do not correlate with other performance indicators, such as longer-term accounting-based measures or managerial performance evaluations (Oler, Harrison, & Allen, 2008). Researchers subsequently started reconceptualizing the role of abnormal returns for M&A research from a behavioral perspective. Highlighting the information asymmetry between the corporate decision-makers and stock market participants, these studies shed light on the behavioral dynamics that underlie investor sensemaking. Instead of rationally calculating the future value potential of deals, stock market participants rely on the “wisdom of crowds,” collectively attempting to assess the reliability of the signals provided by the acquiring firms (Campbell, Sirmon, & Schijven, 2016; Schijven & Hitt, 2012). Given the significant importance of public perceptions of a deal, research recently started examining the tactics with which acquiring firms try to influence the external reactions to their M&A announcements. For example, Graffin, Haleblian, and Kiley (2016) found evidence of “impression offsetting,” an anticipatory impression management technique that consists of releasing positive, yet unrelated, information in a short time window surrounding the acquisition announcement Anna Nadolska and Xena Welch

date to “offset” the potentially negative stock price reaction to the acquisition. Another study (Busenbark, Lange, & Certo, 2017) examined a technique they called “foreshadowing,” which refers to guidance regarding future potential acquisition activity. Other studies (Vaara & Monin, 2010; Vaara & Tienari, 2011) examine the legitimization strategies with which acquiring firms attempt to manage public attention in cross-border deals by providing the media with selected information and carefully crafting a narrative between nationalist storytelling and MNC identity.

Post-merger integration

Over the past two decades or so, a broad consensus has emerged among academics and practitioners alike that the post-acquisition integration process represents a crucial, if not the single most important, determinant of acquisition performance (Haleblian, Devers, McNamara, Carpenter, & Davison, 2009; Haspeslagh & Jemison, 1991; Larsson & Finkelstein, 1999). Research on post-merger integration (PMI) developed in strength in the late 1980s and has attracted broad research interest ever since. Scholars have conceptualized and measured PMI in multiple ways (Bodner & Capron, 2018; Graebner, Heimeriks, Huy, & Vaara, 2017). In one view, PMI is understood as a set of actions. For example, Pablo (1994: 806) defined PMI as “the making of changes in the functional activity arrangements, organizational structures and systems, and cultures of combining organizations to facilitate their consolidation into a functioning whole.” Similarly, Cording, Christmann, and King (2008: 744) defined integration as “the managerial actions taken to combine two previously separate firms.” Other authors have viewed PMI as an outcome or end state in which the buyer’s and target’s practices are standardized and physically consolidated (Heimeriks, Schijven, & Gates, 2012), or the acquired firm ceases to be a stand-alone business unit (Puranam, Singh, & Zollo, 2006). Still others have conceptualized integration as multidimensional. For example, dimensions of integration may include “task integration” and “human integration” (Birkinshaw, Bresman, & Hakanson, 2000), or “functional integration” and “strategic control” (Reus, Lamont, & Ellis, 2016).

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As one of the most central questions in this domain, scholars examined if and how to structurally integrate two firms. The most influential integration framework is the 2×2 matrix put forward by Haspeslagh and Jemison (1991). The framework proposes strategic interdependence and need for organizational autonomy as underlying dimensions, resulting in the archetypical integration approaches of absorption (low need for autonomy, high strategic interdependence), preservation (high need for autonomy, low strategic interdependence) and symbiosis (high strategic interdependence, high need for autonomy). Later on, empirical work examined structural integration choices more narrowly, focusing on the integration choices of entrepreneurial (Schweizer, 2005), or innovative (Paruchuri, Nerkar, & Hambrick, 2006; Puranam & Srikanth, 2007) targets. Overall, this work re-emphasizes the need to align the integration mode with the intended value-creation logic of the deal. While structural integration facilitates coordination and efficiency, it may harm and disrupt the “technical core” of highly innovative firms. Another important theme in post-merger integration research is the determinants of successful integration. One set of studies highlighted the importance of communication (Ranft & Lord, 2002; Schweiger & Denisi, 1991; Vaara, 2003) and perceived justice (Ellis, Reus, & Lamont, 2009; Monin, Noorderhaven, Vaara, & Kroon, 2013) – and the difficulty to manage them well. Other studies examined the role of integration speed (Bauer & Matzler, 2014; Homburg & Bucerius, 2006) and executive turnover (Bilgili, Calderon, Allen, & Kedia, 2017; Krug, Wright, & Kroll, 2014). Here, empirical results again suggest to carefully align the integration approach with the strategic motive of the deal. Acquisitions may benefit from slow integration processes and high post-deal involvement of target management, if the merging firms are relatively dissimilar, and the target seeks to learn and access sensitive resources from the target. Conversely, fast integration and quick replacement of the target firm management may be suitable when integrating strategically similar, but lower-performing, targets.

Culture and acculturation in M&A

A significant proportion of global M&A activity involves firms from different countries and therefore introduces the tension of cultural differences. It is thus no surprise that a significant body of research has focused on the impact of cultural differences on M&A outcomes. National culture is frequently reflected in organizational culture – a set of beliefs shared among organizational members (Nahavandi & Malekzadeh, 1988). It has been acknowledged that the construct of culture itself is multi-layered and multi-dimensional, and that most organizations have various subcultures divided not only along geographical, but also along occupational, functional, or product lines (Sathe, 1985). Yet, the majority of prior research has focused on cultural differences stemming from national cultures. These add additional complexity to international M&As as firms have to deal with “double-layered acculturation,” defined by Barkema, Bell, and Pennings (1996: 154) as an “adjustment to both a foreign national culture and an alien corporate culture.” Despite continuous research interest, empirical evidence on the role of cultural differences on post-acquisition performance remains inconclusive (Reus & Lamont, 2009; Sarala, Vaara, & Junni, 2019; Stahl & Voigt, 2008). One set of studies suggests a negative relation between cultural distance and acquisition performance due to cultural clashes and the resulting costs of post-acquisition implementation (Buono, Bowditch, & Lewis, 1985; Lubatkin, Calori, Very, & Veiga, 1998). In contrast, another set of studies emphasizes that cultural differences may be a source of value creation and learning and may thus enhance performance by providing the acquirer with a diverse set of new routines and repertoires (Chakrabarti, Gupta-Mukherjee, & Jayaraman, 2009; Morosini, Shane, & Singh, 1998). Attempting to reconcile the contrasting findings, a number of studies set out to examine the contextual factors and processes that underlie the relationship between cultural distance and M&A performance. In their meta-analysis, Stahl and Voigt (2008) found that cultural differences impact sociocultural integration, synergy realization, and shareholder value in different and sometimes opposing ways, suggesting that it is diffiAnna Nadolska and Xena Welch

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cult to uncover clear linear relationships that would apply across contexts. Dikova and Sahib (2013) suggest that more internationally experienced acquirers have an advantage in value creation over their less experienced counterparts due to their better understanding of how to resolve acquisition-related conflicts. Reus and Lamont (2009) describe cultural distance as a double-edged sword. On the one hand it serves as a barrier to mutual understanding and effective communication. If, however, firms manage to solve the communication problem, acquirers can greatly benefit from the diversity that cultural distance provides. Implicitly, all of these studies emphasize the importance of skillful management of the acculturation process, which may be more important than the underlying cultural differences themselves. In one of the most influential studies in the acquisition literature, Nahavandi and Malekzadeh focus on the acculturation process, defined as “changes induced in two cultural systems as a result of the diffusion of cultural elements in both directions” (Nahavandi & Malekzadeh, 1988: 81), and suggest well-managed acculturation processes to reduce acculturative stress and support successful implementation of the merger. Mirroring this line of reasoning, recent calls have been made to pay more attention to the managerial practices with which acculturation can be managed successfully (Graebner et al., 2017; Larsson & Lubatkin, 2001; Sarala & Vaara, 2010; Sarala et al., 2019).

Learning in M&A

Despite continuous efforts to decipher the “recipe” of successful M&A management, recent meta-analyses still indicate that a majority of completed deals falls short of their intended value-creation objectives (King et al., 2021). To gain a better understanding of the factors that may help firms to become successful acquirers, scholars devoted significant attention to examining the role of experience and learning in M&A. The first question addressed in this line of research concerns the relationship between acquisition experience and acquisition performance. The answer is not straightforward. Some scholars have found a positive relationship between experience and performance (Barkema, Bell, & Pennings, 1996; Bruton, Anna Nadolska and Xena Welch

Oviatt, & White, 1994). Others, however, have found nonsignificant (Hayward, 2002; Zollo & Singh, 2004), negative (Kusewitt, 1985; Zollo, 2009), or U-shaped relationships (Haleblian & Finkelstein, 1999). This suggests that important contingencies are at play. For instance, Haleblian, Kim, and Rajagopalan (2006) argue that learning is enhanced through active evaluation of performance feedback about recent acquisitions. Later, research examined the role of deliberate learning processes, such as knowledge codification (Zollo & Singh, 2004) and risk management practices (Heimeriks et al., 2012). Most recently, Trichterborn and colleagues (2016) show that the presence of a dedicated M&A function facilitates deliberate learning and is therefore positively associated with M&A performance. Other questions addressed in this line of research concern what kind of experience, and whose experience it is, that matters for M&A capability development. Nadolska and Barkema (2007) suggest that firms engaged in international acquisitions can benefit from prior experience with domestic acquisitions, foreign acquisitions, and international joint ventures, but that their learning process is prone to biases. Research later showed that experience with alliances (Zollo & Reuer, 2010) and divestitures (Bingham, Heimeriks, Schijven, & Gates, 2015) can also contribute to M&A capability development. Shedding more light on the locus of capability development, Nadolska and Barkema (2014) find that it is the top management team’s experience with M&As, rather than the experience of the firm as such, that impacts acquisition success. McDonald and colleagues (2008) focus on the experience of the board of directors and suggest that the directors develop expertise in making particular kinds of acquisition decisions, such as related or unrelated acquisitions, or acquisitions in specific industries or product markets. This expertise later on has positive effects on the performance of a focal firm’s acquisitions, especially when the focal firm’s board is independent from management. Meyer-Doyle and colleagues (2019) compare firm-level and CEO-level factors and conclude that CEO-level characteristics, including a CEO’s prior acquisition experience, explain a larger portion of the variance in acquisition performance than firm-level factors. Anna Nadolska and Xena Welch

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50. International control mechanisms In the context of international business, control refers to the mechanisms the headquarters use to control their subsidiaries to ensure corporate goals and plans (Brenner & Ambos, 2013; Child, 1972). The issue of control has a long tradition within international business (Bartlett & Ghoshal, 1989; Gupta & Govindarajan, 1991; Martinez & Jarillo, 1989) and is still a widely discussed topic among international business scholars (Brenner & Ambos, 2013; Sageder & Feldbauer-Durstmüller, 2018; Stendahl, Schriber, & Tippmann, 2021). This literature, supported by organization theorists, identifies different control mechanisms that can be grouped into five classes of control: centralization, formalization, outcome, process/ behavior, and social control. Centralization refers to the level of locus of decision-making authority (Child, 1972; Egelhoff, 1988; Hennart, 1991). In the context of multinational corporations (MNCs), centralization means that the decision-making authority lies in the headquarters, where there exists a more complete understanding of the various subsidiaries and their activities (Kim et al., 2003). Centralizing decision-making, or the centralizing strategy of control (Child, 1972), will be most effective in integrating geographically dispersed subsidiaries to assist in achieving the benefits of global scale, scope and learning (Egelhoff, 1988). Formalization refers to the use of policies, rules and standardized work procedures that are written at headquarters and subsequently distributed to subsidiaries as guidelines for their activities (Nobel & Birkinshaw, 1998; Nohria & Ghoshal, 1994). The effectiveness of this mechanism will increase with the degree to which the process of conducting specific activities can be codified into a set of identifiable procedures, rules and formulas (Kim et al., 2003). Output control relies on assessing performance by measuring desired performance targets or the quality of output, without prescribing the types of behaviors that should be adopted (Baliga & Jaeger, 1984; Ouchi, 1979). Examples include performance targets for subsidiaries in terms of revenue, cost or quality.

Process controls detail the kinds of behaviors and processes that should be adopted, without specifying potential outcomes. Examples are clearly delineated processes and the direct surveillance of their utilization (Eisenhardt, 1985). In the MNC, such process controls include the use of expatriates from headquarters in subsidiaries to monitor subsidiary behavior (Martinez & Jarillo, 1989; Paik & Sohn, 2004). Social control relates to the use of norms and values to instigate conformative pressure among organizational members (Ouchi, 1979, 1980). In the MNC, this relies on strong socialization mechanisms, such as the transfer of managers, meetings, teams, training, committees and integrators. It facilitates the process of sharing vison, values and norms, and of building trust among members (Gupta & Govindarajan, 2000; Martinez & Jarillo, 1989). A high degree of shared norms and values across the MNC enables the headquarters to control with little process control (Brenner & Ambos, 2013). This is particularly valuable in MNCs due to the challenge of headquarters in directly monitoring behavior in foreign subsidiaries (Bartlett & Ghoshal, 1989; Doz & Prahalad, 1981). It can also help to address issues with outcome control in the MNC. These issues relate, for example, to headquarters’ difficulty in setting appropriate goals due to limited information of local subsidiaries as well as subsidiaries not fully sharing the goals given by headquarters. Social control can be helpful here as it establishes some level of goal congruence between headquarters and subsidiaries (Doz & Prahalad, 1981). In addition to those five classes of control, peer control has recently been noted as a way of controlling foreign subsidiaries. Peer control refers to the combination of norms and peer pressure among subsidiaries (de Jong, Bijlsma-Frankema, & Cardinal, 2014), and it has been found that the transparency and collective awareness of performance afforded by digital performance management systems can be an effective way of instigating peer control (Stendahl et al., 2021; Stendahl, Tippmann, & Yakhlef, 2022). In designing international control mechanisms, a few things are important. First, MNCs combine control mechanisms from the different classes of centralization, formalization, output, process, and social control, and seek to achieve a harmonious

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combination (Cardinal et al., 2004: 412; Cardinal et al., 2017). Second, corresponding to situational circumstances, or contingencies, is important. In terms of contingencies that influence the appropriateness of control mechanisms, there are several internal and external factors that need to be considered (Bartlett & Ghoshal, 1989). These include the strategy (Baumgartner & Tippmann, 2018; Govindarajan, 1988; Govindarajan & Fisher, 1990) to achieve a strategy–structure fit (Chandler, 1962; Fouraker & Stopford, 1968; Stopford & Wells, 1972), the need for integration and local responsiveness (Doz & Prahalad, 1981; Martinez & Jarillo, 1991), as well as the mandate, role and product market of the subsidiary, its interdependencies with other units of the MNC and its role in knowledge flows (Ambos & Schlegelmilch, 2007; Belderbos & Heijltjes, 2005; Gupta & Govindarajan, 1991; Menz, Kunisch, & Collis, 2015; Nobel & Birkinshaw, 1998). Other external contingencies include the institutional uncertainty and volatility encountered by the subsidiary in its local market (Luo, 2003; Sartor & Beamish, 2014). Furthermore, it is important to use control mechanisms that are legitimate in the local context, as ‘illegitimate’ controls sometimes lack credibility within the subsidiary and may not be fully institutionalized or resisted (Ambos & Schlegelmilch, 2007; Kostova & Roth, 2002; Jacqueminet & Durand, 2019). As the circumstances of subsidiaries vary, so should the nature of control across subsidiaries. Third, international control mechanisms need to evolve over time to ensure ongoing alignment with the headquarters and subsidiary strategies and structure (Brenner & Ambos, 2013). To illustrate, the headquarters may design and use different outcome controls for each subsidiary on a regular basis, depending on its particular situation. By doing this, the MNC creates strategic flexibility, allowing the organization to respond to emerging opportunities and threats, both in the local and international environment. Fourth, designing and implementing international control mechanisms is not only a top–down choice. The headquarters’ choice and use of control mechanisms may be constrained by the power of subsidiaries, as powerful subsidiaries may draw on their access to important resources and relationships to Emma Stendahl and Esther Tippmann

influence the chosen control mechanism or resist a high level of headquarters’ control (Balogun et al., 2011; Clark & Geppert, 2011; Jarzabkowski & Balogun, 2009). Also, recent research on international control mechanisms identifies a set of practices that enable the headquarters and subsidiaries to adjust control mechanisms and jointly work together to design appropriate control mechanisms (Stendahl et al., 2021). Emma Stendahl and Esther Tippmann

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International control mechanisms  193 study. Administrative Science Quarterly, 17(2): 163–177. Clark, E., & Geppert, M. 2011. Subsidiary integration as identity construction and institution building: A political sensemaking approach. Journal of Management Studies, 48(2): 395–416. de Jong, B., Bijlsma-Frankema, K., & Cardinal, L. 2014. Stronger than the sum of its parts? The performance implications of peer control combinations in teams. Organization Science, 25(6): 1703–1721. Doz, Y., & Prahalad, C.K. 1981. Headquarters influence and strategic control in MNCs. Sloan Management Review, 23(1): 15–29. Egelhoff, W. 1988. Strategy and structure in multinational corporations: A revision of the Stopford and Wells model. Strategic Management Journal, 9(1):1–14. Eisenhardt, K. 1985. Control: Organizational and economic approaches. Management Science, 31(2): 134–149. Fouraker, L.E., & Stopford, J.M. 1968. Organizational structure and the multinational strategy. Administrative Science Quarterly, 47–64. Govindarajan, V. 1988. A contingency approach to strategy implementation at the business-unit level: Integrating administrative mechanisms with strategy. Academy of Management Journal, 31(4): 828–853. Govindarajan, V., & Fisher, J. 1990. Strategy, control systems, and resource sharing: Effects on business-unit performance. Academy of Management Journal, 33(2): 259–285. Gupta, A.K., & Govindarajan, V. 1991. Knowledge flows and the structure of control within multinational corporations. Academy of Management Review, 16(4): 768–792. Gupta, A.K., & Govindarajan, V. 2000. Knowledge flows within multinational corporations. Strategic Management Journal, 21(4): 473–496. Hennart, J.-F. 1991. Control in multinational firms: The role of price and hierarchy. Management International Review, 31(1): 71–96. Jacqueminet, A., & Durand, R. 2019. Ups and downs: The role of legitimacy judgment cues in practice implementation. Academy of Management Journal, 63(5): 1485–1507. Jarzabkowski, P., & Balogun, J. 2009. The practice and process of delivering integration through strategic planning. Journal of Management Studies, 46(8): 1255–1288. Kim, K., Park, J.H., & Prescott, J.E. 2003. The global integration of business functions: A study of multinational businesses in integrated global industries. Journal of International Business Studies, 34(4): 327–344. Kostova, T., & Roth, K. 2002. Adoption of an organizational practice by subsidiaries of multinational corporations: Institutional and

relational effects. Academy of Management Journal, 45(1): 215–233. Luo, Y. 2003. Market-seeking MNEs in an emerging market: How parent–subsidiary links shape overseas success. Journal of International Business Studies, 34(3): 290–309. Martinez, J.I., & Jarillo, J.C. 1989. The evolution of research on coordination mechanisms in multinational corporations. Journal of International Business Studies, 20: 489–514. Martinez, J.I., & Jarillo, J.C. 1991. Coordination demands of international strategies. Journal of International Business Studies, 22: 429–444. Menz, M., Kunisch, S., & Collis, D.J. 2015. The corporate headquarters in the contemporary corporation: Advancing a multimarket firm perspective. The Academy of Management Annals, 9(1): 633–714. Nobel, R., & Birkinshaw, J. 1998. Innovation in multinational corporations: Control and communication patterns in international R&D. Strategic Management Journal, 19(5): 479–496. Nohria, N., & Ghoshal, S. 1994. Differentiated fit and shared values: Alternatives for managing headquarters–subsidiary relations. Strategic Management Journal, 15(6): 491–502. Ouchi, W. 1979. A conceptual framework for the design of organizational control mechanisms. Readings in accounting for management control (pp. 63–82). Boston, MA: Springer. Ouchi, W. 1980. Markets, bureaucracies, and clans. Administrative Science Quarterly, 25(1): 129–141. Paik, Y., & Sohn, J. 2004. Expatriate managers and MNC’s ability to control international subsidiaries: The case of Japanese MNCs. Journal of World Business, 39(1): 61–71. Sageder, M., & Feldbauer-Durstmüller, B. 2018. Management control in multinational companies: A systematic literature review. Review of Managerial Science, 13(5): 1–44. Sartor, M.A., & Beamish, P.W. 2014. Offshoring innovation to emerging markets: Organizational control and informal institutional distance. Journal of International Business Studies, 45(9): 1072–1095. Stendahl, E., Schriber, S., & Tippmann, E. 2021. Control changes in multinational corporations: Adjusting control approaches in practice. Journal of International Business Studies, 52(3): 409–431. Stendahl, E., Tippmann, E., & Yakhlef, A. 2022. Practice creation in multinational corporations: Improvisation and the emergence of lateral knowledge. Journal of World Business, 57(3): 101287. Stopford, J., & Wells, L. 1972. Managing the multinational enterprise: Organization of the firm and ownership of the subsidiary. New York: Basic Books.

Emma Stendahl and Esther Tippmann

51. International coordination Since the 1980s, scholars in international strategic management have been concerned with how multinational companies (MNCs) coordinate the increasing number of their dispersed but interdependent international activities (e.g., Cray, 1984; Jaeger & Baliga, 1985; Martinez & Jarillo, 1989). International coordination is defined as the organization of the different units and employees of an MNC to enable them to work together effectively. International coordination ensures reciprocal predictability of action among interdependent—geographically dispersed— units (e.g., Thompson, 1967). The efforts to achieve coordination increase with the complexity of the interdependence (Thompson, 1967; Tushman & Nadler, 1978). Given the special complexity of establishing and maintaining interdependences in international operations, it is not surprising that the choice of which specific coordinating mechanisms8 to implement, and how and when, have become a major focus in work on MNCs (e.g., Edström & Galbraith, 1977; Egelhoff, 1984; Ghoshal & Nohria, 1989; Jaeger, 1983). Coordinating mechanisms include aspects of control and communication and generally call into the categories of structural mechanisms (i.e., allocation of decision-making authority, grouping of organizational units), formal mechanisms (i.e., formalization, standardization, planning), and other less formal and more subtle mechanisms like lateral relations (i.e., committees, meetings, liaisons, teams) and socialization (i.e., development of common expectations and shared values promoting likeminded decision-making style). Martinez and Jarillo (1989) provide an extensive review of these mechanisms. The need for international coordination varies with MNC strategies (e.g., Harzing, 2000; Martinez & Jarillo, 1991). The introduction of the integration–responsiveness (I-R) framework (Bartlett & Ghoshal, 1989; Prahalad & Doz, 1987) allowed scholars to show that the level of coordination and how this coordination is achieved vary according

to the MNC’s international, multidomestic, global, and transnational strategies. MNCs that are pursuing multidomestic strategies have the lowest need for coordination given the stable and simple interdependence among their units (Kostova & Roth, 2003). In these cases, coordination is achieved through high levels of decentralization of decision-making authority to foreign subsidiaries, grouping units into area structures and setting output controls with only limited need for less formal and more subtle coordinating mechanisms. In the case of international, global and transnational strategies, respectively, the level of interdependence varies from moderate to high, to very high (Kostova & Roth, 2003). The implications of the level and type of coordination vary similarly (e.g., Bartlett & Ghoshal, 1989; Birkinshaw & Morrison, 1995; Harzing, 2000; Nohria & Ghoshal, 1994). An MNC pursuing an international strategy coordinates its units through means of centralization and a combination of output and behavioral controls. The headquarters (HQ) maintains centralized control to facilitate the transfer of core competencies to foreign units, which is supported also by some more informal mechanisms (e.g., direct managerial contacts). In the case of a global strategy, the need for coordination is high and requires centralization of decision-making authority, grouping of activities based on products and business type, some forms of formalization and standardization, combinations of output and behavioral control systems, and an array of different lateral relations. Finally, a transnational strategy focuses on subsidiaries exposed to both local responsiveness and global integration pressures and operating in a network of interdependent relationships. Coordination is achieved by combining centralization in the HQ of some decisions and decentralization to national subsidiaries of other decisions. At the same time, the very high level of interdependence requires coordination through several additional formal and informal coordinating mechanisms, including social controls, combined with lateral relations and different forms of socialization. Interest in transnational strategies in turn increased interest in MNC networks. Work on MNC networks has

8 To avoid ambiguity, I use the term coordination to refer to the outcome of the coordinating process achieved via the implementation of coordinating mechanisms.

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shown a shift from centralized hub-and-spoke structures, with the MNC home country acting as the hub, to multi-hub structures where the adoption of more systemic coordinating mechanisms promotes intensive communication flows, both within the MNC and with its external network (Criscuolo & Narula, 2007; Hedlund, 1986). However, because HQ deals differently with different subsidiaries (Ghoshal, 1986; Ghoshal & Nohria, 1989), coordinating mechanisms are best managed when tailored to the specific situation of the particular subsidiaries (e.g., Ambos & Schlegelmilch, 2007; Nobel & Birkinshaw, 1998; Noorderhaven & Harzing, 2009). Any given HQ–subsidiary relationship will exhibit different combinations of coordinating mechanisms to cater to the heterogeneity of the foreign subsidiaries and the MNC’s environment (Nobel & Birkinshaw, 1998). This has made investigation of how international coordination facilitates the generation, transfer, and use of knowledge within the MNC both challenging and urgent. Research emphasizes that decentralization is related positively to subsidiaries’ knowledge creation (Ambos & Schlegelmilch, 2007; Nobel & Birkinshaw, 1998), but different types of subsidiary initiatives may call for much more contextualized use of diverse coordinating mechanisms (Birkinshaw, 1997). Also, counteracting the excessive involvement of the HQ with socialization mechanisms favors local managers’ support for subsidiary initiatives (Decreton, Nell, & Stea, 2019). Decentralization tends to hamper knowledge exchange between subsidiary and HQ (Gupta & Govindarajan, 2000; Noorderhaven & Harzing, 2009). However, decentralization combined with lateral relations and forms of socialization mitigates this negative outcome for the subsidiaries with contributory role (Rabbiosi, 2011). In general, lateral relations and socialization facilitate knowledge transfer in all directions within the MNC (Gupta & Govindarajan, 2000; Noorderhaven & Harzing, 2009), whereas use of formal mechanisms limits the transfers of knowledge from subsidiary to HQ (Noorderhaven & Harzing, 2009). The imperative to understand international coordination has entered a new phase as MNCs come under pressure to take responsibility for the social, labor, and environmental impacts of their activities. Due to the interdependence among geographically dis-

persed MNC units, irresponsible behavior by one subsidiary may damage the entire MNC (Kostova & Roth, 2002). Research shows that managing international coordination could help to contain these costs. For instance, Asmussen and Fosfuri (2019) explore the coordination challenges faced by MNCs in trying to implement global corporate social responsibility (CSR) strategies, and, among other conditions, they find that MNCs reduce CSR-related coordination costs when collaborating with nongovernmental organizations. Rabbiosi and Santangelo (2019) show that greater decentralization of decision-making authority helps minimize the costs associated with corruption. However, increased lateral relations and communication between subsidiaries and HQs weaken this autonomy-based advantage. Larissa Rabbiosi

References

Ambos, B. & Schlegelmilch, B. B. 2007. Innovation and control in the multinational firm: A comparison of political and contingency approaches. Strategic Management Journal, 28: 473–86. Asmussen, C. G. & Fosfuri, A. 2019. Orchestrating corporate social responsibility in the multinational enterprise. Strategic Management Journal, 40(6): 894–916. Bartlett, C. A. & Ghoshal, S. 1989. Managing across borders: the transnational solution. Boston: Harvard Business School Press. Birkinshaw, J. 1997. Entrepreneurship in multinational corporations: The characteristics of subsidiary initiatives. Strategic Management Journal, 18(3): 207–29. Birkinshaw, J. & Morrison, A. J. 1995. Configurations of strategy and structure in subsidiaries of multinational corporations. Journal of International Business Studies, 26(4): 729–54. Cray, D. 1984. Control and coordination in multinational corporations. Journal of International Business Studies, Fall: 85–98. Criscuolo, P. & Narula, R. 2007. Using multi-hub structures for international R&D: Organisational inertia and the challenges of implementation. Management International Review, 47(5): 639–60. Decreton, B., Nell, P. C., & Stea, D. 2019. Headquarters involvement, socialization, and entrepreneurial behaviors in MNC subsidiaries. Long Range Planning, 52(4): 1–12. Edström, A. & Galbraith, J. R. 1977. Transfer of managers as a coordination and control strategy

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196  Encyclopedia of international strategic management in multinational organizations. Administrative Science Quarterly, 22: 248–63. Egelhoff, W. G. 1984. Patterns of control in U.S., UK, and European multinational corporations. Journal of International Business Studies, Fall: 73–83. Ghoshal, S. 1986. The innovative multinational: a differentiated network of organizational roles and management processes. Ph.D. Dissertation, Harvard Business School, Boston. Ghoshal, S. & Nohria, N. 1989. Internal differentiation within the multinational corporation. Strategic Management Journal, 10: 323–37. Gupta, A. K. & Govindarajan, V. 2000. Knowledge flows within multinational corporations. Strategic Management Journal, 21: 473–96. Harzing, A. W. 2000. An empirical analysis and extension of the Bartlett and Ghoshal typology of multinational companies. Journal of International Business Studies, 31(1): 101–20. Hedlund, G. 1986. The hypermodern MNC – A heterarchy? Human Resource Management, 25: 9–25. Jaeger, A. M. 1983. The transfer of organizational culture overseas: An approach to control in the multinational corporation. Journal of International Business Studies, 14(2): 91–114. Jaeger, A. M. & Baliga, B. R. 1985. Control systems and strategic adaptation: Lessons from the Japanese experience. Strategic Management Journal, 6: 115–34. Kostova, T. & Roth, K. 2002. Adoption of an organizational practice by subsidiaries of multinational corporations: Institutional and relational effects. Academy of Management Journal, 45(1): 215–33. Kostova, T. & Roth, K. 2003. Social capital in multinational corporations and a micro-macro

Larissa Rabbiosi

model of its formation. Academy of Management Review, 28(2): 297–317. Martinez, J. I. & Jarillo, C. J. 1989. The evolution of research on co-ordination mechanisms in multinational corporations. Journal of International Business Studies, 3: 489–514. Martinez, J. I. & Jarillo, J. C. 1991. Coordination demands of international strategies. Journal of International Business Studies, 22(3): 429–44. Nobel, R. & Birkinshaw, J. 1998. Innovation in multinational corporations: Control and communication patterns in international R&D operations. Strategic Management Journal, 19: 479–96. Nohria, N. & Ghoshal, S. 1994. Differentiated fit and shared values: Alternatives for managing headquarters-subsidiary relations. Strategic Management Journal, 15(6): 491–502. Noorderhaven, N. & Harzing, A.-W. 2009. Knowledge-sharing and social interaction within MNEs. Journal of International Business Studies, 40: 719–41. Prahalad, C. K. & Doz, Y. L. 1987. The multinational mission: balancing local demands and global vision. New York: The Free Press. Rabbiosi, L. 2011. Subsidiary roles and reverse knowledge transfer: An investigation of the effects of coordination mechanisms. Journal of International Management, 17: 97–113. Rabbiosi, L. & Santangelo, G. D. 2019. Host country corruption and the organization of HQ–subsidiary relationships. Journal of International Business Studies, 50(1): 111–24. Thompson, J. D. 1967. Organizations in action. New York: McGraw Hill. Tushman, M. L. & Nadler, D. A. 1978. Information processing as an integrating concept in organizational design Academy of Management Review, 3: 613–24.

52. International corporate social responsibility Before considering comparative perspectives on corporate social responsibility (CSR) and the role of CSR in international and cross-border contexts, such as the activities of multinational enterprises (MNEs), we start with a definition of the key concept of this entry, CSR, and the related concepts of corporate sustainability and environmental, social, and governance (ESG) standards. The concepts of CSR and corporate sustainability both address the relationship between business and society, as shown by Figure 52.1. They have largely converged in terms of construct definitions, ontological assumptions, nomological networks, and measurement approaches; yet, they have distinct historic origins (Bansal & Song, 2017; Carroll, 2015). Taking a normative approach to criticize the amorality of businesses, the corporate responsibility debate emerged in the 1950s with a focus on the ethical responsibilities of

corporations and their managers. CSR can be understood as a “firm’s consideration of, and response to, issues beyond the narrow eco­ nomic, technical, and legal requirements of the firm” (Davis, 1973, p. 312). CSR thus is discretion­ary, encompassing activities that go beyond what is required by the letter and spirit of the law and the fulfillment of minimum ethical standards. These responsibilities are either “expected” (ethical responsibilities) or “desired” (philan­thropic responsibilities) by societal members (Carroll & Shabana, 2010). However, while there is little disagreement regarding what con­stitutes the economic and legal responsibilities of business organizations, the ethical and philan­thropic obligations of the corporation toward society are ill-defined and continuously debated as to their legitimacy (e.g., Freeman et al., 2004; Waldman & Siegel, 2008). They also vary across institutional and cultural contexts. For example, although it is not legally required, lifetime employment in Japan represents an ardent social norm. Thus, there is strong pressure on companies not to lay off workers unless it is vital to the corporation’s survival. As such, providing job security and lifetime employment does not constitute

Source:  Stahl, 2022 (also see Bansal & Song, 2017; Carroll, 2015).

Figure 52.1

Evolution of the concept of CSR and related concepts

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a discretionary CSR activity for a Japanese company, like it would, for example, for a US company; rather, it can be described as a quasi-mandatory requirement, and violation of this societal expectation may threaten a company’s legitimacy and have serious reputational consequences (Filatotchev, Ireland, & Stahl, 2022). The first discussions on corporate sustainability appeared in the 1970s, emphasizing the limits to growth of modern economies while applying a systems approach to investigate the failures of businesses to preserve the natural environment (Bansal & Song, 2017). Like CSR, corporate sustainability has been defined in many ways. Perhaps the most widely cited definition of sustainability is from the Brundtland Report of the World Commission on Environment and Development (WCED): “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (WCED, 1987, p. 43). This broad understanding of sustainability is often expressed as the “triple bottom line” of people, planet, and profits (Elkington, 2018). In addition, scholars adopt a systems perspective that views businesses as nested in nomic, ecological, politlarger macroeco­ ical, and societal systems (Hitt, Beamish, Jackson, & Mathieu, 2007; Stahl, Filatotchev, Ireland, & Miska, 2023). The United Nations Sustainable Development Goals (SDGs) are a recent attempt toward capturing not only mental, economic, and social the environ­ dimensions, but also applying a systems perspective on sustainable development. The 17 goals and 169 sub-targets cover numerous domains, such as gender equality, poverty, health, climate change, sustainable growth, and justice and strong institutions. Together they target multiple stakeholders including businesses, governments, non-governmental organizations, and individuals. These various frameworks have recently been complemented by the concept of ESG standards—environmental, social and governance issues that investors and other stakeholders use to evaluate corporate performance in addition to traditional economic measures. While the “E” and “S” components are similar to the corresponding elements of the triple bottom line, “G” refers to various aspects of how the corporation is governed, including issues such as the composition and

role of the board of directors, management compensation practices, codes of conduct, and auditing processes. The concept of ESG has been extended beyond the financial sector, for example, to map specific ESG issues (e.g., environmental risks) to the SDGs and their sub-targets (Montiel, Cuervo-Cazurra, Park, Antolín-López, & Husted, 2021), or to explain irresponsible behavior on the part of MNEs in the ecological (e.g., overexploitation of natural resources), social (e.g., human rights violations in global supply chains) and economic/governance (e.g., corruption) diverse domains (Cuervo-Cazurra, Dieleman, Hirsch, Rodrigues, & Zyglidopoulos, 2021). Thus, despite different foci and underlying assumptions, the corporate responsibility and sustainability debates have converged over time, sometimes using the terms interchangeably (such as in responsible/sustainable investing). These discussions often position sustainability as the overarching goal, with socially, environmentally, and economically responsible behavior, as well as good corporate governance, as the means to get there (Pucik, Björkman, Evans, & Stahl, 2023).

CSR from a comparative perspective

Organizations are embedded in national contexts, which do not always correspond to country borders. They comprise different political, economic, institutional, and cultural environments that influence CSR managerial decision-making and CSR strategy formulation. These contexts exert different degrees of internal and external pressures on actors to engage in CSR (Aguilera, Rupp, Williams, & Ganapathi, 2007; Filatotchev et al., 2022); shaping societal norms and values related to CSR (Waldman et al., 2006; Witt & Stahl, 2016); and posing constraints on the types of practices and behavior that are endorsed and considered acceptable in a society (Martin, Resick, Keating, & Dickson, 2009; Miska, Szőcs, & Schiffinger, 2018). Despite the potentially critical role of context in CSR (Stahl et al., 2023), we know relatively little about how national- and country-level factors influence the adoption of CSR practices by both individuals and organizations. The literature on society- or country-level influences on CSR has emphasized the role of formal institutions, such as political, legal, and regulatory arrangements,

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in shaping CSR practices (e.g., Matten & Crane, 2005; Williams & Aguilera, 2008; Witt & Redding, 2012). Less attention has been paid to informal institutions such as societal norms and values. Therefore, drawing definitive connections between macro-level factors, such as national cultural orientations, and CSR outcomes is often speculative (Aguinis & Glavas, 2012). There is growing recognition that to understand the relationship between CSR and both formal and informal institutions, a polycontextual approach (Shapiro, Von Glinow, & Xiao, 2007; Tsui, Nifadkar, & Ou, 2007) is needed. For example, to fully grasp the expectations of stakeholders and the specificities of CSR in different national settings, it is necessary to consider aspects of the political environment, economic factors, institutional arrangements, and societal norms and values and their complex interplay (Aguilera et al., 2007; Stahl et al., 2023). Furthermore, the broader supranational or global context is gaining increased attention in the field of CSR (and corporate sustainability) research, especially in the discourse of societal grand challenges (George, Howard-Grenville, Joshi, & Tihanyi, 2016; Voegtlin, Scherer, Stahl, & Hawn, 2022). This is particularly relevant for the emergence of global governance mechanisms and their impact on CSR strategies and initiatives. Comparative perspectives on CSR and culture view stakeholders’ expectations of company engagement in social responsibility as varying across societal cultures (Kumar et al., 2019; Witt & Stahl, 2016). As noted above, this could be explained through a combination of contextual elements. In the case of cross-cultural research in management sciences, values orientation theory has been influential in a variety of the culture conceptualizations (Hofstede, 2001; House et al., 2004; Kluckhohn & Strodtbeck, 1961; Schwartz, 1999; Triandis & Gelfand, 1998). Foremost among these are two that are commonly used to conduct CSR research: the Hofstede values model (Hofstede, 2001) and the GLOBE culture dimensions framework (House et al., 2004). These studies tend to find that national culture is influential on organizational practices in a context of “institutional voids” or deficient institutions. This influence of culture, however, fades when a country is characterized by effective institutional, regulatory and legal frameworks

(Chakrabarty, 2009). Thus, MNEs that aim to fill institutional voids as part of their CSR initiatives need to understand the local cultural contexts in the countries where they operate, prior to engaging in “political CSR,” i.e., the provision of public goods (see Scherer & Palazzo, 2007).

International and cross-border perspectives on CSR

From the international and cross-border perspective on CSR, the global–local dilemma is a key issue for MNEs. Just as their business strategies respond to the pressures for global integration and local responsiveness in product markets (Bartlett & Ghoshal, 1998), so there is increased recognition that MNEs must respond to these competing pressures with respect to CSR and sustainability. Consequently, companies operating across national or cultural bound­aries need to carefully balance both local and global demands associated with CSR, sustainability, and governance issues (e.g., Filatotchev & Stahl, 2015; Husted & Allen, 2006). The framework of “transnational CSR” (Arthaud-Day, 2005; Stahl et al., 2018) suggests three prototypical approaches to CSR in international and cross-border contexts: the global approach, the local approach, and a balanced approach. Figure 52.2 provides an overview of the three approaches and their implications for stakeholder management, highlighting the tensions and possible trade-offs between globally integrated and locally adapted strategies. MNEs that follow the global approach to CSR tend to establish universal guidelines and codes of conduct that apply worldwide. The emphasis is thus on global consistency of corporate responsibility policies and activities, as opposed to giving priority to the needs and concerns of local stakeholders. This approach implies that universal principles of responsible conduct exist which transcend the norms and values of specific societies. Business ethics scholars refer to such universal principles as “hyper-norms” (Donaldson & Dunfee, 1999), asserting that they are based on values acceptable to all cultures and all organizations. Examples of such universal norms and values appear in the UN Global Compact or the UN Guiding Principles on Business and Human Rights, and they are also implicit in corporate policies, mission statements, and

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Source:  Adapted from Stahl et al. (2018).

Figure 52.2

Three prototypical approaches to CSR in cross-border contexts

ethics codes (Wettstein, Santangelo, Giuliani & Stahl, 2019). The global CSR approach establishes consistent rules of behavior, supports trust in the firm’s governance mechanisms, helps firms to prevent and manage reputational risks, fosters a unified culture across the organization, and establishes global standards for managerial decision-making and behavior. However, arrogance and ethical imperialism may lead to neglect of the needs of local stakeholders, as managers are encouraged to act everywhere in the same way as “things are done at headquarters” even when differences may exist (Sully de Luque et al., 2008). Similarly, a global approach may legitimize the neglect of human rights abuses in the countries where MNEs operate. In a classic case, Shell took a global approach to its activities in Nigeria with its policy of non-interference in local affairs, ignoring Nigerian activist stakeholders and human rights violations by the Nigerian military government. Due to its desire not to take

sides, this created the impression that the company was condoning human rights violations. Notable among examples of this is the case of writer and civil rights activist Ken Saro-Wiwa. He founded and led a local NGO representing the rights of the Ogoni people, which in turn created barriers to industry land access. As a consequence, Mr. Saro-Wiwa and others were executed; henceforward, those actions seriously damaged Shell’s reputation (Hennchen, 2015). The locally adapted approach to CSR is in some ways the mirror opposite of the global approach. It emphasizes the need for flexibility and responsiveness to local circumstances and stakeholders’ needs. Executives of companies that have implemented a local approach thus attempt to behave in a socially desirable—or, at least, acceptable—manner according to the local standards of the countries where the company operates. This approach requires that subsidiary managers work cooperatively with local stakeholders. When making CSR-related decisions, this

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may involve taking local cultural norms and sensitivities into account. Compared with the global approach, the main advantage of this approach is its greater flexibility and responsiveness to host-country requirements and local stakeholders’ needs. However, this elevated responsiveness may come at a price, as practicing this approach makes it very difficult to both create or apply any universally accepted norms and standards, and determine what is “responsible” conduct in a particular context. As Donaldson (1996) noted, “cultural relativism is morally blind.” In combination with weak institutions, inadequate regulations, and problematic human rights situations in the countries where an MNE operates, a local approach may promote irresponsible practices. One such example is the case of IKEA’s activities in Saudi Arabia in 2012, where the company digitally erased all images of women from the local version of the catalogue. Despite seemingly complying with local norms, IKEA found itself at the center of a global human rights controversy. Moreover, IKEA acted against its own corporate values, such as a belief in equality, diversity, and gender egalitari­anism (Miska & Pleskova, 2016). The balanced or “transnational” approach to CSR calls for a hybrid strategy, seeking to reconcile global and local requirements. In essence, MNCs develop a template of global responsibility to guide managerial decision-making and ensure consis­tency across the organiza­tion, while allowing local managers to adapt that template according to their distinct needs and circum­stances (Filatotchev & Stahl, 2015). Therefore, depending on the specific local stakeholder needs and the conditions of each country, global policies, norms and codes of conduct may be enacted in different ways. For example, amidst the COVID-19 pandemic, Schneider Electric launched its “New Ways of Working” model and employee wellbeing initiative. Through its multi-hub setup, the company had support of global and local hubs as well as satellite offices in key locations around the world. Thus, the company could enable each country to determine which roles are eligible for this hybrid work model and what aspects—like work– life balance options, diversity and inclusion practices, and mental health and wellbeing resources—needed to be adapted to local circumstances (Pucik et al., 2023).

Since the three approaches define the space for managers to maneuver through and engage in opportunities of “doing good” and “avoiding harm” to stakeholders (Stahl & Sully de Luque, 2014), they have far-reaching implications for the design and implementation of global CSR strategies and how managers make CSR-related decisions. Generally, the transnational approach to CSR seems best able to guide managerial decision-making. It supports the firm’s business model and strategy, fosters cross-border learning, and facilitates the transfer of best practices across the globe while offering the flexibility required to respond to local circumstances and the legitimate demands of stakeholders in the countries where the firm operates.

Coordination and control challenges in international CSR

The choice of a CSR strategy also comes with organizational challenges that may be compounded by geographic distances and cultural differences. When MNCs choose, in particular, a global or a transnational CSR strategy, they cannot just assume that their CSR policies can and will be implemented in a consistent way throughout the global value chain. Using a game-theoretic model, Asmussen and Fosfuri (2019) show that foreign subsidiary managers may fail to converge on consistent CSR strategies due to a lack of trust in the organization combined with trade-offs between social and economic performance. Similarly, suppliers may fail to implement MNCs’ codes of conduct for social behavior (Pedersen & Andersen, 2006), especially if they operate in environments with institutional or regulatory voids (Lund-Thomsen, Lindgreen, & Vanhamme, 2016) and at the same time are subject to pressures from lead MNCs to reduce costs and prices (Golgeci, Makhmadshoev, & Demirbag, 2021). As experienced by companies such as Apple, Nike, Walmart, and others, the scandals resulting from such coordination and control failures may lead to CSR decoupling, where stakeholders perceive an MNC to be “greenwashing” (Wu, Zhang, & Xie, 2020), as the operational reality in its global value chain diverges from the green advertising and sustainability campaigns orchestrated by HQ (Jamali, Lund-Thomsen, & Khara, 2017). The implication is that global and transnational CSR strategies must be accom-

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202  Encyclopedia of international strategic management

panied by various measures, such as auditing (Distelhorst, Hainmueller, & Locke, 2017), socialization (Chi & Nystrom, 1998), and collaboration with NGOs (Huq, Chowdhury, & Klassen, 2016) to ensure compliance throughout the value chain. In conclusion, with the importance of corporate social responsibility and corporate sustainability pervasive in the vernacular of MNCs, this entry assists in explaining the distinctions and convergence of these constructs. Many MNCs have been given mandates that they endorse actions and structures enabling socially, environ­mentally, and economically responsible behavior, as well as good corporate governance (Pucik et al., 2023) in order to achieve their overarching sustainability goals. As MNCs track strategic progress on their designated environmental, social and governance issues, the concept of ESGs extends the means to map and measure these actions and outcomes. With the emphasis and urgency given to CSR and sustainability, and subsequently ESG, it is important that MNCs develop informed approaches to CSR in international and cross-border contexts and implement these approaches with attention to coordination and control challenges. The framework of “transnational CSR” (Stahl et al., 2018) provides a useful method for MNCs to design and implement their CSR strategies, be it global, local or transnational. The benefits of the transnational approach notwithstanding, MNEs may find a global approach most appropriate where anti-corruption and human rights issues are concerned. Günter K. Stahl, Christof Miska and Mary Sully de Luque

References

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53. International diversification The defining characteristic of international strategic management is the extension of the firm, its productive capacity, and its markets into foreign locations – international diversification. For decades, the definition of a multinational enterprise (MNE) has been a firm that owns and controls operations and assets in multiple foreign markets (Hymer, 1960), substituting internal controls over international production and intra-firm trade in intermediate goods for the global export trade market (Buckley & Casson, 1976). International business studies evolved from the comparison of foreign direct investment with export trade into the study of the MNEs that engaged in these cross-border activities (Dunning, 1988), which opened the way to apply firm-level strategic management concepts in the international context (Tallman, 2004). International strategic management has largely merged theories of market differentiation with concepts of firm-level competitive advantage to explain international diversification strategies. Key aspects of these strategies include the choice of location (both national and sub-national), the means of entry, the governance of subsequent operations in the host nation, and the degree of integration that any one foreign activity will have with the rest of the multinational firm’s global network of activities, operations, and alliances (Tallman, 2001). Expansion of the firm into foreign markets offers three primary strategic incentives to the MNE (Tallman & Yip, 2009). The most widely examined is that international market diversification allows the MNE to exploit its unique firm-specific assets (FSAs), whether technologies, brands, or other competencies, across a larger customer base (Caves, 1971; Hymer, 1960). In the common situation that the firm’s FSAs are best applied in combination with host country-specific assets (CSAs) as foreign markets grow, the MNE itself becomes diversified as it sets up production in its host markets (Rugman, 1979). From the strategic management perspective, the resource-based view supports the application of existing strategic resources in international

markets, while transaction cost concepts address the issue of substituting hierarchical controls for market transactions (Tallman & Li, 1996). Limits to international diversification of markets are tied to concerns that FSAs might have less rent-earning potential in foreign markets (Tallman, 1992), and that the costs of internal governance might limit the potential scope of international diversification (Rugman, 2000). The second potential benefit of international diversification is that MNEs can access new resources and capabilities as they expand across borders. Encountering new and differentiated markets forces MNEs to develop new capabilities to compete successfully in multiple host markets (Johanson & Vahlne, 1977). However, MNEs also can diversify their sources of production to countries that are not important markets for their products in order to lower costs, to tap supplies of unevenly distributed inputs, or to access technologies or other intellectual property that is tied to foreign locations (Tallman & Yip, 2009). Both distribution and supply chains can be heavily diversified across national borders while the firm’s boundaries remain within its domestic market, but more often the firm itself internationalizes – extends its legal boundaries into multiple countries; and globalizes – ties together its various international operations into a coherent whole (Tallman & Fladmoe-Lindquist, 2002). The third benefit of international diversification lies in protecting the value of existing resources and capabilities through diversifiable risk reduction and competitive positioning (Tallman & Yip, 2009). Differences in business cycles across regions and countries offer portfolio effects to reduce financial risks, although these are at least partially offset by the financial costs of working in different currencies and economic regimes (Reeb, Kwok & Baek, 1998). However, internationally diversified production offers arbitrage possibilities to keep costs competitive globally (Kogut, 1985), while its presence in multiple markets allows the MNE to identify and adapt to emerging demand patterns and to base operational units in locations that provide strong support for their productivity, efficiency, and innovation in response to competitive moves from other MNEs.

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Multinationalization and performance

All the theories and frameworks that purport to explain international diversification and global market integration assume that superior performance drives these strategic decisions. Empirical studies, though, have only partially supported this connection, showing great variation in performance outcomes as international diversification, often referred to as multinationalization, increases (Cardinal, Miller & Palich, 2011). Early studies (Delios & Beamish, 1999) argue that multinationality is related positively to profitability. Other studies have showed no relationship or a negative relationship, while later formulations predicted curvilinear relationships, whether U-shaped (Lu & Beamish, 2001), inverted U-shaped (Geringer, Beamish & da Costa, 1989), or a “horizontal S shape” (Contractor, Kundu & Hsu, 2003). These more complex curves suggest that international diversification offers performance benefits, but also increases bureaucratic costs, so that simple relationships are difficult to discern. Other models (Morck & Yeung, 1991) find that multinationalization only offers benefits when firms have superior resources, or under specific contextual conditions (Berry & Kaul, 2016). Some (Wiersema & Bowen, 2011) suggest that empirical tests of the multinationalization–performance relationship are highly sensitive to data used (both over time and across home and host countries), model and variable specification, and statistical techniques. Hennart (2011) contends that the amount of internationalization is a strategic choice for firms, so there should be no overall M–P relationship except when management has (temporarily) over- or under-diversified internationally. In studies that look beyond simple measures of economic performance, international diversification finds some support. Firms that are internationalized have higher survival rates and enjoy superior stock performance than domestic-only firms (Christophe & Lee, 2017). Internationalization strategy through exporting has been found to improve firm productivity based on learning from exporting activity (Chang & Chung, 2017). Strategies focused on cross-border acquisitions have been found to increase the productivity of the

acquiring firm in its home country when there are learning opportunities in the host country (Bertrand & Capron, 2015). Industry characteristics and home country factors (stronger benefits for advanced economies than developing countries) are important moderating effects for the M–P relationship (Kirca, Roth, Hult & Cavusgil, 2012). The type of country and types of investment strategies are key to what future growth opportunities may be available to the MNE due to internationalization (Belderbos, Tong & Wu, 2018). In summary, the theories and empirical findings addressing the M–P relationship suggest that strong firm-specific assets are critical to successful international diversification (Verbeke & Forootan, 2012). In addition, managerial skills and learning over time should enhance the benefits of international diversification (Tallman & Fladmoe-Lindquist, 2002), and a multitude of contingencies such as industry, national level of development, strategic purpose, levels of economic growth, and the like, undoubtedly moderate the M–P relationship. These varied findings suggest that replication of the extant studies is unlikely to change the overall picture of international diversification as a strategy – one that is complex and uncertain. However, the critical studies cited here offer many suggestions for refining empirical approaches and sharpening conceptual models, even incorporating new theories, that could help scholars to understand better why international diversification, by many means and under many guises, continues to expand even as a volatile and uncertain environment throws new challenges at this key aspect of international strategy. Stephen Tallman

References

Belderbos, R., Tong, T. & Wu. 2018. Multinational Investment and the Value of Growth Options: Alignment of Incremental Strategy to Environmental Uncertainty. Strategic Management Journal, 40: 127–152. Berry, H. & Kaul. 2016. Replicating the Multinationality-Performance Relationship: Is There an S-Curve? Strategic Management Journal, 37: 2275–2290. Bertrand, O. & Capron, L. 2015. Productivity Enhancement at Home via Cross-Border Acquisitions: The Roles of Learning and

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208  Encyclopedia of international strategic management Contemporaneous Domestic Investments. Strategic Management Journal, 36: 640–658. Buckley, P. and Casson, M. 1976. The Future of the Multinational Enterprise. London: Macmillan. Cardinal, L., Miller, C. & Palich. 2011. Breaking the Cycle of Iteration: Forensic Failures of International Diversification and Firm Performance Research. Global Strategy Journal, 1: 175–186. Caves, R. E. 1971. International Corporations: The Industrial Economics of Foreign Investment. Economica, 38(149): 1–27. Chang, S.J. & Chung, J. 2017. A Quasi-Experimental Approach to the Multinationality-Performance Relationship: An Application to Learning-by-exporting. Global Strategy Journal, 7: 257–285. Christophe, S.E. & Lee, H. 2017. Does Going Global or Staying Local Improve the Long-Term Survival and Performance of IPOs. Global Strategy Journal, 8: 563–577. Contractor, F.J., Kundu, S. & Hsu, C. 2003. A Three-stage theory of International Expansion: The Link Between Multinationality and Performance in the Service Sector. Journal of International Business Studies, 34: 5–18. Delios, A. & Beamish, P. 1999. Geographic Scope, Product Diversification, and the Corporate Performance of Japanese Firms. Strategic Management Journal, 20: 711–727. Dunning J.H. 1988. The Eclectic Paradigm of International Production: A Restatement. Journal of International Business Studies, 19(1): 1–32. Geringer, J.M., Beamish, P. W. & da Costa, D.C. 1989. Diversification Strategy and Internationalization: Implications for MNE Performance. Strategic Management Journal, 24: 1289–1306. Hennart, J.-F. 2011. A Theoretical Assessment of the Empirical Literature on the Impact of Multinationality on Performance. Global Strategy Journal, 1: 135–151. Hymer, S. 1960. The International Operations of National Firms: A Study of Direct Investment. Doctoral Thesis, MIT. Published 1976, Cambridge, MA: MIT Press. Johanson, J. & Vahlne, J.E. 1977. The Internationalization Process of the Firm. Journal of International Business Studies, 8(1): 23–32. Kirca, Roth, K., Hult, T. & Cavusgil, T. 2012. The Role of Context in the Multinationality-Performance Relationship:

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A Meta-Analytic Review. Global Strategy Journal, 2: 108–121. Kogut, B. 1985. Designing Global Strategies: Profiting from Operational Flexibility. Sloan Management Review, 27(1): 27–38. Lu, J. & Beamish, P. 2001. The Internationalization and Performance of SMEs. Strategic Management Journal, 22: 565–586. Morck, R. & Yeung, B. 1991. Why Investors Value Multinationality. Journal of Business, 64(2): 165–187. Reeb, D., Kwok, C.Y. & Baek, H.Y. 1998. Systematic Risk of the Multinational Corporation. Journal of International Business Studies, 29(2): 263–279. Rugman, A.M. 1979. International Diversification and the Multinational Enterprise. Lexington, MA: Lexington Books. Rugman, A.M. 2000. The End of Globalisation. London: Random House Business Books. Tallman, S. 2001. Global Strategic Management. In M. Hitt, R.E. Freeman, J. Harrison, eds., The Blackwell Handbook of Strategic Management: 464–490. Oxford: Blackwell Publishers Ltd. Tallman, S.B. 1992. A Strategic Management Perspective on Host Country Structure of Multinational Enterprises. Journal of Management, 18(3): 455–471. Tallman, S.B. 2004. John Dunning’s Eclectic Model and the Beginnings of Global Strategy. In J. Cheng & M. Hitt, eds., Managing Multinationals in a Knowledge Economy, Advances in International Management, 15: 43–55. Oxford: Elsevier Ltd. Tallman, S. & Fladmoe-Lindquist, K. 2002. Internationalization, globalization, and strategy. California capability-​based Management Review, 45(1): 116–135. Tallman, S.B. & Li, J.T. 1996. The Effects of International Diversity and Product Diversity on the Performance of Multinational Firms. Academy of Management Journal, 39(1): 179–196. Tallman, S. & Yip, G. 2009. Strategy and the Multinational Enterprise. In A. Rugman, ed., Oxford Handbook of International Business, 2nd Ed, 307–340. Oxford: Oxford University Press. Verbeke, A. & Forootan. 2012. How Good are Multinationality-Performance (M-P) Empirical Studies? Global Strategy Journal, 2: 332–344. Wiersema, M. & Bowen, H. 2011. The Relationship Between International Diversification and Firm Performance: Why it Remains a Puzzle. Global Strategy Journal, 1: 152–170.

54. International experience International experience is considered a relevant theoretical construct in international strategic management because it explains outcomes related to an organization’s international activities. There is usually an indirect relationship posited, with an intervening construct between experience and the outcome being explained. For example, international experience may increase a firm’s business network, which in turn provides the firm with better options for international partners, leading to better international performance (Reuber & Fischer, 1997).

Definition

The international experience of an organization can be defined as the involvement of the organization in past international activities. The focus can be on internationalization broadly, such as selling in foreign markets, or it can be on specific activities related to internationalization, such as setting up foreign subsidiaries. In either case, international experience can be measured as the length of time the organization has been engaged in international activities; for example, the number of years it has been selling outside its domestic market, or the number of years it has been manufacturing in a foreign country. Alternatively, international experience can be measured as the number of times the organization has performed an activity. This may be a count, such as the number of foreign subsidiaries established, or it may be a binary indicator, such as whether or not the firm has been involved in a foreign partnership. While the international experience of the firm is often measured directly by firm-level activities, as described above, it has also been measured by the international experience of the firm’s top management team. This has been done in studies of diverse organizations, including Fortune 500 firms (e.g., Daily, Certo and Dalton, 2000), small firms (e.g., Reuber and Fischer, 1997) and young firms (e.g., Hashai, 2011). The rationale for examining the international experience of top decision-makers within the firm is that it constitutes an experiential knowledge base that can affect firm-level international activ-

ities, even though the firm itself may have limited international exposure (De Cock, Andries and Clarysse, 2021; Maitland and Sammartino, 2015). The choice of how to measure international experience in a particular research project – as a time period, a count or a binary indicator; associated with the firm or its top managers – depends on the nature of the expected theoretical relationship between international experience and the outcome it is explaining.

The consequences of international experience

The dominant theme in the literature is that international experience is consequential because organizations learn through experience. Experientially acquired knowledge can result in reduced uncertainty about an international activity, more informed decisions, and more effective organizational routines, systems, and structures (e.g., Johanson and Vahlne, 1977). An implication of this is that it can be beneficial for firms to sequence foreign market entries in a way that leverages the international experience they have accrued (Barkema and Drogendijk, 2007; Delios and Henisz, 2003). The relationships among international experience and learning and performance have been linked with firm-specific advantages, or knowledge bundles. Clarke, Tamaschke and Liesch (2013) argue that experience with international activities which span locations, such as international partnering, can be associated with non-location-bound learning and concomitant non-location-bound firm-specific advantages, while experience with international activities unique to a location, such as navigating the culture of a host location, can be associated with location-bound learning and concomitant location-bound firm-specific advantages. For organizations to learn from experience, experientially acquired knowledge needs to be codified into routines, systems, structures and managerial cognition. This is complex and takes time. Since learning processes are more effective if a firm has time to absorb and adjust to new knowledge, fast-paced engagement in international activities may impede learning and therefore dampen its beneficial effects (Vermeulen & Barkema, 2002). This means that beneficial experience-related out-

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comes may be constrained if experience is acquired too quickly; for example, if a firm enters new foreign markets or establishes new foreign subsidiaries at too fast a pace.

New directions

To conclude, international experience has long been studied as an antecedent to important internationalization outcomes and it can be considered an established and stable theoretical construct. Its effects are well known and so it is often incorporated in an empirical analysis as a control variable. For example, in their study of fast internationalization, Kim, Wu, Schuler and Hoskisson (2020) incorporate controls spanning diverse types of experience. With respect to new directions, it is important to recognize that extant research has focused mainly on the beneficial effects of international experience, and we know much less about its possible detrimental effects. The literature on individual-level experience suggests that the knowledge-related benefits of international experience can be accompanied by a lack of flexibility (Dane, 2010). At the managerial level, there may be cognitive entrenchment which constrains decision-making. At the organizational level, the organizational routines, systems, and structures that evolved through learning processes may be difficult to change if change is needed because the organization suddenly faces new environmental demands. Investigating possible adverse consequences of international experience is likely to provide fruitful avenues for future research. A. Rebecca Reuber

References

Barkema, H.G. & Drogendijk, R. 2007. Internationalising in small, incremental or larger steps? Journal of International Business Studies, 38(7), 1132–1148. Clarke, J.E., Tamaschke, R. & Liesch, P.W. 2013. International experience in international busi-

A. Rebecca Reuber

ness research: A conceptualization and exploration of key themes, International Journal of Management Reviews, 15(3), 265–279. Daily, C.M., Certo, S.T. & Dalton, D.R. 2000. International experience in the executive suite: The path to prosperity? Strategic Management Journal, 21(4), 515–523. Dane, E. 2010. Reconsidering the trade-off between expertise and flexibility: A cognitive entrenchment perspective. Academy of Management Review, 35(4), 579–603. De Cock, R., Andries, P., & Clarysse, B. 2021. How founder characteristics imprint ventures’ internationalization processes: The role of international experience and cognitive beliefs, Journal of World Business, 56(3), 101163. Delios, A. & Henisz, W.J. 2003. Political hazards, experience, and sequential entry strategies: The international expansion of Japanese firms, 1980–1998, Journal of International Business Studies, 24(11), 1153–1164. Hashai, N. 2011. Sequencing the expansion of geographic scope and foreign operations by “born global” firms. Journal of International Business Studies, 42(8), 995–1015. Johanson, J. & Vahlne, J-E. 1977. The internationalization process of the firm: A model of knowledge development and increasing foreign market commitments, Journal of International Business Studies, 8 (Spring/Summer), 23–32. Kim, H., Wu, J., Schuler, D.A., & Hoskisson, R.E. 2020. Chinese multinationals’ fast internationalization: Financial performance advantage in one region, disadvantage in another, Journal of International Business Studies, 51(7), 1076–1106. Maitland, E. & Sammartino, A. 2015, Managerial cognition and internationalization, Journal of International Business Studies, 46(7), 733–760. McDougall, P. P., Shane, S., & Oviatt, B.M. 1994. Explaining the formation of international new ventures: The limit of theories from international business research, Journal of Business Venturing, 9(6), 469–487. Reuber, A. R. & Fischer, E. 1997. The role of management’s international experience in the internationalization of smaller firms, Journal of International Business Studies, 28(4), 807–825. Vermeulen, F. & Barkema, H. 2002. Pace, rhythm, and scope: Process dependence in building a profitable multinational corporation, Strategic Management Journal, 23(7), 637–653.

55. International finance International finance as an academic subject area has prominently entered the curricula in business schools, typically under the umbrella terms of international finance or international financial management. Specifically, Baker and Riddick (2012: 1) provide the following definition: “International finance studies the dynamics of such areas as exchange rates, global financial systems, and foreign investment as well as how these affect international trade. It also studies international investments and portfolio management. Further, international finance involves decision making in the context of many different countries, each having its own political systems, laws, and currencies.”

Yet, the legitimacy of international finance as a distinct academic discipline is often contested. With the notable exception of behavioral finance, finance theory historically evolved along dominant assumptions of rational, frictionless and information-efficient markets. These assumptions underpin many of the seminal theoretical and empirical contributions of finance, such as portfolio theory and capital asset pricing model (CAPM). Emanating from these theories, the foundational concepts of finance (e.g., diversification, systematic risk, beta, alpha, random walk) theorize away inefficiency issues that may arise in an international setting (e.g., information asymmetry, heterogeneous access to resources), thereby justifying the claim that all traditional finance is inherently international. Table 55.1

Nevertheless, the field of finance acknowledges that some financial decisions require refinement in an international context. Classic textbooks of international finance commonly include chapters on currency risk management (e.g., hedging), challenges of international taxation, valuation, credit risk management, cost of capital and capital budgeting (e.g., Sercu, 2009; Bekaert & Hodrick, 2017; Buckley, 2004; Madura & Fox, 2020). Nevertheless, many of these decisions are built on traditional assumptions about market actors, companies and financial markets. With few exceptions (e.g., competitive or economic exchange rate risk), a systematic acknowledgement of the idiosyncrasies of companies and their strategic environment is not in focus (Allayannis, Ihrig, & Weston, 2001). Intendedly, international finance offers generalizable advice to “average” firms, or firms at the center of the competitive distribution, under a “state of normalcy.” The discipline of strategy (of which international strategic management is part), we argue, offers valuable synergies to this intended mission by focusing on the tails of the competitive distribution (“competitive exceptionality”) and states of uncertain, inefficient markets. While there have been efforts to encourage interdisciplinary research between finance and strategy (Puck & Filatotchev, 2020), the two fields still remain largely isolated with little to no cross-fertilization (Cumming, Filatotchev, Knill, Reeb, & Senbet, 2017). In the following, we want to explain two reasons behind this tenacious disconnect and point out some areas where an integration of finance and

International finance and strategy fields: heuristic differences and connections

 

Strategy

Finance

Focus of interest

Competitive advantage from distinguishing

Generalizable financial impact on companies at the

features of companies at the

“center of the competitive distribution”

“tails of the competitive distribution” Environmental

Long-term competitive uncertainty

Short-term financial market efficiency

assumption Fruitful avenues for interdisciplinary research Strategy & capital structure/cost of capital Strategy & internal capital markets (ICM) Strategy & corporate governance Strategic finance & competitive advantage Institutional influences in corporate finance

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strategy would be particularly fruitful (illustrated in Table 55.1).

The theoretical relationship between international finance and strategy Strategy irrelevance vs. finance follows The two fields are historically built on conflicting but synergetic paradigms (Agmon, 2006). On the one hand, finance theory must make assumptions about the financial environment and actors (e.g., efficiency, rationality, homogeneity) to generate a generalizable understanding of companies’ financial functioning in the form of formal models. This leads to what strategy scholars – trained to understand the uniqueness of companies’ strategies and the fit between strategy and environment – may falsely diagnose as an implicit assumption of “strategy irrelevance.” However, this diagnosis fails to acknowledge the different aim of finance research and importance of understanding the financial foundations on which, ultimately, corporate strategy is built. Conversely, the strategy discipline is focused on explaining the idiosyncrasies of companies and their uncertain environments (i.e., their uniqueness). Instead of focusing on companies at the center of the distribution, strategy conceptualizes and empirically proxies firm properties (e.g., dynamic capabilities, nonmarket strategy, and competitive dynamics) that explain deviations from the average (i.e., tails of the competitive distribution). In doing so, strategy scholars, oftentimes, assume that “finance follows” (Forssbæck & Oxelheim, 2008) and overlook the relevance of financial foundations. This ignores the fact that finance is, for large part of companies, also a valuable, rare, imperfectly imitable and non-substitutable resource (Barney, 1991, but also the entry on firm-specific advantages in this volume) necessary to pursue strategies (e.g., wholly owned subsidiaries, M&As, R&D). Market efficiency and risk vs. market uncertainty In line with the dominant aim of the finance discipline to generate generalizable insights for “average” firms, finance theory and empirical research relies on assumptions of

“a state of normalcy.” When markets do not function, the mechanisms that underpin these generalizable financial mechanisms and the measures of risk applied in financial modelling become compromised. In times of high uncertainty, for example, market correlations can change rapidly (Lukomnik & Hawley, 2021). Along with them, traditional measures used in finance can become biased and financial strategies taught in international finance classes become difficult or impossible to implement (e.g., hedging). Strategy, on the other hand, has a more long-term view of companies and specializes in companies’ strategies towards maintaining competitiveness under an uncertain competitive environment. The idea in strategy is not to generalize in a state of normalcy to “average” firms (like in finance), but to create generalizable insights into why some firms are above (or below) average in times of uncertainty. With their distinctive and complementary perspectives, the two fields offer immense potential for synergies. Understanding the generalizable foundations of, for example, M&A transactions is equally important as understanding the strategies and characteristics that make some companies exceptionally successful in this strategy (please see the entry on international acquisitions in this volume). In the following section, we aim to highlight some areas of research with strong potential for interdisciplinary advancement between the two disciplines.

Aspects of finance relevant for strategic management Strategy and capital structure/cost of capital A firm’s capital structure and cost of capital are decisive factors in finance, but also important antecedents to firms in their strategic planning (e.g., growth, innovation, and internationalization). On the one hand, access to capital provides a necessary prerequisite to strategy implementation, and, on the other hand, capital access is co-determined by firms’ strategic decisions (Arborgast & Praveen, 2018). In the international context, financial capital structure theories have provided mixed but insightful results. Following classic finance theory, Fatemi (1988) suggests that internationalization yields a diversification

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benefit that firms can use to increase their leverage. On the contrary, Reeb, Kwok, and Baek (1998) and Mansi and Reeb (2002) maintain that firms have to reduce leverage when they internationalize because activities in foreign markets add relatively more risk (e.g., political, exchange rates, information asymmetries) than domestic investments. With regard to the equity and bond markets, recent research indicates that the internationalization of capital markets provides companies with access to significant financial resources outside their home countries. For example, as some of the emerging markets such as India and China have large and growing corporate sectors, there is an opportunity for emerging market firms (EMFs) to choose from multiple equity markets, including those outside their home countries (Fernandes, 2011). Equity offerings from EMFs also create significant investment portfolio diversification opportunity for global investors, especially the ones from developed economies (Chakrabarti, Megginson, & Yadav, 2008). However, a significant body of literature indicates home bias among investors against EMFs from dissimilar institutional environments, and the benefits of tapping into (potentially vast) foreign capital markets are negatively affected by institutional differences between countries (Cornaggia, Cornaggia, & Israelsen, 2020). A key conclusion of these studies is that the higher differences are between institutional settings in the firm’s home and host countries, the lower will be the valuation in the foreign equity market (or greater cost of capital). Contextualizing the type of investments and applying a more strategic view on internationalization, Kwok and Reeb (2000) show that the effect of internationalization on cost of capital depends on the direction of the investment (upstream vs. downstream), as the increase in risk stemming from an investment in a country with lower institutional quality cannot always be compensated by the resulting diversification benefits – and vice versa. Lindner, Müllner, and Puck (2016) use both diversification and liability arguments to build a comprehensive model of how institutional factors affect capital structure. These early findings connecting concepts from finance (diversification) and strategy (liability of foreignness) suggest that a holistic theory of capital structure and cost of

capital would improve decision-making and academic inquiry. Strategy and Internal Capital Markets (ICM) An internal capital market is the market for financing and investments inside the firm. ICM research frequently addresses the ex post flexibility in capital allocation of diversified and/or internationalized firms. The performance effect of ICM activity is discussed controversially in the literature. The discussion revolves around two opposing perspectives, one arguing for, on average, a positive effect of ICMs (Gopalan et al., 2007; Khanna & Tice, 2001; Maksimovic & Phillips, 2002), the other highlighting, on average, the negative effects (Doukas & Kan, 2008; Gertner et al., 1994; Hill, 1988; Lamont, 1997; Lamont & Polk, 2002; Rajan et al., 2000; Scharfstein & Stein, 2000; Chen, 2006; Shin & Stulz, 1998). The differing perspectives are also referred to as “The Bright Side of Internal Capital Markets” (Khanna & Tice, 2001 p. 1489) and “The Dark Side of Internal Capital Markets” (Ozbas & Scharfstein, 2010 p. 581; Scharfstein & Stein, 2000 p. 2537). On the positive side, scholars argue that ICMs allow firms to overcome the limits of external financial markets (Williamson, 1970 p. 140). Firms have superior knowledge about investment projects, which ultimately leads to lower internal and higher external transaction costs. Diversified investments allow them to cross-subsidize promising investments, which would be very costly to finance otherwise (Desai et al., 2004; Staglianò et al., 2014; Myers, 1984). On the negative side, scholars suggest that ICM may have negative effects on firms’ performance due to lack of external monitoring and managerial empire building (Cline et al., 2014; Doukas & Kan, 2008; Liebeskind, 2000; Denis, Denis, & Yost, 2002). Empirical evidence in both finance and strategy has been mixed, suggesting that the effect of ICM on performance may be contingent on the strategic environment (i.e., company idiosyncrasies and/or environmental context) (Alcácer, Chung, Hawk & Pacheco-de-Almeida, 2018; Jiraporn, Kim, Davidson, & Singh, 2006). In the field of international business, Mudambi (1999) provides evidence that strategic independence of subsidiaries appears to impede the functioning of internal capital markets. Fisch and Schmeisser (2020) expand the

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headquarter-focused perspective and show that subsidiaries located in markets with a capital resource advantage transfer financial resources to other parts of the MNC after strategic changes. Herein, finance and strategy scholarship would combine ideally to not only explain mixed findings but also develop strategies for companies to maximize their return on ICM (Oviatt, 1984). Strategy and corporate governance In their seminal contribution, Shleifer and Vishny (1997) define corporate governance as dealing with the agency problem and “the separation of management and finance.” Rooted in the disconnect between finance and management, corporate governance is situated squarely at the blind spot between the two academic disciplines. Corporate governance emerged as a practical problem and research field because transaction costs within internalized business units can be lower than external market transactions (Hennart, 1988). In the international context, strategy scholarship on governance has evolved to study, for example, the complex relationship between MNCs headquarters and its subsidiaries (Andersson, Forsgren, & Holm, 2002; Birkinshaw & Hood, 1998; Mudambi & Navarra, 2004). At the same time, finance has made significant inroads studying financial constraints to governance. For example, Yamin and Golesorkhi (2010) show that growth constraints are imposed upon small and medium-sized enterprises by a lack of access to financing. In summary, corporate governance connects managers (agents) and shareholders (principals) and therein sets the stage for both financial and strategic decisions requiring a theoretical and empirical integration of the two perspectives. Strategic finance and competitive advantage In addition to financial constraints, firms can also actively pursue financial strategies (Oxelheim, Randøy, & Stonehill, 2001; Puck & Filatotchev, 2020) in the domains outlined by the OLI framework (Dunning, 1980; Dunning, 1998). Financial strength, per se, can be seen as a special form of economies of scale and scope of MNCs that have headquarters in countries with liquid financial markets (Dunning, 1993).

