'2R-Based View' on the Internationalization of Service MNEs from Emerging Economies: Evidence from China.

VerfasserXiao, Shufeng Simon

1 Introduction

The international business (IB) environment has witnessed unprecedented changes in recent years, particularly with the increasingly important role played by multinational enterprises (MNEs) from emerging economies (Bello et al. 2016; Luo and Tung 2007; Park and Xiao 2017; Upadhyayula et al. 2017; Yilmaz et al. 2015). According to UNCTAD (2016), outward foreign direct investment (FDI) by these MNEs substantially increased from $68 billion in 2000 to $409 billion in 2015. In particular, China, the largest emerging economy in the world, has continually strengthened its position as one of the leading sources of outward FDI. China's FDI outflows surpassed its inflows in 2016. Prior IB research mainly focused on the internationalization process or the relationship between internationalization and performance in manufacturing MNEs (Capar and Kotabe 2003; Meyer et al. 2015). Although FDI in the manufacturing sector accounted for only approximately 27% of global FDI stocks in 2014, that of the service sector amounted to 64% (UNCTAD 2016). Importantly, MNEs from emerging economies, especially those from China, have been playing an increasingly important role in leading global FDI outflows in the service sector. UNCTAD (2014, 2016) reported that although the service sector continues to drive global FDI flows, MNEs from emerging economies undergoing internationalization have been actively undertaking outward FDI in service sectors such as finance and real estate. Thus far, little extant research has examined the internationalization behaviors of service MNEs from emerging economies (Park et al. 2012; Stevens et al. 2015). Despite the surge in the outward FDI by MNEs from emerging economies, relatively little is known about what factors determine the extent and nature of service MNEs' internationalization (Kundu and Lahiri 2015; Stevens et al. 2015) and whether these MNEs can improve their performance through internationalization (Capar and Kotabe 2003).

To the best of our knowledge, only a small number of studies have investigated the issue regarding the export-driven internationalization behaviors of MNEs from emerging economies or the performance implications of such behaviors (e.g., Brouthers and Xu 2002; Brouthers et al. 2005; Buck et al. 2007; Gao et al. 2010; Zhao and Zou 2002). Moreover, only a few studies are in the context of outward FDI, representing a notable gap in internationalization research.

Governments of emerging economies, including China, have been developing FDI-friendly promotion policies in the hope of promoting rapid transformation from a manufacturing-based economic structure to a service-based one. The problem is the limited understanding of what drives the internationalization of MNEs from emerging economies and whether outward FDI-based internationalization can deliver benefits to MNEs' performance. This issue represents a serious shortcoming as service MNEs, especially those from emerging economies, have been rapidly pursuing internationalization and increasingly playing an important role in various global value chains (Williamson 2013). Thus, IB scholars need to pay much attention to unveiling the internationalization of MNEs from emerging economies because they are becoming a crucial force that drives globalization as an agent of change in the international investment landscape.

A large body of research in the IB strategy literature has been conducted on the determinants of internationalization or performance implications of such an internationalization strategy (Gimeno et al. 2005; Hitt et al. 2006b; Marano et al. 2016). Our review reveals that two conventional dominant research streams have been widely adopted to identify the factors influencing whether and to what extent MNEs from emerging economies should internationalize, that is, the eclectic paradigm (Dunning 1993) and internationalization process model (Johanson and Vahlne 1977). These theories center on how firm-specific advantages (e.g., knowledge, technology, experiential market knowledge, and learning) affect the extent of internationalization and how firms overcome liabilities of foreignness. These two different research streams share a common concept, namely, the firm-level resources and capability known as resource-based view (RBV). The notion of RBV is that heterogeneous firm-specific resources and capabilities lead to competitive advantages, thus explaining the performance differences among competitors (Barney 1991; Penrose 1959; Peteraf 1993; Wernerfelt 1984).

