Regional strategies in the high tech emerging market multinationals

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Regional Strategies in the High Tech

Emerging Market Multinationals

Master Thesis

MSc. Business Studies – International Management Supervisor: Dr. Johan Lindeque

Second reader: Dr. Alan Muller

Student: Edo Cohen

Student ID: 10435077

Date: 21-03-14

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Abstract

Substantial evidence in international business (IB) research shows that the majority of multinational enterprises (MNEs) have yet to become truly global in their international operations. In fact, it is evident that most MNEs operate and strategize on a semi-global or a regional scope. The purpose of this study was twofold. Firstly, it showed that it is meaningful to examine the existence of regional strategies even in the more globally-oriented industries. Secondly, it provided evidence of the distinctive characteristics of emerging market MNEs (EM-MNEs) in relation to developed market MNEs (DM-MNEs) when considering the existence of regional strategies in their international operations. To achieve its objectives this study conducted an in depth qualitative multiple-case study on five MNEs in the personal computer (PC) industry. The results obtained from the case studies provided three noteworthy implications for the present literature on regionalization. Firstly, the results showed that the source of embeddedness that tied MNEs to their home region greatly differed between EM-MNEs and DM-MNEs. Most predominant reason for this was found to be EM-MNE’s distinct need to adapt their firm specific advantages (FSAs) to operate in the emerging market context of their home country and their ability to transfer and deploy such FSAs intra-regionally into proximate emerging markets. Secondly, the results of the study also showed that in spite of their regional strategies, and unlike DM-MNEs, EM-MNEs relied on global scope of inter-firm relationships in order to access strategic resources and supplement their FSA development. Lastly, it was shown that DM-MNEs and EM-MNEs faced different barriers in their inter-regional expansion. On the one hand, DM-MNEs needed to adapt their FSAs to operate in inter-regional emerging markets. On the other hand, EM-MNEs needed to overcome competitive barriers when competing in inter-regional developed markets as well as to overcome other non-economical legal and political barriers, such as lawsuits, patent infringement allegations and international trade disputes.

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Acknowledgements

I would likely to thank all the people that help me successfully complete this study.

Firstly, I would to express my deep gratitude for my supervisor Dr. Johan Lindeque for his great support, guidance and patience during the process of writing my thesis. Secondly, I would like to thank my fellow master students at the University of Amsterdam. Lastly, I would like to thank my family and friends for supporting me during my studies and in particularly I would likely to thank my brother for his continual

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Index of Tables and Figures

Figure 1.1: Regional Matrix - PC Industry……….……..9

Figure 1.2: Top 5 Vendors, Worldwide PC Shipments………9

Figure 2.1: Rugman and Verbreke 2004 “Classification of the top 500 MNEs” ……….. 12

Figure 2.2: CSA/FSA matrix for EM-MNEs……….………..16

Figure 2.3: Inter-firm relationships………..……….20

Figure 2.4: DM-MNEs internationalization path………...25

Figure 2.5: EM-MNEs internationalization path………...26

Figure 2.6 - Conceptualizing regionalization and FSA transferability for DM-MNEs………..29

Figure 2.7 - Conceptualizing regionalization and FSA transferability for EM-MNEs………..30

Figure 3.1: Studies Quality Criteria and Analytical Technique Used………..32

Figure 3.2: Summary Statistics Global 500 for 2004 and 2012……….…………....35

Figure 3.4: Regional Matrix - Consumer Electronic Industry………..35

Figure 3.5: Overview of Case Selection………..36

Figure 3.6: Overview of Data Sources………....37

Figure 4.1 Results table 1 of Lenovo: Quantitative data……….…40

Figure 4.1 (1/2): Results table 2 of Lenovo: Qualitative………..41

Figure 4.1 (2/2): Results table 2 of Lenovo: Qualitative………..42

Figure 4.2 Results table 1 of Asus: Quantitative data………..47

Figure 4.2 (1/2) Results table 2 of Asus: Qualitative data….………48

Figure 4.2(2/2) Results table 2 of Asus: Qualitative data….………..….49

Figure 4.3 Results table 1 of Acer: Quantitative data….………...54

Figure 4.3 (1/2) Results table 2 of Acer: Qualitative data….………55

Figure 4.3 (2/2) Results table 2 of Acer: Qualitative data……….56

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Figure 4.4 (1/2) Results table 2 of Dell: Qualitative data………..61

Figure 4.4 (2/2) Results table 2 of Dell: Qualitative data………..62

Figure 4.5 Results table 1 of Apple: Quantitative data………..65

Figure 4.5 (1/2) Results table 2 of Apple: Qualitative data……….66

Figure 4.5 (2/2) Results table 2 of Apple: Qualitative data……….67

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1. Introduction

Substantial research in international business (IB) in the past decade has dedicated its attention to the predominantly regional scope of international operations for even the largest multinational enterprises (MNEs). For the majority of MNEs, the home region provides the main source of sales (Rugman, 2004) and is the centre of most assets and employees (Rugman and Oh 2007, Collinson and Rugman 2008). Following this, recent studies have questioned the existence of truly global strategies, in the sense that the world is flat (Friedman, 2005), holds homogenous consumption patterns and permit MNEs to compete globally and exploit synergies and arbitrages opportunities across regions (Kogut, 1985; Hamel and Prahalad, 1985). In fact, the strategies of MNEs are not uniform (Buckley and Ghauri, 2004) and they operate and strategize regionally or semi-globally (Ghemawat, 2003).

As regionalization is demonstrated to be a prevailing phenomenon at the macro-level, a number of studies have called for more case specific qualitative studies (Li, 2005; Osegowitsch and Sammartino 2008; Mehanna, 2008), where more meaningful interpretation of the data have shown to be attained. Longitudinal industry specific case studies have provided deeper understanding for the source of MNE’s regional strategies, both in terms of the institutional factors that create social, cultural, and political harmonization within regions (Rugman and Oh, 2012; Rugman and Collinson, 2004; Oh and Rugman 2006, 2007), as well as in terms of sources embeddedness that tie most of the MNE’s firm’s specific advantages (FSAs) to their home region and prevents them from exploiting them inter-regionally (Rugman and Collinson, 2008). This study focused on the latter and examined regional strategies in terms of their implication to FSA transferability (Verbeke, 2009).