Firms may seek financial competitive advantages, for example, through cross-listing, when a company listed on its domestic capital market offers equity to investors using a stock market abroad (Bell & Rasheed, 2016). Because classic assumptions of finance do not hold in an international setting, foreign firms face information asymmetries and an unfavorable investor base in the foreign country; such strategies may involve capital market liabilities of foreignness (Bell, Filatotchev, & Rasheed, 2012) and potentially higher cost of capital, lower liquidity, and less analyst coverage (Blass & Yafeh, 2001). Strategy provides a rich repertoire of theories to explain why some firms are more capable of navigating diverse institutional settings. Firms may also use foreign capital market entry to gain local legitimacy for their commercial operations (Gu, Filatotchev, Bell & Rasheed 2018; Lindorfer, d’Arcy, & Puck; 2016), choose certain types of investors to fit their competitive strategy (Kochhar & David, 1996; Kochhar & Hitt, 1998) or assemble resourceful debt syndicates to support their risky investments (Dorobantu, Lindner, & Müllner, 2017; Dorobantu & Müllner, 2019; Dorobantu & Müllner, 2017). Thus, financing decisions can confer strategic advantages which are commonly disregarded in strategy scholarship. Institutional aspects of corporate finance National culture and institutions as important elements of the firm environment have been studied intensely in strategy literature. They have also found their way into finance in the field of new comparative financial economics (La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998), which focuses on how institutional and cultural aspects (e.g., investor protection, property rights) affect firms’ financing strategies (e.g., capital structure, cost of capital). These seminal contributions have been on a macro level with extensive residual variation on the firm level. Further, they have focused strongly on firms’ headquarter locations, ignoring the fact that multinational companies have access to multiple financial markets. As such, they provided few insights into strategies that firms can pursue to arbitrage on institutional and cultural differences.

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Internationalization allows MNCs to borrow from different governance regimes. For example, a firm may export its governance practices to its acquisition target in an overseas location by appointing foreign directors or export governance practices from its home country (Cumming et al., 2017). This concept of mobility of corporate governance is intensely studied in governance research but to a lesser extent in finance. Overall, the recognition of corporate governance mobility through firms’ organizational boundaries presents an important opportunity for further theory-building, as this suggests that governance is a product not only of economic factors associated with market efficiency, but also of institutional norms legitimizing the adoption of appropriate governance practices within firms (Bell, Filatotchev, & Aguilera, 2014). Finally, the ESG movement in finance reflects a growing recognition that companies do not operate in efficient markets as dominantly theorized (Lukomnik & Hawley, 2021). Therein, strategy research offers valuable firm-level frameworks on how companies can tackle the environmental and social externalities of their operations.

Conclusions

Our analysis indicates that international finance is increasingly occupying a prominent place among disciplines focused on various international dimensions of business strategy and operations. Despite historically independent development trajectories, international finance and international strategic management have many common research themes and methodologies, and this entry provides an overview of these commonalities and possible avenues for interdisciplinary perspectives. Most importantly, the diverging aims of the disciplines along the distribution of firm outcomes (tails vs. center) offer promising synergies that should be capitalized on by interdisciplinary researchers in both domains. Moving forward, researchers need to develop a holistic analysis of current business practices within the global context by bringing together strategy decisions with financial resources or constraints associated with their implementation. Jonas Puck, Jakob Müllner and Igor Filatotchev

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56. International HRM International human resource management (IHRM) refers to “all HR activities in their internal and external contexts as they impact the processes of managing [people] in organizations throughout the global environment to enhance the experience of multiple stakeholders” (Schuler & Tarique, 2007, p. 718). Global events such as the COVID-19 pandemic and ongoing trends such as globalization, global mobility of work, changing demographics, and the growth of emerging economies, have all contributed to the challenges and opportunities for managing diverse employees, and operating within and across different national contexts (Caligiuri, De Cieri, Minbaeva, Verbeke, & Zimmermann, 2020). IHRM research spans at least two broad research streams. First, HRM in multinational enterprises (MNEs) research refers to the study of how people are managed in MNEs, with particular attention to people who work across national borders (Brewster, Mayrhofer, & Smale, 2016; Cooke, Wood, Wang, & Veen, 2020). This research stream focuses on the capacity of MNEs to attract, develop and deploy talented employees and so that they work effectively despite differences in culture, language and locations. Within this stream researchers also examine HRM practice transfer. The second research stream, comparative HRM (CHRM) research, focuses on the differences in (the effect of) HR practices between countries, which may be due to historical, cultural and institutional factors (Brewster et al., 2016). Within this stream, researchers address questions of why and to what extent there are differences between countries in (the effect of) HR practices. Recently, Sanders and De Cieri (2021) have identified a third research stream that they labelled “combined international and comparative HRM” and defined as “the study of HR practices in MNEs with an emphasis on similarities and differences in the effectiveness of HR practices between countries” (p. 56). This research stream can be seen as a linking pin between the first two research streams as it contains elements of both other research streams. In this contribution, drawing on the recent review by Sanders and De Cieri (2021), we describe topics, major theoretical frameworks and key examples in the two major research

streams, with some attention to the emergent third stream. Over the last 60 years, research activity in the IHRM field has grown and become increasingly diverse in several ways. The most frequently researched countries in the IHRM field, both in the HRM in MNEs and comparative HRM research streams, are: North America, including the United States of America, China, and European countries, particularly Germany, and the United Kingdom. While Japan was featured in several earlier studies as an emerging presence in global markets (1960–80), interest in southeast Asia, particularly China, has grown since the 1980s. While relatively few studies have addressed African or South American country contexts, WEIRD (western, educated, industrialized, rich, developed) countries have received much attention.

HRM in multinational enterprises (MNEs) research

Spanning several decades, researchers have drawn attention to the strategic alignment that is necessary between the HR function in an MNE and the international strategy of the organization. This body of research pays attention to international and executive staffing, particularly the mix of home-, host- and third-country nationals that MNEs employ. Important examples of research in this area have focused on the development of organizational capability, including how knowledge is transferred between units within an MNE, as well as the development of global human capital, performance management, and how MNEs build employee capabilities through practices such as management training. Research in this stream has been influenced to some extent by theories of strategic choice, particularly the resource-based view and knowledge management perspectives, mainly studied at the firm level. More recently, social network theoretical frameworks have been applied. A related and important strand of research in this stream is focused on the management of global work, largely focused within MNEs, where interactions with different stakeholders (such as suppliers, colleagues, or clients) across national borders are required to perform one’s job. This work is more likely to be focused on the individual level, drawing on theoretical perspectives such as stress theories and cross-cultural theories, to advance understanding of global

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work. Some of the common characteristics of global work include cross-cultural communication (including virtual meetings), frequent international travel, international work assignments (e.g., long-term expatriation), and work arrangements such as global project teams. A well-established (and ongoing) body in this stream focuses on large MNEs and on highly skilled professional employees. An example of this research shows that international work experience helps to foster social networks and trust within and across units in MNEs, contributing to a firm’s competitive advantage. This body of work has also established that both individual factors, such as cultural intelligence, and organizational factors, such as cross-cultural training, contribute to the success of international assignments, in terms of positive outcomes for the employee and for the MNE (Kraimer, Bolino, & Mead, 2016). Some of this research focuses on the individual level rather than the firm level and focuses on individual outcomes, such as career development and adjustment to international assignments. For example, recent work has examined the implications of international work experience for employability and career success. Within this research stream, there is growing interest in how HR practices within MNEs are influenced by external shocks, crises, and uncertain contexts. Here scholars and professionals are dealing with the effects of volatility and demands driven by factors such as geopolitical changes, global shifts in workforce characteristics, digitization of business, and the impact of the COVID-19 pandemic on global work, including the rise in virtual working-from-anywhere. External changes in the political, cultural, and economic contexts have increased the urgency for more research on international staffing in these volatile environments. While most people who work in MNEs or move across national borders for work are unlikely to face life-threatening situations, MNEs have a duty of care to protect and manage the health and safety of their employees, and this responsibility usually falls within the remit of the HR function (De Cieri & Lazarova, 2021). The onset of the COVID-19 pandemic in 2020 caused dramatic changes for many MNEs, including the contraction of global mobility (Caligiuri et al., 2020). There are emerging questions about employees’ will-

ingness to accept international assignments, as many employees worldwide are now engaged in virtual international work, which enables an employee to work from anywhere. Specific areas where HRM in MNEs contributes in valuable ways include the design of work and jobs to facilitate collaboration across borders virtually and to develop appropriate HR practices to enable employees to have the mix of skills and capabilities to perform the work.

Comparative HRM (CHRM) research

The comparative HRM research stream investigates similarities and differences in the adoption and effects of HR practices within and between national contexts. Important contributions in the comparative HRM research include research that examines the influence of national (institutional) factors, such as national cultural values, on the relationship between the adoption and effects of HR practices on organizational outcomes. In this comparative HRM stream, researchers also study the different effect of HR practices on individual attitudes and behaviors, such as organizational citizenship behavior, organizational commitment, work-related stress and work–life balance. Very few studies within this stream have brought together national, organizational, and individual factors. An exception is the work of Sanders et al. (2018), who investigated the effects of two internal factors, performance-based rewards and employee perceptions of HR strength, and one external factor, country-level uncertainty avoidance, on employee innovative behaviors. Within this research stream, there is also an ongoing debate about convergence versus divergence focusing on the extent to which HRM policies and practices are or should be more similar (convergent), different (divergent), or some integrated mix, across countries. An example of research focusing on this debate is the Cranet project (www​.cranet​ .org). This project is based on a long-running survey of comparative HRM research among many countries and has resulted in numerous empirical studies. Much of the comparative HRM research has been informed by cultural and contingency theoretical frameworks, and by institutional theory. Applying these perspectives, Helen De Cieri and Karin Sanders

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Goergen, Chahine, Brewster and Wood (2021) have developed a framework for comparative institutional research that views HRM in a multi-level context, serving multiple stakeholders and recognizing the importance of time. There are calls within this research stream to pay more attention to matters of inequality across national and regional contexts and there are increasing expectations to contribute meaningful responses to humanitarian crises such as human rights abuses and inequality, which have been exacerbated by the COVID-19 pandemic. Some recent studies have brought attention to the needs of vulnerable workers, and gender inequality. Current comparative HRM scholarship also examines the employment challenges faced by migrants, particularly skilled migrants, and refugees. Related to this is the need for policymakers and IHRM professionals to develop policies and practices that are inclusive of the steadily increasing presence of migrants and refugees in the talent pool of many countries.

Combined international and comparative HRM research

The emerging research stream that combines elements of the HRM in MNEs and comparative HRM research streams includes studies of HRM within MNEs with a comparison across countries where subsidiaries of one MNE are located. An example is Cogin, Sanders and Williamson’s (2018) analysis of work–life balance experienced by employees of a European MNE; this study examined the boundary conditions of national cultural values in the relationship between HR practices and customer satisfaction. Current research in this stream pays increasing attention to MNEs from emerging economies, and knowledge transfer between subsidiaries of an MNE in different host locations, global talent management, and global leadership development.

Conclusion

International HRM is a critical function in international business and can be seen as encompassing three research streams: HRM in MNEs, comparative HRM, and combined international and comparative HRM. Overall, by advancing understanding of the links Helen De Cieri and Karin Sanders

between national and regional contexts, the management of people in MNEs, and ways of doing global work, research in the IHRM field offers an evidence base that can inform decisions by HR professionals, national policymakers, leaders in MNEs, as well as individuals engaged in global work. Helen De Cieri and Karin Sanders

References

Brewster, C., Mayrhofer, W., & Smale, A. (2016). Crossing the streams: HRM in multinational enterprises and comparative HRM. Human Resource Management Review, 26, 285–297. Caligiuri, P., De Cieri, H., Minbaeva, D., Verbeke, A. & Zimmermann, A. (2020). International HRM insights for navigating the COVID-19 pandemic: Implications for future research and practice. Journal of International Business Studies, 51, 697–713. Cogin, J.A., Sanders, K., & Williamson, I. (2018). Work-life support practices and customer satisfaction: The role of TMT composition and country culture. Human Resource Management, 57, 279–291. Cooke, F.L., Wood, G., Wang, M., & Veen, A. (2020). How far has international HRM travelled? A systematic review of literature on multinational corporations (2000–2014). Human Resource Management Review, 29, 59–75. De Cieri, H., & Lazarova, M. (2021). “Your health and safety is of utmost importance to us”: A review of research on the occupational health and safety of international employees. Human Resource Management Review, 31(4), 100790. Goergen, M., Chahine, S., Brewster, C., & Wood, G. (2021). Context, governance, associational trust and HRM: Diversity and commonalities. The International Journal of Human Resource Management, 32(17), 3696–3720. Kraimer, M., Bolino, M., & Mead, B. (2016). Themes in expatriate and repatriate research over four decades: What do we know and what do we still need to learn? Annual Review of Organizational Psychology and Organizational Behavior, 3, 1.1–1.27. Sanders, K., & De Cieri, H. (2021). Similarities and differences in international and comparative human resource management: A review of 60 years of research. Human Resource Management, 60(1), 55–88. Sanders, K., Jorgensen, F., Shipton, H., Van Rossenberg, Y., Cunha, R., Li, X, Rodrigues, R., Wong, S.I., & Dysvik, A. (2018). Performance-based rewards and innovative

International HRM  221 behaviors. Human Resource Management, 57, 1455–1468. Schuler, R. S., & Tarique, I. (2007). International human resource management: A North

American perspective, a thematic update and suggestions for future research. The International Journal of Human Resource Management, 18(5), 717–744.

Helen De Cieri and Karin Sanders

57. International joint ventures Strategic alliances are collaborative organizational arrangements that use resources and/ or governance structures from more than one existing organization. As a form of strategic alliance, an equity joint venture (JV) is a legally distinct business unit, owned by two or more partner firms (Nippa & Reuer, 2019). This definition and its equity component clearly distinguish JVs from contractual alliances and other non-equity forms of collaboration. An international JV (IJV) is a JV with two or more parents of different nationality. As an organizational form an IJV has several important characteristics. First, the two (or more) firms partnering remain independent subsequent to the formation of the IJV. Second, IJVs have ongoing mutual interdependence, in which one party is vulnerable to the other (Parkhe, 1993). Mutual interdependence leads to shared control and management, which contributes to the complexity of IJV management and often creates significant administrative and coordination costs. Third, because the partners remain independent, there is uncertainty as to what one party is counting on the other party to do (Powell, 1996).

IJV strategic objectives

An IJV pools the resources of multiple firms to create value in a way that each of the parents could not achieve by acting alone. Firms collaborate for many reasons: to access and acquire knowledge, to reduce and spread risk, to gain scale, to enter and explore new markets, as a stage towards acquisition or divestiture, to share technology, as a defensive response to a competitive action, to create real options, and to gain access to complementary resources. There are a variety of reasons why an IJV is the preferred organizational arrangement for a multinational enterprise (MNE). IJVs are often used as entry vehicles into new countries. The foreign partner may contribute resources such as technology, brand, or marketing know-how, and the local partner contributes market access and local knowledge. IJVs may be an attractive option for large, risky international projects because neither

partner bears the full cost of the venture activity. IJVs also provide a platform for organizational learning, giving firms access to the knowledge of their partners (Inkpen & Tsang, 2016). Through the shared execution of the alliance task, mutual interdependence and problem-solving, and observation of alliance activities and outcomes, firms can learn with and from their partners (Fang & Zou, 2010).

Partner selection

Partner selection is a critical first step in creating an IJV (Beamish & Lupton, 2016). Firms will look for partners that can help achieve their collaborative objectives. In most cases the objectives for the partners will differ. For example, General Motor’s strategic objectives for its NUMMI JV with Toyota included access to North American production of high-quality small cars for the United States market and access to Toyota manufacturing knowledge. As Toyota’s first attempt at building cars in North America, the JV provided the company with an opportunity to develop an understanding of the North American manufacturing environment and gain a foothold in a key market. While the parties in an IJV may see the relationship as a means to their individual ends, compatibility between the partners and congruency in partner cultural factors are often cited as critical to alliance success (Barkema & Vermeulen, 1997). Many scholars have argued that mutual trust is critical to the partner relationship and to IJV performance (Ertug, Cuypers, Noorderhaven, & Bensaou, 2013). In a study of a failed IJV, Ariño and de la Torre (1998) concluded that, in the absence of a reserve of trust, IJVs that experience threats to stability often dissolve.

IJV control and governance

IJVs are formed when two or more partners, often with disparate skills and objectives, come together to form a new entity. The new entity will require governance mechanisms to establish management structures and oversee partners’ interests. Alliance governance involves various design components, including the interface between partners, the codification and standardization of alliance activities, and the allocation of decision-making authority (Albers, Wohlgezogen, & Zajac, 2016). IJV control

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is closely related to governance and refers to the process by which partner firms influence the JV to behave in a manner that achieves partner objectives and satisfactory performance. The process includes the use of power, authority, and a range of bureaucratic, cultural, and informal mechanisms (Geringer & Hebert, 1989). The primary problems in managing alliances stem from one main cause: there is more than one parent (Killing, 1982). The risk of opportunism by one partner is ever present in IJVs, which makes governance critical to IJV success. Even when partner interests are well aligned, the partners need to divide labor and coordinate effectively to complete their joint and individual tasks (Gulati, Wohlgezogen, & Zhelyazkov, 2012). Thus, it is critical that during alliance formation stages, potential partners evaluate the perceived fairness of the proposed governance components (through which they will eventually create and share value) and of their negotiation processes (Ariño & Smith Ring, 2010). There are a variety of formal and informal governance arrangements that can be used in IJVs (Makhija & Ganesh, 1997). Formal contracts can establish the initial basis for cooperation, but as the IJV evolves, adjustments in governance will likely be necessary. Negotiating and forming an IJV initiates a dynamic interactive relationship that must evolve if it is to be successful (Inkpen & Currall, 2004). Trust creates the initial climate that shapes partner interactions. In turn, these interactions lead to subsequent decisions about the nature of governance and controls.

IJV performance

Although IJVs are often described in the business press as inherently unstable organizational forms that are prone to failure, the measurement of IJV performance is challenging. Measurement must consider outcomes at the venture level and at the partner level. One partner may have a view of performance that differs from that of another partner. In addition, the performance of an IJV could be assessed from various outcomes, including knowledge acquisition, innovation, competitive positioning, and financial

(Ryan-Charleton, Gnyawali, & Oliveira, 2022). Instability in IJVs usually is linked with equity changes or major reorganizations (Inkpen & Beamish, 1997) that are unplanned and premature from one or both partners’ perspectives. Usually, instability will result in premature alliance termination, either when one partner acquires the alliance business or the venture is dissolved. A complicating factor in linking instability with performance is that alliance termination will not always be a mutual decision. IJV instability is linked to the inherent tension among the partners between value creation and value appropriation. The tension is usually rooted in the partners’ diverging or misaligned interests. Value appropriation by one partner at the expense of another partner can shift bargaining power. Unintended knowledge spillovers can lead to friction between the partners that conflicts with the original alliance objectives. Finally, the tension highlighted above is especially prevalent when MNEs establish IJVs with political institutions in emerging markets (Sun, Deng, & Wright, 2020), which is often the case in China. Looking forward, IJVs have been an important organizational form in the MNE toolkit and have provided a rich research context for many decades. Although frequently challenging to structure and govern, IJVs are often a viable alternative to organic development and other organizational forms such as acquisitions, contracting, and non-equity relationships. Alliance management skills continue to improve, which creates new opportunities for IJVs in the years ahead. Andrew C. Inkpen

References

Albers, S., Wohlgezogen, F., & Zajac, E. J. (2016). Strategic alliance structures: An organization design perspective. Journal of Management, 42: 582–614. Ariño, A. & de la Torre, J. (1998). Learning from failure: Towards an evolutionary model of collaborative ventures. Organization Science, 9: 306–325. Ariño, A. & Smith Ring, P. (2010). The role of fairness in alliance formation. Strategic Management Journal, 31: 1054–1087. Barkema, H. G., & Vermeulen, F. (1997). What differences in the cultural backgrounds of partners are detrimental for international joint

Andrew C. Inkpen

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Andrew C. Inkpen

in joint ventures. Organization Science, 15: 586–599. Inkpen, A. C. & Tsang, E. (2016). Reflections on the 2015 Decade Award—Social capital, networks, and knowledge transfer: An emergent stream of research. Academy of Management Review, 41: 573–588. Killing, J. P. (1982). How to make a global joint venture work. Harvard Business Review, 60(3): 120–127. Makhija, M. V. & Ganesh, U. (1997). The relationship between control and partner learning in learning-related joint ventures. Organization Science, 5: 508–520. Nippa, M. & Reuer, J. (2019). On the future of international joint venture research. Journal of International Business Studies, 50: 555–597. Parkhe, A. (1993). Strategic alliance structuring: A game theoretic and transaction cost examination of interfirm cooperation. Academy of Management Journal, 36: 794–829. Powell, W. W. (1996). Trust-based forms of governance, in R. M. Kramer & T. R. Tyler (eds.), Trust in organizations: Frontiers of theory and research. Thousand Oaks, CA: Sage, 51–67. Ryan-Charleton, T, Gnyawali, D. & Oliveira, N. (2022). Strategic alliance outcomes: Consolidation and new directions. Academy of Management Annals, 16(2): 719-758. Sun, P., Deng, Z. & Wright, M. (2020). Partnering with Leviathan: The politics of innovation in foreign-host-state joint ventures. Journal of International Business Studies, 52: 595–620.

58. International modularity Since its inception in the 1990s, research on modularity has expanded along changes in technological markets, such as the increasing pace of innovation (Langlois and Robertson, 1992) and the reduction in prior forms of coordination (Sanchez and Mahoney, 1996). One main contribution of research has been to show numerous instances of modularity’s influence on competition. These include allowing small firms to incubate innovations before suddenly disrupting markets (Bresnahan and Greenstein, 1999), and enabling the rise of co-opetition strategies that generate network effects (Garud and Kumaraswamy, 1993). These early days of modularity research culminated in Baldwin and Clark’s (2000) fundamental book and its depiction of modularity as an efficient coordination mechanism. They established modularity as an important field of research and seeded the promise of a “modularity revolution.” Advances in material knowledge, innovative contractual arrangements, and deregulation held the promise of a spread of modularity across all industries (Baldwin and Clark, 1997). Arguably, however, a “modularity revolution” did not come to fruition, as the evolution and spread of the modularity paradigm found practical limits. First, neither researchers nor practitioners have a uniform understanding of modularity. In a complex industry such as the automotive industry, modularity in component design balances engineers’ and researchers’ attention with modularity in the manufacturing process, or modularity-as-process (Jacobides, MacDuffie and Tae, 2015; MacDuffie, 2013; Kotabe, Parente and Murray, 2007; Fixson, Ro and Liker, 2005). In this entry, we define the metric of modularity in terms of the extent of decoupling, i.e., the more modular a system, the more the sub-systems or components are decoupled. This definition implies that a modular strategy is one where firms design their products with decoupled modules. Second, modularity research frequently relied on the computer and electronics industries as the research settings. Thus, even when the methodology was rigorous, this inevitably limited potential extrapolation to other

industries. Modular strategies are not equally implementable in all industries. In some industries, it is relatively easy to apply modularity in the design of a product (Baldwin and Clark, 2000), since the modules’ relevant requirements are typically related to only a few dimensions, while other industries face more challenging requirements. For instance, in the automotive industry, mechanical parts need to fit other tri-dimensional parts, meet “look and feel” requirements in terms of NVH (noise, vibration and harshness), not to speak about manufacturing ergonomics, and reliability to mechanical wear ratios (MacDuffie, 2013). Third, many relevant consequences to the use of modular (decoupled) designs go way beyond product innovation or manufacturing process optimization. Research shows that modularity affects organizations’ boundaries (Kapoor, 2013; Ethiraj, 2007), knowledge outcomes (McDermott, Mudambi and Parente, 2013; Pil and Cohen, 2006), and even the social structure of competition (Ansari, Garud and Kumaraswamy 2015; Afuah, 2000; Brandenburger and Nalebuff, 1997). In some industries, modularity shifts the power balance by vertically disintegrating industries (Jacobides, 2005). Despite its limitations, the relevance of modularity led to a growing body of research and to spawn directly or indirectly entire new fields of research, such as that focused on ecosystems (Adner and Kapoor, 2010; Gawer and Cusumano 2002; Afuah 2000) and on industry standards (Farrell and Shapiro, 1992; Garud, Jain and Kumaraswamy, 2002; Lerner and Tirole, 2004; Rysman and Simcoe, 2008). In this entry, we propose a new way to analyze modularity for both research and practice by systematically ranking modularity along two broad dimensions. The first dimension is related to production, comprising the design, manufacturing, and use stages. Research investigating the automotive industry suggests that modularity is particularly relevant in the manufacturing stage of a car, with many moving parts, intensive use of labor, expensive coordination, and logistics (Jacobides, MacDuffie and Tae, 2015; MacDuffie, 2013, Kotabe, Parente and Murray, 2007; Fixson, Ro and Liker, 2005). This contrasts to the computer industry, in which the most relevant modularity insights are at the design stage, such as in the definition of standard interfaces, coordination

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with other firms to obtain network effects, planning economies of scale, and betting on the disruption of markets. The manufacturing stage in the computer industry is simpler because it comprises fewer components, and the final product typically has fewer interfaces. Further, in industries such as video games and cycling, the relevant elements arise in the use phase of production. Theecondd dimension relates to which level of modularity is most relevant for a given product. Every product (or in a more general sense, every system) is modular to some degree (Campagnolo and Camuffo, 2010). We argue that with this functional definition of modularity, a module can almost always be broken down to smaller components, to a level that is not relevant for business researchers. To reconcile theory and practice in terms of approaching modules with different meanings, we propose categorizing products and systems at their most relevant level of modularization. With these two broad dimensions, we turn to systematically organize the modularity literature, contributing to a better understanding of the phenomenon and offering actionable insights, and review the application of modularity in international strategic management (ISM).

Modularity at the industry level

Modularity can be understood as lenses to examine reality, and as such, it may help us understand several phenomena. For example, product substitution can be examined through modular thinking. Buses, cars, taxis, airplanes, trains, bicycles, scooters, subways, Uber, etc., can each be examined as an isolated industry. But we can also understand the transportation system as a combination of these, from the point of view of the customer who wants to get from point A to point B. Said customer can mix and match options to better fit their preferences. These options frequently offer some form of integration, such as combined passes for metropolitan transportation, Uber waiting areas in airports, and so on and so forth. These integration points are akin to the interface between two modules. Options might compete and complement simultaneously – also a frequent feature of other modularized markets.

Within-industries modularity

The transformation of the automobile industry to a modularized paradigm, and the disintegration of the banking industry, help us understand some relevant aspects of within-industry modularity, or firm-level modularity. In the automobile industry, incumbents experimented with a move to a design stage modularity (i.e., turning design responsibility to suppliers) (MacDuffie, 2013; Jacobides, MacDuffie and Tae; 2015). However, among other problems, incumbents faced increasing coordination costs (MacDuffie, 2013). Increasing coordination costs is at odds with the usual expectations of a modular strategy. One of the main problems was that a module was not defined as a functional paradigm; rather, incumbents considered that a module was a group of physically proximate components. Instead of reducing, these modules increased interdependencies, creating more linkages with the external actors that received responsibility for design. Moreover, a secondary issue is the performance measure occurring within an integrated framework mindset (MacDuffie, 2013). The use of the modular strategy generated a steep learning curve, causing delays and increasing coordination effort, generating immediate inefficiencies. However, firms ignored the beneficial creation of long-term capabilities (McDermott, Mudambi and Parente, 2013).

Component level modularity

The race bicycle industry was dominated by specialized component makers (thus modularity was already adopted), and the main players tended to focus on components’ durability or wear. Shimano changed the paradigm of quality components by proposing an integrated approach to the gear system, creating an indexed system (Fixson and Park, 2008; Takeishi and Aoshima, 2006). Shimano has dominated the market since then, with a yet unmatched innovation pace. This case also highlights a contradiction to modularity theory predictions since Shimano was competing in a modular component market but innovated and differentiated by integrating the drive train components. The most known example of component-level modularity is the computing industry. The mainframe IBM System/360

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was planned for modularity. The goal of designers was to overcome limitations such as high software development costs; the modular approach allowed software reuse (Baldwin and Clark, 2000). This is the main modularity paradigm and some classical modularity predictions stem from the computing industry setting. Modularity in computing evolved to become the default design option, modern information and communication technology (ICT) products have achieved such complexity that ICT firms typically specialize in one or a few components, instead of trying to project a complete product. These cases depict modularity in different levels and settings, under distinct circumstances. To help evaluate its characteristics and improve understanding of the modularity concept, this way alleviating misunderstandings, we propose to organize modularity across stages and levels. Such a systematic examination will help shed light on contradictory aspects of modularization and propel research forward.

Figure 58.1

Stage vs level of modularity

About the stages of modularity

The first of the two dimensions is the production stage in which a modular approach is adopted (Langlois and Robertson, 1992; Baldwin and Clark, 1997). Arguably, all products and services will go through three stages in their lifecycle: design, manufacturing, and use. These stages may not always be well defined and may have flexible boundaries (e.g., a product that can be customized by the client). The design stage is very relevant for complex products, such as automobiles, buildings, or computers. Stages generally follow a logical order (design, manufacturing, and use), and each stage presupposes some degree of modularity in the previous stage. In other words, modularity in the manufacturing stage presupposes some degree of design modularity, while modularity in use presupposes some degree of manufacturing modularity (Baldwin and Clark, 1994).

The manufacturing stage is commonly associated with automakers that can mix and match components at the manufacturing stage, adapting to market conditions, changing consumer preferences, and obtaining scale economies. At the use stage, final customers can combine modules from different providers. For instance, high fidelity audio systems can be created by the final user mixing and matching components from various vendors. Or as in our introductory example, a customer can get from point A to B by mixing and matching a variety of transportation options.

About the levels of modularity

The second dimension relevant to our systematization is the level in which a modular design is observed. We categorize the dimension in three levels: industry, firm, and component. Modularity at industry level means that it is possible to mix and match components from different industries. The transportation system presents such peculiarities; cars and trains compete at system level, since they present a degree of substitution, while facing competition within their own industries. Firm-level modularity suggests competition for products and services that are integrated, i.e., they are distant from the functional definition of a module. They have multiple parts that present interaction and require coordination to assemble. One example is the SI-IP module designed by Visteon to Ford (MacDuffie, 2013), thought of as a module but that presented multiple interacting systems. Component-level modules are functionally defined in such a way that one module should have one function. Consequently, modules are more independent, which reduces coordination costs and allows phenomena such as the industry disintegration in the banking system (Jacobides, 2005). Modules defined this way can occur within-firm when designers mix and match a variety of components to create different products, with a variety of strategic goals, such as to provide a larger portfolio, managing demand, or adapting to market dynamic conditions. Component level can also occur between firms, which is typical to ICT (but not exclusive to it), allowing increasing returns to scale and fast innovation pace through parallel trial and error.

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Implications for management theories

We turn to organize a sample of extant literature along the discussed levels and stages. It may provide some interesting insights and allow us to propose some future research. We begin with the design stage, where modularity is related to innovation due to parallel trial and error (Langlois and Robertson, 1992), to market dynamics due to network externalities (Garud and Kumaraswamy, 1993), easier coordination due to decreasing interdependence (Sanchez, 1995; Sanchez and Mahoney, 1996), vertical and horizontal disintegration (Langlois and Robertson, 1992; Jacobides, 2005), gains from specialization and trade (Jacobides, 2005), and to decreasing imitation (Baldwin and Henkel, 2015). Modularity at the manufacturing stage is related to robustness due to adaptability (Pil and Cohen, 2006; Ethiraj and Levinthal, 2004), faster adaptability to changing user needs (Fichman and Kemerer, 1993), increased product variety and lower costs (Takeishi and Fujimoto, 2001; Utterback, 1994), outsourcing due to decreased interdependence (Weigelt and Sarkar, 2012). Modularity at the use stage is related to faster adaptability to changing user needs (Fichman and Kemerer, 1993). At industry level, research has found that modularity reduces the need for alliance control (Tiwana, 2008). At the product level, we observe increased product variety and lower costs (Takeishi and Fujimoto, 2001; Utterback 1994) and process optimization (Kotabe, Parente and Murray, 2007; MacDuffie, 2013). At the component level, research has found impact of modularity in the production scale, innovation due to parallel trial and error (Langlois and Robertson, 1992), rise of multiple competitive structures (Ansari, Garud and Kumaraswamy, 2015; Adner and Kapoor, 2010; Jacobides et al., 2006; Gawer and Cusumano, 2002; Afuah, 2000; Brandenburger and Nalebuff, 1997) and institutions (Farrell and Shapiro, 1992; Garud, Jain, Kumaraswamy, 2002; Lerner and Tirole, 2004). Some research streams suggest that modularity increases imitation (Pil and Cohen, 2006), while others propose that modularity may help hinder imitation (Baldwin and Henkel, 2015). This apparent contradiction happens because modularity choice responsi-

bility is often overlooked. Can firms choose what modules may be hidden and which ones may be outsourced? When firms cannot choose how and when to apply modularity, modularity is not an option but a property of the market – this is when the imitation problem becomes relevant. On the other hand, when modularity choices occur within a firm, it may help reduce imitation. In a related discussion, we observe the evolution of some markets from a hierarchical structure to a more fluid one, where inter-firm coordination costs are drastically reduced and firms specialize in components rather than in products (Adner, 2006). It is important to highlight that modularization does not mean eliminating relationships and coordination. Modularization forced researchers and practitioners alike to rethink how to improve coordination and joint learning at different, shifting interfaces. Buyers and suppliers cannot implement cost-effective innovation strategies independent from one another but rather continue to need to share critical knowledge to ensure effective integration of modules. The recent ecosystem research field brings this discussion to the forefront (Adner and Kapoor, 2010; Gawer and Cusumano, 2002; Afuah, 2000). Modularity can be a useful lens to understand competition at the firm level. For instance, a consumer that wants to buy a laundry detergent can choose from a variety of options. Research and practice tell us that due to the low level of differentiation across laundry detergent brands, the competition in this industry is driven by marketing strategies. An attentive reader can argue that applying a modularity perspective may not be very useful at this point, to which we would agree except to the idea that modularity is not necessarily an intrinsically complex concept. Grouping many streams of research under the modularity label can potentially create confusion in concepts and in the definition of terms. Our systematization along stages and levels aims to simplify and alleviate some of these contradictions.

Modularity in an international context

Modularity is particularly important in the context of offshoring and fine-slicing of global value chains (Valle, Avella and García, 2011), and as such plays an important

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role in ISM. As explained by Autio et al., the trend towards modular architecture constitutes a centrifugal force facilitating geographical dispersion of the value chain, as the need for coordination is reduced by well-designed interfaces between the activities. In practice, using consumer electronics as an example, this opens for the possibility that “components can be designed and developed independently” (Autio et al., 2021: 10–11). McDermott, Mudambi, and Parente (2013) similarly evoke the example of Boeing’s 787 program, arguing that modularity enables the MNE to become an “orchestrator” of global value chains, facilitating innovation and learning without having to invest extensively in R&D and internalization. Asmussen, Larsen and Pedersen (2016) conceptualize the degree of modularity on a scale from 0 to 1, where 0 indicates that the activities are completely inseparable and 1 that they are fully modular. As offshoring entails a geographic separation of previously co-located activities, it creates, proportionally to the degree of modularity, a residual need for continuous coordination between offshored activities and core activities remaining in the home country. For example, the Danish toy manufacturer LEGO keeps manufacturing activities at home despite Denmark’s comparative disadvantage in such activities, reflecting the need for coordination of these activities with R&D. Using a simulation framework, Asmussen et al. (2016) demonstrate that when the degree of activity modularity is sufficiently high, it becomes valuable for firms to obtain “architectural knowledge,” i.e., knowledge about the interdependencies between tasks, so that they can selectively offshore activities while balancing the costs of coordination with the obtained cost savings. Consistently with these arguments, Elia, Massini, and Narula (2019) predict that foreign entry mode choices should mirror the firm’s organizational architecture. Since modularity decreases transaction costs, modular activities can be more readily outsourced when moved abroad, while complex (non-modular) interdependencies are better managed within firms and thus warrant captive offshoring. Elia et al. (2019) find support for these ideas, but only in culturally close and politically stable countries. Another application of modularity within IB is its role in facilitating global strat-

egies. Lehrer and Behnam (2009) argue that modularity can help firms overcome trade-offs between global integration and local responsiveness by allowing for globally standardized modules that interface with locally adapted ones. They argue that this is particularly salient in the hardware and software industries and provide a rich case study of how modular strategies facilitated the internationalization of German ERP provider SAP. In sum, modularity is a term of high relevance in connection to well-known ISM issues and provides a promising avenue for future research. Renato Kogeyama, Ronaldo Parente, Gerry McDermott, Ram Mudambi and Christian Geisler Asmussen

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59. International non-governmental organizations Introduction

A non-governmental organization (NGO) is an independent non-profit organization that provides advocacy or other services on behalf of a constituency or group of stakeholders. Examples include environmental NGOs (Worldwide Fund for Nature, the Nature Conservancy, the Sierra Club), humanitarian and relief organizations (Oxfam, International Rescue Committee), and public health entities (Doctors Without Borders). The term was first introduced in Article 21 of the United Nations Charter in 1945. While there is no firmly established definition for NGOs, the United Nations (2023) has defined them as a not-for profit, voluntary citizen’s group that is organized on a local, national or international level to address issues in support of the public good. Task-oriented and made up of people with a common interest, NGOs perform a variety of services and humanitarian functions, bring citizen’s concerns to Governments, monitor policy and program implementation, and encourage participation of civil society stakeholders at the community level.

Classification

NGOs may also be called civil society organizations (CSOs), social movement organizations (SMOs), third-sector organizations, non-profit organizations, non-state actors, advocacy groups, and other terms, depending on the context and academic discipline in question. NGOs act as implementers, catalysts, and partners and often mobilize resources to provide goods and services to people who have been affected by wars or natural disasters; they drive change, and partner with other organizations to tackle problems and address human needs (Vachini, Doh, & Teegen, 2010). Teegen, Doh, and Vachani (2004) and Yaziji and Doh (2009) classify NGOs along two dimensions: whether they are primarily engaged in advocacy (through lobbying, boycotts, campaigns or others means) or, conversely, are focused on “operational” programming such as disaster relief, public health care, or other socially oriented

service activities. They note that many NGOs engage in both advocacy and service delivery and are therefore “hybrid” in nature. The second dimension defines whether the NGO is primarily directed at external stakeholders (“other benefitting” – governments, business, or specific stakeholder groups) or internally directed (self-benefitting), as is the case with NGOs that operate as clubs or membership organizations. Another potential dimension for understanding NGOs is whether they operate at the local, national, or global level. Increasingly, local NGOs work with and collaborate with national and international ones, and many national-level NGOs have expanded their reach internationally through organic growth, alliances, or other means.

NGOs and international strategic management

NGOs are increasingly important to international strategic management generally, and to the strategy and operations of multinational enterprises (MNEs) in particular. According to Doh and Teegen (2002: 665), “The emergence of NGOs as important institutional actors in international business can be traced to the widespread movement in the mid-1980s to pressure companies to divest from South Africa.” Since then, the scale and scope of NGO activities has increased dramatically. In particular, NGOs have engaged in a wide range of activities to encourage MNEs to minimize the negative impacts of their operations and maximize their positive societal and ecological impacts. There is a burgeoning scholarly literature exploring the interactions between NGOs and MNEs. This includes a number of scholarly books (Yaziji & Doh, 2009), review articles (Dahan, Doh, & Teegen, 2010; Kourula & Laasonen, 2010), theory development efforts to use extant IB theory to inform NGO–MNE interactions (Boddewyn & Doh, 2011; Vachani, Doh, & Teegen, 2010) and empirical analyses. Lambell, Ramia, Nyland, and Michelotti (2008) organize this literature along the following domains: strategic alliances and resource dependency; global governance and multilateralism; public management; and regulation theory. They argue that greater interdisciplinarity should result in more innovative treatments of the role of NGOs in global strategy. Indeed, some scholars are examining NGOs as multinational

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organizations themselves, and exploring their role as institutional actors that face some of the same challenges and influences as MNEs as they extend their global reach. Gaspar, Moreira, Cercas, Queirós, and Campos (2022) undertook a review of literature on the internationalization of NGOs and conclude that NGOs internationalize in a manner quite consistent with the traditional “stages” model associated with the Uppsala school (Johanson & Vahlne, 1977). As described in the following, NGOs interact with MNEs both as a source of external pressures and as potential collaborative partners.

NGO pressure on MNEs

As Yaziji and Doh document (2009), NGOs such as Greenpeace, Oxfam and others engage in various strategies to place pressure on MNEs to change aspects of their operations, strategy, and supplier relationships. These are often called “campaigns” and can take the form of organizing boycotts, protests, advocacy in the media, shareholder resolutions, and other means. In an era of widespread access to information through social media, these campaigns can be very effective. Campaigning groups have been key drivers of intergovernmental negotiations, ranging from the regulation of hazardous wastes to a global ban on land mines and the reduction of child labor. An example of a successful NGO campaign targeting MNEs was the Free Burma Coalition of NGOs, which forced companies such as Levi Strauss, Macy’s, Liz Claiborne, PepsiCo, Texaco, Amoco, ABN AMRO, Kodak, Apple, Disney, Motorola and many others to withdraw from Burma. Recent NGO campaigns have focused on influencing companies and investors to de-carbonize their activities of investment holdings.

NGO–MNE collaboration

NGOs also increasingly engage in collaborative partnerships or alliances with MNEs, relationships sometimes termed cross-sector partnerships. These collaborations often yield tangible, complementary benefits for the respective participants. They provide MNEs with access to different resources, competencies and capabilities than those that are otherwise available within their organization or that might result from alliances

with for-profit organizations (Rondinelli & London, 2003). NGOs may gain financial, human resource and reputation benefits, while MNEs gain access to skills, competencies and capabilities that support their corporate social responsibility (CSR) efforts and also enhance their legitimacy with stakeholders (Pedersen, Luedeke-Freund, Henriques, & Seitanidi, 2021). An example of this type of engagement is the longstanding alliance between Coca-Cola Inc. and WWF around water conservation. In this case, Coca-Cola provides financial support, public awareness, and outreach, while WWF offers technical expertise to help Coke reach its 100% water replenishment goal. There is particular interest in the role of NGOs in helping MNEs better understand the dynamics of markets in developing countries. In this regard, Dahan, Doh, Oetzel, and Yaziji (2010) highlight the capabilities NGOs can bring to MNEs, including market expertise, legitimacy with clients/customers, civil society players and governments, and access to local expertise and sourcing and distribution systems. It is not uncommon for NGO–MNE engagement to begin with a confrontational campaign and evolve into a collaborative alliance (Yaziji & Doh, 2009). One example is efforts in the early 2000s by NGOs such as Doctors Without Borders, Act Up, and Health Action Network to press governments and pharmaceutical companies to make expensive HIV/AIDS medications available at no or low cost to patients in developing countries. These campaigns later evolved into collaborations among these NGOs, the Gates Foundation, the World Health Organization, and the originally targeted companies such as Boehringer Ingelheim, Bristol-Myers Squibb, Merck and GlaxoSmithKline.

Conclusion

Many executives, government officials, and scholars call on MNEs to increasingly contribute to initiatives such as the United Nations Sustainable Development Goals and other efforts to address societal grand challenges (Buckley, Doh, & Benischke, 2017). NGOs will continue to play a critical role in pressing MNEs to commit to these solutions, and will also partner with MNEs and governments in advancing social and ecological goals. Lambell, Ramia, Nyland, and Jonathan Doh

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Michelotti (2008: 75) suggest that fully integrating NGOs in international management research will help inform “the nature of strategic agency among organizations other than MNEs; the interpretation of globalization and its implications for organizations; and whether IB (and by extension international strategic management) is too isolated from the other social sciences.” Jonathan Doh

References

Boddewyn, J., & Doh, J.P. 2011. Global strategy and the collaboration of MNEs, governments and NGOs for the provisioning of collective goods in emerging markets. Global Strategy Journal, 1, 345–361. Buckley, P.O., Doh, J.P., & Benischke, M. 2017. Towards a renaissance in international business research? Big questions, grand challenges, and the future of IB scholarship. Journal of International Business Studies, 48(9), 1045–1064. Dahan, N. Doh, J.P., Oetzel, J., & Yaziji, M. 2010. Corporate-NGO collaboration: Creating new business models for developing markets. Long Range Planning, 43(2), 326–342. Dahan, N., Doh, J., & Teegen, H. 2010. Role of nongovernmental organizations in the business-government-society interface: Special issue overview and introductory essay. Business & Society, 49, 20–34. Doh, J., & Teegen, H. (2002). Nongovernmental organizations as institutional actors in International Business: Theory and implications. International Business Review, 11(6), 665–684. Doh, J.P., & Teegen, H. 2003. (eds.). Globalization and NGOs: Transforming business, government, and society. Westport, CT: Praeger Publishers. Doh, J., Tashman, P., & Benischke, M. 2019. Adapting to grand environmental challenges through collective entrepreneurship. Academy of Management Perspectives, 33(4), 450–468. Gaspar B., Moreira, A.C., Cercas, C., Queirós, R., & Campos, S. 2022. The internationalization of nongovernmental organizations: Characteristics and challenges. Administrative Sciences, 12, 140.

Jonathan Doh

Johanson, J., & Vahlne, J. 1977. The internationalization process of the firm: A model of knowledge development on increasing foreign commitments. Journal of International Business Studies, 8(1), 23–32. Kourula, A., & Laasonen, S. 2010. Nongovernmental organizations in business and society, management, and international business research: Review and implications from 1998 to 2007. Business & Society, 49, 35–67. Lambell, R., Ramia, G., Nyland, C. & Michelotti, M. 2008. NGOs and international business research: Progress, prospects and problems. International Journal of Management Reviews, 10. 10.1111/j.1468–2370.2007.00218.x. Pedersen, E.R.G., Luedeke-Freund, F., Henriques, I., & Seitanidi, M.M. 2021. Toward collaborative cross-sector business models for sustainability. Business & Society, 60(5), 1039–1058. Rondinelli, D., & London, T. 2003. How corporations and environmental groups cooperate: Assessing cross-sector alliances and collaborations. Academy of Management Perspectives, 17(1): 61–76. Selsky, J. W., & Parker, B. 2005. Cross-sector partnerships to address social issues: Challenges to theory and practice. Journal of Management, 6, 1–25. Teegen, H. 2003. International NGOs as global institutions: Using social capital to impact multinational enterprises and governments. Journal of International Management, 9: 271–285. Teegen, H., Doh, J.P., & Vachani, S. 2004. The importance of nongovernmental organizations (NGOs) in global governance and value creation: An international business research agenda. Journal of International Business Studies, 35(6), 463–483. United Nations. 2023. Department of Public Communications. “Civil Society.” Retrieved 30 January. https://​www​.un​.org/​en/​civil​-society/​ page/about-us#:~:text=A%20civil%20society %20organization%20(CSO,local%2C%20 national%20or%20international%20level. Vachani, S., Doh, J.P., & Teegen, H. 2010. NGOs’ influence on MNEs’ social development strategies in varying institutional contexts: Transaction cost perspective. International Business Review, 18(5), 446–456. Yaziji, M., & Doh, J.P. 2009. NGOs and corporations: Conflict and collaboration. New York: Cambridge University Press.

60. International outsourcing International outsourcing refers to the procurement of inputs from independent suppliers and across national borders. It is alternatively referred to as offshore or global outsourcing. International outsourcing has been on the rise since at least the 1980s. Where it initially mostly concerned manufacturing (e.g., Mol et al., 2005; Murray et al., 1995), recently more emphasis in practice and in the literature has gone towards international outsourcing of services including business processes (Doh, 2005), as well as more advanced knowledge processes such as research and development (Bertrand and Mol, 2013) and design (Lee, 2020). In manufacturing, international outsourcing can be of components, sub-assemblies or even entire products, such as Apple’s wholesale subcontracting of iPhone manufacturing to China. International outsourcing of service activities often involves delegation of a process and/or function of the firm to a service provider, as in the case of ABN-AMRO outsourcing its IT services to IBM. International outsourcing is in some cases part of a deliberate strategy to develop a global supply chain. Decisions to outsource internationally involve both a make-or-buy component and a location choice. Thus some natural theories for understanding the conditions under which firms engage in international outsourcing include transaction cost theory, the resource-based theory of the firm, the OLI framework, and internalization theory. The literature suggests that make-or-buy decisions and location choices are interrelated (Leiblein et al., 2022). A consequence of the decision to outsource internationally is that a cross-border buyer–supplier relationship is established. This in turn raises questions about how to best deal with a variety of cross-national differences of a formal and informal institutional nature as well as geographic distance, and particularly how cooperation and trust can be established and maintained under those conditions. A significant number of studies have attempted to understand the drivers, or antecedents, of international outsourcing. These studies suggest that these drivers are found in product characteristics, decision-maker

characteristics, industry characteristics, and national characteristics of both the buyer and supplier countries. Specifically, among others, this includes whether the market can provide an input at low transaction costs. Over time, firms have become better at coordinating (advanced) activities through partnering with foreign and external suppliers. At the firm level, the absence or weakness of relevant resources and capabilities for production within the firm helps to predict outsourcing. On the other hand, prior international and/or outsourcing experience may be leveraged in pursuit of further international outsourcing. At the national level, by using foreign suppliers, firms can benefit from location-specific advantages in terms of labor costs or quality, other relevant production factors and potentially ‘institutional arbitrage’ from weaker laws and regulations. Likewise, there has been much effort in the literature to understand how international outsourcing affects performance outcomes both at the activity (product) level and at the firm level. There is conflicting evidence about these performance outcomes, including positive, negative and non-linear effects at the firm level (Verwaal, 2017). Moreover, these firm-level effects are contingent upon product, firm, industry and national characteristics. At the activity (product) level, there is equally some ambiguity regarding performance effects, with suppliers often failing to deliver the high expectations they set. Studies have found that some of this can be explained by ‘extra’ and ‘hidden’ costs of international outsourcing (Dibbern et al., 2008; Larsen et al., 2013). Such costs are often incurred in the process of managing national (cultural) differences (Choi et al., 2018) as well as interorganizational relationships (Skowronski et al., 2020). Over the past 20 years or so, the literature has started to also look at broader outcomes of international outsourcing, especially how it affects social responsibility and social irresponsibility of firms. Since practices are harder to manage across national borders and firm boundaries, the likelihood and severity of socially irresponsible practices rises with international outsourcing. This can be said to represent one form of hidden costs of international outsourcing. While meticulous contract design might seem to be an obvious way to tackle this, studies have found it to be less effective in weak institutional environments. Hence,

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more emphasis has been placed on alternative governance mechanisms such as trust and power. Looking forward, literature on international outsourcing has addressed some of the main research questions around its drivers and performance outcomes, although there is scope for replications and extensions of this body of work, including in lesser-known contexts such as Africa. Research opportunities exist around understanding whether and how trends such as digitalization and deglobalization affect international outsourcing. Researchers in international outsourcing will have to come to terms with changes in supply chains and global value chains, for instance from the rise of platforms, cloud, and blockchain, but also from technologies such as 3D printing and artificial intelligence. Such technological advancements are expected to further improve efficiency and transparency in international outsourcing and global supply chain, but may also bring on unprecedented managerial challenges. The same is true for climate change, geopolitical upheaval and other potential disruptions to supply chains. Sun Hye Lee and Michael Mol

References

Bertrand, O. and Mol, M. J. (2013). ‘The antecedents and innovation effects of domestic and offshore R&D outsourcing: The contingent impact of cognitive distance and absorptive capacity’. Strategic Management Journal, 34, 751–760. Choi, J. J., Ju, M., Kotabe, M., and Trigeorgis, L. (2018). ‘Flexibility as firm value driver:

Sun Hye Lee and Michael Mol

Evidence from offshore outsourcing’. Global Strategy Journal, 8, 351–376. Dibbern, J., Winkler, J., and Heinzl, A. (2008). ‘Explaining variations in client extra costs between software projects offshored to India’. MIS Quarterly, 32, 333–366. Doh, Jonathan P. (2005). ‘Offshore outsourcing: Implications for international business and strategic management theory and practice’. Journal of Management Studies, 42, 695–704. Larsen, M. M., Manning, S., and Pedersen, T. (2013). ‘Uncovering the hidden costs of offshoring: The interplay of complexity, organizational design, and experience’. Strategic Management Journal, 34, 533–552. Lee, S. H. (2020). ‘Design outsourcing management: Mitigating risks and achieving objectives’. Creativity and Innovation Management, 29, 719–731. Leiblein, M. J., Larsen, M. M., and Pedersen, T. (2022). ‘Are governance mode and foreign ?’. Global location choices independent  Strategy Journal, 12, 273–307. Mol, M. J., Tulder, R. J. M. Van, and Beije, P. R. (2005). ‘Antecedents and performance consequences of international outsourcing’. International Business Review, 14, 599–617. Murray, J. Y., Kotabe, M., and Wildt, A. R. (1995). ‘Strategic and financial performance implications of global sourcing strategy: A contingency analysis’. Journal of International Business Studies, 26, 181–202. Skowronski, K., Benton, W. C. J., and Hill, J. A. (2020). ‘Perceived supplier opportunism in outsourcing relationships in emerging economies’. Journal of Operations Management, 66, 989–1023. Verwaal, E. (2017). ‘Global outsourcing, explorative innovation and firm financial performance: A knowledge-exchange based perspective’. Journal of World Business, 52, 17–27.

61. International standards International standards contrast with the standards devised and implanted by individual nation states. For one, international standards are considered more beneficial – and less protectionist – with respect to cross-border business activities as compared with national standards (Swann, 2010). In fact, the International Organization for Standardization (ISO) is a Geneva-based international institution established after World War II with the objective to develop international standards that aid global business (Clougherty and Grajek, 2008). The ISO’s efforts specifically involve setting international standards that harmonize the diverse and conflicting national standards present throughout the globe into common international standards (Neumayer and Perkins, 2005). As such, the work of the ISO is akin to that of other international institutions – e.g., the World Trade Organization (WTO), the Organization for Economic Cooperation and Development (OECD), the International Monetary Fund (IMF), and the International Civil Aviation Organization (ICAO) – that have missions to ease cross-border exchange in capital, goods, and services. While observers are generally aware of the generic international standards (e.g., ISO 9000 for quality management, ISO 14000 for environmental management, ISO 26000 for corporate social responsibility, and ISO 27000 for information security management) that have been promoted and experienced pan-industry adoption, industry-specific technical standards constitute the vast majority of the ISO’s efforts (Drori et al., 2023). In fact, the ISO has issued some 30,585 international standards to date (www​.iso​.org/​standards​.html for this information). The remarkable spread of international standards (particularly ISO 9000 and ISO 14000) to organizations over recent decades has spawned a substantial scholarly literature attempting to define what drives the adoption and global diffusion of these standards throughout the globe (e.g., Anderson et al., 1999; Christmann and Taylor, 2001; Corbett, 2006; Corbett and Kirsch, 2001; Delmas, 2000, 2002; Guler et al., 2002; Husted et al., 2016). While drivers can vary across

different standards, some common diffusion drivers have been identified: e.g., the role of government directives (particularly the EU), government agencies mandating adoption, multinational enterprises requiring supplier adoption, and extensive adoption by trading-partner and trading-competitor nations. Common drivers of firm-level adoption have also been identified: e.g., organizational size, importance of international markets, and a firm’s role as a producer of intermediate products. There also exists scholarship focusing on the economic impact of international standards. Indeed, international institutions generally lower the liability of foreignness experienced by firms engaging in cross-border business (An and Maskus, 2009). Accordingly, the presence of extensive international standardization represents an international institution that conceivably facilitates firm internationalization. Following these insights, Drori et al. (2023) provide evidence that the industrywide presence of international standards enhances firm internationalization, as standardization reduces the transaction costs and information asymmetries endemic to international business. Furthermore, some studies (e.g., Clougherty and Grajek, 2008, 2014; Goedhuys and Sleuwaegen, 2016; Hudson and Jones, 2003) have focused on quality-management standards (e.g., ISO 9000) and provided support for the ability of these international standards to increase cross-national trade and FDI flows. Thus, the preponderance of evidence indicates that the presence of international standards promotes firm internationalization, cross-border trade, and FDI activities. International standards also involve varied effects – where not every effect is conducive to international business. For one, adopting international standards can increase the competitiveness of a home firm’s products – signaling certain qualities – and therefore lead to enhanced cross-border business (Swann et al., 1996; Blind 2001, 2004). Furthermore, the adoption of international standards by host nations can be favorable to cross-border business as it provides crucial information to internationalizing firms on how to adapt products for the market (Moenius 2004, 2006). Yet, host-nation adoption may also be protectionist by raising the costs of foreign competitors – particularly when foreign firms face high adoption costs due to their having

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limited influence on the standard-setting process (Blind, 2001; Gandal and Shy, 2001). In addition, Bénézech et al. (2001) point out that international standards involve common-language elements that facilitate exchanges between firms from different countries. The presence of these varied effects makes it difficult to pin down the particular channel via which international standards impact cross-border business, hence empirical scholarship generally elicits a net effect – see Clougherty and Grajek (2014) for an exception. The presence of varied effects leads to the point that international standards involve limits in terms of effectiveness. For example, the last decade has witnessed a substantial degree of decertification behavior, as firms have increasingly decided to voluntarily withdraw from international standards by not recertifying – a trend that is most conspicuous with ISO 9000 (Castka and Corbett, 2015). For instance, Cândido et al. (2021) report that ISO 9000 has recently experienced an average of 60,000 withdrawals per year. Despite increased de-adoption behavior, this decertification phenomenon has gone understudied. Instead of analyzing the recertification decision and the factors behind abandoning international standards, researchers have continued to narrowly focus on the initial adoption decision. We foresee future research that explores the limits of international standards and fully considers de-adoption. That said, early empirical work (i.e., Clougherty and Grajek, 2023) suggests that exporters are far less likely to abandon international standards. This result is in line with the findings in the general literature where exporters are keen adopters of international standards due to the extensive benefits in foreign markets (Anderson et al., 1999; Christmann and Taylor, 2001; Corbett, 2006). Indeed, international buyers face greater transaction costs and information asymmetries, and international standards can alleviate these barriers and be conducive to cross-border business (e.g., Blind, 2001; Hudson and Jones, 2003; Terlaak and King, 2006). Accordingly, the main takeaway here should be that international standards – while complicated and involving varied effects – are largely compatible and supportive of global business activities. Joseph A. Clougherty Joseph A. Clougherty

References

An, G., Maskus, K.E., 2009. The impacts of alignment with Global Product Standards on exports of firms in developing countries. World Economy 32, 552–574. Anderson, S.W., Daly, J.D., Johnson, M.F., 1999. Why firms seek ISO 9000 Certification: regulatory compliance or competitive advantage? Production and Operations Management 8, 28–43. Bénézech, D., Lambert, G., Lanoux, B., Lerch, C., Loos-Baroin, J., 2001. Completion of knowledge codification: an illustration through the ISO 9000 standards implementation process. Research Policy 30, 1395–1407. Blind, K., 2001. The impacts of innovations and standards on trade of measurement and testing products: empirical results of Switzerland’s bilateral trade flows with Germany, France and the UK. Information Economics and Policy 13, 439–460. Blind, K., 2004. The Economics of Standards: Theory, Evidence and Policy. Edward Elgar Publishing, Cheltenham. Cândido, C.J.F., Coelho, L.M.S., Peixinho, R.M.T. 2021. Why firms lose their ISO 9001 certification: evidence from Portugal. Total Quality Management & Business Excellence 32(5–6), 632–651. Castka, P., Corbett, C.J. 2015. Management systems standards: diffusion, impact and governance of ISO 9000, ISO 14000, and other management standards. Foundations and Trends in Technology, Information and Operations Management 7(3–4), 161–379. Christmann, P., Taylor, G., 2001. Globalization and the environment: determinants of firm self-regulation in China. Journal of International Business Studies 32, 439–458. Clougherty, J.A., Grajek, M., 2008. The impact of ISO 9000 diffusion on trade and FDI: a new institutional analysis. Journal of International Business Studies 39, 613–633. Clougherty, J.A., Grajek, M., 2014. International standards and international trade: empirical evidence from ISO 9000 diffusion. International Journal of Industrial Organization 36, 70–82. Clougherty, J. A., Grajek, M., 2023. Decertification in quality-management standards by incrementally and radically innovative organizations. Research Policy 52(1), 1-16. Corbett, C.J., 2006. Global diffusion of ISO 9000 certification through supply chains. Manufacturing & Service Operations Management 8, 330–350. Corbett, C.J., Kirsch, D.A. 2001. International Diffusion of ISO 14000 Certification. Production and Operations Management 10(3), 327–342. Delmas, M.A. 2000. Barriers and incentives to the adoption of ISO 14001 by firms in the United

International standards  239 States. Duke Environmental Law and Policy Forum 11(1), 1–38. Delmas, M.A. 2002. The diffusion of environmental management standards in Europe and in the United States. Policy Sciences 35, 91–119. Gandal, N., Shy, O., 2001. Standardization policy and international trade. Journal of International Economics 53, 363–383. Goedhuys, M., Sleuwaegen, L., 2016. International standards certification, institutional voids and exports from developing country firms. International Business Review 25, 1344–1355. Guler, I., Guillén, M.F., Macpherson, J.M. 2002. Global competition, institutions, and the diffusion of ISO 9000 quality certificates. Administrative Science Quarterly 47, 207–232. Hudson, J., Jones, P. 2003. International trade in ‘quality goods’: signalling problems for developing countries. Journal of International Development 15(8), 999–1013. Husted, B.W., Montiel, I., Christmann, P. 2016. Effects of local legitimacy on certification decisions to global and national CSR standards by multinational subsidiaries and domestic firms. Journal of International Business Studies 47(3), 382–397. Moenius, J., 2004. Information Versus Product Adaptation: The Role of Standards in

Trade. Working Paper: Kellogg School of Management, February. Moenius, J., 2006. The good, the bad and the ambiguous: standards and trade in agricultural products, in: IATRC Summer Symposium. pp. 28–30. N. Drori, N. Hashai, & J.A. Clougherty (2023) Fire and Ice: The Incompatible Impact of Industry Wide Domestic Patents and International Standards on Firm Internationalization, International Business Review 32(5): 1-17. Neumayer, E., Perkins, R., 2005. Uneven geographies of organizational practice: explaining the cross-national transfer and diffusion of iso 9000. Economic Geography 81, 237–259. Swann, G.P., 2010. International Standards and Trade: A Review of the Empirical Literature. OECD Trade Policy Papers. No. 97, OECD Publishing, Paris, https://​doi​.org/​10​.1787/​ 5kmdbg9xktwg​-en. Swann, P., Temple, P., Shurmer, M., 1996. Standards and trade performance: the UK experience. The Economic Journal 106, 1297–1313. Terlaak, A., King, A.A. 2006. The effect of certification with the ISO 9000 quality management standard: a signaling approach. Journal of Economic Behavior and Organization 60(4), 579–602.

Joseph A. Clougherty

62. International strategic alliances International strategic alliances (ISAs) are considered one of the major pillars of international business (IB) as they constitute hybrid strategies positioned between market and hierarchy in a dynamic global economy (Buckley & Casson, 2009). Despite rich research (see Nippa & Reuer, 2019; Silva et al., 2020; Batra et al., 2021 for reviews), the complexity of strategic alliances in an international context with multiple levels of interactions across borders and time (Eden & Nielsen, 2020) is underappreciated. Due to the great variety of collaborative types, ranging from ad hoc agreements to equity joint ventures (JVs), there is a lack of a clear definition of an ISA (Silva et al., 2020). For this entry, we rely on Nielsen and Gudergan’s (2012) definition: “ISA is an interfirm collaboration over a given international economic space and time for the attainment of mutually defined goals” (p. 558). This definition implies that at least one partner is headquartered outside the alliance’s country of operation, or the collaboration has significant levels of operation in more than one country. ISAs are driven by both value creation and value appropriation. Value creation is collectively achieved through shared objectives among the partners, whereas value appropriation refers to how much value each partner independently can achieve via the collaboration (Lavie & Miller, 2008). ISAs are used as vehicles for firm strategy in various ways – i.e., as effective means to drive and diffuse innovation, enable fast learning, provide gateways or market entry to new markets, but also when searching for economies of scale/scope, diversification, or value chain optimization across various countries (Fatehi & Choi, 2019; He et al., 2021). In this sense, ISAs represent an alternative and more flexible internalization compared with wholly owned subsidiaries (WOS), which could also be used to achieve these economies but in a more costly and irreversible way. For this entry, we take a processual lens when examining the complexity of ISAs. We consider four key steps (meso levels) in the ISA development as outlined by Parkhe (1993: 231): (1) motivation for ISA forma-

tion; (2) partner selection; (3) governance and structure; (4) ISA stability and performance. As illustrated in Figure 62.1, the four key steps are sequentially interrelated (indicated by numbers and double-headed arrows) as alliance motive drives partner selection (and sometimes vice versa), which may determine both the choice of governance mode and, in turn, alliance performance. The management process (micro-dimension) of the ISA (strategies for learning, response, relational governance, and conflict) will affect how the alliance is managed ex post formation. The micro-dimensions link the four main stages (the meso-dimensions) and are continuous throughout the lifecycle of the ISA (imagine a revolving disk). To be effective, these management processes are determined by the core sociological dimension (CSD) (e.g., trust, alliance capabilities, etc.) that provides the “social glue” to hold together the interorganizational relationship. Lastly, ISAs are embedded within external environmental contexts (macro-dimension), such as industries and home/host countries, which affect the formation, development, and performance of the collaboration. To analyze the complexity of ISAs, we structure the chapter according to the four key steps (meso-dimensions) in Figure 62.1. Each stage is presented and discussed from three levels: firm level (e.g., size, resources, experiences, etc.); inter-organizational level (e.g., knowledge sharing/communicative mechanisms, etc.); and contextual level (e.g., country and industry context).

1.

Motive for international strategic alliance formation

Access to resources remains one of the principal determinants of ISA creation (Batra et al., 2021). Resources at an international scale are linked to products, services, raw materials, processes, and specific knowledge, but also to partner reputation, network position, and local experiences/expertise (Parkhe, 1998). ISAs formed primarily in upstream activities, such as sharing and developing new knowledge, are characterized as exploration alliances (Cohen & Levinthal, 1990; Nielsen & Gudergan, 2012). Such alliances are especially prevalent in R&D collaborations but also found in vertical supply chain activities. In contrast, ISAs formed in downstream activities, such as manufacturing, marketing,

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International strategic alliances  241

Source:  Adapted and modified from Parkhe (1993) and Nielsen (2010b).

Figure 62.1

Integrative framework of ISA development

distribution, and services, are characterized as exploitation alliances pursuing increase and optimization of existing productivity and efficiency of employed resources (Lavie & Rosenkopf, 2006). We summarize research on ISA motives from a variety of theoretical perspectives and levels in Table 62.1. At the firm level, the most pronounced ISA motives are access to unique, compatible, or complementary resources as well as market access (Nielsen, 2005; Mitsuhashi & Greve, 2009). Ultimately, ISAs are created either to facilitate scale (efficiency) or scope (diversification) strategies. At the interorganizational level, the ISA motives are driven by network dynamics as well as absorptive capabilities, where the aim is to learn and benefit from the partner’s specific know-how, skills, or reputation (Nielsen & Nielsen, 2009). Often, ISAs are formed explicitly to gain access to (existing) networks of suppliers, distrib-

utors, or customers in a foreign location via cooperation. At the context level, industry dynamism is an important driver, especially in innovative industries. Certain companies depend heavily on their portfolio of ISAs to innovate with multiple actors to win the market race. Industry cyclicality may drive ISA formation as firms are motivated to look for new types of resources and hence new partners (Albers, 2017) in times of change. By the same token, firms may consider horizontal collaborations with competitors in certain industries as a way of shaping competition (Fernandez et al., 2019). In some national contexts, forming an ISA is the only possible access to a given market (e.g., China and Japan during the 1990s), due to protective mechanisms where the local government set up barriers for foreign actors to protect local actors and hence the national interests (Beamish & Lupton, 2016). Notwithstanding trade liberalizations in many Juliane Engsig and Bo Bernhard Nielsen

242  Encyclopedia of international strategic management Table 62.1 Level of

Levels of theory on ISA motives Theory/Perspective

Examples of ISA motives

theory Firm Level

TCE: Glaister & Buckley, 1996; Nielsen & Gudergan, ● Cost/risk reduction 2012; Beamish & Zhang, 2018

● Access to compatible resources

RBV: Barney, 1991; Ahuja, 2000.

● Economies of scale and scope

Organizational Learning: Nielsen, 2005

● Access to complementary resources ● Access to tacit and explicit knowledge/skills ● Access to new markets

Inter-​

TCE: Granovetter, 1973

● Trust

organizational KBV: Grant, 1996; Aslam et al., 2022 Level

● ISA experience (collaborative know-how)

Social Network Theory: Mitsuhashi & Greve, 2009

● Access to distribution/supplier/innovation networks

Social Capital and Organizational Learning:

● Knowledge-sharing

Contractor & Lorange, 1988; Nielsen & Nielsen, 2009 ● Absorptive (learning) capabilities ● Partner reputation Context Level TCE: Hagedoorn, 1993; Choi & Yeniyurt, 2015

● Industry dynamism

Industrial Organization: Porter, 1980; Albers, 2017

● Industry munificence

Institutional Theory: DiMaggio & Powell, 1983; Li

● Shaping of industrial competition

& Reuer, 2022

● Country resource endowment ● National attributes ● Government access and political compliance

markets, several countries retain various restrictions and compliance regulations in specific industries deemed of particular strategic or national importance (i.e., infrastructure, medical, military, etc.). In times of uncertainty and faced with competitive pressures, firms will often search for relevant resources in new places of the world, thus being confronted by additional risks related to country differences at formal and informal institutional levels (Mikami et al., 2022). The growing complexity of global value chains (GVCs), often involving ISAs, is an example of companies constantly adapting to global changes by reconfiguring their international activities (Gereffi et al., 2021, McWilliam & Nielsen, 2020).

2.

Partner selection

The success of ISAs is rooted in the choice of an appropriate partner (Brouthers et al., 1995). Choosing an ISA partner implies matching resources and skills, across dynamic entities, settings, and time (Nielsen, 2003), as well as help to overcome external uncertainty related to new markets (Globerman & Nielsen, 2007). Partner selection criteria for ISAs have been analyzed from a variety of theoretical perspectives and levels, as indicated in Table 62.2. Juliane Engsig and Bo Bernhard Nielsen

From a firm-level perspective, an ISA partner is chosen based on task-related and/ or partner-related criteria, and in relation to the strategic motives of the ISA (Glaister & Buckley, 1996; Kumar et al., 2022). A synergy between compatible and complementary resources is considered an attractive partner attribute (Nielsen, 2002; Furlotti & Soda, 2018). Synergy is often found at interorganizational level among asymmetric partners, especially the asymmetry of small and big actors (Batra et al., 2021), where established actors look for unique and complementary resources held by new actors in the market. New actors, in turn, benefit from the established actors’ market position, reputation, and networks. From a context perspective, asymmetry between the partners is often found in industries that depend on high levels of innovation (e.g., pharmaceutical, biotech, aerospace, ICT, etc.), in which established market leaders work closely with innovative start-ups (Cherbib et al., 2021). Moreover, the absence of asymmetry between partners, labeled as coopetition, has received increased attention from scholars (Bengtsson & Kock, 2000; Fernandez et al., 2019). The global geographical scope of ISA partners is to a large extent driven by North American partners (Gomes et al., 2016).

International strategic alliances  243 Table 62.2 Level of

Levels of theory on ISA partner selection Theory/Perspective

Examples of partner selection criteria

TCE: Geringer, 1991; Brouthers et al., 1995; Chand

● Task-related criteria (know-how, capabilities/skills)

& Katou, 2012

● Strategic fit

RBV: Luo, 2002; Furlotti & Soda, 2018

● Partner-related criteria (reputation, position in network,

theory Firm Level

Organizational Learning: Nielsen & Nielsen, 2009; Inter-​

TCE: Glaister, 1996; Meschi et al., 2017

organizational RBV: Arinõ et al. 1997; He et al., 2020 Level

corporate cultures) ● Financial fit ● Partner (a)symmetry

Kumar et al., 2022

● Nature of shared resources

Organizational Learning: Nielsen, 2003; Cherbib et

● Partner size

al., 2021

● Partner commitment

Social Network Theory: Gulati & Gargiulo, 1999;

● ISA experience (collaborative know-how)

Choi et al., 2022

● Organizational variety

Context Level TCE: Reuer & Lahiri, 2013; Engsig et al., 2018;

● Shaping of industrial competition

Engsig et al., 2021

● Network position

Institutional Theory: Hitt et al. 2004; Dorobantu et

● Location choice

al., 2020

● National attributes

Industrial Organization: Albers, 2017

● Country differences (distances) ● Local knowledge

Evidence suggests that ISAs have played a central role in developing emerging and transition economies (Beamish & Zhang, 2018). Recent research focuses on how the specific location (country, region, or city) of the partners can determine the choice of partner (Choi & Yeniyurt, 2015; Dorobantu et al., 2020; Engsig et al., 2021). It is found that a greater distance (physically and culturally) between partners is associated with a decreased likelihood of ISA formation (Hitt et al., 2004; Reuer & Lahiri, 2013; Engsig et al., 2018). Teaming up with a local partner reduces the various costs and secures efficient access to the market as well as knowledge of the institutional environment (Aslam et al., 2022). By studying where the partners are located, a non-monotonic (U-shaped) tendency of the global ISA activity is observed – between either “close” partners or “distant” partners (Zhang et al., 2022).

3.

International strategic alliance governance and structure

The contractual form of the ISA specifies and aligns the functioning and the outcome of the collaboration, such as profit-sharing, power relations, risk-taking, investment, and dedication of each partner, as well as the

termination of the alliance (Meschi et al., 2017; Fatehi & Choi, 2019). At the same time, governance – both contractual and procedural – may guard against opportunistic behavior, thus serving as a mechanism for effective collaboration (Nielsen, 2010c). Many ISA partners explicitly choose neutral country or international governance agencies as enforcement mechanisms to avoid liability of institutional voids or national opportunism (Pinkham & Peng, 2017). Traditionally, alliance governance mode has been divided into two large categories: (1) equity agreements, such as JVs; and (2) non-equity agreements, such as contract-based alliances. Yet, this dichotomized alliance governance mode does not adequately capture various alternative modes and micro-contractual variations (Reuer et al., 2016; Choi & Contractor, 2016). Instead, we should consider a larger continuum of governance modes that range from very loose, short-term ad hoc interactions (including virtual collaborations) with relatively low degrees of risk and control, to longer-term, highly protective contractual equity joint ventures, and lots of hybrids in between (Reuer & Devarakonda, 2016; He et al., 2020). Figure 62.2 illustrates this continuum. Table 62.3 presents the various theoretical perspectives and levels associated with the choice of ISA governance mode. Juliane Engsig and Bo Bernhard Nielsen

244  Encyclopedia of international strategic management Table 62.3 Level of

Levels of theory on ISA governance Theory/Perspective

Examples of governance criteria

TCE: Nielsen, 2010c; Meschi et al., 2017

● Benefits

RBV: Teng & Das, 2008; Nielsen, 2010a

● Cost-/Risk-sharing

Organizational Learning: Wassmer, 2010

● Competence similarity

theory Firm Level

● Contractual safeguards ● Strategic fit Inter-​

● Portfolio strategy ● Trust

TCE: Hennart, 1988; Globerman & Nielsen, 2006

organizational RBV/KBV: Colombo, 2003 Level

● Prior experience with the partner

Organizational Learning: Nielsen, 2011;

● ISA experience (collaborative know-how)

Chiambaretto & Wassmer, 2019

● Absorptive capacity

Social Exchange Theory: Das & Teng, 2002; Lioukas ● Hierarchy (power relations) ● Portfolio governance

& Reuer, 2015

● Collaborative business model ● Networks and ecosystems Context Level TCE + RBV: Oxley, 1999; Globerman & Nielsen,

● Industry dynamism (multi-partner ISAs) ● Market volatility and cyclicity

2007; Choi & Contractor, 2016

Real Options Theory: Reuer & Tong, 2005; Cuypers ● Uncertainty related to country differences ● Institutional voids

& Martin, 2010 Industrial Organization: Li et al., 2012; Doz, 2019

The literature on governance choice in ISAs is rich and reflects the perceived risk/control tradeoff as espoused in TCE. Generally, the higher the (perceived) risk, the more control is needed to combat opportunistic behavior and thus firms tend to move to the right on the continuum (Figure 62.2) in uncertain

Figure 62.2

(risky) situations. These perceived risks can be related to the financial investment as well as potential (unintentional) spillover of proprietary resources and knowledge, and may be related to either the partner firm, the local market attributes, and/or country differences (Nielsen, 2010c).

