Is the concept of isomorphism still relevant for the multiply embedded multinational enterprise? : a study of subnational location choices of Fortune 500 firms

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Is the Concept of Isomorphism Still Relevant for the

Multiply Embedded Multinational Enterprise?

A study of subnational location choices of Fortune 500 firms

Master Thesis

MSc. Business Studies – International Management

Supervisor: Dr. Johan Lindeque

Second reader: Mr. Erik Dirksen M.Sc.

Student: Joop-Pierre de Koning

Student ID: 10872787

Date: January 29th, 2016

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Abstract

This research aims to further develop the understanding of how multiple embeddedness (Meyer et al., 2011 and isomorphism (DiMaggio & Powell, 1983; Beckert, 2010) affect MNEs in the different subnational contexts in which they do business. Building on questions posed by Boschma, Makino, Qian, Ma, Li and Mudambi (2015) about how the embeddedness in multiple subnational contexts of international business activities affects MNEs in terms of the locations they choose, combined with arguments that isomorphism (DiMaggio & Powell, 1983; Beckert, 2010) is no longer a relevant concept for the multiply embedded multinational firm (Aguilera & Jackson, 2003; Kostova, Roth and Dacin, 2008), this study aims to create a better understanding of what it means to be isomorphic for the multiply embedded multinational firm and how this is reflected in their location decisions on a subnational level. A multiple case study has been performed, analyzing the location decisions of eight cases, sampled from Global Fortune 500 MNEs in the banking and pharmaceutical industry. The findings of this research indicate that the degree to which isomorphic patterns in location choices can be detected increases when shifting from a national level to a subnational level of analysis. Moreover, the findings also show signs of sectorial specificity as the geographic investment patterns from banks and pharmaceutical companies are only similar to those of their industry peers.

Keywords: isomorphism, multiple embeddedness, location choice, subnational levels of analysis, cities, industry clusters

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Statement of Originality

This document is written by student Joop-Pierre de Koning who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating

it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Acknowledgements

The master thesis that lies before you is the finalizing piece of the Business Administration Master program at the University of Amsterdam. From the beginning of this thesis process I was guided by Dr. Johan Lindeque and I would like to take this opportunity to express sincerest gratitude and appreciation for the excellent supervision during the past months. His enthusiasm, constructive feedback and always critical perspective were very pleasant drivers to aim for the best possible result. Secondly I want to thank Stéphanie Thijssen for taking the time to point out minor structural improvements with a strong eye of detail. Finally I would like to thank the librarians for keeping the library open until the late hours, especially during the last few weeks in which I was finalizing this research.

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Index of Tables and Figures

Tables

Table 1: City Characteristics 30

Table 2A: Selected cases from the banking industry and used data sources 44

Table 2B: Selected cases from the pharmaceutical industry and used data sources 45

Table 3: Coding Scheme 47

Table 4: Categorization of Cities 49

Table 5: Countries entered by banks between 2000 and 2015 51

Table 6: Countries Entered by Pharmaceutical companies between 2000 and 2015 51

Table 7A: Scotiabank’s spread across city tiers, SBUs and FDI motives 58

Table 7B: Scotiabank’s Investment overview 59

Table 8A: Banco Santander’s spread across city tiers, SBUs and FDI motives 62

Table 8B: Banco Santander’s Investment overview 63

Table 9A: ING Groep’s spread across city tiers, SBUs and FDI motives 66

Table 9B: ING Groep’s Investment overview 67

Table 10A: Crédit Agricole’s spread across city tiers, SBUs and FDI motives 70

Table 10B: Crédit Agricole’s Investment overview 71

Table 11A: Johnson & Johnson’s spread across city tiers, SBUs and FDI motives 75

Table 11B: Johnson & Johnson’s Investment overview 76

Table 12A: Roche Group’s spread across city tiers, SBUs and FDI motives 79

Table 12B: Roche Group’s Investment overview 80

Table 13A: Novartis’s spread across city tiers, SBUs and FDI motives 84

Table 13B: Novartis’s Investment overview 85

Table 14A: Bayer’s spread across city tiers, SBUs and FDI motives 90

Table 14B: Bayer’s Investment overview 91

Table 15 : Results 101

Figures

Figure 1A: Banks ranked on 10-year average Return on Assets ratio’s 43

Figure 1B: Pharmaceutical firms ranked on 10-year average Return on Assets ratio’s 43

Figure 2A: Legend SBUs Banks 51

Figure 2B: Legend SBUs Pharmaceutical Companies 53

Figure 3A: Map of location choices [2000 – ‘15] Banks 52

Figure 3B: Map of location choices [2000 – ‘15] Pharmaceutical Companies 54

Figure 4 : Banks’ relative spread across City Tiers per firm 93

Figure 5 : Pharmaceutical companies’ relative spread across City Tiers per firm 96

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1. Introduction

International Business (IB) research on location is most often conceptualized and operationalized at a national level of analysis (Andersson, Beugelsdijk, Mudambi & Zaheer, 2011). However, the increasing complexity of the business world has led scholars in the past decade to start looking at different levels of analysis, ‘above’ and ‘below’ the national level. Rugman and Verbeke (2004) focused on a regional level through the aggregation of countries, while other scholars looked at subnational levels of analysis, such as global cities (Goerzen, Asmussen & Nielsen, 2013), clusters (Birkinshaw & Hood, 2000), or agglomeration effects (Lamin & Livanis, 2013). Their findings created a realization that it is necessary to analyze phenomena at a subnational level in order to create a better understanding of multinational enterprises (MNEs) and their location decisions.

MNEs operate in different national and subnational locations with different types of strategic business units within these locations (Meyer, Mudambi and Narula, 2011). This study will create a better understanding of how isomorphic pressures affect MNEs across different levels of analysis and how this can influence MNEs’ location choices (DiMaggio and Powell, 1983). MNE isomorphism or the tendency towards homogenization of MNE structures through institutional (DiMaggio and Powell, 1983) and economic pressures (Beckert, 2010) is a phenomenon that may not accurately be understood if only studied at the national level.

The isomorphic pressures MNEs face are far more complex as a result of their multiply embedded nature across and within the national competitive and institutional environments of diverse home and host country locations. Several authors have argued that isomorphism is less relevant for MNEs as a result of their multiply embedded nature (Aguilera & Jackson, 2003; Kostova, Roth & Dacin, 2008), however only viewing the MNE from a national perspective while doing so.