This study produced a multiple-case study design following the footsteps of studies that have taken similar approach in regionalization literature (Rugman, and Collinson, 2004; Kolk, et.al, 2010; Rugman, and Collinson, 2008). It provides an in depth examination of five MNEs in the personal computer (PC) industry. Focusing on the PC industry provided a unique opportunity for this study to touch upon two areas that have been relatively neglected in the regionalization literature. That is, studying more globally oriented firms as well as examining the unique implication of emerging market MNEs (EM-MNEs) from peripheral regions. Firstly, only a handful of studies in the regionalization literature have examined truly globally oriented industries in which global strategies are most likely to prevail (Millar, 2005; Cerrato, 2009; Lee and Marvel, 2009). Globally oriented industries, such as the consumer electronic industry, rely on global supply chains, have homogeneous consumer preference and are required to have a global scale in order to recoup their competitive R&D budget (Cerrato, 2009). Such characteristics means such

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industries are most likely to be those that benefit from the increasingly globalized and interconnected world and to which traditional global strategies are likely to be most advantageous (Hamel and Prahalad, 1985; Kogut, 1985). The growth of the PC industry in the 1990s had closely coincided with the rise in market liberalization and integration around the world (Dedrick et al., 2001). In a period of two decades, MNEs in PC industry were able to develop globally oriented production networks and take advantage of arbitrages opportunities all across the globe, particularly in East Asia, that by 2000 contained 29.9% of the world PC production (Dedrick and Kraemer, 2002). In spite of this, it is evident that most MNEs in the PC industry are regionalized and thus provide an interesting case for examining regional strategies. As is possible to see in figure 1.1, out of the 9 firms in the PC industry, only 3 are truly global.

Geographic reach of FSAs

Regional Global Geographic scope of locational FSAs Global 3 Global

(Acer, Sony, Apple) Regional 5 Regional

(Asus, Fujitsu, Dell, Toshiba, Lenovo Group)

1 Bi-Regional (Hewlett-Packard) Figure 1.1: Regional Matrix - PC Industry (data available in Appendix 3)

Secondly, considering the historical predominance of East Asia in the world PC production, by the late 1990s many of the emerging market PC producers began to move up the value chain to become direct competitors of established developed market MNEs (DM-MNEs) and by 2012 managed to prove themselves as worthy opponents, grabbing top positions within the PC industry (figure 1.2). EM-MNEs from peripheral regions have generally been examined only to a limited extent from the lens of regionalization (Sethi, 2009; Rugman and Li, 2007; Banalieva and Santoro, 2009). Considering this, the PC industry provided the unique prospect to examine in parallel EM-MNEs and DM-MNEs that managed to establish themselves in equal footing within an industry.

Figure 1.2: Top 5 Vendors, Worldwide PC Shipments (IDC, 2013)

PC Vendor 2012 Market Share (%)

1. HP (DM-MNE) 15.7

2. Lenovo (EM-MNE) 15.0 3. Dell (DM-MNE) 11.3 4. Acer (EM-MNE) 10.8 5. Asus(EM-MNE) 6.8

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EM-MNEs possess unique differences relative to DM-MNEs, particularly when considering their competitiveness (Ramamurti, 2009; Rugman and Li, 2007), embeddedness in their domestic market institutional voids (Khanna, 2005), suitability for operating in emerging markets (Cuervo-Cazurra and Genc, 2008; Buckley et al. 2008; Zeng and Williamson, 2007), and distinct FSA development mechanisms (Meyer, 2013; Johanson and Vahlne, 2009; Forsgren, 2002). Such distinctions were shown in this study to provide interesting implication in regards to their regional strategies and also provide explanation why in such a globally oriented industry MNEs still exhibit regional components in their strategic planning, need to meet heterogeneous inter-regional consumer preference, experience embeddedness in their home region and face barriers when expanding inter-regionally.

More specifically, this study investigated how regional strategies differ between EM-MNEs and DM-MNEs in the globally oriented PC industry. Regionalization was examined under two dimension of MNE’s international FSA transferability. Firstly, the study identified the sources of embeddedness that tie most MNEs in their home region (Rugman and Collinson, 2004; 2008; Oh and Rugman, 2012). Unlike DM-MNEs that followed similar sources of regional embeddedness to what was previously identified in the literature, EM-MNEs needed to adapt their FSAs for operating in the emerging market context in their home country and showed the ability to transfer and deploy those locally bound FSAs into proximate regional emerging markets. Such advantages included their abilities to have local customization and appropriate price targeting in lower income countries (Zeng and Williamson, 2007; Kachaner, 2007), have well adapted distribution and sales networks and have unique expertise for operating in the institutional voids of emerging markets. Secondly, the study also identified the barriers for pursuing global strategies and deploying and profiting from FSAs inter-regionally (Rugman and Girod, 2003; Rugman and Oh 2006; Rugman, 2011). To achieve global presence DM-MNEs needed to adapt their FSAs for operating in emerging markets. In contrast, EM-MNEs needed to overcome competitive barriers when competing in developed markets, consistent with Rugman and Li (2007) examination of Chinese MNEs, as well as to overcome other non-economical legal and political inter-regional barriers, such as lawsuits and patent infringement accusations, international trade disputes and imposed trade barriers resulting from national security concerns.

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2. Literature Review

This chapter is divided into three sections. Initially the debate surrounding regionalization is introduced and it is argued that the literature is still limited in its examination of truly global industries. Following this, the unique case of emerging markets MNEs (EM-MNEs) is briefly introduced and is compared to develop market MNEs (DM-MNEs) in terms of EM-MNE’s competitiveness and FSA development. Lastly, the theoretical propositions of regionalization literature are reviewed and applied together with the unique case of emerging markets. Regional strategies are examined both in terms of the sources that are responsible for the embeddedness of FSAs in their home region, as well as in terms of the barriers that limit the transferability and exploitability of FSAs inter-regionally. Throughout this section the working propositions (WP) used in this study are developed.

2.1 The Globalization and Regionalization Debate

2.1.1 The emergence of regionalization literature

In our current time, globalization has come to be seen as a dominant phenomenon. Improved communication technology, the abolition of control on capital flows and reduced trade barriers have created the notion of ‘death of distance’, ‘the end of geography’ and increase interdependence among nations (Sideri, 1997). Macro data showing the increase growth of world trade in relation to world GDP (Hindle 2009) and increase in number of MNEs engaging in international activities gives the impression that globalization is likely to continue and become more significant force in the future. Friedman’s (2005) notion that the world is flat gives the impression that economic integration has been occurring globally. Consequently, the IB literature has devoted much attention to how globalization affects MNE’s strategies. In a sense, globalization and its potential benefits was accepted as a given and many researchers have advocated the need for firms to follow strategies that allow them to compete globally (Hamel and Prahalad, 1985; Levitt, 1983; Kobrin, 1991, Baden-Fuller 1991). Authors such as Levitt (1983) and Kogut (1985) have traditionally emphasized standardization and uniformity as a potential source of competitive advantages for MNEs. Cross-border integration of markets allow MNEs to gain advantages form exploiting synergies and arbitrages opportunities across regions and optimizing economies of scale by standardizing products and integrate activities worldwide (Kobrin 1991).

More recently, a large body of research in IB literature has examined the existence of regional strategies and disputed the simplistic notion that the world is in fact ‘flat’ (Rugman and Verbreke 2004; Ghemawat 2007). Most MNE’s in fact operate in a semi-globalized world. Ghemawat (2003) semi-globalization concept argues that international business strategy falls between the two extremes of either complete

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isolation or complete integration of markets across borders. Increasing world trade (Hindle 2009) and MNE’s internationalization are more likely to take place intra-regionally, within the broad triad regions of the North America Europe and Asia. Rugman and Verbreke (2004) extend this concept by examining regionalization patterns in the Fortune Global 500. The results of their study, as can be seen in figure 2.1, revealed that only a handful of the world largest MNEs can be considered to be ‘truly’ global.