Strategic integration continuum of ISA governance structure

Juliane Engsig and Bo Bernhard Nielsen

International strategic alliances  245

From an interorganizational perspective, social exchange theory shifts the focus toward relational governance mechanisms, such as trust in the pursuit of effective governance (e.g., Das & Teng, 2002, Lioukas & Reuer, 2015). Informal relational or procedural mechanisms complement formal structures, as they improve communication and develop a common language that allows for effective knowledge transfer among partners (Nielsen, 2011; Bamel et al., 2021). A strong level of interorganizational and/or interpersonal trust can in some cases act as a complement or even substitute for contracting and may lead to selection of less formal governance modes (Teng & Das, 2008; Chen et al., 2022). On the contrary, a lack of trust can be compensated by contractual agreements, but such safeguards do not necessarily facilitate the successful sharing of resources (Nielsen, 2010a). ISAs are traditionally studied as bilateral agreements, but an increasing number of ISAs consist of multiple partners, particularly in industries (e.g., airline, aerospace, automobile, pharmaceutical) where several partners share resources, costs, network partners, and suppliers, etc. (Chiambaretto & Wassmer, 2019). These are formal arrangements, involving at least three partners, signed to keep prices down or create new products and services, and/or to prevent the growth of an external competitor (Li et al., 2012; Doz, 2019). In such cases, the governance mode is interrelated with the motives and the partner selection for ISAs. Moreover, the governance mode can be seen as a protective mechanism against corruption as well as geopolitical changes (Li & Reuer, 2022). Firms will invest more (or less) in equity to gain either control or flexibility (Reuer & Tong, 2005; Cuypers & Martin, 2010). However, little consensus exists in the ISA literature on how various types of external uncertainty affect the governance mode for ISAs (Silva et al., 2020).

4.

International strategic alliance performance and stability

ISA performance is multidimensional and may be captured as financial, procedural, relational, or learning outcomes (Christoffersen, 2013). Failure remains a frequent outcome of

ISAs, with approximately 50% of all alliances terminated before the designated date (if such has been specified) (Russo & Cesarani, 2017). There are many reasons why ISAs are terminated, including relational reasons (i.e., lack of trust or unintentional spillover), process reasons (i.e., due to inefficiency), technical reasons (i.e., the lack of technical results), and external reasons (i.e., industry or institutional changes). The numerous strategic goals and motives of the partners (specified or not in the contract) is often an obstacle; when one partner achieves one of its goals, it may decide to end the collaboration prematurely (Meschi et al., 2017). Indeed, most firms involved in ISAs have several (often competing) short-term and long-term goals, which may or may not be specified in the contract (Schilke & Lumineau, 2018), rendering monitoring, assessment, and division of value difficult (Christoffersen et al., 2014). Moreover, some alliances are considered (explicitly or implicitly) as natural precursors of M&As and thus are “terminated” by one company buying out the other (Oxley, 2009). Table 62.4 presents the different theoretical levels pertaining to ISA performance. From a firm level, performance criteria have extensively been studied through subjective, financial or stability measures. Recently, scholars have encouraged a focus on multiple simultaneous outcomes of an alliance, suggesting a mixture of subjective and objective criteria in a more holistic way (e.g., Ryan-Charleton et al., 2022). From an interorganizational perspective, the successful sharing of resources (both tangible and intangible) is facilitated by trust among the partners, and as such development of interorganizational trust and learning may be criteria for success (Zaheer et al., 1998; Robson et al., 2019). Contrary, lack of trust can be triggered by size, power, and strategic objective asymmetries, and can lead to opportunistic behavior, which may jeopardize ISA success (Ho & Wang, 2015). From a context level, the industry composition and dynamism can determine both competition and ISA performance. An increased diversity in partners’ industry, organizational, and national background may lead to added complexity and coordination costs, while also providing broadened resource and learning benefits (Jiang et al., 2010). In this way, ISAs may help shape industry structure and competition as well as the rate and speed Juliane Engsig and Bo Bernhard Nielsen

246  Encyclopedia of international strategic management Table 62.4 Level of

Levels of theory on ISA performance Theory/Perspective

Examples of performance criteria

TCE: Parkhe, 1993; Pangarkar & Klein, 2004

● Subjective measures

RBV: Simonin, 2000; Chen et al., 2022

● Stability/duration measures

Social Network Theory: Lavie & Miller, 2008;

● Financial accounting measures

Wassmer et al., 2017

● Cumulative abnormal returns

theory Firm Level

● External (reputational) evaluation ● Holistic measures (360o or balanced scorecard) Inter-​

● ISA portfolio (synergistic) outcomes ● Opportunism and knowledge spillover

TCE: Saxton, 1997; Nielsen, 2007

organizational Social Exchange Theory: Das & Teng, 2002; Ho & Level

● Trust

Wang, 2015

● Commitment

TBV/Organizational Learning: Nielsen & Nielsen,

● Knowledge-sharing

2009; Robson et al., 2019

● Absorptive (learning) capabilities ● Hierarchy (power relations) ● Network and portfolio efficiency and synergy

Context Level Industrial Organization Theory: Porter, 1980; Jian

● Industry composition and structure

et al., 2010

● Industry learning cycles and innovation

Institutional Theory: Tse et al., 1997; Li & Reuer,

● Agglomeration and clusters

2022

● Country differences (cultural, institutional, geographic, etc.)

(cyclicality) of industry evolution over time. Also from a context level, the literature is rich on potential negative performance effects of cultural and geographical differences (e.g., Nielsen, 2007; Lew et al., 2016). Moreover, institutional differences, such as high corruption or weak intellectual property protection rights, may further jeopardize the outcome for one or both partners in ISAs (Li & Reuer, 2022). At the same time, the scale and scope of economic outcomes of ISA is particularly strong in certain locations, such as industrial clusters and global cities, since resources and knowledge are more easily shared when partners are in physical proximity (Reuer & Lahiri, 2013; Ryu et al., 2018). For example, micro-locations such as global cities reduce liability of foreignness costs (Asmussen et al., 2020; Goerzen et al., 2013) and may influence the choice of partner, governance mode, and ultimately ISA performance outcomes. Juliane Engsig and Bo Bernhard Nielsen

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of international joint venture research”, Journal of International Business Studies, vol. 50, n° 4, pp. 555–597. Oxley, J. E. (1999). “Institutional environment and the mechanism of governance: The impact of intellectual property protection on the structure of inter-firm alliances”, Journal of Economic Behavior and Organization, vol. 38, n° 3, pp. 283–309. Oxley, J. E. (2009). “Alliances and performance”, in Economic Institutions of Strategy, Emerald Group Publishing Limited. Pangarkar, N., & Klein, S. (2004). “The impact of control on international joint venture performance: A contingency approach”, Journal of International Marketing, vol. 12, n° 3, p. 86–107. Parkhe, A. (1993). “Strategic alliance structuring: A game theoretic and transaction cost examination of interfirm cooperation”, Academy of Management Journal, vol. 36, n° 4, p. 794–829. Parkhe, A. (1998). “Understanding trust in international alliances”, Journal of World Business, vol. 33, n° 3, p. 219–240. Pinkham, B. C., & Peng, M. W. (2017). “Overcoming institutional voids via arbitration”, Journal of International Business Studies, vol. 48, n° 3, p. 344–359. Porter, M. E. (1980). “Industry structure and competitive strategy: Keys to profitability”, Financial Analysts Journal, vol. 36, n° 4, p. 30–41. Reuer, J. J., & Tong, T. W. (2005). “Real options in international joint ventures”, Journal of Management, vol. 31, n° 3, p. 403–423. Reuer, J. J., & Lahiri, N. (2013). “Searching for alliance partners: Effects of geographic distance on the formation of R&D collaborations”, Organization Science, vol. 25, n° 1, p. 283–298. Reuer, J. J., & Devarakonda, S. V. (2016). “Mechanisms of hybrid governance: Administrative committees in non-equity alliances”, Academy of Management Journal, vol. 59, n° 2, p. 510–533. Reuer, J. J., Ariño, A., Poppo, L. & Zenger, T. (2016). “Alliance governance”, Strategic Management Journal, vol. 37, n° 13, p. E37-E44. Robson, M. J., Katsikeas, C. S., Schlegelmilch, B. B., & Pramböck, B. (2019). “Alliance capabilities, interpartner attributes, and performance outcomes in international strategic alliances”, Journal of World Business, vol. 54, n°2, p. 137–153. Russo, M., & Cesarani, M. (2017). “Strategic alliance success factors: A literature review on alliance lifecycle”, International Journal of Business Administration, vol. 8, n° 3, p. 1–9. Ryan-Charleton, T., Gnyawali, D., & Oliveira, N. (2022). “Strategic alliance outcomes: Consolidation and new directions”, Academy of Management Annals.

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250  Encyclopedia of international strategic management Ryu, W., McCann, B. T., & Reuer, J. J. (2018). “Geographic co-location of partners and rivals: Implications for the design of R&D alliances”, Academy of Management Journal, vol. 61, n° 3, p. 945–965. Saxton, T. (1997). “The effects of partner and relationship characteristics on alliance outcomes”, Academy of Management Journal, vol. 40, n° 2, p. 443–461. Schilke, O., & Lumineau, F. (2018). “The double-edged effect of contracts on alliance performance”, Journal of Management, vol. 44, n° 7, p. 2827–2858. Silva, S. C., Elo, M., Larimo, J., Vlacic, B., & Meneses, R. (2020). “A state of the art review on international strategic alliances: Do we really know what we are researching?”, European Journal of International Management, p. 1–53. Simonin, B. L. (2000). “Collaborative know-how and collaborative advantage”, Global Focus, vol. 12, n° 4, p. 19–34.

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63. International trade theory International trade theories are a set of economic models that aim to explain trade patterns, meaning which goods are exported and imported, and who imports and exports those goods. The theories allow us to say something about the costs and benefits of globalization to whole economies and individual groups within them. Modern international trade theory is based on David Ricardo’s “Law of Comparative Advantage,” an important and long-lived concept, which says that a country should engage in trade with another country, even if the first country is more efficient in producing all the goods. The idea is that even if a country has absolute advantage (being more efficient) in the production of goods, that country may be better off trading with another (less efficient) country by exploiting lower relative opportunity costs. The anecdotal example is the one for England and Portugal. England is better at producing both textiles and wine compared with Portugal. However, Portugal has a comparative advantage (lower relative opportunity cost) in producing wine. And both countries benefit from trade. The concept of comparative advantages was developed in 1817 by David Ricardo (1772–1823), who was a British political economist. That idea broke with the conventional wisdom of the time of absolute advantage, a concept created by Scottish economist Adam Smith (1723–1790) in 1776 in his masterpiece The Wealth of Nations (Smith, 1776). In his work, Smith “argued that it was impossible for all nations to become rich simultaneously by following mercantilist prescriptions because the export of one nation is another nation’s import. However, all nations would gain simultaneously if they practiced free trade and specialized in accordance with their absolute advantage” (Das, 2008). The newest generation of international trade models are due to Eaton and Kortum (2002), Melitz (2003), and Bernard, Eaton, Jensen and Kortum (2003), which introduced firm heterogeneity as a source of comparative

advantages. In this class of models, firms are heterogenous in productivity, there are trade barriers in the form of transportation costs (in economics jargon, iceberg costs9), and also a fixed cost of entry. Melitz (2003) shows that only the most productive firms export. This means profitable opportunity for firms involved in international trade. In special, openness leads to inequality, where a firm who exports increases its share of industry revenues while a firm who does not export loses market share. Based on Dornbusch, Fischer, and Samuelson (1977), a model only for two countries, Eaton and Kortum (2002) expanded the framework for models that are fit to study cases with many goods and many countries. That provided, and still provides, the perfect theoretical background for empirical studies of international trade. This is especially true when combined with the so-called gravity equations. Gravity models, which give us gravity equations, predict international trade based on countries’ physical distance and economic size (for example, GDP or population). The paper by Isard (1954) was probably the first to introduce such a class of models. They are the economic equivalents of Newton’s Law of Gravity for space objects. In a different dimension, by exploring production and trade of intermediate goods (rather than just final goods), modern international theories provide a framework for studying global value chains (see for example Antràs and Chor, 2013). These theories consider cases where the inputs (intermediate goods) in the production of a final good are manufactured by different companies in different countries. This is similar to the idea of division of labor by Adam Smith. How much specialization or integration happens will depend on the elasticity of demand of the final good and the relative position (upstream versus downstream) of inputs in the production of the good. A significant part of international trade models is focused on trade policy (tariffs, subsidies, quotas, among others), and more recently, even how climate change policies can interact or be affected by trade policies (see for example Elliott et al., 2010). On other extensions, international trade theories

9 These transportation costs are called Iceberg Costs, since the cost is the loss of the good that is being traded, as if, like an iceberg, the good melts more the longer the distance it travels. Most importantly, modeling wise, these costs are variable costs of trade in contrast with other possible fixed costs.

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try to address questions on labor mobility, unemployment, other trade frictions (besides iceberg and fixed costs), trade beyond goods (e.g., trade of ideas), and the role of multinational enterprises and foreign direct investments (see for example Markusen, 1995). Historically, over a century ago, the international trade theory paradigm was developed by Eli Heckscher (1879–1952) and Bertil Ohlin (1899–1979), two Swedish economists. The Heckscher-Ohlin model predicts trade based on the relative abundance and scarcity of factor endowments. A country will export goods that use factors of production that are relatively abundant, and a country will import goods that use factors of production that are relatively scarce. Ohlin won, together with James E. Meade (1907–1995), the 1977 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel “for their pathbreaking contribution to the theory of international trade and international capital movements.” Directly linked to the Herckscher-Ohlin model is the Stolper-Samuelson theorem (see Stolper and Samuelson, 1941), which states that a rise (fall) in the price of a good will lead to a rise (fall) in the income to the factor of production which is used most intensively in the production of the good. One conclusion of the theorem is that there are winners and losers in international trade. For example, workers employed in import-competing industries will face lower wages, while workers in exporting firms will have higher wages. In a model of two countries, two goods, and three factors of production (labor, which is mobile and used in the production of the two goods, and two others which are specific in the production of each of the goods), Jacob Viner (1892–1970) tries to explain the migration of workers from the rural to urban areas after the Industrial Revolution. Like in the Stolper-Samuelson theorem, this specific factors model (also known as Ricardo-Viner model) shows that trade benefits the factor of production specific to the export sector of a country while hurting the factor specific to the import-competing sector. Krugman (1979, 1980) came to represent what became known as “new trade theory.” Paul Krugman (b. 1953) won the 2008 Economics Nobel Prize “for his analysis of trade patterns and location of economic activity.” By assuming increasing returns to scale, monopolistic competition, and network Maurício Prado

effects, his work showed that most trade is conducted by countries of similar levels of development and endowment. One example is Japan and the United States producing cars and still trading cars with each other. The increasing returns to scale assumption is key here, since large domestic markets allow firms to produce goods at a lower unit cost and that makes those goods also attractive to export. One common theme in international trade theories over the past 250 years is the benefits of free trade and how protectionism can be harmful to the domestic economy and its residents/consumers. As mentioned while discussing the Stolper-Samuelson theorem, international trade may lead to winners and losers. But overall, aggregate welfare calculations tend to favor trade over no trade. Much theoretical work is still needed to analyze the optimal design of trade agreements. One groundbreaking work in this area is Grossman and Helpman (1994), who developed a political economics model where interest groups influence the size of trade tariffs. Meyer (2017) raises awareness about the impact of “anti-globalization” movements on the international business environment. The idea is that groups in society who do not benefit from globalization need to be supported, otherwise unrest can lead to political and economic disruptions. Maurício Prado

References

Antràs, P., and D. Chor (2013) “Organizing the Global Value Chain”, Econometrica, 81, 2127–2204. Bernard, A. B., J. Eaton, J. B. Jensen, and S. Kortum (2003) “Plants and Productivity in International Trade”, American Economic Review, 93, 1268–1290. Das, M. (2008) “Absolute and Comparative Advantage” in W. A. Darity Jr (ed.) International Encyclopedia of the Social Sciences, Macmillan Reference USA, Volume 1, 2nd edition. Dornbusch, R., S. Fischer, and P. A. Samuelson (1977) “Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods”, American Economic Review, 67, 823–839. Eaton, J. and S. Kortum (2002) “Technology, Geography, and Trade” Econometrica, 70, 1741–1779. Elliott, J., Foster, I., Kortum, S., Munson, T., Perez Cervantes, F. and Weisbach, D. (2010) “Trade

International trade theory  253 and carbon taxes”, The American Economic Review, 100, 465–69. Grossman G. M. and E. Helpman (1994) “Protection for Sale”, The American Economic Review, 84, 833–850. Isard, W. (1954) “Location Theory and Trade Theory: Short-Run Analysis”, Quarterly Journal of Economics, 68, 305–322. Krugman, P. (1979) “Increasing Returns, Monopolistic Competition and International Trade”, Journal of International Economics, 9, 469–479. Krugman, P. (1980) “Scale Economies, Product Differentiation, and the Pattern of Trade”, American Economic Review, 70, 950–959. Markusen, J. R. (1995) “Enterprises and the Theory of International Trade”, Journal of Economic Perspectives, 9, 169–189. Melitz, M. J. (2003) “The Impact of Trade on Intra-Industry Reallocations and Aggregate

Industry Productivity”, Econometrica, 71, 1695–1725. Meyer, K. E. (2017) “International Business in an Era of Anti-Globalization”, Multinational Business Review, 25, 78–90. Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations. Republished in 1977 by the University of Chicago Press. Stolper, W. F., and P. A. Samuelson (1941) “Protection and Real Wages” The Review of Economic Studies, 9, 58–73.

Maurício Prado

64. Knowledge-based theory of the MNE The knowledge-based theory of the multinational enterprise (MNE) is a theory that aims to explain the existence of the MNE as a function of its superior ability to facilitate international knowledge exchange. The productive role of knowledge and the notion that knowledge shapes both the performance and the economic organization of the MNE has been part and parcel of most MNE theory since Buckley and Casson’s (1976) seminal contribution. Whereas others had focused on imperfections in intermediate product markets, Buckley and Casson highlighted knowledge flows between R&D and production (while not excluding other intermediate products). Knowledge-based advantages were seen as primary examples of “ownership advantages” in Dunning’s (1979, 2000) “eclectic paradigm.” Other scholars in the international business fields also pointed to the characteristics of knowledge as major determinants of the boundaries of the MNE. For example, Teece (1986) develops a systematic transaction cost economics (TCE) approach to the MNE that stresses that knowledge may cause market failure because of its public good features, the information disclosure problem (or “Arrow’s information paradox” that trade in knowledge requires disclosure of knowledge, but if knowledge is disclosed there is nothing left to trade), or because of its tacit and complex nature. A foreign direct investment would be preferable on efficiency grounds to contractual relations involving knowledge transactions between independent parties. Stated in this way, such reasoning is essentially the same as the “comparative-contracting” or “comparative-institutional” approach developed by transaction cost scholars, such as Coase (1937) and Williamson (1975, 1985). In fact, since Buckley and Casson (1976), MNE theory developed as essentially a parallel TCE approach (cf. Hennart, 1986, 1991), often referred to as “internalization theory.” In this theorizing, knowledge was highlighted as an empirically highly important driver of cross-border boundary decisions, but it was not seen as qualitatively different from other input factors that could cause market failure. This began to change in the early 1990s, when

an explicitly “knowledge-based theory of the MNC” was launched. We here particularly focus on Kogut and Zander (1993), a paper that has amassed almost 6,000 cites (as of 10 November 2022). The theory emerged against the backdrop of increasing interest in the knowledge-based heterogeneity of MNE subsidiaries, MNE knowledge flows, the spatial distribution of knowledge, and a general expansion of importance of knowledge as a factor of production. Parallel developments were the emergence of a “knowledge-based view of the firm” in strategy (e.g., Grant, 1996)—in fact, Kogut and Zander’s (1992) contribution to this view predates their contribution to MNE theory (and is even more cited i.e., more than 20,000 cites), the interest in the management of knowledge, and the increasing interest in innovation (for more on the background for knowledge-based MNE theory, see Grant & Phene, 2022). In this entry we review the knowledge-based theory of the MNE. We summarize the key ideas in the original statements, briefly discuss recent advances, and outline some of the key problems in the theory, which lead us to conclude that it is not in contradiction to internalization theory.

What is the “knowledge-based theory” of the MNE?

In his JIBS Decade comment on Kogut and Zander (1993), Tallman (2003) drew attention to a “transition of the dominant conceptual model of the multinational firm from the market failure approach of internalization theory and transaction cost economics theory to the market imperfections approach of capabilities or knowledge-based theories of the firm” (Tallman, 2003, p. 495). This change, comparable with the change from a market power approach (as in Hymer, 1969) to a market failure approach in Buckley and Casson (1976), can, according to Tallman, primarily be ascribed to Kogut and Zander’s 1993 breakthrough paper. To be sure, there are precursors of Kogut and Zander’s argument (including Kogut & Zander, 1992), notably among the many papers that began to focus on the MNE as what was often called a “differentiated network” (Hedlund, 1986; Bartlett & Ghoshal 1989; Gupta & Govindarajan, 1991, 1994; Doz & Prahalad, 1993; Foss & Pedersen, 2002, 2004). This literature went beyond the

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view of MNE expansion as a matter of exploiting the parent company’s firm-specific advantages (Kogut, 1990; Birkinshaw & Morrison, 1996), and instead emphasized how advantage may arise from different parts of the MNE network, with potential implications for the distribution of power across the network and the design and maintenance of mechanisms of transferring knowledge between units in the network. The overall view underlying this “differentiated MNE literature” is one of the MNE as a fundamentally knowledge-based entity that thrives on account of its ability to generate and orchestrate flows of knowledge between units in the network, and may possess an advantage relative to national or less internationalized firms stemming from its knowledge management capabilities. This view stimulated much research into the drivers of and barriers to knowledge transfer (e.g., Gupta & Govindarajan, 1991, 1994; Szulanski, 1996; see Foss & Pedersen, 2004, 2019), and linked up with other, highly complementary research on subsidiary embeddedness (Andersson & Forsgren, 1996; for details see the entry on foreign subsidiary networks in this volume) and “mandates” (Cantwell & Mudambi, 2005).

Kogut and Zander

Kogut and Zander’s 1993 article, “Knowledge of the firm and the evolutionary theory of the multinational corporation” is squarely in line with the differentiated MNE literature (while they also in their 2003 retrospective link their ideas to Sidney Winter’s (1987) work on knowledge in firms and to Rogers’ (2003) work on diffusion). However, it is in some key respects more radical. Using many of the same arguments of their one-year earlier Organization Science article (Kogut & Zander, 1992), Kogut and Zander’s paper is a self-conscious break with the internalization approach to the MNE, which is taken to be based on ideas that are either similar to or imported from the Coase-Williamson line of transaction cost economics. Rather, theirs is “a distinctly sociological theory” (Kogut & Zander, 2003: 505; see also Kogut & Zander, 1996). Thus, MNEs aren’t best seen as contractual institutions that exist by virtue of their ability to curb opportunism in vital transactions, but rather as “social communities that specialize in the creation and internal transfer of knowledge” (they discuss

the possibility that firms as social communities may be related to overcoming opportunism; Foss, 1996). The costs that firms minimize aren’t the costs of safeguarding against opportunism, but the costs associated with creating and transferring knowledge. Firms, including MNEs, exist because they are better capable than other governance structures, notably markets (which seems to also include hybrids, such as strategic alliances), at creating and sharing knowledge. They may avoid the familiar problems associated with the public good nature of knowledge. By cultivating a shared identity and an accompanying firm-specific “language,” they may also reduce the cost of transferring tacit knowledge. The key idea in Kogut and Zander (1993) is that attempts to economize on the costs of transferring knowledge are sufficient to explain why firms may expand their boundaries beyond national borders. Opportunism, particularly in its Williamsonian manifestation as hold-up in the presence of uni- or bilateral deployment of specific investments, is not necessary. As Tallman (2003) notes, this argument implies that internalization theory is “overdetermined.” Another critique is involved in their argument. Thus, whereas internalization theory and transaction cost economics involve a comparison of “markets” and “hierarchies” in terms of their respective “failures” with respect to governing transactions with different characteristics, Kogut and Zander (1993: 625) focus on the MNE’s “superior efficiency as an organizational vehicle by which to transfer this knowledge across borders,” and they reject the markets and hierarchies comparison: “the choice of transfer mode is determined by the efficiency of the multinational corporation in transferring knowledge relative to other firms, not relative to an abstract market transaction.” Empirically, they consider decisions to transfer manufacturing capabilities (relating to new products) to wholly owned subsidiaries or to other parties. The harder to codify and teach the capabilities are, the more likely that transfer will take place to wholly owned operations.

Later work and critiques

As Verbeke (2003: 498) argued, an effect of Kogut and Zander’s article was to stimulate “scholars to conduct more eclectic, empirical Nicolai J. Foss

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analyses, which should include both transaction cost related parameters, and broader learning/competence related variables.” Again, the article gave impetus to tendencies that were already present or emerging at the time the article was published (Grant & Phene, 2022), but helped to inspire the spate of research on intra-MNE knowledge flows that characterized much MNE research in the latter part of the 1990s (Szulanski, 1996, is a particularly influential example). Critiques were relatively quick to appear. One may first note that Kogut and Zander’s core arguments had already been made in the literature. Thus, Teece (1986) is explicit that costs of transferring knowledge in general (not just those caused by opportunism) help explain the existence of the MNE (his argument is an adaptation of the mechanism that he had earlier applied to explain the diversified firm; Teece, 1982). However, Teece’s argument was framed in terms of TCE. The argument that the relevant comparison is not really between the “market” and the “hierarchy,” but between different firms with different capabilities for organizing different transactions, had been made by, for example, Coase (1992). However, the first article to explicitly criticize Kogut and Zander (1993) is probably Love (1995), who argued that their reasoning was consistent with notions of market failure and transaction costs, and that both phenomena may exist in the absence of opportunism. In a parallel critique of Kogut and Zander (1992), Foss (1996) argued that the firm-specific codes, identity, routines, etc., that Kogut and Zander invoked in their reasoning may be seen as specific assets that would be potentially susceptible to hold-up. In the absence of opportunism, there was no reason such assets could not be built by actors interacting in markets as there would be no need for the firm to safeguard the relevant transactions. Fransson et al. (2005: 427) argued that even in the presence of opportunism, “firms are but one of the many types of ‘epistemic communities’ possessing and nurturing procedural norms, identity, and the cognitive, linguistic and reflexive attributes conducive to efficient exchange and re-combination of knowledge among their members.” Similar arguments are developed by Low and Ho (2016). Foss (2006) criticized Kogut and Zander’s (and subsequent writers’) heavy emphasis on knowledge flows at the Nicolai J. Foss

expense of attention to the distribution of knowledge stocks across the MNE network, and argued that a stronger predictive theory of knowledge flows would emerge if knowledge stocks were factored into the analysis (as this would enable a better understanding of MNE-wide knowledge complementarities; see Foss & Pedersen, 2004, for an empirical step in this direction).

Conclusions

The knowledge-based theory of the MNE emerged towards the end of the 1980s as part of a general expansion of interest across a number of management fields in knowledge as an increasingly important factor of production, and as an attempt to furnish a “new paradigm” in MNE theory (Doz & Prahalad, 1993). The theory was launched as a new conceptualization of the MNE that provided the basis for novel theorizing of the sources of competitive advantage of MNEs (i.e., ongoing learning based on access to a diverse international network of knowledge nodes), and as a theory of the existence, boundaries, and internal organization of the MNE. The most radical and most highly cited contribution that explicitly makes these points is Kogut and Zander (1993), which has become a standard reference in recent MNE theory. Their theorizing has been subjected to critique, much of which has been along standard transaction cost economics lines (e.g., Kogut and Zander failed to sufficiently identify and contrast alternative structures for transferring knowledge internationally; e.g., Low & Ho, 2016). In their 2003 retrospective assessment, Kogut and Zander granted a number of these critical points. In all, the knowledge-based theory of the MNE placed the forms and characteristics of knowledge more centrally in the explanation of key MNEs. From the vantage point of the 2020s, many would likely agree that the theory was essentially a clearer, more pointed articulation of a host of insights and ideas that were already present or at least emerging in the international business field around 1990. It also seems to be a near-consensus view that the critique of internalization theory and TCE that accompanied the emergence of the knowledge-based theory was partly misguided. While it is true that market failure and exchange hazards may emerge in the absence of opportunism, Verbeke (2003: 498) is right that the

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“transaction cost economics lens adopted in internalization theory clearly remains critical to any analysis of MNE strategy with impacts on the boundaries of the firm.” To a large extent knowledge-based ideas, along with closely related resource-based ideas (Beamish & Chakravarthy, 2021), have been assimilated into the mainstream of IB and MNE theory. A broader set of issues concern the extent to which a distinct conceptualization of the MNE as a knowledge-based entity was actually fully articulated. Most research focused on knowledge flows, the driver and hindrances to such flows, and how the MNE could orchestrate flows in the best possible manner. However, flows emerge from stocks, but differential knowledge stocks across the MNE network were usually assumed rather than analyzed (Foss, 1996). Similarly, the conceptualization of the MNE as a distinct mini-society with its own identity and organizing principles articulated by Kogut and Zander (1993, 1996) and seen by them as the underpinning of a knowledge-based view of the MNE is challenged by the observation that substantial heterogeneity and barriers to knowledge exchange exist also within the MNE (e.g. Asmussen, Foss, & Pedersen, 2013). Thus, while many of the core key ideas of the knowledge-based theory were quickly assimilated into mainstream, not all were. Thus, although the knowledge-based theory of the MNE (and of the theory of the firm in general) may have failed to become a distinct viable approach (cf. Grant & Phene, 2022), mainly because many of its core ideas were assimilated into existing theory, knowledge-based ideas may still be able to stimulate novel research. Nicolai J. Foss

References

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Beamish, P & Chakravarthy, D. 2021. Using the Resource-Based View in Multinational Enterprise Research. Journal of Management, 47: 1861–1877. Birkinshaw, J.M. & Morrison, A.J. 1996. Configurations of Strategy and Structure in Multinational Subsidiaries. Journal of International Business Studies, 26: 729–794. Buckley, P.J. & Casson, M. 1976. The Future of the Multinational Enterprise. London: Macmillan. Cantwell, J. & Mudambi, R. 2005. MNE Competence-Creating Subsidiary Mandates. Strategic Management Journal, 26: 1109–1128. Coase, R.H. 1937. The Nature of the Firm. Economica, 4: 17–44. Coase, R.H. 1992. The Institutional Structure of Production. American Economic Review, 82: 713–719. Doz, Y. & Prahalad, C.K. 1993. Managing DMNCs: A Search for a New Paradigm. In Ghoshal, S., Wesney, D.E. (eds.) Organization Theory and the Multinational Corporation. New York: St Martins Press. Dunning, J.H. 1979. Toward an Eclectic Theory of International Production: Some Empirical Tests. Journal of International Business Studies, 11: 9–31. Dunning, J.H. 2000. The Eclectic Paradigm as an Envelope for Economic and Business Theories of MNE Activity. International Business Review, 9: 163–190. Foss, N.J. 1996. Knowledge-Based Approaches to the Theory of the Firm: Some Critical Comments. Organization Science, 7: 470–476. Foss, N.J. 2006. Knowledge and Organization in the Multinational Enterprise: Some Foundational Issues. Journal of Management and Governance, 11: 3–20. Foss, N.J. & Pedersen, T. 2002. Sources of Subsidiary Knowledge and Organizational Means of Knowledge Transfer. Journal of International Management, 8: 49–67. Foss, N.J. & Pedersen, T. 2004. Governing Knowledge Processes in the Multinational Corporation. Journal of International Business Studies, 35: 339–349. Foss, N.J. & Pedersen, T. 2019. Microfoundations in International Management Research: The Case of Knowledge Sharing in Multinational Corporations. Journal of International Business Studies, 50: 1594–1621. Fransson, A., Håkansson, L., & Liesch, P. 2005. The Underdetermined Knowledge-based Theory of the MNC. Journal of International Business Studies, 42: 427–435. Grant, R.M. 1996. Toward a Knowledge-based Theory of the Firm. Strategic Management Journal, 17: 109–122. Grant, R.M. & Phene, A. 2022. The Knowledge Based View and Global Strategy: Past Impact

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258  Encyclopedia of international strategic management and Future Potential. Global Strategy Journal, 12: 3–30. Gupta, A.K. & Govindarajan, V. 1991. Knowledge Flows and the Structure of Control within Multinational Corporations. Academy of Management Review, 16(4): 768–792. Gupta, A.K. & Govindarajan, V. 1994. Organizing for Knowledge Flows within MNCs. International Business Review, 4: 443–457. Hedlund, G. 1986. The hypermodern MNC—A heterarchy? Human Resource Management, 25: 9–35. Hennart, J.-F. 1986. What is Internalization? Weltwirtschaftliches Archiv-Review of World Economics, 22: 791–804. Hennart, J.-F. 1991. The Transaction Cost Theory of the Multinational Enterprise. In The Nature of the Transnational Firm. Edited by C. Pitelis & R. Sugden. London: Routledge. Hymer, S. 1969. Multinational Corporation and International Oligopoly: The Non-American Challenge. Center Discussion Paper, No. 76, Yale University, Economic Growth Center, New Haven. Kogut, B. (1990). The Permeability of Borders and the Speed of Learning Among Countries. Globalization of Firms and the Competitiveness of Nations, 59–90. Kogut, B. & Zander, U. 1992. Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology. Organization Science, 3, 383–397. Kogut, B. & Zander, U. 1993. Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation. Journal of International Business Studies, 24: 625–645. Kogut, B., & Zander, U. 1996. What Firms Do Coordination, Identity, and Learning. Organization Science, 7, 502–518. Kogut, B. & Zander, U. 2003. A Memoir and Reflection: Knowledge and an Evolutionary Theory of the Multinational Firm 10 Years

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65. Knowledge-seeking FDI Knowledge-seeking foreign direct investments (FDI) are a subset of strategic asset-seeking FDI. Firms engaging in knowledge-seeking FDI specifically target knowledge and technology-related skills and capabilities in host locations (Cantwell, 1989), whereas firms investing abroad to seek strategic assets in general can also search for management- and marketing-related assets, including skilled individuals and brands (see the entry on strategic asset-seeking FDI). The development of technological skills and capabilities depends on location-specific factors, such as previously established innovations, the education system, and the linkages between educational institutions and firms (Narula, 2002; Narula & Santangelo, 2012). Knowledge and technology-related skills and capabilities are difficult to access and source across space because they are partially tacit, and their transfer requires frequent interactions (Kogut & Zander, 1992). Thus, multinational enterprises (MNEs) must be physically proximate to knowledge sources in foreign locations to access localized knowledge (Cantwell, 1989). MNEs want to access this knowledge for different reasons. They aim to offset home-country technological disadvantages, catch up to augment their technological competences, or reduce their fixed research and development (R&D) costs (Almeida, 1996; Cantwell, 1989; Chung & Yeaple, 2008).

these countries (Laursen & Santangelo, 2017) have also triggered knowledge-sourcing from advanced countries in these locations (e.g., D’Agostino, Laursen, & Santangelo, 2013; D’Agostino & Santangelo, 2012). The study on knowledge-seeking FDI has informed the literature on R&D internationalization. A first stream within this literature has examined the heterogeneity of the R&D units (Dunning & Narula, 1995; Florida, 1997). A second stream has considered the location of knowledge-seeking FDI and examined how different host-country factors influence these investments. The following two sections review these streams.

Knowledge-seeking FDI and foreign R&D units

In the literature on R&D internationalization, the heterogeneity of the MNE units sourcing knowledge abroad has been studied along different dimensions (see also the entry on global R&D in this volume). First, R&D units have varying levels of absorptive capacity for host-country knowledge (Minbaeva, Pedersen, Björkman, Fey, & Park, 2003). They are heterogeneous in their capability of sourcing and combining knowledge (Phene & Almeida, 2008; Song, 2014). They also differ in the extent to which they are embedded in the MNE network and host country (Almeida & Phene, 2004; Andersson & Forsgren, 2000) and, thus, the extent to which they engage in knowledge transactions within and outside the MNE (Gupta & Govindarajan, 2000). Second, the heterogeneity of the R&D units has been related to the knowledge Research on knowledge-seeking development role these units have within the MNE network. A part of this literature has FDI Over time, the geography of knowledge-​ intersected with the research on subsidiary seeking FDI has changed. Knowledge-seeking roles, which has developed within the broader FDI was traditionally a phenomenon mainly literature on strategic asset-seeking FDI (see involving investments from and to advanced the entry on strategic asset-seeking FDI). countries. However, the international expan- Another stream has considered the technologsion of emerging market multinationals ical scope of the subsidiaries (e.g., Phene & (EMNEs) looking for knowledge-related Santangelo, 2022) and the different activities assets has motivated knowledge-seeking along the R&D value chain, which each investments from these countries, which unit conducts in the host location (Hood & target advanced economies (Li, Li, & Shapiro, Young, 1982; Pearce & Singh, 1992; Pearce 2012). The rise of fast-growing emerging & Papanastassiou, 1999; Ronstadt, 1977). markets as talent-rich locations (Lewin, R&D units can carry out research activities Massini, & Peeters, 2009) and the improve- where “basic,” “scientific,” “fundamental,” ment of knowledge-supporting institutions in and “frontier technology” research and its application are explored (Papanastassiou, 259

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1999; Pearce & Papanastassiou, 1999). They can focus on development activities in terms of “development” and “solutions” of products or processes already oriented toward the market (Dunning & Narula, 1995; Hood & Young, 1982). Finally, R&D units can carry out product and process adaptation in the foreign locations, where current products or technologies are adjusted to the “customer needs” or provide “technical services” in the host country (Dunning & Narula, 1995). Regardless of the taxonomy adopted to study the heterogeneity of MNE units seeking knowledge abroad, the role of these units evolves as a result of the subsidiary’s initiative and pursuit of riskier projects (Monteiro, 2015) and in responses to technological changes within the host country context (Phene & Tallman, 2018). A backbone of this literature is the concept of reverse knowledge transfer (Ambos, Ambos, & Schlegelmilch, 2006). To contribute to the MNE’s global competitive advantage, the knowledge sourced in the foreign location has to be transferred to the headquarters and integrated into the MNE’s knowledge pool. The MNE’s units are heterogenous in their intra-MNE knowledge-sharing activity (Gupta & Govindarajan, 2000). Thus, the effective management of intra-MNE relationships (Björkman, Barner-Rasmussen, & Li, 2004; Frost & Zhou, 2005; Gupta & Govindarajan, 1991; Gupta & Govindarajan, 2000; Nobel & Birkinshaw, 1998; Noorderhaven & Harzing, 2009), and the organizational and control mechanisms adopted by headquarters (Ambos, Ambos, & Schlegelmilch, 2006; Iwasa & Odagiri, 2004; Rabbiosi & Santangelo, 2013) determine the extent to which the MNE can benefit from knowledge-seeking FDI.

Knowledge-seeking FDI and host-country factors

Host-country factors have been another aspect that the literature on knowledge-seeking FDI has studied. Specifically, technological, institutional and competitive conditions in the host location and actors have been examined as influencing knowledge-seeking FDI (see also the entry on location advantages). First, firms engaging in knowledge-seeking FDI are especially sensitive to the technological capabilities of the host location (Alcacer & Chung, 2007; Belderbos, Grazia D. Santangelo

Lokshin, & Sadowski, 2015; Chung & Alcacer, 2002; Frost, 2001; Song, Asakawa, & Chu, 2011). MNEs target foreign countries in areas of host technological expertise (Cantwell, 1995), with high levels of patenting activities (Shan & Song, 1997), and where technology not available at home is developed (Almeida, 1996; Kogut & Chang, 1991). The relevance of the host country’s knowledge-related endowment has been a major driver of knowledge-seeking FDI by EMNEs in advanced countries (Luo & Tung, 2007). Extant research has also highlighted that the benefits that MNEs can enjoy from knowledge-sourcing FDI in terms of, for example, innovation performance depend on the geographical and cognitive proximity between its local unit and the host-country actors from which the unit sources knowledge (Chung & Alcacer, 2002; Perri & Santangelo, 2022). A second set of host-country factors influencing knowledge-seeking FDI are institutions at both national and subnational levels (Branstetter, Fisman, & Foley, 2006; Santangelo, Meyer, & Jindra, 2016). While weak host-country IPR regimes deter firms’ R&D investments (Belderbos, Lykogianni, & Veugelers, 2008; Kumar, 1996), staying away from upraising R&D locations with relatively weak IPR regimes may not be an option due to the increasing strategic relevance of these locations for knowledge development (D’Agostino, Laursen, & Santangelo, 2013). To deal with the risk of knowledge misappropriation in these countries, MNEs have strategically used cross-unit R&D collaborations and employees’ assignments to R&D projects. Cross-unit R&D collaborations allow the segmentation of tasks involved in R&D projects across geographically dispersed R&D sites, thus reducing the risk of knowledge spillovers (Alcácer & Zhao, 2012; Belderbos, Park, & Carree, 2021; Quan & Chesbrough, 2010; Srikanth, Nandkumar, Mani, & Kale, 2020; Zhao, 2006). The assignment of home-country employees to R&D projects in weak IPR countries limits the risk of knowledge leakages in those host countries (Berry, 2017; Nandkumar & Srikanth, 2016). Competitive conditions in the host country are a further location factor influencing knowledge-seeking FDI. The collocation of knowledge-related activities with competitors exposes MNEs to the risk of unintended knowledge spillovers

Knowledge-seeking FDI  261

(Cantwell & Santangelo, 2002). It may ultimately produce adverse selection, with technology-leading MNEs geographically separating from their rivals (Alcácer, 2006). However, the location-bounded nature of knowledge-related assets (Jaffe, Trajtenberg, & Henderson, 1993) may force MNEs to locate close to competitors. In these situations, MNEs can rely on a technological partnership with their collocated competitors to monitor the knowledge leakages to their rivals (Narula & Santangelo, 2009).

Looking ahead

Although the literature on knowledge-seeking FDI is long-standing and well established, several issues remain on the agenda, offering promising research avenues. First, the micro-foundation movement (Felin & Hesterly, 2007) has triggered research on the role of specific individuals (e.g., boundary spanners, expatriates, migrants) and teams in knowledge-seeking FDI (Choudhury, 2016; Fang, Jiang, Makino, & Beamish, 2010; Gaur, Delios, & Singh, 2007; Minbaeva & Santangelo, 2018; Nuruzzaman, Gaur, & Sambharya, 2019). Future research can delve deeper into this aspect. Theories from other disciplines, such as psychology and sociology, can be usefully borrowed to expand our understanding of the phenomenon (e.g., Reinholdt, Pedersen, & Foss, 2011). These theoretical lenses can be fruitfully used to study simultaneously the individual, the complex multi-layered multinational context, and how the two interact in the knowledge-seeking process. Recent works have made an effort in this direction (Santangelo & Phene, 2022), but several contingencies and dimensions remain to be explored. Second, the upsurge of unconventional R&D locations has prompted research on knowledge-seeking FDI in weak institutional contexts (D’Agostino, Laursen, & Santangelo, 2013). The main issue in these locations is how to reap the benefits the host country can offer while protecting the MNE’s knowledge and technology. Research on knowledge protection has examined organizational strategies (Nandkumar & Srikanth, 2016; Zhao, 2006). A fruitful way forward is to “explore [the] appropriateness of govern-

ance mechanism based on knowledge type and activity” (Grant & Phene, 2022, p. 19). Grazia D. Santangelo

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Grazia D. Santangelo

66. Language in international business The study of language in international business (IB) – or language-sensitive research in IB – investigates how language diversity in multinational and multilingual organizations affects workplace interactions, organizational processes, and management outcomes. But the causality goes both ways, in terms of how the broader organizational context affects the strategic management of language (Luo & Shenkar, 2006). Like IB itself, language-sensitive research is a multidisciplinary field, covering contributions from sociolinguistics, economics, management and organization studies, marketing and even neuroscience (Tenzer, Terjesen & Harzing, 2017).

Historical overview

Initially, IB scholars treated language as a problem to be overcome in managing the multinational (Perlmutter, 1969), or in designing cross-national survey instruments (Green & White, 1976). Over the years, this view has been complemented with a more positive, generative and strategic take on language, suggesting that language may serve as a window onto a range of core IB phenomena such as international trade flows and foreign direct investments (Oh, Selmier, & Lien, 2011), foreign market entry (Brannen, 2004), cross-border acquisitions (Cuypers, Ertug, & Hennart, 2015), and global mindsets (Gupta & Govindarajan, 2002). Language-sensitive research can be traced back to the 1960s and 1970s, when IB scholars addressed language in a rather sporadic way, often subsuming language under cultural differences. At that time, cultural facility – rather than language facility – was seen as key for successful cross-border business (Hall, 1960). Even the most cited measure of culture – Hofstede’s (1980) cultural values dimensions – did not have space for language. It was not until the late 1990s that IB researchers began to study language more systematically (Marschan-Piekkari, Welch, & Welch, 1999a, 1999b), and by the mid-2010s, language had become a major area of conceptual and empirical research in IB (Brannen,

Piekkari, & Tietze, 2014). While the initial research efforts focused on decoupling language from culture (Brannen et al., 2014), more recent research on boundary-spanning activities in MNCs acknowledges the intertwined relationship between the two concepts (e.g., Barner-Rasmussen, Ehrnrooth, Koveshnikov, & Mäkelä, 2014; Yagi & Kleinberg, 2011). The emergence of language-sensitive IB research can be explained by several parallel developments. First, cross-cultural management researchers started to pay greater attention to the intensification of communications and interactions between people of different nationalities in organizations (Szkudlarek, Romani, Caprar, & Osland, 2020). Furthermore, the study of the management and organization of multinational corporations (MNCs) – a central focus of research in IB – increasingly viewed the MNC as a network (e.g., Hedlund, 1986; Bartlett & Ghoshal, 1989). This network structure was characterized by growing direct interactions across subunits in different countries (Piekkari & Westney, 2017). Finally, the expansion of Japanese MNCs in the West (Bartlett & Yoshihara, 1988; Peterson & Schwind, 1977; Sullivan & Peterson, 1982) as well as Western operations in Japan (Peltokorpi, 2007; SanAntonio, 1987) made language much more salient and visible to both academics and practitioners. At that point, it became almost impossible to continue glossing over language. Together, these developments paved the way for the focus on language in its own right.

Current state of knowledge

In the light of the historical evolution, it is perhaps not surprising that much of the language-sensitive IB research has been conducted within MNCs and on the organizational level of analysis. For example, topics such as language policies of MNCs and the use of English as a lingua franca (e.g., Neeley & Dumas, 2016; Sanden & Kankaanranta, 2018), knowledge-sharing between headquarters and subsidiaries (e.g., Reiche, Harzing, & Pudelko, 2015; Schomaker & Zaheer, 2014) and the effects of language differences on organizational communication (e.g., Harzing & Pudelko, 2014; Louhiala-Salminen & Kankaanranta, 2012) have received considerable attention.

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But the study of language in IB can also involve other levels of analysis (Tenzer et al., 2017). For example, research on the effects of language on individual career paths and HR practices (Itani, Järlström, & Piekkari, 2015; Peltokorpi, 2022; Yamao & Sekiguchi, 2015), as well as on micro-processes in multinational teams (Tenzer, Pudelko, & Harzing, 2014; Vigier & Spencer-Oatey, 2017), has proliferated in recent years. On the macro level, the language lens has been used to predict international trade flows and patterns of foreign direct investment between countries (e.g., Isphording & Otten, 2013), performance of the global microfinance industry (e.g., Golesorkhi, Mersland, Piekkari, Pishchulov, & Randøy, 2019), and economic inclusion of women in society (Drori, Manos, Santacreu-Vasut, Shenkar, & Shoham, 2018). From this perspective, language has presented IB scholars with many formidable challenges. One of them is how language can be turned into a quantifiable measure to be used in the kind of quantitative research that characterizes mainstream IB scholarship. In response, a number of scholars have devised linguistic-based measures to advance research methods and ultimately knowledge production (e.g., Chiswick & Miller, 2005; West & Graham, 2004). Some of these linguistic distance measures have been applied to estimate international economic transactions (Isphording & Otten, 2013). A more recent measure of linguistic gender marking (i.e., female/male grammatical distinctions in a language) has been advocated as a superior alternative to the value-based measures of culture by Hofstede that have dominated IB research to date (Santacreu-Vasut, Shenkar, & Shoham, 2014). The field has also started to engage in some introspection by asking what the core concept of language actually means (Karhunen, Kankaanranta, Louhiala-Salminen, & Piekkari, 2018). Initially, language tended to refer to national languages, but over the years this definition has been expanded to include also company jargon (Brannen & Doz, 2012) as well as technical and professional language used by communities of practice to underscore their distinctiveness. More recently, researchers have uncovered practices of

hybrid language use and translanguaging, suggesting that individuals rely on any linguistic and communicative resources at hand in order to cope with multilingual encounters (e.g., Barner-Rasmussen & Langinier, 2020; Gaibrois, 2018). These contributions conceive of language as “a social practice rather than a discrete entity” (Janssens & Steyaert, 2014: 623), making it more difficult to plug into a statistical model. Therefore, in much of IB research, language still refers to discrete national languages. Researchers have also started to problematize the technical and mechanical way that translation has been treated in quantitative and qualitative cross-language IB research, and management studies more broadly (Tietze, 2022). IB scholars have been encouraged to move beyond the myth of equivalence of meaning (i.e., to give up “the quest for conveying identical meanings” between languages), and instead to reframe the process of translation as intercultural interaction (Chidlow, Plakoyainnaki, & Welch, 2014: 563). Compared with mainstream IB research, language-sensitive research uses more qualitative research methods and demonstrates greater paradigmatic diversity in terms of positivist, interpretivist and critical traditions (Piekkari, Gaibrois, & Johansson, 2022). Thus, in addition to micro, meso and macro levels of analysis discussed above, language-sensitive IB research also deals with broader questions of knowledge production, and what theory and theory-building mean (i.e., meta-theory). To conclude, the study of language has made IB scholars increasingly aware of the role of language boundaries in both cross-border business as well as in academic research conducted in non-English environments. As IB scholars, we constantly translate, not only across linguistic boundaries but also across organizational, functional, and disciplinary boundaries (Westney, Piekkari, Koskinen, & Tietze, 2022). While some of this translation may be geared toward routine problem-solving tasks, other translating activity may have more generative outcomes, fostering creativity and innovative solutions. In this regard, language-sensitive research may bring about a paradigm shift – a shift that

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conceives the entire field of IB as translation across borders and boundaries. Rebecca Piekkari10

References

Barner-Rasmussen, W., Ehrnrooth, M., Koveshnikov, A., & Mäkelä, K. 2014. Cultural and language skills as resources for boundary spanning within the MNC. Journal of International Business Studies, 45(7): 886–905. Barner-Rasmussen, W., & Langinier, H. 2020. Exploring translanguaging in international business: Towards a comparison of highly context-embedded practices: Evidence from France and Finland. In S. Horn, P. Lecomte, & S. Tietze (Eds.), Managing multilingual workplaces. Methodological, empirical and pedagogic perspectives: 105–121. Abingdon, Oxfordshire: Routledge. Bartlett, C. A., & Ghoshal, S. 1989. Managing across borders: The transnational solution. Boston, MA: Harvard Business Press. Bartlett, C. A., & Yoshihara, H. 1988. New challenges for Japanese multinationals: Is organization adaptation their Achilles heel? Human Resource Management, 27(1): 19–43. Brannen, M. Y. 2004. When Mickey loses face: Recontextualization, semantic fit, and the semiotics of foreignness. Academy of Management Review, 29(4): 593–616. Brannen, M. Y., & Doz, Y. L. 2012. Corporate languages and strategic agility: Trapped in your jargon or lost in translation? California Management Review, 54(3): 77–97. Brannen, M. Y., Piekkari, R., & Tietze, S. 2014. The multifaceted role of language in international business: Unpacking the forms, functions and features of a critical challenge to MNC theory and performance. Journal of International Business Studies, 45(5): 495–507. Chidlow, A., Plakoyiannaki, E., & Welch, C. 2014. Translation in cross-language international business research: Beyond equivalence. Journal of International Business Studies, 45(5): 562–582. Chiswick, B. R., & Miller, P. W. 2005. Linguistic distance: A quantitative measure of the distance between English and other languages. Journal of Multilingual and Multicultural Development, 26(1): 1–11. Cuypers, I., Ertug, G., & Hennart, J. F. 2015. The effects of linguistic distance and lingua franca proficiency on the stake taken by acquir-

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10 I would like to thank D. Eleanor Westney and Wilhelm Barner-Rasmussen for their most generous and helpful feedback on an earlier draft of this text.

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organization theory: Post millennium perspectives, 49: 193–232. Emerald. Reiche, B. S., Harzing, A. W., & Pudelko, M. 2015. Why and how does shared language affect subsidiary knowledge inflows? A social identity perspective. Journal of International Business Studies, 46(5): 528–551. SanAntonio, P. M. 1987. Social mobility and language use in an American company in Japan. Journal of Language and Social Psychology, 6(3–4): 191–200. Sanden, G. R., & Kankaanranta, A. 2018. “English is an unwritten rule here”: Non-formalised language policies in multinational corporations. Corporate Communications: An International Journal, 23(4): 544–566. Santacreu-Vasut, E., Shenkar, O., & Shoham, A. 2014. Linguistic gender marking and its international business ramifications. Journal of International Business Studies, 45(9): 1170–1178. Schomaker, M. S., & Zaheer, S. 2014. The role of language in knowledge transfer to geographically dispersed manufacturing operations. Journal of International Management, 20(1): 55–72. Sullivan, J., & Peterson, R. B. 1982. Factors associated with trust in Japanese-American joint ventures. Management International Review, 22(2): 30–40. Szkudlarek, B., Romani, L., Caprar, D. V., & Osland, J. S. (Eds.). 2020. The SAGE Handbook of Contemporary Cross-cultural Management. SAGE: Thousand Oaks, CA. Tenzer, H., Pudelko, M., & Harzing, A. W. 2014. The impact of language barriers on trust formation in multinational teams. Journal of International Business Studies, 45(5): 508–535. Tenzer, H., Terjesen, S., & Harzing, A. W. 2017. Language in international business: A review and agenda for future research. Management International Review, 57(6): 815–854. Tietze, S. 2022. Language, translation and management knowledge: A research overview. Routledge: Abingdon, UK. Vigier, M., & Spencer-Oatey, H. 2017. Code-switching in newly formed multinational project teams: Challenges, strategies and effects. International Journal of Cross Cultural Management, 17(1): 23–37. West, J., & Graham, J. L. 2004. A linguistic-based measure of cultural distance and its relationship to managerial values. Management International Review, 44(3): 239–260. Westney, D. E., Piekkari, R., Koskinen, K., & Tietze, S. 2022. Crossing borders and boundaries: Translation ecosystems in international

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67. Learning in and by MNEs Some theorists (Grant 1996; Kogut & Zander, 1992, 1993) view MNEs as a repository of knowledge that is accumulated through the individual and their collective experiences, and learning of its human capital (Fiol & Lyles, 1985; Huber, 1991; Leonard, 1995). This knowledge develops through the interactions of MNEs’ employees with one another, within and across different units as well as with other companies. These interactions provide an opportunity and forum for learning, i.e., the acquisition of new knowledge that offers fresh insights that revise what is known and how it is used and the purposes for which it is used. Individual and group learning provides the foundation to MNEs’ organizational learning. In turn, this learning serves as the engine for creating, replenishing and updating MNEs’ knowledge, enhancing their competitive advantage (Kogut & Zander, 2003; Lam, 2003).

Learning and MNE internationalization

The quest for knowledge has been recognized as a key motivator for MNEs’ internationalization and the various strategic moves they undertake, including new market entry or developing particular types of strategic alliances (Luo, 2020). Learning is also important for determining the organizational capabilities MNEs need and how to build, upgrade and deploy them (Nonaka, 1994; Nonaka & Takeuchi, 1995) and retain their dynamism over time (Zahra, Petricevic & Luo, 2022). Having dynamic capabilities is essential to MNEs’ successful adaptation (Zahra et al., 2022). However, learning is also an important, indeed crucial, outcome of MNEs’ moves; it has the potential to transform MNEs’ strategic thinking and choices, affecting their survival, profitability and growth (Leonard, 1995; Nonaka & Takeuchi, 1995). Understandably, a large body of research now exists on learning within and by MNEs. This research often invokes the organization learning perspective (Argote, 2012; Bower & Hilgard, 1981; Huber, 1991; Tallman & Chacar, 2011) when discussing the conditions under which MNEs learn, how and what

they learn, how they use what they learn, and the consequences of their learning on their market success, organizational evolution and successful adaptation. MNEs’ learning could be accidental and even vicarious (Huber, 1991). Learning is also intentional and deliberate, seeking to generate new insights and explore their implications for MNEs’ strategies and operations (Argote, 2012; Bower & Hilgard, 1981; Huber, 1991). MNEs also learn by doing (Rui, Cuervo-Cazurra & Un, 2016). The global dispersion of MNEs’ operations and their vast networks provide much richness to their learning as they can canvass different types of new knowledge from different markets (Gupta & Govindarajan, 1991, 2000). This knowledge could relate to markets’ social structures, technological developments, institutional arrangements, regulatory conditions, and competitive dynamics, etc. In turn, MNEs can integrate the diverse knowledge they gain from these markets (Zahra, Neubaum & Hayton, 2020). This integration can spark innovation and experimentation that leads to discovery, new business model development and new market and industry creation (Zahra et al., 2020). MNEs also can diffuse the knowledge they gain from one part of their global network to other markets, promoting additional innovations and business developments. New knowledge could also pinpoint weaknesses in MNEs’ capabilities and how to overcome them.

MNEs’ multifaceted learning

The knowledge MNEs gain through learning is multifaceted in nature. It could be organizational (Gupta & Govindarajan, 1991; Noorderhaven & Harzing, 2009; Szulanski, 1996), focusing on how to structure operations around the globe to enhance productivity, achieve efficiency, and enhance local responsiveness. It could also be technological (Zahra, Ireland & Hitt, 2000), focusing on mastering frontier and emerging technologies and understanding their potential capabilities for complementing vs. disrupting operations and undoing MNEs’ market positions. MNEs’ social learning centers on deciphering national and local cultures and their subtleties and how they influence the workings of local markets (Knight & Kim, 2009; Zahra et al., 2000). Social learning also centers on understanding the intertwining of national and

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organizational cultures with local institutions to shape the competitive dynamics in given markets. Learning about institutions enables MNEs to devise strategies that address the diverse needs of their multiple stakeholders. MNEs’ learning could be operational or strategic. Operational learning centers usually on how MNEs structure their work throughout their international networks to achieve agility, responsiveness, and efficiency. This entails learning about effective work designs and flows, the various linking mechanisms that ensure the seamless integration of their subsidiaries, and ensure effective quality controls throughout their international networks. It also involves learning about process designs and improvements that make effective operational synchronization possible. Strategic learning focuses on promoting MNEs’ “learning to learn” and applying the knowledge gained in mapping new strategic directions, such as defining new business domains for development or new markets to penetrate. Strategic learning also means gaining experience and insights into MNEs’ (and their rivals’) strategy-making processes and how to transform these strategies into concrete actions through resource allocation and timely deployment (Li & Fleury, 2020). Strategic learning often demands unlearning and discarding outdated knowledge, beliefs and organizational cognitions (Tsang & Zahra, 2008). Moreover, it requires MNEs to question their assumptions about the durability of their capabilities as well as their industry and rivals. Strategic learning also requires recognizing blind spots in MNEs’ managers’ strategy-making processes and addressing them. MNEs also need to learn how to develop the systems and processes essential to making different types of learning happen, capture and share this learning, and put it to effective use in their strategy formulation and execution (Leonard, 1995; Luo, 2020; Nonaka & Takeuchi, 1995). Over time, having such an organizational capability becomes a key source of MNEs’ competitive advantage as it renews their knowledge bases, ensuring the currency of their absorptive capacity that, in turn, makes it possible for them to capture and assimilate new knowledge, especially from external sources such as suppliers, customers and collaborators (Zahra & George, 2002). The constant flow of such knowledge ensures the currency of MNEs’ absorptive Shaker A. Zahra

capacity and adds more richness that can become a great source of strategic variety and new capabilities. While both operational and strategic learning are important, over time operational learning could be the source of strategic learning, enhancing MNEs’ competitive advantage. For instance, learning how new competitors organize their operations can give MNEs important insights that allow them to revise their own strategies to challenge these competitors and beat them at their own game. To engage in operational and strategic learning, MNEs sometimes have to also unlearn (Tsang & Zahra, 2008). Unlearning means discarding past cognitions, methods and practices. For instance, MNEs from emerging markets contemplating entry into more advanced markets may have to unlearn some of their home practices to create opportunities to learn about their new host markets’ institutional environments; the reverse is also true. Research highlights the fact that unlearning is a complicated and difficult process that is hard to achieve (Tsang & Zahra, 2008). To unlearn, sometimes MNEs need to undo or revise existing systems processes, reverse past precedent and explain why unlearning is needed. They may also need to change existing individual and group cognitions. These activities take time and effort, often without a guarantee of success; it is also hard for employees and managers to let go of what they know. These challenges underscore the importance of cognitive learning, where MNEs’ subsidiaries and their members engage in a systematic process where they reflect, analyze, interpret, connect, and even critique what they have experienced in order to determine the organizational implications of their learning. Cognitive learning also covers the group and organizational processes associated with learning, not only the content of learning. MNEs learn from their successes and failures, but need to take time to distill key lessons learned (Nonaka & Takeuchi, 1995; Tsang & Zahra, 2008). They can also learn from crises and use this learning to avert future mishaps (Hertenstein & Alon, 2021; Leonard, 1995). Researchers have documented several approaches to MNEs’ learning, including: vicarious, experiential, learning by association, abductive, and experimental. MNEs can also learn through reverse engineering or innovation (Govindarajan &

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Ramamurti, 2011). Each of these approaches can enhance MNEs’ knowledge base, albeit in different ways. In many MNEs, these approaches are likely to unfold at the same time, and therefore have to be harmonized for greater effectiveness. This often requires knowledge articulation, i.e., defining what has been learned, linking to MNEs’ existing knowledge bases, as well as its operational and strategic usefulness. The variety and diversity of MNEs’ spheres and types of learning just noted can add considerable richness to MNEs’ knowledge bases. Such knowledge flows are the key source of MNEs’ competitive advantage, as they allow them to experiment, discover and innovate. Knowledge-based theorists posit that it is these knowledge flows, rather than stocks, that create, renew and sustain MNEs’ competitive advantage (Dierickx & Cool, 1989). However, given the diverse nature of such knowledge, MNEs need to find ways to integrate this knowledge and direct it for strategic purposes (Zahra et al., 2020), as discussed below.

Dimensions of MNEs’ learning

MNEs are likely to vary considerably in the depth, breadth and speed of their learning, with important consequences for their competitive success. These differences arise due to MNEs’ internal operations, history, cultures (Zeng et al., 2013), as well as their heterogeneous knowledge management practices. This heterogeneity can be a great source of advantage, allowing MNEs to leverage their learning and related capabilities differently. For instance, the depth of their learning in a given field (e.g., nanotechnology or medical devices) could be the source of radical innovations in products and processes that give MNEs advantages in their markets. The depth of learning also safeguards against MNEs’ superstitious learning (Zollo, 2009), where they fail to understand the cause–effect relationships they observe in their operations or markets. Such errors are common when MNEs enter culturally distant markets, especially those that have “thick cultures,” as is happening today in emerging markets (Hertenstein & Alon, 2021; Li & Fleury, 2020). Markets with thick cultures make it difficult for outsiders to understand locals’ (e.g., customers, institutions or other companies) behaviors and the factors shaping them,

thus complicating predictions. The breadth of MNEs’ learning could be used to create new innovative recombinations that enhance their ability to differentiate their products and services. It can also enhance MNEs’ strategic repertoires, enabling them to develop a wider variety of products, processes, and business models. The speed of MNEs’ learning could give them advantages in terms of lead time, early market entry and gaining first-mover advantages. Of course, the advantages of MNEs’ speed, depth and breadth in learning could be in any area (e.g., organizational and social), not only technology. Moreover, these advantages could be enduring and even more profound when they occur in the ways by which MNEs learn to learn. Such a capability is difficult for rivals to decipher or emulate.

Addressing barriers to MNEs’ learning

Despite the potential for MNEs to engage in different types of learning, their complex structures and processes may inhibit their organizational learning (Leonard, 1995). Employees are usually busy with their jobs and may not focus as much on what they have learned or its broader consequences for their companies. Sometimes employees are also unaware of what they have learned. If they do, they learn different things that may not mean much to others. Moreover, learning is often local, and the knowledge gained may not make sense to others outside their immediate domains. Some of what is learned is also too technical or too abstract, complicating employees’ ability to communicate it to others. Given the realities just described, the literature highlights multiple potential barriers to knowledge-sharing and diffusion within MNEs, inhibiting their organizational learning. These barriers could be organizational, political, cultural and cognitive in nature (Dougherty, 1992). Organizational barriers may include the physical and psychological distance between subsidiaries, different incentive systems, and the cultures that pervade subsidiaries about sharing, collaboration and competition (Szulanski, 1996). Political barriers include the relative power positions subsidiaries hold within the MNE network and their differential access to senior management (Leonard, 1995). Cultural barriers refer to norms and values that influence Shaker A. Zahra

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employees’ disposition to learn, articulate their learning and share it with others. Some MNEs (and subsidiaries) encourage these efforts; others do not. Cognitive barriers refer to the beliefs, feelings and perceptions that influence learning and knowledge-sharing (Leonard, 1995; Szulanski, 1996). Knowledge-sharing sets the stage for knowledge articulation, the definition of what was learned, by whom, where, how and why it matters. It also clarifies how and where this knowledge could be useful in an MNE’s network. This articulation, in turn, sets the stage for knowledge integration. Importantly, sharing means the successful transfer of new learning (knowledge) from one individual/ group to others who appreciate, comprehend and assimilate it. The literature discusses different means by which MNEs can enable successful knowledge-sharing, including direct contact, employee mobility, task forces, and organizational liaisons, among others. Such transfers, however, are a precondition but not a guarantee to learning. Recipient persons or subsidiaries need to show a readiness to accept new knowledge and to use it. This readiness depends on recipient subsidiaries’ absorptive capacity, the receptivity of its organizational culture, the quality of internal communication, and effectiveness of internal processes. Another important means by which MNEs learn is by transferring and diffusing best practices within their internal networks (Luo, 2020). Different subsidiaries may develop innovative practices that could be useful in enhancing sister units’ productivity. The success of such knowledge transfers hinges greatly on the presence of champions who connect different units/subsidiaries and explain the value of knowledge being exchanged (Shane, Venkataraman & MacMillan, 1995). Success depends also on mutual trust and support; using the knowledge being transferred often demands adjustments by recipient subsidiaries. Moreover, in MNEs, learning occurs on the fringes of their operations, away from these companies’ major power centers. Having champions and gatekeepers can help identify potentially valuable knowledge and ensure its transfer. Shaker A. Zahra

Shaker A. Zahra

References

Argote, L. (2012). Organizational learning: Creating, retaining and transferring knowledge. Springer Science & Business Media. Bower, G. H., & Hilgard, E. R. (1981). Theories of learning. Prentice-Hall. Dierickx, I., & Cool, K. (1989). Asset stock accumulation and sustainability of competitive advantage. Management Science, 35(12), 1504–1511. Dougherty, D. (1992). Interpretive barriers to successful product innovation in large firms. Organization Science, 3(2), 179–202. Fiol, C. M., & Lyles, M. A. (1985). Organizational learning. Academy of Management Review, 10(4), 803–813. Govindarajan, V., & Ramamurti, R. (2011). Reverse innovation, emerging markets, and global strategy. Global Strategy Journal, 1(3–4), 191–205. Grant, R. M. (1996). Toward a knowledge-based theory of the firm. Strategic Management Journal, 17(S2), 109–122. Gupta, A. K., & Govindarajan, V. (1991). Knowledge flows and the structure of control within multinational corporations. Academy of Management Review, 16(4), 768–792. Gupta, A. K., & Govindarajan, V. (2000). Knowledge flows within multinational corporations. Strategic Management Journal, 21(4), 473–496. Hertenstein, P., & Alon, I. (2021). A learning portal model of emerging markets multinationals. Global Strategy Journal, 12(1), 134–162. Huber, G. P. (1991). Organizational learning: The contributing processes and the literatures. Organization Science, 2(1), 88–115. Knight, G. A., & Kim, D. (2009). International business competence and the contemporary firm. Journal of International Business Studies, 40(2), 255–273. Kogut, B., & Zander, U. (1992). Knowledge of the firm, combinative capabilities, and the replication of technology. Organization Science, 3(3), 383–397. Kogut, B., & Zander, U. (1993). Knowledge of the firm and the evolutionary theory of the multinational corporation. Journal of International Business Studies, 24(4), 625–645. Kogut, B., & Zander, U. (2003). Knowledge of the firm and the evolutionary theory of the multinational corporation. Journal of International Business Studies, 34(6), 516–529. Lam, A. (2003). Organizational learning in multinationals: R&D networks of Japanese and US MNEs in the UK. Journal of Management Studies, 40(3), 673–703. Leonard, D. (1995). Wellsprings of knowledge. Harvard Business School Press. Li, J., & Fleury, M. T. L. (2020). Overcoming the liability of outsidership for emerging market

Learning in and by MNEs  273 MNEs: A capability-building perspective. Journal of International Business Studies, 51(1), 23–37. Luo, Y. (2020). Adaptive learning in international business. Journal of International Business Studies, 51(9), 1547–1567. Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization Science, 5(1), 14–37. Nonaka I., & Takeuchi H. (1995). The Knowledge Creating Company. Oxford University Press. Noorderhaven, N., & Harzing, A. W. (2009). Knowledge-sharing and social interaction within MNEs. Journal of International Business Studies, 40(5), 719–741. Rui, H., Cuervo-Cazurra, A., & Un, C. A. (2016). Learning-by-doing in emerging market multinationals: Integration, trial and error, repetition, and extension. Journal of World Business, 51(5), 686–699. Shane, S., Venkataraman, S., & MacMillan, I. (1995). Cultural differences in innovation championing strategies. Journal of Management, 21(5), 931–952. Szulanski G. (1996). Exploring internal stickiness: Impediments to the transfer of best practice within the firm. Strategic Management Journal, 17(Special Issue, Winter), 27–43. Tallman, S., & Chacar, A. S. (2011). Knowledge accumulation and dissemination in MNEs: A practice-based framework. Journal of Management Studies, 48(2), 278–304. Tell, F. (2013). Knowledge articulation. In The Palgrave encyclopedia of strategic man-

agement, eds Mie Augier & David J. Teece. Palgrave Macmillan. Tsang, E. W., & Zahra, S. A. (2008). Organizational unlearning. Human Relations, 61(10), 1435–1462. Zahra, S. A., & George, G. (2002). Absorptive capacity: A review, reconceptualization, and extension. Academy of Management Review, 27(2), 185–203. Zahra, S. A., & Hashai, N. (2022). The effect of MNEs’ technology startup acquisitions on small open economies’ entrepreneurial ecosystems. Journal of International Business Policy, 1–19. Zahra, S. A., Ireland, R. D., & Hitt, M. A. (2000). International expansion by new venture firms: International diversity, mode of market entry, technological learning, and performance. Academy of Management Journal, 43(5), 925–950. Zahra, S. A., Neubaum, D. O., & Hayton, J. (2020). What do we know about knowledge integration: Fusing micro-and macro-organizational perspectives. Academy of Management Annals, 14(1), 160–194. Zahra, S. A., Petricevic, O., & Luo, Y. (2022). Toward an action-based view of dynamic capabilities for international business. Journal of International Business Studies, 1–18. Zeng, Y., Shenkar, O., Lee, S. H., & Song, S. (2013). Cultural differences, MNE learning abilities, and the effect of experience on subsidiary mortality in a dissimilar culture: Evidence from Korean MNEs. Journal of International Business Studies, 44(1), 42–65. Zollo, M. (2009). Superstitious learning with rare strategic decisions: Theory and evidence from corporate acquisitions. Organization Science, 20(5), 894–908.

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68. Legal distance Institutions are a distinguishing feature of international strategic management, whereby the differences between countries’ institutions are pivotal to managers formulating and implementing successful international strategies for their firms. The concept of institutions encapsulates formal rules, laws, and regulations, and informal cultural norms and values; these dimensions reflect the “rules of the game” within a national context. Multinational firms doing business abroad are exposed to institutional environments different from their home country, generating unique difficulties and opportunities. These differences are often termed institutional distance or the extent of dissimilarity between two national institutional environments (Kostova, 1999). Legal distance, a specific case of formal institutional distance, reflects the dissimilarity between two countries’ legal systems (White et al., 2013). This entry overviews research on legal distance and its implications for international strategic management. The primary functions of legal institutions or the legal system are to interpret and enforce laws as well as to facilitate conflict resolution and redress. Research adopts varying nomenclature to capture various forms of legal distance and its impact on firm strategy. These studies examine differences in the rule of law, legal origins, intellectual property rights protection, and judicial independence. For example, Fainshmidt et al. (2014) examine legal distance based on the rule of law or “the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, the police, and the courts, as well as the likelihood of crime and violence” (Roy & Oliver, 2009: 780). They empirically analyze intellectual property disputes of multinational corporations and find that higher legal distance increases the likelihood of choosing negotiation over litigation to resolve the dispute. Multinational firms may prefer negotiating a resolution to a dispute as a means to avoid dealing with unfamiliar judicial systems. Conversely, when the other party originates from a country with a similar legal environment, the dispute occurred despite the shared legal institutions, making litigation more likely.