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This study seeks to address this gap in our understanding by developing a new conceptualization of what it means to be isomorphic for the multinational firm. MNEs could for instance show divergence in structures on a national level by choosing to locate in different countries, but when analyzing their decisions on a subnational level, they could still be exhibiting isomorphism in the subnational locations they choose to locate in with the same kinds of strategic business units.

Combining the existing literature on isomorphism and the general theories on location decisions on a national level of analysis with recent literature on subnational levels of analysis in location choice, will allow for the development of a new conceptualization of how isomorphic pressures are reflected in multinational firms’ strategies.

This new conceptualization will be built around two core concepts: isomorphism (DiMaggio and Powell, 1983; Beckert, 2010) and multiple embeddedness (Meyer et al., 2011). MNEs are located in different countries, locate themselves in different layers within those countries (e.g. regions, global cities or clusters) and have different types of strategic business units which they choose to place in those locations. MNEs are embedded at all these different levels, and pressures from these levels impact the MNE in different ways, making it crucial to take them all into account when analyzing structures and location decisions.

Boschma, Makino, Qian, Ma, Li and Mudambi (2015) pose several questions about how the embeddedness in multiple subnational contexts of international business activities affects MNEs in terms of the locations they choose and the types of FDI they make. In light of these questions this study looks at the organization of a MNE´s international subsidiary network. MNE´s can be more or less similar based on both structural characteristics, the market segments that they are in and many more aspects relating to the way firms do business as a result of isomorphic pressures. This study argues that isomorphism can be reflected in the strategic business units a firm has and in the location decisions of firms, taking both a

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national- and a subnational level of analysis. MNEs in the pharmaceutical industry could, for instance, consistently choose to place their manufacturing in locations such as smaller cities with specific location-bound advantages, their top management in a global city and their R&D in an innovation cluster. These choices for subnational locations are driven by the location-specific advantages (LSA) with which these locations are endowed.

Subnational locations such as cities offer locational advantages which attract firms to locate there (Goerzen et al., 2013). Locating in industry clusters can influence the development of subsidiaries (Birkinshaw & Hood, 2000). Furthermore locating in industry clusters where other MNEs are present can lead to knowledge spillovers, a driver for firms agglomerating with other firms (Mariotti, Piscitello & Elia, 2010).

Similar subnational locations across national contexts can offer comparable locational advantages to firms. Interestingly, this could mean that the subnational location is the primary driver for location choices based on the locational advantages they offer.

Therefore the reason why Novartis locates their R&D operations in Brentford could be driven by the same motivations for Bayer to locate their R&D operations in Witterswil, a similar subnational location but in a different national context. This does not mean that the national context can be neglected, several national aspects such as the quality of the institutions (Du, Lu and Tao, 2008), or cultural differences (Hofstede, 1994) play a role in location choices, but that is beyond the scope of this study. However this study does acknowledge that different national contexts might result in different patterns of location choices and thus the degree to which isomorphism can be detected. In order to keep the influence of national contexts to a minimum the sample will be drawn from Global Fortune 500 MNEs with their headquarters in the developed legs of the triad, being North America and Europe.

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Moving away from solely analyzing these locational advantages at a national level, this study intends to find evidence for the idea that both economic and institutional isomorphism can be conceptualized at a subnational level. By answering the following research question this study will provide new insights in the way in which isomorphism affects MNEs across multiple levels of embeddedness.

“To what degree are multinational firms featured by different degrees of isomorphism across national and subnational levels of analysis?’’

This research starts off with a review of the literature on MNE location choices, shifting from a national level to a subnational level of analysis, discussing drivers behind these decisions and forces influencing location decisions by bringing in institutional theory. The discussion of the literature builds towards creating an understanding of expected variations in the degree of isomorphism between national and subnational levels of analysis. It continues with the conceptualization of the subnational level of analysis in which different city tiers are established which will be the main unit of analysis for subnational locations. Several working propositions are derived from the literature review and the methods used to test these will be discussed in the methodology chapter. The following chapter analyzes the results found through a multiple case study approach in which eight cases are assessed, sampled from the banking and pharmaceutical industry. This is done by analyzing their geographic investment patterns on a subnational level of analysis within and across these different cases. The final section of this study discusses the observed patterns across these cases and relates these to the literature, concluding with the contributions of this study.

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2. Literature review

The literature review firstly reviews the motives for MNE location decisions and their importance (e.g. Dunning 1998; Iammarino & McCann, 2013), after which patterns in MNE location choices will be discussed (Birkinshaw&Hood, 2000; Lamin&Livanis, 2013; Mariotti et al., 2010) subsequently explaining how these choices lead to the diversification of strategic business units across locations. After these topics have been reviewed, their interconnectedness will be discussed in light of the multiple embeddedness MNEs have to manage and the degree to which isomorphism is a relevant concept when it comes to MNE location decisions. Finally a conceptual framework will be elucidated which will lead up to working propositions about how the interaction of location choices at the national and subnational level in combination with specific SBUs may result in different perceptions of MNE isomorphism.

2.1 Internationalization and MNE location choice

Location decisions are very important for MNEs when internationalizing and have always been an essential part of the IB literature (Rugman, Verbeke & Nguyen, 2011). When looking at the international expansion process two different perspectives can be distinguished. On the one hand, internationalization theory argues that the internationalization process should be seen as a learning process in which international expansion takes place in an incremental manner (Johanson & Vahlne, 1977) and location choice decisions are interdependent. This fits within the resource-based view (Rugman &Verbeke, 1992), which argues that firm-specific resources and capabilities are imperative to competitive advantage in the internationalization process. These decisions are made after considering economic and institutional factors. Firms develop specific resources (Rugman&Verbeke, 1992) to deal with institutional differences from previous internationalization experiences. These resources aid in further expansion to more distant markets (Johanson & Vahlne, 1977). This emphasizes

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the cumulative nature of location choices and foreign direct investment (FDI). The MNE develops a path-dependent set of FSAs related to specific location types for recombining with core FSAs (Rugman&Verbeke, 1992). Benito and Gripsrud (1992) found that MNEs actually make rational location choices when internationalizing, finding marginal support for the theories of incremental expansion in which MNEs make initial investments in foreign markets with low cultural distance to then gradually enter more culturally distant countries. This supports Hirsch’s (1976) claim that investment decisions are unique independent rational decisions driven by economic arguments, made following a cost- benefit analysis and in which lack of market knowledge and experience is seen as a cost that needs to be taken into account. Dunning’s OLI-paradigm supports this notion by arguing that foreign direct investment (FDI) can be explained by ownership-specific (O) advantages, locational attractions (L) of alternative countries or regions and internalization-specific (I) advantages (Dunning, 1988; 1998).