Figure 2.1: Rugman and Verbreke 2004 “Classification of the top 500 MNEs”

Their study developed a four part typology depending on the MNE’s degree of regional presence, namely: global, bi-regional, home region and host-region oriented MNEs. Regions were classified based on an extended version of Ohmae (1985)’s original three central triad regions and included Asia, NAFTA, and the EU. Their study focused exclusively on sales data, as such data was argued to provide the best proxy for the firm’s performance and competitive strategic positioning relative to its competitors. Out of the 380 MNEs for which data was available, only 9 were considered to be truly global. The majority, accounting for 84% of the 380, were only home region oriented with more than half of their sales in their home region. Rugman (2001), who announced the ‘end’ of global strategy, calling it a ‘myth’ advocated that IB research should shift to MNE’s regional strategies. In terms of Ohmae’s (1985) triad power concept, MNEs that attempt to have “equal penetration and exploitation capabilities, and no blind spots, in each of the triad regions” (p. 165) face the barrier of global impasse. That is, they face impediments when attempting to penetrate all three triad regions. But in fact where Ohmae (1985) advocated how MNE can eventually achieve triad power, theory of regionalization advocates that MNEs are best able to maximize their benefits when they remain within their own home region as countries within a region are more homogeneous in terms of economic development, institutional framework and cultural background (Rugman, 2011).

Studies following Rugman’s (2004) findings have examined regional orientation of MNEs through different methodological approaches. Subsequent quantitative studies have reviewed macro-level regionalization patterns using alternative proxies for measuring the MNEs global dispersion of activities.

Global Bi-regional oriented home region oriented host-region oriented Percentage of sales Less than 50% in

home region and at least 20% in three regions

Less than 50% in home region and at least 20% in two regions More than 50% in home region More than 50% in host-region Number of firms found 9 25 320 11

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For instance, a number of studies have examined the dispersion of upstream value chain activities in comparison to downstream sales data, such as for instance foreign assets and foreign employment data (Rugman and Oh 2007, Collinson and Rugman 2008). Other studies have compared variation in performance and profits between the home and host regions (Rugman and Oh 2010; Qian and Rugman 2013; Rugman and Oh, 2009). Besides large macro-level cross-sectional studies, substantial amount of literature has conducted longitudinal case specific studies. Although regionalization is proven to be a prevailing phenomenon at the macro-level, a number of studies have called for more case specific studies (Li, 2005; Osegowitsch and Sammartino 2008; Mehanna, 2008). Li (2007) showed that different industries greatly vary in their regionalization patterns. Case studies require the recognition of context and more holistic examination of firms and the patterns of their development. It allows complementing quantitative data with cultural and institutional context explanations, and deeper understanding of sociological factors that make MNE’s bound to their region (Collinson and Rugman, 2008; Brouthers, 2002). Furthermore, the longitudinal dimension of case specific studies allows research to move beyond the dominance of static cross-sectional data in the literature and provide more dynamic understanding of regionalization. Collinson and Rugman (2008) examined a period in time that Japanese firms were forced to internationalize due to a growing recession in their domestic market and thus were able to study the contextual and case specific factors responsible for their eventual success or failure when they pursued their internationalization.

Case specific studies have also observed regionalization through different units of analysis. Country-level studies have examined Chinese firms (Rugman and Li 2007), Korean firms (Rugman and Oh 2008), Asian firms (Collinson and Rugman 2007), European firms (Rugman and Oh 2012). Industry level studies have examined the automotive industry (Rugman and Collinson, 2004), the retail industry (Rugman, 2003), the cosmetic industry (Oh and Rugman 2006, 2007), electric utilities firms (Kolk et al. 2014), financial institutions (Grosse, 2005) and the pharmaceutical industry (Rugman, 2005). However, the literature has been limited in its examination of more globally oriented industries, such as the high tech industries. Out of the nine global firms identified by Rugman and Verbeke (2004), seven were within the consumer electronic industry (Philips, Nokia, IBM, Intel, Sony, Canon, and Flextronics). Moreover, in total the electronic industry was found to be the most globalized than all the other industries with average intra-regional sales of 56% (Rugman, 2005). Considering this, it is quite surprising that only a handful of studies have attempted to examine such industries in more depth (Millar, 2005; Cerrato, 2009; Lee and Marvel, 2009). Both Millar (2005) examination of the creative industries and Lee and Marvel (2009) examination of Italian R&D intensive firms have shown that it is worthwhile to examine more globally oriented

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industries as such industries also show regionalization patterns and thus provide interesting extension to regionalization literature.

2.1.2 Unique Characteristics of Globally Oriented Industries

According to Cerrato (2009), the three main factors that show the likelihood that an industry will become globalized are: the potential to reduce costs, the speed of technological change and the degree to which customers’ preferences are homogeneous. Such characteristics are likely to be widely evident in the consumer electronic industry. High tech firms are under constant pressure to develop new products and short product life cycles means innovation is a recurrent process. This means that MNEs in the consumer electronic industry are required to make large investments in technology and R&D in order to be able to exploit technological advantages and continue to maintain their competitive positions (Porter, 1986; Morrison and Roth, 1992). Considering the scale and complexity of such R&D requirements, firms operating in such industries are not able to generate competitive R&D budget in a single market. They are required to disperse their downstream sales on a global scale in order to reach a “critical mass” requirement and recoup their large R&D costs. That is, such technological intensive firms are required to take advantage from global integration benefits as well as large global sales dispersions in order to remain competitive (Kogut, 1985). Furthermore, electronic products have a relatively homogeneous consumer preference across markets, which allows for standardization of products. Moreover, reliance on global supply chains means standardized parts can be cheaply transferred across regions. Nonetheless, as discussed in the introduction, firms in the PC industry do exhibit regionalization patterns. Thus, investigating such firms is likely to provide interesting extension for regionalization literature. However, to understand regionalization patterns in the PC industry it is essential to further focus on the distinction between EM-MNEs and DM-MNEs.

2.2 Unique Case of Emerging Markets

Emerging markets are defined as ‘‘low-income, rapid-growth countries that use economic liberalization as their primary engine for growth’’ (Hoskisson, 2000, p. 249). Such markets are also characterized by underdeveloped institutional and legal systems that only since the late 1980s became integrated to the world economy (Khanna, 2005). EM-MNEs offer a unique case for regionalization theory that has only been examined to a limited extent in the literature (Sethi, 2009; Rugman and Li, 2007; Banalieva and Santoro, 2009). EM-MNEs face unique challenges compare to their rivals from developed markets. As they only recently entered the world economy they lag behind in terms of their competitiveness (Ghoshal and Bartlett 2000; Ramamurti, 2009). Furthermore, EM-MNEs need to compensate for their weak institutional constraints at home by tapping into markets with stronger institutional frameworks

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(Hobday, 1995; Kim, 1997). Therefore, unlike DM-MNEs that use internationalization to seek new markets and exploit their existing FSAs, EM-MNEs use international expansion as a springboard and acquire strategic resources that allow them to further develop the competitiveness of their FSAs in international markets. Furthermore, their internationalization can be seen as a leapfrog trajectory as they seek late mover advantages (Lieberman, 1988; Bruneel et al. 2010) and attempt to catch up with more established competitors. That is, they exhibit accelerated internationalization and undertake high risk entry modes which allows them to aggressively acquire many of the critical assets they lack (Mathews, 2006; Luo and Tung, 2007).