Differences between the legal systems of nations influence important executive decisions, such as the mode of entry into a host country (Estrin et al., 2009), location choice (Pogrebnyakov & Maitland, 2011), and joint venture partner selection (Roy & Oliver, 2009). For example, firms tend to opt for international joint ventures when legal distance is low because it reduces investment costs (Brouthers et al., 2008). When legal distance is high, however, multinational firms opt for operation modes with more control because the legal system is less desirable as a mechanism to protect rights over resources. The importance of legal distance is evident in adjacent research on strategic financial decisions as well. With legal distance reflecting differences in “bureaucratic patterns due to colonial ties, language, religion, and the legal system” (Gu et al., 2019: 148), prior research finds higher legal distance increases the cost of foreign debt. Because standards and scrutiny differ substantially across capital markets, firms often aim to reduce liabilities when sourcing debt. The legal proximity between the multinational firm’s home and host countries can reduce the cost of debt, and foreign bond issuance can further curtail the liabilities of operating in distant environments. Hence, legal distance can shape the degree of uncertainty, trust, and motives of two parties, even in complex capital markets. Similarly, in international finance and corporate governance research, legal distance has been prominent in highlighting the link between legal origins and corporate governance practices. La Porta et al. (1998, 1999) categorize countries according to their type of legal system, with the underlying assumption that historical institutional and cultural conditions have resulted in distinct archetypes of national legal traditions. A good example is financial markets being generally more developed in common law countries compared with their civil law counterparts due to the emphasis on private property rights among the former. Perhaps not surprisingly, differences between countries’ legal traditions can affect foreign ownership, international M&A activity, and the tendency to seek external capital as well (Cumming et al., 2017). For example, Ellis et al. (2017) show that stock price reactions are more positive when the target firm is from a country with a worse legal system than the one in the acquirer’s home country. Stav Fainshmidt and Daniel S. Andrews

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References

Brouthers, K. D., Brouthers, L. E., & Werner, S. (2008). Real options, international entry mode choice and performance. Journal of Management Studies, 45(5), 936–960. Cumming, D., Filatotchev, I., Knill, A., Reeb, D. M., & Senbet, L. (2017). Law, finance, and the international mobility of corporate governance. Journal of International Business Studies, 48(2), 123–147. Ellis, J. A., Moeller, S. B., Schlingemann, F. P., & Stulz, R. M. (2017). Portable country governance and cross-border acquisitions. Journal of International Business Studies, 48(2), 148–173. Estrin, S., Baghdasaryan, D., & Meyer, K. E. (2009). The impact of institutional and human resource distance on international entry strategies. Journal of Management Studies, 46(7), 1171–1196. Fainshmidt, S., White III, G. O., & Cangioni, C. (2014). Legal distance, cognitive distance, and conflict resolution in international business intellectual property disputes. Journal of International Management, 20(2), 188–200. Gu, Y. J., Filatotchev, I., Bell, R. G., & Rasheed, A. A. (2019). Liability of foreignness in capital markets: Institutional distance and the cost

of debt. Journal of Corporate Finance, 57, 142–160. Kostova, T. (1999). Transnational transfer of strategic organizational practices: A contextual perspective. Academy of Management Review, 24(2), 308–324. La Porta, R. L., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of Political Economy, 106(6), 1113–1155. La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (1999). Corporate ownership around the world. The Journal of Finance, 54(2), 471–517. Pogrebnyakov, N., & Maitland, C. F. (2011). Institutional distance and the internationalization process: The case of mobile operators. Journal of International Management, 17(1), 68–82. Roy, J. P., & Oliver, C. (2009). International joint venture partner selection: The role of the host-country legal environment. Journal of International Business Studies, 40(5), 779–801. White III, G. O., Hadjimarcou, J., Fainshmidt, S., & Posthuma, R. A. (2013). MNE home country cultural norms and conflict strategy fit in transnational business contract disputes. International Business Review, 22(3), 554–567.

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69. Liability of foreignness The theory of the liability of foreignness provides a crucial lens with which to better understand the dynamics of the internationalization of firms, and has implications for multinational enterprise (MNE) conduct and performance in foreign markets. The role of foreignness becomes all the more important post-COVID-19, which has intensified anti-globalization sentiments or, at the very least, slowed down globalization (Ciravegna & Michailova, 2022). Broadly speaking, the liability of foreignness (LOF) refers to the extra costs that firms venturing abroad experience compared with domestic firms. These additional costs derive from “the unfamiliarity of the environment, from cultural, political, and economic differences, and from the need for coordination across geographic distances” (Zaheer, 1995, p. 341). At a first glance, the LOF conceptualization seems to have a lot in common with the theorizing on the cost of doing business abroad (CDBA) (e.g., Eden & Miller, 2004; Hymer, 1960; Kindleberger, 1969). Though closely related, LOF research is distinct in its social emphasis—on the institutional and relational costs of conducting business abroad—shifting attention away from the dominant focus in CDBA research on market-based economic costs. The liabilities arise because, compared with a local player, a foreign player may fail to tap into local resources and knowledge, given its lack of understanding of local conditions and lack of network relationships in the host country. Moreover, a firm may face costs due to its unfamiliarity with local institutions because of the legal, normative, and cognitive distances between its home and host countries, which can negatively influence its legitimacy and result in discrimination (Kostova, 1999; Kostova & Zaheer, 1999). A recent development in LOF is the discussion that foreignness may be an asset (advantages of foreignness or AOF) under certain conditions, such as firms internationalizing for innovation (e.g., Shi & Hoskisson, 2012; Un, 2016). In the case of innovation generation, institutional deviance may allow for better knowledge recombination opportunities, and product exoticness may yield

positive legitimacy evaluations in foreign lands. IB studies have begun to reconcile the existence of LOF and AOF (see An, Zagelmeyer, & Rygh, 2021, for a review; Edman, 2016), leading to a spurt in new theoretical viewpoints and empirical contexts to further tease apart the nuances of the foreignness construct. For example, although institutional theory and social network theory have dominated earlier discussions about the sources of the liabilities of foreignness, novel theorizing with a behavioral focus, for example, drawing on identity-based views or the creative cognition perspective, have been used recently to broaden the discussion on the sources and impacts of foreignness (Edman, 2016; Kumar, Deodhar, & Zaheer, 2022). These new socio-cognitive approaches gain salience, particularly as we move into a world of separation between the locus of output and the location of work, spurred by digitalization. Digitalization is therefore an exciting new direction in which to advance LOF research. Given a firm’s ability to be international without being physically present raises the question of what the definition of a foreign firm is in the first place. In other words, firms can be digitally international without being physically international. Such a physical disconnect from a host location makes cognitive biases from both the home and host locations simultaneously relevant (see Kumar et al., 2022), providing a fertile area for future research. Additionally, digitalization and the associated new modes of organizing work and innovation, namely, sourcing work to a “crowd” of globally scattered atomistic workers outside the boundaries of the firm, raises another question about what is the appropriate level—headquarters, subsidiary, managers, or workers—at which LOF operates. Furthermore, it is well known that foreignness has a temporal element to it (Zaheer & Mosakowski, 1997). Whether the liability of foreignness dissipates faster in a digital setting due to increased availability of information remains to be seen. An ongoing debate in LOF research is whether LOF represents a difference in kind or a difference in degree. In its seminal and still dominant conceptualization, the LOF construct is reflective of a difference-in-kind viewpoint, i.e., singular categorization of all foreigner firms in a particular host country, wherein the additional cost arises by virtue

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of being a foreigner and not a local firm (Luo & Mezias, 2002; Un, 2011; Zaheer, 2002). At the same time, recently, scholars have focused on the question of whether there exist differences among foreign firms operating in the same host country, or the degree to which firms differ in their foreignness, by specifying the home–host country distance itself (e.g., institutional distance and cultural distance) as foreignness, implying a difference-in-degree viewpoint (Brannen, 2004; Eden & Miller, 2004). We believe in the authenticity of both viewpoints, and note that the presence of one does not negate the value of the other. In this vein, a researcher’s inclination to use one approach over the other should be determined by the research question and theoretical and empirical considerations. For example, if the research question is focused on comparing foreign with domestic firms, a difference-in-kind approach, with controls, if needed, for home–host distances, is appropriate. For a different research question, where the primary goal is to distinguish between foreign firms from different countries, using distance itself as a measure of degree of foreignness may be warranted. Furthermore, to the extent that a foreign subunit has leeway in how it presents itself, a difference-in-degree approach could be more appropriate; whereas if all foreigners are subject to discriminatory host-country regulations or host-consumer biases, a difference-in-kind perspective may be more suitable (see Edman, 2016). Additionally, a more nuanced approach may be needed to parse out LOF from other related concepts, such as liabilities of origin (Ramachandran & Pant, 2010), liabilities of outsidership (Johanson & Vahlne, 2015), and liabilities of multinationality (Sethi & Judge, 2009). Pankaj Kumar and Srilata Zaheer

References

An, Y. H., Zagelmeyer, S., & Rygh, A. (2021). Between liability and asset: A critical review of 25 years of foreignness research in international business. Critical Perspectives on International Business (1742–2043). Emerald Publishing Limited. Brannen, M. Y. (2004). When Mickey loses face: Recontextualization, semantic fit, and the semi-

otics of foreignness. Academy of Management Review, 29(4), 593–616. Ciravegna, L., & Michailova, S. (2022). Why the world economy needs, but will not get, more globalization in the post-COVID-19 decade. Journal of International Business Studies, 53(1), 172–186. Eden, L., & Miller, S. R. (2004). Distance matters: Liability of foreignness, institutional distance and ownership strategy. In Theories of the Multinational Enterprise: Diversity, Complexity and Relevance. Emerald Group Publishing Limited. Edman, J. (2016). Reconciling the advantages and liabilities of foreignness: Towards an identity-based framework. Journal of International Business Studies, 47(6), 674–694. Hymer, S. H. (1960). The international operations of national firms: A study of direct foreign investment (Doctoral dissertation, Massachusetts Institute of Technology). Johanson, J., & Vahlne, J. E. (2015). The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. In International Business Strategy (pp. 33–59). Routledge. Kindleberger, C., 1969. American business abroad. University Press, New Haven, CT. Kostova, T. (1999). Transnational transfer of strategic organizational practices: A contextual perspective. Academy of Management Review, 24(2), 308–324. Kostova, T., & Zaheer, S. (1999). Organizational legitimacy under conditions of complexity: The case of the multinational enterprise. Academy of Management Review, 24(1), 64–81. Kumar, P., Deodhar, S. J., & Zaheer, S. (2022). Cognitive sources of liability of foreignness in crowdsourcing creative work. Journal of International Business Studies, 1–31. Luo, Y., & Mezias, J. M. (2002). Liabilities of foreignness: Concepts, constructs, and consequences. Journal of International Management, 8(3), 217–221. Ramachandran, J., & Pant, A. (2010). The liabilities of origin: An emerging economy perspective on the costs of doing business abroad. In The Past, Present and Future of International Business & Management. Emerald Group Publishing Limited. Sethi, D., & Judge, W. (2009). Reappraising liabilities of foreignness within an integrated perspective of the costs and benefits of doing business abroad. International Business Review, 18(4), 404–416. Shi, W., & Hoskisson, R. E. (2012). Advantages of foreignness: Benefits of creative institutional deviance. In Institutional Theory in International Business and Management (Vol.

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278  Encyclopedia of international strategic management 25, pp. 99–125). Emerald Group Publishing Limited. Un, C. A. (2011). The advantage of foreignness in innovation. Strategic Management Journal, 32(11), 1232–1242. Un, C. A. (2016). The liability of localness in innovation. Journal of International Business Studies, 47(1), 44–67. Zaheer, S. (1995). Overcoming the liability of

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foreignness. Academy of Management Journal, 38(2), 341–363. Zaheer, S. (2002). The liability of foreignness, redux: A commentary. Journal of International Management, 8(3), 351–358. Zaheer, S., & Mosakowski, E. (1997). The dynamics of the liability of foreignness: A global study of survival in financial services. Strategic Management Journal, 18(6), 439–463.

70. Location advantages In the international business (IB) literature, “location advantages” or “locational advantages” (henceforth the latter) are commonly discussed by reference to one of two prominent IB frameworks, either the OLI paradigm of Dunning or the FSA–CSA matrix originally presented by Rugman (1981) and later developed by Rugman and Verbeke (see entry on firm-specific advantages in this book). The basic definition and treatment of these advantages in both paradigms (locational advantages in the former and country-specific advantages (CSAs) in the latter) is very similar (Rugman, 2010), the main difference being that in the OLI paradigm, locational advantages are mainly discussed in connection with outward investment to host countries. This entry will discuss CSAs in the context of the OLI paradigm. In the OLI (ownership, location, internalization) paradigm, the ownership advantages of multinational enterprises (MNEs) are exemplified by knowledge intangibles, such as proprietary technology or brands, which form the sources of sustainable competitive advantage of the MNE (Dunning, 2009; Dunning & Lundan, 2008a). These advantages are imprinted by the locational attributes of the home country, and thus reflect the locational advantages or disadvantages present there. The internalization factor explains why a firm would choose to undertake particular activities inside the firm, while other activities are carried out using purely contractual or cooperative modalities enforced by an equity stake or a contract. Locational advantages cover the wide variety of characteristics that distinguish one location from another, specifically the characteristics of the host country. We can distinguish three different types of locational characteristics, namely natural resources, created resources (including institutions) and agglomeration economies. The first and most obvious group of locational characteristics is related to the presence of natural resources or other physical and geographical characteristics of a location. Such resources can include mineral deposits, agricultural growing conditions or other natural attributes, such as the availability of fresh water, which are unevenly distributed between countries. These resources also typ-

ically include a large but relatively unskilled labor force. Such characteristics can form a strong locational advantage, but it is clear that such differences in natural conditions or geography can also present disadvantages. For example, landlocked countries typically suffer from longer distribution routes (Faye, McArthur, Sachs, & Snow, 2004), while countries in the northern hemisphere have to account for the extremes of cold weather. The strong reliance of some developing economies on the exploitation of natural resources, particularly petroleum, has also been associated with the so-called resource curse (Ross, 2015). This can take different forms, but the common factor is the detrimental effect of the reliance on natural resources on governance quality and the subsequent negative effects on economic growth. The second major category is created resources, which comprise any input relevant to the value-adding process of firms that is created or enhanced by human ingenuity. In technology-intensive sectors, typical examples include firms that thrive in the proximity of research institutions that provide conduits for knowledge transfer or those that benefit from local research and development subsidies (Lundan & Cantwell, 2020). Other advantages relate to different aspects of the communication and transportation infrastructure, with port cities being particularly attractive for certain types of trade-intensive cross-border activity. Created advantages that contribute to a high quality of life, including schools and universities, cultural amenities and other recreational opportunities, also offer locational advantages, particularly for headquarters activities and market-seeking firms (Belderbos, Du, & Slangen, 2020; Côté, Estrin, & Shapiro, 2020; Florida, 2002). Such created endowments have received increasing attention over the past two decades in the research that has focused on the effects of institutional quality or good governance on economic growth and MNE activity (Acemoglu & Johnson, 2005; Dunning & Lundan, 2008b; North, 1990; Rodrik, Subramanian, & Trebbi, 2004). In such studies formal institutional quality is often proxied by multidimensional indicators, such as the Economic Freedom of the World Index of the Fraser Institute or the World Governance Indicators of the World Bank, which covers aspects such as voice and accountability, political stability and absence

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of violence/terrorism, government effectiveness, regulatory quality and rule of law. Well-functioning institutions are thought to be an essential precondition for the exploitation of the natural and created resources available in a location with low transaction costs. Indeed, the distribution of FDI in the global economy, which continues to be concentrated in developed countries and a relatively small number of emerging markets, confirms the basic notion that countries with poor institutional quality generally attract little investment, and when they do, this is often in connection with natural resources (UNCTAD, 2022). An example of such a scarce and very unevenly distributed resource is cobalt, which is used in electric batteries and where investment continues to take place in the Democratic Republic of the Congo despite its poor governance rating. Conversely, developed economies all score quite highly on such governance dimensions, so good governance alone is not likely to be a distinguishing locational factor between them, but simply a precondition for the exploitation of the created and natural resources. The focus on institutions as one aspect of home- and host-country location factors has also led to a number of studies that have explored not only the effects of the quality of governance, but whether the institutional distance between countries matters for MNEs (Eden & Miller, 2004; Xu & Shenkar, 2002). The idea is that apart from the effects of governance quality, the institutional distance between the home and host countries matters because it might increase the liability of foreignness and make the activities of MNEs in distant host countries more difficult (Belderbos et al., 2020). While such measures have some known shortcomings (van Hoorn & Maseland, 2016)—such as the fact that institutional distances between countries are asymmetrical, meaning that the effects of institutional distance for a German firm in Ghana might be quite different from those of a Ghanaian firm in Germany—such studies have helped to attract focus on those aspects of the home- and host-country locational environment that can lead to an increased perception of distance. Finally, although it is not typically discussed in connection with institutional distance, the literature on MNE taxation is also effectively focusing on institutional distance Sarianna Lundan

between countries, since taxation is one area of the institutional environment where countries have explicitly competed with each other to attract investment. The Base Erosion and Profit Shifting (BEPS) initiative of the OECD and the global minimum tax due to be implemented in 2023 is aimed at curbing this competition and the tax-motivated income-shifting by MNEs across borders (Lorraine Eden, 2020; UNCTAD, 2022). The ultimate aim of the project is for home and host countries to get the share of the tax revenue that is proportionate to the activities of MNEs in the country, and for locational competition to take place in terms of the fundamentals of natural and created resources and institutional quality. The third category of locational advantages arises from agglomeration economies. Agglomeration refers to the clustering of similar activities in a particular location and it is subject to virtuous cycles, where the presence of a large multinational firm sends a credible signal to other investors about the locational advantages available at the location. Such signaling may lead to agglomeration, whereby clusters of activity develop in a location which attracts more qualified labor to the area, which in turn makes the location attractive for new investors (Tan & Meyer, 2011). However, as is the case with natural and created advantages, agglomeration economies also have their associated disadvantages. These are manifested in crowding-out in the labor market, rising wages, talent shortages, knowledge dissipation as well as physical congestion and the associated pollution (Becker, Driffield, Lancheros, & Love, 2020). From the previous discussion it is clear that the locational advantages and disadvantages are not always, or even typically, experienced at the level of the country. Rather, they are generated in clusters or other agglomerations where firms interact with each other as well as with other market and nonmarket participants (see the entry on Porter’s diamond model in this book). Accordingly, more attention has been paid in recent research to the growing importance of cities as preferred sites for MNEs, whether for manufacturing, services, or research and development activities (Chakravarty, Goerzen, Musteen, & Ahsan, 2021), or for MNE coordination and control activities (see Goerzen, Asmussen, & Nielsen, 2013, and the entry on global

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cities in this book). Cities can thus present quite a different locational profile than the country as a whole, which explains why we sometimes see investment in countries with relatively poor governance and other locational attributes at the national level. An even more specific case of this is special economic zones, which are created to allow countries to overcome deficiencies in infrastructure and governance by providing dedicated facilities and tailored regulation to lower the risks for investors (UNCTAD, 2019). The final issue related to locational advantages concerns the ability of the MNE to fully exploit such advantages. By definition, unlike ownership-specific advantages, locational advantages are supposed to be available to all firms in a particular area. In practice, however, there can be substantial barriers to the ability of firms to access and develop these resources. This bundling of ownership and locational advantages that happens in the host country is often beset by the unavailability of resources because the local resource owners restrict access to resources in the hopes of extracting rents, or because the local firms lack the capacity to effectively partner with the foreign investor to enable the mutual exploitation of local resources (Hennart, 2009). Furthermore, the choice of different forms of governance by MNEs in the host country, including equity joint ventures, contracts, or full ownership, can be seen as the outcome of the transferability of ownership advantages and the extent of availability of local resources to a specific firm. The same applies to locational disadvantages, which in an analogous manner are assumed to be difficult for all economic actors to manage. Nonetheless, there are many examples that demonstrate that while particular host-country conditions are nearly impossible for some firms to overcome, other firms find them easier to navigate. In the late 1980s the US government launched the Structural Impediments Initiative with Japan in response to complaints by American firms that found the market impossible to enter due to processes that were opaque and difficult for outsiders to follow (Kreinin, 1988). This did not prevent some American firms from succeeding in the Japanese market, and the kinds of political or institutional risks which deter most investors can sometimes be overcome thanks to prior organizational experience or interpersonal connections, specific

to a firm and the location (Delios & Henisz, 2003; Mbalyohere, Lawton, Boojihawon, & Viney, 2017). Sarianna Lundan

References

Acemoglu, D., & Johnson, S. 2005. Unbundling Institutions. Journal of Political Economy, 113(5): 949–995. Becker, B., Driffield, N., Lancheros, S., & Love, J. H. 2020. FDI in hot labour markets: The implications of the war for talent. Journal of International Business Policy, 3(2): 107–133. Belderbos, R., Du, H. S., & Slangen, A. 2020. When do firms choose global cities as foreign investment locations within countries? The roles of contextual distance, knowledge intensity, and target-country experience. Journal of World Business, 55(1): 101022. Chakravarty, D., Goerzen, A., Musteen, M., & Ahsan, M. 2021. Global cities: A multi-disciplinary review and research agenda. Journal of World Business, 56(3): 101182. Côté, C., Estrin, S., & Shapiro, D. 2020. Expanding the international trade and investment policy agenda: The role of cities and services. Journal of International Business Policy, 3(3): 199–223. Delios, A., & Henisz, W. J. 2003. Political hazards, experience, and sequential entry strategies: The international expansion of Japanese firms, 1980–1998. Strategic Management Journal, 24(11): 1153–1164. Dunning, J. H. 2009. Location and the multinational enterprise: A neglected factor? Journal of International Business Studies, 29(1): 5–19. Dunning, J. H., & Lundan, S. M. 2008a. Multinational Enterprises and the Global Economy, Second Edition. Cheltenham: Edward Elgar Publishing. Dunning, J. H., & Lundan, S. M. 2008b. Institutions and the OLI paradigm of the multinational enterprise. Asia Pacific Journal of Management, 25(4): 573–593. Eden, L. 2020. Taxing multinationals: The GloBE Proposal for a global minimum tax. Tax Management International Journal, 49(1): 1–10. Eden, L., & Miller, S. R. 2004. Distance matters: Liability of foreignness, institutional distance and ownership strategy. Advances in International Management, 16: 187–221. Faye, M. L., McArthur, J. W., Sachs, J. D., & Snow, T. 2004. The challenges facing landlocked developing countries. Journal of Human Development, 5(1): 31–68. Florida, R. 2002. The Rise of the Creative Class. New York: Basic Books. Goerzen, A., Asmussen, C. G., & Nielsen, B. B. 2013. Global cities and multinational enter-

Sarianna Lundan

282  Encyclopedia of international strategic management prise location strategy. Journal of International Business Studies, 44: 427–450. Hennart, J. F. 2009. Down with MNE-centric theories! Market entry and expansion as the bundling of MNE and local assets. Journal of International Business Studies, 40(9): 1432–1454. Kreinin, M. 1988. How closed is the Japanese economy? Additional evidence. The World Economy, 11(December): 529–542. Lundan, S., & Cantwell, J. 2020. The local co-evolution of firms and governments in the Information Age. Journal of International Business Studies, 51(9): 1516–1528. Mbalyohere, C., Lawton, T., Boojihawon, R., & Viney, H. 2017. Corporate political activity and location-based advantage: MNE responses to institutional transformation in Uganda’s electricity industry. Journal of World Business, 52(6): 743–759. North, D. C. 1990. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. Rodrik, D., Subramanian, A., & Trebbi, F. 2004. Institutions rule: The primacy of institutions over geography and integration in economic

Sarianna Lundan

development. Journal of Economic Growth, 9(2): 131–165. Ross, M. L. 2015. What have we learned about the resource curse? Annual Review of Political Science, 18: 239–259. Rugman, A. M. 1981. Inside The Multinationals: The Economics of Internal Markets. London: Croom Helm. Rugman, A. M. 2010. Reconciling internalization theory and the eclectic paradigm. Multinational Business Review, 18(2): 1–12. Tan, D., & Meyer, K. E. 2011. Country-of-origin and industry FDI agglomeration of foreign investors in an emerging economy. Journal of International Business Studies, 42(4): 504–520. UNCTAD. 2019. World Investment Report 2019: Special Economic Zones. New York and Geneva: United Nations Conference on Trade and Development. UNCTAD. 2022. World Investment Report 2022: International Tax Reforms and Sustainable Investment. New York and Geneva: United Nations Conference on Trade and Development. van Hoorn, A., & Maseland, R. 2016. How institutions matter for international business: Institutional distance effects vs institutional profile effects. Journal of International Business Studies, 47(3): 374–381. Xu, D., & Shenkar, O. 2002. Institutional distance and the multinational enterprise. Academy of Management Review, 27(4): 608–618.

71. Metanational company A metanational company identifies, locates, accesses, and melds (i.e., melts and welds) elements of knowledge – technological, market and societal – from multiple locations around the world to feed its innovation processes. The term “metanational” was coined in 2001 by Doz, Santos, and Williamson, borrowing the prefix “meta” from the Greek to denote the “beyond, but not above” nations character of a metanational firm. It might be more accurate, though, to write about metanational innovations rather than metanational firms, as the definition does not prejudge how the supply chain, the manufacturing operations, and the downstream activities, such as service and marketing and sales, are deployed and configured geographically. A firm that draws upon dispersed and differentiated sources of knowledge for its innovation process can also be metanational without being multinational (for instance, by relying on multiple partners, worldwide, to contribute dispersed and differentiated knowledge). In the view of its originators, the concept of a metanational firm is both a descriptive empirical model (drawn from inductive reasoning based on detailed research on the management of a few quasi-ideal type outliers), and a deductive, normative construct, addressing the issue of harnessing dispersed and differentiated knowledge “pockets” spread around the world to create unique innovative knowledge-melding combinations – be they products, services, or new business models. And, of course, metanational firms differ from traditional multinational or transnational firms, both conceptually and empirically. Most multinational firms expanded from a lead location, a home base usually provided by their country of origin, drawing on the strength of its competencies (or, in some cases, the fact that the inventors of early products and technologies that enabled internationalization simply lived there, for instance the Philips brothers in Eindhoven in the Netherlands). Transnational firms, as put forward by Bartlett and Ghoshal (1989), may locate the headquarters, and center of gravity, of each of their businesses in a different country, but this country usually pro-

vided a lead market and the capabilities to address it. Different businesses thus have different home bases. “Reverse innovation” simply denotes that innovation originates from a country that is not the home country of the firm, but the term does not convey that elements of knowledge needed for a given innovation may also be dispersed and differentiated across borders, calling for multiple locations in different countries to contribute to the innovation. Likewise, “centers of excellence,” where a specific product or competence mandate is assigned to a subsidiary in a multinational company, mostly rely on the knowledge available locally, the importance of which being usually the very justification for their designation as a center of excellence. Metanational companies differ from all those mentioned above in that the melding of knowledge, from dispersed and differentiated sources on technology, market understanding, and other capabilities, gives them a distinctive advantage: they can achieve innovations that competitors dependent on only one main source of knowledge are unable to match. And metanational innovation is more than just developing some new products or services; it may also enable firms to develop valuable business models, strategies, and capabilities that rivals may find hard to emulate. For instance, Starbucks was built on a combination of very diverse knowledge: Italian coffee roasting technology, the European concept of a “café,” and U.S. expertise in managing retail chains, fast food service routines, logistics, and staff training and incentive systems. This allowed Starbucks to reinvent the selling of a cup of coffee in the U.S., making it a pleasant, differentiated (and expensive) consumer experience. Metanational innovation capabilities rest on three key processes: (1) prospecting and sensing new knowledge; (2) mobilizing and melding knowledge from multiple differentiated and dispersed sources; and (3) deploying, leveraging, and scaling up the innovation. Prospecting and sensing: Knowing what to look for, discovering where to find it and how to tap into new, promising sources of knowledge. This may involve highly targeted efforts, such as a Japanese cosmetics company hiring French fragrance creators and managers, locating a facility for development and manufacturing in the French fragrance cluster, and acquiring high-end beauty salons to understand how perfumes and fra-

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grances are used in France (Japan, itself, not being a significant market for perfumes). The search can also be less focused and much broader, as with open innovation approaches (Chesbrough, 2010). In between, companies can use small teams of roving investigators tasked with the discovery of emerging technologies and new customer applications, the creation of a network of contacts, and often collaborations to follow, access, and use these. A network of alliances with lead customers, suppliers, universities, research institutes, and even competitors and potential disruptors extend the sensing criteria of the metanational company, worldwide (Wilson & Doz, 2011). Selectively assessing knowledge and avoiding redundancies or excessive fragmentation in sources of knowledge being used is another capability of metanational companies, as the multiplication of knowledge sources involves exponential costs of coordination and integration and complicates melding. Successful metanational companies limit the number of contributing locations for specific projects. A survey found that four different contributing locations was more than average among companies. Mobilizing: More than other multinationals (that historically have transferred the technologies and know-how created centrally to their subsidiary, in a knowledge projection mode), metanationals face the challenge of bringing together and melding heterogeneous elements of knowledge. Bringing together codified, explicit knowledge, such as blueprints or chemical formulas, is easy, and, indeed, scientists have long been collaborating and writing papers with co-authors on the other side of the world. But much of the knowledge that has the greatest potential for unique innovations is complex: tacit, context-dependent, and collectively held. In other words, it is

Yves Doz

embedded in a local context and cannot be easily moved to another location. In metanationals, performing the knowledge-melding process, where the hardest-to-move knowledge resides, and bringing other knowledge elements, makes sense. However, melding cannot take place in a vacuum; it needs a crucible into which knowledge elements can converge. Proponents of the metanational concept use the term “magnet” to characterize this, and argue that key customers in B2B businesses, or core technology clusters or lead markets, can be such magnets, depending on circumstances. A product concept itself can be a magnet, providing an architectural design within which to fit the various knowledge elements. However, this calls for the architectural design to be defined, limiting the possibility of major radical innovation. Deploying and leveraging: Here, the model of a metanational firm is not significantly different from that of any firm. The company needs to be able to accept, accommodate and build on innovations. Yves Doz

References

Bartlett, C. A. & Ghoshal, S. (1989). Managing Across Borders: The Transnational Solution, 1st edition. Boston, MA: Harvard Business School Press. Chesbrough, H. (2010). Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era. Jossey-Bass. Doz, Y., Santos, J., & Williamson, P. (2001). From Global to Metanational: How Companies Win in the Global Knowledge Economy. Boston, MA: HBS Press. Wilson, K., & Doz, Y. (2011). Agile Innovation: A Footprint Balancing Distance and Immersion. California Management Review, 53(2), 6–26.

72. Migrants and migration The UN Migration Agency (IOM) broadly defines an international migrant as someone who is moving or has moved across an international border, whether voluntarily (e.g., economic migration) or involuntarily (e.g., fleeing persecution). Migration can also be internal, referring to persons who move within their country but away from their habitual place of residence (UN, 2022). Migration is a global phenomenon, inexorably connected with broader processes of economic development. Migration management has been typically understood as the prerogative of nation states; however, firms play an increasingly important role in shaping migration. In fact, labor shortages are the main driver of international migration. Businesses are also the primary beneficiaries of migrant labor, consumerism, and innovation (de Haas, Castles & Miller, 2020). Despite popular narratives of a staggering increase in international migration, the reality is that since the 1960s, the number of international migrants has grown at a pace roughly equal to the increase in the world’s total population, maintaining at around 3% of it (de Haas et al., 2019). A similar misconception applies to the global number of refugees. In the last 70 years, it has fluctuated between 0.1% and 0.4% of the world population, generally reflecting the outbreak or end of conflicts and oppression in origin countries (Fransen & de Haas, 2022; UNHCR, 2023).

Multidisciplinary research on migration

The roots of migration research lie in the Laws of Migration—the first known work devoted to the internal and international movements of people (Ravenstein, 1885, 1889). A century later, a multidisciplinary field of migration studies came into its own in response to the complexity and dynamism of the migration patterns of a globalizing world. Migration research has primarily focused on why and how migration occurs. The dominant paradigms are generally divided into functionalist and historical-structural perspectives (de Haas et al., 2020; de Haas, 2021). The former includes neo-classical equi-

librium and push–pull models and migrant network theories. Their shared features are generally a perspective of migration as a positive phenomenon that serves to optimize geographical differences in the supply and demand for labor, income gaps, and livelihood opportunities. In contrast, in historical– structuralist approaches, such as the dual labor-market theory, migration is seen as one of the ways that high- and low-income economies manifest their inequalities in economics and in power relationships. Recent research challenges both paradigms in favor of more attention to human agency. Additions to the literature increasingly highlight migrants’ capabilities and aspirations by focusing on their tactics and successes in overcoming structural constraints (de Haas, 2021). In examining these perspectives, it becomes evident that migration processes have been mostly seen in terms of the interaction between nation states (macro-structures) and individuals (micro-aspects). Largely unaddressed in migration studies is the relationship between migration and firms—a gap that has caught the attention of business scholars (Hajro et al., 2023).

Migration in management and business research

In the growing stream of research on migration, four broad areas have particular relevance for strategic management. These are sociopolitical–firm intersections, the migration–trade nexus, the alignment of migrant human capital with long-term organizational goals, and migrant entrepreneurship. Countries across all levels of development have used labor migration as a growth strategy. In the global race for labor, states develop policies to facilitate immigration of the highly skilled and, increasingly, of lower- and semi-skilled migrants. However, societal fears of an influx of undocumented migrants, of lost ethnic homogeneity, and of increased social and economic problems can result in anti-immigration backlashes, causing sudden shifts toward more restrictive immigration policies. For firms, this means top management often must navigate changing state policies on immigration that differ across national boundaries while addressing the needs of their companies. For example, in most migrant-receiving countries, visa pro-

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grams require that employers hire foreign workers while they are still in their places of origin (e.g., in the Philippines, if Filipino workers are recruited to factories in Hungary). This has resulted in complex transnational migrant worker recruitment networks. How firms design and implement strategies to cope with migrant recruitment-related issues and mitigate their risks is increasingly important in the face of stiff competition for labor (Hajro, Žilinskaitė, & Baldassari, 2022). As for the second area, the migration–trade nexus has been empirically supported. The literature identifies three channels—demand, supply, and impact on host countries— through which migrant networks impact trade. The demand effect occurs because migrants stimulate trade by demanding goods from their home countries. On the supply side, migrants can help firms in their countries of origin to obtain resources to aid their foreign expansion and facilitate knowledge transfers between locations (Kerr, 2019). And third, migrants affect the institutional environments of their host countries. Over time, the presence of a migrant diaspora in a certain location makes that location “less foreign and more attractive” for investment by firms from these migrants’ countries of origins (Shukla & Cantwell, 2018, p. 835). Each argument makes a case for migration as a positive effect on trade, implying that firms should make strategic choices to reap benefits. Movement of capital, goods, and ideas trigger the movement of people and vice versa, resulting in an ever-growing complexity of markets (de Haas et al., 2020). Regarding the third point, an emerging body of business literature explores the role of migrants as boundary spanners in organizational contexts. They are increasingly regarded as intermediaries whose transnational ties, multilingual skills, and ability to navigate different cultural schemas equip them for contributing innovation to their workplaces. Such individuals are also referred to in the literature as “biculturals,” “multiculturals,” or “insider-outsiders” (Brannen & Thomas, 2010; Fitzsimmons, 2013). Because migrants likely have more cultural flexibility and cognitive complexity than individuals embedded in one culture, some studies have pointed to their potential as global leaders (Fitzsimmons, Lee & Brannen, 2013). Thus, integrating and deploying these individuals can help firms, especially multinationals, Aida Hajro and Milda Žilinskaitė

realize their strategic initiatives (see also the entry on multiculturalism). Finally, not all migrants end up employed by an organization. It is a well-known fact that migrants are over-represented among innovators and entrepreneurs. For example, in the US, almost 30% of all entrepreneurs are immigrants, although immigrants are only around 13% of the population (IOM, 2020). Traditionally, scholars have studied migrants’ entrepreneurship from the perspectives of either superior business acumen and entrepreneurial spirit or a survival strategy to cope with changed circumstances. This is changing in favor of research that addresses how personal characteristics affect the basic strategic choices of migrant entrepreneurs when pursuing a venture strategy and striving for growth (Hajro et al., 2021). (See also the entry on global mobility and innovation.) In brief, migration is here to stay, with important implications for corporate strategies, structures, and decision-making. Aida Hajro and Milda Žilinskaitė

References

Brannen, M. Y., & Thomas, D.C. 2010. Bicultural individuals and intercultural effectiveness. International Journal of Cross Cultural Management, 10: 5–16. de Haas, H. 2021. A theory of migration: The aspirations-​ capabilities framework. Comparative Migration Studies, 9(8): 1–35. de Haas, H. Castles, S., & Miller, M. J. 2020. The Age of Migration 6th Edition. London: Red Globe Press. de Haas, H., Czaika, M., Flahaux, M.-L., Mahendra, E., Natter, K., Vezzoli, S., & Villares-Varela, M. 2019. International migration: Trends, determinants, and policy effects. Population and Development Review, 45(4): 885–922. Fitzimmons, S. R. 2013. Multicultural Employees: A framework for understanding how they contribute to organizations. Academy of Management Review, 38(4): 525–549. Fitzsimmons, S. R., Lee, Y-T., & Brannen, M. Y. 2013. Demystifying the myth about marginals: Implications for global leadership. European Journal of International Management, 7(5): 587–603. Fransen, S., & de Haas, H. 2022. Trends and patterns of global refugee migration. Population and Development Review, 48(1): 97–128. Hajro, A., Caprar, D., Zikic, J., & Stahl, G. K. 2021. Global migrants: Understanding the implications for international business and

Migrants and migration  287 management. Journal of World Business, 56: 1–11. Hajro, A., Žilinskaitė, M., & Baldassari, P. 2022. Addressing the elephant in the room: Global migration and its implications for business school teaching. Academy of Management Learning and Education, 21(1): 1–19. Hajro, A., Žilinskaitė, M., Gibson, C., Baldassari, P., Mayrhofer, W., Brewster, C., & Brannen, M. Y. 2023. Movement of people across borders: Transdisciplinary research to meet the challenges in migration, business, and society. Academy of Management Discoveries, 9(2): 125–131. International Organization for Migration (IOM). 2020. UN World Migration Report 2020.

Available at https://​publications​.iom​.int/​ system/​files/​pdf/​wmr​_2020​.pdf Kerr, W. 2019. The Gift of Global Talent. How Migration Shapes Business, Economy & Society. Stanford University Press. Ravenstein, E. G. 1885. The laws of migration. Journal of the Statistical Society, 48(2): 167–227. Ravenstein, E. G. 1889. The laws of migration. Second paper. Journal of the Statistical Society, 52: 241–301. Shukla, P., & Cantwell, J. 2018. Migrants and multinational firms: The role of institutional affinity and connectedness in FDI. Journal of World Business, 53(6): 835–849. The United Nations High Commissioner for Refugees (UNHCR). 2023. Refugee statistics. https://​www​.unhcr​.org/​refugee​-statistics United Nations (UN). 2022. Migration. Retrieved from: https://​www​.un​.org/​en/​global​-issues/​ migration

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73. Multicultural teams Definitions

Teams can be defined as small groups of people with complementary technical, problem-solving and interpersonal skills, who are committed to a common purpose and specific performance goals for which they hold themselves mutually accountable. Multicultural teams (MCTs) are particular teams in that their members collectively represent two or more cultures. They can be distinguished from monocultural teams with members of just one culture. While cultural team diversity may, in principle, be intra-national (e.g., people of different ethnic background but with the same nationality such as migrants), most studies refer to cross-national teams when investigating MCTs. In most cases, nationality is even used as a proxy for culture, thus avoiding the necessity to measure cultural differences on the individual level.

Multicultural teams as a building block for multinational corporations

In management practice as well as research, teams, specifically multicultural teams, have gained considerably in importance. While teams have not replaced traditional hierarchies, they provide crucial additions to corporate structures. As a result, in modern global corporations, they form the basic organizing principle and constitute a key feature of today’s business environment. Against the backdrop of an increasingly complex, interdependent, international and fast-changing business environment, multinational corporations (MNCs) bring together MCTs to keep up with global competition. MCTs have been described as the ‘heart of globalization’, as they often stand in the center of what is arguably the most decisive challenge of MNCs: balancing global integration and local responsiveness. On one side, they are expected to find globally integrated solutions and act as the ‘glue’ across cultural boundaries, which hold all organizational entities together; on the other side, they are meant to be agents of their respective local cultures, representing the interests and viewpoints of their country’s custom-

ers or co-employees. As working in MCTs has become very common in contemporary MNCs, according to surveys, managers spend about half of their work time in such teams.

Characteristics of multicultural teams

While mono- and multicultural teams share many characteristics, they also differ in a number of important aspects, as the latter are characterized by their members’ more diverse expectations, modes of perceptions, information processing procedures and decision-making styles. This diversity results from variations in terms of surface-level (nationality, ethnicity and language) and deep-level (values, attitudes and beliefs) attributes. While MCTs can, in principle, be collocated, de facto most are geographically dispersed. As such, they rely on virtual communication based on computer-assisted media (see also entry on global virtual teams). Specifically, if communication occurs across different time zones, the used media tend to be lean and asynchronous (e.g., e-mail). As a consequence, trust-building and the formation of shared mental models and team identity become more difficult, rendering team coordination particularly challenging.

Outcome variables of multicultural teams

As MCTs have access to a rich collection of knowledge resources and perspectives from various cultures, they are increasingly called on to locate, store, share and integrate diverse and geographically dispersed knowledge. Such integration processes are intended to promote the development of common frames of reference and ultimately the convergence of management practices. Furthermore, MCTs with their diverse viewpoints are expected to be the source of creative initiatives and important innovations. However, simply bringing together individuals from many locations does not automatically translate to high team performance. Consequently, cultural diversity might not function as a resource but more as a barrier to team effectiveness. Given this uncertainty, most MCT research has investigated the effects of multicultural diversity on outcomes on the team level, such as team performance

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or team effectiveness, or on the individual level, such as personal satisfaction or well-being. Overall, empirical research found that cultural diversity can have both positive and negative effects. As such, cultural differences among team members can be either an asset or a liability. Most research focuses on negative outcomes. While often difficult to recognize, cultural differences can have highly detrimental effects on teamwork. Based on social identity theory, social categorization theory and similarity–attraction theory, researchers identified for MCTs problems of value incongruence, decreased group identity, low social integration and reduced team cohesiveness, all resulting in disturbed communication and a high degree of misunderstandings and conflicts. Frequently, the ‘cultural distance concept’ is referred to, arguing that problems with multicultural teamwork intensify with increasing dissimilarity among team members. By contrast, some scholars emphasize more the positive outcomes of multicultural teamwork. Next to generating high-potentials for creativity and innovation, multiculturalism in teams might also serve as a catalyst for learning and adaptability, a reduced tendency towards groupthink and the development of positive work relationships, team member satisfaction and global social capital. While empirical studies found overall more evidence for negative than for positive outcomes of cultural diversity in MCTs, one might wonder how relevant these findings ultimately are. After all, in most instances, MNCs put together MCTs, not because of their cultural diversity, but because of the necessity to collect and integrate globally dispersed expertise – and if this globally dispersed expertise comes along with cultural diversity, this will have to be addressed separately.

Composition of multicultural teams

Research focusing on how to address challenges of cultural diversity in MCTs has established the relevance of team composition. In most instances, team composition is entirely based on country-specific functional expertise, perceived as relevant for completing the team task. However, also intercultural

competence, including the ability to establish and maintain relationships and share knowledge with others, has been identified as an important factor contributing to MCT success. Intercultural competence does not only depend on knowledge about specific cultures and languages, but also, more generally, on affective and behavioral skills, such as empathy and the ability to deal with anxiety and uncertainty. Research further established that multiculturals, with their bridging skills, are particularly useful as MCT members. Of exceptional relevance, when deciding over the team composition, is the position of the team leader. The team leader must detect underlying cultural causes of conflicts and develop conflict avoidance and resolution strategies. Next to selecting the right team leader, their training and preparation are also of importance. While leadership research has traditionally focused on leader–subordinate interactions, the team leader should be evaluated more for directing group dynamics. Given that team leaders have a lower degree of formal authority over team members in comparison with superiors in traditional hierarchies, they experience particular challenges in motivating and inspiring their team. This is all the more problematic if cultural diversity results in a lower degree of group identity, social integration and team cohesiveness. Finally, MNCs also have to create on the organizational level an inclusive and supportive diversity climate. Such a diversity climate contributes to the development of a shared cultural identity of MCT members and an inclusive environment where all cultures are valued and respected, ultimately enhancing the performance and effectiveness of this key organizational unit of modern MNCs. Markus Pudelko

References

Jang, S. (2017) Cultural Brokerage and Creative Performance in Multicultural Teams, Organization Science, 28, 993–1009. Stahl, G. & Maznevski, M. (2021) Unraveling the Effects of Cultural Diversity in Teams: A Retrospective of Research on Multicultural Work Groups and an Agenda for Future Research, Journal of International Business Studies, 52, 4–22. Zander, L. & Butler, C.L. (2010) Leadership Modes: Success Strategies for Multicultural

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Markus Pudelko

B., Laurence Romani, Dan V. Caprar, Joyce & S. Osland (eds) The SAGE Handbook of Contemporary Cross-Cultural Management, Los Angeles, 340–356.

74. Multiculturalism Conceptualization

Multiculturalism at the individual level has been conceptualized and measured in various ways, but a comprehensive review of the literature across five disciplines defines it as “the degree to which someone has knowledge of, identification with, and internalization of more than one societal culture” (Vora, Martin, Fitzsimmons, Pekerti, Lakshman, & Raheem, 2019, p. 506). In other words, multicultural individuals (a) have knowledge of more than one culture’s values, norms, beliefs, and behaviors, (b) see themselves as a member of more than one culture and value such membership, and (c) have internalized more than one society’s cultural values, assumptions, beliefs, and practices as their own. The more widely known concept of biculturalism is a specific case of multiculturalism, referring to individuals with exactly two cultures (Fitzsimmons, 2013). While informative, it is more limiting than the term “multiculturalism,” which encompasses not only exactly two cultures, but also allows for one hybrid culture (e.g., Martin, Shao, & Thomas, 2019) and more than two cultures. As such, multiculturalism is the more general term. A major reason multiculturalism arises is from migrants and migration, where individuals may be members of a diaspora. Individuals may migrate themselves, be children of migrants, or develop knowledge, identification, and internalization of more than one societal culture in another way.

Individual-level implications

From an international strategic management perspective, multicultural individuals have knowledge, skills, and abilities that are relevant at the individual, team, and organizational levels. At the individual level, multicultural individuals tend to engage in cultural frame switching, where they change their cultural norms, behaviors, and attitudes based on contextual cues that make one culture salient and relevant (e.g., Hong, Morris, Chiu, & Benet-Martínez, 2000). As such, they exhibit cross-cultural adaptability, flexibility, cross-cultural effectiveness, cultural intelligence, and cultural meta-cognition of recognizing and responding to cultural cues

(e.g., Fitzsimmons, Liao & Thomas, 2017; Hong 2010; Lakshman, Bacouël, & Kraak, 2021), all of which facilitates their ability to work in diverse contexts. Multicultural individuals also have more cognitive complexity, which is associated with a global mindset, compared with monocultural individuals who have only one culture. Multicultural individuals are able to understand people, objects, ideas, and underlying relationships in a multidimensional way, can acknowledge and see links between competing perspectives, and have complex causal reasoning (Benet-Martínez et al., 2006; Lakshman et al., 2021; Tadmor, Galinsky, & Maddux, 2012). Such cognitive complexity is related to innovation, promotion rates, and having a positive reputation (Tadmor et al., 2012). Further, individuals with more cultural identities tend to have both higher levels of social capital since they have friends from different cultural groups, and higher levels of job performance (Fitzsimmons et al., 2017). Taken in tandem, research on the individual-level effects of multiculturalism generally suggests that multiculturalism is associated with adaptability, flexibility, cognitive skills, and intercultural effectiveness, which can translate into job-related individual benefits like increased innovation, enhanced reputation and performance, and more promotions.

Group-level implications

These individual-level capabilities can translate to group-level benefits. Because of their cultural knowledge, skills, and ability to engage in cultural frame switching, multicultural individuals are more likely to act as boundary spanners and engage in conflict-mediating roles in a team, which can improve team effectiveness (Hong, 2010). Similarly, multicultural individuals engage in cultural brokering within multicultural teams, facilitating interactions among culturally different team members, which can enhance the team’s creativity (Jang, 2017). Multiculturalism is also related to team performance. For example, one recent study found that diverse teams perform better when supervised by multicultural managers (Szymanski, Alon, & Kalra, 2022). Overall, research suggests that, particularly in diverse teams, multicultural individuals may enhance team processes and performance.

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Organization-level implications

Multiculturalism is also expected to influence organizations. For instance, multicultural individuals have been found to be better able to recognize new product opportunities, prevent translation issues, assimilate newcomers, and bridge headquarters–subsidiary differences (Hong & Doz, 2013). It has also been argued that multiculturalism is likely to influence social networks and power dynamics in organizations, potentially building new connections across national boundaries, redistributing power to different cultural groups, and increasing subsidiary network centrality and power (Vora et al., 2019). Further, one could expect creativity, innovation, and job performance at individual and team levels (e.g., Fitzsimmons et al., 2017; Jang, 2017; Tadmor et al., 2012) to be able to be leveraged by the organization to achieve organizational benefits. As such, multicultural individuals’ positive impact on individual- and team-level activities may influence organization-level outcomes. Despite the various benefits outlined above, organizations often fail to tap into the skills and abilities of multicultural individuals. As Brannen and Thomas (2010) state, both multicultural individuals and their organizations may not be aware of multicultural individuals’ knowledge, skills, and abilities. For example, Hong and Minbaeva (2022) found that simply hiring multicultural individuals did not necessarily lead to organizational benefits. However, organizations can create an environment that facilitates the use of such knowledge and skills. Hong and Minbaeva (2022) showed that for this to happen, units must have a global mindset, a differentiated human resource architecture whereby multicultural individuals’ skills and abilities are used as a source of differentiation, a multilingual language practice and common language policy, high levels of team cultural diversity, and multicultural leaders in teams. Thus, creating an organizational context that encourages multicultural individuals to draw upon their unique knowledge, skills, and abilities is critical for realizing the benefits of multiculturalism in organizations. Davina Vora

Davina Vora

References

Benet-Martínez, V., Lee, F., & Leu, J. 2006. Biculturalism and cognitive complexity: Expertise in cultural representations. Journal of Cross-Cultural Psychology, 37(4): 386–407. Brannen, M. Y. & Thomas, D. C. 2010. Bicultural individuals in organizations: Implications and opportunity. International Journal of Cross-Cultural Management, 10(1): 5–16. Fitzsimmons, S. R. 2013. Multicultural employees: A framework for understanding how they contribute to organizations. Academy of Management Review, 38(4): 525–549. Fitzsimmons, S. R., Liao, E. & Thomas, D. C. 2017. From crossing cultures to straddling them: An empirical examination of outcomes for multicultural employees. Journal of International Business Studies, 48(1): 63–89. Hong, H-J. 2010. Bicultural competence and its impact on team effectiveness. International Journal of Cross Cultural Management, 10(1): 93–120. Hong, H-J. & Doz, Y. 2013. L’Oreal masters multiculturalism. Harvard Business Review, 91(6): 114–119. Hong, H-J. & Minbaeva, D. 2022. Multiculturals as strategic human capital resources in multinational enterprises. Journal of International Business Studies, 53(1): 95–125. Hong, Y., Morris, M. W., Chiu, C.-Y., & Benet-Martínez, V. 2000. Multicultural minds: A dynamic constructivist approach to culture and cognition. American Psychologist, 55(7): 709–720. Jang, S. 2017. Cultural brokerage and creative performance in multicultural teams. Organization Science, 28(6): 993–1009. Lakshman, C., Bacouël, S., & Kraak, J. 2021. Attributional complexity of monoculturals and biculturals: Implications for cross-cultural competence. Journal of World Business, 56(6): 101241. Martin, L., Shao, B., & Thomas, D.C. 2019. The role of early immersive culture mixing in cultural identification of multiculturals. Journal of Cross-Cultural Psychology, 50(4): 508–523. Szymanski, M., Alon, I., & Kalra, K. 2022. Multilingual and multicultural manager’ effects on team performance: Insights from professional football teams. Multinational Business Review, 30(1): 40–61. Tadmor, C. T., Galinsky, A. D., & Maddux, W. M. 2012. Getting the most out of living abroad: Biculturalism and integrative complexity as key drivers of creative and professional success. Journal of Personality and Social Psychology, 103(3): 520–542. Vora, D., Martin, L., Fitzsimmons, S., Pekerti, A., Lakshman, C., & Raheem, S. 2019. Multiculturalism within individuals: A review, critique, and agenda for future research. Journal of International Business Studies, 50(4): 499–524.

75. Multinationality– performance relationship One of the most important changes in the world economy over the past few decades is the rapid globalization of industries and markets (Maksimov et al., 2022), an important economic phenomenon that changes the operations of multinational enterprises (MNEs) and affects their corporate strategies. Multinationality is becoming increasingly crucial for the survival and long-term development of MNEs within this environment (Fisch & Schmeisser, 2020). This entry examines the multinationality–performance relationship, which is an empirical correlation for which various causal and non-causal theoretical explanations apply. An MNE by definition expands its business scope beyond the domestic market (Seong & Godart, 2018), but this expansion can occur to a varying degree. Accordingly, international business scholars define multinationality as the degree to which “a firm expands the sales of its goods or services across the borders of global regions and countries into different geographic locations or markets” (Hitt et al., 2007, p. 251; see also the entry in this book on international diversification). Although scholars have studied several determinants of multinationality, the influence of firm-, industry- and environmental-level factors still needs to be fully understood (Gimeno et al., 2005) and the relationship between strategy and performance remains complex (Maksimov et al., 2022). As a result, the degree and scope of multinationality representing MNEs’ international engagements are increasingly becoming a research focus in strategic management and international business.

1.

Literature review of multinationality research

In the field of international business, early research on multinationality focused on the strategic motivations of MNEs to diversify and attempted to explain the factors that influence MNEs’ competitive market positioning (Hitt et al., 2006). Multinationality can provide MNEs with new ways of creating value through access to foreign institutions,

stakeholders, and other resources (Dorobantu et al., 2017). Although operating overseas adds to firms’ uncertainty, it also allows firms to leverage existing competitive advantages, gain access to new resources, and experience market growth abroad (Hitt et al., 2006). From a strategic management perspective, the degree and scope of MNEs’ multinationality help explain the extent of their strategic intentions (Bergh, 2001). A high level of multinationality implies strong market power, ample resources, and the potential for greater efficiency in resource use (Hitt et al., 2006). Additionally, when examining MNEs’ overseas operations from a resource-based perspective, scholars emphasize the importance of resource utilization, defined as the number of significant activities conducted abroad by MNEs (Chen et al., 2021). Although multinationality plays a vital role in firms’ survival and long-term development, some scholars argue that multinationality does not always create value for MNEs as they may suffer from liabilities of foreignness (Zaheer, 1995; Edman, 2016) when operating in markets with different levels of development, different cultural values, and institutional arrangements. In international business, several scholars believe that early international experience may benefit MNEs, but expanding the global scope may lead to substantial coordination costs (Peng, 2004).

2. Multinationality– performance relationship

The multinationality–performance relationship received extensive attention from international business researchers; however, a consistent relationship between multinationality and firm performance has yet to emerge from the research (Shin et al., 2017). Some of the early literature explored performance differences between domestic and MNEs (Brewer, 1981; Shaked, 1986), while other studies suggested a positive impact on performance because multinationality helps firms achieve economies of scale and take location advantages (Errunza & Senbet, 1984; Grant et al., 1988). The positive correlation argument is partially supported by the findings of Tallman and Li (1996) and Delios and Beamish (1999) that the extent of multinationality positively impacts the profitability of MNEs. Nonetheless, Siddharthan and Lall (1982) and Kumar (1984) find no

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positive or negative impact of multinationality on MNEs’ performance. Recently, an increasing number of scholars agreed that the relationship between multinationality and performance is more complicated than a simple positive or negative relationship (Zhou & Wan, 2017), because multinationality brings benefits and costs to MNEs. Therefore, they suggest using U-shaped curves (Ruigrok & Wagner, 2003), inverted U-shaped curves (Gomes & Ramaswamy, 1999), and S-shaped curves (Contractor et al., 2003; Berry & Kaul, 2016) to describe this relationship. For an inverted U-shaped relationship, Ruigrok and Wagner (2003) suggest that the positive impact of multinationality has a peak, the “internationalization threshold,” at which point the cost of coordination between different foreign operations exceeds the benefits from increased resource access. Gomes and Ramaswamy (1999) support an inverted U-shaped relationship and further argue that over-diversification of international operations can lead to substantial governance costs. Proponents of the U-shaped relationship argue that multinationality may initially reduce firm performance due to foreign governance costs (Ruigrok & Wagner, 2003). Nevertheless, when firms further internationalize, they learn more about the new environment and their profitability starts to recover (Johanson & Vahlne, 2009; Maksimov et al., 2022). A longitudinal study by Ruigrok and Wagner (2003) finds support for a U-shaped relationship between multinationality and performance. Somewhat reconciling the mixed results, Riahi-Belkaoui (1998) proposes that while entry into new markets is initially detrimental to performance, internationalization positively impacts firm profitability at intermediate levels of diversification, which declines again due to high coordination and governance costs. Studies by Lu and Beamish (2004) and Berry and Kaul (2016) further support the S-curve relationship between multinationality and MNEs’ performance. Most international business studies use accounting performance indicators when investigating the multinationality– performance relationship, while other disciplines that use market-based indicators show mixed results. Based on market-based performance measures, Kim and colleagues (1993) argue that multinationality can increase the Yi Li, Ruosu Gao and Vikas Kumar

market value of MNEs and reduce their risk. In contrast, Denis and fellows (2002) suggest that multinationality may hurt MNEs’ market value because it benefits management reputation more than investors. Further, another group of scholars suggest that the valuations of MNEs are generally higher than domestic firms, suggesting a positive effect of MNEs on market-based performance (Gande, Schenzler & Senbet, 2009). Thus, scholars still need to gain a consensus on the relationship between cross-country and performance when using market-based performance measures.

3.

Contextual factors affecting MNEs’ multinationality

For MNEs, many background factors affect their global strategies, including organizational task environment, institutional, industrial, and natural environment. When discussing MNEs’ task environment, management scholars mainly focus on customers, suppliers, and competitors (Castrogiovanni, 2002; Huang & Kim, 2019). Martin and colleagues (1998) find that the likelihood of being an MNE increases with the number of multinational buyers and that there is an inverted U-shaped relationship between the degree of international involvement of suppliers and the multinationality of competitors. Based on an empirical study of the telecommunications industry, Sarkar et al. (1999) suggest that industries’ competitive structure and firms’ network characteristics hold a substantial impact on multinational decision-making. As an essential environmental factor affecting MNEs’ global strategy, institutional pressure attracts extensive attention from scholars. For example, Calof and Beamish (1995) find that regulatory factors can affect MNEs’ multinational patterns and their patterns of change. For studies focusing on economic institutions, scholars believe that firms are more willing first to enter countries with low bureaucratic costs when they diversify internationally (Wan, 2005). Although the normative and cognitive pillars of the institutional environment are also crucial for MNEs’ international strategies, research on these aspects is limited due to data limitations (Eesley et al., 2016). Desai (2018) believes that due to the increasing complexity of the industrial environment, internationally diversified firms

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face more challenges in maintaining organizational legitimacy. Girod and Whittington (2017) also find evidence of the impact of environmental dynamism on MNEs’ restructuring strategies. Furthermore, the relationship between top management teams (TMTs) demographics and firms’ multinationality is stronger in highly dynamic environments, as TMTs often express greater discretion in such environments, enhancing the influence of demographic characteristics on their strategic decisions (Saeed et al., 2022). Accordingly, Thomas (2005) argued that TMTs’ internationalization and global mindsets would constitute a critical link in the multinationality–performance relationship. The natural environment also has an important impact on firms’ global strategy. The location advantages of host countries hence are an important consideration when MNEs choose overseas markets (Hitt et al., 2006). When choosing a target market, MNEs need to consider the host country’s market potential and economies of scale (Ioulianou et al., 2021). However, there is still a lack of research on how the natural environment affects MNEs’ strategic decision-making.

4.

Moderators impacting multinationality– performance relationships

To explain the inconsistent findings on multinationality–performance relationships, scholars suggested several endogenous and exogenous moderators. While the endogenous factors (e.g., firm size, firm structure, product diversification) attracted the most research attention, the exogenous factors, especially formal and informal institutions, were also investigated in international business. The most explored firm-level moderator has been the level of product diversification. While detecting no effect of multinationality on US MNEs’ performance, Sambharya (1995) finds that product diversification was a positive moderator of this main relationship. However, product diversification may weaken the multinationality–performance relationship in a more munificent home environment (Wan & Hoskisson, 2003). To reconcile the inconsistency in the effect of product diversification, Oh and Contractor (2012) suggest considering the heterogeneity of regional distances on foreign expansion.

Specifically, they find that product diversification negatively moderates the relationship for firms expanding into proximate regions and positively moderates it for firms expanding into distant regions. Kotabe, Srinivasa and Aulakh (2002) investigated R&D intensity and marketing intensity as relevant endogenous resource factors and found that both factors could enhance the relationship between multinationality and performance. In Japan, the relationship varies over time, and multinationality has negative profitability and growth consequences only in some periods (Geringer et al., 2000). While existing studies mainly focus on static contextual factors, Li and Tallman (2011) argue that dynamic changes in environmental factors may affect multinationality and its impact on performance. Using a matched sample of US and non-US firms, they find that the reach of multinational enterprises before September 11 was negatively related to their near-term performance but positively related to their long-term performance. Treating multinationality as a positive strategy, scholars also investigated its performance influence and boundary conditions. According to Riahi-Belkaoui (1996), the positive multinationality–performance relationship is even stronger for firms with unrelated diversification. As endogenous firm-level factors, firm size and advertising intensity positively moderate the positive relationship between multinationality and performance (Chang & Rhee, 2011; Dragun, 2002), while foreign expansion pace, product and geographic scopes of the expansion process, and irregular pace of foreign expansion work as negative moderators (Vermeulen & Barkema, 2002). Regarding contextual factors, industry globalization can enhance the positive impact of multinationality on performance (Chang & Rhee, 2011), and the main positive relationship may only exist in certain geographic regions (Nachum, 2004). In addition, some scholars suggest financial tools as potential moderators. For instance, leverage was found to be a negative moderator (Chang & Rhee, 2011), while real options awareness positively moderates the relationship between multinationality and performance, and its effect is even stronger for multinationals in periods of high market uncertainty. Realizing the diminishing marginal effects and learning costs of multinationality, scholars explored the factors impacting the non-linear Yi Li, Ruosu Gao and Vikas Kumar

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multinationality–performance relationship. For the inverted U-shaped main relationship, product diversification was found to be a positive moderator on publicly listed US firms (Hitt et al., 1997) but a negative moderator on emerging small- and medium-sized US firms (Qian, 2002). Considering contextual differences, scholars found that regional diversification and regulative institutional distance worked as negative moderators, but normative distance could enhance the linkage between multinationality and performance (Chao & Kumar, 2010; Li & Qian, 2005). At a lower level of multinationality, family and foreign corporate ownership was found to have a positive moderating effect, while domestic financial institutional ownership has a negative moderating effect; at a higher level of multinationality, these moderating effects were reversed (Purkayastha et al., 2017). For U-shaped multinationality–performance relationship, two factors – exporting and group affiliation – were found to negatively moderate it (Gaur & Kumar, 2009; Lu & Beamish, 2001). Moreover, considering the complexity of effective mechanisms, scholars have proposed a horizontal S-shaped multinationality–performance relationship and found a firm’s intangible assets and advertising intensity to be positive moderators (Lu & Beamish, 2004; Rugman & Oh, 2010), while product diversification and R&D intensity could weaken it (Rugman & Oh, 2010; Oh & Contractor, 2014). Table 75.1 summarizes all endogenous and exogenous factors influencing various multinationality–performance relationships.

5.

Critical gaps in the literature

To advance the field, researchers are encouraged to investigate cross-country phenomena more deeply and to explore other variables as potential antecedents, mediators, moderators, and outcomes of multinationality (Li et al., 2021). We identify three major research gaps in the current literature, providing insights and directions for future multinationality researchers. First, the findings of multinationality studies need more generalizability, with much existing research mainly focused on enterprises from developed economies (DMNEs) while ignoring the internationalization of Yi Li, Ruosu Gao and Vikas Kumar

emerging MNEs (EMNEs) (Contractor et al., 2007; Gao et al., 2022). Since EMNEs differ from DMNEs in many ways (Wang et al., 2014), their motivations and performance outcomes may differ from current research findings (Choi et al., 2020). Future research could devote more effort to examining the performance outcomes of EMNEs’ multinationality and identify mixed FDI as an important type of multinationality for EMNEs to achieve their strategic goals (Li et al., 2022). Second, while much research draws on a contingency perspective, implying a unique fit between a certain level of strategy and desired firm performance (Oehmichen et al., 2017), there are reasons to be sceptical of the contingency view, as some scholars argue that there may be more than one contingent route to the same level of expected performance (e.g., Cui et al., 2017). Since MNEs from different environments can achieve expected performance through different multinational strategies, new theoretical perspectives and methodological tools are needed to explore the relationship between multinationality and performance (Li et al., 2022). To address this issue, we propose future studies to investigate the effects of multiple equilibrium configurations of the environment, internationalization strategies, and TMT structures on the expected performance of MNEs, for example through fuzzy set analysis. The third research gap concerns how scholars conceptualize multinationality when studying the multinationality–performance relationship. The literature needs a consistent way of conceiving multinationality while paying more attention to institutional differences between home and host countries. As a result, empirical research on performance linkages in MNEs can yield mixed results. Whether and how multinationality affects firm performance remains unresolved in international business, despite a large body of empirical research. To solve this problem, researchers can adopt an institution-based perspective, add institutional dimensions to the concept of multinationality, and introduce more variables to measure the concept of institutional diversification. Yi Li, Ruosu Gao and Vikas Kumar

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Cambridge, MA: Cambridge University Press. Li, L., & Qian, G. (2005). Dimensions of international diversification: Their joint effects on firm performance. Journal of Global Marketing, 18(3–4), 7–35. Li, S., & Tallman, S. (2011). MNC strategies, exogenous shocks, and performance outcomes. Strategic Management Journal, 32(10), 1119–1127. Li, Y., Cui, L., Meyer, K. E., & Fan, D. (2022). Strategic configurations and international performance of emerging economy multinationals. Management and Organization Review, 18(5), 924–957. Li, Y., Gao, R., & Wang, J. (2021). Determinants of EMNEs’ entry mode decision with environmental volatility issues: A review and research agenda. Journal of Risk and Financial Management, 14(10), 500. Lu, J. W., & Beamish, P. W. (2001). The internationalization and performance of SMEs. Strategic Management Journal, 22(6–7), 565–586. Lu, J. W., & Beamish, P. W. (2004). International diversification and firm performance: The S-curve hypothesis. Academy of Management Journal, 47(4), 598–609. Maksimov, V., Wang, S. L., & Yan, S. (2022). Global connectedness and dynamic green capabilities in MNEs. Journal of International Business Studies, 53(4), 723–740. Martin, X., Swaminathan, A., & Mitchell, W. (1998). Organizational evolution in the interorganizational environment: Incentives and constraints on international expansion strategy. Administrative Science Quarterly, 43, 566–601. Nachum, L. (2004). Geographic and industrial diversification of developing country firms. Journal of Management Studies, 41(2), 273–294. Nielsen, S. (2010). Top management team internationalization and firm performance: The mediating role of foreign market entry. Management International Review, 50, 185–206. Oehmichen, J., Schrapp, S., & Wolff, M. (2017). Who needs experts most? Board industry expertise and strategic change­—a contingency perspective. Strategic Management Journal, 38(3), 645–656. Oh, C. H., & Contractor, F. J. (2012). The role of territorial coverage and product diversification in the multinationality-performance relationship. Global Strategy Journal, 2(2), 122–136. Oh, C. H., & Contractor, F. (2014). A regional perspective on multinational expansion strategies: Reconsidering the three-stage paradigm. British Journal of Management, 25, S42–S59. Peng, M. W. (2004). Identifying the big question in international business research. Journal of International Business Studies, 34, 99–108. Purkayastha, S., Kumar, V., & Lu, J. W. (2017). Business group heterogeneity and the inter-

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Yi Li, Ruosu Gao and Vikas Kumar

Ronald D. Picur

Riahi-Belkaoui, Ahmed, and

Riahi-Belkaoui, Ahmed

Contractor

Oh, Chang Hoon, and Farok J.

Li, Sali, and Stephen Tallma

Hoskisson

Wan, William P., and Robert E.

Srinivasan, and Preet S. Aulakh

Kotabe, Masaaki, Srini S.

Tallman, and David M. Olsen

1998

1996

2012

2011

2003

2002

2000

1995

Sambharya, Rakesh B

Geringer, J. Michael, Stephen

Year

firms, 1987–1992

100 USA manufacturing and service

31 French multinationals, 1990

1998–2004

315 USA publicly listed firms,

multinationals, 2000–2002

sample of 191 non-USA

multinationals and a matched

A sample of 191 USA

European countries, 1996–1999

722 firms from six Western

1987–1993

49 USA firms in 12 industries,

multinationals, 1977–1993

108 Japanese manufacturing

1985 Fortune Industrial 500 list

53 USA multinationals from the

Data

Positive

Positive

No indicated relationship

No indicated relationship

No indicated relationship

No indicated relationship

No indicated relationship

No indicated relationship

Relationship

Multinationality–Performance

Moderators impacting multinationality–performance relationships

Author(s)

Table 75.1

moderates the main relationship. In

Investment opportunity set positively moderates the main relationship.

set

unrelated diversification.

relationship is stronger for multinationals with Investment opportunity

Unrelated diversification

The positive multinationality–performance

diversification is a positive moderator.

for firms expanding into distant regions, product

proximate regions, product diversification is a negative moderator on the main relationship;

Regional distance,

main relationship. For firms expanding into

Regional distance negatively moderates the

diversification is a negative moderator.

a more munificent home environment, product

product diversification

environment (GBE)

the global business

Exogenous shock to

diversification

munificence, product

Home environmental

moderate the main relationship.

intensity

Home environmental munificence positively

R&D intensity and marketing intensity positively

varies in different periods.

The multinationality–performance relationship

multinationality–performance relationship.

Product diversification positively moderates the

Key Findings of Moderating Effects

R&D intensity, marketing

Time

Product diversification

Moderating Factors

300  Encyclopedia of international strategic management

Kumar

2010

2005

Li, Lee, and Gongming Qian

Chao, Mike Chen-Ho, and Vikas

2002

1997

2021

Qian, Gongming

Hoskisson, and Hicheon Kim

Hitt, Michael A., Robert E.

J. Leiblein, and Lenos Trigeorgis

Sophocles P. Ioulianou, Michael

Rhee

2011

2004

Nachum, Lilach

Chang, Sea-Jin, and Jay Hyuk

2002

2002

Year

Dragun, D

Barkema

Vermeulen, Freek, and Harry

Author(s)

2002–2004

500 multinationals from 31 nations,

500 list, 1993–1997

167 USA firms from the Fortune

medium enterprises, 1989–1993

71 USA emerging small and

1988–1990

295 publicly listed USA firms,

1996–2009

1827 USA manufacturing firms,

firms, 1970–2003

276 listed Korean manufacturing

345 developing country firms, 1997

130 retailing firms from 19 nations

1967–1992

22 publicly listed Dutch firms,

Data

Inverted U-shape

Inverted U-shape

Inverted U-shape

Inverted U-shape

Positive

Positive

Positive

Positive

Positive

Relationship

Multinationality–Performance

scopes of the expansion process, and irregular pace of foreign expansion negatively moderate the

the expansion process, geographic scope of the expansion process,

negatively moderates it.

institutional distances

Regulative and normative

Regional diversification

Product diversification

Product diversification

for multinationals in periods of high market

market uncertainty

moderates it.

relationship, and normative distance positively

Regulative distance negatively moderates the main

main relationship.

Regional diversification negatively moderates the

multinationality–performance relationship.

Product diversification negatively moderates the

multinationality–performance relationship.

Product diversification positively moderates the

uncertainty.

main relationship, and its effect is even stronger

Real options awareness,

Real options awareness positively moderates the

positively moderate main relationship, and leverage

globalization

Advertising intensity and industry globalization

varies in different regions.

The multinationality–performance relationship

performance relationship.

Size positively moderates the multinationality–

leverage, industry

Advertising intensity,

Geographic regions

Firm size

rhythm of expansion pace

multinationality–performance relationship.

Foreign expansion pace, product and geographic

pace, product scope of

Foreign expansion

Key Findings of Moderating Effects

Moderating Factors

Multinationality–performance relationship  301

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Yi Li, Ruosu Gao and Vikas Kumar

Contractor

Oh, Chang Hoon, and Farok J.

Hoon Oh

Rugman, Alan M., and Chang

Beamish

Lu, Jane W., and Paul W.

Gaur, Ajai S., and Vikas Kumar.

Beamish

Lu, Jane W., and Paul W.

Kumar, and Jane Wenzhen Lu

Purkayastha, Saptarshi, Vikas

Author(s)

2014

2010

2004

2009

2001

2017

Year

1998–2004

315 USA publicly listed firms,

2001–2005

The world’s largest 500 firms,

1997

1,489 Japanese listed firms, 1986-

240 firms from India, 1997–2001

enterprises, 1986–1997

164 Japanese small and medium

2000–2010

185 Indian business groups,

Data

Horizontal S-shape

Horizontal S-shape

Horizontal S-shape

U-shape

U-shape

Inverted U-shape

Relationship

Multinationality–Performance

Product diversification

advertising intensity

R&D intensity,

Intangible assets

Group affiliation

Exporting

corporate

institution, and foreign

family, domestic financial

Three ownership types –

Moderating Factors

multinationality–performance relationship.

Product diversification negatively moderates the

moderates it.

relationship, while advertising intensity positively

R&D intensity negatively moderates the main

main relationship.

Firm’s intangible assets positively moderate the

relationship.

Group affiliation negatively moderates the main

relationship.

Exporting negatively moderates the main

effect.

institutional ownership has a positive moderating

moderating effect, whereas domestic financial

and foreign corporate ownership have a negative

effect. At a higher level of multinationality, family

institutional ownership has a negative moderating

moderating effect, while domestic financial

foreign corporate ownership have a positive

At a lower level of multinationality, family and

Key Findings of Moderating Effects

302  Encyclopedia of international strategic management

76. National culture

Research traditions of cultural values models

International strategy scholars continue to use formulations of national culture to predict firms’ major choices about products and markets and the success of these choices within different nations and across their borders. When studying more than a handful of countries, scholars predominantly draw from models that theorize culture dimensions and provide dimensional scores for nations. When studying firms in smaller numbers of nations, scholars sometimes subjectively interpret configurations of national culture differences. Here, we focus on applications of national culture dimensions, while also referring interested international strategy scholars to alternatives to culture dimensions.

Definitions

By nation, we mean the 200-odd governmental entities throughout the world that claim sovereignty within explicit boundaries. We recognize that some national boundaries are disputed, sometimes militarily. We also recognize that some groups view themselves as nations, but lack explicit boundaries (i.e., diasporas) or identify with homelands apart from national boundaries. Our use of nation is consistent with our primary audience of scholars whose professional identity rests on a sharp distinction between international business scholarship about firm differences between and transactions across national government boundaries and other business scholarship. Conceptualizing culture requires recognizing differences and changes in its meaning in major social science theoretical traditions (Fischer, 2007). Such advances in basic theory such as neo-institutional theory in sociology and political science, and cognitive theories in psychology, inform how international strategy scholars can theorize culture. Here, we follow Peterson and Barreto (2014, p. 1134) who “use culture to refer to characteristic patterns of social behavior, social interaction, and conscious and unconscious influences on action that recur in or typify a society, and use society to refer to the large, differentiated groups with which members share an identity throughout life.”