As the field of IB evolved, the focal unit of analysis started to shift, going from a national level, to the MNE-level, later characterizing the MNE as a network of subsidiaries (Rugman et al., 2011) each having idiosyncratic resources which can influence the MNE as a whole (Birkinshaw, Hood & Jonsson, 1998), The subsidiary-specific advantages (SSAs) that can be created within subsidiaries, when efficiently leveraged, can be transformed into non-location bound firm-specific advantages (NLB FSAs) (Rugman&Verbeke, 1992; Birkinshaw et al,, 1998) for the MNE, hereby increasing the importance of the role of the subsidiary as a level of analysis (Rugman, et al., 2011).

Location choices impact the subsidiary’s ability to contribute to the firms FSA creation where the local business environment is an important factor. Location choices are therefore directly related to the possibilities for subsidiaries to contribute to FSA creation for the MNE (Birkinshaw et al., 1998).

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2.2 Multiple embeddedness

Subnational locations are influenced by the larger context in which they are embedded and it has been argued that globalization will make the effects of local context less important. However, despite the effects of globalization, the different regional, national and local contexts in which MNEs operate still have significantly different characteristics which need to be managed (Ghemawat, 2003, 2007, Rugman, 2003), at multiple levels. Meyer et al.(2011), explain that management of this ‘multiple embeddedness’ needs to take place at the MNE level, where firms need to organize their networks across multiple locations to optimally benefit from the opportunities and deal with the challenges these locations provide. Besides the national level of analysis, this has also been analyzed at the supra-national regional level (Rugman&Verbeke, 2004) and at the subsidiary level, where the strategic role of the subsidiary needs to be determined based on internal embeddedness within the firm and external embeddedness in the host countries’ environment (Meyer et al., 2011). The host country environment or the local context is also embedded in a wider context itself, thus conceptualizing multiple embeddedness in three different forms. Firms are embedded in the national and subnational context, which are both external to the firm and the subsidiaries and headquarters are embedded within the MNE network, which is an internal aspect of embeddedness for the MNE (Meyer et al., 2011).

This study looks at the effects of different subnational contexts in which MNEs are embedded. These multiple locations, across which multinational firms stretch their business activities, expose MNEs to several institutional environments which will be further elaborated upon in the following section through institutional theory and the concept of isomorphism.

Most traditional literature deals with multiple embeddedness by discussing how MNEs are embedded in different national institutional contexts. Adding a subnational level of

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analysis to the concept of multiple embeddedness enriches the understanding of what it actually means for a multinational firm to be multiply embedded: being embedded in a global economy, a supranational region, in a country (national), but also within subnational locations such as global cities (Goerzen et al., 2013) or industry clusters (Lamin&Livanis 2013; Mariotti et al., 2010; Porter, 2000). The multinational firm is thus multiply embedded across different conceptualizations of geographic space.

These different geographic spaces can be associated with different institutional constellations which will create complexity for the multiply embedded multinational firm. Because of this complexity, several authors (Aguilera&Jackson, 2003; Kostova et al., 2008) have questioned the degree to which the from institutional theory originating concept of isomorphism is still relevant for the MNE. However the degree to which this is the case still remains open and needs to be studied.

2.3 Institutional embeddedness and isomorphism of MNEs

This study adopts North’s (1991) economic approach to conceptualizing institutions, rather than taking Scott’s (2001) sociological approach. North (1991, p.97) defines institutions as “humanly devised constraints that structure political, economic and social interaction”, thereby differentiating between formal and informal institutions. Formal institutions consist of laws, property rights and constitutions, whereas informal institutions are comprised of sanctions, taboos, customs, traditions and codes of conduct.

According to North (1991) institutions have been developed to create order and reduce uncertainty in exchange; firms modify their behavior to comply with the institutional environment in which they operate as it directly influences their transaction and production costs and thus firm performance. These formal and informal institutions can vary across national and subnational levels of analysis (Beugelsdijk&Mudambi, 2013); some are

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universal, whereas others are subject to subnational variation in engagement of the MNE with its environment, resulting in different behavior on a subnational level.

The institutional environment is characterized by constellations of formal and informal institutions that affect and are affected by firms interacting with each other on a regular basis (North, 1991). DiMaggio and Powell (1983, p.184) describe such “organizations that, in the aggregate constitute a recognized area of institutional life: key suppliers, resource and product consumers, regulatory agencies, and other organizations that produce similar services or products”, as an organizational field. This concept is very useful for capturing the complexity of the institutional environment faced by the multiply embedded MNE.

As a result of globalization, organizational fields are not restricted by national boundaries and thus have to be analyzed as being transnational in nature.

Isomorphism

Institutional theory explains that the structure of organizations is not just shaped by technical rationality but also by its social context. More specifically, it looks at how isomorphic pressures originating from the institutional environment affect the patterns which organizations adopt in locating types of subsidiaries (Ghoshal&Westney, 2005). Once the organizational field develops and gets more structured, the organizations within this organizational field tend to take on similar structures (DiMaggio and Powell, 1983). Due to these isomorphic pressures, firms tend to look similar and adopt behavior that is appropriate according to their environments and reinforced in their interactions with other organizations. It describes the business environment as socially constructed based; organizations have relationships with their environment and these relationships put pressure and constraints on firms, resulting in isomorphism (Zucker, 1987).

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Once organizations are structured in an organizational field, strong ‘forces’ arise which leads to organizational homogenization, a process also known as isomorphism (DiMaggio&Powell, 1983). This process forces firms to adopt similar structures as other firms facing the same environmental conditions. A distinction can be made between competitive or economic isomorphism (Beckert, 2010), which is about competitive pressures forcing firms to do the same thing in order to survive and remain competitive, and institutional isomorphism (DiMaggio&Powell, 1983), resulting from formal and informal institutions.

