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TABLE OF CONTENTSWeek 1 - Theoretical Foundations of International Strategy 2
Article 1.1 - An evolutionary approach to understanding international business activity: the co-evolution of
MNEs and the institutional environment - Cantwell, Dunning & Lundan (2010) 2
Article 1.2 - Organizing knowledge processes in the multinational corporation - Foss & Pedersen (2004) 5
Article 1.3 - A note on the transnational solution and the transaction cost theory of multinational strategic
management - Rugman & Verbeke (1992) 7
Article 1.4 - Changing pattern of international competition - Porter (1986) 9
Article 1.5 - Reconceptualizing international strategy and organization - Ghemawat (2008) 11
Week 2 - Where do MNEs invest? 13
Article 2.1 - The expansion of foreign direct investments: discrete rational location choices or a cultural
learning process? - Benito & Gripsrud (1992) 13
Article 2.2 - Spatial agglomeration of multinational enterprises: the role of information externalities and
knowledge spillovers - Mariotti, Piscitello & Elia (2010) 15
Article 2.3 - Factors determining offshore location choice for R&D projects: a comparative study for
developed and emerging regions - Demirbag & Glaiser (2010) 17
Article 2.4 - Cross-border relocations of headquarters in Europe - Laamanen, Simula & Torstila (2012) 19
Week 3 - How do MNEs invest abroad? 22
Article 3.1 - Boundaries of the firm: insights from international entry mode research - Brouthers & Hennart
(2007) 22
Article 3.2 - Joint ventures and the option to expand and acquire - Kogut (1991) 24
Article 3.3 - Institutions, resources, and entry strategies in emerging economies - Meyer, Estrin, Bhaumik &
Peng (2009) 26
Article 3.4 - Do international acquisitions by emerging economy firms create shareholder value? The case of
Indian firms - Gubbi, Aulakh, Ray, Sarkar & Chittoor (2010) 29
Week 4 - When do MNEs invest abroad? 31
Article 4.1 - First mover advantages - Lieberman & Montgomery (1988) 31
Article 4.2 - First mover advantage: a synthesis, conceptual framework, and research propositions - Kerin,
Varadarajan & Peterson (1992) 34
Article 4.3 - First mover advantages in international business and firm-specific political resources - Frynas,
Mellahi & Pigman (2006) 37
Article 4.4 - Timing of entry in international market: an empirical study of US Fortune 500 firms in China -
Gaba, Pan & Ungson (2002) 40
Week 5 - How do MNEs manage foreign subsidiaries? 43
Article 5.1 - Building Firm-Specific Advantages in Multinational Corporations: the role of subsidiary initiative -
Birkinshaw, Hood & Jonsson (1998) 43
Article - 5.2 - Knowledge flows (K-FLOWS) within multinational corporations: explaining subsidiary isolation
and its performance implications - Monteiro, Advidsson & Birkinshaw (2008) 46
Article 5.3 - Is knowledge power? Knowledge flows, subsidiary power and rent-seeking with MNCs -
Mudambi & Navarra (2004) 49
Article 5.4 - MNC subsidiaries and country risk: internalization as a safeguard against weak external
institutions - Feinberg & Gupta (2009) 52
Week 6 - Multinationality and Performance 55
Article 6.1 - International Diversification and Firm Performance: The S-curve hypothesis - Lu & Beamish
(2004) 55
Article 6.2 - Pace, rhythm, and scope: process dependence in building a profitable multinational corporation -
Vermeulen & Barkema (2002) 58
Article 6.3 - Rapid FDI expansion and firm performance - Chang & Rhee (2011) 61
Article 6.4 - The theoretical rationale for a multinationality-performance relationship - Hennart (2007) 64
1
,Week 1 - Theoretical Foundations of International Strategy
Article 1.1 - An evolutionary approach to understanding international business activity: the
co-evolution of MNEs and the institutional environment - Cantwell, Dunning & Lundan (2010)
Institutions vary, within firms, there is a manager with the ability to change (managerial conditions).
