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Chapter Two Internationalisation theories and foreign expansion strategies of MNEs
Introduction
For the present study to do justice to its stated objectives, internationalisation theories and foreign expansion strategies need to be understood. Studies have established the link between firm internationalisation strategies and factors that determine the pattern of FDI in terms of the direction and the flow (Dunning, 2015; Rugman, 2014; Hashai and Buckley, 2014). Recent studies propose that internationalisation theories are better seen as strategic positions that are determined by individual firm motives and capacity (Buckely and Casson, 2014).
This realisation entails decision making of an individual firm to select the right market penetration strategy based on the motives and many other aspects like resources of the firm, prospects and the environment of host markets. Internationalisation theories are therefore assumed to determine the linkage between firm heterogeneity and specific aspects in host markets (Andreff and Balcet, 2015; Dunning, 2015, Helpman, 2014; Aspelund, 2010).
The study is underpinned by the theory of competitive advantage of a nation (Porter, 1990). According to Porter (1990), multinational firm strategies are often heavily reliant on the ability to create capacity necessary to manage institutional idiosyncrasies. However, the creation of institutional idiosyncrasies is a consequence of the linkages between macro and micro environmental factors. This study reviews competitive advantage of nation’s theory (Porter, 1990) and analyses the path dependency of micro and macro determinants and their relative impact on internationalisation process and outward FDI. The competitive advantage of nation’s theory is used as the lens of illuminating the establishment and relationship between firm-level aspects and market level aspects.
The competitive advantage of nation’s theory by Porter (1990) asserts that there are four favourable aspects, which determine the impact of international business and trade. The theory hinges on the four identified aspects.
In the first strand, Porter (1990) considers that demand conditions, the nature, and size of demand influence production and innovation of goods and services. A host of theoretical and empirical literature identify the size of the market as a major determinant of FDI inflows (Deng and Yang, 2013; Deng, 2013 and Luo and Wang, 2012). These studies assume that the size of the host market enables allocation and efficient utilization of resources.
In the second strand, Porter (1990) observed that factor conditions also influence the flow and direction of FDI. These relate to the availability and price of factor inputs, labour, capital and technology. For instance, host markets with low price factor inputs (high endowment) are more attractive to resource-orientated multinational firms, therefore enhancing the likelihood of investment in the extraction sector. In this regard, it is arguable that market with low prices of factor inputs (which is an important aspect of multinational firm investment sustainability) is an essential pull aspect for internationalisation process.
According to Porter (1990), relating and supporting Industries is one of the key issues for international investment, as supporting structure relate to the industries for synergy benefit, as well as an infrastructural development that supports and reduce the cost of investment. This gives credence to the fact that has been reinforced by a host of findings that network of both suppliers and related businesses are important pull factors for FDI (Buckley and Verberke, 2016).
Another aspect that is expounded by Porter (1990) is firm strategy and rivalry. This is one of the fundamental aspects of international trade as companies compliment government efforts by producing goods and services that are not only critical for household consumption, but national economic growth as well. Consistent with this argument, Buckely (2015) buttressed the importance of market efficiency and the role of government in enabling information that forms the causal aspect in international business.
Rugman and Cruz (1993) modified the theoretical underpinnings of Porter’s original work by including the addition of vital aspect on firm-specific assets that determine multinational behaviour in host markets.
According to Rugman and Cruz (1993), the fundamental standpoint of the theory is flawed when applied in a small trading economy. Thus, the conceptual gap raises the need to reinforce Porter’s proposition with resource-based view models, which are more aligned to Penrose’s (1959) views on the boundaries of the firm. The later change by Rugman and Cruz (1993) added the dimension of individual firm heterogeneity but without specific reference to firm idiosyncrasies. This theoretical proposition also remains handicapped in explaining the impact of these asset-related factors on multinational behaviour and performance.
Recently, Nguyen and Rugman (2015) reinforced the double-diamond model through empirical evidence from a sample of 101 multinational firms. The study, using a principal component analysis, concluded that over the years, multinational firms have increased their competitiveness. Narula and Verbeke (2015) have also reinforced the double-diamond model and calls for more research on institutional idiosyncrasies that determine performance and their relative causal link. For this reason, this study proposes to bridge the academic gap in research by investigating the relevance of institutional idiosyncrasies , and the causal relationship between these factors with macro environmental factors in host markets, and their relative impact on performance and behaviour.