DiMaggio and Powell (1983) identify three types of institutional isomorphism: (1) normative isomorphism, (2) coercive isomorphism and (3) mimetic isomorphism. The first is a result of professionalization. Since many professionals follow the same type of formal education they follow the same type of norms resulting in similar behavior and these norms are easily spread throughout the growing professional networks, increasing the influence of normalization. The second results from formal and informal pressures organizations face in order to achieve legitimacy and political influences such as legal and technical requirements that shape the organizations in certain ways, and it has been argued that isomorphic behavior has a positive effect on organizational legitimacy (Deephouse, 1996). The last is a standard response from organizations when facing uncertainty. Uncertainty drives imitation because mimetic behavior offers an easy solution in problemistic search (Cyert&March, 1963).

Beckert (2010) adds competitive pressures to the existing model of DiMaggio and Powell (1983), as a fourth economic mechanism of isomorphism. Economic isomorphism is about firm survival and copying effective strategies, driven by what seems to allow the most successful firms to survive and outcompete others. Economic isomorphism is different from the first three types of institutional isomorphism (DiMaggio&Powell, 1983) as it has a stronger focus on economic effectiveness and efficiency. It is assumed that competitive

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pressure results in isomorphism as inefficient institutions are eliminated. This assumption is based on economic theories which describe how competitive pressures lead to convergence toward an optimal solution. Firms will become more similar as they all aim to reduce transactions costs by adopting this optimal solution, thereby leading to greater homogeneity.

Beckert (2010) also explains that under different conditions the processes of institutional isomorphism can also lead to institutional divergence. The various institutional pressures are not always likely to lead to homogenization; institutional change can be seen as a process that moves in two directions.

It remains a challenge to identify other conditions under which the mechanisms steer institutions towards convergence or divergence. Further research is needed to describe these conditions more precisely. This study also aims to contribute to this challenge by assessing the degree of isomorphism from different levels of analysis and across different levels of embeddedness.

Isomorphism and the MNE

It has been argued that isomorphism is less salient for MNEs (Aguilera&Jackson 2003), as they are exposed to many different institutional environments across different countries, which gives them the opportunity to select models and structures to adopt and avoid institutional pressures which they find unattractive (Kostova et al., 2008). According to Kostova et al., (2008) this should limit the amount of institutional isomorphism for MNEs. They even assert that isomorphism among MNEs is partly impossible and unnecessary. However they mainly discuss practices mandated by institutions and headquarters. They do not pay attention to isomorphism regarding location choices, which reflects the fact that institutional theory has mostly been applied to MNEs at a national level, creating country specific institutional profiles (Kostova et al., 2008).

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This study contends that the concept of isomorphism is still applicable to MNEs and can be so in different ways at the national- and the subnational level. In addition to the arguments given earlier as to why the subnational location matters, the degree to which isomorphic pressures affect SBUs also depends on the type of activities the SBUs perform. It has been argued that SBUs that perform activities further removed from the overall performance of the firm, such as marketing or R&D, are more likely to be subject to institutional pressures compared to SBUs whose activities are closely related to the overall performance such as production (Meyer, Scott & Deal, 1983). This makes an analysis of isomorphism at the SBU level necessary.

Looking at the locations MNEs choose and how to conceptualize locations at different levels of analysis will provide a clearer understanding of how exactly isomorphism can be applied to MNEs and the multiple levels in which they are embedded. Adding a subnational perspective to conceptualize locations reflects arguments that spatial heterogeneity within countries is an influencing factor in firm strategies (Beugelsdijk&Mudambi, 2013). By shifting to a subnational level of analysis, a different conceptualization of what it means for a multiply embedded multinational firm to be isomorphic can be created, arguing that firms can still be isomorphic at a subnational level while not being so at a national level of analysis. This effectively results in firms having similar subnational locations related to the same FDI motives for specific types of business units. The FDI motive of the MNE is another important element of the isomorphism of MNEs in their location choices.

The next section is about structurally identifying isomorphism of multinational firms by looking at different location types and the co-location of specific business units in certain location types for a given FDI motive (i.e. agglomeration).

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2.4 Geographic diversification of locations

Since the late 1990s literature started focusing more on regionalization, or partial globalization in which regionalization is seen as a form of semi-globalization (Ghemawat, 2003; 2005), which implies that global markets are not fully integrated nor are they completely isolated. Dunning (1998) argues that as a result of globalization the location of production is becoming more dispersed, while other economic forces are pushing toward geographical concentration of these activities within regions and countries.

Rugman and Verbeke (2004) analyzed the global distribution of sales from MNEs in the Fortune 500 and found evidence for the fact that the majority of their sales are in their respective home regions of the triad, implying that only few firms are truly globalized, supporting Ghemawats’ (2003) arguments of semi-globalization. Rugman and Verbeke (2004) find that the non-location boundedness of a MNEs FSAs can be constricted to a certain region and thus be considered as region-bound and cannot be exploited across regions. This can also explain why most firms are actually home region oriented instead of truly global and are therefore locating their subsidiaries in certain locations.

Rugman and Verbeke’s (2004) research thus implies that it is important to realize that FSAs are not truly non-location bound, but can be bound at the regional level. The evolving question however, is to which level of analysis a MNEs’ FSAs are location bound. Most of the research is currently focused on either the country or regional levels of analysis and how these affect MNEs and their strategic decisions, among which decision on where to locate.

Several scholars have started looking at different levels of analysis. Looking at the subnational level of analysis, we become more specific about what aspect of a location is attractive. When conceptualizing subnational locations, cities are often used because business activity is increasingly concentrated there. This increases the importance of cities as a level of

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analysis in geographic space (Sassen, 2001, Scott, 2001) and thereby also in MNE location strategies (Nachum&Wymbs, 2005).

Hymer (1972) started classifying cities in three categories and linking these to different levels of business administration as described by Chandler and Redlich (1961), where Level I is the firms’ top management team, responsible for setting goals and the framework in which the lower levels operate, Level II represents middle management, responsible for coordinating the lower managers in level III, concerned with the management of firms’ day-to-day activities. This categorization connects specific business activities to different characteristics and attractions of varying city types, where Level 1 activities are attracted to Tier I cities, Level 2 to Tier II cities and Level 3 to Tier III cities.