The rest of the section compares EM-MNEs and DM-MNEs in terms of their home market locational advantages (Porter, 1990; Verbeke 2009) and competitiveness of their FSAs (Hobday, 1995; Rugman & Li 2007) as well as in terms of their ability to accelerate their FSA development through alternative mechanisms (Mathews, 2006; Luo and Tung, 2007)

2.2.1 Home Market Locational Advantage and Competitiveness

When firms internationalize they are required to possess FSAs that are internationally exploitable. In creating their FSAs firms may need to drew upon locational advantages in their home market and make them internationally competitive (Verbeke, 2009). The home country advantages can also be conceptualized in terms of Porter’s Diamond (Porter, 1990). FSAs are developed through advantages found in the MNE’s home country national diamond. The stronger is the home country diamond, the more MNEs are able to create internationally competitive FSAs. This is important in particular when distinguishing between MNEs that arise from emerging markets and MNEs that arise from advanced markets. DM-MNE’s are likely to have strong home country diamond. Their home market is likely to have advanced production factors and sophisticated consumer demand that allows them to test and develop FSAs to a level that is likely to be competitive abroad. Furthermore, they are likely to be supported by strong institutional and regulatory settings and have strong incentives to improve innovation due to the high rivalry conditions that allow them to benchmark themselves against stronger competitors.

In contrast, EM-MNEs weaker home market diamond condition means they are lagging behind DM-MNEs in the development of FSAs, in particular in terms of the development of technology, international brand recognition and international distribution and marketing capabilities. As discussed by Ramamurti (2009), EM-MNEs have limited FSAs and typically rely on their country specific advantages (CSA) when competing abroad. For instance, EM-MNEs can exploit natural resources or low labor costs in their home country and leverage such advantages internationally. As described by Hobday (1995), many EM-MNEs

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Figure 2.2: CSA/FSA matrix for EM-MNEs

possess original equipment manufacturing technologies which they have acquired through licensing and contracting arrangements with firms from developed markets. However, their relative inferiority in development of FSAs usually means EM-MNEs only compete at the bottom of the value curve (Ghoshal and Bartlett 2000). Rugman and Li (2007) conceptualize EM-MNEs through the CSA/FSA matrix, as can be seen in figure 2.2.

Proposition 1 (a): DM-MNEs that have strong home country diamond are likely to possess internationally more competitive FSAs.

Proposition 1 (b): EM-MNEs that have weaker home country diamond are likely to possess internationally less competitive FSAs and rely more on their country specific advantages (CSA).

2.2.2 FSA Development through Inter-Firm Relationships

To improving the competitiveness of their FSAs, MNEs can either do so through internal endogenous accumulative processes and grow organically (Hobday, 1995; Doz and Hamel, 1998), or they can rely on alternative mechanisms of FSA development, such as strategic alliances, joint ventures or merges and acquisitions (M&A), that allow them to leapfrog and accelerate their internationalization (Luo and Tung, 2007; Mathews, 2006). Due to the difficulties of transferring and absorbing tacit knowledge, traditionally the majority of the firm’s learning activities needed to be internalized and MNEs needed to rely mainly on organic growth (Forsgren, 2002). But in today’s globalized world, and in particular, in the case of EM-MNEs, it is shown that MNEs can develop their FSAs through a wider range of mechanisms (Meyer, 2013; Johanson and Vahlne, 2009; Forsgren, 2002). As discussed by Mathews (2006), EM-MNE are better suited to take advantage of today’s new interlinked global character and follow strategies based on linkage, leverage and learning that enable them to externally access needed resources. As stated by Mathews (2006, p. 9), EM-MNEs “do not start out in a cautious way, feeling their way through foreign markets, but tend to regard a highly integrated world as their market from the outset”. They accelerate

FSA in Technology and Innovation

Weak Strong

CSA low cost advantages

Strong 1. EM-MNEs 3. MNEs from advanced economies

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their internationalization by leveraging their preexisting inter-firm linkages and networks, such as for instance leveraging existing contracting arrangements or business partnerships with DM-MNEs to penetrate new markets (Johanson and Vahlne, 2009). They can also follow aggressive M&A to rapidly acquire necessary resources externally (Luo and Tung, 2007). This study considers three such alternative mechanisms for FSAs development, namely, M&A, network relationship such as strategic alliances and observing and imitating others. As also shown, the degree of use of the different mechanisms for FSA development are likely to differ between EM-MNEs and DM-MNEs.

2.2.2.1 FSA development through acquisitions

M&A is the most aggressive but also risky mechanism as it is the fastest way a firm is able to acquire necessary resources, but also requires the most commitment from the firm (Forsgren, 2002). Buying existing firms could provide MNEs tangible assets such as international distribution network as well as intangible assets that are more difficult to acquire through external market such as a brand name (Barkema & Vermeulen, 1998). M&A can also provide the firm with knowledge-based resources in the form of technological or managerial capabilities. However, because of their nature knowledge-based resources are more difficult to transfer inter-organizationally. Elango and Pattnaik (2011) showed that EM-MNEs only gradually increase the size of their M&As and in a sense follow a progressive commitment pattern predicted by the stage models. Therefore, EM-MNEs are likely to grow through acquisitions only at later stages in their internationalization. As observed by Rugman and Li (2007), Chinese MNE’s lack of experience in innovative activities makes it difficult for them to absorb effectively and efficiently acquired companies, and when they are able to do so, such processes take an excessively long time.

2.2.2.2 FSA development through strategic alliances and other network relationship

Alliances are defined as any "voluntary arrangement between firms involving exchange, sharing, or co-development of products, technologies, or service" (Banalieva and Athanassiou, 2010, p. 2). Business relationships provide MNEs with a supplementary mechanism to acquire necessary resources and knowledge with a lower risk and commitment requirement compared with M&As. Therefore, EM-MNEs tend to rely more on partnerships and joint ventures as such mechanisms allow them to reduce the level of risks associated with their internationalization (Mathews, 2006). As Forsgren (2002) notes, in cases of close inter-business networks MNEs to some extent could also acquire tacit knowledge due to the close inter-personal interaction firms may experience when they undertake business networks. This makes this mechanism appealing to EM-MNEs that have more to gain through partnerships as they can tap into other firm’s resources, but less appealing to DM-MNEs that have more to lose when sharing their resources through partnerships (Mathews, 2006).