However, it is important to point out that the work of Porter (1990) does not suffice in explaining the impact of overlapping aspects on firm performance and behaviour. This is shown by the following arguments. First, the theory gives a hint on the trade-off of micro and macro factors; there is no link to firm level adjustments, which determine the intensity of firm behaviour and subsequent firm performance. Second, related to Heckscher-Ohlin’s model is that they adopt similar productivity across the board. This is a significant drawback, especially, considering the rise of new theories that have taken into account aspects of the microenvironment.
Third, since the theory provides no link to firm-level determinants, there is also no establishment of a causal relationship of overlapping aspects, the direction of causality and relative weights of overlapping aspects.
This study assumes that multinational firm behaviour and performance hinges on three pillars: firm-level adjustment in host markets, the trade-off of interaction between micro-level decision making to either exploit an opportunity or mitigate a risk factor and the causal direction of the trade-off. Most studies that focused on this new intellectual direction have overlooked the importance of overlapping factors, and how they enable firms to adjust firm-level variables and to adopt strategic positions that add value (Verbeke and Asmussen, 2016; Narula and Verberke, 2015; Nguyen and Rugman, 2015).
The following sections of the chapter are arranged as follows: section 2.2 presents a review of motivations of multinational firms. Section 2.3 presents a synopsis of internationalisation theories. Sections 2.4 discusses micro aspects and expansion strategies, which are influenced by internal competencies. Section 2.5 presents host market and relative linkage on the expansion strategy. Section 2.6 surveys overlapping aspects and their influence on the strategic position of MNEs, while section 2.7 explores the economic perspective theory. The final section (2.8) concludes the chapter.
Motivations for multinational firms to venture abroad
According to Harris and Moffat (2015), understanding the motives of a multinational firm is at the core of understanding their strategic position as they invest in host markets. In this context , when a firm invests in international markets in pursuit of different aims, for this intention, the motivation for multinational firm are not exclusive. The issue of multinational motivations has not been examined as a causal aspect of investment patterns and subsequent behaviour of multinational firms in offshore markets. Motivations are subject to adjustment over the passage of time and they are heavily reliant on both internal variables (firm structure and key competencies), as well as the externally imposed variables of host markets, (Dunning, 2015).
In the context of background provided in preceding paragraph, this section assumes that motives of multinational firms are inherent to internationalisation strategies that they adopt in host markets. A genre of studies concur that motivations of firms have a direct impact on strategies that are adopted in the host markets (Teece, 2014). Nonetheless, there is no consistency on the direction of causality between firm objectives and internationalisation strategies.
In the context of the current study, motives of multinational firm are hypothesized to align the strategic position of the firm with conditions in the host markets.
According to Cantwell (2016) the most quoted seminal classification of multinational motivation is one suggested by Dunning‘s eclectic theory. It is therefore reasonable to consider the work of Dunning as the canon of our analysis. Dunning’s theory expounds why ownership advantage and how a firm decides to invest in global markets where it is considered most probable to invest. The taxonomy consists of three classifications as detailed in the paragraphs that follow.
Resource seeking
In this classification, the main objective of a multinational is to obtain specific categories that are not obtainable in domestic markets such as raw materials or natural resources , that are obtainable at cost-effective rate, for instance, a price of labour. In this connection, resource-seeking motive are more compatible with pull factors that are discussed in host country-based perspectives (Dunning, 2001; Dunning, 2015).
Market seeking
In this scenario, multinational firm invest in a host country to exploit opportunities granted by greater dimensions of markets. Several objectives are central in this option; amongst them are to serve customers and suppliers that have been present in foreign markets. Multinational firms may also seek to transform services to local needs and tastes, inevitably saving the cost of serving a market from a distance. In contemporary era, it is becoming more imperative to occupy a market and discourage potential entrants (Dunning, 2015). Consistent with this argument, market-seeking motives regard push factors, which are discussed under micro level-based aspects in section 2.4.
Efficiency seeking
Efficiency seeking occurs under two scenarios. In the first scenario, firms capitalize on differences in cost and availability of factor endowment in different host markets. While in the second scenario, firms capitalize on the economies of scales and scope and of different supply aptitude and consumer taste in host markets. This realization takes into account the bi-directional causal relationship firm specific aspects and market level specific considerations. Hence, it gives credence to the proposition of firm and market level advantages perspective (Dunning, 2015).