Global cities (e.g. Goerzen et al.,2013), or Tier I cities (Hymer, 1972) are often the main focus point within the city literature as MNEs are attracted to global cities that provide micro-locational advantages that can help MNEs to overcome negative LoF-effects (Goerzen et al.,2013). Tier II (large but less concentrated) and Tier III (small, mainly attractive for daily operations) cities have been less covered in the city literature (Hymer, 1972).

Cities and the regions around them can also be featured by clusters; geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries and related institutions such as universities and trade associations, in a specific industry that compete with each other but can also form alliances (Porter 1990). Clusters can be found at a national, regional or even city level, and are more likely to be so in developed economies (Porter, 2000). Locating in industry clusters can help firms to co-evolve with other firms as a result of knowledge spillovers, creating location-based competitive advantages (Birkinshaw&Hood, 2000, Lamin & Livanis 2013; Mariotti et al., 2010; Porter, 2000). Clusters are especially beneficial for firms in knowledge-intensive industries such as

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pharmaceuticals. Locating in clusters allows knowledge-intensive firms to benefit from the available resources to support the firm’s activities (Mudambi&Swift, 2012).

Other scholars have looked at agglomeration effects on determining MNEs location choices (Lamin&Livanis 2013; Mariotti et al., 2010). Mariotti et al. (2010) found that MNEs take information externalities and the net effect of knowledge spillovers into account when deciding whether or not to agglomerate with domestic or foreign MNEs. Lamin and Livanis (2013) later found that both domestic and foreign firms tend to agglomerate, preferring locations with a larger presence of other firms. This effect is stronger for domestic firms, especially those in emerging markets, whose catch-up motivations are a stronger driver for location choices in emerging markets than liability of foreignness (LoF).

Sectorial specificity of location choice

Several studies that looked at sectorial specificity and the effect it has on firms across industries, strengthening Rugman and Verbeke’s (2004) findings that firms are not truly global but more regionally oriented (Kolk, Lindeque & Buuse, 2013; Rugman, 2005; Rugman&Girod, 2003; Grosse, 2005). The results also emphasize the importance of taking industry-specific characteristics into account when looking at location choices. The degree to which this is necessary goes beyond the mere differences between service and manufacturing industries (Kolk et al., 2013) and also looks at specific subsectors such as financial services (Grosse, 2005), automotives (Rugman&Collinson, 2004) and cosmetics (Oh&Rugman, 2006).

The patterns in location choice can be partially attributed to sector-specific characteristics (Li&Li, 2007) as the automotive industry tends to operate in clusters of localized activities (Rugman&D’Cruz, 2000) and banks seem to cluster in financial centers (Grosse, 2005). Some service sectors like banking may have more internationalization

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difficulties due to governmentally imposed barriers (Rugman, 2005). Manufacturing MNEs’ internationalization is less restricted by these barriers as they often work with global supply chains and are thus less bound to local contexts and regulations. Since this study focuses on two specific sectors, of which banking is a service industry and pharmaceuticals is a manufacturing industry, sectorial specificity needs to be taken into account. Banks, relying more on services, are more prone to rely on intangible FSAs given their knowledge-driven nature. Technological developments led to the increasing internationalization of financial service firms, enabling their services to be offered electronically across the globe (Grosse, 2004). Pharmaceutical companies however, are knowledge-based manufacturing firms, relying on a mixture of tangible and intangible FSAs. They require knowledge bases in their production but also a wide availability of high and low skilled human resources for their production processes. These different characteristics may lead to different locational endowments being more or less attractive for firms from different industries. This might result in different location decisions and patterns across industries, which decreases the degree of isomorphism. The nature of these decisions is based on the question why these firms locate in a certain location and what their main motives are for locating their business activity in a certain location. These drivers for choosing certain locations can be explained using Dunnings’ (1998) FDI motives.

2.5 FDI Motives and location choice

Dunning (1998) discusses four FDI motives which are important drivers to consider when analyzing MNE location decisions. Firstly, resource-seeking FDI motives are related to obtaining specific tangible or intangible resources such as natural resources, infrastructural benefits or human capital, that are available in the host location. Secondly, market-seeking FDI motives concern expanding the market the MNE serves by increasing its scope. This could also be motivated by locating closer to key suppliers (i.e. agglomeration advantages) or

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being closer to customers. Thirdly, efficiency-seeking FDI motives are essentially cost-focused. Being closer to users and efficiency benefits gained from locating in an industry cluster, agglomerating with key suppliers or competitors in an industry cluster are also drivers for efficiency-seeking FDI. Lastly, strategic asset-seeking FDIs are made in order to gain valuable assets such as technical knowledge or managerial expertise which are of strategic importance for the competitive advantage of the MNE (Iammarino&McCann, 2013). Banks might acquire local banks for their market size and localized knowledge (Buch, 2000) and pharmaceutical companies might acquire a firm partially or completely to gain access to the firms’ technologies (Kale&Puranam, 2004)

In conclusion MNEs choose a specific location abroad because of differential advantages such as country-specific advantages only available in the host country. The four identified FDI motives (Dunning, 1998) are motivated by specific locational advantages available in a location that can be recombined with the MNE’s FSAs to create a competitive advantage. These FDI motives are related to the specific locations in a host country, therefore they can also be analyzed on a subnational level of analysis as exemplified by Goerzen et al. (2013) when looking at investment motives related to global cities. The authors found that market-seeking investments and market-serving activities are more likely to locate in global cities and competence-creating or efficiency-seeking and asset-seeking activities are more likely to be located outside of global cities, thus arguing that the nature of the activities and FDI motives are important determinants for MNEs location choices.

We conclude that a MNE’s attraction to locations is related to their investment motives (Nachum & Zaheer, 2005). The degree to which firms are isomorphic is also related to how MNEs FDI motives are similar or different for a specific location type and the SBU located therein.

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2.6 Strategic business unit diversification across locations

Strategic business units (SBUs) are indicators that can be used to identify structures in location choices and assess isomorphism on a more specific level. SBUs are characterized by the specific activity they perform, being upstream or downstream, which relate to certain FSAs, different value chain activities and thus different SBUs (Rugman&Verbeke, 2008). This ‘asset specificity’ influences MNEs’ internationalization. Downstream activities, mainly sales-related, require strong downstream FSAs, consisting of direct interaction with customers and are necessary for successful market penetration. Upstream activities such as sourcing, logistics and R&D are asset-based and require strong upstream FSAs.

