Country-specific Advantages Research Articles

Rethinking the Literature on the Performance of Chinese Multinational Enterprises

ABSTRACTWe synthesize the literature on Chinese multinational enterprises (MNEs) and find that much of the prior research is based on as few as a dozen case studies of Chinese firms. They are so case-specific that it has led to a misplaced call for new theories to explain Chinese firms’ internationalization. In an attempt to better relate theory with empirical evidence, we examine the largest 500 Chinese manufacturing firms. We aim to find out the number of Chinese manufacturing firms to be true MNEs by definition, and to examine their financial performance relative to global peers using the financial benchmarking method. We develop our theoretical perspectives from new internalization theory. We find that there are only 49 Chinese manufacturing firms to be true MNEs, whereas the rest are purely domestic firms. Their performance is poor relative to global peers. Chinese MNEs have home country bound firm-specific advantages (FSAs), which are built upon home country-specific advantages (home CSAs). They have not yet developed advanced management capabilities through recombination with host CSAs. Essentially, they acquire foreign firms to increase their sales in domestic market, but they fail to be competitive internationally and to achieve superior performance in overseas operations. Our findings have important strategic implications for managers, public policy makers, and academic research.

Regulation as Country‐Specific (Dis‐)Advantage: Smoking Bans and the Location of Foreign Direct Investment in the Tobacco Industry

This paper seeks to examine the relationship between smoking bans and the propensity of tobacco firms to engage in foreign direct investment (FDI). Using international business theory based on the firm‐specific advantage/country‐specific advantage (FSA/CSA) matrix, the authors show that, contrary to what one may expect, smoking bans at home are an important institutional intervention, reducing the propensity for firms to engage in FDI, even to countries without a ban themselves.

Alan Rugman and internalisation theory

Alan Rugman made a singular contribution to international business research through his pioneering work on the internalisation theory of the multinational enterprise (MNE). This centred on the international transfer of knowledge in the MNE and the role of firm and country specific advantages in determining flows and outcomes of foreign direct investment. His unique contributions included, inter alia, the concept of subsidiary specific advantages and the early development of a theory of the flagship firm.

The limits of firm-level globalization: Revisiting the FSA/CSA matrix

Multinational enterprises (MNEs) engaging in foreign direct investment (FDI) need advantages allowing them to offset the liability of foreignness in host countries. This liability of foreignness gives rise to additional operational costs related to economic, institutional, and cultural differences between home and host countries. MNEs therefore need to own or control firm-specific advantages (FSAs) that, along with country-specific advantages (CSAs) and internalization advantages, affect international business transactions. In this paper, we revise Rugman’s classic FSA/CSA matrix to better reflect how firms bundle their assets with CSAs. We further contribute to the prior debate on the linkages between the global factory paradigm and internalization theory by empirically evaluating the validity of a key proposition associated with the global factory, namely that FDI becomes relatively less important as a building block of the modern MNE. We do so using data on FDI and cross-border mergers and acquisitions, a major component of FDI.

Literature Review on Country-Specific Advantage

During the constant research of internationalization, firms have been focused on as it is the main body that implements strategies. However, the role of a country in the process of internationalization has been ignored for a long time. Where does country-specific advantage come from? What’s the relationship between country-specific advantage and firm-specific advantage? These questions haven’t been understood clearly yet. Home country provides necessary infrastructure, service conditions, resources and institutions guarantee, which is the origin of firm’s core competition advantages; while host country’s characteristic will influence the way and path of internalization. It is of great significance to understand how to transform country-specific advantages into firm- specific advantages in the process of internationalization of multinational firms.