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Alliance usually are limited to joint ventures but could also be extended to the firm’s broader networks of exchange partners such as relationships with key affiliates as suppliers or technology partners (Johanson and Vahlne, 2003). Many EM-MNEs develop partnerships with foreign firms investing in in their domestic markets, which in turn they later are able to leverage in their international expansion (Mathews, 2006). EM-MNEs that lack the internally endogenous and accumulative processes to develop technological an innovative capabilities (Hobday, 1995) usually rely on such partnerships and joint ventures to acquire such capability externally and tend to choose them over M&As as they have lower risks and lower commitment requirements.

2.2.2.3 FSA development through observing and imitating others

The push towards homogenization is a common process in any organizational field, as both competitive isomorphism as well institutional isomorphism pushes firms to imitate and resemble each other in order to increase their efficiency and institutional legitimacy (DiMaggio and Powell, 1983). But imitation occurs to a greater extent when latecomers into an industry are able to accelerate their learning by selectively imitating partner firms or incumbent market leaders in the industry (Lu, 2002) and gain free-rider advantages (Lieberman, 1988). More specifically, by following the paved path of the incumbents in the industry, latecomer firms can learn what is feasible and quickly gain legitimacy with their affiliates and partners (Lu, 2002). Such patterns are likely to be associated with young and less experienced firms, such as EM-MNEs (Bruneel et al. 2010).

Proposition 2 (a): DM-MNEs are likely to rely on organic growth as well as higher

commitment FSA development mechanisms such as mergers and acquisitions.

Proposition 2 (b): EM-MNEs are likely to rely less on organic growth and accelerate their FSA development through a wider range mechanisms of which they are most likely to choose lower commitment and less risky strategic alliances and network relationship as well as observation and imitation of others.

2.2.2.4 Regional versus global scope of inter-firm relationships

As mentioned by Rugman (2011), regionalization literature is still limited in its application to inter-firm relationships. MNEs can have regional partners with firms located within their home region or they could have global partners with firms located outside their home region (Banalieva and Athanassiou, 2010). Due to the high transaction costs associated with global alliances most international networks and alliances are very selective in terms of their geographic coverage and so are likely to be limited to a regional scope (Rugman, 2011). Having a regional partner can increase efficiency by limiting the MNEs

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search costs and reduce risks associated with higher liability of forgiveness. In spite of this, Banalieva and Athanassiou (2010) showed that global networks or a mix of global and regional networks are likely to generate higher performance returns for firms. In particular, global networks are essential for firms engaging in high innovative activities. As is discussed in the literature, EM-MNEs need to have a global outlook in order to leverage a wider range of opportunities and take advantage of today’s new interlinked global character (Cantwell and Barnard, 2008; Mathews, 2006). In particular, when considering EM-MNEs strategic asset seeking motives for internationalization (Luo and Tung, 2007), their need to tap into developed markets outside their home region makes the benefit from global networks more pronounce. This study focused more broadly on inter-firms relationships. Yoshino and Rangan (1995) provide a useful categorization of various kinds of inter-firms relationships (figure 2.3). Traditionally, the literature examined M&As separately from strategic alliances (Banalieva and Athanassion, 2010), but this study examined inter-firm relationships more broadly and included both equity relationships such as M&A and joint ventures as well as non-equity relationships such as collaboration and strategic alliance. This was done because specific to the electronic industry, it was shown that M&As were an important inter-firm relationship and so were essential to be accounted for in this study (Shiraishi, 2009; Dedrick et al., 2001).

Figure 2.3: Inter-firm relationships adapted from Yoshino & Rangan (1995)

Proposition 3(a): DM-MNEs inter-firm relationships are likely to be undertaken in a regional scope as they can increase efficiency by limiting their search costs and reduce risks associated with higher liability of forgiveness.

Inter-firm Relationships Non-equity based relationships Contractual agreements

Licensing Joint R&D

Equity based relationships Creation of entity Joint Ventures Dissolution of entity Mergers and acquisitions Strategic Alliances

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Proposition 3(b): EM-MNEs inter-firm relationships are likely to be undertaken in a global scope as they need to rely on MNEs in other developed markets outside their region to acquire necessary strategic assets.

2.3 FSA Transferability and Barriers to Global Strategies

MNEs possess many advantages when operating abroad. The eclectic paradigm successfully integrates the reasons why MNEs engage in cross-border activities (Dunning, 1977, 1988, 1998). MNEs engage in FDI in order to overcome inefficiencies in external markets (Buckley and Casson, 1976), gain access to new locational advantages, whether it is new markets, new raw materials, or new efficiencies capabilities, and to gain ownership advantages (Dunning, 1998). In order to access such locational advantages, MNEs must overcome the costs of doing business abroad; a concept that was first pioneered by Hymer (1960), and conceptualized by Zaheer (1995) as liability of foreignness (LOF). MNEs engaging in cross-border activities are almost always at a disadvantage compared to firms from the host country. FSA is seen as the relative strength firms possess relative to their competitors (Verbeke, 2009). In order to overcome liabilities of operating abroad, MNEs must possess such valuable proprietary assets in order to have competitive edge relative to their local competitors (Rugman and Verbeke, 1992). FSAs in a sense can be seen as the driver that allows firms to internationalize and the one that allows them to overcome costs associated with LOF. With this, it is tempting to have the perspective that as long as firms possess strong FSAs, they can consequently create global strategies and develop worldwide presence. However, global strategies are in fact not the norm, and MNEs are unable to exploit their FSAs globally across all regions of the world (Asmussen and Goerzen, 2013). The regional presence of the majority of MNEs indicates that MNEs in fact experience higher costs when expanding outside their home region. Following this, Rugman (2004) suggested that MNEs experience higher LOF inter-regionally and lower LOF intra-regionally. The disadvantage MNEs experience relative to local firms outside their home region can be captured by the different dimensions of distance. This can be conceptualized by the CAGE framework (Ghemawat, 2001), which shows that regions vary in terms of cultural, administrative, geographic as well as economic distance, and when firms internationalize they are likely to be effected by those distance components simultaneously. Rugman (2011) refers to this as the effect of compounded distance. Regions are not characterized only by geographic proximity but also by institutional and cultural proximity. This is due to the development of multilateral regional frameworks and institutional coordination such as NAFTA, the EU and ASEAN. Such political level integrations create favorable conditions for integrating regions in terms of other distance dimensions as well. As stated by Rugman (2011, p.776), “it is not sufficient to ‘add’ the isolated effects of cultural, institutional, economic

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and geographic distance components. There may multiplicative effects arising from these distance dimensions, especially in inter-regional as opposed to intra-regional settings”. For instance, the economic, institutional and regulatory integration within the EU created social, cultural and political harmonization within the region. Following this, European firms are likely to have lower intra-regional LOF. In contrast, inter-regional business is likely to be restricted by government-imposed barriers to entry such as subsidization of local European firms or imposition of tariffs on import from outside the EU. Interestingly though, regionalization patterns are not consistent only with the level of political integration at the regional level. Unlike the EU, other regions such as the NAFTA and Asia have much lower degree of political and social integration but are nearly as home region oriented as European firms (Rugman, 2011).