Two projects that provide dimensional culture scores for many nations frequently appear in international strategy research. These are Hofstede’s (1980, 2001) project and Project GLOBE (House et al., 2004). Analogous to most socioeconomic indicators, these national culture studies aggregate data based on individuals and organizations. For example, national GDP per capita aggregates innumerable transactions among individuals and firms, national education levels aggregate individuals’ education, national health statistics aggregate individuals’ health conditions, and national crime rates aggregate illegal individual behaviors. Similarly, scores for each of the national culture studies are derived by asking survey questions to individuals and aggregating their responses. The choice, organization, and interpretation of measures are based on alternative functional taxonomies that each project proposes about national cultural responses to the problems all societies face. These projects share some advantages. Conceptually, national culture scores from these projects allow international strategy scholars to summarize major aspects of the cultural context which citizens inevitably know very well and deeply understand from long exposure and experience (Leung & Morris, 2015; Peterson & Barreto, 2014). Consequently, strategy makers, whether consciously or not, are most prone to consider what is culturally possible and accepted in their nation when considering their strategic options and anticipating how other parties might react to their strategic preferences. Culturally linked strategic considerations include how agreements are reached and how compliance is managed, how clients and customers will react to products, and how alternative management practices will be received by employees, labor organizations, and national governments (Beugelsdijk et al., 2018a). The data collection approaches and samples, the specific survey questions that are aggregated, the justification for aggregating the questions, and the specific functional taxonomies used differ. Turning to each project, Hofstede’s 1980 study has been the most widely used. It appeared first, uses questions for a business context and respondents employed in

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a U.S.-based multinational firm (IBM), and controls for internal validity threats by using data from its many sales and service subsidiaries. Theoretically, Hofstede developed and interpreted four national culture dimensions especially using Mulder’s (1977) experimental studies of power relationships (power distance), early psychological and organizational research about authoritarianism and uncertainty management (uncertainty avoidance), and IBM’s traditional assessment of employee work goals (individualism and masculinity; Hofstede, 1980). He organized the resulting dimensions around a set of societal functions that Inkeles and Levinson (1969) used to integrate national culture research. After the original study of 53 countries (Hofstede, 2001), national culture scores were accumulated from 13 additional countries using a varied set of samples (Hofstede et al., 2010). The dimensions have been validated against many socioeconomic criteria and national culture measures from other studies (Hofstede et al., 2010). Major publications from the project reference and support the necessity of ethnographic research and personal experience for successfully functioning in a new society (Hofstede, 2004). The project has also been frequently critiqued as being increasingly dated, only applying to the company in which it was conducted, and being based on survey questions that critics see as not being intuitively related to the national culture dimension labels (House et al., 2004; McSweeney, 2002). Project GLOBE was designed to update and overcome some limitations of Hofstede’s project. Like its predecessor, it uses survey questions designed for a business context. However, it administered them to managers of many domestically owned firms rather than sales and service employees of a single multinational, and it sought to control for industry effects and promote external validity by representing three industries. Its theory base integrates Hofstede’s model and research following from it as well as Kluckhohn and Strodtbeck’s (1961) model of societal value orientations, Rokeach’s (1968) model of personal values, and many focused studies to create a new framework of nine societal functions. It represents these functions using separate survey forms for four subsamples of managers (House et al., 2004). One set asks managers what their society is like (national culture “as is” or practices questions), another

set asks managers how their society should change in the future (national culture “should be” or values questions), and two corresponding sets of forms ask about organizational culture. In total, these produce 18 national culture scales and 18 organizational culture scales. The nine “as is” and nine “should be” national culture dimensions were validated against many socioeconomic criteria (House, et al., 2004). Among the major critiques of Project GLOBE are the challenges of interpreting 18 (nine “as is” and nine “should be”) complexly intercorrelated dimensions, lack of transparency about the individual-level sample sizes for each of the four forms used in each country, limited success in representing the intended industries with comparable size organizations, and questions about the conceptual correspondence of what GLOBE terms “practices” and “values” with prior uses of these terms by Hofstede and others (Peterson, 2004). Moreover, national scores for Project GLOBE are also now about 20 years old, but a revised update of the GLOBE project is pending release. Discussions of the successes and limitations of Project GLOBE in improving on the Hofstede measures are provided in a special issue of the Journal of International Business Studies (Leung, 2006). Since survey questions to generate business-focused culture indicators are not part of most ongoing projects and since these two major studies focus on nations rather than national subcultures, approaches to updating and adjusting them have been proposed. To update them, some scholars show ways to adjust national culture scores based on socioeconomic indicators, such as GDP per capita, with which they are theoretically and empirically related (Tang & Kaveos, 2008). To adjust them for national culture heterogeneity, the use of indicators of ethnolinguistic differences within nations have been proposed to weigh national culture measures (Bagchi, Hart, & Peterson, 2004).

Recent revisions to IB culture research traditions

In the past decade, scholars have attempted to integrate Hofstede’s original dimensions with measures developed using the World Values Survey (WVS) database (Inglehart, 1997; Inglehart & Baker, 2000). Some of these studies recognized limitations in the scope

Mark F. Peterson, Sjoerd Beugelsdijk and Juliette de Wit

National culture  305

of the original four dimensions and sought to supplement them. Additions have been to replace an earlier time orientation measure that Hofstede and Bond (1988) added to the original model using WVS items (Minkov & Hofstede, 2012) and a measure of indulgence versus restraint indicating happiness, life control, and personal freedom (Hofstede et al., 2010; Minkov, 2009). Other studies have sought to replicate Hofstede’s constructs using only WVS data (Beugelsdijk & Welzel, 2018) and applied the new scores to assess potential within-country region differences (Kaasa, Vadi, & Varblane, 2014) and assess stability over time (Beugelsdijk, Maseland, & van Hoorn, 2015). In so doing, some analyses argued that difficulties in replicating some of Hofstede’s dimensions using WVS data raised questions about whether the original dimensions are meaningful. These included analyses suggesting that only Hofstede’s individualism and collectivism dimension can be replicated and the addition of a WVS-based flexibility– monumentalism dimension similar to time orientation (Minkov, 2018). Like the WVS studies, a recent study relied on a heterogenous sample using work goals and other items that resembled or had conceptual similarity to the items in Hofstede’s original study, and another suggested that Hofstede’s measures are not useful because they could not be replicated (Minkov & Kaasa, 2021). Stimulated by the Hofstede dimensions, scholars’ use of World Values Survey data continues to evaluate measures designed for sociological and political science applications, especially about culture and modernization (Inglehart, 2018). Both the Hofstede-related and other WVS work is ongoing and is identifying potential new dimensions of use to international strategy scholars or critiquing existing dimensional national culture models.

Alternative national culture dimension traditions

Several alternative ways of representing national culture are available that rarely appear in international strategy research. Four appear occasionally. Although the Schwartz Value Survey (SVS) (Sagiv, Schwartz, & Arieli, 2011; Schwartz & Sagiv, 1995) is most often used to represent the personal values endorsed by individuals, nation-level aggregates are available both from the orig-

inal SVS study of teachers and students (Schwartz, 2006, 2008) and from samples of working people (Ralston et al., 2001). Leung, Bond and colleagues (Bond et al., 2004; Leung et al., 2002) developed models of conscious questionnaire reports of cognitive propensities that have been used at the individual level in cross-cultural psychology and have appeared as national culture measures in IB. Smith and Peterson (1988) have theorized the propensity to rely on different aspects of role structure (e.g., superiors, organization norms, self, colleagues) to handle work situations and provide eight multi-item indices to represent them (Peterson, Barreto, & Smith, 2016). Gelfand and colleagues (2011) have developed a theory and provided national culture data for cultural tightness and looseness that is closely associated with the propensity to closely follow explicit rules and societal norms. Other national culture indicators also have potential international strategy application. Hofstede and McCrae (2004) provide nation scores and document sufficient differences among nations in Big Five personality traits to consider their use as national culture indicators. Drawing from self-theory, Vignoles and colleagues (2016) document nation differences in a set of constructs closely related to individualism–collectivism. Leung and Cohen (2011) provide evidence that what might be considered collectivist cultures are best separated into honor and face cultures in contrast to dignity cultures. Smith and colleagues (2021) provide nation-level scores of honor, face, and dignity cultures from university student samples. This work is influencing international studies of negotiation (Aslani et al., 2016). Minkov and Kaasa (2021) have proposed national culture measures of long-term orientation validated against subjective flexibility vs. monumentalism and emancipation validated against subjective indicators of individualism–collectivism. Their research builds on within-country studies that also use social indicators that do not rely on attitude/value questionnaires to represent culture (e.g., Harrington & Gelfand, 2014).

Cultural distance

International business strategy scholars are legitimately interested in providing comparative information that managers can use to

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assess whether their experiences in some nations are likely to apply in others and how managers’ cross-border business relationships operate (Beugelsdijk et al., 2018a). Whereas national culture indicators can be used to explain differences in the relationship of strategic choices to outcomes, assessments of the implications of degree of foreignness can also be helpful. Degree of foreignness can indicate heightened uncertainty, differing practices, challenges to trust and common identity, increased transaction costs, and learning opportunity. Because of these implications, scholarly interest in the effects of degree of foreignness has promoted studies of cultural distance based on national culture measures. Scholars’ challenges in assessing the implications of cultural distance only begin with inconclusiveness about which national culture project, projects, or specific dimensions to use and extend, and whether to incorporate non-cultural constructs into distance measures (Beugelsdijk, Ambos, & Nell, 2018). They also include questions about the best statistical procedures for estimating distance. Composites using Euclidean distance are traditional, but including the Mahalanobis correction can have substantial advantages (Beugelsdijk, Ambos, & Nell, 2018). Distance estimates are especially prone to reliability problems when the culture of one nation (e.g., an MNC’s headquarters nation) is compared with the cultures of multiple other nations (e.g., an MNC’s subsidiaries; Peterson & Muratova, 2020). Quantitatively estimating distance is also challenged by change over time in some aspects of distance, the effects of borders and subcultures on distance, and asymmetrical differences in experienced distance between pairs of countries when looking at one another (Shenkar, 2001). Some conceptual aspects of distance, like societal affinity, can be inferred directly from patterns in intergovernmental support (e.g., United Nations voting; Gartzke, 1998) or cross-national support in public culture preferences (e.g., the Eurovision Song Contest; Siganos & Tabner, 2020) rather than being derived from culture dimensions.

Conclusion

Scholarly endeavors to provide strategic managers with information about how culture plays into the practicality of their interna-

tional choices remain necessary. Culture definitions have changed with advances in basic theory since Kroeber and Kluckhohn’s (1952) review and Hofstede’s (1980) “collective programming of the mind.” Nations as explicit governmental institutions are culturally significant because their boundaries are an integral part of the global way of managing political tensions among cultural groups (Peterson, Søndergaard, & Kara, 2018). Nevertheless, the limitations of theories and methods that international strategy scholars have developed are appearing as they are applied to nations having areas that substantially differ economically and culturally (Hutzschenreuter, Matt, & Kleindienst, 2020; Kara, Peterson, & Søndergaard, 2021). International business scholars have a rich and developing group of culture dimension models to consider when theorizing and assessing the implications of national culture. Such culture dimension scores, however, are prone to misinterpretation when scholars mistake the use of nation averages as being culture with their use as indicators of culture. That is, such scores indicate the context that members of a society share, but only to a more limited degree the personal values that societal members accept. To the extent that the culture of another nation with which strategic managers are working differs from their own and is unfamiliar, they will find it challenging to identify alternative strategies, appropriately plan implementation, and anticipate responses in that other nation. These challenges are not matters of the managers’ personal values, but challenges of their culturally conditioned understanding of what is and is not conceivable (Akaliyski et al., 2021). Mark F. Peterson, Sjoerd Beugelsdijk and Juliette de Wit

References

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77. National innovation systems Why are some nations more innovative than other nations? Research on national innovation systems (NIS) (Freeman, 1995; Lundvall, 1992; Nelson, 1993; Niosi, 2002) has been particularly fruitful in addressing the above question. The value of the NIS framework lies in identifying the fundamental components and explaining the key mechanisms that drive technological progress, innovation and growth within a country. Going beyond traditional economic theories, the overarching explanation of the framework about the determinants of innovation hinges on the interactions and relationships between key actors (firms, universities and government) as well as on the learning and flows of ideas, knowledge and technology within a given ecosystem (Lundvall, 2007; Watkins, Papaioannou, Mugwagwa, & Kale, 2015). The role of institutions (e.g., economic, political, legal and regulatory) and the importance of collaboration are also emphasized in the framework given that these determine incentive structures and the rate and trajectory of learning, knowledge transfer and technological advance (Mercan & Goktas, 2011; Nelson, 1992; Patel & Pavitt, 1994). In sum, NIS includes various components and mechanisms for supporting science, technology and education that, in turn, facilitate access to a cumulative stock of technological knowledge and help organizations create new ideas and successfully commercialize them (Furman, Porter, & Stern, 2000, 2002). However, key components in NIS can either reinforce each other in promoting learning and innovation or inhibit learning and deter innovation. Indeed, there is substantial diversity and even persistent divergence across nations. Such cross-country variations exist in various dimensions, including in the level of R&D investments, scientific talent and workforce skills, quality of innovation infrastructure, government intervention and development of institutions. For instance, governments play an important coordinating role in the generation and diffusion of ideas. Similarly, institutions matter because they can create a learning environment that enables organizations to combine and exchange knowledge and resources in the

pursuit of innovation (Watkins et al., 2015). The above differences result in the uneven development of NIS across countries and, in turn, explain variations in the innovativeness of nations (Freeman, 2002; Nelson, 1992; Patel & Pavitt, 1994).

Key components of national innovation systems

National innovation systems are characterized by various interconnected and interdependent components (which are also referred to in the literature as core components and wider context (setting); Lundvall, 2007). The key component of innovation systems is considered to be firms and their interactions with other organizations as well as the knowledge infrastructure of a nation that enables them to create new ideas and knowledge and transform them into marketable innovations. Such components also include institutions that may promote the accumulation and diffusion of knowledge and which constitute the sources of innovation (Freeman, 2002) as well as national educational systems, financial and labour markets, intellectual property laws and welfare regimes. This view acknowledges that firms are embedded in a wider system where various forces (including industrial, political, and cultural influences) shape the direction of innovative activities and determine innovative output and performance. For example, Porter (1990) suggests that innovation is shaped by interactions between supply, local demand conditions and the nature of competition, while other studies emphasize the role of knowledge spillovers and technological interdependencies between various sectors in accelerating the rate of innovation (Furman et al., 2002), the geographic concentration of interconnected firms (Porter, 2000), and the accumulation and transfer of knowledge within and across geographic clusters.

The role of national innovation systems in driving innovativeness

Given the importance of innovation, it is imperative to understand under what conditions organizations within a nation stay technologically competitive and innovate. Accordingly, prior studies have widely discussed and documented how various components of NIS affect the innovativeness of organizations within a given nation. Although

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it is impossible to discuss all these components and drivers, the section below considers several integral aspects. Specifically, prior studies have shown that R&D collaborations between firms and universities increase the likelihood of innovations (Kafouros, Wang, Piperopoulos, & Zhang, 2015). Similarly, other studies show that variations in collaborations can explain why firms differ in their ability to create breakthrough inventions and create economic value (Kafouros, Hashai, Tardios, & Wang, 2022). It has also been established that innovation performance is considerably affected by the institutional environment in each country (Kafouros et al., 2015; Kaiser & Prange, 2004). Indeed, prior studies have established that the way NIS is structured within an institutional setting has a tremendous impact on how firms behave, innovate and perform (Filippetti & Archibugi, 2011; Freeman, 1995). NIS and their comprising institutions affect not only the structural conditions in a given country, but also the ability of firms to respond to certain conditions and innovate. Effective NIS require, among many elements, a degree of technological openness and receptivity to external ideas. Such openness is essential for building on external knowledge reservoirs that are essential for the creation of innovations and breakthrough inventions (Kafouros, Buckley, & Clegg, 2012). In line with the literature that emphasizes the role of institutions, recent studies have shown that innovation outcomes in emerging economies are profoundly influenced by political instability (Krammer & Kafouros, 2022) and political affiliations between firms and governments (Wang, Kafouros, Yi, Hong, & Ganotakis, 2020). Furthermore, in line with the notion that a well-educated workforce and skilled migrants are good predictors of the innovation culture in a well-functioning NIS (Nelson, 1992), the literature suggests that scientific and technological institutions, education and training infrastructure, and the organization of the labour market can facilitate or inhibit organizational action and technological progress (Edquist & Lundvall, 1993), and determine innovation persistence even in economic crises (Filippetti & Archibugi, 2011). Similarly, a robust financial system facilitates innovation and compensates for economic shocks by providing firms with the necessary resources to carry

on investing and developing innovations (Filippetti & Archibugi, 2011). Although various components and mechanisms matter for innovation, it is important to recognize that not all nations are the same, but rather they differ significantly in their needs, capabilities and innovation approach. While developed countries typically focus on frontier technology, emerging economies focus on imitative and frugal innovation and face scarcity of resources (Awate, Larsen, & Mudambi, 2012), financial constraints (Sheth, 2011) and less demanding consumers with lower disposable income (Prahalad, 2012). This is a salient point because an NIS that is functioning well for some countries might not be optimal for other countries. To demonstrate such differences, let us consider the role of legal institutions and more specifically intellectual property rights (IPR) protection. In the case of developed countries, it is often presumed that inadequate IPR protection can stifle technological learning and innovation (Metcalfe & Ramlogan, 2008). Yet, excessive protection of knowledge inhibits imitation, the probability of follow-up innovations (Bessen & Maskin, 2009) and technological progress (Dosi, Marengo, & Pasquali, 2006; Nelson et al., 2018). This is particularly true in emerging economies that focus on imitation and bricolage to develop cost-effective, good-enough innovations and, therefore, rely extensively on the utilization of external knowledge (Nakata & Weidner, 2012). In such instances, strong IPR protection might not be optimal for innovation in emerging economies. The above point emphasizes that a well-functioning NIS is not always an institutionally strong environment, but rather depends on country specificities and needs. To conclude, NIS provides an integrative framework for explaining why certain nations are more innovative than others (Freeman, 1995; Lundvall, 1992; Nelson, 1993; Niosi, 2002). Given that innovation is a particularly complex and multidimensional phenomenon, the NIS framework is particularly helpful for bringing together the fundamental drivers of innovation, and for clarifying the mechanisms underlying technological progress, innovation, and growth within a country. To this end, the NIS framework emphasizes that innovation is driven by interactions (including collaboration) between key actors, the institutions of the ecosystem, Mario Kafouros and Eva Mavroudi

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and the overall learning and flows of ideas, knowledge and technology with the nation. However, as nations differ in their characteristics and needs, we must emphasize that a well-functioning innovation system is not necessarily a system that is institutionally strong (e.g., in terms of IPR protection). Rather, it depends on each nation’s context and certain specificities. A theoretical implication is that an NIS that is optimal for one country might not be optimal and well functioning for another nation, emphasizing the need for future research to consider the determinants and outcomes of innovation within each specific national context. Mario Kafouros and Eva Mavroudi

References

Awate, S., Larsen, M. M., & Mudambi, R. 2012. EMNE catch-up strategies in the wind turbine industry: Is there a trade-off between output and innovation capabilities? Global Strategy Journal, 2(3): 205–223. Bessen, J., & Maskin, E. 2009. Sequential innovation, patents, and imitation. The RAND Journal of Economics, 40(4): 611–635. Dosi, G., Marengo, L., & Pasquali, C. 2006. How much should society fuel the greed of innovators? Research Policy, 35(8): 1110–1121. Edquist, C., & Lundvall, B.-A. 1993. Comparing the Danish and Swedish systems of innovation. National Innovation Systems: A Comparative Analysis: 265–298. Filippetti, A., & Archibugi, D. 2011. Innovation in times of crisis: National systems of innovation, structure, and demand. Research Policy, 40(2): 179–192. Freeman, C. 1995. The ‘National System of Innovation’in historical perspective. Cambridge Journal of Economics, 19(1): 5–24. Freeman, C. 2002. Continental, national and sub-national innovation systems—complementarity and economic growth. Research Policy, 31(2): 191–211. Furman, J. L., Porter, M. E., & Stern, S. 2000. Understanding the Drivers of National Innovative Capacity. Paper presented at the Academy of Management Proceedings. Furman, J. L., Porter, M. E., & Stern, S. 2002. The determinants of national innovative capacity. Research Policy, 31(6): 899–933. Kafouros, M. I., Buckley, P. J., & Clegg, J. 2012. The effects of global knowledge reservoirs on the productivity of multinational enterprises: The role of international depth and breadth. Research Policy, 41(5): 848–861. Kafouros, M., Hashai, N., Tardios, J. A., & Wang, E. Y. 2022. How do MNEs invent? An invention-based perspective of MNE profitabil-

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ity. Journal of International Business Studies: 1–29. Kafouros, M., Wang, C., Piperopoulos, P., & Zhang, M. 2015. Academic collaborations and firm innovation performance in China: The role of region-specific institutions. Research Policy, 44(3): 803–817. Kaiser, R., & Prange, H. 2004. The reconfiguration of National Innovation Systems—the example of German biotechnology. Research Policy, 33(3): 395–408. Krammer, S. M., & Kafouros, M. I. 2022. Facing the heat: Political instability and firm new product innovation in sub-Saharan Africa. Journal of Product Innovation Management. Lundvall, B.-Å. 1992. National systems of innovation: Towards a theory of innovation and interactive learning, in Lundvall, B.-Å (ed.), The learning economy and the economics of hope: Anthem Press, 85–106. Lundvall, B.-Å. 2007. National innovation systems-analytical concept and development tool. Industry and Innovation, 14(1): 95–119. Mercan, B., & Goktas, D. 2011. Components of innovation ecosystems: A cross-country study. International Research Journal of Finance and Economics, 76(16): 102–112. Metcalfe, S., & Ramlogan, R. 2008. Innovation systems and the competitive process in developing economies. The Quarterly Review of Economics and Finance, 48(2): 433–446. Nakata, C., & Weidner, K. 2012. Enhancing new product adoption at the base of the pyramid: A contextualized model. Journal of Product Innovation Management, 29(1): 21–32. Nelson, R. R. 1992. National innovation systems: A retrospective on a study. Industrial and Corporate Change, 1(2): 347–374. Nelson, R. R. 1993. National innovation systems: A comparative analysis: Oxford University Press on Demand. Nelson, R. R., Dosi, G., Helfat, C. E., Pyka, A., Saviotti, P. P., Lee, K., Dopfer, K., Malerba, F., & Winter, S. G. 2018. Modern evolutionary economics: Cambridge University Press. Niosi, J. 2002. National systems of innovations are “x-efficient” (and x-effective): Why some are slow learners. Research Policy, 31(2): 291–302. Patel, P., & Pavitt, K. 1994. National innovation systems: Why they are important, and how they might be measured and compared. Economics of Innovation and New Technology, 3(1): 77–95. Porter, M. E. 1990. The competitive advantage of nations. Harvard Business Review, 73: 91. Porter, M. E. 2000. Location, competition, and economic development: Local clusters in a global economy. Economic Development Quarterly, 14(1): 15–34. Prahalad, C. K. 2012. Bottom of the pyramid as a source of breakthrough innovations. Journal

National innovation systems  313 of Product Innovation Management, 29(1): 6–12. Sheth, J. N. 2011. Impact of emerging markets on marketing: Rethinking existing perspectives and practices. Journal of Marketing, 75(4): 166–182. Wang, C., Kafouros, M., Yi, J., Hong, J., & Ganotakis, P. 2020. The role of government affiliation in explaining firm innovativeness and

profitability in emerging countries: Evidence from China. Journal of World Business, 55(3): 101047. Watkins, A., Papaioannou, T., Mugwagwa, J., & Kale, D. 2015. National innovation systems and the intermediary role of industry associations in building institutional capacities for innovation in developing countries: A critical review of the literature. Research Policy, 44(8): 1407–1418.

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78. Not-invented-here syndrome The not-invented-here-syndrome (NIHS) can be broadly defined as a bias against knowledge and ideas that cross organization or unit boundaries. As a consequence, outside knowledge and ideas are rejected or underused simply because their source is external to the organization or unit (Antons and Pillar, 2015; Dunford, 2018). The notion of NIHS has been widely applied to a variety of contexts, including knowledge transfers within multinational enterprises (MNEs). MNEs are indeed constantly engaged in knowledge transfers both between the headquarters and the subsidiaries, and between subsidiaries (Gupta and Govindarajan, 2000). The effectiveness of such transfers is often the key factor behind the competitive advantage of MNEs vis-à-vis domestic competitors (Minbaeva et al., 2003). NIHS might affect how subsidiaries assess knowledge originating from either the headquarters or another subsidiary, hindering the rate of knowledge transfer, with important consequences for MNE performance (Schotter and Beamish, 2011). Consider a subsidiary of an MNE assessing the possibility of introducing a new product developed by another subsidiary. From the MNE’s point of view, rejection of the new product by the focal subsidiary is not by itself a negative outcome and the decision-maker could be perfectly unbiased. For instance, it could be rational that the subsidiary dismisses the new product if it does not meet the highly idiosyncratic local demand. Instead, rejection or downgrading of external knowledge is damaging when it provides value or more value than internal solutions (Kathoefer and Leker, 2012). In the latter case, we are in the presence of a bias that harms MNE performance. The NIHS can form for a number of different reasons. In their original contribution, Katz and Allen (1982) argue that when a research and development (R&D) group remains stable and successful for a long period of time, it inevitably ends up developing an NIHS. Success reinforces and magnifies the belief that it is unlikely that there would be new ideas of value or merit coming from outside

the group. From a rational standpoint, this stance against external knowledge might have its own merit. For instance, high-tech firms might be subject to various quality standards in their processes, which are on average less likely to apply to external organizations. Thus, in a context of asymmetric information, it might be rational to discount external knowledge. Sometimes, even if the external ideas are superior to internal solutions, committing the organization to disregard them might work as an incentive device for internal researchers (Rotemberg and Saloner, 1994). While ex post it would be rational to use external technologies whenever they are superior to internally developed ones, an ex ante commitment to bias the assessment in favor of the latter might trigger greater innovation efforts and help develop stronger internal capabilities. Another mechanism is the defense of prestige, reputation and power within the organization (Gupta and Govindarajan, 2000). Managers might dismiss external ideas because, if they were to embrace them, their competence relative to that of the idea originators might be questioned. This notion might be reinforced by the internal incentive structure of the organization. Arora, Fosfuri and Rønde (2013) show that agency conflicts within large firms can result in the firm becoming more insular from the external market for technology. In large firms, individual organizational units (i.e., divisions, subsidiaries) have specialized information about the costs and benefits of external opportunities, which might help the headquarters to make better decisions. However, eliciting this information is costly in a context in which incentives might not be aligned. Therefore, when firms rely upon the local information of their organizational units, they often trade off the cost of eliciting information against the benefits. Firms might sometimes be unable to provide sufficient incentives to extract information about costs and benefits of external opportunities. The result is a bias against externally developed technology, i.e., the NIHS. In an MNE context, this mechanism might manifest itself as a power struggle among subsidiaries, whereby managers at a subsidiary would avoid implementing ideas or best practices developed in other subsidiaries because of the risk that this might erode both their power and/or their economic incentives.

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Some recent advances in NIHS research draw on social identity theory and in-group vs. out-group dynamics (Tajfel and Turner, 1986) to explain why individuals within an organization or organizational unit might develop a negative attitude toward external knowledge (Antons and Pillar, 2015). When a specific group (i.e., colleagues from the same organization or department or subsidiary) remains stable for an extended period of time, its members develop greater identification, which inevitably increases the perceived distance from external groups (Tajfel and Turner, 1986). This greater perceived distance influences, among other things, the adoption of ideas from outside, in the sense that it encourages an emphasis on internal knowledge and negative attitudes toward external knowledge. Internal members might reject external knowledge because the R&D group considers it more legitimate and prestigious to create new knowledge in-house, instead of using knowledge invented elsewhere, whose adoption might potentially cause the loss of identity and group cohesion (Burcharth and Fosfuri, 2015). The effects of in-group bias imply that knowledge gets evaluated not exclusively on the basis of objective criteria, such as quality and content, but also according to subjective criteria that stem from affect, cognition, and social relationships—that is, attitudes. Consistent with the identity-based motivation for the NIHS, Lifshitz-Assaf (2018) studied the introduction of the open innovation model at NASA. She reported that some internal R&D professionals attempted to preserve their original professional identity and developed a strong NIHS, which prevented them from incorporating the solutions of the open innovation model. Understanding the underlying mechanisms behind the NIHS and making managers aware that it might be pervasive within an organization are the first steps toward the identification of potential remedies and their effective implementation. In an MNE context, the more any given subsidiary is isolated from the rest of the corporation, the more likely it will be subject to the NIHS. Thus, activities that increase commonality of frame of reference between subsidiaries and between subsidiaries and headquarters would help create a shared understanding that would, at least, reduce the more behavioral component of NIHS (Ko et al., 2005). Job rotation and long-term career

planning for upwardly mobile managers are well-established remedies for reducing the pursuit of parochial subsidiary goals that deviate from the larger MNE goals (Baliga and Jaeger, 1984; Chi and Nystrom, 1998). For instance, recent research on knowledge integration across MNE subsidiaries has shown that cross-border mobility within the MNE enables the temporary co-location of mobile inventors in different units, facilitating the dissemination of their knowledge within the MNE (Castellani et al., 2022). Corporations might also redesign some aspects of their organizational structure to reduce NIHS. Procter & Gamble had a very closed innovation approach, with subsidiaries often reinventing the wheel or launching products that were successful in other international markets only several years later. The reorganization of the company around units that would span across geographical markets and the launch of ‘Connect and Develop’ were instrumental for a cultural transformation toward a company open to external ideas. Companies must be willing to invest in shaping the identity of the employees and reward appropriately the utilization of external ideas. In her study of the introduction of the open innovation model at NASA, Lifshitz-Assaf (2018) shows that only those R&D professionals who underwent identity refocusing work dismantled their boundaries, truly adopting the knowledge from outside and sharing their internal knowledge. Training programs might also be an effective channel through which companies shape employee attitudes. For instance, in the context of a leading MNE within the specialty chemicals industry, Herzog and Leker (2010) report that levels of NIHS were notably lower among employees working in business units with what they call an open innovation culture than their counterparts in business units with a closed innovation culture. Sometimes, the NIHS could be the side effect of otherwise well-intentioned organizational practices. For instance, Burcharth and Fosfuri (2015) argue that institutionalized newcomer socialization practices are central to the formation not only of strong organizational identities among employees, but also of overly positive perceptions of knowledge originating from the in-group and NIHS toward knowledge from the out-group. As newcomer socialization practices are essential for the functioning of organizations, the Andrea Fosfuri and Esther Roca Batllori

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answer is not to eliminate them, but instead to design them in a less in-group-centric way that preserves newcomers’ appreciation of—and openness to—outsiders and their knowledge inputs. In an MNE context, these socialization practices should account for the geographically dispersed network of subsidiaries (Baliga and Jaeger, 1984; Chi and Nystrom, 1998). Finally, incentives within units have to be appropriately calibrated such that decision-makers do not find it more convenient to implement internally developed solutions rather than solutions from other units or external to the organization. Andrea Fosfuri and Esther Roca Batllori

References

Antons, D., & Pillar, F.T. 2015. Opening the Black Box of “Not Invented Here”: Attitudes, Decision Biases, and Behavioral Consequences. Academy of Management Perspectives, 29(2): 193–217. Arora, A., Fosfuri, A., & Rønde, T. 2013. Managing Licensing in a Market for Technology. Management Science, 59(5): 1092–1106. Baliga, R.B., & Jaeger, A.M. 1984. Multinational Corporations: Control Systems and Delegation Issues. Journal of International Business Studies, 15(2): 25–40. Burcharth, A.L., & Fosfuri, A. 2015. Not-Invented-Here: How Institutionalized Socialization Practices Affect the Formation of Negative Attitudes Toward External Knowledge. Industrial and Corporate Change, 24(2): 281–305. Castellani, D., Perri, A., & Scalera, V.G. 2022. Knowledge Integration in Multinational Enterprises: The Role of Inventors Crossing National and Organizational Boundaries. Journal of World Business, 57(3): 101290. Chi, T., & Nystrom, P. 1998. An Economic Analysis of Matrix Structure, Using Multinational

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Corporations as an Illustration. Managerial and Decision Economics, 19: 141–156. Gupta, A.K., & Govindarajan, V. 2000. Knowledge Flows Within Multinational Corporations. Strategic Management Journal, 21(4): 473–496. Herzog, P., & Leker, J. 2010. Open and Closed Innovation – Different Innovation Cultures for Different Strategies. International Journal of Technology Management, 52(3/4): 322–343. Kathoefer, D.G., & Leker, J. 2012. Knowledge Transfer in Academia: An Exploratory Study on the Not-Invented-Here Syndrome. The Journal of Technology Transfer, 37(5): 658–675. Katz, R., & Allen, T.J. 1982. Investigating the Not-Invented-Here (NIH) Syndrome: A Look at the Performance, Tenure and Communication Patterns of 50 R&D Project Groups. R&D Management, 12: 7–19. Ko, D.G., Kirsch, L.J., & King, W.R. 2005. Antecedents of Knowledge Transfer from Consultants to Clients in Enterprise System Implementations. MIS Quarterly, 29: 59–85. Lifshitz-Assaf, H. 2018. Dismantling Knowledge Boundaries at NASA: The Critical Role of Professional Identity in Open Innovation. Administrative Science Quarterly, 63(4): 746–782. Minbaeva, D., Pedersen, T., Björkman, I., Fey, C.F., & Park, H.J. 2003. MNC Knowledge Transfer, Subsidiary Absorptive Capacity, and HRM. Journal of International Business Studies, 34(6): 586–599. Rotemberg, J.J., & Saloner, G. 1994. Benefits of Narrow Business Strategies. The American Economic Review, 84(5): 1330–1349. Schotter, A., & Beamish, P.W. 2011. Performance Effects of MNC Headquarters–Subsidiary Conflict and the Role of Boundary Spanners: The Case of Headquarter Initiative Rejection. Journal of International Management, 17(3): 243–259. Tajfel, H., & Turner, J.C. 1986. The Social Identity Theory of Intergroup Behavior. In: Worchel, S., & Austin, W.G., Eds., Psychology of Intergroup Relation, Hall Publishers, Chicago, 7–24.

79. Offshoring Offshoring refers to relocation of organizational tasks and activities from a firm’s home country to foreign locations (Contractor et al., 2010; Doh et al., 2009; Lewin et al., 2009). Offshoring has been applied as a business practice since the 1960s (Ferdows, 1997) and it is described as early as 1966 by Raymond Vernon in the seminal product lifecycle theory. Here, Vernon describes how production is typically moved from industrialized countries to developing countries towards the maturity stage of the product lifecycle (Vernon, 1966). Since the late 1990s, offshoring has emerged as a broad construct that comprises the relocation of tasks to foreign wholly owned subsidiaries (referred to as “captive offshoring”) or to external partners (“offshore outsourcing”). A foundational firm strategy model for offshoring is frequently portrayed as a choice between ownership and control on one side and the choice of location on the other. Figure 79.1 illustrates this choice set in a simple matrix that includes the two dimensions, which, when combined, open four different strategic options to firms. The model outlines four strategies; however, there is no “one best strategy” since each option comes with a blend of potential advantages and disadvantages. The firm has to assess and trade off the relative importance of these pros and cons. In this regard, the attractiveness of one specific strategic option also depends on firm-specific characteristics, industry and other contextual factors. While

the model captures central dimensions of the offshoring strategy, it should be noted that it simplifies the choices of location and ownership into binary choices, whereas the choices a firm faces contain more nuances. The choice of foreign location includes important dimensions of distance (e.g., cultural, geographical) and “liabilities of foreignness” (Zaheer, 1995) that influence the magnitude of benefits, costs and challenges the firm encounters in a specific host location (e.g., Stringfellow et al., 2008). Furthermore, the model’s location focus on “domestic” and “foreign” in practice excludes other locational dynamics, such as when a European firm decides to relocate production activities from a supplier in China to a supplier in Vietnam. In the same vein, the ownership and control dimension similarly depicts a binary choice between internalization and externalization. However, a firm can opt for alternative models, for example engaging in an international joint venture or by owning a minority stake in a foreign firm. In part to respond to the limitations of the above model, the offshoring construct has been extended with process perspectives, which stress the dynamic nature of offshoring and the interdependencies and interfaces between the tasks, organizational units and people involved (Jensen et al., 2013; Kumar et al., 2009; Srikanth and Puranam, 2011). From a firm perspective, such interdependencies may lead to coordination and communication challenges, challenges regarding the transfer, sharing and reintegration of knowledge (e.g., Stringfellow et al., 2008), and to

Source:  Adapted from Tallman (2011).

Figure 79.1

Offshoring strategy as an outcome of choice of ownership and location

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unexpected “hidden” costs resulting from the offshoring operations (Larsen et al., 2013). The Offshoring Research Network (https://​ en​.wikipedia​.org/​wiki/​Offshoring​_Research​ _Network), formed in 2004, provided a boost to the research on offshoring by providing extensive data on the development and spread of offshoring involving more tasks, business functions and locations (Lewin and Peeters, 2006). In the academic literature, offshoring is addressed as an empirical phenomenon with analytical linkages to a range of themes and theories in the literatures on international business and global strategy, economic geography, and supply chain management. Transaction cost economics (TCE) and resource-based theory (RBT) stand out as central theories with regard to the strategy and motive driving offshoring operations (McIvor, 2009). Building on the strategic motives for foreign direct investments (Dunning and Lundan, 2008), offshoring is frequently portrayed as driven by one of two main motives, or a combination thereof: first, an efficiency-seeking motive, which is related to cost arbitrage through offshore outsourcing to external partners. Such partners are typically located in emerging market economies with relatively low labor costs, and therefore analyzed through the theoretical lens of TCE (e.g., Choi et al., 2018; Ellram et al., 2008; Geyskens et al., 2006). Second, by a search for human resources, knowledge, or other strategic assets in foreign locations, thus theoretically taking the perspective of RBT with regard to strengthening and complementing firm resources (e.g., Holcomb and Hitt, 2007; Jensen, 2012). These two theories are also centrally placed with regard to another recurrent theme in offshoring research concerning the question of internalization versus externalization, as mirrored in Figure 79.1, often referred to as the make-or-buy decision. The essence of TCE concerns questions about control, governance and costs of using the market (Williamson, 2008). In comparison, RBT takes a different angle and considers the role of firm-specific resources in offshoring, e.g., whether the offshoring firm has the necessary resources to effectively engage in offshoring, and how the competitive resources of the firm are positively or negatively influenced by the offshoring operations. Similarly, the organizational consequences of spatially separating activities that were previously located under

the same roof has been studied (Asmussen et al., 2016). The question is whether offshoring implies that exchange of information and linkages between the separated value chain activities are broken, or companies can apply other mechanisms to retain the fruitful exchange of knowledge (Larsen et al., 2013). Another theme concerns the choice of location. Under the influence of John Dunning’s eclectic “OLI framework” (e.g., Dunning and Lundan, 2008), international business research has traditionally taken a country-level perspective with regard to location choice. This also largely applies to offshoring research (e.g., Doh et al., 2009; Jensen and Pedersen, 2011; Graf and Mudambi, 2005). An emerging strand of international business research has promoted the city or industry cluster as a more precise conceptualization of the role of location (Goerzen et al., 2013; Nielsen et al., 2017), including the choice of offshoring location (Zaheer et al., 2009). The reasoning is that foreign firms place activities in specific locations due to the qualities of these urban areas and that the country level to a lesser degree plays a role in location decisions. Finally, a theme concerning the knowledge assets of the firm comprises a range of questions related to transfer and sharing of knowledge between firms and locations, as well as the safeguarding of knowledge assets (e.g., Srikanth and Puranam, 2011). Theoretically, this theme mainly connects to the literature on firm resources, specifically on knowledge as a competitive resource, and is pronounced in research concerning services and high value-added activities that contain a significant knowledge component (Mol and Brandl, 2018). In this regard, modularization of tasks in the value chain can serve as a mechanism to protect knowledge assets of the offshoring firm. The concept of modularity includes that the structures of a system, for example in the production process, is based on minimized interaction and interdependences between modules and maximized interaction and interdependences within modules, thus standardizing interfaces between components (Bals et al., 2013; Sanchez and Mahoney, 1996). Research in this field has demonstrated that technological advances that allow firms to more easily modularize their products can explain the co-evolving trends of offshoring and outsourcing (Van Assche, 2008). Consequently, improved opportunities

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for modularizing value chain activities can, in principle, allow firms to offshore activities (modules) and reap the benefits of offshoring without compromising critical knowledge assets. Offshoring research spans different levels of analysis, ranging from the country level, over industry level, to the levels of the firm and the individual. At the country level, much research addressed the potentially negative effects of offshoring on national competitiveness, employment, and risks for, especially, unskilled workers (e.g., Dossani and Kenney, 2006; Olsen, 2006). However, other authors focus on the gains of offshoring and economic globalization for developed, high-cost economies (Farrell et al., 2006) as well as for the destination countries, typically emerging economies (Mudambi, 2008). Similar perspectives on the gains and negative implications are mirrored in industry-level research (e.g., Andersen, 2006; Patibandla and Petersen, 2002), which shows a main distinction between research manufacturing industries compared with service domains (e.g., UNCTAD, 2004). Research at the level of the firm addresses a wide range of topics, in particular the motives for offshoring (e.g., Jensen and Pedersen, 2012), organization and governance modes (e.g., Kedia and Mukherjee, 2009; Mudambi and Tallman, 2010), and performance implications for offshoring firms and host firms (e.g., Brandl et al., 2018; Lahiri et al., 2022). While the role of individuals as “boundary spanners” in creating and sustaining collaboration between firms and organizational units is recognized in international business research (Schotter et al., 2017), little research is done on this question in offshoring research, although some notable studies exist (Levina and Vaast, 2008; Søderberg et al., 2013; Søderberg and Romani, 2017). The current discussion on offshoring has shifted its focus from cost efficiency in the value chain to resilience in the value chain (e.g., Gereffi et al., 2022; Gligor et al., 2019; Han et al., 2020; Pedersen and Jensen, 2023). The reason is that companies over the past couple of decades have pursued more granular fine-slicing and increased offshoring of their activities, thereby creating tightly coupled global value chains. This, in turn, has exposed them to a variety of risks and shocks, including the risks caused by a global

pandemic, but also disruptive technologies, climate change, natural disasters, geopolitical tensions, the risk of cybersecurity attacks, which all have pointed at the vulnerability of these global value chains (e.g., McKinsey, 2020, 2021). It has generated debate about whether companies that operate in global markets are too vulnerable because of the organization of their global value chains. Have companies given too much priority to low costs and efficiency at the expense of resilience and sustainability? Can resilience be restored by merely adapting companies’ strategies and practices? As a consequence, companies are adopting new practices in order to increase resilience along the lines of making the global value chains more diversified (e.g., having more trusted suppliers), shorter (e.g., regional nearshoring) and domestic (e.g., stockpiles and back-shoring). Peter D. Ørberg Jensen and Torben Pedersen

References

Andersen, P. H. (2006). Regional clusters in a global world: Production relocation, innovation, and industrial decline. California Management Review, 49(1), 101–122. Asmussen, C. G., Larsen, M. M., & Pedersen, T. (2016). Organizational adaptation in offshoring: The relative performance of home-and host-based learning strategies. Organization Science, 27(4), 911–928. Bals, L., Jensen, P. D. Ø., Larsen, M. M., & Pedersen, T. (2013). Exploring layers of complexity in offshoring research and practice. In Bals, L., Jensen, P. D. Ø., Larsen, M. M., & Pedersen, T. (Eds.), The Offshoring Challenge (pp. 1–18). Springer, London. Brandl, K., Jensen, P. D. Ø., & Lind, M. J. (2018). Advanced service offshore outsourcing: Exploring the determinants of capability development in emerging market firms. Global Strategy Journal, 8(2), 324–350. Choi, J. J., Ju, M., Kotabe, M., Trigeorgis, L., & Zhang, X. T. (2018). Flexibility as firm value driver: Evidence from offshore outsourcing. Global Strategy Journal, 8(2), 351–376. Contractor, F. J., Kumar, V., Kundu, S. K., & Pedersen, T. (2010). Reconceptualizing the firm in a world of outsourcing and offshoring: The organizational and geographical relocation of high-value company functions. Journal of Management Studies, 47(8), 1417–1433. Doh, J. P., Bunyaratavej, K., & Hahn, E. D. (2009). Separable but not equal: The location determinants of discrete services offshoring

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320  Encyclopedia of international strategic management activities. Journal of International Business Studies, 40, 926–943. Dossani, R., & Kenney, M. (2006). Reflections upon “sizing the emerging global labor market”. Academy of Management Perspectives, 20(4), 35–41. Dunning, J. H., & Lundan, S. M. (2008). Multinational Enterprises and the Global Economy. Edward Elgar Publishing: Cheltenham, UK. Ellram, L. M., Tate, W. L., & Billington, C. (2008). Offshore outsourcing of professional services: A transaction cost economics perspective. Journal of Operations Management, 26(2), 148–163. Farrell, D., Laboissiere, M. A., & Rosenfeld, J. (2006). Sizing the emerging global labor market: Rational behavior from both companies and countries can help it work more efficiently. Academy of Management Perspectives, 20(4), 23–34. Ferdows, K. (1997). Making the most of foreign factories. Harvard Business Review, March– April, 73–88. Gereffi, G., Pananond, P. & Pedersen, T. (2022). Resilience decoded: The role of firms, global value chains, and the state in COVID-19 medical supplies. California Management Review, 64(2), 46–70. Geyskens, I., Steenkamp, J. B. E., & Kumar, N. (2006). Make, buy, or ally: A transaction cost theory meta-analysis. Academy of Management Journal, 49(3), 519–543. Gligor, D., Gligor, N., Holocomb, M. & Bozkurt, S. (2019). Distinguishing between the concepts of supply chain agility and resilience: A multidisciplinary literature review. The International Journal of Logistics Management, 30(2), 467–487. Goerzen, A., Asmussen, C. G., & Nielsen, B. B. (2013). Global cities and multinational enterprise location strategy. Journal of International Business Studies, 44(5), 427–450. Graf, M., & Mudambi, S. M. (2005). The outsourcing of IT-enabled business processes: A conceptual model of the location decision. Journal of International Management, 11(2), 253–268. Han, Y., Chong, W. K. & Li, D. (2020). A systematic literature review of the capabilities and performance metrics of supply chain resilience. International Journal of Production Research, 58(15), 4541–4566. Holcomb, T. R., & Hitt, M. A. (2007). Toward a model of strategic outsourcing. Journal of Operations Management, 25(2), 464–481. Jensen, P. D. Ø. (2012). A passage to India: A dual case study of activities, processes and resources in offshore outsourcing of advanced services. Journal of World Business, 47(2), 311–326. Jensen, P. D. Ø., Larsen, M. M., & Pedersen, T. (2013). The organizational design of offshor-

ing: Taking stock and moving forward. Journal of International Management, 19(4), 315–323. Jensen, P. D. Ø., & Pedersen, T. (2011). The economic geography of offshoring: The fit between activities and local context. Journal of Management Studies, 48(2), 352–372. Jensen, P. D. Ø., & Pedersen, T. (2012). Offshoring and international competitiveness: Antecedents of offshoring advanced tasks. Journal of the Academy of Marketing Science, 40(2), 313–328. Kedia, B. L., & Mukherjee, D. (2009). Understanding offshoring: A research framework based on disintegration, location and externalization advantages. Journal of World Business, 44(3), 250–261. Kumar, K., Van Fenema, P. C., & Von Glinow, M. A. (2009). Offshoring and the global distribution of work: Implications for task interdependence theory and practice. Journal of International Business Studies, 40, 642–667. Lahiri, S., Karna, A., Kalubandi, S. C., & Edacherian, S. (2022). Performance implications of outsourcing: A meta-analysis. Journal of Business Research, 139, 1303–1316. Larsen, M. M., Manning, S., & Pedersen, T. (2013). Uncovering the hidden costs of offshoring: The interplay of complexity, organizational design, and experience. Strategic Management Journal, 34(5), 533–552. Levina, N., & Vaast, E. (2008). Innovating or doing as told? Status differences and overlapping boundaries in offshore collaboration. MIS Quarterly, 32(2), 307–332. Lewin, A. Y., Massini, S., & Peeters, C. (2009). Why are companies offshoring innovation? The emerging global race for talent. Journal of International Business Studies, 40, 901–925. Lewin, A. Y., & Peeters, C. (2006). Offshoring work: Business hype or the onset of fundamental transformation? Long Range Planning, 39(3), 221–239. McIvor, R. (2009). How the transaction cost and resource-based theories of the firm inform outsourcing evaluation. Journal of Operations Management, 27(1), 45–63. McKinsey (2020). Risk, resilience, and rebalancing in global value chains. McKinsey Global Institute. McKinsey (2021). The resilience imperative: Succeeding in uncertain times. McKinsey Global Institute. Mol, M. J., & Brandl, K. (2018). Bridging what we know: The effect of cognitive distance on knowledge-intensive business services produced offshore. International Business Review, 27(3), 669–677. Mudambi, R. (2008). Location, control and innovation in knowledge-intensive industries. Journal of Economic Geography, 8(5), 699–725. Mudambi, S. M., & Tallman, S. (2010). Make, buy or ally? Theoretical perspectives on knowledge

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Offshoring  321 process outsourcing through alliances. Journal of Management Studies, 47(8), 1434–1456. Nielsen, B. B., Asmussen, C. G., & Weatherall, C. D. (2017). The location choice of foreign direct investments: Empirical evidence and methodological challenges. Journal of World Business, 52(1), 62–82. Olsen, K. B. (2006). Productivity impacts of offshoring and outsourcing: A review. OECD Science, Technology and Industry Working Papers, 2006/1, OECD Publishing. Patibandla, M., & Petersen, B. (2002). Role of transnational corporations in the evolution of a high-tech industry: The case of India’s software industry. World Development, 30(9), 1561–1577. Pedersen, T. & Jensen, P. D. Ø. (2023, forthcoming). Globalization, disruption and resilience. In A. Hawk, M. M. Larsen, M. Leiblein & J. Reuer (Eds.), Strategy in a turbulent era. Edward Elgar Publishing: Cheltenham, UK. Sanchez, R., & Mahoney, J. T. (1996). Modularity, flexibility, and knowledge management in product and organization design. Strategic Management Journal, 17(S2), 63–76. Schotter, A. P., Mudambi, R., Doz, Y. L., & Gaur, A. (2017). Boundary spanning in global organizations. Journal of Management Studies, 54(4), 403–421. Srikanth, K., & Puranam, P. (2011). Integrating distributed work: Comparing task design, communication, and tacit coordination mechanisms. Strategic Management Journal, 32(8), 849–875. Stringfellow, A., Teagarden, M. B., & Nie, W. (2008). Invisible costs in offshoring services

work. Journal of Operations Management, 26(2), 164–179. Søderberg, A. M., Krishna, S., & Bjørn, P. (2013). Global software development: Commitment, trust and cultural sensitivity in strategic partnerships. Journal of International Management, 19(4), 347–361. Søderberg, A. M., & Romani, L. (2017). Boundary spanners in global partnerships: A case study of an Indian vendor’s collaboration with western clients. Group & Organization Management, 42(2), 237–278. Tallman, S. (2011). Offshoring, outsourcing, and strategy in the global firm. AIB Insights, 11(1), 3–7. UNCTAD (2004). World investment report 2004 – the shift towards services. United Nations: Geneva. Van Assche, A. (2008). Modularity and the organization of international production. Japan and the World Economy, 20(3), 353–368. Vernon, R. (1966). International trade and international investment in the product cycle. Quarterly Journal of Economics, 80(2), 190–207. Williamson, O. E. (2008). Outsourcing: Transaction cost economics and supply chain management. Journal of Supply Chain Management, 44(2), 5–16. Zaheer, S. (1995). Overcoming the liability of foreignness. Academy of Management Journal, 38(2), 341–363. Zaheer, S., Lamin, A., & Subramani, M. (2009). Cluster capabilities or ethnic ties? Location choice by foreign and domestic entrants in the services offshoring industry in India. Journal of International Business Studies, 40(6), 944–968.

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80. Organizational culture in MNEs What is organizational culture, and key early studies

Traditionally scholars differentiated between organizational culture and organizational climate, with organizational culture being more oriented to values and organizational climate being more practice oriented, among other differences, but since the mid-1990s the two terms have largely merged into one, which is referred to as organizational culture (Denison, 1996), a tradition we will follow. The concept of organizational culture became popular in the 1970s, when scholars became interested in the causes of Japan’s economic success and noticed that the differences in the management practices of Japanese and Western firms played an important role in Japanese firms’ success. It was suggested that Japanese firms’ management practices worked well in part because of the strong organizational culture and low turnover which the firms had (Ouchi, 1981; Rohlen, 1974). Harvard scholars Deal and Kennedy (1982) formally defined the concept of organizational culture as “a system of expressed informal rules that impose a certain general conduct.” Deal and Kennedy (1982) further believed that successful firms should have a “strong culture” that helps employees clearly understand how leadership hopes the organization will act. Deal and Kennedy suggest that strong cultures can be developed by focusing on four aspects: values, heroes, rites, and communication networks. Further, it has been shown that firms can use organizational culture to motivate, guide and manage employees to achieve success (Peters & Waterman, 1982). Schein (1984) conducted a seminal qualitative study of organizational culture that suggested there are three levels of organizational culture: starting with basic assumptions, then espoused values, and then the most visible artifacts. Organization culture is theoretically framed as a value system formed in the process of interaction among organization members and accepted by most members, so that it could be used to educate future incoming members and guide all members how to act (Schein, 1984). Robert

Quinn explored organizational culture and developed the competing values framework using quantitative methods to understand differences in organizational culture and the underlying values that contribute to organizational effectiveness. The framework mainly emphasizes two dimensions: stability vs. change, and internal organization vs. external environment (Quinn & Rohrbaugh, 1981). The competing values framework provides an important theoretical basis for measuring and evaluating organizational culture. It also forms the basis of several other models of organizational culture. Organizational culture research became more focused in the 1990s. For example, Scheider (1990) showed that organizational culture impacts a firm’s human resource management practices and employees’ working attitude, behavior and level of dedication to work, ultimately shaping organizational effectiveness. Similarly, Taylor et al. (2008) suggested that organizational culture is associated with organizational commitment and that organizational commitment is more difficult to achieve in MNEs than in domestic firms. The Denison (1990) model of organizational culture has become quite popular, suggesting how to facilitate organizational effectiveness by dealing with the tensions of: internal vs. external and flexibility vs. stability. These two tensions make up a 2×2 matrix that produces four key dimensions of an organizational culture: (1) mission, (2) consistency, (3) involvement, and (4) adaptability. Each dimension consists of four sub-dimensions in post-1995 versions of the model (Denison & Mishra, 1995; Fey & Denison, 2003). These classical organizational culture models provide strong platforms to study organizational culture.

Creating an effective organizational culture in MNEs

When multinational enterprises (MNEs) are brought into the picture, the issue of how to design an effective organizational culture becomes much more complex due to the variety of national cultures influencing an MNE’s organizational culture. Organizational culture has been shown to be associated with firm performance and to benefit from being adapted to local national culture (Fey & Denison, 2003). At the same time, common elements of an organizational

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culture throughout an MNE operating in different countries helps with integration, flow of information, acceptance of ideas, holding the firm together, and understanding and developing a sense of belonging to the global firm for employees and customers. Thus, there is a need to have a balance between local adaptation and global standardization of an MNE subsidiary’s organizational culture. Cultural diversity in MNEs can be an asset in terms of creating diverse innovative ideas and possessing local understanding helpful for selling products and services to local markets, but cultural diversity can also be a liability because it can create misunderstandings and process losses (Stahl & Tung, 2015). MNEs form an internally differentiated network composed of distributed resources in three sets of relationships: linkages among the headquarters and the subsidiaries, linkages between subsidiaries, and subsidiaries’ local linkages in host countries (Ghoshal & Nohria, 1997). Situated in this complex network, MNEs have various stakeholders, ranging from shareholders to employees to customers, distributed both intra-organizationally and inter-organizationally across different countries (Ghoshal & Bartlett, 1990; Scheffknecht, 2011). Different subsidiaries often interact with each other within the established multinational network, where individuals often hold differing deeply ingrained beliefs and assumptions that come from their upbringing in different host-country national cultural contexts (Cummings & Keen, 2008; Hofstede, 2001; Kwantes & Dickson, 2011). National cultural distance between units leads to organizational barriers to forming unified perceptions and attitudes (Minkov & Hofstede, 2012; Rozkwitalska, 2010). Cultural gaps make it challenging to develop a homogenous organizational culture within an MNE. Therefore, MNEs must reconcile tensions between values embedded in national cultures of foreign subsidiaries and those from the MNE’s home country, drawing some aspects from both in forming a subsidiary’s organizational culture (Berson et al., 2004). Creating a set of shared basic assumptions and core values that are widely accepted within an MNE is an effective integration strategy that soothes internal interaction between different units (Meglino & Ravlin, 1998). An organizational culture that effectively integrates subcultures helps create a common vision and shared values among

individuals across subsidiaries, which helps maintain internal stability and foster a high degree of conformity (Denison, Haaland & Goelzer, 2004). Further, a shared common organizational culture facilitates direct and unambiguous communication among all individuals in MNEs (Kotter & Heskett, 1992), and MNEs with a shared common culture develop competitive advantage by improving employee commitment and loyalty as well as reducing bureaucracy (Lee & Yu, 2004). Effective integration of diverse subcultures not only decreases conflicts and misunderstanding at the workplace but also enhances employee creativity (Mavin & Girling, 2000; Maxwell et al., 2001). Furthermore, MNEs that manage to integrate subcultures better support continuous learning and deepen mutual trust among individuals, thus creating a more motivating and harmonious working environment that often results in greater efficiency and effective problem-solving (Swanson, 2002). However, Sagiv, Schwartz and Arieli (2011) leverage institutional arguments to highlight that national and organizational cultures are closely intertwined because organizations maintain legitimacy by adapting to societal values. Thus, local adaption is also needed. As a result, MNEs with an integrative organizational culture that is too standardized globally will struggle to address the differences in consumer needs, distribution channels, local competitors, practices which best stimulate employees to work effectively, and other institutional factors that differ greatly by countries (Ghoshal & Bartlett, 1990). A balance is needed. Since value diversity in MNEs is prevalent, the Schwartz value framework can help MNE managers deal with value conflicts in MNEs by identifying value profiles that could be effectively integrated to create a globally standardized cohesive organizational culture and also adapt subsidiaries’ organizational cultures to different value orientations in different host countries (Sagiv et al., 2011). This is especially important since values have been theorized by many, including Sagiv et al. (2011), to have force, and taxonomies such as the Schwartz value framework aim to inform how tensions about how functions, societies or organizations need to be solved, such as the dynamic between a community/ group and individuals. It is also interesting to note that Dickson, BeShears and Gupta (2004) show that variation in national culture Carl F. Fey and Yian Chen

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explains more in the differences in organizational culture than variance in industry. While Deal and Kennedy (1982) stated that organizations’ continued success can be largely attributed to having an organizational culture with a high level of shared values and mindset, imposing a unified shared global organizational culture entirely on all of an MNE’s subsidiaries could lead to inflexibility, rigidity and be an impediment to creativity and innovation (Welch & Welch, 2006). Therefore, MNEs need to adopt a hybrid approach to organizational culture, like that advocated by Frenkel (2008), where MNEs first put forward a shared common culture around the world and then subsidiaries appraise and adapt some practices to the local operating environment. In this process, MNE leadership needs to identify several (we recommend about three to five) key elements of their organizational culture that form the core of the MNE’s organizational culture and that should be the same globally and not be adapted. Other practices should be open to local adaptation. Indeed, we agree with Denison et al. (2011), who point out the importance of MNEs adapting to a local national culture, as in the case of China, where they suggest considering the role of the Communist Party while at the same time having some key elements of the MNE’s organizational culture consistent around the world. When considering MNE organizational culture, multiple cultures at different levels converge to create a new set of values, beliefs, and traditions (Bhabha, 1990). MNEs should support subsidiaries to adopt locally adapted organizational cultures, since they could lead to novel hybrid practices that are more efficient in the host country (Shimoni, 2011). MNEs with adaptable cultures are in a better position to discover business opportunities in the external environment of the host countries and to create a set of values supporting constant learning and improvement (Calori & Sarnin, 1991). Foreign subsidiaries do not have to attract employees with average cultural values to work for them, as people in any country have a distribution of different cultural values. Furthermore, Western MNEs in developing or transforming economies are often seen as progressive, attractive employers, in part due to their unique/foreign/advanced organizational cultures and resulting practices in Carl F. Fey and Yian Chen

an environment where foreign organizational cultures can have a positive perception and local organizational cultures can have a negative perception to some (Denison et al., 2011). Thus, foreign organizational cultures can serve to help attract good progressive local employees. Caprar (2011) reminds us that a large adaptation to the local environment could even be unwelcomed by many talented and motivated local employees who may have chosen to come to work for an MNE subsidiary due to its foreignness. Thus, too much local adaption could potentially lead to job dissatisfaction and high turnover. However, MNEs should also be sure to adapt some to the local national culture to drive organizational effectiveness. A balance is needed. Instead of a focus on overall cultural difference, MNE managers should follow the suggestion of Morgulis-Yakushev, Yildiz and Fey (2018), who – based on a study of the organizational cultures of 188 MNE headquarters from diverse countries and their Russian subsidiaries – advocate a focus on organizational cultural fit (for which they suggest a unique method of measuring) rather than cultural difference. They suggest that some dimensions of organizational culture should be kept uniform globally to foster consistency and global integration, and others should be adapted to the local environment. They also show that depending on which key goals are important, it is more important that different dimensions of organizational culture are similar. Thus, managers must carefully evaluate multiple dimensions of organizational culture to assess whether standardization, localization, or a balance of both works best to facilitate MNE goals. Normally the answer will be a balance of both. In conclusion, organizational culture is an important performance-enhancing tool, but one which benefits from careful thought given the diverse national culture pressures MNEs experience. MNEs that follow a hybrid approach to organizational culture and make appropriate local adaptations while also keeping some key elements of their firms’ organizational cultures globally standardized best foster a subsidiary’s performance-enhancing organizational culture. Carl F. Fey and Yian Chen

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References

Berson, Y., Erez, M. & Adler, S. 2004. Reflections of organizational identity and national culture on managerial roles in a multinational corporation, Academy of Management Proceedings, 2004(1): Q1–Q6. Bhabha, H.K. 1990. Nation and narration, London & New York: Routledge. Calori, R., & Sarnin, P. 1991. Corporate culture and economic performance: A French study, Organization Studies, 12(1): 49–74. Caprar, D.V. 2011. Foreign locals: A cautionary tale on the culture of MNC local employees, Journal of International Business Studies, 42(5): 608–628. Cummings, T. & Keen, J. 2008. Leadership landscapes, Basingstoke: Palgrave Macmillan. Deal, T.E. & Kennedy, A.A. 1982. Corporate cultures: The rites and rituals of corporate life, Reading, MA: Addison-Wesley. Denison, D.R. 1990. Corporate culture and organizational effectiveness, New York: Wiley. Denison, D.R. 1996. What is the difference between organizational culture and organizational climate? A native’s point of view on a decade of paradigm wars, Academy of Management Review, 21(3): 619–654. Denison, D.R., Haaland, S., & Goelzer, P. 2004. Corporate culture and organizational effectiveness: Is Asia different from the rest of the world? Organizational Dynamics, 33(1): 98–109. Denison, D.R. & Mishra, A.K. 1995. Toward a theory of organizational culture and effectiveness, Organization Science, 6(2): 204–223. Denison, D.R., Xin, K., Guidroz, A.M. & Zhang, L. 2011. Corporate culture in Chinese organizations. In N.M. Ashkanasy, C.P. Wilderom & M.F. Peterson (Eds), Handbook of organizational culture and climate, 2nd ed.: 561–581. Thousand Oaks, CA: Sage. Dickson, M. W., BeShears, R. S., & Gupta, V. 2004. The impact of societal culture and industry on organizational culture: Theoretical explanations. In R.J. House, P. J. Hanges, M. Javidan, P.W. Dorfman & V. Gupta (Eds), Culture, leadership, and organizations: The GLOBE study of 62 societies: 74–90. Thousand Oaks, CA: Sage. Fey, C.F. & Denison, D.R. 2003. Organizational culture and effectiveness: Can American theory be applied in Russia? Organization Science, 14(6): 686–706. Frenkel, M. 2008. The multinational corporation as a third space: Rethinking international management discourse on knowledge transfer through Homi Bhabha, Academy of Management Review, 33(4): 924–942. Ghoshal, S. & Bartlett, C.A. 1990. The multinational corporation as an interorganizational

network, Academy of Management Review, 15(4): 603–625. Ghoshal, S. & Nohria, N. 1997. The differentiated MNC: Organizing multinational corporation for value creation, San Francisco, CA: Jossey-Bass. Hofstede, G. 2001. Culture’s consequences: Comparing values, behaviors, institutions and organizations across nations, 2nd ed., Thousand Oaks, CA: Sage Publications. Hofstede, G. et al. 1990. Measuring organizational cultures: A qualitative and quantitative study across twenty cases, Administrative Science Quarterly, 35(2): 286–316. Kotter, J.P. & Heskett, J.L. 1992. Corporate culture and performance, New York: Free Press. Kwantes, C.T. & Dickson, M.W. 2011. Organizational culture in a societal context lessons from GLOBE and beyond. In N.M. Ashkanasy, C.P. Wilderom & M.F. Peterson (Eds), Handbook of organizational culture and climate, 2nd ed.: 494–514. Thousand Oaks, CA: Sage. Lee, S.K.J. & Yu, K. 2004. Corporate culture and organizational performance, Journal of Managerial Psychology, 19(4): 340–359. Mavin, S. & Girling, G. 2000. What is managing diversity and why does it matter? Human Resource Development International, 3(4): 419–433. Maxwell, G. A., Blair, S. & McDougall, M. 2001. Edging towards managing diversity in practice, Employee Relations, 23(5): 468–482. Meglino, B.M. & Ravlin, E.C. 1998. Individual values in organizations: Concepts, controversies and research, Journal of Management, 24(3): 351–389. Minkov, M. & Hofstede, G. 2012. Hofstede’s fifth dimension: New evidence from the world values survey, Journal of Cross-Cultural Psychology, 43(1): 3–14. Morgulis-Yakushev, S., Yildiz, H.E. & Fey, C.F. 2018. When same is (not) the aim: A treatise on organizational cultural fit and knowledge transfer, Journal of World Business, 53(2): 151–163. Ouchi, W. 1981. Theory Z: How American business can meet the Japanese challenge. Reading, MA: Addison-Wesley. Peters, T.J. & Waterman, R.H. 1982. In search of excellence: Lessons from America’s best-run companies, New York: Harper & Row. Quinn, R.E. & Rohrbaugh, J. 1981. A competing values approach to organizational effectiveness, Public Productivity Review, 5, 141–159. Rohlen, T.P. 1974. For harmony and strength: Japanese white-collar organization in anthropological perspective, Berkeley, CA: University of California Press. Rozkwitalska, M. 2010. Barriers of cross-cultural interactions according to the research findings,

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81. Organizational legitimacy and MNEs Achieving and maintaining, or even more so, lacking or losing, legitimacy is very consequential for organizations. This explains the great scholarly interest in this area. Yet, organizational legitimacy is a broad construct that is somewhat difficult to define and even more challenging to operationalize and empirically measure. Despite notable research efforts, there continues to be some ambiguity and many unanswered questions around organizational legitimacy that need to be addressed to advance theory and provide guidance to practicing managers. In this entry, we present our understanding of the state of knowledge and suggest future research possibilities around this construct. In particular, we focus on the level of the organization, specifically the multinational enterprise (MNE), and take an institutional theory perspective.

Theoretical foundations

Commonly defined as a “generalized perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs and definitions” (Suchman, 1995: 574), the construct of organizational legitimacy is central to the social embeddedness view of organizations, that is, the understanding that organizations are part of a broader social context and are both shaped and evaluated in light of their environment. Achieving and maintaining legitimacy is critical for the performance and even survival of most organizations, since it facilitates access to necessary resources and provides support and endorsement from key actors and stakeholders. The term legitimacy has often been used interchangeably with other constructs, such as reputation and status. A number of scholars have tried to clarify the concept by specifying the theoretical distinctions between these terms (Deephouse & Carter, 2005; Deephouse & Suchman, 2008; Gioia & Thomas, 1996; Rindova, Pollock, & Hayward, 2006; Washington & Zajac, 2005). Essentially, legitimacy emphasizes the social acceptance resulting from adherence to social norms and expectations; reputation reflects

achievements and self-presentation (Lamin & Zaheer, 2012), often relative to other organizations (Deephouse & Carter, 2005); and status derives from an organization’s belonging or ascription to a class of organizations. Although legitimacy has been studied from multiple theoretical perspectives, including for example the resource-dependence theory (e.g., Ashforth & Gibbs, 1990; Dowling & Pfeffer, 1975; Pfeffer & Salancik, 1978), the greatest contribution to the literature on organizational legitimacy comes from the institutional perspective, particularly the organizational (new) institutionalism strand, where this construct has a central status as one of the main outcomes, if not the main outcome of interest that the theory aims to explain. The other strands of the institutional perspective also focus on the embeddedness of organizations, but tend to be primarily concerned with transaction costs and efficiency (institutional economics) or fit (comparative institutionalism) as their theoretical lens. Organizational institutionalism underscores the social acceptance of a focal organization by the relevant ‘legitimating actors’ for its specific organizational class. Organizational fields or classes comprise organizations that face common or similar contextual conditions, because, for example, they belong to the same sector and thus have overlapping key stakeholders and constituents. Through the processes of field-level structuration, certain organizational practices, structures, and arrangements emerge and become institutionalized, and the organizations in the respective field face institutional pressures to adopt these arrangements in order to be accepted and approved, that is, to become legitimate (e.g., DiMaggio & Powell, 1983; Meyer & Rowan, 1977; Zucker, 1987). Thus, to understand legitimacy, it is essential to consider three building blocks: (i) the characteristics of the institutional environment in which an organization is embedded, (ii) the characteristics of the organization that demonstrate suitability and appropriateness with regard to the environment, and (iii) the strategies and processes that companies follow in pursuit of legitimacy. With regard to the institutional environment, the most common conceptualization in organizational institutionalism is the ‘three-pillar’ framework (Scott, 1987) proposing three aspects of institutional arrangements – regulatory (i.e., laws, rules, and

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regulations), cognitive (i.e., social knowledge and cognition), and normative (i.e., social norms and cultural values). These three types of institutions are usually specific to a particular organizational field and domain. Thus, the first step in pursuing legitimacy is identifying the appropriate organizational field for a focal firm and learning about its institutional setup. Regarding organizational characteristics, a central tenet of the theory is that organizations achieve legitimacy when they adopt structures, practices, and other organizational arrangements that are consistent with the regulatory, cognitive, and normative institutional aspects of their field environment. In other words, organizations need to develop desirable characteristics based on the institutionalized patterns of organizing and functioning in the respective institutional context (and be able to convey this to the key legitimating actors). With regard to mechanisms and strategies, the main legitimating mechanism for organizations is isomorphism – that is, to become similar, or consistent with, the externally validated institutional arrangements. Early work on legitimacy provided straightforward examples of this theoretical proposition by examining organizations, such as public schools, which are subject to clear and strong institutional pressures to comply with rules and regulations and thus implement consistent, if not standardized, arrangements. Over time, scholars expanded the setting of their research to examine theoretically similar processes of structuration, institutionalization, isomorphic pressures, and adoption of particular organizational arrangements using other types of organizations. For example, for business companies, legitimating actors included suppliers, customers, industry associations, government agencies, and civil society entities, among others. As a result, scholarly views on legitimating strategies became more expanded and sophisticated over time. In addition to ‘conforming’ to ‘the dictates of preexisting audiences within the organization’s environment,’ scholars identified more proactive or ‘agentic’ types of strategies, such as decoupling and learning, which involve efforts to manipulate environmental structures by creating new audiences and new legitimating beliefs, or selecting among multiple environments in pursuit of an Tatiana Kostova and João Albino-Pimentel

audience that will support current organizational practices (Suchman, 1995).

Legitimacy of MNEs

Multinational companies present a particularly complex case that challenges traditional assumptions underlying theories of organizational legitimacy and highlights the specific difficulties in establishing and maintaining legitimacy (Kostova & Zaheer, 1999). These organizations operate through a network of diverse subunits located in different countries, yet generally linked through shared policies and strategies on a global basis. MNEs experience dual pressures to be somewhat locally adapted to the specific environments in which their subunits operate and, at the same time, to be managed in an integrated fashion across all locations. These dual pressures for global integration and local responsiveness have implications for their legitimacy as well. As noted in the literature, the MNE case introduces complexity in all theoretical building blocks of the legitimacy construct. It thus brings forth several challenges for both scholars and managers of global companies (Kostova & Zaheer, 1999). Since institutions, such as laws and regulations, social cognition, and cultural norms, are country-specific, MNEs face not only multiple but usually rather diverse institutional environments across the set of markets in which they operate. They face various legitimating actors, each with unique expectations and levers of power over the organization. Accordingly, in addition to the number of foreign countries, the difficulty of achieving legitimacy also depends on the institutional distance (i.e., institutional differences) between the MNE’s home and its units’ host countries (Kostova, 1996), as well as the degree of diversity in the entire portfolio of markets in which the company is situated. Furthermore, while more formal institutional requirements like regulations are relatively easy to understand, it might be difficult to make sense of the more tacit aspects of the environment, like cognitive and normative institutions, which require deep contextual and cultural knowledge. The MNE case also highlights issues regarding levels of analysis and internal complexity. Scholars have suggested important distinctions between the legitimacy of the MNE as a whole and the legitimacy of its

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subunits due to their fundamentally different legitimating environments. The MNE as a whole seeks acceptance and/or approval in its global ‘meta-environment,’ which consists of the home and all host countries, as well as relevant supranational institutions. Subunits are naturally concerned with their external host-country environments, but interestingly, at the same time, they also need internal legitimacy with the parent company to secure resources and support. The external and internal legitimacy of MNE subunits presents a tension and a non-trivial management challenge. Finally, the legitimation process in MNEs is also complex due to the liability of foreignness (Zaheer, 1995), the limited understanding of host-country environments, as well as the limited information that legitimating actors have about any particular foreign company. Under such conditions of bounded rationality, the legitimacy of an organization or a unit is often affected by perceived similarity with other classes of organizations and country stereotypes (e.g., other MNEs from the same home country or past experiences in the same host country), a process referred to as spillovers. Thus, compared with domestic firms, there is much more ambiguity, volatility, and uncertainty of legitimacy judgments for MNEs, which requires a more involved and deliberate management of organizational legitimacy. As a result, the legitimation strategies of MNEs are much more multidimensional (whole MNE vs. subunit; external vs. internal; home vs. host vs. supranational, etc.). They also tend to rely less on the conformity/ isomorphism mechanisms as it is impossible to adopt the variety of possibly conflicting institutional prescriptions faced by the MNE and its subunits. Instead, MNEs are likely to emphasize the decoupling and learning approaches. Decoupling implies ceremonial rather than full adoption of prescribed practices to falsely convey compliance to legitimating actors and manipulate their perceptions about the organization (Meyer & Rowan, 1977). It might be used to mask or distract attention from activities that may be unacceptable to some key constituencies (Elsbach & Sutton, 1992; Scott, 1987). While decoupling can be used in all types of organizations, it is more common in more complex and diverse institutional scenarios, as in the MNE (Kostova & Roth, 2002). What Suchman (1995) referred to as a learn-

ing strategy is similar to more recent work on institutional entrepreneurship, where companies, especially MNEs, leverage their power and engage in efforts to influence and reshape the institutional environment in host countries (Greenwood & Suddaby, 2006; Hardy & Maguire, 2008; Leca, Battilana, & Boxenbaum, 2008). Due to bounded rationality and the spillover phenomenon discussed above, companies can also gain legitimacy through publicly distancing from illegitimate entities and associating with legitimate ones. In general, the legitimation process in MNEs and their subunits requires more deliberate institutional work to make sense of the complex institutional environment, prioritize competing institutional pressures, manage the tradeoffs between the many sides of legitimacy, engage in political strategies, and create and use a narrative and meaning to convey appropriateness (Tashman, Marano, & Kostova, 2019; Vaara & Tienari, 2011; Vaara, Tienari, & Laurila, 2006).