Intangible Asset Holdings and Investments of Multinational Subsidiaries

There is increasing evidence that intangible assets (e.g. patented technology, trademarks, copyrights, etc.) are a source of international competitiveness and drivers of value creation for firms. In this study, we examine the key non-tax factors which influence the holdings and investments in intangible assets of multinational subsidiaries. We adopt an inter-disciplinary approach by integrating the theory of the multinational enterprise in the international business (IB) literature and the pecking order theory in the finance literature, and applying the international accounting standard IAS38 Intangible assets in our research. Intangible asset is defined “as non-monetary identifiable asset without physical substance. We test our hypotheses using a new original dataset of US multinational subsidiaries in Europe. We find that subsidiary managers act strategically in the holdings and investments in knowledge-based intangible assets by exploiting host country specific advantages and combining with their liquid assets (cash holdings) in innovative ways. They are driven by non-tax reasons in their strategic decision making as we control for tax-related variables. Our study makes new theoretical and empirical contributions to the literature of subsidiary strategy. Our findings provide important strategic implications for subsidiary managers and policy makers.

Subnational institutions and outward FDI by Chinese firms

Purpose– The purpose of this study is to extend the classic country-specific advantage (CSA) – firm-specific advantage (FSA) framework by integrating an institution-based view of CSAs into the discussion of FSAs. In his classic CSA – FSA framework, Rugman suggests that successful multi-national enterprises (MNEs) are often built on the interaction between strong FSAs and strong CSAs at home. In the case of emerging market multi-nationals (EMNEs), he argued that strong CSAs were of particular importance in allowing EMNEs to develop FSAs. In particular, we examine CSAs at the sub-national level.Design/methodology/approach– The authors suggest that sub-national heterogeneity in market-supporting institutions is an important feature of emerging market economies, and that consideration of such heterogeneity contributes to our understanding of firm capabilities and overseas investment behavior of emerging market firms. The authors also identify explicitly the mechanisms through which sub-national institutions at home affect FSAs and, subsequently, the ability of emerging market firms’ entry into developed markets. Specifically, the authors argue that strong local institutions that support effective and well-functioning markets create the conditions that induce firms in that location to develop market-related capabilities in R & D and marketing, which, in turn, enable them to expand into developed countries.Findings– Using a unique data set on overseas investment by Chinese firms and causal mediation analysis, the authors find strong evidence in support of the view that strong sub-national institutions help emerging market firms develop the capabilities to enter developed country markets.Originality/value– This study extends the classic CSA–FSA framework by integrating an institution-based view of CSAs into the discussion of FSAs. In particular, the authors examine CSAs at the sub-national level.

The determinants of tax haven FDI

This paper examines the determinants of a multinational enterprise's (MNEs) decision to set up tax haven subsidiaries. We adapt the firm-specific advantage–country-specific advantage (FSA–CSA) framework and construct a number of empirically testable hypotheses. The analysis is based on a database covering 14,209 MNEs in twelve OECD countries. We find that the variety of capitalism of a MNEs home location and the level of technological intensity has a strong impact on this decision. We also find that the home country corporate tax rate has a minimal impact. This suggests that corporate tax liberalisation is unlikely to deter MNEs from undertaking this activity.

The Internationalization of Service Firms from Emerging Economies: An Internalization Perspective

How can service firms internationalize in the absence of significant resources and capabilities prior to internationalization? This question is important, because internalization theory has dismissed the possibility of internationalization without firm-specific advantages (FSAs) or country-specific advantages (CSAs). This conceptual study argues that resource-scarce service firms undertake FDI to access intangible resources abroad, which are then used to develop FSAs in these firms' domestic market. We call this novel service internationalization strategy domestic market-seeking internationalization (DMSI). We embed DMSI within a comprehensive internalization theory-based framework that derives testable propositions. The framework extends internalization theory by explaining generic service internationalization strategies through leveraging different types of domestic and foreign-originated FSAs. In addition, this study provides recommendations for practicing managers who face the dilemma of increasing competitive pressures to take their firm international under severe resource constraints, a challenge typical to many emerging economy firms.

