A comparison of multinational and domestic firms in an emerging market: A strategic choice perspective

Abstract

Building upon the MNE theory and strategy literature, this study compares the strategic choice in response to environment between multinational and domestic firms operating in an emerging market. We theorize that the strategic choice of multinational firms in response to a changing environment is not necessarily isomotphic with that of local firms because they have different organizational capabilities and perceptions of environmental dimensions. Canonical analysis is conducted based on data collected from foreign businesses and state firms in China. We observe that among foreign firms, managerial perceptions of increased environmental complexity, dynamism, and hostility are positively associated with an analyzer strategy. In contrast, a defender strategy is preferred by local state firms during economic transition. Multiple regression analysis also demonstrates that the analyzer strategy drives up profitability and competitive position for MNEs. When operating in an emerging economy, it is important for MNEs to formulate and implement right strategies that align with environmental dynamics and lead to superior performance. The complex and uncertain environment in emerging economies generally has a strong and sustainable influence over the strategic choices for both foreign and local businesses there. As MNEs and local firms are heterogenous in organizational capabilities, market orientations, strategic objectives, and institutional support, such strategic choices will not, and should not, be the same between them. MNEs need to be more innovative and adaptive than local companies in order to offset their liabilities of foreignness and compensate for their disadvantages in the lack of governmental supports that are important to business success in emerging economies. Nevertheless, MNEs should not become enormously proactive and aggressive in order to mitigate unnecessary instabilities in a volatile environment. This hybrid (or Analyzer) orientation can lead to superior performance in both sales and profitability for MNEs because it fits well with the objective to exploit emerging market potentials as well as daunting challenges they face. The defensive orientation is advisable for such local state firms that intend to pursue profitability when they are institutionally protected by the government. Although many state firms are now restructuring and reorganizing to keep pace with economic transformation, they are inherently less innovative because their industrial property rights are owned and controlled by the central government.