Most firms find it more difficult to access and deploy knowledge related to downstream activities outside of their home region as these are significantly different from the knowledge required for the same downstream activities in their home region (Rugman&Verbeke, 2004). This appeared to be less so for upstream activities, since their geographic diversification is greater. This is illustrated by the fact that most Fortune 500 firms have the majority of their sales in their home-region (Rugman&Verbeke, 2004). Some firms may have stronger upstream FSAs and others have stronger downstream FSAs; this can also influence the geographic dispersion of upstream and downstream SBUs (Rugman&Verbeke, 2008).

MNEs increasingly prefer to co-locate with other firms to form alliances leading to concentration of business activities in certain locations (Dunning, 1998). They might make similar decisions regarding SBU/FSA locations which makes them isomorphic, in line with the core argument of this study, these similar locations do not need to be in the same location on a national level. Therefore locating similar SBUs in similar subnational locations within diverging countries can still be seen as isomorphic location choices.

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Hymer (1972) has argued that MNE activities can be divided into three levels. According to this location theory, Level III activities would spread themselves to locations where manpower, markets and raw materials are in abundance (Hymer 1972). Level II activities require specific resources such as human capital for middle management positions and properly developed communication systems, often found in large cities. Since the demands for all firms’ Level II activities are similar, corporations from the same and from different industries tend to locate their coordinating offices in similar or the same cities. Level I activities, which are most often headquarter locations, are generally even more concentrated as they must be close to financial centers (Sassen, 1999). The development of cities, and especially global cities, as characterized by Taylor (2005), has been studied in relation to globalization from economical (Hymer, 1972, Goerzen et al. 2013) geographical (Beaverstock, Smith & Taylor.,1999) and sociological (Sassen, 2001) perspectives.

The different levels of business administration (Chandler&Redlich, 1961) can be used as guidelines to link SBUs, FDI motives and the subnational locations in which firms choose to locate their subsidiaries to each other. Different SBUs and FDI motives are clear and developed concepts that can be studied and recognized. However as a result of the lack of data on global cities there is no generally accepted norm for categorizing cities (Beaverstock, Smith, Taylor & Walker, 2000).

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2.7. Conclusion

This literature review has discussed a shift in IB literature in which the focal level of analysis has shifted from a national level of analysis to a subnational level of analysis (Rugman et al., 2011). It has also presented arguments about how the, from institutional theory originating, concept of isomorphism would no longer be relevant for the multiply embedded multinational enterprise (Aguilera&Jackson, 2003; Kostova et al., 2008). This was then followed by arguments about how MNEs can still be featured by different degrees of isomorphism in the cities in which they locate, motives behind their FDI and SBUs they have in similar locations. The following chapter will become more specific about how we can conceptualize isomorphism on a subnational level of analysis.

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3. Conceptualizing MNE isomorphism

This chapter starts by discussing the expected variation between the degree of isomorphism between the national and the subnational level. Subsequently, units of measurement are conceptualized by the development of three city categories, building on existing city literature (Beaverstock et al., 1999; Goerzen et al., 2013; Sassen, 2001; Scott, 2001; Taylor, 2005) and developing a new classification of different city tiers, following the traditional categorization of Hymer (1972), in which sectorial and asset specific factors are expected to influence the degree to which isomorphism can be identified. Several working propositions have been formulated to guide this study, these will be presented across this chapter..

3.1 National and subnational variation in the degree of isomorphism

Whereas arguments made about isomorphism being irrelevant for MNEs (Aguilera&Jackson, 2003; Kostova et al., 2008) were made from a country level perspective, this study argues that isomorphism (DiMaggio & Powell; 1983, Beckert,2010) is still relevant when the level of analysis shifts to a subnational level.

Locations across countries can offer similar locational advantages and the level in which these advantages are embedded has become more specific, therefore the attractions towards specific locations needs to be addressed on a subnational level. Based on these arguments, MNEs are expected to show stronger degrees of isomorphism in their location decisions when assessed from a subnational level of analysis compared to their investment patterns from a national level perspective. These expectations lead to the following working propositions.

WP 1 MNEs will not be isomorphic on a national level of analysis WP 2 MNEs will be more isomorphic on a subnational of analysis

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3.2 Conceptualizing the subnational level of analysis by sector and SBU

Following Hymer’s (1972) traditional classification, this study classifies cities as Tier I, Tier II and Tier III cities. Each tier has distinct characteristics enabling categorization based on a mixture of quantitative and qualitative data. Categorization is based on the resources each city type is endowed with: their locational advantages. These advantages are City-specific advantages or attributes (City-SAs).

Traditionally Rugman and Verbeke (1992) named Country-Specific Advantages (CSAs) an important element in MNEs international strategies. Since the focal level of analysis shifted away from the national level to the subnational level, we apply this principle of location-based advantages to the city level. Some of these locational advantages at a city level are the international connectedness of the city, its cosmopolitanism or the advanced producer services located within the city (Goerzen et al., 2013). These characteristics can help firms overcome the additional costs of doing business abroad.

The characteristics and advantages linked to each different city type are determined based on a conjunction of previous studies (e.g. Goerzen et al.,2013; Hymer, 1972; Sassen, 2001). As these studies do not specifically attribute certain characteristics to the same type of categorization, the exact characteristics linked to a tier are based on the interpretation of this study’s author.

The categorization of global cities is of paramount importance as there are many differences among the characteristics of cities (Goerzen et al., 2013). Cities remain heterogeneous in nature (Knox & Taylor, 1995, Beaverstock et al., 1999), but the characterization based on the three tier perspective gives this study means to analyze the degree to which isomorphism differs by the major characteristics of different city types.

In this section the characteristics and attractions of Tier I, Tier II and Tier III will subsequently be discussed. Based on their characteristics, certain FDI motives and thus certain SBUs will be related to a particular type of city. Sectorial and asset specificity are also

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important as they nuance the degree to which certain patterns in location choice can be expected. Therefore it can be expected that the degree to which and the exact city type in which isomorphic behavior can be observed will differ depending on whether we are dealing with service or knowledge intensive manufacturing firms. This originates from the different resources sought after and the different city types in which these are available.