This study examines regionalization through the lens of FSA transferability. This is best done through Verbeke (2009) beneficial framework that unifies many of the key concepts developed in IB literature in past decades (complete framework is available in appendix 1). When firms internationalize, their FSAs are distinguished between non-location bound (NLB) FSAs and location bound (LB) FSAs. The former is the MNEs strength that can be transferred and exploited across borders with relative ease. For instance, this includes global brand reputation, or technological know-how that can easily be deployed internationally. The latter is those MNE’s strength that can only be exploited in limited geographical space. For instance, LB FSAs might include relationships with local actors or local distribution networks. Following previous observation and conceptual work used in regionalization literature (Rugman, 2005; Rugman and Verbeke, 2002; 2007; 2008; 2011) this study examines two key dimensions of MNE’s regional strategies. Firstly, it examines it in terms of the embeddedness of MNEs in their home region. Regionalization theory expands the scope of the LB FSAs’ local embeddedness from the country level to the regional level. As intra-regional economic and institutional distance is lower than the inter-regional distance, many of the MNE’s home country LB FSA can easily be upgraded and deployed in other home regional countries (Rugman and Collinson, 2004; 2008; Oh and Rugman, 2012). Secondly, regionalization creates the need to reevaluates how truly NLB FSAs are internationally transferable outside the home region and how MNE’s are likely to experience barriers when pursuing global strategies and expanding inter-regionally. Higher inter-regional distance means that many of the firms NLB FSAs can less easily be deployed and exploited outside the home region and require extensive amount of local adaptation (Rugman and Girod, 2003; Rugman and Oh 2006; Rugman, 2011). Figure 2.6 and 2.7, in pages 29-30, summarizes the conceptual framework used in this study and provide the main distinctions between EM-MNEs and DM-EM-MNEs. The rest of this section expands on the discussion on regional strategies by

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examining respectively MNEs’ embeddedness in their home region, their predicted path of internationalization and the expected barriers they experience when pursuing global strategies and deploying FSAs inter-regionally. For each dimension, this section also proposes differences that are likely to exist between DM-MNEs and EM-MNEs.

2.3.3 Home Regional and Sub-regional Embeddedness

As already mentioned, MNEs possess FSAs that are bound to the specific locations in which they operate. Rugman and Collinson (2008) studied the LB FSAs of Japanese firms by examining how their assets and capabilities have evolved to be bound to the specific location endowments in their home market. They attribute the embeddedness of the Japanese firms to two main factors. The first factor was the Japanese firm’s practices and organizational factors that have evolved to be contingent and to fit the specific economic, social and cultural environment of Japan. Specifically, they studied the uniqueness of the Japanese firms HR practices e.g. recruitment practices and mentoring and rewards mechanisms, that differ greatly from the HR practices that exist in firms from western countries. The second factor was the Japanese firm’s dependency on external networks and in particular, domestic relationships and collaborations that were bounded by their location and proven to be difficult to transfer or replicate outside their location. For instance, this included R&D alliances with local universities and local suppliers and relationships with retailers and local customers. Rugman and Collinson (2004) also identified such dependencies on external networks in the automotive sector. This included the automotive firm’s dependency on key suppliers and OEMs manufactures. Path dependency is useful for explaining the gradual processes that makes the firms’ strengths and assets locally embedded in their specific context. The firm’s need to invest in local employment obligations and locally bound relationships creates assets

specificity and a kind of inertia that limits the firm’s ability to change and adapt its FSAs to other

locations. This can also be extended to the region at which the MNE operates, where various distance components have been significantly reduced. With this, the conventional perspective that LB FSAs can be exploited only up to the country borders is not applicable in many cases. As shown by Rugman and Collinson (2008), many aspects of the LB FSAs of the Japanese firms were effectively upgraded and deployed into other Asian home region countries. Another good example is the EU context where the ease of travel and transport restrictions allowed firms to more easily upgrade their external networks beyond the country level inside the EU region (Oh and Rugman, 2012). Such implication has led Rugman (2004) to conceptualize the concept of regionally bound FSAs that are exploitable within the home region of the MNEs and are unable to be modified or restructured to become transferable and profitable outside the home region.

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However, previous literature has shown that MNEs’ embeddedness in their region is not uniform and it is important to consider intra-regional differences. Most important has been the need to account for the significance of the home country within the region (Aharoni, 2006; Osegowitsch and Sammartino, 2008; Seno-Alday,2009; Kolk et al, 2010; 2014). Kolk et al. (2010) re-examination of Rugman and Verbeke’s (2007) data set, showed that on average, domestic market accounted for approximately 65% of the total activities of the studied MNEs. This has been named the ‘home-country effect’ and points out that it is essential to take into account also the size of the home market. Seno-Alday (2009) showed that the balance between the benefits and the costs of expanding outside the home country is likely to differ depending on the size of the home country. Consistent with the gravity model approach (Hejazi 2009), MNEs arriving from larger home countries are likely to have fewer benefits when entering proximate smaller markets. An example of this is the dominance of the US market in NAFTA. MNEs from surrounding countries to the US are more likely to expand inwards towards the US market than US firms are likely to expand outwards to surrounding markets (Hejazi 2009). With the increase emphasize on the need for a finer-grained classification of firm geographic orientation, authors as Rugman and Verbeke (2008) and Banalieva and Santoro (2009) introduce the term locally oriented MNEs i.e. MNEs that have the majority of their activities within their home country.

Proposition 4: Home country effect is likely to be more significant when MNEs arrive from larger home country markets.

Beyond the importance of the home country, authors as Kolk et al. (2014) and Asmussen (2009) have provided evidence that regional firms can exhibit a concentration of their activities within sub-regions of one of the Triad regions, providing a possible intermediate step between the local and regional orientation. An important sub-regional difference is between emerging markets and developed markets. FSAs are likely to be embedded not only regionally but also in terms of their adaptability to the institutional voids in which the firms operate. EM-MNEs home markets are exceptional in that they are characterized by their own idiosyncratic institutional voids. Khanna (2005) has identified such institutional voids as market failures that create higher transaction costs for firms operating in emerging markets. For instance, firms operating in South Africa must overcome the existence of weaker capital markets and adapt to make internal capital markets or firms operating in Chile must adapt to become more flexible when dealing with political risks. As discussed by Khanna (2005), emerging markets most commonly are characterized by their lack of efficient local intermediary organizations, such as strong banking systems, capital markets, established retail networks or market research firms. Furthermore,

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they also lack strong formal regulatory institutions that provide contract-enforcing advantages. EM-MNEs operating in their home-country in turn must adapt their FSAs to such institutional voids and internalize many activities DM-MNEs usually choose to outsource to external markets (Peng, 2002). For instance, some EM-MNEs need to establish their own retail networks or need to rely more on interpersonal relations as a substitute for contractual relationship (Peng, 2002).

