Emerging multinational companies and firm-specific advantages
The rise of multinational companies originating from emerging economies has attracted a lot of attention among the business and economic literature. We start review of this literature by looking at the classic theories of internationalisation.
The ‘eclectic paradigm’ originally proposed by John Dunning (1981) yielded many useful insights that have informed subsequent research; it represent the most influential approach to study the international activities of multinational companies. This eclectic paradigm can be considered as an ‘envelope’ for the existing theories of internationalisation, with the addition of a new attention to the locational choice of investments (Dunning, 2000). Besides, according to Dunning (2006), the eclectic paradigm can be easily adapted to include new features emerging from the recent developments in globalised markets. In its essence, the eclectic paradigm postulates that the decision of firms to expand their activities abroad via FDI can be explained by three different advantages. Ownership (O) advantage represents the ownership of specific resources to be exploited externally. Location (L) advantage depends on the characteristics of the host country and opportunities it offers. Internalisation (I) advantage depends on the opportunity to internalise firm-specific advantages rather than to exploit them on the markets through other transactions.
Another fundamental contribution by John Dunning (1993) is a widely used typology of motivations drawing FDI. They are: (1) resources-seeking investments aimed at accessing unique resources specific to foreign locations (e.g. natural resources), (2) market-seeking investments aimed at entering new markets, (3) efficiency-seeking investments pursuing an efficient specialisation of firms, and (4) strategic asset-seeking investments aimed at augmenting the set of proprietary resources of firms.
The key precondition to become engaged in foreign investments is that a firm must possess some unique competitive advantage, or firm-specific advantages (FSA). The multinational company needs to build on some type of FSA that, at the simplest level, is nonlocation-bound, i.e., easily transferable across borders as an intermediate product. It can be either a functional, production-related proprietary asset, typically technological, manufacturing or marketing know-how, or an organisational capability to efficiently coordinate and control the multinational company’s asset base. Hence, the FSA concept covers a very broad set of unique company strengths (competencies and capabilities). The importance of FSA transfer to explain performance of the multinational company has become a pivotal in the international business literature (Rugman and Verbeke, 2001).
Alan Rugman also identifies country specific factors (CSA). The CSAs are the location-bound, exogenous factors in a multinational company’s home-market. The CSAs result from the home country’s economic and institutional environments, such as labour force, factor endowments, government policies, national culture, productive reputation, or institutional framework. In fact, both FSA and CSA can be related to the O and L advantages of the OLI framework.
The OLI framework originally designed to explain internationalisation of companies from western economies does not directly address the pattern of internationalisation of firms from less advanced (or emerging) countries. Essentially, companies from emerging economies might not possess the same competitive advantages as companies from advanced economies do. As Goldstein (2007: 81) argues, ‘If they invest abroad, it is not on the basis of ‘O’, and the parameters that determine the degree of ‘I’ in their foreign operations are different’. These firms internationalise in order to get access to the strategic resources abroad they need. This idea is consistent with the classical Dunning’s typology of FDI motives. UNCTAD (2006) identify resource-seeking, market-seeking and efficiency-seeking factors as the main reasons for outward FDI from emerging countries to the emerging / developing countries. On the contrary, strategic asset-seeking motives are dominant for outward FDI from emerging economies to developed countries.
Reflecting on CSA, the domestic environment may be an important advantage for emerging multinationals, such as the low cost of factors (Barnard, 2008; Cuervo-Cazurra, 2007) and the monopolistic power at home (Andreff, 2002). The CSA may serve as a push factor; for instance, home country government policies may create a favourable framework for outward FDI.
Last but not least, cultural and psychic proximity (in line with the tenets of the Uppsala Model) is an essential factor is internationalisation of firms from emerging economies. Aykut and Goldstein (2006) report that that emerging multinationals successfully acquire companies in their home region since they are able to rely on cultural and ethnic affinities. In the same vein, Barnard (2008) shows that in knowledge-intensive services cultural and geographical proximity represent for emerging multinational a source of advantage over developed country multinationals.