Institution-based thinking has also largely influenced the IB research tradition (e.g., Khanna and Palepu 2000; North 1990; Peng et al. 2008). Although insightful, RBV can be criticized for largely ignoring the local institutional contexts in which MNEs from emerging economies are embedded when attempting to understand their internationalization strategy or the performance implications of such a strategy. In practice, RBV alone may not suffice to explain the drivers of MNEs' strategic choices or their performance differences from market rivals (Rumelt 1991), particularly for MNEs from emerging economies. In emerging economies, institutions are in a state of flux (Meyer 2004). Product, capital, and labor markets; legal systems; and other institutions are transitioning toward economic liberalization (Hoskisson et al. 2000). Emerging economies are dynamic and therefore undergoing fundamental and drastic regional economic and institutional changes (Peng et al. 2008; Wang et al. 2012). As such, local contexts are more important for IB research on MNEs from large emerging economies with heterogeneous local conditions (Chidlow et al. 2009) than conventional MNEs from advanced economies with relatively homogeneous local contexts. Such regional differences may facilitate or hinder the extent of indigenous firms' internationalization. Perhaps one of the fundamental features of local contexts in large emerging economies is regional heterogeneity. With regard to the inward FDI toward China, the country should not be considered as a single market but as multiple sub-regional markets segmented by regional economic development and local culture (Lew and Liu 2016; Park and Xiao 2016; Zhang and Felmingham 2002). Each region in China has region-specific advantages and is managed by its own regional institutions (Lew et al. 2017). Thus, from an outward FDI perspective, regional heterogeneity also matters in the context of large emerging economies such as China.

This research attempts to enrich the understanding of whether and how heterogeneity in regional markets within an emerging economy matters in shaping the internationalization of MNEs. As such, we advocate and stress the importance of a region-based view. Specifically, we view regional heterogeneity as all the differences or variations in local conditions across subnational regions in a nation because such heterogeneity may shape firms' internationalization behaviors differently. One possible result is firms having different heterogeneous strategies for internationalization that influence their performance. In this study, we ask the following research questions: Do firm-specific resources and regional diversity within a home market shape the internationalization strategy of MNEs from emerging economies? To what extent does the internationalization of service MNEs from emerging economies affect their performance?

To fill the research gaps in the literature, we develop an integrative framework by obtaining insights from 2Rs, that is, (1) RBV and (2) region-based view of an IB strategy. Using panel data from 2003 to 2011, this approach allows for both internal firm-specific resources and external regional heterogeneity within China in shaping the internationalization of Chinese MNEs in the service sector.

Our study extends the service MNE literature in three ways. The core of our theoretical contribution lies on the development of an integrative 2R-based view of outward FDI by explaining to what extent do firm-specific resources and regional heterogeneity influence Chinese MNEs' internationalization. Our study also extends existing internationalization research to the international service setting by underscoring the roles of firm-specific competitive advantages and regional heterogeneity in shaping service MNEs' internationalization and performance. Finally, prior research that explored the effect of internationalization on firms' performance produced inconsistent findings (Capar and Kotabe 2003; Hitt et al. 2006b; Xiao et al. 2013) and focused largely on manufacturing MNEs, especially those from advanced triad economies. We find that the U-shaped relationship between internationalization and performance applies to Chinese service MNEs. This research is one of the first attempts to examine the performance implications of Chinese service MNEs' internationalization at both the theoretical and empirical levels.

2 Theory and Hypothesis Development

In the following sections, we develop two sets of hypotheses that specify the key drivers of internationalization by service MNEs from emerging economies. Our model also defines the effect of internationalization on performance in such service MNEs, which may experience a different pattern from conventional manufacturing MNEs with respect to their performance (Borda et al. 2017). Drawing on the 2R-based view of outward FDI, the conceptual model explains to what extent do firm-specific resources and regional heterogeneity influence Chinese MNEs' internationalization (see Fig. 1).

2.1 2Rs: RBV and Region-Based View

Internationalization (i.e., the extent of a firm's international operations) is one of the most critical strategic decisions made by MNEs and a critical part of their growth strategies. What shapes a firm's internationalization and whether the firm can improve its performance through internationalization are fundamental questions in IB (Buckley 2002...

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