The role of clusters in the global innovation strategy of MNEs

Purpose– This paper aims to focus on the role of clusters as home and host country-specific advantages for multinational enterprises (“MNEs”) in the organization of their internal and external networks to optimize the diffusion and generation of new knowledge. Strategic asset-seeking investment has been a major driver of the internalization of innovation activities performed by MNEs abroad. This paper demonstrates the attractiveness of foreign clusters in the global innovation process of MNEs. The main assumption is that location within innovative clusters may foster the ability of firms to generate new innovations.Design/methodology/approach– This paper illustrates the theoretical developments through the example of firms located in the Basel pharmaceutical clusters which have invested in other clusters abroad.Findings– The results are based on an in-depth patent data analysis and confirm the importance of clusters in an innovation-driven industry.Originality/value– This paper focuses on the role of clusters as home and host country-specific advantages for “MNEs” in the organization of their internal and external networks to optimize the diffusion and generation of new knowledge. Strategic asset-seeking investment has been a major driver of the internalization of innovation activities performed by MNEs abroad. This paper demonstrates the attractiveness of foreign clusters in the global innovation process of MNEs. The main assumption is that location within innovative clusters may foster the ability of firms to generate new innovations. This paper illustrates the theoretical developments through the example of firms located in the Basel pharmaceutical clusters which have invested in other clusters abroad. The results are based on an in-depth patent data analysis and confirm the importance of clusters in an innovation-driven industry.

Country specific advantage, firm specific advantage and multinationality – Sources of competitive advantage in emerging markets: Evidence from the electronics industry in China

The extant literature on emerging market multinationals (EMNEs) suggest that they derive their advantages from country-specific advantages (CSAs) such as economies of scale, as opposed to traditional firm specific advantage (FSA) such as technology. We use firm level data from the Chinese electronics industry and an empirical methodology that has thus far not been used in the literature to provide clear empirical support for this proposition. Further, we demonstrate that not all emerging market firms can leverage CSAs equally and that EMNEs are better at exploiting CSAs than their non-MNE domestic counterparts. We also demonstrate that developed country MNEs operating in emerging market economies are not as good as leveraging available CSAs as their EMNE competitors, arguably on account of liability of foreignness. Our results have implications for outward investment by emerging market firms as well as for the ability of developed country MNEs to significantly benefit from efficiency-seeking FDI in emerging market economies.

Converting country-specific advantages into firm-specific advantages in emerging markets

Scholars have suggested that the origins of firm-specific advantages (FSAs) are the local environment in which a firm is based. However the extant literature has not explained how to convert country-specific advantages (CSAs) in the local environment into FSAs. Drawing on the resource-based view of the firm, in this research we develop an overarching framework explaining how local firms in emerging markets first access CSAs, and then transform CSAs into unique FSAs. We thus shed light on central issues in the dynamic theory of strategy.

Multinational subsidiary sales and performance in South East Asia

We extend the theory of the multinational enterprise (MNE) by exploring the concept of subsidiary-specific advantages (SSAs) as a driver for subsidiary performance. We investigate the relationship of host country-specific advantages (host CSAs) in the form of market attractiveness, SSAs and subsidiary sales as they affect subsidiary performance. From an original primary dataset of 101 British multinational (MNE) subsidiaries in six South East Asian countries, our analysis reveals three significant findings. First, host market attractiveness has a statistically positive impact on the performance of subsidiaries. Second, the three traditional SSAs of general management, marketing capabilities and invested capital enhance subsidiary performance. Third, we examine geographic direction and types of customers for subsidiary sales by following international accounting standards. We find that these subsidiaries generate on average 95 percent of total sales from the Asia Pacific region and 91 percent of total sales from external customers. Our findings have important research and managerial implications.