- Organization theory: adaptation/selection, isomorphism (coercive, mimetic and normative),
the key concept of legitimacy
- Co-evolutionary theory: managerial adaptation/intentionality and environmental selection
occur simultaneously
- North: economic history / Nelson: evolutionary economics
- Key points: integrative framework combining firm-level adaptation, the importance of
informal institutions, the importance of co-evolutionary processes
Why is this paper important?
If we look at this longer perspective, IB is a shift that put these businesses back in ... Why do we look
at MNEs: confronted with institutional tensions ...; why are MNEs faced with more pressures: “in
multiple countries, it is difficult to coordinate, you are faced with different kinds of rules”
Essentially the paper gets very deep in the fact that; it suggests that institutions and environments in
companies affect each other, put it in the context; why have we not paid enough attention previously.
Selling the argument, if you look at MNEs this is the perspective you need.
Introduction
Firms co-evolve with their environment, which is a process of adaptation and selection. Organization
theory literature has tended to approach institutions in terms of isomorphism, that is, the extent to
which coercive, mimetic and normative pressures push firms to adopt similar structures and
strategies, particularly in the pursuit of legitimacy. The literature on business systems has explored in
detail how economies are organized in terms of labour market institutions, capital market institutions
and patterns of ownership, resulting in different typologies of ideal types of capitalism. In order to be
able to present an integrative framework for a topic as broad and complex as the co-evolution of
MNEs and institutions, we have adopted an approach that borrows from the recent contributions of
two noted scholars: North (1990, 2005) in economic history, and Nelson (2002, 2003, 2007) in
evolutionary economics. They share striking similarities in terms of the main tenets concerning path
dependence, institutional change, and the systemic nature of evolutionary change. We present our
framework in the context of the OLI paradigm.
Definitions and key propositions
We consider the MNE as a coordinated system or network of cross-border value-creating activities,
some of which are carried out within the hierarchy of the firm, and some of which are carried out
through informal social ties or contractual relationships. Value creation consists of the production and
distribution of goods and services, involving the exploitation (and augmentation) of ownership (O)
specific advantages related to resources, capabilities and markets.
Institutions arise as certain social technologies become institutionalized or standardized. This is also,
therefore, the mechanism for institutional change, and it follows that actors – including existing
organizations – can potentially influence institutional change where they contribute to the emergence
of new social technologies. An institutional system is complete only when both formal and informal
institutions are considered; institutional change may result from changes in the character and content
of either or both of these, or their relevant enforcement mechanisms.
2
,North (1990) defined institutions as formal rules (e.g., constitutions, laws and regulations) and
informal constraints (norms of behaviour, codes of conduct). Institutions (and their enforcement
mechanisms) set the ‘‘rules of the game’’, which organizations, in pursuit of their own learning and
resource allocative goals, must follow. North argues that the uncertainties that arise from
interconnected global markets originate primarily in the domain of informal institutions. The kinds of
uncertainties firms face today are different from and more difficult to deal with than those they faced
only a few decades ago, owing to a rise in global interconnectedness, and hence in complexity, what
North called a non-ergodic world of continuous change, in which it is often not possible to forecast the
future from past patterns in behaviour.
While North (1990, 2005) sees institutional change as the result of the reactions of organizations (the
players) to the prevailing institutions (the rules of the game), his analysis largely ignores the firm-level
processes of evolution. We contend that there are important systemic links involving the mutual
formation of expectations at the level of individuals, MNE affiliates and parents, that connect the
behaviour of firms to changes in external institutions.
We develop three propositions linking the evolutionary and institutional views:
❖ The institutional aspects of the environment for IB activity have become steadily more
important for MNEs over time, particularly since the advent of the knowledge-based economy
and contemporary globalization.
❖ The rising significance of non-ergodic uncertainty has placed more emphasis on the
development of new institutions that help to better manage or reduce uncertainty in the
course of economic development. These considerations imply that the only effective way of
countering such uncertainties is through experimentation with new approaches and
institutional entrepreneurship.