Tier I City Tier II City Tier III City

City

Charac

te

ristics

Global interconnectedness high in- and outflow of knowledge and materials Advanced producer services

Highly skilled human

capital / workforce Presence of expatriates High concentration of firms

Less developed megacities Capitals from developing economies (large market / population) (industry) specialized economies Presence of industry specific partners Lower concentration of Firms

Low cost labor Availability of specific resources (Raw materials, Plants/ facilities)

Local Assets / Local

Embeddedness

Greenfield opportunities Strategic locations

Table 1: City Characteristics (Source: Author)

3.2.1 Tier I Cities

Tier I cities or ‘global cities’ are part of a global city network (Sassen, 2004) and are characterized by their global interconnectedness, high knowledge flows and the presence of advanced producer services (Goerzen et al., 2013). Global cities also possess a highly specialized and skilled workforce partially attributable to the presence of top universities. These assets make global cities especially attractive for knowledge-based MNEs and the development of their intangible FSAs (Iammarino&McCann, 2013).

The interconnectedness of global cities provides the infrastructure for a global economy for in and outgoing resource flows (Lorenzen&Mudambi, 2012), through physical infrastructures such as seaports and airports and informational infrastructures through mass media centers. Global cities are hubs in a web of global linkages (Jacobs, Ducruet & De

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Langen, 2010). These characteristics enhance the transferability of NLB FSAs generated in global city host locations and are therefore main locations for many MNEs.

The development of global cities is linked to the development of MNEs and therefore more global economy led than local economy led (Nachum & Wymbs, 2005). Global cities are prime locations for MNEs top management, corresponding with Level I business activities (Chandler&Redlich, 1961). These cities are often large political, cultural (Beaverstock et al., 1999) and financial centers connected to the stock markets. The presence of financial centers is also especially attractive for banks as Buch (2000) has shown that banks’ foreign activities are related to demand conditions in the local market, FDI from home country firms and the presence of financial centers. Banks follow their customers abroad (Buch, 2000).

Therefore, headquarters of multinational corporations will be concentrated in global cities (Tier I) or in Tier II cities of developed countries, and are centers for strategic planning (Hymer, 1972). This is motivated by the need for face-to-face contact at higher levels of decision-making with many stakeholders often located there.

These factors make global cities distinct from mega cities with large populations, but missing specific global city characteristics. Zurich for example is a relatively small city population-wise but characterized by high degrees of global connectivity, presence of advanced producer services and a cosmopolitan nature (Goerzen et al., 2013).

It has also been argued that MNEs are attracted to global cities to mitigate the additional costs of doing business abroad (Liabilities of Foreignness) (Goerzen et al., 2013; Lamin & Livanis, 2013). Locating in global cities can help firms to alleviate some of the complexities that arise as a result of distance. It can help MNEs to reduce discrimination of their products and services in a host country and also facilitates communication between subsidiaries. The presence of local experts that are experienced in dealing with MNEs eases

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information gathering, making learning about the local environment easier (Goerzen et al., 2013).

The global connectedness of these cities eases the transfer of capital, people, goods and information to and from different subsidiaries (Friedmann, 1986). Additionally the presence of advanced producer services makes importing these services from the home country obsolete, enables MNEs to work with the same services providers in different host contexts, promoting consistency. The advanced producer services firms create a network through their own global location strategies and global cities have become centers for the production and consumption of these services (Taylor, 2001).

Finally global cities are culturally diverse partially resulting from the presence of expatriates. The use of expatriates is facilitated by global cities and this eases the management of complexity (Martinez & Jarillo, 1989).

There are also risks to locating in Tier 1 Cities. Given the high information velocity within global cities, competitors may appropriate knowledge spillovers in global cities deteriorating the MNEs competitive advantage (Shaver & Flyer, 2000). The agglomerated demand driving up labor and service prices can also make it more costly to locate there. A Tier I city provides a high degree of centrality and visibility but those benefits need to outweigh the costs. Hence only MNEs that reap sufficient benefits from locating in a tier I city will, others might defer to tier II cities. (Goerzen et al., 2013)

Patent and strong intellectual property-driven MNEs such as pharmaceutical companies might have stronger knowledge spill-out concerns (Gordon & McCann, 2000) and might thus prefer more remote locations such as Tier II cities. On the other hand, locating subsidiaries in Tier I cities is attractive to gain legitimacy and access that host countries’ market since the LoF-reducing effects of global cities then become increasingly important.

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MNEs can use global cities and their mass media centers and other branding channels to acquire access to customers in the host country, or as an initial location to expand their operations to reach a larger geographic area. The interconnectivity of global cities makes these locations well-suited for establishing distribution networks in a host country (Goerzen et al., 2013),

Market-seeking investments are more likely to be located in Tier I cities, whereas strategic asset-seeking, resource-seeking and efficiency-seeking motives might be more efficiently located outside of global cities (Goerzen et al., 2013; Dunning, 1998). Subsidiaries in global cities are more competence-exploiting, driven by market demand, rather than competence-creating dependent on supply to enhance a firms’ capabilities (Cantwell & Mudambi, 2011). Competence-creating subsidiaries and supply-driven subsidiaries are less attracted to global cities. An exception might be observed when an MNE needs to access local sources of knowledge nested in firms and universities located in a global city (Guimón & Salazar, 2014). In this case, competence-creating subsidiaries can be attracted to the global city, but mainly due to the presence of these knowledge sources

The specific attractions towards financial centers and the links within global cities towards a nations’ financial system and its institutions leads to the expectation that especially banks will be isomorphic across Tier I cities as these characteristics are less important for pharmaceutical companies.

WP3A: Financial MNEs will be more isomorphic across Tier I cities

3.2.2 Tier II Cities

Tier II cities are large but less concentrated compared to global cities (Hymer, 1972). They often have a relatively large population and an economy of significant size. However the flows of knowledge, information and materials are significantly smaller than in global cities

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(Beaverstock et al., 1999). These cities are related to Level II activities (Chandler&Redlich, 1961) and are thus where MNEs place middle-management functions (Hymer, 1972). Their large population provides MNEs with a large market to serve and extend their customer base. Consequentially, when an MNE does not need strategic assets in order to access a market, a Tier II city is a suitable location to enter a countries’ market. Tier II cities are not connected in a world city network in the way that global cities are, but they are still important within a country as gateways for MNEs to serve a nation or region (Beaverstock et al., 1999).