Misunderstanding embeddedness: a response to Ferraris’ rethinking multiple embeddedness

Purpose– The purpose of this paper is to address the misapplication of the embeddedness concept in Ferraris’s (2014) paper and show how it needs to be used as a cornerstone economic sociology concept within his proposed framework. This paper is a response to his paper in theMultinational Business Review“Rethinking the literature on ‘multiple embeddedness’ and subsidiary-specific advantages”.Design/methodology/approach– The paper outlines the origin of the embeddedness concept and its evolution within the economic sociology literature. It addresses different types of embeddedness and continues with a critical analysis of Ferraris’s (2014) proposed framework of four main types of multinational enterprise (MNE) relationships. It provides suggestions for its improvement and application, as well as discusses the appropriate applications of embeddedness concept by international business (IB) scholars in MNE research.Findings– The paper shows how the embeddedness concept is mostly used as a metaphor and as a simple umbrella label for different types of connections between MNEs, their subsidiaries and different types of environments. The analysis of Ferraris’s (2014) proposed framework shows how MNE embeddedness is incorrectly understood as emanating from the balancing of local responsiveness and global integration within MNEs, where subsidiaries develop subsidiary-specific advantages (SSAs) by recombining home – host country-specific advantages and parent – subsidiary firm-specific advantages (FSAs).Originality/value– The paper adds to the existing IB understanding of MNEs’ multiple embeddedness and subsidiaries’ dual embeddedness through a wider and more structured economic sociology perspective. It provides an appropriate economic sociology-grounded typology of different types of embeddedness. A discussion of possible future research directions stresses how the embeddedness – dissembeddedness capability is a key source of MNE competitive advantage, which moderates the actual recombination process of producing FSAs and SSAs.

Rethinking the literature on “multiple embeddedness” and subsidiary-specific advantages

Purpose– This paper aims to synthesize the literature on embeddedness of MNE subsidiaries, rethinking the concept of “multiple embeddedness” in order to clarify the importance of the subsidiary-specific advantages.Design/methodology/approach– A new and innovative framework based on four key relationships: home country-specific advantages (CSAs)-Headquarters (HQ); HQ-subsidiary; subsidiary-host CSAs; and subsidiary-HQ. This framework is used to discuss the complex phenomenon of “multiple embeddedness”.Findings– The framework proposed sheds light on the subsidiary's need to develop and sustain over time its subsidiary-specific advantages (SSAs) and, where possible, to “upgrade” these SSAs and to integrate them across the entire network of the MNE. The framework is based on two pillars. The first one is the “creation and development” of firm-specific advantages (FSAs) (in the home country) and SSAs (in the host country); the second one is the “transfer” of these advantages from the parent to the subsidiary and vice versa. In addition, several interesting interrelations are found between the four main relationships, and the central role of the recombination capabilities and the importance of distance are highlighted.Originality/value– This paper is one of the first to develop a framework incorporating all the relevant relationships in multiple embeddedness. The framework is innovative and “embeddedness” is analyzed in a novel way, as many studies only partially analyze this complex phenomenon and neglect one or more of these relationships.

Converting Country-Specific Advantages into Firm-Specific Advantages in Emerging Markets

Converting Country-Specific Advantages into Firm-Specific Advantages in Emerging Markets

The Contribution of Local Environments to Competence Creation in Multinational Enterprises

This paper examines the competence development of subsidiaries in multinational enterprises. We analyze how local subsidiary environments affect the development of technological and business competencies among other units in the multinational enterprise. We test our predictions using data from 2,107 foreign-owned subsidiaries located in seven European countries, by means of structural equation modeling — namely, LISREL. By bringing the local environment to the fore, we contribute to the literature on the emergence and determinants of firm-specific advantages. We link local subsidiary environments to the development of the competencies of other units in the multinational enterprise. The role of the multinational enterprise is characterized as integrative, as it may bridge local competencies and environments that are conducive to competence creation, and as it facilitates the use of resources residing locally throughout the organization. Thus, we contribute to an enhanced understanding of location as a determinant of the creation of units of competence and centers of excellence within multinational enterprises. In other words, we demonstrate that country-specific advantages are beneficial for competence creation in units other than the local subsidiary. We thereby link country-specific advantages to the creation of firm-specific advantages in the multinational enterprise — i.e., the multinational enterprise can build and augment firm-specific advantages by making the most of country-specific advantages.