Moreover, EM-MNEs unique adaptability to their home country institutional voids also becomes a source of advantage when they compete with DM-MNEs in other emerging markets (Cuervo-Cazurra and Genc, 2008; Ramamurti, 2009; Buckley et al. 2008; Sauvant et al. 2008). Familiarity with operating in weak institutional conditions means EM-MNE’s managers are able to operate in high uncertainty and be flexible when dealing with political instability, government inefficiencies, and poor regulations (Cuervo-Cazurra and Genc, 2008). They also generally experience lower LOF relative to other DM-MNEs when operating in emerging markets (Buckley et al. 2008). Ramamurti (2009) further showed how EM-MNEs are able to develop customized products that are better suited for emerging markets. A key advantage EM-MNEs possess is their ability to have cost innovation. By revolutionizing their cost advantages and economies of scale at home and combining this with their ability to acquire DM-MNEs cutting edge technologies, Zeng and Williamson (2007) showed how Chinese MNEs are able to develop products that have the unique combination of high technology, high variety and high specialty, while still managing to have lower and more competitive prices than established DM-MNEs. Their advantage goes beyond simply imitating an established player but such EM-MNEs are able to use their lower cost business models and engineering resources to provide advanced technologies at lower prices and thus make them more affordable and suitable to the large segment of customers in emerging markets that have limited financial means (Kachaner, 2007). Sauvant et al. (2008) has shown more generally that EM-MNEs have become important investors in other emerging markets and more typically in emerging markets within their region in which they have higher knowledge and expertise. Therefore, it is predicted that EM-MNEs home region embeddedness is likely to differ from DM-MNEs because of their adaptability to the institutional voids in emerging markets. EM-MNEs ability to developed customized products fitted to the economical and institutional conditions in emerging markets as well as their organizational and managerial ability to operate and minimize risks in emerging markets means that EM-MNEs are likely to be more embedded within other emerging markets in their region.

Proposition 5(a): DM-MNEs are likely to be bound to the specific location endowments in their home market. This includes embeddedness of the firm’s practices and organizational

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factors as well as dependency on external network. They are likely also to easily transfer and deploy regionally those LB FSAs into other developed markets in their region.

Proposition 5(b): EM-MNEs are likely to have LB FSA adaptable to operating in the institutional voids in their home markets and so are likely to easily transfer and deploy those LB FSAs regionally into other emerging markets

2.3.4 Internationalization path

As discussed by Rugman and Verbeke (2008), MNEs are likely to experience a higher level of inter-regional LOF than intra-inter-regional LOF and thus are likely to internationalize into and remain in their regionally proximate markets. Thus, most DM-MNEs are likely to be regionally oriented.

Conceptualizing EM-MNE’s internationalization path is more difficult as such firms in some cases accelerate their internationalization and so are less likely to follow predicted patterns in their internationalization path (Mathews, 2006; Banalieva and Santoro, 2009; Luo and Tung, 2007). Unlike the regional outlook DM-MNEs have, EM-MNEs need to have a global outlook as this allows them to maximize their internationalization leverage advantages and to find opportunities that are unavailable in their domestic environment (Mathews, 2006). Based on Cantwell and Barnard (2008), EM-MNEs purposively enter mature markets from the outset in order to establish themselves as global leaders. In

DM-MNE Intra-regional LOF Co u n tr y bo rd e r R eg io n al bo rd e r

Figure 2.4: DM-MNEs’ internationalization path

Locally oriented Regionally oriented Globally oriented

Inter-regional LOF EM-MNE Co u n tr y b o rd e r R eg io n al bo rd e r

Figure 2.5: EM-MNEs’ internationalization path

Locally oriented Regionally oriented Host region oriented

Intra-regional LOF

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contrast, as discussed previously, EM-MNEs also develop FSAs that are more suitable and more competitive for operating in emerging markets (Cuervo-Cazurra and Genc, 2008). Therefore, EM-MNEs can also choose to expand into other emerging markets to gain such advantages. Banalieva and Santoro (2009) found that EM-MNEs can become regionally oriented which usually involves expansion into other proximate emerging markets in their region, particularly when considering Asian EM-MNEs, or can choose to enter developed markets and in turn become host-region oriented and have a large proportion of their operation outside their home region. They also found that EM-MNEs usually focus their efforts on either developed markets or emerging markets in order to not stretch themselves too thin and become less competitive relative to their rivals. As they observed, the high adaptation costs required from EM-MNEs when operating in regionally proximate emerging market possess too much uncertainty and risk for them if they combine it with the costs of operating in developed markets outside their region as well.

Proposition 6(a): DM-MNEs’ internationalization path is likely to follow 3 stages by first expanding locally then regionally and only lastly expanding globally. Due to the existence of high inter-regional LOF most MNEs are likely to be regionally oriented.

Proposition 6(b): EM-MNEs’ internationalization path is likely to either have regional outlook or global outlook, and so are likely to expand either locally then regionally or locally and then immediately inter-regionally.

2.3.6 Inter-regional Barriers in Transferring and Deploying NLB FSAs

Even when MNEs possess strong NLB FSAs, their capacity to exploit those advantages depends on their ability to align their resources and strengths to fit the specific conditions at the host market. As discussed by Verbeke (2009), in most cases when MNEs enter host markets and attempt to exploit locational advantages they need to form a match between their FSAs and the host markets’ specific conditions. As noted by Verbeke (2000, p.112), “even strong FSAs from the host country may need to be complemented with location-bound FSAs in every country where the firm operates in order to achieve a balance between integration and local responsiveness”. To do so, firms are required to gain access to LB FSAs in the host market and to meld those with their existing NLB FSAs. Verbeke (2009) refers to such adaptation investments as linking investments. In a sense, the need to create LB FSAs can be seen as a way to overcome LOF (Zaheer, 1995). The greater the geographical, cultural and institutional distance is between the MNE and the host market, the less effectively the MNE can transfer and exploit its NLB FSAs in the host market, and the more it needs to complement its NLB FSAs with LB FSAs. The degree that the

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MNE is able to do so depends on its resource recombination capability (Verbeke 2011). The recombination capability is the MNE’s ability to adapt and change its resource bundle to fit changing environmental circumstances, and so, in this way it is very similar to the concept of dynamic capabilities in the strategic management literature (Teece and Shuen 1997; Teece, 2009). The greater the mismatch is between the host location and the firms NLB FSAs, the more recombination is needed.

MNE’s ability to transfer and exploit NLB FSAs greatly dissipates inter-regionally (Rugman, 2011). What is becoming more apparent is that the world is not flat (Friedman, 2005) and firms that simply possess strong FSAs cannot be assumed to gain competitive advantages globally without significantly adapting their FSAs. As discussed by Rugman (2011), MNEs face recombination barriers when they attempt to access and meld new LB FSAs with their NLB FSAs in host regions. This may stem from difficulties in creating local brand reputation, as for instance was observed in the Cosmetic industry where high consumer trust was required (Rugman and Oh 2006) or with the existence of heterogeneous demands as was shown in the retail industry with consumers’ diets being highly culturally bound (Rugman and Girod 2003). Furthermore, government-imposed barriers, including divergent legalization and regulations may also restrict access to LB FSAs in host regions as was observed in the pharmaceutical industry, where high inter-regional health codes differences were observed (Rugman, 2005). Therefore, higher LOF experience outside the MNE’s home region is likely to create barriers for MNE’s ability to transfer and exploit their FSAs outside their home region. Moreover, such inter-regional expansion barriers are likely to differ between EM-MNEs and DM-MNEs. Considering EM-MNEs lower competitiveness, they are likely to also experience competitive barriers when expanding inter-regionally and in particularly when entering mature markets, as was shown by Rugman and Li (2007) examination of Chinese MNEs. Hence, while EM-MNEs experience inter-regionally LOF, they are likely to also further be at a disadvantage in inter-regional markets because of the lower competitiveness of their FSAs.