Methodological challenges

Legitimacy as a construct is rarely measured. It is more commonly used as an explanatory mechanism in developing theoretical arguments rather than as an empirical variable. In the limited empirical research that has attempted to measure it, scholars have operationalized it as either dichotomous (Deephouse & Suchman, 2008) or continuous variables (Suddaby, Bitektine, & Haack, 2017). Some measurement examples include population density, media accounts, and regulatory authorizations. However, there is no consistent and established operationalization and measurement approach.

Conclusion

Organizational and international business scholars have built a solid literature around the important notion of organizational legitimacy, particularly in the context of MNEs. Informed by the existing research and motivated by the significance of this construct for global companies, we offer several ideas for future research which should advance our understanding of legitimacy management. On the theoretical side, we see opportunities to more deeply examine the alternative legitimating strategies used in MNEs and their effectiveness, to analyze the particular Tatiana Kostova and João Albino-Pimentel

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steps of institutional work that managers follow when they approach the task of managing legitimacy under conditions of complexity and contradictions, and to explore the micro-foundations of these processes for a better understanding of motivations and required critical skills. On the empirical side, more work is needed on building a consensus around a reliable measure of organizational legitimacy and its different types and expanding the range of methodologies employed to study legitimacy (e.g., lab experiments, ethnography, and historical analysis). Improving our understanding of legitimacy is paramount in international business for both new companies entering the global space and trying to position themselves as legitimate, as well as incumbent companies facing constantly changing institutional environments and ever-increasing competitive challenges. Tatiana Kostova and João Albino-Pimentel

References

Ashforth, B. E., & Gibbs, B. W. 1990. The double-edge of organizational legitimation. Organization Science, 1(2): 177–194. Deephouse, D. L., & Carter, S. M. 2005. An examination of differences between organizational legitimacy and organizational reputation. Journal of Management Studies, 42(2): 329–360. Deephouse, D. L., & Suchman, M. 2008. Legitimacy in organizational institutionalism. In Royston Greenwood, Christine Oliver, Roy Suddaby & Kerstin Sahlin (Eds), The Sage Handbook of Organizational Institutionalism, 49: 77. DiMaggio, P. J., & Powell, W. W. 1983. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 147–160. Dowling, J., & Pfeffer, J. 1975. Organizational legitimacy: Social values and organizational behavior. The Pacific Sociological Review, 18(1): 122–136. Elsbach, K. D., & Sutton, R. I. 1992. Acquiring organizational legitimacy through illegitimate actions: A marriage of institutional and impression management theories. Academy of Management Journal, 35(4): 699–738. Gioia, D. A., & Thomas, J. B. 1996. Identity, image, and issue interpretation: Sensemaking during strategic change in academia. Administrative Science Quarterly, 370–403. Greenwood, R., & Suddaby, R. 2006. Institutional entrepreneurship in mature fields: The big five

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accounting firms. Academy of Management Journal, 49(1): 27–48. Hardy, C., & Maguire, S. 2008. Institutional entrepreneurship. In Royston Greenwood, Christine Oliver, Roy Suddaby & Kerstin Sahlin (Eds), The Sage Handbook of Organizational Institutionalism, 1: 198–217. Kostova, T. 1996. Success of the transnational transfer of organizational practices within multinational companies. University of Minnesota. Kostova, T., & Roth, K. 2002. Adoption of an organizational practice by subsidiaries of multinational corporations: Institutional and relational effects. Academy of Management Journal, 45(1): 215–233. Kostova, T., & Zaheer, S. 1999. Organizational legitimacy under conditions of complexity: The case of the multinational enterprise. Academy of Management Review, 24(1): 64–81. Lamin, A., & Zaheer, S. 2012. Wall Street vs. Main Street: Firm strategies for defending legitimacy and their impact on different stakeholders. Organization Science, 23(1): 47–66. Leca, B., Battilana, J., & Boxenbaum, E. 2008. Agency and institutions: A review of institutional entrepreneurship. Citeseer. Meyer, J. W., & Rowan, B. 1977. Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83(2): 340–363. Pfeffer, J., & Salancik, G. R. 1978. The external control of organizations: A resource dependence perspective. Stanford University Press. Rindova, V. P., Pollock, T. G., & Hayward, M. L. 2006. Celebrity firms: The social construction of market popularity. Academy of Management Review, 31(1): 50–71. Scott, W. R. 1987. The adolescence of institutional theory. Administrative Science Quarterly, 493–511. Suchman, M. C. 1995. Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3): 571. Suddaby, R., Bitektine, A., & Haack, P. 2017. Legitimacy. Academy of Management Annals, 11(1): 451–478. Tashman, P., Marano, V., & Kostova, T. 2019. Walking the walk or talking the talk? Corporate social responsibility decoupling in emerging market multinationals. Journal of International Business Studies, 50: 153–171. Vaara, E., & Tienari, J. 2011. On the narrative construction of multinational corporations: An antenarrative analysis of legitimation and resistance in a cross-border merger. Organization Science, 22(2): 370–390. Vaara, E., Tienari, J., & Laurila, J. 2006. Pulp and paper fiction: On the discursive legitimation of global industrial restructuring. Organization Studies, 27(6): 789–813. Washington, M., & Zajac, E. J. 2005. Status evolution and competition: Theory and evidence.

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38(2): 341–363. Zucker, L. G. 1987. Institutional theories of organization. Annual Review of Sociology, 13(1): 443–464.

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82. The Penrose effect The Penrose effect refers to the managerial constraint on the rate of the growth of a firm (Hay & Morris, 1991; Marris, 1963). Penrose’s seminal book, The Theory of the Growth of the Firm, maintains that a firm is an administrative organization in which activities are “interrelated and are coordinated by policies, which are framed in the light of their effect on the enterprises as a whole” (1959: 15–16). Planning and implementing a firm’s growth projects involve coordination and resource mobilization that are too complex to be codified as a management “blueprint” for newly hired managers to implement (1959: 46). Such a task requires internally experienced managers possessing firm-specific knowledge and relationships. Because it takes time to accumulate such knowledge and relationships, the supply of the managers is inelastic in the short term. Therefore, the capacity of a firm’s existing management sets a limit to the amount of expansion possible in any given time period (1959: 55). If the firm grows either deliberately or inadvertently at a rate faster than its management members can obtain necessary firm-specific experience and relationships for managing increased complexity of the expanded organization, inefficiency and “a period of ‘stagnation’ may follow” (1959: 47). The Penrose effect thus predicts negative intertemporal correlations in the growth rates of a firm (Tan, 2014), and is incorporated within mainstream macro(Uzawa, 1969) and micro-economic theories of investment as a source of a firm’s dynamic adjustment costs (Mortensen, 1973; Rubin, 1973; Slater, 1980; Treadway, 1970). The Penrose effect is corroborated by empirical analyses based on plant-level, firm-level, and industry-level data (Gander, 1991; Lockett, Wiklund, Davidsson, & Girma, 2011; Orser, Hogarth-Scott, & Riding, 2000; Shen, 1970). Penrose proposes that her theory of firm growth applies to modern multinational corporations (1995: xv); however, “expansion through acquisition of subsidiaries through foreign countries… sometimes escapes the need for administrative coordination” if these new subsidiaries “operate virtually independently of the parent” (1959: 193). More recently, the Penrose effect is empirically investigated in the international context. Tan

(2003) examines the Penrose effect using the data of Japanese subsidiaries in the U.S. and does not find that a fast-growing Japanese firm in a U.S. industry grew more slowly in the subsequent time period and posits that the reduced need for cross-border coordination may relieve managerial diseconomies that one expects from domestic growth. However, Hashai (2011) finds that geographical scope of expansion of born globals is negatively associated with their subsequent foreign operation expansion. Mohr, Batsakis, and Stone (2018) find that large retail firms’ rapid international expansion leads to lower profitability and subsequent divestments of their international operations. Some studies identified conditions under which the Penrose effect is more likely to occur. Tan and Mahoney (2005) find that Japanese investors in the U.S. were more vulnerable to the Penrose effect in industries where close coordination within multinational firms is required. Hutzschereuter, Voll, and Verbeke (2011) show that German multinational firms encounter greater managerial constraints when expanding into culturally distant and diverse foreign markets. Several studies identify firm characteristics and strategies that relieve the Penrose effect (Kor, Mahoney & Tan, 2023; Tan, Su, Mahoney, & Kor, 2020). Hashai (2011) and Mohr et al. (2018) find that internally experienced firms are less subject to the negative impact of fast internationalization. Tan and Mahoney (2007) show that firms more capable of developing new personnel in foreign operations are less vulnerable to the Penrose effect. Goerzen and Beamish (2007) find that the use of expatriates leads to better foreign market performance when multinational firms have more local experience. Thompson (1994) and Shane (1996) show that the use of contractual forms of expansion mitigates managerial constraints and facilitates faster growth. Tan (2009) shows that acquisitions enable faster post-entry growth when coordination between the corporate parent and its foreign subsidiaries is simple and codifiable. Lockett et al. (2011) further find that acquisitive growth in one time period increases organic growth in the subsequent time period, and suggest it is because acquisitions incorporate non-path-dependent knowledge. Finally, Vidal and Mitchell (2015) show that firms can use divestiture to free up managerial and financial resources and

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achieve greater growth. In sum, the Penrose effect has been fruitful in generating theory on adjustment costs and in inspiring empirical research that is of practical relevance to management and international business (Kor, Mahoney, Siemsen, & Tan, 2016; Tan, D., Su, W. Mahoney, J. T. & Kor, Y. Y., 2020). Joe Mahoney and Danchi Tan

References

Gander, J.P. (1991). Managerial intensity, firm size and growth. Managerial and Decision Economics, 12(3): 261–266. Goerzen, A., & Beamish, P.W. (2007). The Penrose effect: “Excess” expatriates in multinational enterprises. Management International Review, 47(2): 221–239. Hashai, N. (2011). Sequencing the expansion of geographic scope and foreign operations by “born global” firms. Journal of International Business Studies, 42(8): 995–1015. Hay, D.A., & Morris, D.J. (1991). Industrial Economics and Organization: Theory and Evidence. New York: Oxford University Press. Hutzschenreuter, T., Voll, J.C., & Verbeke, A. (2011). The impact of added cultural distance and cultural diversity on international expansion patterns: A Penrosean perspective. Journal of Management Studies, 48(2): 305–329. Kor, Y.Y., Mahoney, J.T., Siemsen, E., & Tan, D. (2016). Penrose’s The Theory of the Growth of the Firm: An exemplar of engaged scholarship. Production and Operations Management, 25(10): 1727–1744. Kor, Y., Mahoney, J., & Tan, D. (2023). Edith Penrose’s under-explored insights in strategic management and international business research. Strategic Management Review, forthcoming. Lockett, A., Wiklund, J., Davidsson, P., & Girma, S. (2011). Organic and acquisitive growth: Re-examining, testing and extending Penrose’s growth theory. Journal of Management Studies, 48(1): 48–74. Marris, R. (1963). A model of the ‘managerial’ enterprise. Quarterly Journal of Economics, 77(2): 185–209. Mohr, A., Batsakis, G., & Stone, Z. (2018). Explaining the effect of rapid internationalization on horizontal foreign divestment in the retail sector: An extended Penrosean perspective. Journal of International Business Studies, 49(7): 779–808. Mortensen, D.T. (1973). Generalized costs of adjustment and dynamic factor demand theory. Econometrica, 41(4): 657–665. Orser, B.J., Hogarth-Scott, S., & Riding, A.L. (2000). Performance, firm size, and man-

agement problem solving. Journal of Small Business Management, 38(October): 42–58. Penrose, E.T. (1959/1995). The Theory of the Growth of the Firm. Oxford, UK: Oxford University Press. Rubin, P.H. (1973). The expansion of firms. Journal of Political Economy, 81(4): 936–949. Shane, S.A. (1996). Hybrid organizational arrangements and their implications for firm growth and survival: A study of new franchisors. Academy of Management Journal, 39(1): 216–234. Shen, T.Y. (1970). Economies of scale, Penrose-effect, growth of plants and their size distribution. Journal of Political Economy, 78(4): 702–716. Slater, M. (1980). The managerial limitations to a firm’s rate of growth. Economic Journal, 90(359): 520–528. Tan, D. (2003). The limits to the growth of multinational firms in a foreign market. Managerial and Decision Economics, 24(8): 569–582. Tan, D. (2009). Foreign market entry strategies and post-entry growth: Acquisitions vs greenfield investments. Journal of International Business Studies, 40(6): 1046–1063. Tan, D. (2014). The Penrose effect. In D. Teece and M. Augier (Eds.), The Palgrave Encyclopedia of Strategic Management. Palgrave MacMillan. Tan, D., & Mahoney, J.T. (2005). Examining the Penrose effect in an international business context: The dynamics of Japanese firm growth in US industries. Managerial and Decision Economics, 26(2): 113–127. Tan, D., & Mahoney, J.T. (2007). The dynamics of Japanese firm growth in US industries: The Penrose effect. Management International Review, 47(2): 259–279. Tan, D., Su, W., Mahoney, J. T. & Kor, Y. Y. (2020). A review of research on the growth of multinational enterprises: A Penrosean lens. Journal of International Business Studies, 51(4): 498–537. Thompson, R.S. (1994). The franchise life cycle and the Penrose effect. Journal of Economic Behavior and Organization, 24(2): 207–218. Treadway, A.B. (1970). Adjustment costs and variable inputs in the theory of the competitive firm. Journal of Economic Theory, 2(4): 329–347. Uzawa, H. (1969). Time preference and the Penrose effect in a two-class model of economic growth. Journal of Political Economy, 77(4): 628–652. Vidal, E., & Mitchell, W. (2015). Adding by subtracting: The relationship between performance feedback and resource reconfiguration through divestitures. Organization Science, 26(4): 1101–1118.

Joe Mahoney and Danchi Tan

83. Political conflict Political conflict occurs when different state or nonstate actors seek to promote their interests, and/or stop others from pursuing their political or policy agendas and can inhibit economic activity if it becomes a threat (Essien, 2020; Oetzel & Getz, 2012; Oh & Oetzel, 2017). One of the factors that increases the likelihood of violence in a country is political and economic disenfranchisement by race, ethnicity, gender, religion, etc. If access to economic opportunities and political power is restricted (formally or informally) to only a few groups, and the system is unjust, there is not only a loss of human capital, but also an increased risk that political conflict will become violent (Collier & Hoeffler, 1998; Oetzel & Oh, 2019). Unfortunately, many areas of the world lack stable political and economic environments. There was a brief time – when the Berlin Wall came down between 1989 and 1990, the Gulf War ended in early 1991, and the Cold War between the United States and Russia ended in 1991 – that the world appeared to be becoming more politically stable and slowly converging toward similar policies aimed at promoting trade and globalization. Of course, only 10 years later the September 11, 2001, terrorist attacks occurred in the United States, followed by war in Afghanistan between 2001 and 2021, the Iraq War, 2003 to 2011, and a refugee crisis in 2011, driven by civil war in Syria, among other conflicts (Devinney, Hartwell, Oetzel, & Vaaler, 2023). Then in February 2022, Russia invaded Ukraine. The conflict is ongoing as of this writing and has resulted in thousands of deaths, food shortages in many countries (Ukraine is a major exporter of wheat), and widespread energy disruption in Europe (due to sanctions on Russia). Moveover, it threatens to expand beyond Ukraine’s borders. As a result, to different degrees instability is not unusual. In addition, the anticipated convergence around shared international trade policies did not happen as many experts expected. While regional trade agreements have significantly increased economic and political integrations among member countries within trade blocs, there are significant differences across countries (Berry, Guillén, & Hendi, 2014) and across supra-regions, and thus the world is

rather spiky than flat (Rugman & Oh, 2008). Given this background, there is a continuing need for managers of MNEs to understand how to manage political conflict and the violence it can create. Moreover, conflicts in one country can lead to secondary impacts in others (e.g., supply chain disruption, etc.). While political violence may seem “unmanageable” by MNEs, research over the last two decades suggests that, in some cases, managers of MNEs can learn from experience operating in conflict-affected countries and, in some cases, help mitigate political violence and conflict and promote peace (Albino-Pimentel, Oetzel, Oh, & Poggioli, 2021; Getz & Oetzel, 2010; Oetzel & Breslauer, 2015; Oh & Oetzel, 2017). By developing core competencies around managing violent conflict risk and understanding their role in promoting peace and economic development in countries where they operate, managers and their firms have an important role to play in mitigating conflict. To manage political conflict risk, it is important to understand the conflict characteristics and country conditions (Getz & Oetzel, 2010). For instance, one important factor is whether a conflict involves state or nonstate actors. State involvement means that the government is a party to the conflict. One example is the conflict between Ukraine and Russia. In nonstate conflicts, the government is not directly involved, such as in the case of violence between drug cartels in Mexico. In situations where a conflict involves nonstate actors, it is possible for MNEs to leverage corporate-level experience in one country to other countries experiencing similar conflicts (Oh & Oetzel, 2017). In that case, conflict management may involve security strategies and tactical approaches that apply in multiple contexts. Thus, deep knowledge of a conflict and its causes may not be critical, especially if the MNE does not become a direct target of the hostilities. Other research has shown that rather than investing in internal capacity-building, MNEs may simply mimic peers’ behavior. For instance, managers may choose to divest from a country in the face of terrorist attacks if other firms divest (Liu & Li, 2020). The other type of conflict is where the state is a party to the conflict. When the state is involved, mangers need a deeper understanding of country conditions. For example, it is critical for managers to understand the

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reason(s) for the conflict, its scope, the government’s interest in instigating or responding to it, the ability of other institutions in society to continue operations despite the violence, etc. Given that, location-specific knowledge is essential. As such, this type of learning is not generally transferable across countries. On the other hand, the benefit of experience in this context is that MNEs may be well positioned to understand how to operate, despite adversity. In fact, MNEs with country-specific experience are more likely to expand their investments in a country where the state is involved in conflicts (Oh & Oetzel, 2017: 727). One reason for this finding may be that local stakeholders are able to partner with and/or engage MNEs in addressing conflict. Businesses can partner with nonprofits, industry associations, and corporate partners to develop collaborative strategies for continuing operations despite unrest. More importantly, by continuing operations, maintaining employment, and working to mitigate violence, companies can make a positive contribution to overall wellbeing in a country (Oetzel & Getz, 2012). Learning from experience is not always possible or even desirable. Instead, MNEs use existing knowledge to develop risk management capabilities, strategies and tactics that may be as, or even more, effective. For instance, managing political risk through geographic diversification can be effective (Witte, Burger, Ianchovichina & Pennings, 2017), particularly for firms in the computing and information technology sector (Mithani, Narula, Surdu, & Verbeke, 2022). MNEs with strong environmental, social, and governance capabilities may have an advantage in a foreign country, despite its hostile country condition (Albino-Pimentel et al., 2021; Darendeli & Hill, 2016). Also, reconfiguring a firm’s supply chain to avoid conflict-affected areas is important. Of course, it is important to recognize that at times, the best course of action is to exit a country (Dai, Eden, & Beamish, 2017). Even though violence and conflict seem ever present, from a historical perspective violence has declined over the centuries (Pinker, 2011). Nevertheless, political strife and conflict seem to be part of the human condition. While MNEs and society writ large can create conflict, they can also use their power and influence to create positive social change and, in some cases, reduce conflict in

their areas of influence (Oetzel & Miklian, 2017; Reade, McKenna, & Oetzel, 2019). Macro studies show that foreign investments and international trade flows not only lower political conflicts but improve peace between countries (Reuveny & Kang, 1996; Polachek, Seiglie & Xiang, 2011), illuminating the positive roles of MNEs in political conflicts. Jennifer Oetzel and Chang Hoon Oh

References

Albino-Pimentel, J.A., Oetzel, J., Oh, C.H., & Poggioli, N. 2021. Positive institutional changes through peace: The relative effects of peace agreements and non-market capabilities on FDI. Journal of International Business Studies, 52(7): 1256–1278. Berry, H., Guillén, M.F., & Hendi, A.S. 2014. Is there convergence across countries? A spatial approach. Journal of International Business Studies, 45(4): 387–404. Collier, P., & Hoeffler, A., 1998. On economic causes of civil war. Oxford Economic Papers, 50(4): 563–573. Dai, L. S., Eden, L., & Beamish, P.W. 2017. Caught in the crossfire: Dimension of vulnerability and foreign multinationals’ exit from war-afflicted countries. Strategic Management Journal, 38(7): 1478–149. Darendeli, I.S. & Hill, T.L. 2016. Uncovering the complex relationships between political risk and MNE firm legitimacy: Insights from Libya. Journal of International Business Studies, 47(1): 68–92. Devinney, T.M., Hartwell, C.A., Oetzel, J., & Vaaler, P. 2023. Managing, theorizing, and policymaking in an age of sociopolitical uncertainty: Introduction to the Special Issue. Journal of International Business Policy, forthcoming. Essien, D.E. 2020. Chapter 6: Ethical implications of identity politics for good governance in 21st century Nigeria. In N.N. Kristensen (Ed.), Political Identity and Democratic Citizenship in Turbulent Times: 129–155. IGI Global. Getz, K., & Oetzel, J. 2010. MNE strategic intervention in violent conflict: Variations based on conflict characteristics. Journal of Business Ethics, 89(4): 375–386. Liu, C. & Li, D. 2020. Divestment response to host-country terrorist attacks: Inter-firm influence and the role of temporal consistency. Journal of International Business Studies, 51(8): 1331–1346. Mithani, M.A., Narula, R., Surdu, I., & Verbeke, A. 2022. Unique implications of crises and disruptions for international business: How established MNEs are exposed to crises and mitigate their effects. In Mithani, M.A., Narula, R., Surdu, I., & Verbeke, A. (Eds.), Crises and

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336  Encyclopedia of international strategic management Disruptions in International Business: 3–18. London, England: Palgrave Macmillan. Oetzel, J. & Breslauer, M. 2015. The business and economics of peace: Moving the agenda forward. Business, Peace and Sustainable Development, 6: 3–8. Oetzel, J. & Getz, K. 2012. When and how might firms respond to violent conflict? Journal of International Business Studies, 43: 166–186. Oetzel, J. & Miklian, J. 2017. Multinational enterprises, risk management, and the business and economics of peace. Multinational Business Review, 25(4): 270–286. Oetzel, J. & Oh, C.H. 2019. Melting pot or tribe? Ethnic diversity and its effect on subsidiaries. Journal of International Business Policy, 2(1): 37–61. Oh, C.H. & Oetzel, J. 2017. Once bitten twice shy? Experience managing violent conflict risk and MNC subsidiary-level investment and expansion. Strategic Management Journal, 38(3): 714–731. Pinker, S. 2011. The Better Angels of our Nature. New York: Viking. Polachek, S. W., Seiglie, C., & Xiang, J. 2011. Globalization and international conflict: Can

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FDI increase cooperation among nations? The Oxford Handbook of the Economics of Peace and Conflict: 733–762. New York, NY: Oxford University Press. Reade, C., McKenna, M., & Oetzel, J. 2019. Unmanaged migration and the role of MNCs in reducing push factors and promoting peace: A strategic HRM perspective. Journal of International Business Policy, 2(4): 377–396. Reuveny, R., & Kang, H. 1996. International trade, political conflict/cooperation, and Granger causality. American Journal of Political Science, 40(3): 943–970. Rugman, A., & Oh, C.H. 2008. Friedman’s follies: insights on the globalization/regionalization debate. Business and Politics, 10(2): 1–14. Witte, C., Burger, M., Ianchovichina, E., Pennings, E. 2017. Dodging bullets: The heterogeneous effect of political violence on greenfield FDI. Journal of International Business Studies, 48(7): 862–892.

84. Porter’s diamond model The “diamond” of business environment quality

Michael Porter introduced the “diamond” in his book The Competitive Advantage of Nations as a conceptual framework to analyze the quality of the business environment as a driver of the level of growth and productivity firms can achieve in a location (Porter, 1990). It has gained its name from the graphical representation of the four groups in which these factors are organized, with arrows connecting them to build the outer contours of a diamond. This entry describes the nature of the “diamond” framework, puts it into the broader discussion of competitiveness, and discusses its relationship to company competitiveness and the choices faced by multinational firms.

Elements of the diamond

The four groups into which the diamond organizes the specific characteristics of the business environment are factor (input) conditions, the context for strategy and rivalry,

demand conditions, and the presence of related and supporting industries. Figure 84.1 indicates some of the more specific dimensions covered under these groups. Factor (input) conditions capture access to input factors, either directly – as in access to skilled employees or investment capital – or indirectly – as in access to the services provided by the physical infrastructure, the science and innovation system, and the public administration. This dimension of the diamond is often emphasized by those that argue for an active role of government in shaping higher levels of productivity. The context for strategy and rivalry captures the rules, regulations, and other circumstances that affect the way in which companies compete. It is strongly shaped by government policies on competition, the openness to trade and investment, the use of industrial policies, and other interventions that affect different companies heterogeneously. This dimension of the diamond is often emphasized by those that argue for a stronger role of market forces in shaping higher levels of productivity. It is more than simply intense rivalry; what drives productivity and innovation is a market structure that rewards companies for providing better value to customers, not simply charge lower prices.

Source:  Michael Porter. Used with permission.

Figure 84.1

Business environment quality: the diamond framework

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There is a critical difference here between the diamond and the five forces, the framework Porter introduced earlier to assess industry attractiveness (Porter, 1980). In the diamond, rivalry is viewed positively as a driver to incentivize higher productivity. In the five forces, it is a factor that erodes industry attractiveness. These different views reflect the different perspectives of these two tools: the diamond is primarily interested in societal benefit and overall value generation, five forces in firm-specific benefits and individual value capture. In a dynamic perspective these can coincide – stronger rivalry can push companies to enhance their performance and thus be more profitable over time. But in a static view there is a clear tension. The diamond includes demand conditions and the presence of related and supporting industries as additional dimensions that were at least at the time less often mentioned as drivers of productivity. In demand conditions, the focus is on the sophistication and forward-looking nature of consumer preferences. In the “Porter hypothesis,” the argument was made that strict regulation can lead to the development of competitive advantages if this regulation foreshadows patterns of future market demand in broader markets (Porter & van der Linde, 1995; Ambec et al., 2013). But demand sophistication does not necessarily need to rely on government regulation. It can also be the result of specific consumer needs, for example the preferences for outdoor sports in the north-western US supporting the emergence of a competitive sport apparel cluster in Oregon. The focus on demand sophistication instead of demand size is a significant departure from the concentration on economies of scale in economics and the cost curve in business studies. The presence of related and supporting industries enables companies to raise their own productivity by specializing in specific activities and by drawing on the higher productivity of these specialized partners (Porter, 1998a). A rich empirical literature emerged to test and explore this hypothesis in more depth (Ketels, 2011; Delgado et al., 2014). Porter himself described clusters as a “derivative of the diamond theory” (Porter, quoted in Snowdown & Stonehouse, 2006). While the traditional economic geography literature focused largely on positive externalities arising from co-location, the diamond framework suggested also looking at the quality Christian Ketels

of the cluster-specific business environment. The cluster-specific “diamond” influences the emergence of a cluster, shapes its evolution, and affects its performance. A number of other factors have been discussed as “missing” dimensions of the diamond: “government” and “chance” were captured in earlier representations of the diamond. And it was suggested to add further “human” factors to the analysis (Cho, 1994; Cho et al., 2009). The diamond framework treats these as contextual factors influencing productivity through their effect on the four elements of the diamond rather than fundamental drivers themselves.

The diamond as a system

A key feature and value of the diamond framework is its systemic perspective: The value of individual dimensions of the business environment depends on the qualities of other parts of the diamond. Much existing research focuses on showing the relevance of specific factors on productivity holding others constant, or aims to identify which factor is most important on average. The diamond builds on and synthesizes these findings to provide a new perspective on their interplay, in particular their complementarities. These complementarities are represented by the arrows that connect the four corners of the diamond. Complementarities across individual factors are a key reason why the dynamics captured by the diamond are location-specific: The value of one factor, say access to skilled labor, for firm productivity depends on the specific quality of another factor, say a market context in which competing on skilled labor is profitable for firms. The average value of workforce skills is recognized based on prior research; the diamond enables an analysis of the deviations from this average based on specific local circumstances. The diamond allows an identification of the specific factors of the business environment that are most critical to enhance in a given location to provide companies with better opportunities for productivity growth and innovation. No location can or needs to be strong in all dimensions of the business environment. In its approach, the diamond has some commonalities with the notion of “binding constraints,” later introduced in the work on growth diagnostics

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(Hausmann, Rodrik, & Velasco, 2005). The diamond provides a conceptual perspective to guide qualitative analysis, viewing the relationships across the different elements as too complex and context-specific to be captured in a general quantitative model (Peruzzi & Terzi, 2021).

The diamond within the broader competitiveness framework

Porter’s competitiveness framework puts business environment quality into a broader set of microeconomic and macroeconomic drivers. It also acknowledges the impact of endowments, including location, natural resources, and cultural traits. Among microeconomic factors alongside the diamond, company sophistication has been shown to be a significant driver of productivity differences across locations. It is both affected by and influences the context for strategy and rivalry (Bloom & van Reenen, 2010). Another factor is the economic composition and the strength of the cluster portfolio: Stronger business environments see regional composition shift towards higher value-added sectors or cluster categories, and stronger clusters of related and supporting industries enable companies to generate higher performance from an otherwise given level of business environ-

ment quality (Delgado et al., 2014; Ketels & Protsiv, 2021). Macroeconomic competitiveness drivers are important, too. They are often a necessary but not sufficient condition for achieving higher levels of performance (Porter et al, 2006). Macroeconomic, political, or health and social crises can come at high costs, undermining a location’s potential to benefit from robust business environments and microeconomic competitiveness.

The diamond at different levels

The diamond framework can be applied at different geographic levels, and to distinct parts of the economy. Many of the factors captured in the diamond are heterogeneous not only across countries (or groups of countries) but also across regions within countries. Clusters, the geographic concentration of related and supporting industries that have been a significant focus of Porter’s work, shape an important part of the business environment in subnational regions. Policies affecting the business environment are set at different levels of government. In Europe, for example, trade policy affecting the context for strategy and rivalry is set at the EU level, financial market structures affecting access to capital are largely shaped at the national level, while the availability of skilled labor

Source:  Michael Porter. Used with permission.

Figure 84.2

Competitive framework

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is primarily a function of the regional labor market. The diamond can be applied to analyze the overall productivity of a location across all sectors, or it can be focused on the factors most critical for a specific sector. For a life sciences cluster, for example, the availability of specific lab technicians and researchers is more important than the overall education level of the workforce.

Measuring the diamond

When the diamond was introduced as a conceptual framework, it was grounded in case studies as well as the wider academic research done on its individual elements. Since then, the diamond has been empirically applied to guide quantitative studies on cross-country national competitiveness as well as in policy-oriented work on specific locations and clusters. A key challenge for the empirical work was a lack of data across countries and across the many different dimensions that the diamond framework captures. Public statistics could capture some aspects, like many dimensions of factor input conditions. But they struggled to capture the quality of these inputs as well as factors related to the other dimensions of the diamond. And assessments of legal conditions often failed to represent the reality of conditions companies faced on the ground (Hallward-Driemeier & Pritchett, 2015). In 2000, the World Economic Forum engaged Michael Porter and initially Jeffrey Sachs as co-editors of the Global Competitiveness Report, one of the key cross-country assessments of national competitiveness. A global Executive Opinion Survey was launched to generate the missing data, and the methodology was enhanced over time (Delgado et al., 2012). The data that emerged was fully consistent with the hypotheses underlying the diamond framework. The high correlation of individual elements and of the overall index with prosperity is consistent with the hypotheses underpinning the diamond model. But the data was not rich and rigorous enough to allow testing for causality (Porter & Sachs, multiple years). And the rankings are not able to capture the complex and location-specific interactions across individual dimensions of business environment quality. Christian Ketels

In parallel to these cross-country studies, the diamond framework has been applied in a wide range of policy-oriented reports on countries, subnational regions, clusters, and cross-national regions. These studies use the diamond framework to gain insights into the dynamics of a specific location or cluster, and derive policy recommendations to strengthen their competitiveness.

The diamond and company competitiveness The competitiveness of companies and the competitiveness of locations are different but related concepts. Locations compete based on their productivity as a location for business. Companies also compete based on productivity, but can choose among locations. The competitiveness of a company, then, depends on both its internal capabilities and the results of its locational choices. (Porter et al., 2006)

Porter approached the role of locations and the quality of their business environments from his perspective as a scholar of business strategy. Locational circumstances affect the level of operational efficiency a company can achieve and are an external source of competitive advantage. This perspective combined insights from company strategy, innovation, and economic geography (Iammarino & McCann, 2013; Alcácer et al., 2017). Locational choices are a key part of strategy for companies that compete across locations, especially multinational companies. Such companies not only compete with their rivals based on their internal choices on how to create value, but they implicitly also compete with their rivals’ business environments as an enabler of value creation. Location is particularly important because it can be the source of sustainable competitive advantages, given that changing a company’s locational footprint is often costly and takes significant time (Porter, 1998a).

The diamond and companies’ strategic choices

Companies can draw on the diamond analysis in different ways to infirm their strategic choices. First, the diamond can be used to analyze the attractiveness of different locations as a base for specific activities. Companies thus gain a “supply-side” tool

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complementary to the “demand-side” five forces framework, which analyzes the attractiveness of locations as a market to serve. Second, business environment conditions shape the way companies compete and organize themselves (Kogut, 1993). Companies that understand their local diamond can design strategies that explicitly leverage these local conditions. The more a company’s strategy is aligned with and builds on the local diamond, the harder it is for rivals in other locations to match. Third, companies can invest in upgrading the quality of their local business environment. Such efforts create shared value, i.e., benefits for the location overall but also for the specific company engaging in these efforts (Porter & Kramer, 2006). The diamond analysis can guide companies in targeting those elements of the diamond most valuable for them.

The diamond and multinational companies

Multinational companies have by their nature a particular interest in how to optimize their locational footprint. The diamond framework can be used to identify the sources of competitive advantages at a company’s home base that can then be leveraged in foreign markets (Ketels, 2007). This was the dominant pattern when the diamond model was introduced. But globalization transformed the competitive context in many industries (Narula & Dunning, 2000). International business scholars had argued early on that the diamond framework did not sufficiently reflect the impact and reality of multinational companies (Rugman & Cruz, 1993; Moon et al., 1998). A “double diamond” was proposed to capture how multinationals can tap into the diamonds of both their home and host countries (Rugman & Cruz, 1993; Cartwright, 1993; Cho et al., 2009). The growth of global value chains and an explosion of within-company trade then put multinational firms in the role of global orchestrators, deriving competitive advantages from their ability to seek and leverage activity-specific locational advantages across many diamonds, including those outside of their original home country (Dunning, 1993; Dunning & Narula, 1995; Chung & Alcácer, 2002; Rui & Yip, 2008). Extensions of the “double diamond” model captured the crea-

tion of centers of excellence by multinationals in different countries, focused on specific activities or market segments (Frost et al., 2002; Asmussen et al., 2009). Multinational companies have recognized that their presence in specific locations has a dual nature: On the one hand, it enables them to tap into the local diamond and its strengths. On the other hand, it exposes them to “leakage” through knowledge spillovers. Multinationals have in response organized themselves to manage this balance in their favor (Alcácer & Chung, 2007). At the same time, locations have tried to identify which combination of diamond characteristics and MNCs create the highest impact on local value creation (Alcácer et al., 2017; Crescenzi et al., 2022). Christian Ketels

References

Alcácer, Juan, & Wilbur Chung (2007) Location Strategies and Knowledge Spillovers. Management Science, Vol. 53, No. 5, pp. 760–776. Alcácer, Juan, Bruce Kogut, Catherine Thomas, & Bernard Yeung (eds.) (2017) Geography, Location, and Strategy, Advances in Strategic Management, Vol. 36, Emerald Publishing. Ambec, Stefan, Mark A. Cohen, Stewart Elgie, & Paul Lanoie (2013) The Porter Hypothesis at 20: Can Environmental Regulation Enhance Innovation and Competitiveness? Review of Environmental Economics and Policy, Vol. 7, No. 1. Asmussen, Christian, Torben Pedersen, & Charles Dhanaraj (2009) Host-Country Environment and Subsidiary Competence: Extending the Diamond Network Model, Journal of International Business Studies, Vol. 40, pp. 42–57. Audretsch, David B., & Dirk Dohse (2007) Location: A Neglected Determinant of Firm Growth, Review of World Economics/​ Weltwirtschaftliches Archiv, Vol. 143, No. 1, pp. 79–107. Bloom, Nicholas & John Van Reenen (2010) Why Do Management Practices Differ across Firms and Countries? Journal of Economic Perspectives, Vol, 24, No. 1, pp. 203–224. Cartwright, W.R. (1993) Multiple Linked ‘Diamonds’ and the International Competitiveness of Export-Dependent Industries: The New Zealand Experience, Management International Review, Vol. 2, No. 33, pp. 55–70. Cho, Dong-Sun (1994) A Dynamic Approach to International Competitiveness: The Case of

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342  Encyclopedia of international strategic management Korea, Journal of Far Eastern Business, Vol. 1, No. 1, pp. 17–36. Cho, Dong-Sun, Moon, HC. & Kim, MY (2009) Does One Size Fit All? A Dual Double Diamond Approach to Country-Specific Advantages, Asian Business Management, Vol. 8, pp. 83–102. Chung, Wilbur, & Juan Alcácer (2002) Knowledge Seeking and Location Choice of Foreign Direct Investment in the United States, Management Science, Vol. 48, No. 12, pp. 1534–1554. Crescenzi, Riccardo, Arnaud Dyèvre, & Frank Neffke (2022) Innovation Catalysts: How Multinationals Reshape the Global Geography of Innovation, Economic Geography. Delgado, Mercedes, Christian Ketels, Michael E. Porter, & Scott Stern (2012) The Determinants of National Competitiveness, NBER WP 18249, NBER: Cambridge, MA. Delgado, Mercedes, Michael E. Porter, & Scott Stern (2014) Clusters, Convergence, and Economic Performance, Research Policy, Vol. 43, No. 10, pp. 1785–1799. Dunning, John H. (1993) Internationalizing Porter’s Diamond, Management International Review, Vol. 33, No. 2, pp. 7–15. Dunning, John H., & Rajneesh Narula (1995) The R&D Activities of Foreign Companies in the US, Studies of Management & Organization, Vol. 25, No. 1/2, pp. 39–74. Frost, Tony, Julian Birkinshaw, & Prescott Ensign (2002) Centers of Excellence in Multinational Corporations, Strategic Management Journal, Vol. 23, No. 11, pp. 997–1018. Hallward-Driemeier, Mary, & Lant Pritchett (2015) How Business is Done in the Developing World: Deals versus Rules, Journal of Economic Perspectives, Vol. 29, No. 3, pp. 121–140. Hausmann, Ricardo, Dani Rodrik, & Andres Velasco (2005) Growth Diagnostics, mimeo., Harvard Kennedy School of Government. Iammarino, Simona, & Philip McCann (eds.) (2013) Multinationals and Economic Geography: Location, Technology and Innovation. Cheltenham: Edward Elgar Publishing. Ketels, Christian (2007) Microeconomic Determinants of the Competitiveness of Locations for Multinational Companies, in: John H. Dunning & Philippe Gugler (eds.) FDI, Location, and Competitiveness, Elsevier Publishing: Oxford. Ketels, Christian (2011) Clusters and Competitiveness: Porter’s Contribution, in: Huggins, Robert, & Hiro Izushi (eds.) Competition and Competitive Advantage: The Ideas of Michael Porter, Oxford University Press, Oxford. Ketels, Christian, & Sergiy Protsiv (2021) Cluster Presence and Economic Performance: A New

Christian Ketels

Look Based on European Data, Regional Studies, Vol. 44, No. 2, pp. 208–220. Kogut, Bruce (ed.) (1993) Country Competitiveness: Technology and the Organizing of Work, Oxford University Press: New York. Moon, H. Chang, Alan M. Rugman, & Alain Verbeke (1998) A Generalized Double Diamond Approach to the Global Competitiveness of Korea and Singapore, International Business Review, Vol. 7, No. 2, pp. 135–150. Moon, H. Chang, Alan M. Rugman, & Alain Verbeke (1995) The Generalized Double Diamond Approach to International Competitiveness, in: A.M. Rugman, V.D. Broeck & A. Verbeke (eds.) Research in Global Strategic Management: Beyond the Diamond. Greenwich, CN: JAI Press, pp. 97–114. Narula, R., & John Dunning (2000) Industrial Development, Globalization and Multinational Enterprises: New Realities for Developing Countries, Oxford Development Studies, Vol. 28, No. 2, pp. 141–167. Peruzzi, Michele, & Allesio Terzi (2021) Accelerating Economic Growth: The Science beneath the Art, Economic Modelling, Vol. 103, pp. 1–22. Porter, Michael E. (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press: New York. Porter, Michael E. (1990) The Competitive Advantage of Nations, Free Press: New York. Porter, Michael E. (1998a) Clusters and the New Economics of Competition, Harvard Business Review, Vol. 76, No. 6, pp. 77–90. Porter, Michael E. (1998b) Location, Clusters, and the New Microeconomics of Competition, Journal of Business Economics, Vol. 33, No. 1, pp. 7–13. Porter, Michael E., Christian Ketels, & Mercedes Delgado (2006) The Microeconomic Foundations of Prosperity: Findings from the Business Competitiveness Index, The Global Competitiveness Report 2006–2007, World Economic Forum: Geneva. Porter, Michael E., & Mark R. Kramer (2006) Strategy and Society: The Link between Competitive Advantage and Corporate Social Responsibility, Harvard Business Review, Vol. 84, No. 12, pp. 78–92. Porter, Michael E., & Claas van der Linde (1995) Toward a New Conception of the Environment-Competitiveness Relationship, Journal of Economic Perspectives, Vol. 9, No. 4, pp. 97–118. Porter, Michael E., & Jeffrey Sachs (eds.) (2000–2008) The Global Competitiveness Report, World Economic Forum: Geneva. Rui, Huaichuan, & George S. Yip (2008) Foreign Acquisitions by Chinese Firms: A Strategic

Porter’s diamond model  343 Intent Perspective, Journal of World Business, Vol. 43, No. 2, pp. 213–226. Rugman, Allan, Joseph Cruz (1993) Extensions of the Porter Diamond Framework, Management International Review, Vol. 33, Special Issue, pp. 17–39. Rugman, Allan, & Alain Verbeke (2004) A Perspective on Regional and Global Strategies of Multinational Enterprises, Journal

of International Business Studies, Vol. 35, No. 1, pp. 3–18. Snowdon, Brian, & George Stonehouse (2006) Competitiveness in a Globalised World: Michael Porter on the Microeconomic Foundations of the Competitiveness of Nations, Regions, and Firms, Journal of International Business Studies, Vol. 37, pp. 163–175.

Christian Ketels

85. Private international law As a field, private international law (PIL) defies easy definition. For some (e.g., Randall, 1993), PIL refers to nearly any legal rule or practice governing the structure of cross-border transactions, while for others (e.g., Salacuse, 2013) PIL is more clearly drawn about private contracting rules, particularly as they apply to cross-border investment. Any definition typically accounts for the sources used by focal actors, typically lawyers in private practice advising MNE clients or the chief in-house lawyers within MNEs. Defining the PIL field means defining the range of distinctive legal rules and practices consulted in that advisory role. Advice may follow from a deep understanding of specific contractual terms tailored to cross-border transactions – for example, to rules regarding when contracts are formed under the United Nations Convention on Contracts for the International Sales of Goods (UNCISG), which the US and 94 other countries have signed. But it may also follow from rules more often attributed to issues in the “public” (not private) international law domain governing interactions between nation-states – for example, customary international law assuming the legality of any action taken by a government within its territory. Given the breadth of legal rules and practices that can be drawn on for that advice, I opt for a broad PIL domain. It comprises any issue touching on the negotiating and enforcement of agreements permitting cross-border transactions. The provenance of that domain is centuries old. For many international law scholars (e.g., Gross, 1948), the idea of laws governing interactions between nation-states dates back to the Treaty of Westphalia in 1648, when many European nation-states were first recognized as distinct political actors. The development of many important legal customs followed: sovereign legitimacy for acts taken within territorial bounds; sovereign immunity from suit for those acts; comity demanding recognition and respect for those same acts by foreign sovereigns. Commercial practices, often described as the lex mercatoria or “merchant law,” date back even further. Medieval banking and

trading companies, often organized around extended family relationships, required a set of agreed-upon practices for financing the sale and transferring the legal title of goods over long distances. Those practices required rules, including a pacta sunt servanda rule demanding performance under contract no matter the condition of the parties. Merchant guilds adjudicated disputes among members and punished violations with banishment from trading networks (Grief, 1993). Centuries later, a major source of PIL governing cross-border transactions still comes from customary rules and practices derived from the lex mercatoria and adopted by sovereign nation-states seeking to increase international trade and investment. As Figure 85.1 illustrates, custom among sovereigns and merchants comprises only one of three distinct sources of PIL. Explicit international agreements such as treaties represent a second PIL source. These agreements may simply codify customs relevant to merchants – for example, codification in the 2020 US–Mexico–Canada Agreement (USMCA) of the well-known legal principle that states expropriating private property from others owe “just” compensation in the form of swift, adequate, and effective payment (Becker, 1959: 341). They may create new processes for creating and vindicating private property rights – for example, the creation under the 1970 Patent Cooperation Treaty of an international preliminary examining authority with standard forms to streamline the prosecution of national patent applications across member states (WIPO, 2022). Finally, treaties may create wholly different legal regimes to govern cross-border transactions – for example, the UNCISG creating a separate, independent legal regime governing cross-border sales contracting markedly different in key provisions from the Uniform Commercial Code governing sales contracts among merchants in most US states (Brunner & Gottlieb, 2019). Commonalities across these examples include written documents, signed by nation-states and other international actors (e.g., World International Property Organization), deposited at the UN, and typically administered by some international organization. Domestic law comprises a third source of PIL. It is, perhaps, the most nettlesome for legal scholars and professionals to discern and apply in cross-border transactions. Those

344

Figure 85.1

Private international law: sources and selected examples shaping international business research, practice, and public policy

Private international law  345

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nettles include difficulty in understanding when domestic laws apply abroad notwithstanding the customary presumption against extra-territorial application. Laws regulating contracts typically do not apply abroad. Laws punishing piracy on the high seas and bribery of foreign public officials do. Laws punishing price-fixing by cartels may. Nettles also sometimes go with acts by subnational legislative bodies. US state legislatures (not Congress) and UK city councils (not Parliament) passed laws in the 2010s sanctioning local firms and individuals refusing to do business in Israel or with Israeli firms to demonstrate solidarity with Palestinians. Though foreign policy is typically the province of national governments (HLR, 2013), domestic laws passed by local governments can and sometimes do impose themselves on cross-border transactions and transactors.

Opportunities for integrating PIL into current IB research, practice, public policy issues

Even this brief review suggests multiple areas for collaboration between IB executives and their international legal advisors. To date, that collaboration has been limited, at least in the research sphere. IB researchers more often use “broad-brush” cross-country legal and related regulatory concepts and measures like “rule of law” to explain variation in important IB phenomena such as foreign direct investment (FDI) to developing countries (e.g., Globerman & Shapiro, 2003). Closer integration of IB and PIL research would investigate more specific international legal concepts and measures. Researchers might investigate links between rates of US enforcement of anti-foreign bribery laws like the Foreign Corrupt Practices Act and US FDI to developing countries (Graham & Stroup, 2015). They might investigate determinants of US MNE litigation abroad and enforcement of money judgments in US states adopting or not adopting expediting statutes like US Foreign Money Judgment Recognition Acts (Brand, 1991). They might demonstrate how international alliances between US and certain state-owned airlines from Middle Eastern countries violate US anti-discrimination and anti-boycott laws (Vaaler & Waldfogel, 2019). Paul M. Vaaler

These and other integrative research initiatives should contribute to related integrative practice and public policy. A closer integrative understanding of PIL and IB issues should enhance the senior MNE legal counsel’s role as chief corporate “cop” assuring firm compliance with bedrock regulatory and legal requirements across different countries where the firm operates. They can work more closely with the MNE CEO and other senior executives to develop new value-creating IB opportunities related to their regulatory and legal expertise (Morse, Wang, & Wu, 2016) – think, for example, of international patent prosecution and licensing opportunities. Public policy professionals in government and international organizations will also benefit from this closer integration of PIL and IB issues. US legislatures and prosecutors can gain new insights on the enforcement of anti-discrimination and anti-boycott statutes against global alliances rather than individual firms. World Bank development professionals can gain new insights on the complementary or substitutive nature of Mexican domestic laws and multilateral investment agreements like the USMCA protecting US and Canadian foreign investors from expropriation. Closer integration of PIL and IB issues promises benefits for researchers, practitioners, and public policymakers in both fields. Paul M. Vaaler

References

Becker, Loftus E. 1959. Just compensation in expropriation cases: Decline and partial recovery. Proceedings of the American Society of International Law at Its Annual Meeting, 53: 336–344. Brand, Ronald A. 1991. Enforcement of foreign money-judgments in the United States: In search of uniformity and international acceptance. Notre Dame Law Review, 67: 253–334. Brunner, Christoph & Gottlieb, Benjamin (eds.). 2019. Commentary on the UN sales law (CISG). Wolters Kluwer: Alphen aan den Rijn, The Netherlands. Globerman, Steven & Shapiro, Daniel. 2003. Governance infrastructure and US foreign direct investment. Journal of International Business Studies, 34(1): 19–39. Graham, Brad & Stroup, Caleb. 2015. Does anti-bribery enforcement deter foreign investment? Applied Economics Letters, 23(1): 63–67. Grief, Avner. 1993. Contract enforceability and economic institutions in early trade:

Private international law  347 The Maghribi traders’ coalition. American Economic Review, 83(3): 525–548. Gross, Leo. 1948. The peace of Westphalia, 1648–1948. American Journal of International Law, 42(1): 20–41. HLR. 2013. Note: Recent legislation. Harvard Law Review, 129: 2029–2038. Morse, Adair, Wang, Wei, & Wu, Serena. 2016. Executive lawyers: Gatekeepers or strategic officers? Journal of Law and Economics, 59(4): 847–888. Randall, Kenneth W. 1993. A new paradigm for international business transactions. Washington University Law Review, 71(3): 599–636. Salacuse, Jeswald W. 2013. The three laws of international investment: National, contrac-

tual, and international frameworks for foreign capital. Oxford University Press: Oxford, UK. Vaaler, Paul M. & Waldfogel, Joel. 2019. Discriminatory product differentiation: The case of Israel’s omission from airline route maps. Strategy Science, 4(2): 70–93. WIPO. 2022. Patent cooperation treaty yearly review – 2022. World Intellectual Property Organization: Geneva, Switzerland. Available electronically on June 1, 2022 at https://​www​ .wipo​.int/​publications/​en/​details​.jsp​?id​=​4607​&​ plang​=​EN.

Paul M. Vaaler

86. Psychic distance

The varying definitions and measurement of psychic distance

Within the field of international business (IB), the term distance is typically used as a metaphor for how cross-national differences influence IB activities. Psychic is one such form of distance, and is arguably both the oldest and most influential. It is classically defined as the set of “factors preventing or disturbing the flows of information between firm and market. Examples of such factors are differences in language, culture, political systems, level of education, level of industrial development, etc.” (Johanson & Wiedersheim-Paul, 1975: 307–308). Although, as we will elaborate on later in this entry, there is an ongoing debate concerning the definition. The term psychic distance was originally coined by Beckerman (1956) in an article exploring intra-European trade; and then adopted by researchers at Uppsala University as the key mechanism underlying their now-famous Uppsala internationalization process model (Johanson & Vahlne, 1977). The concept also plays a pivotal role in the two most highly cited articles in the field of IB (Johanson & Vahlne, 1977, Kogut & Singh, 1988). As described in the companion entry entitled distance, there are several other forms of distance in the IB literature, such as national cultural distance (Kogut & Singh, 1988), institutional distance (Xu & Shenkar, 2002) and cross-national distance (Berry et al., 2010). While there is substantial overlap between these constructs, psychic distance is unique in that it specifically concerns how cross-national differences might disrupt the flow and interpretation of information across borders. This provides both a theoretical anchor for the construct, as well as helping to identify why particular types of cross-national differences may be more relevant than others. However, like many abstract constructs, reality is much more complex. For that reason, this entry on psychic distance begins by focusing of the various definitions of, and approaches to, measuring psychic distance. This is followed by a summary of the various antecedents and consequences, the various empirical results, and a short summary of the implications for MNE strategies.

Subsequent to the aforementioned publications by the Uppsala researchers in the 1970s, empirical work concerning psychic distance remained modest until Kogut and Singh (1988) created an index for measuring ‘national cultural distance’ – frequently referred to as the Kogut & Singh Index (KSI). While such differences in culture arguably only represent a subset of the broader concept of psychic distance, for the subsequent two decades the KSI metric became the dominant measure of distance (and psychic distance) in the IB literature (e.g., Benito, 1996; Delios & Beamish, 2004; Luo & Park, 2001). The key turning point in this literature was prompted by a seminal paper by Shenkar (2001) which heavily criticized existing practices concerning the use of the distance metaphor in IB; and in particular, the use of the KSI metric. This theme has been echoed by numerous subsequent commentaries (e.g., Maseland et al., 2018; Tung & Verbeke, 2010), and arguably inspired two new approaches to defining and/or measuring psychic distance. One of these approaches is to define and measure psychic distance in terms of the perceptions of distance in the mind of the decision-maker. This perspective is strongly associated with Evans and Mavondo (2002), Sousa and Bradley (2005), and Håkanson and Ambos (2010). However, there are earlier examples of the use of perceived distance (e.g., Dichtl et al., 1990; Nordstrom & Vahlne, 1994; Dow, 2000). The main advantage of this approach is that the decision-maker’s perception of distance should be more directly linked to the choices they make. Thus, one would expect a stronger empirical link with actual choices. However, there are two key limitations to this approach. The most critical is that measuring a priori perceptions of psychic distance is extremely challenging given the limited access to the relevant individuals, and the sporadic nature of when and where such decisions are made. As a result, post hoc rather than a priori perceptions are often used, which raises concerns of endogeneity. In addition to that, when one is investigating the link between psychic distance and outcomes (rather than choices), the actual differences rather than the perceived differences may be more relevant.

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Psychic distance  349

The other approach to measuring psychic distance (Brewer, 2007; Dow & Karunaratna, 2006) involves what is referred to as psychic distance stimuli (PDS). This approach focuses on differences in exogeneous attributes between countries (e.g., language, religion, industrial development and political systems). In some respects, this is similar to the approach used by Kogut and Singh (1988), but involves a much wider range of dimensions than just culture. This approach was partially in response to Shenkar’s (2001) earlier criticisms, and also echoes the Johanson and Wiedersheim-Paul (1975) definition of psychic distance as a collection of ‘factors’. In addition to avoiding the endogeneity problems mentioned earlier, this approach also provides more readily accessible metrics (for Dow & Karunaratna’s scales, see www​.dow​.net​.au) and also allows one to explore the relative contributions of individual dimensions.

The antecedents of perceived psychic distance

The antecedents of perceived psychic distance fall into three categories. The first group of antecedents are the various PDS mentioned earlier. These factors are almost definitionally the primary antecedents of perceived distance as they reflect the exogenous measurement of the cross-national differences that help shape people’s perceptions. However, empirical efforts to confirm the link between the PDS and perceived distance are surprisingly thin. Only a handful of papers (e.g., Dow et al., 2014; Håkanson & Ambos, 2010; Håkanson et al., 2016; Sousa & Bradley, 2006) have addressed the issue. Nevertheless, the results are quite consistent in confirming cultural, linguistic, and religious distance, and various forms of other PDS as significant antecedents of perceived distance. The second group of antecedents of perceived distance are factors which may systematically bias an individual’s perceptions and cause them to diverge from objective measures of cross-national differences (i.e., PDS). This is a newer and to some extent still emerging stream of literature which typically builds on social psychology concepts such as confirmation bias (Baack et al., 2015), exposure effects (Håkanson et al., 2016), social comparison theory (Yildiz & Fey, 2016), similarity comparisons (Williams & Gregoire,

2015), and framing effects (Rogenhofer, 2022). The early results seem to be promising in terms of confirming and highlighting inherent biases in our perceptions. The final group of antecedents acknowledges that an individual’s personal experiences may cause their perceptions to differ from the broader population. In particular, international experience (both general and country specific) may influence perceptions of distance. Sadly, this aspect has received only very limited attention (e.g., Dichtl et al., 1990; Dow, 2009), with local experience being the main antecedent.

The consequences of psychic distance and implications for MNE strategies

While Beckerman (1956) originally coined the term psychic distance to explain unusual patterns in international trade, the construct has subsequently been applied to explain a broad range of issues ranging from entry and establishment mode choices, to foreign subsidiary and joint venture survival, and market selection and order of market entry for both FDI and exports. With respect to the original use of the term – i.e., the influence on international trade – the results of Dow and Karunaratna (2006) are intriguing. Cultural distance, measured using the KSI metric, does not appear to significantly influence trade; however, differences in religion, industrial development, education and political systems all appear to have a significant impact. For example, differences in religion between two countries – equivalent to the differences between Spain and China – will on average have an impact on bilateral trade equivalent to the countries being 27,000km further apart. With respect to entry mode choice (i.e., the choice to use a wholly owned subsidiary or a joint venture), the impact of distance is similarly bifurcated depending on how you measure it. Multiple meta-analyses (e.g., Beugelsdijk et al., 2018; Magnusson et al., 2008; Tihanyi et al., 2005; Zhao et al., 2004) find at best a weak association between distance and preferences for joint ventures when using the KSI metric. However, Zhao et al. (2004) find that when perceptual measures of distance (i.e., perceived psychic distance) are used, the effect sizes are four to five times Douglas Dow

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larger. Similarly, Dow and Larimo (2009) find that their broader set of PDS measures also provide four times as much explained variance as the KSI metric. In effect, regardless of whether you measure psychic distance using perceptions or PDS, greater psychic distance is associated with a stronger preference for the use of joint ventures. A similar pattern is evident with respect to predicting foreign subsidiary performance and establishment mode choice (i.e., the choice to enter via acquisition or establishing a greenfield investment). The various meta-analyses report a weak negative association between distance and subsidiary performance using the KSI metric, but effect sizes increase five-fold when measures of perceived distance are employed (Beugelsdijk et al., 2018; Magnusson et al., 2008). And once again, Dow and Ferencikova (2010) find that a broader set of PDS are substantially better at predicting performance. In each case, higher levels of psychic distance tend to reduce subsidiary performance. For predicting establishment mode, the body of literature is much thinner, but Beugelsdijk et al. (2018) again find perceived distance to be a superior predictor of establishment mode choice than the KSI metric, with greater psychic distance favouring establishment by acquisition. Similarly, Dow and Larimo (2011) again find a broader set of PDS provides two to three times as much explained variance as the KSI metric. The same results also appear to hold true for many other outcomes, such as FDI location choice (Beugelsdijk et al., 2018), R&D laboratory location choice (Castellani et al., 2013), order of entry into export markets (Dow, 2000), the level of equity control in cross-border acquisitions (Cuypers et al., 2015), and stock market equity flows (Guo & Tu, 2021). To conclude, it is fair to argue that in any IB situation where uncertainty and communication may play a significant role, psychic distance is likely to also play a significant role. However, the empirical results seem to be heavily contingent on how you measure distance. If one only employs the classic KSI metric, the effect of distance will often appear weak or non-existent; but that is merely a reflection of using an inferior metric. Both

Douglas Dow

approaches advocated here – i.e., measures of perceived distance and a broader set of psychic distance stimuli (PDS) – appear to be superior predictor variables, and typically yield larger effect sizes. Thus, psychic distance, if measured appropriately, does appear to be a major liability of foreignness in most IB settings. Douglas Dow

References

Baack, D. W., Dow, D., Parente, R., & Bacon, D. 2015. Confirmation Bias in Individual-Level Perceptions of Distance: An Experimental Investigation. Journal of International Business Studies, 46(8): 938–59. Beckerman, W. 1956. Distance and the Pattern of Inter-European Trade. The Review of Economics and Statistics, 38(1): 31–40. Benito, G. R. G. 1996. Ownership Structures of Norwegian Foreign Subsidiaries in Manufacturing. International Trade Journal, 10(2): 157–98. Berry, H., Guillen, M., & Zhou, A. 2010. An Institutional Approach to Cross-National Distance. Journal of International Business Studies, 41(9): 1460–80. Beugelsdijk, S., Kostova, T., Kunst, V. E., Spadafora, E., & van Essen, M. 2018. Cultural Distance and Firm Internationalization: A Meta-Analytical Review and Theoretical Implications. Journal of Management, 44(1): 89–130. Brewer, P. 2007. Operationalizing Psychic Distance: A Revised Approach. Journal of International Marketing, 15(1): 44–66. Castellani, D., Jimenez, A., & Zanfei, A. 2013. How Remote are R&D Labs? Distance Factors and International Innovation Activities. Journal of International Business Studies, 44(7): 649–75. Cuypers, I. R. P., Ertug, G., & Hennart, J.-F. 2015. The Effects of Linguistic Distance and Lingua Franca Proficiency on the Stake Taken by Acquirers in Cross-Border Acquisitions. Journal of International Business Studies, 46(4): 429–42. Delios, A. & Beamish, P. W. 2004. Joint Venture Performance Revisited: Japanese Foreign Subsidiaries Worldwide. MIR: Management International Review: 69–91. Dichtl, E., Koeglmayr, H.-G., & Mueller, S. 1990. International Orientation as a Precondition

Psychic distance  351 for Export Success. Journal of International Business Studies, 21(1): 23–40. Dow, D. 2000. A Note on Psychological Distance and Export Market Selection. Journal of International Marketing, 8(1): 51–64. Dow, D. 2009. Factors Influencing Perceptions of Psychic Distance. Academy of International Business (AIB). San Diego. Dow, D. & Ferencikova, S. 2010. More than just National Cultural Distance: Testing New Distance Scales on FDI in Slovakia. International Business Review, 19(1): 46–58. Dow, D., Håkanson, L., & Ambos, B. 2014. Perceptions Versus National-Level Differences: A Mediating Model of Psychic Distance. In Verbeke, A., R. Tulder, & S. M. Lundan, (Eds.), Progress in International Business Research: Multinational Enterprises, Markets and Institutional Diversity: Emerald Group Publishing Limited. Dow, D. & Karunaratna, A. 2006. Developing a Multidimensional Instrument to Measure Psychic Distance Stimuli. Journal of International Business Studies, 37(5): 578–602. Dow, D. & Larimo, J. 2009. Challenging the Conceptualization and Measurement of Distance and International Experience in Entry Mode Choice Research. Journal of International Marketing, 17(2): 74–98. Dow, D. & Larimo, J. 2011. Disentangling the Roles of International Experience and Distance in Establishment Mode Choice. Management International Review, 51(3): 321–55. Evans, J. & Mavondo, F. T. 2002. Psychic Distance and Organizational Performance: An Empirical Examination of International Retailing Operations. Journal of International Business Studies, 33(3): 515–32. Guo, N. & Tu, A. H. 2021. Stock Market Synchronization and Institutional Distance. Finance Research Letters, 42: 101934. Håkanson, L. & Ambos, B. 2010. The Antecedents of Psychic Distance. Journal of International Management, 16(3): 195–210. Håkanson, L., Ambos, B., Schuster, A., & Leicht-Deobald, U. 2016. The Psychology of Psychic Distance: Antecedents of Asymmetric Perceptions. Journal of World Business, 51(2): 308–18. Johanson, J. & Vahlne, J.-E. 1977. The Internationalization Process of the Firm—A Model of Knowledge Development and Increasing Foreign Commitments. Journal of International Business Studies, 8(1): 23–32. Johanson, J. & Wiedersheim-Paul, F. 1975. The Internationalization of the Firm: Four Swedish

Cases. Journal of Management Studies, 12(October): 305–22. Kogut, B. & Singh, H. 1988. The Effect of National Culture on the Choice of Entry Mode. Journal of International Business Studies, 19(3): 411–32. Luo, Y. & Park, S. H. 2001. Strategic Alignment and Performance of Market-Seeking MNCs in China. Strategic Management Journal, 22(2): 141–55. Magnusson, P., Baack, D. W., Zdravkovic, S., Staub, K., & Amine, L. 2008. Meta-Analysis of Cultural Differences: Another Slice at the Apple. International Business Review, 17(5): 520–32. Maseland, R., Dow, D., & Steel, P. 2018. The Kogut and Singh National Cultural Distance Index: Time to Start Using it as a Springboard Rather than a Crutch. Journal of International Business Studies, 49(9): 1154–66. Nordstrom, K. A. & Vahlne, J.-E. 1994. Is the Globe Shrinking? Psychic Distance and the Establishment of Swedish Subsidiaries During the Last 100 Years. In Landeck, M., (Ed.), International Trade: Regional and Global Issues. New York: St Martin’s Press. Rogenhofer, L. 2022. Thinking inside the Box: A Psychological Perspective on Psychic Distance – Examining Cognitive Biases in International Business, Doctoral Thesis, School of Management, Economics, Law, Social Sciences and International Affairs, University of St. Gallen, St Gallen, Switzerland. Shenkar, O. 2001. Cultural Distance Revisited: Towards a More Rigorous Conceptualization and Measurement of Cultural Differences. Journal of International Business Studies, 32(3): 519–36. Sousa, C. M. P. & Bradley, F. 2005. Global Markets: Does Psychic Distance Matter? Journal of Strategic Marketing, 13(1): 43–59. Sousa, C. M. P. & Bradley, F. 2006. Cultural Distance and Psychic Distance: Two Peas in a Pod? Journal of International Marketing, 14(1): 49–70. Tihanyi, L., Griffith, D. A., & Russell, C. J. 2005. The Effect of Cultural Distance on Entry Mode Choice, International Diversification, and MNE Performance: A Meta-Analysis. Journal of International Business Studies, 36(3): 270–83. Tung, R. L. & Verbeke, A. 2010. Beyond Hofstede and GLOBE: Improving the Quality of Cross-Cultural Research. Journal of International Business Studies, 41(8): 1259–74. Williams, D. W. & Gregoire, D. A. 2015. Seeking Commonalities or Avoiding Differences? Re-Conceptualizing Distance and its Effects

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352  Encyclopedia of international strategic management on Internationalization Decisions. Journal of International Business Studies, 46(3): 253–84. Xu, D. & Shenkar, O. 2002. Institutional Distance and the Multinational Enterprise. Academy of Management Review, 27(4): 608–18. Yildiz, H. E. & Fey, C. F. 2016. Are the Extent and Effect of Psychic Distance Perceptions Symmetrical in Cross-border M&As? Evidence

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from a Two-country Study. Journal of International Business Studies, 47(7): 830–57. Zhao, H., Luo, Y., & Suh, T. 2004. Transaction Cost Determinants and Ownership-Based Entry Mode Choice: A Meta-Analytic Review. Journal of International Business Studies, 35(6): 524–44.

87. Regional MNE A regional MNE is typically defined as an MNE that has confined its activities and focus to a single region, such as a continent and/or supranational administrative domain (e.g., Oh & Rugman, 2014). This reflects one understanding of the term regional strategy, which can be contrasted as alternatives to both a stylised global strategy where MNEs pursue a worldwide presence, or the domestic strategy of non-MNEs. Note, however, that regional strategy can refer to several different aspects of MNEs’ quests for competitive advantage (as with much of IB scholarship, there is often a lack of consistency in the term’s use). The current entry describes the regional MNE as a firm that pursues a regional geographic footprint, while the regional strategy entry describes how regions may serve as a locus of organisational structure and decision-making in large MNEs.

Home regionalisation

A stream of research – which can be thought of as the home regionalisation school – refers to the observed tendency of MNEs to limit their geographic footprints to more proximate locations, primarily within some recognisable home region. Here regional strategy can be defined as an MNE’s choice to pursue advantages within a home region. These regions are usually geographically demarcated with an institutional overlay. For example, several have sprung up in response to, and alongside, the negotiation of multilateral trade agreements, such as the European Union (EU), the United States–Mexico–Canada Agreement (USMCA), Mercosur, or the Association of Southeast Asian Nations (ASEAN). This stream emerged from the observation that few MNEs had true global reach. The most prominent empirical works are those of Rugman and Verbeke (and occasional additional co-authors). They demonstrated that among the largest firms in the world (e.g., Forbes magazine’s Global 500), only a handful of firms had a global sales footprint – defined as having less than 50% of sales in the home region and greater than 20% in each of the other two regions, with North America, Europe and Asia-Pacific the predefined regions – and that the most common locus of activity was an MNE’s home region

(Rugman, 2005; Rugman & Verbeke, 2004). This finding has been replicated for numerous industries, including retailing (Rugman & Girod, 2003), cosmetics (Oh & Rugman, 2006) and food and beverages (Filippaios & Rama, 2008), as well as for MNEs from various home countries, including Italy (Cerrato, 2009), Japan (Delios & Beamish, 2005), Canada (Qian, Li & Rugman, 2013) and the BRICs quartet (Sethi, 2009). The latest data for the Global 500 still support the predominance of home-regional firms, although global firms have quadrupled in number (Rosa, Gugler & Verbeke, 2020). The theoretical explanations for this phenomenon typically rest on several core IB concepts. First, it is argued that liability of foreignness (LOF) is variegated across host markets such that LOF is lower within the home region than outside, due, mainly, to greater institutional and cultural similarities. This leads to a relatively lower cost of doing business that is amplified by the geographic proximity and concomitant lower transport and coordination costs. The higher level of challenge and costs beyond the home regions was tagged as the liability of regional foreignness by Rugman and Verbeke (2007). Put simply, MNEs will find it more difficult and more costly to attempt host regional expansion due to greater differences in institutions, business norms, and consumer preferences, and their own greater unfamiliarity with such markets. This is also consistent with Johanson and Vahlne’s (2009) liability of outsidership concept. Furthermore, this pattern of expansion can be viewed as consistent with the general incremental geographic expansion characterised by particular interpretations of the Uppsala model (Barkema & Drogendijk, 2007; Johanson & Vahlne, 1977), with a boundary condition, of sorts, imposed by the regional borders. This boundary condition has been explained as the compounded distance between regions (Verbeke & Asmussen, 2016). Second, and relatedly, it is argued that MNEs will find their firm-specific advantages (FSAs) more relevant and leverageable in the more proximate home region markets, and less so elsewhere (Rugman & Verbeke, 2004). Indeed, the presumed greater integration within each given region, along with the lower LOF, offers MNEs more opportunity to tap into economies of scale and scope by integrating operations and activities within

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this home region (Kim & Aguilera, 2015). In essence, these FSAs become regionally applicable, while also region bound (Verbeke & Asmussen, 2016). This contention crosses over considerably with the second stream of works on regional strategy.