Chinese multinationals in Denmark

PurposeThe purpose of this paper is to explain in detail the strategic asset‐seeking OFDIs of Chinese firms in Denmark through a theoretical lens that combines the updated OLI (Ownership, Location, Internalization) paradigm and the internalization theory. Meanwhile, the authors hope to unveil the unique characteristics of firm specific advantages (FSAs, including O and I advantages) and country specific advantages (CSAs, including L advantages).Design/methodology/approachThe authors chose two case firms that just started investing and a third one that was in the process of preparing investment in Denmark. Primary data were collected by semi‐structured interviews in English at various locations in late 2009 and early 2010. The three Chinese firms in this study share a common primary objective in their strategic orientation of OFDIs. That is to seek strategic assets that are complementary and critical to augment their existing FSAs.FindingsRugman stated that strategic asset‐seeking OFDIs are supposed to have high levels of FSAs and CSAs. This study presents a more detailed analysis regarding the O, L and I advantages that Chinese investing firms in Denmark are perceived to possess. It was found that these Chinese investing firms had high levels of Oa and Oi but Ot was largely absent; furthermore, although Lr was obviously appreciated in Denmark, Li presented a mixed picture. The paper also found that internalization advantages were only able to be realized when investing firms were good at utilizing networking and guanxi, which were largely derived from their prior Oi advantages.Originality/valueFew have analyzed strategic asset‐seeking OFDIs made by emerging markets based on the FSA/CSA matrix that combines the OLI paradigm and the internalization theory. This study pursued this research endeavor by enriching a refined framework that connects the OLI paradigm, which recognizes multiple dimensions of O advantages and an institutional perspective, to the internalization theory, which converts O and I advantages into FSAs and associates L advantages with CSAs.

Double-Layered Institutional Environment in Offshoring Location and Governance Decisions

To exploit country-specific advantages, firms that source activities from abroad are forced to integrate the institutional environment into the choice not only of host-country, but also of governance model for their offshore activities. Considering inefficient institutions as drivers of transaction costs, this conceptual paper explores the impact of the host-country regulative environment in the interdependent decisions of country selection and governance model (captive or outsourcing) in firms’ global sourcing strategies. We consider two classes of assets: transferred assets for knowledge/information flows, and local assets sourced from the host location. We show that each class involves specific institutional risks for offshoring practices. In turn, because of the different institutional exposures of the captive model and the outsourced one, the institutional risks associated with transferred and local assets have different implications for the choice of governance model. Firms react to institutional risks relative to transferred assets by internalizing their activity, but they bypass inefficient institutions for local assets using outsourcing. Based on the interaction of the institutional risks relative to each class of assets, we then obtain sufficient conditions that give the firm-optimal combinations of country selection and governance model.

Assessing the drivers of regional trends in solar photovoltaic manufacturing

The photovoltaic (PV) industry has grown rapidly as a source of energy and economic activity. Since 2008, the average manufacturer-sale price of PV modules has declined by over a factor of two, coinciding with a significant increase in the scale of manufacturing in China. Using a bottom-up model for wafer-based silicon PV, we examine both historical and future factory-location decisions from the perspective of a multinational corporation. Our model calculates the cost of PV manufacturing with process step resolution, while considering the impact of corporate financing and operations with a calculation of the minimum selling price that provides an adequate rate of return. We quantify the conditions of China's historical PV price advantage, examine if these conditions can be reproduced elsewhere, and evaluate the role of innovative technology in altering regional competitive advantage. We find that the historical price advantage of a China-based factory relative to a U.S.-based factory is not driven by country-specific advantages, but instead by scale and supply-chain development. Looking forward, we calculate that technology innovations may result in effectively equivalent minimum sustainable manufacturing prices for the two locations. In this long-run scenario, the relative share of module shipping costs, as well as other factors, may promote regionalization of module-manufacturing operations to cost-effectively address local market demand. Our findings highlight the role of innovation, importance of manufacturing scale, and opportunity for global collaboration to increase the installed capacity of PV worldwide.