Therefore, both EM-MNEs and DM-MNEs “success” in expanding inter-regionally depends on their ability to reduce their inter-regional LOF by undertaking linking investment in host markets. For DM-MNEs this mainly depends on their ability to access LB FSAs specific to the market they target (Meyer, 2013) and exploit their competitive FSAs. For instance, when entering emerging markets they must make substantial linking investment to adapt their FSA bundles to operate in the unique institutional voids in that country (Kale and Anand, 2006). On the other hand, for EM-MNEs, their success in expanding inter-regionally depends both on their ability exploit their FSAs as well as their ability to improve the competitiveness of their FSAs by acquiring strategic asset in host markets (Mathews, 2006). Therefore,

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EM-MNEs are likely to acquire local assets at host-regions either to improve their local presence in that specific host market, i.e. for market seeking motives, or to improve their overall competitiveness in all the markets they operate i.e. for strategic asset seeking motives (Meyer, 2013). For instance when EM-MNEs acquire technological capabilities or global brand names they don’t use those resources only locally, but also utilize them in other markets in which they operate (Meyer, 2013).

Proposition 7(a): DM-MNEs attempting to exploit their FSAs are likely to experience inter-regional barriers in accessing LB FSAs specific to the market they target. Their success depends on their ability to adapt their FSA bundle to such inter-regional markets.

Proposition 7(b): EM-MNEs are likely to experience both competitive barriers as well as barriers in accessing LB FSAs in inter-regional markets. Their success depends on their ability to acquire strategic assets to complement their FSA’s competitiveness as well as their ability to adapt their FSA bundle to operate in inter-regional markets.

2.4 Conceptual Model

Figure 2.6 and 2.7 illustrate the conceptual framework developed in this study for DM-MNEs and EM-MNEs respectively. EM-MNEs’ FSA development is derived from their home market locational advantages (Verbeke, 2009) as well as from their inter-firm relationships (Meyer, 2013; Rugman and Li, 2007). EM-MNEs are likely to rely more on global scope of inter-firm relationships, where DM-EM-MNEs are likely to rely mostly on regional firms. A portion of the MNE’s FSAs are bounded by their location and can either be embedded in the MNE’s home country or can be upgraded and be embedded in the MNE’s home region (Rugman and Collinson, 2004; 2008). DM-MNEs and EM-MNEs are likely to differ in their home region embeddedness because of the considerable investments EM-MNEs need to make to adapt their FSAs to the institutional voids in their home market which they can transfer into other regional emerging markets. Entering foreign markets, MNEs need to overcome LOF by gaining access to LB FSAs. Considering their lower competitiveness, EM-MNEs are likely to also experience competitive barriers in inter-regional mature markets. Thus, their success in penetrating inter-regional markets depends both on their ability to access host-region locational advantages, as well as their ability to acquire strategic assets and recombine it with their existing FSA bundles.

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Home region embeddednes s NLB FSA Recombination LB FSA H o m e r eg io n lo cat io na l a dv an tag e H o st R eg io n Lo cat io na l ad van tage s Home-Region Border

Competitiveness (WP 1a): DM-MNEs that have strong

home country diamond are likely to possess internationally more competitive FSAs.

FSA Development (WP 2a): DM-MNEs are likely to rely on organic growth as well as high commitment FSA development mechanisms such as mergers and acquisitions.

Scope of inter-firm relationships (WP 3a): DM-MNEs inter-firm relationships are likely to be undertaken in a regional scope as they can increase efficiency by limiting their search costs and reduce risks associated with higher liability of forgiveness.

Inter-regional Expansion Barriers (WP 7a): DM-MNEs

attempting to exploit their FSAs are likely to experience inter-regional barriers in accessing LB FSAs specific to the market they target. Their success depends on their ability to adapt their FSA bundle to such inter-regional markets.

Regionally Bound FSA FS A D eve lo p me n t Acquire/create local resources

Home country effect (WP 4a): Home country

effect is likely to be more significant when MNEs arrive from larger home country markets.

Home Regional Embeddedness (WP 5a): DM-MNEs are likely to be bound to the specific location endowments in their home market. This includes embeddedness of the firm’s practices and organizational factors as well as dependency on external network. They are likely also to easily transfer and deploy regionally those LB FSAs into other developed markets in their region.

Internationalization path (WP 6a): DM-MNEs’ internationalization path is likely to follow 3 stages by first expending locally then regionally and only lastly expending globally. Due to the existence of high inter-regional LOF most MNEs are likely to be regionally oriented.

Country Bound FSA Home country effect Regional inter-firm relationships Inter-regional LOF

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Recombination Home region embeddednes s NLB FSA Recombination LB FSA C o un tr y Spe ci fi c A dv an tag es Ho st R eg io n Lo cat io na l ad van tag es Home-Region Border

Competitiveness (WP 1b): EM-MNEs that have weaker

home country diamond are likely to possess internationally less competitive FSAs and rely more on their country specific advantages.

FSA Development (WP 2b): EM-MNEs are likely to rely

less on organic growth and accelerate their FSA development through a wider range mechanisms of which they are most likely to choose lower commitment and less risky strategic alliances and network relationship as well as observation and imitation of others.

Scope of inter-firm relationships (WP 3b):EM-MNEs inter-firm relationships are likely to be undertaken in a global scope as they need to rely on MNEs in other developed markets outside their region to acquire necessary strategic assets.

Inter-regional Expansion Barriers (WP 7b): EM-MNEs are

likely to experience both competitive barriers as well as barriers in accessing LB FSAs in inter-regional markets. Their success depends on their ability to acquire strategic assets to complement their FSA’s competitiveness as well as their ability to adapt their FSA bundle to operate in inter-regional markets. Regionally Bound FSA FS A D eve lo p me n t Acquire/create local resources

Home country effect (WP 4b): Home country effect is likely to be more significant when MNEs arrive from larger home country markets.

Home Regional Embeddedness (WP 5b):

EM-MNEs are likely to have LB FSA adaptable to operating in the institutional voids in their home markets and so are likely to easily transfer and deploy those LB FSAs regionally into other emerging markets.

Internationalization path (WP 6b): EM-MNEs’ internationalization path is likely to either have regional outlook or global outlook, and so are likely to expend either locally then regionally or locally and then immediately inter-regionally. Country Bound FSA Home country effect Global inter-firm relationships Inter-regional LOF

Regional strategies in the high tech emerging market multinationals