Research challenges and opportunities

There remain several underexplored aspects within this stream of literature. There are empirical challenges in observing and assessing the footprints of MNEs, and in reconciling these footprints with regional overlays. As Flores et al. (2013) have shown, there may be more justifiable regional configurations than the North America, Europe and Asia-Pacific triad adopted in the initial regionalisation studies. It would seem logical and informative to observe both the actual configurations of countries MNEs do operate in, and also how they aggregate these within their organisational structures, as this presumably reflects their experiences of any regional gains and constraints. And irrespective of the regional configurations selected, it is hard to justify the implicit expectation that each region (and thus MNEs’ footprints) will be of equivalent size, given the variance in the underlying national economy sizes. Asmussen (2009) offers a GDP-adjusted measure that unfortunately has had less traction with scholars than it deserves. Osegowitsch and Sammartino (2008) have argued that both the inclusion of domestic sales, and the adoption of arbitrary thresholds for categorising regional footprints, may be misdirecting attention and overstating the number of home regional MNEs. On the theoretical side, perhaps because of the empirical ease of gathering sales data, the explanations for regional footprints have tended to focus only on the leveraging of FSAs into sales. Expansion in the back end of the value chain is less commonly analysed or theorised (Mudambi & Puck (2016) is a notable exception), yet relocation of production and offshoring of business processes have been key MNE actions as they explore global value chain configurations (McWilliam et al., 2020). Indeed, much of the logic behind multilateral trade agreements and associated policy initiatives to induce inward FDI rest on attracting production and support activities, rather than sales. This litAndré Sammartino

erature would have a greater policy impact by more directly modelling these elements of MNEs’ regional strategies. Research possibilities remain with respect to the dynamics of regionalisation and MNEs’ footprints over time. Ghemawat’s semi-globalisation arguments suggest an ever-evolving balancing of strategic intents and actions in response to countries’ and regions’ shifting advantages and inter-locational distances. The data from Rosa et al. (2020) point to a considerable shift in the proportions of large MNEs adopting differing regional strategies over the last two decades. Sammartino and Osegowitsch (2013) have proposed competing theoretical perspectives on the strategic possibilities for MNEs that depend on the porousness of regional boundaries and noted that these could differ very considerably between industries and over time. Asmussen et al. (2015) presented findings showing MNEs oscillating between home region and global expansion over time, which would seem to challenge any strong form claims as to the non-viability of extra-regional expansion. The recent work by Békés et al. (2021), which incorporates regional footprints with operational mode choices, could be an exciting way forward in modelling the diversity and dynamics of intra- and extra-regional choices. Finally, behavioural explanations for both the predominance of regional strategies relative to global, and also for the persistence of MNEs operating beyond their home regions, warrants greater empirical exploration and theoretical exploration. Verbeke and Asmussen (2016) describe the latter as overstretching, and attribute these to possibly exaggerated beliefs in the transferability and deployability of FSAs across regions. There are clear opportunities to explore the role of managerial hubris in such beliefs and actions (Picone, Dagnino & Minà, 2014; Picone, Pisano & Dagnino, 2021), along with other cognitive differences between managers (Biru et al., 2022). Understanding the heuristics and mental models of senior decision-makers with these MNEs (Maitland & Sammartino, 2015a, 2015b) should reveal some of the precursors to such strategic actions as well as deepening our understanding of what regional really means to those building MNE strategies. André Sammartino

Regional MNE  355

References

Alfoldi, E. A., Clegg, L. J., & McGaughey, S. L. 2012. Coordination at the edge of the empire: The delegation of headquarters functions through regional management mandates. Journal of International Management, 18(3): 276–292. Arregle, J. L., Miller, T. L., Hitt, M. A., & Beamish, P. W. 2018. The role of MNEs’ internationalization patterns in their regional integration of FDI locations. Journal of World Business, 53(6): 896–910. Asmussen, C. G. 2009. Local, regional, or global? Quantifying MNE geographic scope. Journal of International Business Studies, 40(7): 1192–1205. Asmussen, C. G., Foss, N. J., & Pedersen, T. 2013. Knowledge transfer and accommodation effects in multinational corporations: Evidence from European subsidiaries. Journal of Management, 39(6): 1397–1429. Asmussen, C. G., Nielsen, B. B., Osegowitsch, T., & Sammartino, A. 2015. The dynamics of regional and global expansion. Multinational Business Review, 23(4): 306–327. Barkema, H. G., & Drogendijk, R. 2007. Internationalising in small, incremental or larger steps? Journal of International Business Studies, 38(7): 1132–1148. Békés, G., Benito, G. R., Castellani, D., & Muraközy, B. 2021. Into the unknown: The extent and boldness of firms’ international footprint. Global Strategy Journal, 11(3): 468–493. Biru, A., Filatotchev, I., Bruton, G., & Gilbert, D. 2022. CEOs’ regulatory focus and firm internationalization: The moderating effects of CEO overconfidence, narcissism and career horizon. International Business Review, 102078. Cerrato, D. 2009. Does innovation lead to global orientation? Empirical evidence from a sample of Italian firms. European Management Journal, 27(5): 305–315. Delios, A. & Beamish, P.W. 2005. Regional and global strategies of Japanese firms, Management International Review, 45(1): 19–36. Filippaios, F. & Rama, R. 2008. Globalization or regionalization? The strategies of the world’s largest food and beverage MNEs. European Management Journal, 26(1): 59–72. Flores, R., Aguilera, R. V., Mahdian, A., & Vaaler, P. M. 2013. How well do supranational regional grouping schemes fit international business research models? Journal of International Business Studies, 44(5): 451–474. Ghemawat, P. 2003. Semiglobalization and international business strategy. Journal of International Business Studies, 34(2): 138–152. Ghemawat, P. 2005. Regional strategies for global leadership. Harvard Business Review, 83(12): 98–108. Ghemawat, P. 2008. Reconceptualizing inter-

national strategy and organization. Strategic Organization, 6(2): 195–206. Johanson, J., & Vahlne, J.E. 1977. The internationalization process of the firm: A model of knowledge development and increasing foreign market commitment. Journal of International Business Studies, 8(1): 23–32. Johanson, J., & Vahlne, J. E. 2009. The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership. Journal of International Business Studies, 40(9): 1411–1431. Kim, J. U., & Aguilera, R. V. 2015. The world is spiky: An internationalization framework for a semi-globalized world. Global Strategy Journal, 5(2): 113–132. Maitland, E., & Sammartino, A. 2015a. Managerial cognition and internationalization. Journal of International Business Studies, 46(7), 733–760. Maitland, E., & Sammartino, A. 2015b. Decision making and uncertainty: The role of heuristics and experience in assessing a politically hazardous environment. Strategic Management Journal, 36(10), 1554–1578. McWilliam, S. E., Kim, J. K., Mudambi, R., & Nielsen, B. B. 2020. Global value chain governance: Intersections with international business. Journal of World Business, 55(4): 101067. Mudambi, R., & Puck, J. 2016. A global value chain analysis of the ‘regional strategy’ perspective. Journal of Management Studies, 53(6): 1076–1093. Oh, C., & M. Rugman, A. 2014. The dynamics of regional and global multinationals, 1999–2008. Multinational Business Review, 22(2): 108–117. Oh, C. H., & Rugman, A. M. 2006. Regional sales of multinationals in the world cosmetics industry. European Management Journal, 24(2–3): 163–173. Osegowitsch, T., & Sammartino, A. 2008. Reassessing (home-) regionalisation. Journal of International Business Studies, 39(2): 184–196. Picone, P. M., Dagnino, G. B., & Minà, A. 2014. The origin of failure: A multidisciplinary appraisal of the hubris hypothesis and proposed research agenda. Academy of Management Perspectives, 28(4), 447–468. Picone, P. M., Pisano, V., & Dagnino, G. B. 2021. The bright and dark sides of CEO hubris: Assessing cultural distance in international business. European Management Review, 18(3): 343–362. Piekkari, R., Nell, P. C., & Ghauri, P. N. 2010. Regional management as a system. Management International Review, 50(4): 513–532. Qian, G., Li, L., & Rugman, A. M. 2013. Liability of country foreignness and liability of regional foreignness: Their effects on geographic diversification and firm performance. Journal of International Business Studies, 44(6): 635–647. Rosa, B., Gugler, P., & Verbeke, A. 2020. Regional and global strategies of MNEs:

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356  Encyclopedia of international strategic management revisiting Rugman & Verbeke (2004). Journal of International Business Studies, 51(7): 1045–1053. Rugman, A. M. 2005. The regional multinationals: MNEs and ‘global’ strategic management. Cambridge: Cambridge University Press. Rugman, A., & Girod, S. 2003. Retail multinationals and globalization: the evidence is regional. European Management Journal, 21(1): 24–37. Rugman, A. M., & Verbeke, A. 2004. A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1): 3–18. Rugman, A. M., & Verbeke, A. 2007. Liabilities of regional foreignness and the use of firm-level

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versus country-level data: A response to Dunning et al. (2007). Journal of International Business Studies, 38(1): 200–205. Sammartino, A., & Osegowitsch, T. 2013. Dissecting home regionalization: How large does the region loom? Multinational Business Review, 21(1): 45–64. Sethi, D. 2009. Are multinational enterprises from the emerging economies global or regional? European Management Journal, 27(5): 356–365. Verbeke, A., & Asmussen, C. G. 2016. Global, local, or regional? The locus of MNE strategies. Journal of Management Studies, 53(6): 1051–1075.

88. Regional strategy The term ‘regional strategy’ can be understood in two ways: as a description of the firm’s organizational choices and role allocation, or a description of the geographic footprint that it pursues. The latter understanding is consistent with the regional MNE (see the entry on this topic), most particularly a home regional strategy. Such MNEs have recognised the greater ease of leveraging and build firm-specific advantages within an area that is more geographically, institutionally and culturally close, as opposed to attempting to attend to the more diverse and complex distances involved in a cross-regional or global footprint (Verbeke & Asmussen, 2016). It has been found that such an approach and focus predominates among even the world’s largest firms, with a large majority being home region focused (Rosa, Gugler and Verbeke, 2020; Rugman & Verbeke, 2004). This entry, however, focuses on regional strategy in the organisational understanding of the term. In that sense, a regional strategy may be pursued by a global firm (in terms of footprint), i.e., a firm that does operate across more than one region, but organises these operations along regional lines. Again, the explanation for such organisational choices rests on the relative ease and greater returns of building and leveraging advantages within, rather than across, regions. It is assumed that sufficient economies of scale and scope can be achieved within regions. Different advantages and operating models may be more appropriate in the various regions. Formulating and implementing uniform strategies that stretch across multiple regions would thus trade away many gains, while also adding complexity in retaining consistency (Schotter et al., 2017). Regional strategy is evident in an MNE’s locus of decision-making – both where strategy decisions are made, and where they are enacted. The presumption of home-regionalisation is not as necessary here, but it is assumed that regions remain front of mind even for MNEs with multi-region footprints. This might be thought of as the regionally focused strategies school. Here regional strategy can be defined as the distinct strategy an MNE adopts within a region. This is consistent with Ghemawat’s semi-globalisation papers (2003, 2005, 2008), contending

that the persistence of institutional, cultural and economic differences between national markets, coupled with the challenges and costs of geographic distance, renders a consistent, global strategy unviable for most MNEs. Regions are recognised as a more viable domain for strategy formulation and implementation, as distances here are more manageable and may also grant scope to provide advantage. For instance, MNEs are urged to explore the opportunities to aggregate some activities at a regional level to tap into economies of scale (Arregle et al., 2018). This may grant the MNE an advantage in delivering goods or services to the entire region, especially if little adaptation is required. At the same time, this literature seeks to explain why MNEs might operate across multiple regions. The MNE may have sufficient firm-specific advantages (FSAs) to warrant such expansion, yet they must then wrestle with adaptation to a different region’s expectations and needs. An MNE’s knowledge transfer capabilities become crucial in explaining their success or otherwise in doing so (Asmussen, Foss & Pedersen, 2013). Regions themselves may have different resource endowments, growth stages and rates, and these may represent significant and persistent arbitrage opportunities for MNEs, as they can gain advantages in one (or more) region that they then utilise elsewhere. As with many strategy conversations, this literature also explores the structural and organisational implications of these strategic choices. These include the role of regional head offices (Piekkari, Nell, & Ghauri, 2010) and the allocation of regional mandates (Alfoldi, Clegg & McGuaghey, 2012). The former is perhaps the more common of the two and can occur under both our definitions of a regional MNE. The latter reflects an option available to, and role within, regional MNEs that operate distinct strategies in different regions.

Regional head offices

MNEs typically expand on a country-​ by-country basis, adding subsidiary units into the fold, whether via greenfield FDI or acquisitions. Concurrently, they may also be utilising other operational modes to expand their reach, such as exporting, licensing and production agreements, and may be sourcing

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key inputs via cross-border supply contracts. While these subsidiaries may, initially, report directly through to the home country corporate headquarters, over time additional hierarchical layers and organisational mechanisms are often introduced. Initially, this might be an international office, reflecting a clear distinction and delineation between the domestic and international portions of the business, especially if domestic operations are very dominant, or an MNE’s international efforts are focused on only a single or few product lines from the firm’s much larger domestic portfolio. Aggregating responsibilities for the international division in one of the MNE’s offshore locations can serve to focus attention on economies of scale and scope across the suite of foreign subsidiaries. For a single (home) region MNE, the international office can also be thought of as a regional head office. MNEs operating across regions will often have multiple regional head offices with delegated responsibility for groups of country-level subsidiaries (Enright, 2005b; Mahnke et al., 2012), and clustered by regions. They are established in recognition of the different needs of groups of countries within an MNE’s portfolio. As demonstrated by Piekkari, Nell, and Ghauri’s (2010) extensive, longitudinal study of Finnish MNE Kone, the identification of regions may stem from perceptions of distinct market types with differing product needs. Here, regional head offices serve as more logical loci of decision-making about strategic choices within these domains, especially as the MNE adapts strategies to local needs and looks to build region-specific FSAs. Verbeke and Asmussen (2016) present a modified version of the traditional integration– responsiveness framework, where regional head offices serve as the logical domain for managing the pursuit of regional economies of scale and scope, balanced with regional responsiveness to customer needs. Regional head offices also serve a conduit role for information to and from the corporate headquarters to subsidiaries (Birkinshaw & Pedersen, 2009), and as a mechanism for dispersing knowledge acquired within one region to others (Verbeke & Asmussen, 2016). Thus, the MNE becomes a three-tiered structure, with the regional head offices as an intermediary between country subsidiaries and headquarters (Hoenen & Kostova, 2015). André Sammartino

Regional head offices may be responsible for nurturing region-wide HRM practices, including building pools of managerial, design and marketing talent across subsidiaries (Lee et al., 2022), for identifying and transferring best practices (Geary, Aguzzoli & Lengler, 2017), and for coordinating regional supply chains (Turkulainen et al., 2017). Furthermore, they can serve a central role in an MNE’s innovation system in coordinating linkages and knowledge flows (Asakawa & Lehrer, 2003). The establishment of regional head offices has risen considerably in recent years. Ambos and Schlegelmich (2010) reported a 76% increase in their number in Europe during the first decade of this millennium. Lasserre (1996) and Enright (2005a) documented their emergence in the Asia-Pacific. This is consistent with the aforementioned data on regional strategy adoption. Studies suggest that regional head offices are more likely in MNEs with higher levels of foreign manufacturing than sales (Egelhoff, 1988; Wolf & Egelhoff, 2002). This reflects the greater coordination challenges and knowledge-sharing needs with dispersed value chains.

Regional mandates

As MNEs expand, they often allocate specific responsibilities to different subsidiaries. In line with the MNEs’ different motivations for operating in particular locations, such as access to country-specific advantages (CSAs), and the presence of superior capabilities within certain subsidiaries, some subsidiaries will be granted mandates to perform activities on behalf of a broader portion of the MNE (Birkinshaw, 1996). Such mandates are most consistent with the pursuit of integration and aggregation benefits, as MNEs seek to build cross-border value chains (Ghemawat, 2007). As Ghemawat (2005) argues, often this may involve allocating mandates to specific country subsidiaries within a region to provide an activity (e.g., assembly, design, or marketing) to that region. He calls this a regional hub strategy. Alternatively, one region might be allocated responsibility for delivering a function or product globally. Ghemawat calls this a mandate strategy. The latter is less typical given the various challenges of identifying a standardised offering acceptable around the globe, and the risks of

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servicing such needs from a single locale or value chain. Subsidiary mandates can be won and lost. These decisions by headquarters may reflect shifting, relative subsidiary-level FSAs, changes in an MNE’s strategy, and also various political battles (Birkinshaw & Hood, 1998; Bouquet & Birkinshaw, 2008; Mudambi & Navarra 2004). A distinction is increasingly made between regional head offices (RHOs) and regional management mandates (RMMs). Whereas a regional head office is principally concerned with administering, monitoring and managing the subsidiaries within its geographic purview, a regional management mandate may be allocated to the suite of activities performed by an existing subsidiary, alongside its more profit-oriented endeavours (Alfoldi, Clegg & McGuaghey, 2012). Concerns arise with the effectiveness of such arrangements given the tensions around both legitimacy of authority, and also the greater scope for parochial decision-making. Data on use of RMMs and RHOs by Japanese MNEs indicates RMMs to be much more frequently adopted, indicative of their lower cost burden, greater flexibility in reallocation, and the potential to disperse responsibilities more widely (Chakravaty et al., 2017). It is often the case that RMMs may only cover a smaller subset of subsidiaries in a region (Alfoldi, Clegg & McGuaghey, 2012). RMMs look to be better integrated into the MNE’s regional value chain than RHOs, with the latter more attuned to financial risk mitigation and support activities (Chakravaty et al., 2017).

Research opportunities

There remain rich research prospects in better understanding the operations of regional MNEs in their various forms. Verbeke and Asmussen (2016) offer promising modifications to the traditional integration–responsiveness framework, whereby a regional middle ground is identified. How MNEs align their regional structures to these strategic choices, in terms of the allocation of subsidiary roles, especially managerial mandates, has not been adequately explored. There is scope to contrast these choices with Ghemawat’s (2005) various archetypes of regional strategies to delineate further configurations. Chakravaty et al. (2017) made some tentative claims as to possibly performance effect differences

between the use of RHOs and RMMs, but utilising data beyond just Japanese MNEs could reveal different relationships. Pla-Barber and Camps (2012) highlight the allocation of extra-regional RHO responsibilities to Spanish subsidiaries for Latin American operations. There may be further examples of such geographically dispersed mandates that could shed light on the opportunities and pitfalls of managing regional initiatives from afar. More closely delineating the functional domains within regional MNEs (e.g., HRM, innovation, marketing, logistics) and the impact of differing their locations also has scope to bolster our understanding of the how such MNEs might best be structured. André Sammartino

References

Alfoldi, E. A., Clegg, L. J., & McGaughey, S. L. 2012. Coordination at the edge of the empire: The delegation of headquarters functions through regional management mandates. Journal of International Management, 18(3), 276–292. Ambos, B., & Schlegelmilch, B. 2010. The new role of regional management. Basingstoke: Palgrave Macmillan. Arregle, J. L., Miller, T. L., Hitt, M. A., & Beamish, P. W. (2018). The role of MNEs’ internationalization patterns in their regional integration of FDI locations. Journal of World Business, 53(6), 896–910. Asakawa, K., & Lehrer, M. 2003. Managing local knowledge assets globally: The role of regional innovation relays. Journal of World Business, 38(1), 31–42. Asmussen, C. G., Foss, N. J., & Pedersen, T. 2013. Knowledge transfer and accommodation effects in multinational corporations: Evidence from European subsidiaries. Journal of Management, 39(6), 1397–1429. Birkinshaw, J. 1996. How multinational subsidiary mandates are gained and lost. Journal of International Business Studies, 27(3), 467–495. Birkinshaw, J., & Hood, N. 1998. Multinational subsidiary evolution: Capability and charter change in foreign-owned subsidiary companies. Academy of Management Review, 23(4), 773–795. Birkinshaw, J., & Pedersen, T. 2009. Strategy and management in MNE subsidiaries. In A. M. Rugman (Ed.) The Oxford handbook of international business. 2nd edn: 367–388. Oxford: Oxford University Press. Bouquet, C., & Birkinshaw, J. 2008. Weight versus voice: How foreign subsidiaries gain atten-

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360  Encyclopedia of international strategic management tion from corporate headquarters. Academy of Management Journal, 51(3), 577–601. Chakravarty, D., Hsieh, Y. Y., Schotter, A. P., & Beamish, P. W. 2017. Multinational enterprise regional management centres: Characteristics and performance. Journal of World Business, 52(2), 296–311. Egelhoff, W. G. 1988. Strategy and structure in multinational corporations: A revision of the Stopford and Wells model. Strategic Management Journal, 9(1), 1–14. Enright, M. J. 2005a. Regional management centres in the Asia-Pacific. Management International Review, 45(1), 69–82. Enright, M. J. 2005b. The roles of regional management centers. Management International Review, 45(1), 83–102. Geary, J., Aguzzoli, R., & Lengler, J. 2017. The transfer of ‘international best practice’ in a Brazilian MNC: A consideration of the convergence and contingency perspectives. Journal of International Management, 23(2), 194–207. Ghemawat, P. 2005. Regional strategies for global leadership. Harvard Business Review, 83(12): 98–108. Ghemawat, P. 2007. Redefining global strategy: Crossing borders in a world where differences still matter. Boston: Harvard Business Press. Hoenen, A. K., & Kostova, T. 2015. Utilizing the broader agency perspective for studying headquarters–subsidiary relations in multinational companies. Journal of International Business Studies, 46(1), 104–113. Lasserre, P. 1996. Regional headquarters: The spearhead for Asia Pacific markets. Long Range Planning, 29(1), 30–37. Lee, J. Y., Yahiaoui, D., Lee, K. P., & Cooke, F. L. 2022. Global talent management and multinational subsidiaries’ resilience in the Covid-19 crisis: Moderating roles of regional headquarters’ support and headquarters–subsidiary fric-

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tion. Human Resource Management, 61(3), 355–372. Mahnke, V., Ambos, B., Nell, P. C., & Hobdari, B. 2012. How do regional headquarters influence corporate decisions in networked MNCs? Journal of International Management, 18(3), 293–301. Mudambi, R., & Navarra, P. 2004. Is knowledge power? Knowledge flows, subsidiary power and rent-seeking within MNCs. Journal of International Business Studies, 35(5), 385–406. Piekkari, R., Nell, P. C., & Ghauri, P. N. 2010. Regional management as a system. Management International Review, 50(4): 513–532. Pla-Barber, J., & Camps, J. 2012. Springboarding: a new geographical landscape for European foreign investment in Latin America. Journal of Economic Geography, 12(2), 519–538. Rosa, B., Gugler, P., & Verbeke, A. 2020. Regional and global strategies of MNEs: Revisiting Rugman & Verbeke (2004). Journal of International Business Studies, 51(7), 1045–1053. Rugman, A. M., & Verbeke, A. 2004. A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1), 3–18. Schotter, A. P., Mudambi, R., Doz, Y. L., & Gaur, A. 2017. Boundary spanning in global organizations. Journal of Management Studies, 54(4), 403–421. Turkulainen, V., Roh, J., Whipple, J. M., & Swink, M. 2017. Managing internal supply chain integration: Integration mechanisms and requirements. Journal of Business Logistics, 38(4), 290–309. Verbeke, A., & Asmussen, C. G. 2016. Global, local, or regional? The locus of MNE strategies. Journal of Management Studies, 53(6), 1051–1075. Wolf, J., & Egelhoff, W. G. 2002. A reexamination and extension of international strategy– structure theory. Strategic Management Journal, 23(2), 181–189.

89. Repatriation Repatriation is defined as the completion of an international assignment and the assignee’s move to a subsequent position, either at the individual’s home unit or another unit of a multinational company (MNC) (Lazarova, 2015; Reiche, 2012). It is thus considered a major role transition that affects the individual’s work and family domain (Reiche et al., 2023) and also has several important organizational implications (Bolino, 2007; Oddou et al., 2008). The scholarly literature typically assesses repatriation success in the form of post-assignment retention, repatriate satisfaction, repatriation adjustment and performance (Kraimer et al., 2016). By contrast, poor handling of repatriation is thought to increase repatriate turnover intentions and actual turnover (e.g., Kraimer et al., 2009, 2012) and reduce the willingness of other employees to accept international assignments (Bolino, 2007). From the perspective of the individual, the return from an international assignment has been linked to the experience of reverse culture shock (Gaw, 2000), adjustment problems to life both in and outside the work environment (Black et al., 1992), and social and role identity changes (Kraimer et al., 2012; Sussman, 2001). Specifically, due to exposure to foreign contexts where daily practices, interactions between people, and institutions differ from those of their home country, individuals may experience personal change, with important implications for their self-meanings (Adam et al., 2018). Returning assignees often also experience career frustrations immediately upon repatriation (e.g., Kraimer et al., 2009), which, considered jointly with other stressors such as dissatisfaction and adjustment problems of significant others, explain returnees’ intentions to leave their employer (Kraimer et al., 2012) or self-initiate new expatriation (Ho et al., 2015). Other research provides important boundary conditions that help individuals benefit from their international assignments. For example, Ramaswami and colleagues (2016) demonstrated that repatriates only obtained positive compensation returns when they had more than one assignment, considered that their acquired knowledge and skills were utilized post repatriation, and were working at higher organizational levels.

From the perspective of the organization, repatriates are considered important knowledge agents (Chiang et al., 2018; Lazarova & Tarique, 2005). Assignees acquire important task- and relationship-oriented knowledge during their relocation abroad, including knowledge about the host country’s market and customs as well as cross-cultural understanding of work relationships. Research suggests that assignees apply and transfer this knowledge upon their return (Froese et al., 2021). Extant work further suggests that this knowledge transfer hinges on returnees’ effective reintegration in their home unit (Peltokorpi et al., 2022). In this vein, the literature has offered a number of effective support practices that can facilitate reintegration, including administrative and logistical support with the reintegration process, career planning sessions that focus on the person’s long-term career plan within the company, or mentoring programs (Burmeister & Deller, 2016; Lazarova & Caliguiri, 2001). Despite the recent growth of repatriation research that has seen scholars draw on an increasing variety of theories, the field remains theoretically underdeveloped (Akkan et al., 2020). Further, while researchers more regularly use time-lagged and longitudinal research designs to help support theoretical arguments about causality and change (e.g., Froese et al., 2021; Ramaswami et al., 2016; Reiche, 2012), important methodological concerns remain. Indeed, existing studies don’t always clearly differentiate between the types of assignees whose return they study (e.g., parent-country expatriate vs inpatriate vs third-country national), the time frame that has lapsed since their return, or the influence that salient stakeholders like family members and host-country nationals may have on the focal repatriate’s experience (Chiang et al., 2018). Sample size and sample selection is another empirical challenge given the difficulty to access a sufficient number of comparable repatriates in a given study, leading to samples that are notoriously small in size and that may not adequately consider those repatriates that have left their employer upon return. Promising avenues for future research, however, include not only further theoretical integration and methodological sophistication, but also rethinking the repatriate concept itself. While the literature has traditionally conceived repatriation as a well-demarcated

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final stage of an international posting and return to one’s home unit to resume ‘domestic’ job responsibilities, there are good reasons to challenge this view. Instead of considering it as an assignment endpoint and a return to ‘normality,’ repatriation often requires coping with substantive change in individuals’ identities, their specific roles and the broader organizational, non-work and societal context (Kraimer et al., 2022). The very nature of the repatriation concept itself is also questioned by new forms of global work. For example, while global virtual team members or global domestics will not consider repatriation a relevant issue, international business travelers or short-term assignees will conceive their return as qualitatively different compared with long-term assignees (e.g., Demel & Mayrhofer, 2010). Finally, repatriation may initiate new career activities, including the decision to start entrepreneurial ventures (Lin et al., 2016). Conceptualizing repatriation as a trigger of other work experiences thus promises to integrate the repatriation experience into wider careers research (Baruch et al., 2016). B. Sebastian Reiche and Mila B. Lazarova

References

Adam, H., Obodaru, O., Lu, J. G., Maddux, W. W., & Galinsky, A. D. 2018. The shortest path to oneself leads around the world: Living abroad increases self-concept clarity. Organizational Behavior and Human Decision Processes, 145: 16–29. Akkan, E., Reiche, B. S., & Lazarova, M. B. 2020. A ‘change’ perspective of repatriation: Review and research recommendations. In B. Szkudlarek, J. Osland, D. Caprar, & L. Romani (Eds.), SAGE Handbook of Contemporary Cross Cultural Management (pp. 439–451). London: Sage. Baruch, Y., Altman, Y., & Tung, R. L. 2016. Career mobility in a global era: Advances in managing expatriation and repatriation. Academy of Management Annals, 10(1): 841–889. Black, J. S., Gregersen, H. B., & Mendenhall, M. E. 1992. Toward a theoretical framework of repatriation adjustment. Journal of International Business Studies, 23: 737–760. Bolino, M. C. 2007. Expatriate assignments and intra-organizational career success: Implications for individuals and organizations.

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Journal of International Business Studies, 38(5): 819–835. Burmeister, A., & Deller, J. 2016. A practical perspective on repatriate knowledge transfer: The influence of organizational support practices, Journal of Global Mobility, 4(1): 68–87. Chiang, F. T., van Esch, E., Birtch, T. A., & Shaffer, M. A. 2018. Repatriation: What do we know and where do we go from here. International Journal of Human Resource Management, 29: 188–226. Demel, B., & Mayrhofer, W. 2010. Frequent business travelers across Europe: Career aspirations and implications. Thunderbird International Business Review, 52(4): 301–311. Froese, F. J., Stoermer, S., Reiche, B. S., & Klar, S. 2021. Best of both worlds: How embeddedness fit in the host unit and headquarters improve repatriate knowledge transfer. Journal of International Business Studies, 52(7): 1331–1349. Gaw, K. F. 2000. Reverse culture shock in students returning from overseas. International Journal of Intercultural Relations, 24: 83–104. Ho, N. T. T., Seet, P.-S., & Jones, J. 2015. Understanding re-expatriation intentions among overseas returnees: An emerging economy perspective. International Journal of Human Resource Management, 27: 1938–1966. Kraimer, M., Bolino, M., & Mead, B. 2016. Themes in expatriate and repatriate research over four decades: What do we know and what do we still need to learn? Annual Review of Organizational Psychology and Organizational Behavior, 3(1): 83–109. Kraimer, M. L., Reiche, B. S., & George, M. M. 2022. An identity work perspective of expatriates and cross-cultural transitions: A review and future research agenda. In: S. M. Toh & A. S. DeNisi (Eds.), Expatriates and Managing Global Mobility (pp. 258–281). New York: Routledge; SIOP Organizational Frontiers Series. Kraimer, M. L., Shaffer, M. A., & Bolino, M. C. 2009. The influence of expatriate and repatriate experiences on career advancement and repatriate retention. Human Resource Management 48(1): 27–47. Kraimer, M. L., Shaffer, M. A., Harrison, D. A., & Ren, H. 2012. No place like home? An identity strain perspective on repatriate turnover. Academy of Management Journal, 55(2): 399–420. Lazarova, M. 2015. Taking stock of repatriation research. In D. G. Collings, G. T. Wood & P. M. Caligiuri (Eds.), The Routledge Companion to International Human Resource Management (pp. 378–398). London: Routledge. Lazarova, M., & Caligiuri, P. 2001. Retaining repatriates: The role of organizational support

Repatriation  363 practices. Journal of World Business, 36: 389–401. Lazarova, M., & Tarique, I. 2005. Knowledge transfer upon repatriation. Journal of World Business, 40: 361–373. Lin, D., Lu, J., Liu, X., & Zhang, X. 2016. International knowledge brokerage and returnees’ entrepreneurial decisions. Journal of International Business Studies, 47(3): 255–318. Oddou, G., Osland, J. S., & Blakeney, R. N. 2008. Repatriating knowledge: Variables influencing the “transfer” process. Journal of International Business Studies, 40: 181–199. Peltokorpi, V. M., Froese, F. J., Reiche, B. S., & Klar, S. 2022. Reverse knowledge flows: How and when do preparation and reintegration facilitate repatriate knowledge transfer? Journal of Management Studies, 59(7): 1869–1893. Ramaswami, A., Carter, N. M., & Dreher, G. F. 2016. Expatriation and career success:

A human capital perspective. Human Relations 69: 1959–1987. Reiche, B. S. 2012. Knowledge benefits of social capital upon repatriation: A longitudinal study of international assignees. Journal of Management Studies, 49: 1052–1077. Reiche, B. S., Dimitrova, M., Westman, M., Chen, S., Wurtz, O., Lazarova, M., & Shaffer, M. A. (2023). Expatriate work role engagement and the work-family interface: A conditional crossover and spillover perspective. Human Relations, 76(3): 452-482. Sussman, N. M. 2001. Repatriation transitions: Psychological preparedness, cultural identity, and attributions among American managers. International Journal of Intercultural Relations, 25(2): 109–123.

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90. State-owned enterprises State-owned enterprises (SOEs) are companies owned and operated by national states as separate businesses producing goods and services. SOEs can be distinguished from state agencies that are not legally separate from the state and whose assets are part of the national budget; and from fully privately owned enterprises (POEs) where all equity is held by private owners (Cuervo-Cazurra et al., 2014). SOEs include enterprises where the state is sharing ownership with private owners; therefore, state ownership may be seen as a continuous variable (Gupta, 2005). State ownership can be direct via government units and indirect through state-owned sovereign wealth and pension funds (Cuervo-Cazurra, Grosman, and Megginson, 2022). The ownership rests at different levels, such as central or local governments (Li, Cui, and Lu, 2014). State ownership was important in many economies until a wave of privatization in the 1980s and 1990s, with SOEs sold to private investors (Millward, 2005). In recent decades state ownership re-emerged as an important feature not only in emerging markets, but also in many advanced markets, amongst other reasons due to bailouts of large private firms following the financial crisis. State ownership has also often changed character from traditional wholly owned SOEs to hybrid SOEs with private co-ownership (Bruton et al., 2015). State-owned multinational enterprises (SOMNEs) conduct business activities outside their home country (Cuervo-Cazurra and Li, 2021), and have become increasingly important in the global economy. Current SOMNEs originate from a wide variety of advanced and emerging economies and are found in most industries and sectors (Kowalski, 2020; UNCTAD, 2017). The increased role of SOMNEs has been controversial, linked to both alleged distortions in world trade and investment and current geopolitical tensions (Cuervo-Cazurra, 2018). State ownership and the related issue of privatization have been examined by scholars in economics, business and management, political science, and other disciplines (Megginson and Netter, 2001; Radić, Ravasi, and Munir,

2021; Rygh, 2019). SOEs differ from POEs by having non-financial goals, instead of or in addition to financial goals. State ownership is theoretically motivated by handling market imperfections (i.e., natural monopolies and public goods) (Putniņš, 2015), and may pursue other social goals such as employment (Aharoni, 1986). State ownership and production are considered preferable to contracting out production to POEs, especially when it is difficult to regulate quality (Hart, Shleifer, and Vishny, 1997). State ownership involves distinct corporate governance issues with a wider set of stakeholders, such as citizens, constituents, and political parties, hence, its oversight ministries may be inefficient in offering direction (Lazzarini and Musacchio, 2018; Martimort, 2006). Employees may be government hires motivated by political connections and career prospects (Liang, Ren, and Sun, 2015). This creates a triple agency challenge, whereby citizens as the ultimate principals have limited control over politicians, who, in turn, have limited control over SOE HQ managers. Non-financial goals and potential corporate governance issues predict lower economic performance of SOEs than POEs, and, relatedly, that privatization will improve performance. Empirical studies generally support this (Goldeng, Grünfeld, and Benito, 2008; Megginson and Netter, 2001), although less so when SOEs have purely financial goals (Bozec, Breton, and Cote, 2002; Kole and Mulherin, 1997), while the effects of privatization are contingent on the types of units privatized, how privatization took place, and the institutional and market environment (Radić et al., 2021). Recent literature has demonstrated how private co-ownership and public listing may address corporate governance challenges in SOEs (Lazzarini and Musacchio, 2018; Musacchio, Lazzarini, and Aguilera, 2015). Two major themes in the recent SOE literature are internationalization and innovation, respectively (Radić et al., 2021). State ownership can influence enterprises’ extent of internationalization (Benito, Lunnan, and Tomassen, 2011; Majocchi and Strange, 2012; Wang et al., 2012), entry mode choice (Grøgaard, Rygh, and Benito, 2019; Meyer et al., 2014), location choice (Buckley et al., 2007; Ramasamy, Yeung, and Laforet, 2012), and international performance (Benito, Rygh, and Lunnan, 2016). Distinct

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SOE firm-specific advantages include access to financial and political resources, and competitive advantages stemming from their shielded home base (Benito et al., 2016). SOMNEs may target strategic assets and natural resources (Buckley et al., 2008), and allow the state discreet political influence (Cuervo-Cazurra et al., 2022). Home-country institutions are a key factor for SOMNE international strategies. In competitive markets, SOMNEs’ internationalization extent and behavior resemble private MNEs (Estrin et al., 2016; Grøgaard et al., 2019), while SOMNE strategies have also been studied within frameworks such as varieties of capitalism (Mariotti and Marzano, 2019). Conventional wisdom poses SOEs as limitedly innovative. However, SOEs have been used for extensive research and development projects (Ramamurti, 1987). State ownership may offer slack resources, the ability to handle risk, a longer-term perspective with less focus on immediate financial results, and coordination of research efforts with other public and private institutions. Lack of market-based incentives and government intervention could, however, hamper innovation output, even if more resources are available (Landoni, 2020; Zhou, Gao, and Zhao, 2017; Lazzarini et al., 2021). Recent research shows an increasing variety of SOEs in terms of their ownership and governance, and in general, they are becoming more independent in their operations, mixing private and state ownership in hybrid arrangements (Bruton et al., 2015; Lazzarini and Musacchio, 2018; Okhmatovsky, Grosman, and Sun, 2021). Internationalization of sovereign wealth funds highlights states as financial investors representing one new arena of influence through state ownership (Vasudeva, 2013). In addition, SOEs are entering more globally competitive markets. Implications of state ownership in international management are more diverse and complex, opening up new perspectives and empirical methods. One pertinent area for a better understanding of state ownership is environmental and social issues, consistent with the notion that SOEs take a broader view beyond financial aspects (Hsu, Liang, and Matos, 2021; Steffen, Karplus, and Schmidt, 2022). SOEs may have a potential role in solving global market imperfections (Cuervo-Cazurra et al., 2014; Rygh, 2018). Climate change and

global supply chain issues actualize a need to tackle challenges extending beyond single countries. Solving these challenges could involve SOMNE inter-country collaboration arrangements, in networks of political arrangements, and in collaboration with private firms. Randi Lunnan and Asmund Rygh

References

Aharoni Y. 1986. The Evolution and Management of State-Owned Enterprises. Ballinger Cambridge, MA. Benito GRG, Lunnan R, Tomassen S. 2011. Distant encounters of the third kind: Multinational companies locating divisional headquarters abroad. Journal of Management Studies 48(2): 373–394. Benito GRG, Rygh A, Lunnan R. 2016. The benefits of internationalization for state owned enterprises. Global Strategy Journal 6(4): 269–288. Bozec R, Breton G, Cote L. 2002. The performance of state–owned enterprises revisited. Financial Accountability & Management 18(4): 383–407. Bruton GD, Peng MW, Ahlstrom D, Stan C, Xu K. 2015. State-owned enterprises around the world as hybrid organizations. Academy of Management Perspectives 29(1): 92–114. Buckley PJ, Clegg LJ, Cross AR, Liu X, Voss H, Zheng P. 2007. The determinants of Chinese outward foreign direct investment. Journal of International Business Studies 38(4): 499–518. Buckley PJ, Cross AR, Tan H, Xin L, Voss H. 2008. Historic and emergent trends in Chinese outward direct investment. Management International Review 48(6): 715–748. Cuervo-Cazurra A. 2018. Thanks but no thanks: State-owned multinationals from emerging markets and host-country policies. Journal of International Business Policy 1(3–4): 128–156. Cuervo-Cazurra A, Grosman A, Megginson WL. 2022. A review of the internationalization of state-owned firms and sovereign wealth funds: Governments’ nonbusiness objectives and discreet power. Journal of International Business Studies: 1–29. Cuervo-Cazurra A, Inkpen A, Musacchio A, Ramaswamy K. 2014. Governments as owners: State-owned multinational companies. Journal of International Business Studies 45(8): 919–942. Cuervo-Cazurra A, Li C. 2021. State ownership and internationalization: The advantage and disadvantage of stateness. Journal of World Business 56(1): 101112. Estrin S, Meyer KE, Nielsen BB, Nielsen S. 2016. Home country institutions and the internationalization of state owned enterprises:

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91. Strategic asset-seeking FDI

observations in the current entry apply also to knowledge-seeking FDI.

Literature review

Definition

Strategic assets include technology, marketing and management expertise, as well as other types of resources and capabilities that are of strategic importance to multinational enterprises (MNEs). These firms engage in foreign direct investments (FDI) with different motivations, including the quest for these assets. Specifically, strategic asset-seeking FDI are defined as investments aimed to promote their long-term strategic objectives – especially that of sustaining or advancing their global competitiveness. … The motive of strategic asset-seeking investments … is to augment the acquiring firm’s global portfolio of physical assets and human competences, which they perceive will either sustain or strengthen their ownership-specific advantages or weaken those of their competitors (Dunning & Lundan, 2008, pp. 72–73).

In addition to strategic asset-seeking FDI, Dunning identifies three types of FDI depending on the objective the MNE set out to achieve (Dunning, 1993, Dunning & Lundan, 2008): natural resource-seeking, market-seeking and efficiency-seeking. The taxonomy of FDI motives was developed to understand MNE internationalization and its determinants (Dunning, 1993). It has also proved valuable in guiding managers in drafting the MNE global strategy and assessing MNE performance based on their objectives (Benito, 2015). When going abroad, MNEs can pursue multiple objectives by combining two or more types of FDI. The motivations to engage in FDI may change over time depending on the evolution of firm internationalization and experience, the competition the firm faces and the transformations in the home, host and global contexts. Investments targeting a specific type of strategic asset, namely technology and knowledge-related assets, are a sub-set of strategic asset-seeking FDI and are defined as knowledge-seeking FDI (Dunning & Narula, 1995, Ivarsson & Jonsson, 2003, Kogut & Chang, 1991). This requires specific considerations that are discussed in a separate entry; however, the

Two components of the definition of strategic asset-seeking FDI have animated a lively discussion: the global competitiveness of the investing firm and its global portfolio of resources and competences (Meyer, 2015). This conversation has established first that MNEs engaging in strategic asset-seeking FDI aim to increase their competitiveness globally as opposed to the local competitiveness they can achieve in the home country and/or in the host market where the specific investment is undertaken (Dunning & Lundan, 2008). Second, by engaging in strategic asset-seeking FDI, MNEs aim “to create or gain access to resources and capabilities that complement their existing core competencies’” (Dunning, 1991, p. 135) and, thus, sustain or strengthen their firm-specific advantage (FSA, see separate entry in this book). These conclusions result from a debate on FDI motives that has revolved around the distinction between exploitation and exploration (March, 1991). In the traditional international business perspective, firms engage in FDI to exploit assets developed in the home country and subsequently transferred to host countries (Hymer, 1968; Vernon, 1966). Against this view, arguments building on organizational learning (March, 1991) oppose that asset exploitation account only partially for the foreign activity of the firms (Hedlund & Ridderstrale, 1997). Specifically, FSAs derive not just from the possession of proprietary assets but also from the firm’s capacity to acquire complementary assets owned by other firms in a host country (Dunning, 2000). Asset development is often spatially determined (Enlight, 1998), and assets that are strategic for the MNE’s competitive advantage are not necessarily developed at home. Thus, MNEs are not only exploiters of home-country-specific advantages but also explorers of strategic assets that are developed in different host countries (Almeida, 1996; Chang, 1995; Dunning, 1993; Dunning & Narula, 1995; Fosfuri & Motta, 1999; Frost, 2001; Shan & Song, 1997). Based on the parallel between different FDI motives and the distinction between exploitation and exploration, the concept of

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strategic asset-seeking FDI has spurred two main streams of research. First, it has paved the way for a reconceptualization of the multinational and the development of different subsidiary taxonomies. Second, it has been used to examine FDI by emerging market multinationals (EMNEs). These two streams are reviewed in the following sections.

The MNE network and the role of subsidiaries

By unveiling the explorative nature of MNEs’ foreign operations, research on strategic asset-seeking FDI has contributed to a novel theorizing of the MNE. Traditionally conceived as a centralized, hierarchical organization that exploits pre-existing FSAs (Caves, 1982; Vernon, 1966), the MNE was redefined as a heterarchy with several decision centers in different host countries where it explores sources of competitiveness (Hedlund, 1986). Bartlett and Ghoshal (1989) introduced the concept of the “transnational company” “as a group of geographically dispersed and goal-disparate organizations that include its headquarters and the different national subsidiaries” (Ghoshal & Bartlett, 1990, p. 603). This reconceptualization revolved around the pivotal role of foreign subsidiaries for the MNE’s competitive advantage (Bartlett & Ghoshal, 1986; Ghoshal & Nohria, 1989). Subsidiaries are not all alike – they have different roles and responsibilities, and managing this heterogeneity is central to understanding MNEs’ competitiveness. Specifically, the “meta-national company” theorized by Doz, Santos, and Williamson (2001) builds its competitive advantage on the strategic asset-seeking of its subsidiaries. MNE units identify valuable resources and capabilities developed in different parts of the world, use these resources and capabilities to innovate and pre-empt competitors, and, thus, allow the MNE to create value at a global level. In this multi-hub “integrated network,” subsidiary strategic roles differ in the extent and directionality of their transactions with the rest of the corporations. Their role also depends on the host country’s idiosyncrasies (Gupta & Govindarajan, 1991; Gupta & Govindarajan, 1994; Nohria & Ghoshal, 1997). This reconceptualization of the MNE has motivated the development of different subsidiary taxonomies based on the

distinction between asset-exploitation and asset-exploration FDI. Subsidiaries have been classified as home-based exploiting versus home-based augmenting (Kuemmerle, 1999), competence-exploiting versus competence-creating (Cantwell & Mudambi, 2005), and higher-order versus lower-order contributors to organizational heterarchy (Hedlund, 1986). While the subsidiary role may depend on the MNE group-level and subsidiary-level characteristics (Cantwell & Mudambi, 2005), most of this literature has focused on the location as the source of the differentiation between the different types of subsidiaries (Asmussen, Pedersen, & Dhanaraj, 2009). Subsidiaries with a strategic asset-seeking type of mandate are sensitive to distinctive location drivers and require ad hoc FDI policies to be attracted in peripheral locations (Santangelo, 2009). Thus, centers of excellence subsidiaries are singled out from sites that are not major centers of excellence or a key hub (Frost, Birkinshaw, & Ensign, 2002; Holm, Pedersen, & Björkman, 2000).

EMNE internationalization

The concept of strategic asset-seeking has more recently been used to examine FDI by EMNEs. These investments have been at the center of a lively debate that goes back to the discussion on asset exploitation and exploration. At the core of the debate was the argument that FDI by EMNEs challenge the conventional international business view that firms internationalize by exploiting their firm- and country-specific advantages with the ultimate aim of augmenting them (Rugman, 2010). The theoretical perspectives developed to explain FDI by EMNEs include Mathews’ (2006) linkage, leverage, learning framework, Guillén and García-Canal’s (2009) accelerated internationalization model, and Luo and Tung’s (2007) springboard investment perspective. In all these works, EMNEs at the outset lack FSAs to be exploited abroad. Instead, they invest in foreign markets to explore and obtain strategic assets and compensate for their competitive disadvantage and their home country’s institutional and market deficiencies. This research builds on the evidence that EMNEs have internationalized by aggressively acquiring foreign firms with more advanced technology, brands, skills and management capabilities (Cui, Grazia D. Santangelo

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Meyer, & Hu, 2014; Deng, 2009; Elia & Santangelo, 2017). The acquisition of IBM’s PC business by the Chinese firm Lenovo in 2005 and the Indian firm Tata’s purchase of the UK steel giant Corus in 2007 are prominent examples of strategic asset-seeking FDI by EMNEs. An alternative perspective, however, is that all firms (including EMNEs) have specific sets of FSAs that evolve slowly, thereby establishing cognitive limits to what they can and cannot do at any given point in their evolution as MNEs (Narula, 2012). Thus, also EMNEs must possess a certain threshold of FSAs for their international expansion to be sustainable in the long run. Specifically, this stream has recognized the role and evolution of the home-country context in the internationalization path of EMNEs (Cuervo-Cazurra, 2012; Elia & Santangelo, 2017; Ramamurti & Singh, 2012). Taken together, these arguments suggest that EMNEs are not lacking FSAs – instead, their FSAs are routed in their strong political capabilities and high organizational adaptability (Li, Meyer, Zhang, & Ding, 2018; Meyer & Xin, 2018). This is markedly different from the FSAs of corporations originating from more advanced home countries, which has informed FSA theorizing. Thus, EMNEs explore strategic assets abroad by exploiting their distinctive FSAs when engaging in strategic asset-seeking FDI.

Looking ahead

The study on strategic asset-seeking FDI has considered mainly strategic assets that are “inward-looking,” in the sense that they apply mostly to R&D and manufacturing activities and to coordination and integration of activities within the multinational network to sustain the MNE’s competitive advantage. In that sense, strategic asset-seeking and knowledge-seeking are often used interchangeably in the literature, as noted by Meyer (2015). However, strategic assets could also include brands, reputation, locations, networks, and the ability to orchestrate external networks (Narula, Asmussen, Chi, & Kundu, 2019). Indeed, in the current conversation, the MNE is asked to act as a corporate citizen and contribute to answering “big” questions and tackling grand societal challenges (Buckley, Doh, & Benischke, 2017). This discussion calls for a rethinking of the concept of straGrazia D. Santangelo

tegic asset-seeking. Specifically, the strategic assets that are increasingly valuable in this context are “outward-looking.” They refer to the reputation of the MNE and, relatedly, its ability to manage its value chain by integrating and coordinating activities within its partners network. Research has so far considered how MNEs can protect their reputation by strategically locating and organizing the units within their internal network (Maggioni, Santangelo, & Koymen-Ozer, 2019; Wang & Li, 2019). An appealing question that remains to be answered is whether and how “outward-looking” strategic assets, such as reputation, can be enhanced through FDI. Grazia D. Santangelo

References

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Strategic asset-seeking FDI  371 foreign direct investment? A study of emerging economy firms. Journal of World Business, 49(4): 488–501. Deng, P. 2009. Why do Chinese firms tend to acquire strategic assets in international expansion? Journal of World Business, 44(1): 74–84. Doz, Y., Santos, J., & Williamson, P. 2001. From Global to Metanational: How Companies Win in the Knowledge Economy. Boston, MA: Harvard Business School Press. Dunning, J. H. 1991. The eclectic paradigm of international production. In Pitelis, C. & R. Sugden, (Eds.), The Nature of the Transnational Firm. London: Routledge. Dunning, J. H. 1993. Multinational Enterprises and the Global Economy. Reading: Addison-Wesley. Dunning, J. H. 2000. The eclectic paradigm as an envelope for economic and business theories of MNE activity. International Business Review, 9(2): 163–90. Dunning, J. H. & Lundan, S. M. 2008. Multinational Enterprises and the Global Economy. Cheltenham: Edward Elgar Publishing. Dunning, J. H. & Narula, R. 1995. The R&D activities of foreign firms in the United States. International Studies of Management & Organization, 25(1/2): 39–73. Elia, S. & Santangelo, G. D. 2017. The evolution of strategic asset-seeking acquisitions by emerging market multinationals. International Business Review, 26(5): 855–66. Enlight, M. J. 1998. Regional Clusters and Firm Strategy. New York: Oxford University Press. Fosfuri, A. & Motta, M. 1999. Multinationals without advantages. Scandinavian Journal of Economics, 101(4): 617–30. Frost, T. S. 2001. The geographic sources of foreign subsidiaries’ innovations. Strategic Management Journal, 22(2): 101–23. Frost, T. S., Birkinshaw, J. M., & Ensign, P. C. 2002. Centers of excellence in multinational corporations. Strategic Management Journal, 23(1): 997–1018. Ghoshal, S. & Bartlett, C. A. 1990. The multinational corporation as an interorganizational network. Academy of Management Review, 15(4): 603–26. Ghoshal, S. & Nohria, N. 1989. Internal Differentiation Within Multinational Corporations. Strategic Management Journal, 10(4): 323–37. Guillén, M. F. & García-Canal, E. 2009. The American model of the multinational firm and the “new” multinationals from emerging economies. Academy of Management Perspectives, 23(2): 23–35. Gupta, A. K. & Govindarajan, V. 1991. Knowledge flows and the structure of control within multi-

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92. Structure of the MNE The success of multinational corporations (MNCs) depends to a substantial part on their formal organizational structure. Yet, defining what exactly organizational structure is, is non-trivial. Building on Puranam et al. (2014), organizational structure can be understood as dealing with the fundamental problems of what shall be done (task division) by whom (task allocation to individuals and organizational units), and how the entire set of activities shall be integrated (e.g., through coordination and control mechanisms). Organizational structure therefore deals with a very wide range of issues and phenomena. The MNC literature has essentially approached the wide range of questions of organizational structure in two different ways: (1) macro structures, which embody – at least in their pure forms – specific manifestations of task division, task allocation, and integration; (2) substructures, notably the structure of subsidiaries.

Macro structures

Macro structures refer to archetypical structures and designs on the level of the overall corporation. Two streams of research stick out in terms of importance. First, Stopford and Wells (1972) initiated a contingency perspective on MNC structure. Stopford and Wells (1972) had built on earlier work by Chandler (1962, 1969), who focused on domestic organizations. Chandler’s key conclusion was that “structure follows strategy.” This insight highlights an idea of “fit” and thus represents a contingency theory because the best structure depends on the strategic choices of the corporation. Later on, the question if structure “follows” strategy has given way to a more balanced view in which it has eventually been acknowledged that strategy also follows structure (e.g., Burgelman, 1983). The core idea of fit, however, remained valid. Stopford and Wells (1972) extended Chandler’s contingency framework to the MNC. Building on two important strategy dimensions – the degree of foreign product diversity and the degree of internationaliza-

tion in terms of sales – they found that MNCs used four different types of macro structures and that they move in sequential steps, similar to Chandler’s insights. International division structures occur predominantly in early phases of internationalization, when both foreign product diversity and the degree of internationalization are low. Such structures simply add an “international markets” or “international sales” division to the existing organization, which focuses, by definition, to a dominating extent on the home market. The international division helps take care of the non-domestic business. Area division structures occur when the firm then internationalizes its sales further while keeping foreign product diversity low. Area division structures refer to divisions that are responsible for specific geographic regions, such as Europe or South-East Asia. The area divisions help the organization cope with the complexity that an engagement in a large range of international markets produces. Product division structures occur when firms, instead of internationalizing further, stay in a few international markets only but increase product diversity in these international markets notably. The complexity thus derives predominantly from the many different types of products that need to be handled. Product divisions help separating very different product groups from each other while putting similar ones into the same divisions. Finally, at high levels of foreign product diversity and international sales, firms eventually select a matrix organization, which mixes product, geographic (area), and at times functional divisions and thus responsibilities. Later research revised the model, adding or deleting individual stages or clarifying details (Daniels, Pitts and Tretter, 1985; Habib and Victor, 1991). For example, the overall contingency framework was reinterpreted from an information processing theory perspective (Egelhoff, 1982, 1991; Wolf and Egelhoff, 2002). Later research also added insights with regards to how individual divisions are governed. For example, area divisions are usually governed by regional headquarters (at times also referred to as regional management centers or regional offices). An entire research stream attempted to dissect key features of regional headquarters, such as their embeddedness in the region (Hoenen, Nell and Ambos, 2014), their staffing (Sullivan,

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1992), the various activity configurations that regional offices take over (Enright, 2005; Chakravarty et al., 2017), their impact on the corporation (Mahnke, Ambos, Nell and Hobdari, 2012), their evolution (Lasserre, 1996; Piekkari, Nell and Ghauri, 2010), and the specific locations that are chosen by or for them (Belderbos, Du and Goerzen, 2017). Second, after Stopford and Wells (1972), a new framework of MNC structures emerged that partly overlapped but also extended Stopford and Wells’ ideas. While still applying a contingency lens, this stream added the environmental context to the strategy and structure debate. The researchers in this stream developed the “integration–responsiveness” framework. It categorizes MNC environments in terms of two dimensions that exert pressure on the MNC: the pressures for global integration (e.g., the extent to which the industry of the MNC requires cross-border synergies) and the pressures for local responsiveness (e.g., the extent to which local markets in specific countries require that products and services are adapted). Thus, their key insight was that the type of environmental context needs to be aligned with strategic choices as well as with organizational choices of the MNC. Similar to Stopford and Wells (1972), the protagonists of the stream (e.g., Bartlett and Ghoshal, 1989; Ghoshal and Bartlett, 1990; Prahalad and Doz, 1987; Ghoshal and Nohria, 1989) developed archetypical descriptions that fit different environmental contexts. While there is some disagreement, three archetypical macro structures seem relatively uncontested: global environments are characterized by strong pressures for global integration, for example because of massive economies of scales. In such industries, global standardization strategies are important and global structures apply. Global structures thus need to score high on strong corporate headquarters, top–down coordination and centralized decision-making. In contrast, in multi-domestic environments (characterized by strong local adaptation pressures but low global adaptation pressures), internationally operating firms need to respond to the local needs and organize their firm in such a way that local subsidiaries possess substantial decision-making authority with low corporate involvement and steering and little coordination across countries. Finally, in the case of “transnational” environments (high pressures Phillip C. Nell and Benoit Decreton

of global integration and local responsiveness simultaneously), firms need to find a balance between the two conflicting pressures. The corresponding organizational structure is thus complex, representing a mix of choices, which allows both global coordination as well as local adaptation. Conceptually, transnational structures were often interpreted as representing matrix organizations (Wolf and Egelhoff, 2013) or organizations with a strong regional dimension (Lehrer and Asakawa, 1999). Yet, the transnational structure also received interpretations highlighting its fluid, project-based elements in the organization as well as its characteristic as a network (Hedlund, 1986; Ghoshal and Bartlett, 1990). In fact, transnational structures are rather characterized by more ambiguous roles and responsibilities, various types of interdependencies, and interpersonal relationships, which enable cross-unit and cross-departmental coordination. Formal organizational structure is less emphasized than informal organization (Bartlett and Ghoshal, 1993). Furthermore, the transnational organization is highly differentiated (Ghoshal and Nohria, 1989), which refers to the fact that individual subunits may be organized very differently as compared with others. As a consequence, the transnational structure as an overarching concept gave rise to a number of sub-streams of research that focused on specific elements of the transnational organization, specifically its substructures.

Substructures

Research on substructures primarily focused on “subsidiaries.” Birkinshaw, Hood and Jonsson (1998: 224) define an MNC subsidiary “as any operational unit controlled by the MNE and situated outside the home country.” Subsidiaries represent important organizational subunits in the MNC to which specific sets of activities are allocated and which are integrated in the MNC via various mechanisms (Meyer, Li and Schotter, 2020). Doz, Santos and Williamson (2001), for example, argue that MNCs can source new knowledge via their dispersed subsidiaries and that this knowledge advantage represents the raison-d’être for the MNC. A central theme of research on subsidiaries focused on subsidiary roles or mandates, i.e., the spectrum of activities that subsidiaries take over and that should ideally be

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allocated to a subsidiary given certain circumstances (Birkinshaw and Hood, 1998; Dunning, 1993; Jarillo and Martínez, 1990; Roth and Morrison, 1992). Some subsidiaries are merely local implementors (Gupta and Govindarajan, 1991), some are referred to as competence-creating centers of excellence (Cantwell and Mudambi, 2005), which have responsibilities beyond their host country (Frost and Birkinshaw, 2002). Some are strongly externally embedded in their host context, while others are embedded within the MNC (Meyer, Mudambi and Narula, 2011); some assume a narrow functional scope, while others are referred to as “miniature replicas” (which exist mainly in multidomestic macro structures) because they cover all important activities and functions so that they could be stand-alone companies (White and Poynter, 1984). This variety of subsidiaries reflects the fact that MNCs do use a great variety of organizational solutions for their subsidiaries and that these differ even within individual MNCs. It has also been highlighted that headquarters do not merely allocate roles and mandates in a top–down way but that subsidiaries shape and influence these mandates (for example via subsidiary initiatives) in a quest to become more influential or to get more resources (e.g., Birkinshaw, 1997; Birkinshaw and Hood, 1998; Mudambi and Navarra, 2004). A related and overlapping stream investigated how different types of subsidiaries are integrated via control and coordination mechanisms. The most prevalent control and coordination mechanisms are the centralization of decision-making, normative integration, and the formalization of rules and systems (Ghoshal and Nohria, 1989; Zeng, Grøgaard and Steel, 2018). Yet, there is no universally accepted framework of control and coordination mechanisms. For example, some researchers use frameworks that differentiate between input and output control as well as behavioral control (Schmid and Kretschmer, 2010). Many factors pertaining to the environment, the strategy, the local context, and the subsidiary itself matter in shaping the type and extent of integration mechanisms used. Research showed, for example, that decisions tend to be decentralized when subsidiaries are mature, powerful, and when they operate in dynamic and distant contexts (Johnston and Menguc, 2007; Geleilate, Andrews and Fainshmidt, 2020).

Another key finding is that normative integration seems to be generally valuable as a coordination mechanism, irrespective of some contingencies, and that it is necessary for other mechanisms to be applied as well (Nohria and Ghoshal, 1994; Björkman, Barner-Rasmussen and Li, 2004; Brenner and Ambos, 2013; Gupta and Govindarajan, 2000). Normative integration refers to a strong organizational culture, i.e., shared values that help integrate the otherwise highly differentiated subsidiaries (Nohria and Ghoshal, 1994). MNCs often rely on individuals to ensure effective normative integration (Harzing, Pudelko and Reiche, 2016; Schotter et al., 2017). Specifically, research showed that expatriates can help transfer corporate culture to subsidiaries as well as develop subsidiary employees’ perceptions and attitudes towards headquarters (Kostova and Roth, 2002), which increases subsidiary performance (Chang, Gong and Peng, 2012). Along the same lines, subsidiary managers with work experience at headquarters also better understand and react to the involvement of managers from headquarters (Decreton, Nell and Stea, 2019). Additionally, the formalization of rules and systems, such as specific HRM practices, has been shown to improve the ability and motivation of individuals to transfer knowledge within the MNC (Minbaeva et al., 2003). In sum, the archetypical macro structures of earlier research gave way to much more detail and complexity but perhaps also more blurriness later on. Overall, in this entry, we constrained ourselves to contingency theory as the main lens on MNC organization: the optimal organizational structure depends on a number of factors on many levels of analysis. Yet, many more theoretical lenses have been applied to investigate MNC structures, such as resource-based theories, economic theories, such as transaction cost economics or agency theory, as well as institutional and behavioral theories. We refer to recent contributions by Meyer et al. (2020) as well as Nell, Kappen, and Laamanen (2017), which highlight a range of theoretical views and how they relate to MNC organizational questions. These contributions also develop important future research avenues and highlight latest contributions. For example, Mees-Busch, Welch, and Westney (2019) conceptualized a new macro structural model (called the neoglobal organization) as a very Phillip C. Nell and Benoit Decreton

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different organization than the transnational solution. Recent research also investigated if configurations of control and coordination mechanisms are more important than individual mechanisms (Zeng, Grøgaard and Steel, 2018), and there is initial research on the effect of the ongoing digital transformation on MNC structure (Schmitt, Decreton and Nell, 2019). Finally, there is debate about how relevant formal organizational structure really is, mirroring earlier discussion around the transnational solution. For example, some scholars have recently argued that informal and fluid organizational mechanisms are more important than formal organizational structure and that subsidiaries have become meaningless (Edwards et al., 2022). Others disagree, highlighting the importance of formal organizational structural elements (Andrews, Nell, Schotter and Laamanen, 2023). There is thus ongoing debate and the topic of MNC structure is a valid area for research in upcoming years. Phillip C. Nell and Benoit Decreton

References

Andersson, U., Forsgren, M. and Holm, U. (2002). ‘The strategic impact of external networks: subsidiary performance and competence development in the multinational corporation’, Strategic Management Journal, 23, 979–996. Andrews, D., Nell, P. C., Schotter, A., and Laamanen, T. (2023). ‘And the subsidiary lives on: Harnessing complex realities in the contemporary MNE’, Journal of International Business Studies, 54, 538–549. Baaij, M. G., Mom, T. J., Van den Bosch, F. A. and Volberda, H. W. (2015). ‘Why do multinational corporations relocate core parts of their corporate headquarters abroad?’, Long Range Planning, 48, 46–58. Balogun, J., Fahy, K. and Vaara, E. (2019). ‘The interplay between HQ legitimation and subsidiary legitimacy judgments in HQ relocation: A social psychological approach’, Journal of International Business Studies, 50, 223–249. Bartlett, C. A., and Ghoshal, S. (1989). Managing across borders: The transnational solution. Harvard Business Press. Bartlett, C. A., and Ghoshal, S. (1993). ‘Beyond the M-form: Toward a managerial theory of the firm’, Strategic Management Journal, 14(S2), 23–46. Belderbos, R., Du, H. S. and Goerzen, A. (2017). ‘Global cities, connectivity, and the location

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choice of MNC regional headquarters’, Journal of Management Studies, 54, 1271–1302. Birkinshaw, J. (1997). ‘Entrepreneurship in multinational corporations: The characteristics of subsidiary initiatives’, Strategic Management Journal, 18(3), 207–229. Birkinshaw, J., Braunerhjelm, P., Holm, U. and Terjesen, S. (2006). ‘Why do some multinational corporations relocate their headquarters overseas?’, Strategic Management Journal, 27, 681–700. Birkinshaw, J. and Hood, N. (1998). ‘Multinational subsidiary evolution: Capability and charter change in foreign-owned subsidiary companies’, Academy of Management Review, 23, 773–795. Birkinshaw, J., Hood, N. and Jonsson, S. (1998). ‘Building firm-specific advantages in multinational corporations: The role of subsidiary initiative’, Strategic Management Journal, 19, 221–242. Björkman, I., Barner-Rasmussen, W. and Li, L. (2004). ‘Managing knowledge transfer in MNCs: The impact of headquarters control mechanisms’, Journal of International Business Studies, 35(5). Brenner, B. and Ambos, B. (2013). ‘A question of legitimacy? A dynamic perspective on multinational firm control’, Organization Science, 24, 773–795. Burgelman, R. A. (1983). ‘A process model of internal corporate venturing in the diversified major firm’, Administrative Science Quarterly, 28, 223–244. Cantwell, J., and Mudambi, R. (2005). ‘MNE competence-creating subsidiary mandates’, Strategic Management Journal, 26(12), 1109–1128. Chakravarty, D., Hsieh, Y. Y., Schotter, A. P. and Beamish, P. W. (2017). ‘Multinational enterprise regional management centres: Characteristics and performance’, Journal of World Business, 52, 296–311. Chandler, A. D. (1962). Strategy and structure: Chapters in the history of the American enterprise. Massachusetts Institute of Technology. Chandler, A. D. (1969). Strategy and structure: Chapters in the history of the American industrial enterprise (Vol. 120). MIT Press. Chang, Y. Y., Gong, Y. and Peng, M. W. (2012). ‘Expatriate knowledge transfer, subsidiary absorptive capacity, and subsidiary performance’, Academy of Management Journal, 55, 927–948. Ciabuschi, F., Dellestrand, H. and Holm, U. (2012). ‘The role of headquarters in the contemporary MNC’, Journal of International Management, 18, 213–223. Collis, D., Young, D. and Goold, M. (2012). ‘The size and composition of corporate headquarters in multinational companies: empirical evi-

Structure of the MNE  377 dence’, Journal of International Management, 18, 260–275. Daniels, J. D., Pitts, R. A. and Tretter, M. J. (1985). ‘Organizing for dual strategies of product diversity and international expansion’, Strategic Management Journal, 6, 223–237. Decreton, B., Nell, P. C. and Stea, D. (2019). ‘Headquarters involvement, socialization, and entrepreneurial behaviors in MNC subsidiaries’, Long Range Planning, 52, 101839. Doz, Y. L., Santos, J. and Williamson, P. J. (2001). From global to metanational: How companies win in the knowledge economy. Cambridge, MA: Harvard Business School Press. Dunning, J. H. (1993). Multinational enterprise and the global economy. Wokingham: Addison Wesley. Edwards, T., Svystunova, L., Almond, P., Kern, P., Kim, K., and Tregaskis, O. (2022). ‘Whither national subsidiaries? The need to refocus international management research on structures and processes that matter’, Journal of International Business Studies, 53(1), 203–210. Egelhoff, W. G. (1982). ‘Strategy and structure in multinational corporations: An information-processing approach’, Administrative Science Quarterly, 27, 435–458. Egelhoff, W. G. (1991). ‘Information-processing theory and the multinational enterprise’, Journal of International Business Studies, 22, 341–368. Enright, M. J. (2005). ‘The roles of regional management centers’, MIR: Management International Review, 45, 83–102. Foss, N. J. (1997). ‘On the rationales of corporate headquarters’, Industrial and Corporate Change, 6, 313–338. Frost, T. S., Birkinshaw, J. M., and Ensign, P. C. (2002). ‘Centers of excellence in multinational corporations’, Strategic Management Journal, 23(11), 997–1018. Geleilate, J. M. G., Andrews, D. S., and Fainshmidt, S. (2020). ‘Subsidiary autonomy and subsidiary performance: A meta-analysis’, Journal of World Business, 55(4), 101049. Ghoshal, S. and Bartlett, C. A. (1990). ‘The multinational corporation as an interorganizational network’, Academy of Management Review, 15, 603–626. Ghoshal, S. and Nohria, N. (1989). ‘Internal differentiation within multinational corporations’, Strategic Management Journal, 10, 323–337. Gupta, A. K. and Govindarajan, V. (1991). ‘Knowledge flows and the structure of control within multinational corporations’, Academy of Management Review, 16(4), 768–792. Gupta, A. K. and Govindarajan, V. (2000). ‘Knowledge flows within multinational corporations’, Strategic Management Journal, 21, 473–496. Habib, M. M. and Victor, B. (1991). ‘Strategy, structure, and performance of US manufac-

turing and service MNCs: A comparative analysis’, Strategic Management Journal, 12, 589–606. Harzing, A. W., Pudelko, M. and Reiche, S. B. (2016). ‘The bridging role of expatriates and inpatriates in knowledge transfer in multinational corporations’, Human Resource Management, 55, 679–695. Hedlund, G. (1986). ‘The hypermodern MNC—a heterarchy?’, Human Resource Management, 25, 9–35. Hoenen, A. K., Nell, P. C. and Ambos, B. (2014). ‘MNE entrepreneurial capabilities at intermediate levels: The roles of external embeddedness and heterogeneous environments’, Long Range Planning, 47, 76–86. Jarillo, J. C. and Martínez, J. I. (1990). ‘Different roles for subsidiaries: The case of multinational corporations in Spain’, Strategic Management Journal, 11, 501–512. Johnston, S., and Menguc, B. (2007). ‘Subsidiary size and the level of subsidiary autonomy in multinational corporations: A quadratic model investigation of Australian subsidiaries’, Journal of International Business Studies, 38(5), 787–801. Kostova, T., and Roth, K. (2002). ‘Adoption of an organizational practice by subsidiaries of multinational corporations: Institutional and relational effects’, Academy of Management Journal, 45(1), 215–233. Lasserre, P. (1996). ‘Regional headquarters: The spearhead for Asia Pacific markets’, Long Range Planning, 29, 30–37. Lehrer, M. and Asakawa, K. (1999). ‘Unbundling European operations: Regional management and corporate flexibility in American and Japanese MNCs’, Journal of World Business, 34, 267–286. Mahnke, V., Ambos, B., Nell, P. C. and Hobdari, B. (2012). ‘How do regional headquarters influence corporate decisions in networked MNCs?’, Journal of International Management, 18, 293–301. Mees-Buss, J., Welch, C., and Westney, D. E. (2019). ‘What happened to the transnational? The emergence of the neo-global corporation’, Journal of International Business Studies, 50(9), 1513–1543. Meyer, K. E., Li, C. and Schotter, A. P. (2020). ‘Managing the MNE subsidiary: Advancing a multi-level and dynamic research agenda’, Journal of International Business Studies, 51, 538–576. Meyer, K. E., Mudambi, R., and Narula, R. (2011). ‘Multinational enterprises and local contexts: The opportunities and challenges of multiple embeddedness’, Journal of Management Studies, 48(2), 235–252. Minbaeva, D., Pedersen, T., Björkman, I., Fey, C. F. and Park, H. J. (2003). ‘MNC knowledge transfer, subsidiary absorptive capacity,

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378  Encyclopedia of international strategic management and HRM’, Journal of International Business Studies, 34, 586–599. Monteiro, L. F., Arvidsson, N. and Birkinshaw, J. (2008). ‘Knowledge flows within multinational corporations: Explaining subsidiary isolation and its performance implications’, Organization Science, 19, 90–107. Mudambi, R., and Navarra, P. (2004). ‘Is knowledge power? Knowledge flows, subsidiary power and rent-seeking within MNCs’, Journal of International Business Studies, 35, 385–406. Nell, P. C., Kappen, P. and Laamanen, T. (2017). ‘Reconceptualising hierarchies: The disaggregation and dispersion of headquarters in multinational corporations’, Journal of Management Studies, 54, 1121–1143. Nohria, N. and Ghoshal, S. (1994). ‘Differentiated fit and shared values: Alternatives for managing headquarters-subsidiary relations’, Strategic Management Journal, 15, 491–502. Piekkari, R., Nell, P. C. and Ghauri, P. N. (2010). ‘Regional management as a system’, Management International Review, 50, 513–532. Prahalad, C. K., and Doz, Y. L. (1987). The multinational mission: Balancing local demands and global vision. New York: Free Press. Puranam, P., Alexy, O., and Reitzig, M. (2014). ‘What’s “new” about new forms of organizing?’, Academy of Management Review, 39(2), 162–180. Roth, K. and Morrison, A. J. (1992). ‘Implementing global strategy: Characteristics of global subsidiary mandates’, Journal of International Business Studies 23(4), 715–735. Schmid, S., and Kretschmer, K. (2010). ‘Performance evaluation of foreign subsidiar-

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ies: A review of the literature and a contingency framework’, International Journal of Management Reviews, 12(3), 219–258. Schmitt, J., Decreton, B. and Nell, P. C. (2019). ‘How corporate headquarters add value in the digital age’, Journal of Organization Design, 8, 1–10. Schotter, A. P., Mudambi, R., Doz, Y. L. and Gaur, A. (2017). ‘Boundary spanning in global organizations’, Journal of Management Studies, 54, 403–421. Stopford, J. M. and Wells Jr, L. T. (1972). Managing the multinational enterprise: Organization of the firm and ownership of the subsidiary. New York: Basic Books. Sullivan, D. (1992). ‘Organization in American MNCs: the perspective of the European regional headquarters’, MIR: Management International Review, 32, 237–250. White, R. E., and Poynter, T. A. (1984). ‘Strategies for foreign-owned subsidiaries in Canada’, Business Quarterly, 49(2), 59–69. Wolf, J. and Egelhoff, W. G. (2002). ‘A reexamination and extension of international strategy– structure theory’, Strategic Management Journal, 23, 181–189. Wolf, J. and Egelhoff, W. G. (2013). ‘An empirical evaluation of conflict in MNC matrix structure firms’, International Business Review, 22, 591–601. Zeng, R., Grøgaard, B., and Steel, P. (2018). ‘Complements or substitutes? A meta-analysis of the role of integration mechanisms for knowledge transfer in the MNE network’, Journal of World Business, 53(4), 415–432.

93. Temporal distance International business is an activity that is separated in time, assigning critical importance for temporal location and distance (Bahar, 2020; Stein & Daude, 2007; Zaheer, 1995, 2000). The growing virtualization of economic activity and the ability to separate value creation from physical location have accentuated the importance of temporal distance (Côté, Estrin, Meyer, & Shapiro, 2020; Nachum & Buckley, 2023), and the shift toward coordination-intensive forms of production among firms located in different time zones has further increased its impact (Hummels, & Schaur, 2013). Temporal distance affects major theoretical constructs in international business theory and has important implications for practice. The creation and utilization of many of the intangible assets that are assumed to drive international business activity require human interaction and cannot be separated in time in either the production or the consumption. It also requires transaction-related capabilities that address time-related dynamics, such as non-linearities of temporal distance that is punctuated by Circadian human rhythms, time zone overlap or lack thereof, and directionality of movement across cardinals,11 thus modifying the nature of the assets needed for the pursuit of international activity (Hinds & Kiesler, 2002). Furthermore, the transferability of the intangible assets, which is assumed to be costless across spatial distance (Dunning & Lundan, 2008), is mired with challenges and is costly to execute over temporal distance. In parallel, temporal distance opens opportunities for creating time-based advantages in which around-the-clock organization of work enables firms to tap into diverse sources of knowledge and expertise, utlize low-cost resources, and reduce turnaround time. It also enables firms to appropriate greater returns from their intangible assets by leveraging them around the clock (Carmel, Espinosa, & Dubinsky, 2010; Zaheer, 1995, 2000). Temporal distance also affects the costs of transactions via markets and hierarchy and determines their effectiveness as alternative governance mechanisms (Buckley & Casson,

1976, 2020). Increased temporal distance negatively affects the frequency and quality of communication, the amount of time it takes to accomplish work, and the quality of the output (Espinosa, Cummings, & Pickering, 2012; Hinds & Kiesler, 2002). The costs of temporal separation are particularly sensitive to time overlap, which significantly affects the flow of knowledge and the effectiveness of collaborative work (Bahar, 2020; Salas, Ramón, & Passmore, 2017). Temporal separation also affects the costs of market transactions, as it impairs the efficiency of communication with third parties and raises the costs of establishment and maintenance of trust. This is a particular concern in transactions that are neither market nor hierarchy, where trust substitutes for contracting and monitoring as a coordination mechanism. Indeed, gravity models of business activity show strong impact of temporal distance, or some proxy for its consequences. At times the introduction of a measure of temporal distance to the model renders spatial distance insignificant, suggesting that many consequences assumed to be from spatial distance might in fact be a result of temporal distance (Keller & Yeaple, 2013; Stein & Daude, 2007). Other studies document the high cost of transfer and communication among entities separated in time and suggest that time separation has a stronger negative impact on collaborative knowledge creation than spatial separation (Espinosa et al., 2012; Hinds, & Kiesler, 2002; Hummels, & Schaur, 2013). Time changes were shown to have strong impact on a variety of human-related factors and to affect judgment, reaction time and problem-solving (Boeh & Beamish, 2012; Kamstra Kramer, & Levi, 2000). Temporal distance also affects countries’ location advantages and MNE location choices. Temporal proximity and time overlap with other countries ease communication and control and allow for synchronous communication, making it advantageous for, e.g., information-rich activities. In parallel, large temporal distance makes countries attractive for activities that benefit from time zone differences, e.g., by organizing work around the clock (Kikuchi & van Long, 2010; Rooney, 2020; Segalla, 2010). Cardinal location in relation to other countries is another

The cardinal points are the four main compass directions: north, south, east, and west.