❖ MNEs have responded to the more profound nature of uncertainty in part by shifting towards
more open business network structures that provide greater flexibility in adapting to changes
in the institutional environment. In so doing, MNEs have developed solutions for dealing with
the problems of impersonal exchange across multiple markets, and the acquisition and
recombination of dispersed knowledge. Thus, while the institutional environment is external to
any individual firm, the process through which new institutions are created is often initiated
through the experimental actions of individual firms.
Institutions and the evolution of MNE activity
DiMaggio and Powell identified three mechanisms for institutional diffusion: coercive, normative, and
mimetic. Although MNEs do indeed exhibit some signs of isomorphism, this may be through choice,
rather than as a result of a need for legitimacy. In many institutional contexts, MNEs are as powerful
as the local institutional actors. In such circumstances, MNE subsidiaries may be valued for their
differences for local actors, which increases local variety, and not just for their capacity to conform
with or adjust to local norms of behaviour.
MNE’s have to take into account the institutions as they are exposed to different countries. For
example, the dividend tax legislation of the Netherlands for companies such as Unilever. Moving
Unilever outside the UK, it would mean Unilever is not a contributor to the UK economy anymore. In a
broader perspective, the big financial investors put pressure on the CEO of Unilever and he had to
withdraw the decision. So Unilever needs to be present in the ‘Footsy 100’ (most profitable UK
companies). Unilever has such a relatively large size that it controls power to negotiate with both
Holland and the UK. So firms with their decisions can impact a local market. They have bargaining
power in the institutional framework of a given country. This comes together with the process of
coevolution.
3
, The process of coevolution
Three forms of engagement involving MNEs and institutions:
- Institutional avoidance: in which MNEs take the external institutional environment as a given,
but in which they are able to make choices between different institutional environments. The
response of most MNEs is likely to be characterized by an ‘‘exit’’ strategy.
- Institutional adaptation: the MNE treats the institutional environment as essentially
exogenous, but in this case, it seeks to adjust its own structure and policies to better for the
environment.
- Institutional co-evolution: the institutional environment is assumed to be partly endogenous,
and the MNE is engaged in a process of coevolution. Their objective is no longer simply to
adjust but to affect change in the local institutions – be they formal or informal. New
organizational routines and best practices that the affiliates of MNEs have either developed
locally or which are transferred to them from elsewhere within the MNE network.
These three forms of engagement are not mutually exclusive, and MNEs are likely to exhibit both
adaptation and co-evolution with institutions in different home and host countries, in different industrial
sectors, and at different points in time. An institutional system that is in flux is likely to exhibit
‘institutional voids’ that offer opportunities for institutional entrepreneurship and coevolution. Seen
from an evolutionary perspective, all institutional systems represent adaptations to specific
circumstances, with some features more deeply rooted than others, and no expectation that the
system is in any sense optimal. By adapting its technology and associated routines of behavior for the
local environment, the MNE also extends its own range of competence, and hence its overall
innovation potential.
Conclusion
We made three assertions earlier in this paper.
1) The first was that economic growth is increasingly dependent upon the development of more
sophisticated institutions, which are needed to cope with the uncertainties of a dynamic
physical and human environment.
2) Such uncertainty is likely to be non-ergodic, or incapable of being countered by designing and
implementing corporate strategies simply by reference to past patterns or trends. Both
evolutionary and institutional theory suggests that experimentation by firms is the only way to
embrace such fundamental uncertainties.
3) Given the first two factors, as the entities most directly affected by the increasing uncertainties
and complexities in their external environment, MNEs are required to engage in institutional
innovation to counter such uncertainty. As a result, MNEs have evolved more decentralized
governance structures, involving more locally responsive, yet internationally connected,
relationships.
The changes in the strategies and structures of MNEs towards open networks and more operational
flexibility suggest that IB scholars should revisit their thinking about how MNEs respond to changes in
their OLI configurations, and how such configurations evolve over time.
In terms of North’s analysis, which sees firms as organizations that primarily respond to exogenous
incentive structures and enforcement mechanisms, we think that what is missing is the active
involvement of firms in the process of generating new forms of (formal) institutions. Thus our analysis
has highlighted that firms, and MNEs in particular, may and often do play an important role in
generating new ‘‘rules of the game’’.
4
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