Some Tier II cities are capitals of less-developed countries characterized as newly industrialized economies or emerging economies, whose importance to the world economy is growing rapidly (Wright, Hoskisson & Peng, 2005).

These locations are more specialized than global cities where, some Tier II cities have certain types of specialization, such as Stuttgart which is linked to the automotive industry (Plum & Hassink, 2013). Because of their specialized character, many suppliers and supporting businesses agglomerate in tier II cities. The presence of these firms provide MNEs with valuable LB FSAs which act as pulls for industry-specific FDI. The specific knowledge or supporting businesses present in or around Tier II cities will often be linked to multiple but specific industries. Therefore we can expect that companies will find industry competitors in the tier II cities they deem suitable for their FDI; leading to the following working proposition.

WP3B: Tier II Cities will be featured by industry specific agglomeration

Firms can be deterred from Tier I cities as a result of the large costs associated with locating there, when they aim to develop scale and scope advantages in production as

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opposed to servicing a specific market. The presence of expatriates is thus less relevant as production efficiency is mostly driven by low cost local employment.

Production and complementary activities such as R&D often cluster outside of global cities or in Tier II cities. R&D can be related to strategic asset-seeking investment motives (Dunning, 1998) and is expected to play an important part in the development of pharmaceutical MNEs (Jiang, Holburn & Beamish, 2015). R&D subsidiaries increasingly become a source of innovation (Birkinshaw & Hood, 1998) whether it is through knowledge exploitation or exploration, in which exploration is focused on developing new knowledge and exploitation is more about applying the proprietary knowledge and developing it further (Frost, 2001).

Knowledge exploiting R&D activities are often drawn towards location with a strong local industry (Frost et al., 2002). Demirbag & Glaister (2010) add that explorative R&D activities are more drawn to locations with well-educated human capital and knowledge centers such as universities or research institutions.

Silicon Valley, a prominent example of a high-tech industrial cluster, is located in a region outside of San Francisco. These firms benefit from agglomeration economies (Malecki, 1984) and avoid the additional costs of locating in a global city. R&D facilities often require space and the costs of locating in a global city often outweigh the benefits.

3.2.3 Tier III Cities

Tier III cities are relatively small cities where MNEs locate their Level III activities such as production and sales (Hymer, 1972). MNEs are attracted to these cities because of several locational such as cheap labor or the presence of natural- or very specific resources. Furthermore, tier III cities can also be in strategic locations within a region which enable

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MNEs to access other areas of a specific region or country. Often cheaper than locating in tier II cities, this can be related to efficiency-seeking FDI-motives.

Tier III cities are especially attractive for manufacturing business units to develop economies of scale. It is therefore expected that service firms (banks) show less attraction to Tier III cities, with the exception of accessing a larger market, although not expected at a significant level nor driven by isomorphism.

Pharmaceutical companies on the other hand could be inclined to locate their (supporting) manufacturing subsidiaries in Tier III cities to benefit from low cost labor. Therefore it can be expected that efficiency-seeking FDI from manufacturing firms leads to isomorphism in location choices in tier III cities. Manufacturing firms might be attracted to Tier III cities for specific resources such as plants or production facilities available for acquisition. Therefore we could expect pharmaceutical companies to be isomorphic in Tier III cities for resource-seeking FDI.

WP3C: Pharmaceutical firms seeking specific resources will be isomorphic across Tier III cities

Although banks might not be attracted to lower tier cities for the majority of their services, some exceptions are to be expected, mostly related to private banking which is about the management of wealth and is thereby connected to locations where wealth is being invested or managed. Some of these locations might reside in Tier III cities which locate in tax-havens, or off-shore financial centers, which are often in small countries or cities where the majority of the investments belong to institutions or wealthy individuals from outside of that country(Cobb, 1998; Burt, 1995), lured by the attractive regulatory environment (Cobb, 1998; Hampton & Christensen, 2002).

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To guide the data analysis the following working propositions are formulated based on the conceptual framework and the expected effects of the shift in level of analysis WP 1 and WP 2 assess the main predictions of this study, arguing that the degree to which isomorphism can be detected in MNE location choices increases when shifting the focal level of analysis. Based on the nature of the different industries WP 3A , 3B and 3C assess an expected sectorial effect on MNE location choices. If we become even more specific and look at the specific assets for which investments are made we look at the dispersion of SBUs across subnational locations. Following Hymer’s (1972) theory on location certain functions in certain city tiers it can be expected that similar SBUs will be attracted to similar location-specific advantages nested in similar city tiers.

WP4 subnational isomorphism is expected to be associated with a strong relationship between SBU type and city type

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4. Methodology

The following chapter presents the methodological approach to this study. It starts off with a brief explanation of the ontological and epistemological foundations of this research. Consequently, the principles underlying this qualitative multiple case study are presented, followed by an explanation of the sampling strategy. Thereafter the data collection process is outlined and finally, the chapter concludes with a brief description of the data analysis methods that will be utilized.

4.1 Research philosophy

A research philosophy contains important assumptions about the researcher’s view on the world (Saunders&Lewis, 2012). The research philosophy influences the research strategy, thus the research design and therefore needs to be addressed.

Ontology is the way in which a researcher sees the world and reality. The subjective view sees reality as a product of the human mind, thus differing per individual. The objective view attains that a researcher examines reality as is without altering it (Brannick&Coghlan, 2007). This study takes an objective ontology, thereby seeing reality as external to the observer (Saunders&Lewis, 2012).

The concept of ontology is closely related to the epistemology, which is about the nature of knowledge (Ryan, 2006) and how and by whom this knowledge can be acquired (Brannick&Coghlan, 2007). This study adopts a post-positivist perspective; the world and reality are regarded as externally existent and accessible. The post-positivist perspective focuses on creating new knowledge and building on existing theories (Ryan, 2006). This type of research does not assume that the researcher affects the phenomenon (s)he is studying as the researcher will never have a complete understanding of the complex phenomenon as s(he) will only ever knows parts of the whole ‘reality’ (Gephart, 2004). As the post-positivist epistemology assumes the existence of an objective world it also assumes that researchers do

Is the concept of isomorphism still relevant for the multiply embedded multinational enterprise? : a study of subnational location choices of Fortune 500 firms