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temporal characteristic that affects countries’ location advantages, as it determines exposure – whether to spatial distance only (north/ south movement) or to the combined effect of spatial and temporal distances (west/east movement). These correspond to the difference for US firms between Latin America and Asia, and for European firms between Africa and Russia, countries at similar spatial distances from the focal country but considerably different temporal distances. Temporal distance affects international business theory and practice both on its own and in combination with spatial distance. The organization of value-creating activities on a global level evolves separation in both space and time, requiring response to the combined effects of spatial and temporal distances. These two distance dimensions relate to each other in different ways, moving in tandem, such that their consequences accentuate each other, or departing from each other, confronting subjects with different challenges of respective dimensions. This entails that the consequences of the same spatial distance differ across scales of temporal distance, and likewise, temporal distance differs in relation to different scales of spatial distance (Hummels & Schaur, 2013; Zaheer, Albert, & Zaheer, 1999). Varying configurations of spatial and temporal separations are likely to serve different purposes and differ in their effectiveness in supporting different activities, reflecting variations in sensitivity to spatial and temporal differences across industries and value-creating activities, types of investment, and modes of international activity (Hinds & Kiesler, 2002; Tomasik, 2013). Acknowledging the impact of temporal distance, on its own and in combination with that of spatial distance, thus changes many theoretical predictions regarding the intensity and patterns of international business activity and have important implications for practice. This calls for the adoption of a temporal lens towards international business theory, and the developent of a research agenda around time and temporal distance in international business. This research is important because the way firms respond to temporal and spatial distances in their configuration of the spatial and temporal separations of their international activities has important implications for their own competitiveness as well as for those of Lilac Nachum

countries and societies (Brakman, Garretsen, & van Witteloostuijn, 2021; Galor, & Ozak, 2016; Zaheer, 1995). Lilac Nachum

References

Bahar, D. 2020. The hardships of long-distance relationships: Time zone proximity and the location of MNC’s knowledge-intensive activities. Journal of International Economics, 125(5): 103311. Boeh, K.K. & Beamish, P.W. 2012. Travel time and the liability of distance in foreign direct investment: Location choice and entry mode. Journal of International Business Studies, 43: 525–535. Brakman, S., Garretsen, H., & van Witteloostuijn, A. 2021. Robots do not get the Coronavirus: The COVID-19 pandemic and the international division of labor. Journal of International Business Studies, 52: 1215–1224. Buckley, P.J. & Casson, M. 1976. The Future of the Multinational Enterprise. London: Macmillan. Buckley, P.J. & Casson, M. 2020. The internalization theory of the Multinational Enterprise: Past, present and future. British Journal of Management, 31: 239–252. Carmel, E., Espinosa, J.A., & Dubinsky, Y. 2010. “Follow the Sun” workflow in global software development. Journal of Management Information Systems, 27(1): 17–38. Côté, C., Estrin, S., Meyer, K.E., & Shapiro, D. 2020. COVID-19 and the dynamics of distance in international business. AIB Insights, 20(3). Dunning, J.H., & Lundan, S. 2008. Multinational Enterprises and the Global Economy. 2nd ed. Cheltenham: Edward Elgar Publishing. Espinosa, J.A., Cummings, J.N., & Pickering, C. 2012. Time separation, coordination, and performance in technical teams. IEEE Transaction on Engineering Management, 59(1): 91–103. Galor, O., & Ozak, O. 2016. The agricultural origins of time preference. American Economic Review, 106(10): 3064–3103. Hinds, P., & Kiesler, S. (Eds.). 2002. Distributed Work. Cambridge, MA: MIT Press. Hummels, D.L. & Schaur, G. 2013. Time as a trade barrier. American Economic Review, 103(7): 2935–59. Kamstra, M., Kramer, L.A., & Levi, M. 2000. Losing sleep at the market: The daylight-savings anomaly. American Economic Review, 90(4): 1005–1011. Keller, W., & Yeaple, S.R. 2013. The gravity of knowledge. American Economic Review, 103(4): 1414–1444. Kikuchi, T., & van Long, N. 2010. A simple model of service offshoring with time zone differ-

Temporal distance  381 ences. North American Journal of Economics and Finance, 21(3): 217–227. Nachum, L., & Buckley, J.P. 2023. Spatial and temporal distance, and the organization of global business: Lessons of months-long quarantine during COVID-19. Journal of International Business Studies, 54: 1121–1133. Rooney, D. 2020. About Time: A History of Civilisation in Twelve Clocks. W.W. Norton. Salas, E., Ramón, R., & Passmore, J. (Eds.) 2017. The Wiley Blackwell Handbook of the Psychology of Team Working and Collaborative Processes. Hoboken, NJ: Wiley. Segalla, M. 2010. Vision statement: Why Mumbai at 1PM is the center of the business world. Harvard Business Review, October. Stein E., & Daude, C. 2007. Longitude matters: Time zones and the location of foreign

direct investment. Journal of International Economics, 71(1): 96–112. Tomasik, R. 2013. Time zone-related continuity and synchronization effects on bilateral trade flows. Review of World Economics, 149: 321–342. Zaheer, S. 1995. Circadian rhythms: The effects of global market integration in the currency trading industry. Journal of International Business Studies, 26(4): 699–728. Zaheer, S. 2000. Time zone economies and managerial work in a global world. In P. Earley, & H. Singh (Eds.), Innovations in International and Cross-cultural Management, pp. 339–354. SAGE Publications. Zaheer, S., Albert, S., & Zaheer, A. 1999. Time scales and organizational theory. Acdemy of Management Review, 24: 725–741.

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94. Transfer pricing and cross-border arbitrage Today almost all large firms consist of multiple and sometimes hundreds of entities, both domestic and foreign affiliates, that are under the common control of a parent firm or headquarters. These entities regularly engage in transactions with their sister entities; for example, parts and components are assembled by a downstream manufacturer, trademarks and brand names are licensed to distributors, and centralized HR services are provided to the group. These related-party transactions must be priced, both for internal reasons (e.g., efficient resource allocation) and external reasons (e.g., reporting profits to tax authorities). The price of a transaction between commonly controlled entities is called a transfer price and the process by which the firm determines prices for internal transactions is referred to as transfer pricing. Transfer pricing is a technical and specialized field. Inside the firm, transfer pricing policies are typically developed by a small group of trained professionals in the tax or finance departments at headquarters. These internal staff work with outside consultants (e.g., EY, PwC) to develop and implement transfer pricing policies at the entity level, record the related party transactions, and handle audits and disputes with tax authorities. Transfer pricing is viewed by firms as a normal and valued activity that raises the firm’s after-tax profits and creates shareholder wealth as a tool for managing the firm’s internal operations and evaluating managerial performance of the firm’s entities. In addition, both in-house and external transfer pricing professionals view their work as a highly regulated and high-risk compliance exercise because so many governments now regulate transfer pricing. Transfer pricing is regulated because it can be used to shift profits and arbitrage differences in government regulations across borders, which is referred to as transfer price manipulation (TPM) or transfer mispricing. While TPM can be used by a domestic firm

inside a country, for example, to profit from differences in state-level corporate income taxes (CITs), TPM is most controversial when used by multinational enterprises (MNEs) to shift profits between countries. Governments are especially concerned about situations where TPM moves ‘over the line’ from legal TPM to unethical and/or illegal pricing of related-party transactions, which is referred to as abusive transfer pricing (Eden & Smith, 2022; OECD, 2013). The ability to engage in transfer pricing is one of the important benefits of internalization (Buckley & Casson, 1976). Internalization enables the firm to substitute related-party transactions (i.e., the internal market) for arm’s-length transactions (i.e., the external market). There are at least three economic benefits from internalization (Eden, 2019b). First, internalization reduces transaction costs, such as the costs of search, negotiation, monitoring, and dispute settlement, which hamper trade between unrelated parties. Second, firms can transfer tacit resources such as non-codifiable knowledge more effectively between commonly controlled entities than between arm’s-length parties; internalization therefore facilitates cross-border transfer of intangible assets. Third, at the international level, multinational enterprises gain extra benefits from internalization that are not available to domestic firms. MNEs can engage in arbitrage activities, taking advantage of differences in prices and endowments across countries, putting stages of the value chain where they offer the greatest after-tax net value added. MNEs can also integrate activities, taking advantage of economies of scale and scope on a regional or global basis to create centralized hubs for back- and front-office activities. Semi-globalization, i.e., incomplete cross-border integration (Ghemawat, 2003), offers the MNE many opportunities to profit from differences in (including the absence of) regulations across countries by shifting profits to less taxed or regulated locations (Rugman & Eden, 1985; Eden, 1998, 2009). Economists have long studied the external opportunities available to MNEs through TPM. Differences in corporate income taxes have received the most scholarly attention, but tariffs, export controls and foreign

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exchange controls are also external motivations for TPM.12 The opportunities for MNEs to raise global after-tax profits by using TPM to engage in regulatory arbitrage between countries have been a major concern of governments for many decades, one that prompted the development of the arm’s-length standard (Picciotto, 1992; Eden, 1998). To reduce MNE incentives to engage in abusive transfer pricing, CIT laws and regulations in more than 130 countries (EY, 2021b) now require MNEs to set transfer prices according to the arm’s-length standard (ALS), also referred to as the arm’s-length principle. The ALS requires the results of related-party transactions to be based on the results that unrelated parties would have negotiated for the same or similar transactions under the same or similar facts and circumstances (Eden, 1998, 2019b; Eden, Dacin & Wan, 2001). Both the OECD and United Nations now regularly publish guidelines that can be used by national tax authorities and MNEs to interpret and implement the ALS (OECD, 2022; UN, 2021). As a result, TPM, while financially rewarding in terms of raising after-tax global profits for the MNE, also comes with a variety of regulatory risks. For example, the burden of proof typically lies with the MNE to prove that its self-reported transfer price meets the ALS. Second, MNEs can be hit with huge penalties if a national tax authority disagrees with the MNE’s transfer price and the MNE has failed to contemporaneously document its transfer pricing policies (Eden, 1998; Eden, Juárez Valdez & Li, 2005). Third, the variation across countries in terms of transfer pricing laws and regulations – even though they are all purportedly based on the ALS – can be overwhelming, particularly for smaller MNEs that cannot afford sophisticated tax planning advice from the Big Four accounting firms or boutique transfer pricing firms.

We explore these ideas in a simple example where an MNE uses transfer pricing to engage in regulatory arbitrage between two tax jurisdictions. Our example shows that TPM generates higher global after-tax profits for the MNE. However, the more aggressive the TPM, the greater the regulatory risk of the MNE being punished by one or both tax authorities, or of being caught between ‘dueling’ tax authorities. Assume the MNE consists of a commonly controlled manufacturer in country 1 and a distributor in country 2, where the manufacturer exports a product to the distributor for final sale. The higher (lower) the transfer price, the larger (smaller) the MNE’s share of profits declared in country 1 and the smaller (larger) the MNE’s share of profits declared in country 2. We assume that the MNE’s goal is to maximize its worldwide after-tax profits and that each government’s goal is to maximize its tax revenues. In effect, this is a principal–agent problem where the transfer pricing policy of the agent (the MNE) is being monitored by two principals (the two governments). We assume both governments follow a territorial tax system13 where they levy a corporate income tax at rate ti on MNE profits declared in country i (where i=1,2). Each government applies the ALS and accepts the MNE’s transfer price if it lies within the arm’s-length range as determined by the government.14 If the transfer price falls outside the range, the government adjusts the MNE’s transfer price to the midpoint of the range, and recalculates the tax owed. The government may also impose an additional inaccuracy penalty if the MNE’s declared transfer price lies outside the arm’s-length range. Assume, for simplicity, that there are only three possible pricing methods: comparable uncontrolled price (CUP, the open market price between arm’s-length firms), cost plus (average cost plus a gross markup), or resale

12 The wide variation across countries, ranging from no transfer pricing rules in many tax havens to extensive rules in many OECD member countries, provides significant regulatory arbitrage opportunities that encourage profit-shifting through TPM. See, for example, Bartelsman and Beetsma (2003), Clausing (2003, 2009, 2016), Eden and Rodriguez (2004), Li and Balachandran (1996), Fisman and Wei (2004), Goetzl (2005), Grubert and Mutti (1991), Jansky and Palansky (2019), Swenson (2001), Tomohara (2004), Vincent (2004), and the articles included in Eden (2019a). 13 Under a territorial tax system, the tax authority in the home country does not tax foreign source income (FSI) earned by MNEs that are headquartered in the home country; the FSI is taxed only in the host country where the income is earned (Eden, 1998). 14 In transfer pricing there is almost never a single ‘right’ price, rather there is a range of possible arm’s-length prices, which is referred to as the arm’s-length range (Eden, 1998).

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Figure 94.1

Transfer pricing and cross-border arbitrage

price (retail price minus a gross margin).15 The average cost of manufacturing is $4 and the retail price at which the finished product is sold in country 2 is $20. Contract manufacturers are available in country 1 that would produce the product for average cost plus a 50% markup. Contract distributors are also available in country 2 that would distribute the product for the retail price minus a 20% gross margin. There are products somewhat comparable with the intrafirm good available on the open market at $9. In this situation, the three possible transfer prices are $6 (cost plus), $9 (CUP), and $16 (resale price), with some arm’s-length range around each transfer price.16 We start by assuming that government 2 taxes profits declared by the MNE where they are earned and government 1 does not; thus, MNE profits declared in country 2 are taxed, whereas profits declared in country 1

are not taxed. In this case, the MNE will use TPM to take advantage of the difference in tax rates. The MNE will choose the highest transfer price ($16, using the resale price method) because it raises the manufacturer’s revenues and the distributor’s costs, which shifts MNE profits out of country 2 and into country 1. With a CIT rate of 30% in country 2 and a zero CIT rate in country 1, every dollar increase in the transfer price shifts $1 of profit from country 2 to country 1, saving the MNE (alternatively, costing government 2 in lost tax revenues) 30 cents. If the MNE’s declared transfer price lies inside government 2’s arm’s-length range of acceptable prices, then TPM is legal and noncontroversial. However, if the transfer price lies outside the government’s arm’s-length range, the government sees TPM as illegal and an additional tax penalty over and above the corporate income tax may apply. Unless

15 In fact, the situation is likely to be much more complex because there are multiple acceptable transfer pricing methods, and they vary by the type of transaction (e.g., goods, services, intangibles, loans). In addition, governments can and do have different rules as to how and when each method can be applied in practice (see Eden, 1998). We ignore the real-world complexities of the ‘devil is in the details’ below. 16 CUP is the open market price, which is $9. Cost plus is average cost ($4) plus the markup contractor manufacturers would charge (50%), which is $4 × 1.5 = $6. Resale price is the retail price ($20) minus the gross margin that contract distributors would charge (20%), which is $20 (1−.2) = $16.

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the MNE has perfect foresight and knows the government’s arm’s-length range, there is transfer pricing risk for the MNE, especially if the MNE aggressively shifts profits out of country 2. There is also transfer pricing risk for the two governments since TPM shifts the MNE’s tax base between the two countries. Let us make the case more complicated by assuming that government 1 taxes MNE profits earned by the manufacturing affiliate in country 1. Now both governments tax MNE profits that are earned in each country. Here, arbitrage through TPM can separate where profits are earned from where they are declared, which is called profit shifting. The MNE will use TPM to arbitrage the difference in CIT between the two countries, shifting profits into the lower taxed jurisdiction. Both tax authorities may also have incentives to affect the MNE’s transfer price by changing the acceptable transfer pricing method and/or the arm’s-length range. Assume each government’s goal is to maximize its tax revenues. In this case, government 1 has an incentive to select the highest acceptable transfer price ($16, the resale price) because that method puts the largest share of the MNE’s total tax base (global pre-tax profits) in country 1. Government 2 has an incentive to select the lowest acceptable transfer price ($6, cost plus), which places the largest share of the tax base in country 2. Each government’s desire to maximize tax revenues therefore generates conflicts not only with the MNE but also with each other because the agent (the MNE) is being monitored by two principals (the two governments) and all three have conflicting goals. What should the MNE do? We assume that the MNE cannot declare different transfer prices to the two tax authorities (i.e., it cannot keep two sets of books) but must choose one transfer price to report to both tax authorities. How the MNE responds depends on its knowledge of the two arm’s-length ranges and whether they overlap or not. Suppose the two arm’s-length ranges overlap so there is a potential zone of agreement between the two governments. If the MNE has perfect foresight and can determine where the two arm’s-length ranges overlap, the MNE sets its transfer price within the zone of agreement. Within the common zone of agreement, the transfer price by definition is acceptable to both governments and no

additional tax or penalties will be levied by either government. Depending on the two CIT rates, the MNE sets its transfer price close to the floor (if t1 > t2) or the ceiling (if t1 < t2) of the zone of agreement, shifting profits to the lower-taxed jurisdiction. The threat of transfer pricing inaccuracy penalties may also influence the MNE’s choice, since the penalty costs of picking a transfer price outside of the zone of agreement may be higher than the profits saved through tax arbitrage (Eden, 1998; Eden et al., 2005). If the two countries have a bilateral tax treaty, the existence of a MAP (mutual agreement procedure) for settling tax disputes between the two countries may also affect the MNE’s transfer price (Markham, 2017). If there is no zone of agreement, the MNE is caught between the two governments. Assuming the MNE must declare the same transfer price to both governments, that price will fall outside the arm’s-length range for one or both governments, exposing the MNE not only to additional taxation but also potentially to tax penalties. The MNE faces double taxation because the two governments disagree as to the best method and the arm’s-length range – even though both transfer pricing methods comply with the ALS. If the MNE can report different transfer prices to the two governments (i.e., have two sets of books), without the information being shared between the governments, it may be possible for the MNE to avoid double taxation in situations where there is no zone of agreement. However, TPM using ‘two sets of books’ amounts to deception with secrecy, which would likely be both illegal and unethical. Another way to avoid double taxation when there is no zone of agreement is for the MNE and the two tax authorities to negotiate a bilateral advance pricing agreement (APA) committing them to a common transfer price (Markham, 2017). The MNE, however, must disclose any and all potentially relevant information to both regulators, which firms typically prefer not to do for confidentiality reasons. Still, bilateral and even trilateral APAs are becoming more frequent, particularly for MNEs with large intrafirm transactions, since their tax risk is so high. To conclude, given the potential for ‘dueling’ tax authorities, each selecting a transfer pricing method that moves taxable Lorraine Eden

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income into its jurisdiction, we argue that MNEs are often without a zone of agreement where they can safely declare acceptable transfer prices, even when both governments have adopted the ALS. As a result, MNEs are faced with the risk that their transfer prices will be declared illegal by one or more governments and hit with tax penalties. As the number of governments with transfer pricing regulations rises, and the complexity of the acceptable policies and of MNE activities increase, it is not surprising that MNE executives regularly report that transfer pricing is their highest international tax risk despite the benefits of engaging in regulatory arbitrage (EY, 2021a). Lorraine Eden

References

Bartelsman, F.J., & Beetsma, R. M.W.J. (2003). ‘Why pay more? Corporate tax avoidance through transfer pricing in OECD countries’, Journal of Public Economics, 87, 2225–2252. Buckley, P. J., & Casson, M. (1976). The future of the multinational enterprise, London, Palgrave. Clausing, K. A. (2003). ‘Tax-motivated transfer pricing and US intrafirm trade prices’, Journal of Public Economics, 87(9–10), 2207–2223. Clausing, K. A. (2009). ‘Multinational firm tax avoidance and tax policy’, National Tax Journal, 62(4), 703–725. Clausing, K. A. (2016). ‘The effect of profit shifting on the corporate tax base in the United States and beyond’, National Tax Journal, 69(4), 905–934. Eden, L. (1985). ‘The microeconomics of transfer pricing’, in Rugman, A.M. & Eden, L. (eds.), Multinationals and Transfer Pricing, Croom Helm and St. Martin’s Press, pp. 13–46. Eden, L. (1998). Taxing multinationals: Transfer pricing and corporate income taxation in North America, Toronto, University of Toronto Press. Eden, L. (2009). ‘Taxes, transfer pricing and the multinational enterprise’, in Alan Rugman (ed.), Oxford handbook of international business, 2nd edition. Oxford University Press. Eden, L. (ed.) (2019a). The Economics of Transfer Pricing, The International Library of Critical Writings in Economics series, Cheltenham, Edward Elgar Publishing. Eden, L. (2019b). ‘The economics of transfer pricing, looking back, thinking forward’, in L. Eden (ed.), The Economics of Transfer Pricing, The International Library of Critical Writings in Economics series, Cheltenham, Edward Elgar Publishing, pp. xiv–lvi. Eden, L., Dacin, M. T., & Wan, W. P. (2001). ‘Standards across borders: Crossborder diffusion of the arm’s length standard in North

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America’, Accounting, Organizations and Society, 26(1), 1–23. Eden, L., Juárez Valdez, L., & Li, D. (2005). ‘Walk softly and carry a big stick: Transfer pricing penalties and the market valuation of Japanese multinationals in the United States’, Journal of International Business Studies, 36, 398–414. Eden, L., & Rodriguez, P. (2004). ‘How weak are the signals? International price indices and multinational enterprises’, Journal of International Business Studies, 35(1), 61–74. Eden, L., & Smith, L.M. (2022) ‘The ethics of transfer pricing: Insights from the fraud triangle’, Journal of Forensic and Investigative Accounting, 14(3), 361–383. EY. (2021a). EY international tax and transfer pricing survey, EYGM Limited. EY. (2021b). EY Worldwide transfer pricing reference guide, 2020–2021, EYGM Limited. Fisman, R, & Wei, S-J. (2004). ‘Tax rates and tax evasion, Evidence from “missing imports” in China’, Journal of Political Economy, 112(2), 471–496. Ghemawat, P. (2003). ‘Semiglobalization and international business strategy’, Journal of International Business Studies, 34(2), 138–152. Goetzl, A. (2005). ‘Why don’t trade numbers add up?’, ITTO (International Tropical Timber Organisation) Tropical Forest Update 15/1 2005. Grubert, H., & Mutti, J. (1991). ‘Taxes, tariffs and transfer pricing in multinational corporation decision making’, Review of Economics and Statistics, 33, 285–293. Jansky, P., & Palansky, M. (2019). ‘Estimating the scale of profit shifting and tax revenue losses related to foreign direct investment’, International Tax and Public Finance, 26, 1048–1103. Li, S. H., & Balachandran, K. R. (1996). ‘Effects of differential tax rates on transfer pricing’, Journal of Accounting, Auditing and Finance, 11(2), 183–96. Markham, M. (2017). ‘International tax treaty arbitration – fighting an uphill battle in the global arena’, Australasian Dispute Resolution Journal, 28, 162–169. OECD. (2013). Action plan on base erosion and profit shifting, Paris, OECD. OECD. (2022). OECD transfer pricing guidelines for multinational enterprises and tax administrations, Paris, OECD. Picciotto, S. (1992). ‘International taxation and intrafirm pricing in transnational corporate groups’, Accounting, Organizations and Society, 17(8), 759–792. Rugman, A.M., & Eden, L. (eds.) (1985). Multinationals and Transfer Pricing, Croom Helm and St. Martin’s Press. Swenson, D. (2001). ‘Tax reforms and evidence of transfer pricing’, National Tax Journal, 54

Transfer pricing and cross-border arbitrage  387 (1), 7–26. Tomohara, A. (2004). ‘Inefficiencies of Bilateral Advanced Pricing Agreements (BAPA) in Taxing Multinational Companies’, National Tax Journal, LVII(4), 863–873. United Nations. (2021). United Nations practical manual on transfer pricing for developing

countries, Department of Economic & Social Affairs, United Nations. Vincent, J.R. (2004). ‘Detecting illegal trade practices by analyzing discrepancies in forest products trade statistics: An Application to Europe, with a focus on Romania’, World Bank Policy Research Working Paper 3261, April.

Lorraine Eden

95. The Uppsala model The Uppsala model is a theory describing and explaining the gradual expansion of foreign activities of multinational enterprises to new markets and within each market. The work on the Uppsala model began in the mid-1970s, even if the empirical findings on which the early design was based are older, as is described in the paragraph on its origins. It has undergone several iterations, which does not imply that the earlier versions are not useful as a theoretical underpinning of empirical research. Now in 2022, today’s version of the Uppsala model can best be described as “a way to understand the business world” or an axiomatic, dynamic theory to describe and explain the evolution of the firm. Hence, the Uppsala model belongs to the theory of the firm. It is axiomatic, as the essential ingredients – knowledge and commitment – are sufficient and necessary for action to be taken. The process view, realistic in relation to the context of managers, makes sure that history and future are paid attention to. However, the model is descriptive rather than normative in nature but can, by paying attention to context, also be given normative applications.

The origins

Starting in 1957, Professor Sune Carlson made international business an important area for research and education at the Department of Business Studies at the University of Uppsala (Carlson, 1966). To begin with, the idea was to explore what Swedish firms were doing in foreign markets, that is, to offer a description of the activities performed abroad. Later we, the doctoral candidates, working on international business issues, formed an informal group named Exportgruppen (The Export Group). At the time the Swedish multinationals predominantly sold internationally from their home base. Producing abroad was merely the firms’ reaction towards tariff barriers raised by host-country national authorities protecting local manufacturing. When studying the Swedish multinational Sandvik, Jan Johanson discovered a pattern of business modes when entering foreign markets (Johanson, 1966). Vahlne’s work on establishment of subsidiaries in foreign markets identified a similar pattern and offered some conclusions on the dynamics of

the process by which activities were spread internationally (Vahlne, 1972; Hörnell & Vahlne, 1972). In 1975, the empirical observations and the pattern of international expansion were confirmed and validated in a survey presented in Johanson and Wiedersheim-Paul (1975). Obviously, the research process was inductive, consistent with the objective outlined by Sune Carlson’s general question (ibid.): what are Swedish firms doing in foreign markets? The conclusion was that the studied firms went through a process of gradually increasing commitments to, what was then imagined, a foreign, national market. Often the firms started the process by entering neighboring markets, proceeding further and further away in psychic distance terms (Hörnell & Vahlne, 1970). The search for explanations to the characteristics of the internationalization process – and given the background of the researchers in business and management – the transaction cost theory as offered by Williamson (1985, 1991), or Buckley and Casson’s (1976) arguments related to internalization (Johanson & Vahlne, 1990), were not relied upon. Rather, behavioral economics, for example Cyert & March (1963), Aharoni (1966), as well as Penrose (1959), were used as a theoretical base. Knowledge on opportunities was assumed to drive the internationalization process under the condition that the level of uncertainty must not be too high, making perceived risk too large (Johanson & Vahlne, 1977). Figuratively, the model we constructed is reproduced in Figure 95.1. The evolution of the Uppsala model is extensively described in Hult, Gonzalez-Perez and Lagerström (2020). It should be mentioned that others identified similar patterns of internationalization, for example Welch and Loustarinen (1988). A critical analysis of the Uppsala model was performed by Andersen (1993) and tests on larger samples were performed by Benito and Gripsrud (1992). The underlying mechanism in our theoretical model is that change impacts on the state characteristics of the focal firm, in turn affecting the continued change. To develop the model, it was assumed that the more experiential knowledge the current activities produced, the lower the degree of uncertainty would be, allowing new commitment decisions to be taken, making the degree of

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Figure 95.1

The Uppsala model (the 1977 version)

commitment to the market higher. Applying operating modes of greater commitment would bring more experiential knowledge and so the process continues. With successful performance, more markets would be entered, gradually further and further away, in terms of psychic distance. As to the individual variables included, “current activities,” that is, operations, offer experiential learning; “market knowledge” and “market commitment” is exactly what the word says. Affected by the dominant view, the “markets” were the relevant object for exporting companies. Hence, commitment decisions were also directed towards the focal foreign market. The mechanism of the model is today the same as it was in 1977, while the individual variables have been developed as described in Figure 95.2 and in the accompanying text. The process approach was “invented” inductively by observing a fairly stable pattern across companies, entering markets further and further away and, in each market, gradually applying more and more committing modes of operation (Johanson & Vahlne, 1977). The assumptions relied upon were different from those of the neo-classical economists (Johanson & Vahlne, 1990; Vahlne & Johanson, 2014). To highlight this different view, we substituted the concept “multinational enterprise” (MNE) with the concept “multinational business enterprise” (MBE), to stress process rather than structure; network rather than stand-alone unit; exchange rather than production; proactive and entrepreneurial behavior rather than passively adjusting; and heterarchical rather than hierarchical structure (Vahlne & Johanson,

2017). The MBE was perceived as very different from the MNE of the neo-classical economists.

Context dependence

Looking back, it is obvious that assumptions were extremely affected by the prevailing context at the time: both the business world context and to some extent the academic context. The Swedish multinational business enterprises expanded dramatically during the period after the Second World War (Hörnell & Vahlne, 1986). Many countries needed equipment to restore their infrastructure and the output of many Swedish companies fitted that need. Competition was not a big problem. The empirical material collected, of course, mirrored this business context at the time and alternative contexts were imagined. The conclusion was: the more you learn, the more you commit, and then you learn even more and so the process continues. The national market as the object of commitment was overtaken from the economists, being ahead of researchers from the business administration area in researching the activities of the multinational companies (Caves, 1971; Kindleberger, 1969). This was changed into the “network” and the individual customer as discussed below. Of course, the Swedish companies were also context dependent, as was mentioned above. The conclusion one can draw is: always pay attention to the context, imagining alternative contexts! This also goes for the researchers themselves, although it may be hard to put the prevailing “spirit of the times” into perspective. At the time, Jan-Erik Vahlne

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the demand was very large indeed and the problem for the Swedish MBEs was how to satisfy it. As we all know, in the long run, the context became more complex.

The business network view

According to the business network view, companies enjoy mutual benefits from developing relationships with partners with which exchange is performed. From experience, the partners learn about each other and gradually adjust to perform more efficient operations (Hallén, Johanson & Syed-Mohamed, 1991). Those relationships develop through social exchange interactively and sequentially (Kelley & Thibaut, 1978). Through joint, gradually increasing commitments, the partners learn to trust each other (Blankenburg Holm, Eriksson & Johanson, 1999; Vahlne & Johanson, 2002). Most important is that it is within such relations that not only learning takes place, but also new knowledge is created, especially about opportunities (Johanson & Vahlne, 2009; Vahlne & Johanson, 2020). This is an important explanation to the heterogeneity of resources, as assumed in the theory of the firm (Barney, 1986; Penrose, 1959). Hence, it is an advantage to be an insider in a network and consequently a liability to be an outsider of a relevant network (Johanson & Vahlne, 2009). To develop such relationships should be considered a dynamic capability (Vahlne & Bhatti, 2019). To build fruitful relationships takes a long time, with investment in trust-building (Eriksson, Johanson, Majkgård & Sharma, 1997; Morgan & Hunt, 1994; Nahapiet & Ghoshal, 1998). Once established, such relationships constitute an advantage, an important dimension of the advantage package of the firm (Sandén & Vahlne, 1974; 1976; Madhok, 2006). Hence, the process of building relationships is very similar to the internationalization process: the reason, of course, is that the two processes overlap to a large extent. Hence, trying to enter into a new network, for example entering a new market, implies that the focal firm suffers from a “liability of outsidership.” Of course, the liability of outsidership can be overcome by applying cooperative strategies, knowledge development and relationship building (Ong, Freeman, Goxe, Guercini & Cooper, 2022; Vissak, Francioni & Freeman, 2020). Like the interJan-Erik Vahlne

nationalization process, the process of building an insider position requires investments. However, an extensive review of research on collaborative internationalization of SMEs concludes that research is still at a stage of infancy and more systematic research is needed (Zahoor, Al-Tabbaa, Khan & Wood, 2020). To summarize, the network view introduced a novel conception of market structure, constituting a different – from the neo-classical view – context of the business firm (Vahlne & Johanson, 2020). For some time, we have known that digitalization will change the context in several ways. It seems that the Uppsala model is still applicable in this environment, but the nature of relationships is different from before, impacting on the internationalization process (Monaghan, Tippman & Coviello, 2020; Chen, Shaheer, Yi & Li, 2019; Bhatti, Vahlne, Glowik & Larimo, 2022). More research is needed.

The Uppsala model – latest version

The model has undergone several iterations (Hult, Gonzalez-Perez & Lagerström, 2020). All of them may potentially be useful as they may fit different research problems. The most recent version is shown in Figure 95.2. As mentioned in the beginning, the Uppsala model should no longer be considered a “model,” if by model we imply that distinct casual relationships between the variables are included. There are relationships, but we for example no longer believe that more knowledge necessarily will decrease the level of uncertainty. It can of course be the other way around: more knowledge can make the level of uncertainty increase. Hence, the construct should be perceived as a typology (Håkansson & Kappen, 2017; Santangelo & Meyer, 2017; Vahlne & Johanson, 2020), identifying variables in a dynamic interplay to describe and explain, not only internationalization, but evolution in general – of which internationalization is an aspect. According to Verbeke (2020), the model has been applied to “marketing, strategy, entrepreneurship, management, small business management, family business, and innovation management (among others)” (2020: 2). The concept of evolution, rather than strategy, is preferred, as it makes it clear that the context, including other actors, must be paid attention to. It

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Source:  Vahlne & Johanson (2017).

Figure 95.2

The Uppsala model – latest version

also includes all dimensions on which management commits the focal firm: strategic change, reconfiguration, change of coordination and globalization (Vahlne, Ivarsson & Johanson, 2011; Johanson & Vahlne, 2009). The Uppsala model is a skeleton, and those preferring to rely upon it as a theoretical tool should, of course, add relevant aspects of the context to the skeleton. The process ontology is essential to the Uppsala model. In the economic system, there is no equilibrium. The ongoing processes of change are open-ended. Firms are “continually in a state of becoming” (Langley, Smallman, Tsoukas & Van de Ven, 2013: 5). Relevance is higher in process studies, as this ontology is closer to the reality of managers, as compared with static, variance-based studies (Vahlne & Johanson, 2017; Hernes, 2014; Cloutier & Langley, 2020). An example is the, more or less constantly, ongoing change process concerning strategy and configuration. This phenomenon is difficult to catch in variance type studies (Farjoun & Fiss, 2022). As to the variables included, they have been somewhat developed in several iterations since the earliest version. Referring to Figure 95.2, in the upper left corner, the variable is “capabilities,” inspired by research on dynamic capabilities (Teece, Pisano & Schuen, 1997; Teece, Pierce &

Boerner, 2002). Capabilities, operational and dynamic, of course include knowledge and other resources. The lower left variable is “commitments and performance.” Commitment – to a customer, a strategy or technology – is as it has always been, a mental and/or financial binding intention concerning future action. Performance is what has been achieved in dimensions relevant to the research problem at hand. It could, for example, be degree of globalization, or an improved-upon operational capability. The upper right variable is what it has always been, the “commitment processes” by which the focal firm commits itself, with the result visible in the lower left quadrant. In principle, this is a decision-making process, most often not a one-at-a-time decision, but a cumulative process, interchangeable with elements of the “knowledge development processes.” The three knowledge development processes are: learning; experiential and active search; and trust building and creating. Trust building, and trust exploitation, are necessary ingredients in the processes of learning and creating (Nahapiet & Ghoshal, 1998). Recently, it has (again) been realized what was already perceived in 1977, but so far was never done: to pay attention to nano-level factors to improve on the validity of the Jan-Erik Vahlne

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Uppsala model. The nano level depicts the level of individuals managing the organization or parts of the organization. No doubt, human behavior and judgment has explanatory value for MBE evolution (Vahlne & Schweizer, 2022).

A few thoughts about the future of the Uppsala model

For the model to also be of value in the future, history has shown that it must be open for continued change: it is clear that changing contexts will affect the nature of the relationships between the concepts included, as well as the concepts themselves. But, of course, findings from future research may also impact on the model. The Uppsala model should be a living matter. A more ambitious objective for the model, preliminarily touched upon in Vahlne and Johanson (2017), is to explain the evolution of the firm. It seems that not only internationalization but also technology development, strategy-making and organizational development are performed in processes characterized by uncertainty, experiential learning and exploitation of opportunities perceived (Vahlne & Johanson, 2017). Evolutionary processes is a promising area for research. Mostly, the empirical data applied to the model has been case studies. It should be advanced with large-scale, longitudinal quantitative statistical studies. There are methods for such studies, but the problem is lack of data. Centers for studies of international business should invest in building relationships with multinational business enterprises, allowing for data collection over a period of several years. It will be costly, but it will give those investing a “research-center-specific advantage.” Jan-Erik Vahlne

References

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Index

AAA see adaptation–aggregation–arbitrage (AAA) abusive transfer pricing 382, 383 acculturation, M&A 185–6 acquisitions 56, 131 as foreign market entry 183 international 182–6, 212 see also mergers and acquisitions (M&As) adaptation–aggregation–arbitrage (AAA) 1–2 adaptation strategy 1 added distance 3–4 advanced producer services (APS) 118, 119 advance pricing agreement (APA) 385, 386 advertising-to-sales 1 after-tax profits 382–3 agglomeration 5 clusters and city-regions connections 6 complexity of firms 5–6 economies 280 evolution 6 externalities 5–6 location choice 5 aggregation strategy 1 Aguilera, R. V. 33 Aharoni, Y. 388 Alcácer, J. 6 Aldrich, H. E. 109 Allen, T. J. 314 alliance governance mode 243 ALS see arm’s-length standard Alvesson, M. 159 ambiguous nationality 48 Ambos, B. 4, 348, 358 Ambos, T. C. 109 Andersen, O. 388 Anderson, E. 80, 81 Anglo-American corporate governance 32 anti-cosmopolitanism 38 anti-globalization 113, 252 see also deglobalization APA see advance pricing agreement (APA) APS see advanced producer services (APS) arbitration strategy 1 Arieli, S. 323 Ariño, A. 222 arm’s-length range 383–5 arm’s-length standard (ALS) 383, 385, 386 Arora, A. 314

Asmussen, C. G. 9, 72, 79, 118, 195, 201, 229, 354, 358, 359 asset bundling 8–9 management 122 recombination 8–9 attention 99–100 Aulakh, P. S. 295 Autio, E. 229 backward integration 177 Baek, H. Y. 213 Bagchi-Sen, S. 87 Bagozzi, R. P. 169 Baker, H. K. 211 balanced or transnational approach 201 Baldwin, C. Y. 225 Banerjee, S. 169 Barkema, H. G. 183, 185–6 Barkemeyer, R. 170 Barner-Rasmussen, W. 109 Barney, J. 81 Barreto, T. S. 303 Barsoux, J. L. 162 Bartlett, C. A. 1, 127, 283, 369 base of the pyramid (BoP) 11–12 Batsakis, G. 332 Beamish, P. W. 87, 293–4, 332 Beaudouin, N. 118 Beckerman, W. 348–9 Beechler, S. 127, 128 Behnam, M. 229 Békés, G. 354 Bell, J. H. J. 185 Bénézech, D. 238 Benito, G. R. G. 79, 80, 87–90 Bernard, A. B. 251 Berry, H. 52, 53, 58, 68, 294 BeShears, R. S. 324 Beugelsdijk, S. 350 Bhagat, R. S. 128 Bhaskar-Shrinivas, P. 68 biculturalism 291 Bird, A. 123, 128 Birkinshaw, J. 109, 162, 374 Black, J. S. 68 Bolino, M. C. 68, 115 Bond, M. H. 305 BoP see base of the pyramid (BoP)

395

396  Encyclopedia of international strategic management Borini, F. M. 161 born global firms 14–16 boundary spanners 158, 291, 319 boundary spanning 109–10, 150–51 bounded rationality xiv, 73, 329 Bouquet, C. 109, 162 Bourgouin, F. 38 Bowen, D. 123 Bradley, F. 348 Brannen, M. Y. 292 Brewer, P. 169 Brewster, C. 220 Briscoe, J. 116 Brooke, M. Z. 40 Brouthers, K. D. 81, 82, 183 Brouthers, L. E. 81 Brubaker, R. 47 Bryson, J. 174 Buckley, P. J. 60, 90, 98, 147, 180, 181, 254, 388 Bühlmann, F. 38 bundling, asset 8–9 Burcharth, A. L. 315 business groups 18 advantages/benefits of 20–21 affiliated firms 19–21 definitions 18–19 features of 19–21 transaction cost theory 18 business research, migration in 285–6 Calof, J. L. 87, 294 Campbell, J. T. 52 Campos, S. 233 Camps, J. 359 Caprar, D. V. 324 Carlson, S. 388 Casson, M. C. 60, 90, 147, 180, 181, 254, 388 CDBA see cost of doing business abroad (CDBA) centers of excellence (CoE) 24, 283, 341, 369, 375 of global value chains 25, 28–9 subsidiary 24–5 MNEs 27–9 centralization 191 Cercas, C. 233 CG see corporate governance (CG) Chacar, A. 21 Chahine, S. 220 Chakrabarti, R. 52 Chakravarty, D. 118, 169, 359 Chandler, A. D. 1, 373 Chang, S. J. 20 Chen, Y. P. 115 Chi, T. L. 89 Choi, U. 20 Christmann, P. 184 CHRM research see comparative HRM (CHRM) research

Chung, C. C. 88 Chung, W. 5 circular economy 145 Clarke, J. E. 209 Clark, K. B. 225 Clark, T. 79, 87, 88 closest neighbor distance 3 closures 56 Clougherty, J.A. 238 clustering 5–6 CMEs see coordinated market economies (CMEs) Coase, R. H. 147, 179, 254 COE see country-of-origin effect (COE) Cogin, J. A. 220 cognitive complexity 127–8, 286, 291 Cohen, D. 305 Colic-Peisker, V. 38 Colman, H. L. 9 co-location of firms 5 comparable uncontrolled price (CUP) 383, 384 comparative HRM (CHRM) research 218–20 competence-creating subsidiary 106–7, 375 competition/competitiveness 100, 339–40 competitive advantage 20, 40, 60, 61, 106, 109, 149–50, 214, 260, 270, 271, 340, 341 complementary relationship 26 component level modularity 226–7 conflict 100 management 334 contracts 344 law 346 Contractor, F. J. 295 control mechanism 375 international 191–2 coordinated market economies (CMEs) 36 coordination mechanisms 158 Cording, M. 184 corporate ownership 57 sustainability 197–9, 202 corporate finance, institutional 214–15 corporate governance (CG) 57, 214–15, 274 comparative models 32–4 internal 33 corporate political activities (CPA) 133 corporate social performance (CSP) 76 corporate social responsibility (CSR) 195, 197–8 comparative perspective 198–9 coordination and control challenges in 201–2 cross-border 199–202 international 197–202 cosmopolitanism 37, 127–8 culture and 37–8 defined 37 identity and belonging 37–8 as individual-level characteristic 37–8 intrapersonal process 37–8 key challenges for 38

Index  397 openness and transcendence 37–8 cost of doing business abroad (CDBA) 276 Coughlan, A. 80 country differences 51–3 distance 51–4 groupings 66–7 country-of-origin effect (COE) 40 elements 40 and HRM 40–41 and international marketing 41 and MNC 40–41 country-specific advantages (CSAs) 8, 60, 61, 71, 279 COVID-19 pandemic 218–20 CPA see corporate political activities (CPA) Cramton, C. D. 159 created resources 279–80 cross-border business 48 CSR 199–202 flow of goods, decline in 45–6 trade 48 transactions 344 cross-border arbitrage, transfer pricing and 382–6 CSAs see country-specific advantages (CSAs) and location CSP see corporate social performance (CSP) CSR see corporate social responsibility (CSR) culture/cultural and acculturation in M&A 185–6 adaptation 43 agility 43–4 barriers 271–2 cosmopolitanism 37 differences 36, 157 distance 4, 40, 52–3, 289, 305–6, 349 diversity 158, 288–9, 323 frame switching 291 gaps 323 global mindset 127 identity 37, 38 indicators of 306 minimization 43 values models 303–4 CUP see comparable uncontrolled price (CUP) Cyert, R.M. 388 Dahan, N. 233 Datta, D. K. 52 David, T. 38 Davidson, W. H. 80 de la Torre, J. 222 Deal, T. E. 322, 324 decentralization 195 decertification 238 De Cieri, H. 218 deglobalization 45–6, 48

decline in cross-border flow of goods 45–6 economic 45–6 in external shocks 45–6 of markets 45 of production 45 protectionist policies 45–6 Delgado, M. 6 Delios, A. 293 demand and supply 286 Denis, D. J. 294 Denison, D. R. 322, 324 Desai, V. M. 294 developed countries 66–7 developing countries 66–7 Devinney, T. M. 169 diaspora 47–9 defined 47 homeland orientation 47 migrants 47–9 and migration 48 neutral bridging between home-host country 48–9 values, identities and loyalties 47–8 Dickmann, M. 116 Dickson, M. W. 324 differentiated network 254, 323 digital globalization 154 revolution 48 digitalization 276 Dikova, D. 183, 186 distance added 3–4 country 51–4 cultural 4, 40, 52–3, 289, 305–6, 349 defined 3, 51 impact and consequences of 52–3 international expansion of firms, impact on 53 legal 274–5 measuring 53 multiple dimensions of 52, 53 psychic 349–50 temporal 379–80 theoretical perspectives 51–2 diversity, cultural 158, 288–9, 323 divestment consequences of 58 decisions 57 defined 56 explaining 56–7 foreign 56–8 and market re-entry 58 studies of 57–8 types 56 division of labor 25, 26, 28, 29 structures 373

398  Encyclopedia of international strategic management Doh, J. P. 232–3 Donaldson, T. 201 Dornbusch, R. 251 double diamond model 341 double-layered acculturation xiv, 185 double taxation 385 Dow, D. 349–50 Doz, Y. L. 1, 168, 283 Driffield, N. 91 Drucker, P. 144 dual network embeddedness 106–7 Dunning, J. H. 60, 61, 95, 254, 318 dynamic capabilities 390, 391 dynamic recombination capabilities 9 Eaton, J. 251 eclectic paradigm see ownership, location, and internalization (OLI) paradigm economic deglobalization 45–6 economizing strategy, of subsidiary 28 Eden, L. 52 efficiency-seeking investments 61 motive 80, 318 Einola, K. 159 Eisenberg, J. 158 Elango, B. 40 Elia, S. 229 Ellis, J. A. 274 embeddedness defined 105 dual network 106–7 emerging market firms (EMFs) 213 emerging market MNEs (EMNEs) 74, 75, 165, 174, 259, 260, 296, 369, 370 internationalization 369–70 emerging markets multinationals 64–5 emerging markets 66–7 empirical entry mode studies 82 Encarnation, D. J. 19 Enright, M. J. 358 entrepreneurship, international 15–16 entry mode choice 51–3, 349 environmental, social and governance (ESG) 33, 154, 197, 198, 202 equifinality 170–71 equity joint venture 88, 90, 222, 240 Erramilli, M. K. 40, 81 ESG see environmental, social and governance (ESG) Euclidian distance 53 European corporate governance 32 Evans, J. 348 expatriation 68–9 experiential indirect learning 3 exporting 78 external corporate governance (CG) 33 externalities 5–6

Fainshmidt, S. 274 Fan, D. 169 Fatemi, A. M. 213 FDI see foreign direct investment (FDI) Feldman, E.R. 58 FEM see foreign entry mode (FEM) Ferencikova, S. 350 Ferner, A. 41 Fey, C. F. 324 Figge, F. 170 finance theory 212–13 firm innovation 130–31 performance effects 140 firm-level modularity 226, 227 firm-specific advantages (FSAs) 8–9, 60, 61, 71–6, 80, 354, 357, 359, 368–70 dynamic capabilities 73–5 in internalization theory 71, 74–5 location-bound 72–5 non-location-bound 72–5 resource bundling 73 firm-specific assets (FSAs) 206 Fischer, S. 251 Fisch, J. H. 88, 214 flexibility 121 Flores, R. 354 Floriani, D. 161 FOMs see foreign operation modes (FOMs) Fons-Rosen, C. 96 foreign divestment 56–8 expansion 64–5 investment 95–6 ownership 95–6 product diversity 373 foreign direct investment (FDI) 56, 74, 118, 161, 254 knowledge-seeking 259–61 strategic asset-seeking 368–70 foreign entry mode (FEM) 78 choices 80–81 mode combination 79–80 performance 82 theories and determinants of 81–2 typologies 78–9 foreign operation modes (FOMs) 87 institutional changes 90–91 progression of studies 87–8 real option (RO) concept 87–9 foreign subsidiary 24, 68, 69 management 98 HQ–subsidiary relationships 99–100 mechanisms 98–9 multi-level theorizing 100 strategy and initiatives 99 networks 105 dual embedded 106–7

Index  399 external local 106 internal MNE 105–6 foreignness 306 liability of 40, 71, 80, 134, 213, 214, 237, 246, 280, 329 foreshadowing 184 formalization 191 forward integration 177 Fosfuri, A. 195, 201, 314, 315 Foss, N. J. 256 franchising 78 Fransson, A. 256 Frenkel, M. 324 Friedman, T. 128 FSA–CSA matrix 74, 279 FSAs see firm-specific advantages (FSAs); firm-specific assets (FSAs) full-chain responsibility 154 Funk, Russell J. 6 García-Canal, E. 369 Garg, P. 6 Gaspar B. 233 Gatignon, H. A. 81 Gaur, A. S. 20 GaWC Network see Globalization and World Cities (GaWC) Network Gelfand, M. J. 305 geographic clustering 5 Ghauri, P. N. 358 Ghemawat, P. 1–2, 4, 357–9 Ghoshal, S. 1, 127, 283, 369 Gibson, C. B. 158 Girod, S. J. G. 295 global boundary spanners 109–10 boundary-spanning 150 careers 115–16 cities 118–19 corporate responsibility 113 CSR 199–200 digital nomads 115 dispersion 157, 269 factory 121–2, 147, 174 integration 168, 374 leadership 123–4 mindset 127–8, 291 structures 374 supply chain management 144–6 system view 147–8 tensions 47–8 global brands definitions and attributes 112 key challenges for 113 sources and boundaries of 112–13 global mobility 219 challenges 130 opportunities by 130–31

global nonmarket strategy 133–5 global production networks (GPNs) 174 global R&D 139 benefits 138 costs and disadvantages 138–9 firm performance effects 140 location and collocation 139–40 motivations 138 global talent management (GTM) 149 definitional clarity 149–50 key issues in 150–51 global value chains (GVCs) 25–6, 28–9, 47, 153–5, 174, 177, 201, 242 centers of excellence (CoE) of 25, 28–9 global virtual teams (GVTs) 157–9 globalization 48, 53, 95 Globalization and World Cities (GaWC) Network 118 globalness 118 GLOBE project 123–5, 303–4 Goergen, M. 220 Goerzen, A. 118, 332 Golesorkhi, S. 214 Gomes, L. 294 Gong, Y. 68 Gonzalez-Perez, M.A. 388 governance corporate see corporate governance (CG) mode 243, 245, 246 structural 153 GPNs see global production networks (GPNs) Graffin, S. 184 Grajek, M. 238 Granovetter, M. 18 gravity models 251, 379 greenfield 52 subsidiary 81 Grøgaard, B. 9 Grossman, G. M. 252 Grossman, J. 47 group-affiliated firms 19 advantages 19 institutional transition 20–21 international diversification 19–20 performance 19–21 value of 21 see also born global firms GTM see global talent management (GTM) Gudergan, S. 240 Guillén, M. F. 52–3, 369 Gupta-Mukherjee, S. 52 Gupta, V. 324 GVCs see global value chains (GVCs) GVTs see global virtual teams (GVTs) Håkanson, L. 4, 348 Haleblian, J. J. 184, 186 Hannibal, M. 174

400  Encyclopedia of international strategic management Harrison, D. A. 68 Harzing, A. W. 169 Hashai, N. 80, 90, 147, 332 Haspeslagh, P. C. 185 Haugland, S. A. 170 Haxhi, I. 33 headquarters (HQ) 98, 161, 164, 194, 202 Hébert, L. 82 Heckscher-Ohlin model 252 Helpman, E. 252 Henisz, W. 51 Hennart, J. -F. 8, 40, 60, 80, 183, 207 Herker, D. 109 Herzog, P. 315 hierarchy 35 Hill, C. W. L. 78, 87 Hilmer, F. G. 79 Hinds, P. J. 159 Ho, E. Y.-C. 256 Hofstede, G. 40, 199, 264, 265, 303, 305, 306 cultural dimensions 53 home country 161–3 institutions 65, 134, 365 home–host country distance 3, 40 home regionalisation 353, 357 Hong, H. -J. 292 Hood, N. 374 Hoskisson, R. E. 210 host-country 161–3 factors 260–61 institutions 133–4 HQ see headquarters (HQ) HQ–RHQ–subsidiary 109, 151 HQ–subsidiary relationships 24, 98–100, 109, 151, 164, 195 HR architecture 149–50 HRM see human resource management (HRM) Hsieh, A. 169 Hult, G. T. M. 82, 388 human resource management (HRM) comparative 35–6 country-of-origin effect (COE) and 40–41 hybrid 165 in MNEs research 218–19 practice transfer 164–5, 218 Hutzschenreuter, T. 4, 332 Hwang, P. 81 hybrid work model 201 Hymer, S. H. 51, 52, 60, 71 IB see international business (IB) IBM 304 IBS see international business strategy (IBS) iceberg costs 251 ICM see internal capital markets (ICM) identity and belonging 37–8 IHRM see international human resource management (IHRM)

IJVs see international joint ventures (IJVs) industry clustering 5–6 waves 57 informal networks definition and framing of 166 examples of 166–7 information asymmetry 182, 184 Inkeles, A. 304 innovation 130–31, 283 metanational 283–4 input–process–output (IPO) 157, 158 institutional corporate finance 214–15 differences 36 theory 82 transition 20–21 voids 18, 82, 91, 174, 199, 243 integration–responsiveness (I-R) framework 1–2, 168–71, 194, 374 integration–responsiveness–learning (IRL) framework 172 intellectual capital 127 intellectual property rights (IPRs) 121, 174–5, 274, 311 inter-firm agglomeration 5 intermodal transportation 144 internal capital markets (ICM) 213–14 internal corporate governance (CG) 33 internal MNE network 105–6 internalization 382 advantages 60–61 knowledge 177–9 internalization theory 71, 74–5, 147, 177–80, 254, 255, 257 advantages of 180 market costs of 180 transaction costs 180–81 international acquisitions 182–6, 212 control mechanisms 191–2 coordination 194–5 corporate social responsibility 197–202 entrepreneurship 15–16 experience 209–10 human capital 150–51 marketing 41 outsourcing 235–6 staffing of expatriates 68, 69 standards 237–8 trade theory 251–2 international business (IB) 161, 168, 183, 191, 206, 213, 240, 279, 293, 294 culture, research traditions 304–5 language in 264–5 policy 154–5 research on private international law (PIL) 346

Index  401 theory 60–62, 172 international business strategy (IBS) 71, 72, 74, 75 international context, modularity in 228–9 international diversification 206–7 group-affiliated firms 19–20 international finance 211–12, 274 legitimacy of 211 for strategic management 212–15 international human resource management (IHRM) 218–20 international joint ventures (IJVs) 162, 180, 274 control and governance 222–3 partner selection 222 performance 223 strategic objectives 222 international modularity 225–6, 228–9 component level modularity 226–7 implications for management theories 228 at industry level 226 levels of 227 stages of 227 within-industries modularity 226 international new ventures (INVs) 14, 75 international non-governmental organizations (NGOs) 232 with MNE collaboration 233 pressure on MNEs 233 and strategic management 232–3 International Organization for Standardization (ISO) 237 international strategic alliances (ISAs) xiv, 78, 240 governance and structure 243–5 motive for 240–42 partner selection 242–3 performance and stability 245–6 internationalization 3, 8, 14–16, 95, 207, 209, 210, 213, 215, 283 degree of 373 emerging market MNEs 369–70 motives 80–81 process theory 87–8 R&D 259 intra-firm agglomeration 5–6 inverted U-shaped curves 294, 296 investments foreign 95 foreign entry mode 78 foreign direct see foreign direct investment (FDI) R&D 1, 5, 139–40 resource-seeking 61, 177 types 61 INVs see international new ventures (INVs) IPRs see intellectual property rights (IPRs) IRL framework see integration–responsiveness– learning (IRL) framework

Isard, W. 251 ISAs see international strategic alliances (ISAs) ISM see international strategic management (ISM) ISO see International Organization for Standardization (ISO) ISO 9000 238 Japanese corporate governance 33 Jarillo, J. C. 169 Javidan, M. 123, 124, 127 Jayaraman, N. 52 Jemison, D. B. 185 Jensen, J. B. 251 Johanson, J. 87, 89, 349, 353, 388, 392 Johnson, J. H. 169 joint ventures (JVs) 78, 79, 88, 162, 180, 183, 222 equity 88, 90, 222, 240 Jones, G. 48 Jonsson, S. 374 Josserand, E. 159 Judge, W. Q. 33 JVs see joint ventures (JVs) Kaasa, A. 305 Kano, L. 8, 73, 75 Kappen, P. 375 Karunaratna, A. 349 Katz, R. 314 Kaul, A. 294 Kedron, P. 87 Kennedy, A. A. 322, 324 Kester, W. C. 51 Khanna, T. 19–20 Kiley, J. 184 Kim, H. 210 Kim, J. Y. J. 186 Kim, M. J. 6 Kim, W. C. 81, 294 King, D. R. 183, 184 Klein, S. 81 Kleindienst, I. 4 Kluckhohn, C. 306 Kluckhohn, F. R. 304 Knight, G. 174 knowledge internalization 177–9 process 89–90 transfer 28–9 knowledge-based theory MNCs 254–5 MNEs 140, 254–7 knowledge-seeking FDI 259, 368 and foreign R&D units 259–60 and host-country factors 260–61 research on 259 Kogut, B. 40, 51, 53, 80, 88, 254–7, 348, 349 Kogut & Singh Index (KSI) 348–50

402  Encyclopedia of international strategic management Kortum, S. 251 Kostova, T. 41 Kotabe, M. 295 Kraimer, M. L. 68, 115 Kroeber, A. L. 306 Krugman, P. 252 KSI see Kogut & Singh Index (KSI) Kujala, J. 170 Kumar, M. S. 293 Kumar, P. 41 Kundu, S. 73 Kwok, C. C. 213 La Porta, R. L. 51, 274 Laamanen, T. 375 labor-to-sales ratio 1 Lagerstöm, K. 388 Lall, S. 293 Lambell, R. 232, 233–4 Lamont, B. T. 186 Lange, S. 4 language, in international business (IB) 264–5 large distance 52 Larimo, J. 40, 350 Larsen, M. M. 229 Lasserre, P. 358 Lawrence, P. R. 168 learning, MNEs barriers to 271–2 dimensions of 271–2 internationalization 269 multifaceted 269–71 Lee, H.-J. 38 Lee, J. M. 9, 167 Leff, N. 18 legal distance 274–5 legitimacy of international finance 211 MNEs 328–9 Lehrer, M. 229 Leker, J. 315 Lenway, S. A. 169 León, F. 82 Leung, A. K. Y. 305 Levine, R. 184 Levinson, D. J. 304 Levy, O. 127 Li, C. G. 184 Li, G. 169 Li, J. 73, 293 Li, S. 89, 295 liability of foreignness (LoF) 40, 51, 52, 71, 80, 134, 213, 214, 237, 246, 276–7, 280, 317, 329, 353 liability of outsidership 3, 353, 390 liberal market economies (LMEs) 36 licensing 78 Liesch, P. W. 209

Lifshitz-Assaf, H. 315 Lin, S. 169 Lindner, T. 213 local clusters 24–5 local responsiveness (LR) pressures 168 localization, of global brands 113 location advantages 279–81 location (L) advantages see country-specific advantages (CSAs) location choice 5, 52, 340 Lockett, A. 332 LoF see liability of foreignness (LoF) Lopez, J. I. 144 Lorsch, J. W. 168 Loustarinen, R.K. 388 Love, J. H. 256 Low, K. Y. J. 256 Lu, J. W. 20, 82, 294 Luk, D. M. 68 Luostarinen, R. 79, 87 Luo, Y. 369 M&As see mergers and acquisitions (M&As) Ma, X. 20 Mach, A. 38 macro structures 373–5 Mahalanobis method 53 Mahoney, J.T. 332 Makino, S. 82 Malekzadeh, A. R. 186 management, of foreign subsidiary 98–101 Mansi, S. A. 213 March, J.G. 388 market efficiency 183, 212 market re-entry 58 market-seeking investments 61 motives 80 Martin, X. 294 Martinez, J. I. 169 Massini, S. 229 materials management 145 Mathews, J. A. 369 Mavondo, F. T. 348 Mayrhofer, W. 116 MBE see multinational business enterprise (MBE) McCrae, R. R. 305 McDermott, G. 229 McDonald, M. L. 186 McFetridge, D. G. 80 McGuire, D. J. 89 MCTs see multicultural teams (MCTs) Mead, B. 68 Meade, J. E. 252 Mees-Buss, J. 376 Melitz, M. J. 251 Mendenhall, M. 123, 128

Index  403 merchant law 344 mergers and acquisitions (M&As) 52, 182 culture and acculturation in 185–6 foreign market entry 183 learning in 186 post-merger integration (PMI) 184–5 public perception 184 stock market reactions 183–4 target selection 182 Merino, F. 16 metanational company 283–4, 369 Meyer-Doyle, P. 186 Meyer, K. E. 91, 252, 370, 375 Michelotti, M. 232, 233–4 Mickiewicz, T. 91 Midgley, D. F. 169–70 migrants 47–9, 285–6, 291 diaspora 47–9 migration 48, 285 business research 285–6 diaspora and 48 management 285–6 multidisciplinary research on 285 Miller, S. R. 52 Minbaeva, D. xix, 166, 292 miniature replicas 375 Minkov, M. 305 Missoffe, A. 118 Mitchell, W. 332 mixed market economies 33 MNCs see multinational corporations (MNCs) mode combinations 79–80, 90 mode switches 88, 90 modularity 318 industry level 226 international see international modularity Mohr, A. 332 moral cosmopolitanism 37 Moreira, A.C. 233 Morgulis-Yakushev, S. 324 Morrison, A. J. 169 Mudambi, R. 213, 229 Mulder, M. 304 Mulhall, R. 174 Müllner, J. 213 multicultural diversity 288 multicultural teams (MCTs) 288–9 multiculturalism 291–2 multidisciplinary research, on migration 285 multifaceted learning 269–71 multinational business enterprise (MBE) 389–90 multinational corporations (MNCs) 105, 118, 167–72, 191, 194, 201, 202, 214, 215, 288, 289 behavior and entry mode 40 boundary-spanning activities in 264 country-of-origin effect (COE) and 40–41 foreign subsidiary management 98–101

multinational enterprises (MNEs) 3, 61–2, 95, 96, 105–7, 109, 110, 121, 133–5, 139–40, 149, 153, 154, 161–2, 164, 165, 174, 175, 177, 178, 181, 197–9, 202, 206, 218, 220, 222, 223, 232, 233, 259, 260, 276, 279, 293, 296, 314, 315 asset recombination 8–9 centers of excellence (CoE) 24–5 contextual factors affecting 294–5 firm-specific advantages (FSAs) 71–6 HRM in 218–19 internal network relations 105–6 internationalization 269 knowledge-based theory of 140, 254–7 learning barriers to 271–2 dimensions of 271–2 multifaceted 269–71 legitimacy of 328–9 management of conflict and violence 334 network 369 NGO pressure on 233 organizational culture in 322–4 psychic distance for 349–50 regional 353–4 regional head offices 357–9 regional management mandates (RMMs) 358–9 structure of 373–6 subsidiaries 24–5, 27–9 as center of excellence (CoE) 27–9 in global value chain 25–9 transfer price 382–6 multinationality–performance relationship 207, 293–4 moderators impacting the 295–6 multinationality research 293 Munjal, S. 161 Murtha, T. P. 169 Myles Shaver, J. 6 Nadolska, A. 186 Nahavandi, A. 186 Narula, R. 24, 61, 229 national culture 185 alternative traditions 305 cultural distance 305–6, 348 cultural values models 303–4 definitions 303 and institutions 214 international business (IB) research 304–5 national innovation systems (NIS) 310–12 Nell, P. C. 358, 375 neo-nationalism 38 network orchestration 20 new trade theory 252 NGO–MNE collaboration 233 Nielsen, B. B. 118, 240

404  Encyclopedia of international strategic management NIHS see not-invented-here-syndrome (NIHS) NIS see national innovation systems (NIS) non-governmental organizations (NGOs), international 232–3 non-investment foreign entry mode 78 normative integration 375 not-invented-here-syndrome (NIHS) 314–16 Nyland, C. 232, 233–4 Oetzel, J. 233 offshoring 317–19 Offshoring Research Network 318 Oh, C. H. 295 O’Higgins, C. 90 Ohlin, B. 252 OL see organizational learning (OL) OLI paradigm see ownership, location, and internalization (OLI) paradigm Oliva, F. L. 15 Oliver, K. 144 openness and transcendence 37, 38 operating cost 90 operational internalization 177, 179 organizational culture 322–4 institutionalism 327 learning 172 structure 373–6 organizational legitimacy 327–8 of MNEs 328–30 Osegowitsch, T. 354 Osland, J. S. 123, 128 outsourcing, international 235–6 outward-looking strategic assets 370 ownership composition 56–7 defined 95 foreign 95–6 ownership (O) advantages see firm-specific advantages (FSAs) ownership, location, and internalization (OLI) paradigm 60–62, 71, 80, 147, 169, 214, 235, 254, 279, 318 Pablo, A. L. 184 Pananond, P. 25 Parente, R. 229 Park, S. 123 Parry, E. 116 partner selection criteria 242–3 PDS see psychic distance stimuli (PDS) Pedersen, T. 229 peer control 191 Pennings, J. 185 Penrose, E. 388 Penrose effect 332–3 perceived proximity 158 Perlmutter, H. V. 127

Petersen, B. 79, 80, 87, 89 Peterson, M. F. 303, 305 Piekkari, R. 358 PIL see private international law (PIL) Pla-Barber, J. 82, 359 PMI see post-merger integration (PMI) political conflict 334–5 political cosmopolitanism 37 polycentric companies 127 Porter, M. E. 79, 310 Porter’s diamond model and companies’ strategic choices 340–41 competitiveness 339 of companies 340 at different geographic levels 339–40 elements of 337–8 locational choices of companies 340 measuring 340 and multinational companies 341 as a system 338–9 post-merger integration (PMI) 184–5 poverty alleviation 11, 12 Prahalad, C. K. 168 Prieto-Sánchez, C.-J. 16 private international law (PIL) 344–6 privately owned enterprises (POEs) 364 see also state-owned enterprises (SOEs) privatization 364 proactive divestment 56 proactive strategy 167 process control 191 product diversification 295–6 product division structures 373 profit shifting 385 protectionist trade policies 45–6 psychic distance 348 antecedents of perceived 349 definitions and measurement 348–9 for MNE strategies 349–50 psychic distance stimuli (PDS) 349, 350 psychological capital 127 Puck, J. 213 Puia, G. 52 Puranam, P. 373 Putzhammer, M. 87, 88 qualitative comparative analysis (QCA) 135 Queirós, R. 233 Quinn, J. B. 79 Rabbiosi, L. 195 Rajagopalan, N. 186 Ramaswami, A. 361 Ramaswamy, K. 294 Ramia, G. 232, 233–4 Rao, C. P. 81 rationality 178 RBT see resource-based theory (RBT)

Index  405 RBV see resource-based view (RBV) R&D 147, 174 foreign 259–60 global see global R&D internationalization 259 investments 1, 5, 139–40 R&D-to-sales ratio 1 reactive strategy 167 Reade, C. 38 real option (RO) 87–9 Reeb, D. M. 213 regional head offices (RHOs) 357–9 regional management mandates (RMMs) 358–9 regional MNE 353–4 regional strategy 353, 357–9 regulatory arbitrage 382–3 Reiche, B. 123, 124 relationship management competencies 43–4 Remmers, H. L. 40 repatriation 361–2 resilience 43, 319 resource-based theory (RBT) 318 resource-based view (RBV) 72, 74, 75, 81, 82 resource-seeking investments 61, 177 motive 80, 98 resources recombination 75–6 Reus, T. H. 186 reverse innovation 283 revival of protectionism, for global brands 113 Riahi-Belkaoui, A. 294, 295 Ricardo, D. 161, 251 Richardson, G. B. 26, 27 Riddick, L.A. 211 risk 89 vs. market uncertainty 212 Rivkin, J. 19, 20 RO see real option (RO) Rogers, E. 255 Rokeach, M. 304 Romani, L. 109 Rønde, T. 314 Root, F. 78 Rosa, B. 354 Roth, K. 41, 169 Rugman, A. M. 8, 60, 71, 72, 279, 353 Ruigrok, W. 294 Sachs, J. 340 Sagiv, L. 323 Sahib, P. R. 186 Sajasalo, P. 170 Salomon, R. 52 Sambharya, R. B. 295 Sammartino, A. 354 Samuelson, P. A. 251 Sánchez, E. 82 Sanders, K. 218–20

Santangelo, G. D. 195 Santistevan, D. 159 Santos, J. 283 Sarkar, M. B. 294 Saro-Wiwa, K. 200 Scanlan, T. J. 109 Scheider, B. 322 Scheidhauer, C. 118 Schein, E. H. 322 Schlegelmilch, B. 358 Schmeisser, B. 214 Schuler, D. A. 210 Schwartz Value Survey (SVS) 305, 323 Scott, W. R. 51 SDGs see UN Sustainable Development Goals (SDGs) Seetoo, D. 169 self-management competencies 43–4 sell-offs 56 Sethi, S. P. 40 Shaffer, M. A. 68, 115 Shane, S.A. 332 shareholder-oriented model, of corporate governance 32, 33 Sharma, P. 41 Shenkar, O. 348, 349 Shleifer, A. 214 Siddharthan, N. S. 293 Singh, H. 40, 51, 53, 80, 348, 349 Singh, N. 73 Sino-Japanese international joint ventures (IJV) 20 Slangen, A. H. L. 183 Slocum, J. W. 169 Smale, A. 116 small and medium-sized enterprises (SMEs) 15 Smith, A. 161, 179, 251 Smith, P. B. 305 social capital 127 social control 191 Søderberg, A.-M. 109 sourcing strategy 145 Sousa, C. M. P. 348 spin-offs 56 Srinivasan, S. S. 295 Stahl, G. K. 185 stakeholder-oriented corporate governance 32 standardised HRM practices 164 state capitalist hybrid model 33 state-owned enterprises (SOEs) 364–5 state-owned multinational enterprises (SOMNEs) 364–5 state ownership 364–5 Stavrou, E. 41 Stensaker, I. G. 9 Stolper-Samuelson theorem 252 Stone, Z. 332 Stopford, J. M. 373–4

406  Encyclopedia of international strategic management strategic finance 214 governance 153–4 learning 270 strategic asset-seeking 80–81 FDI 259, 368–70 investments 61 strategic management 98, 212–15, 293 NGOs 232–3 strategizing subsidiary 28–9 strategy irrelevance 212 Strodtbeck, F. L. 304 structural governance 153 subsidiaries 24–5, 27–9, 58, 374–5 centers of excellence (CoE) 24–5 economizing strategy of 28–9 MNEs 27–9 ownership 40 roles and responsibilities 369 subsidiary networks 105 dual embedded 106–7 external local 106 internal MNE 105–6 substructures 374–6 Suchman, M. C. 329 supply chain management, global 144–6 supranational institutions 134 sustainability corporate 197–9, 202 for global brands 113 Suter, M. B. 161 SVS see Schwartz Value Survey (SVS) Swedish multinational business enterprises 389–90 tacit knowledge 27 Taggart, J. H. 169 Takeuchi, R. 68 Tallman, S. 254, 255, 293, 295 Tamaschke, R. 209 Tan, D. 332 tax profits 382–5 taxation 385 Taylor, S. 322 TCE see transaction cost economics (TCE) Teagarden, M. 123 technology 8, 16, 25–8 Teece, D. J. 254, 256 Teegen, H. 232 Temouri, Y. 91 temporal distance 379–80 Terjesen, S. A. 33 territorial tax system 383 Thomas, D. C. 292 Thomas, D. E. 295 Thompson, J. D. 90 Thompson, R. S. 332 Tian, X. 169

Tong, T. W. 89 top management teams (TMTs) 295 TPM see transfer price manipulation (TPM) trade theory, international 251–2 transaction cost economics (TCE) 81–2, 183, 254–7, 318 transaction costs 180–81 theory 18, 40 transfer price manipulation (TPM) 382–4 transfer pricing and cross-border arbitrage 382–6 regulatory arbitrage 382–3 risk 385 transition economies 66 transnational company 369 CSR 199, 202 mindset 127 organization 374 structure 374, 376 transparency, of global brand 113 transportation costs 251 trans-specialist understanding 26 Tran, Y. T. T. 91 Trichterborn, A. 186 triple bottom line 198 trust 27 Tsang, E. W. K. 52 Tung, R. L. 3, 369 Tushman, M. L. 109 unaffiliated firms 19, 21 uncertainty 89–90 United Nations (UN), Article 21 of the Charter 232 UN Sustainable Development Goals (SDGs) 171, 175, 198, 233 Uppsala model 52, 89, 353 business network view 390 future of 392 latest version 390–92 origins 388–9 process ontology for 391 US–Mexico–Canada Agreement (USMCA) 344 Vachani, S. 232 Vahlne, J.-E. 89, 353, 388, 392 valuable, rare, inimitable and non-substitutable (VRIN) resources 72, 73 value appropriation 223, 240 capture 72–6, 121 chain 79, 121, 153–5 global 25–6, 28–9, 47, 153–5, 174, 177, 201, 242 creation 72–6, 240 Vanchan, V. 174 Venaik, S. 169–70

Index  407 Verbeke, A. 3, 8, 72, 73, 75, 255, 256, 332, 353, 354, 358, 359, 390 Vermeulen, F. 183 Vernon, R. 317 Vidal, E. 332 Vignoles, V. L. 305 Villar, C. 82 Viner, J. 252 violence and conflict 334–5 Vishny, R. W. 214 Vissa, B. 21 Voigt, A. 185 volatility, uncertainty, complexity, and ambiguity (VUCA) 154 Voll, J. C. 332 voluntary divestment 56, 58 VRIN resources see valuable, rare, inimitable and non-substitutable (VRIN) resources Wadeson, N. 147 Wagner, H. 294 Walton, S. 161 Wang, J. 96 Wang, X. 96 Welch, C. 376 Welch, L. S. 80, 87, 89, 388 Wells Jr, L. T. 373–4 Werner, S. 81 Westney, D. E. 376 Whitley, R. 51 Whittington, R. 295 wholly owned subsidiaries (WOS) 78–80, 82, 240

Wiedersheim-Paul, F. 87, 349, 388 Williamson, I. 220 Williamson, O. E. 28, 51, 254, 388 Williamson, P. 283 Winter, S. 255 within-industries modularity 226 Wood, G. 220 World Intellectual Property Organization (WIPO) 174–5 World Trade Organization (WTO) 174–5 World Values Survey (WVS) 304, 305 Wu, J. 210 Wu, Z. 52 Yamin, M. 214 Yaziji, M. 232–3 Yildiz, H. E. 324 Yip, P. S. L. 52 Yiu, D. 82 Yli-Renko, H. 26 Yu, C. 169 Zaheer, S. 41 Zander, U. 254–7 Zattoni, A. 21 Zhao, H. 82, 349 Zhao, M. 6 Zhou, N. 52–3 Zhu, J. C. 169 Zimmermann, A. 158