Synopsis of internationalisation theories
This discussion explores internationalisation theories that explain MNEs activities. The paramount objective of literature review in this section is to understand theoretical suggestions that explain MNEs positions in host markets. In the context of this argument evidence from internationalisation theories, literature make a crucial connection with the study supposition that firm level and market level aspects have a causal relationship.
Seminal and contemporary theories offer essential insights into the operation of firms in business anywhere, including international firms. However, these theories fail to nuance the distinguishing characteristics of businesses operating among different nations and different business segments in host nations. The question of how then firm’s internal mechanism influences results and macro environment (Fletcher and Harris, 2012) is not answered by these theories.
Since international business is the study of business activities that cross national borders, it is conceptually concerned with the firms that undertake that business, how they make expansion decisions (objectives), and set up internal mechanisms to achieve the stated objectives. Furthermore, the scope of this discourse seeks to extend the discourse from that trend, must also explain how multinationals set objectives and proactive mechanisms to achieve objectives. It must explain how the firms generate responsive mechanisms to respond to trade regulations and business risks in host destinations. As such, this study reviews a genre of theoretical models of internationalisation and economic models of internalization in order to achieve a wider and a deeper understanding of these intricacies and their praxis in global marketplace.
According to Johanson and Valne (2015), it is important to understand why some firms opt for outward investment (most do not), instead of opting for alternative methods of exporting and different methods involved. In the recent past, other firms follow the more dynamic process and a recent phenomenon of newly established firms, have emerged in the last decade that MNEs internationalise at inception or just after – the born global (Cavusgil, and Knight, 2015; Andreff, 2014). Based on this discourse, it is imperative to understand the motivation and the behaviour of multinational firms.
Micro level aspects
Key to the discussion in this segment is internationalisation theories from firm-level perspectives. The initial objective of the outward investment is to exploit competitive advantages enjoyed by a firm compared to other firms in the targeted host country. This perspective considers push motivational factors to be a key competitive advantage in host markets that connects with market-seeking objectives that was discussed earlier in the chapter. Andreff and Balcet (2015) concluded that firm-specific advantages or competitive advantages can be segmented into two subsections.
The first segment revolves around ownership advantages that includes trademarks and patent. The second segment involves non-ownership advantages such as management structures, business networks, and production capacity. Due to the diversity of firm’s competitive advantages, and in an attempt to illuminate the development of emerging multinational firms, the following genre models have been postulated, namely the process models, transaction cost, monopolistic advantage and resource-based models, as well as innovation related and entrepreneurial approach.
Chapter One Introduction and background to the study
1.1 Introduction
1.2 Internationalisation theories and outward FDI: A synopsis
1.3 Research problem statement
1.4 Research questions
1.5 Research objectives
1.6 Research significance
1.7 Organisation of the study
Chapter Two Internationalisation theories and foreign expansion strategies of MNEs
2.1 Introduction
2.2 Motivations for multinational firms to venture abroad
2.3 Synopsis of internationalisation theories
2.4 Micro level aspects
2.5 Macro level aspects
2.6 Micro and macro path dependent theories
2.7 Economic models of Internationalisation
2.8 Conclusion
Chapter Three Theoretical appraisal of outward F.D.I behaviour – a South African imperative
3.1 Introduction
3.2 FDI defined
3.3 The evolution and determinants of FDI destination
3.4 Macro – level determinants of FDI
3.6 Strategic positions of selected MNEs
3.7 Decision-making criterion
3.8. Lessons from the literature
3.9 Conclusion
Chapter Four Research Methodology
4.1 Introduction
4.2 Research hypothesis and models
4.3 Motivation for choosing the variables
4.4. Population and sample size
4.5 Estimation techniques
4.6 Causality between model variables
4.7 Conclusion
Chapter Five Data analysis and interpretation
5.1 Introduction
5.2 Error correction model
5.3 Retail Industry
5.4 Mining Industry
5.5 Technology industry
5.6. Financial Industry
5.7 Conclusion
Chapter Six
6.1 Introduction
6.2 Summary of findings and policy implications
6.3 Research hypothesis
6.4. Policy implications
6.5 Contributions to knowledge
6.6 Recommendations
6.7 Conclusion
6.8 Suggestions for further study
References
Appendices
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