Internalisation Theory and Outward Direct Investment by Emerging Market Multinationals.
| Verfasser | Buckley, Peter J. |
| Posten | RESEARCH ARTICLE |
1 Introduction
This paper examines four research approaches to the rise of emerging market multinational enterprises--international investment strategies, domestic (capital) market imperfections, international corporate networks (including business groups) and the role of domestic institutions and shows how each is related to internalisation theory. It then examines three empirical manifestations of EMNEs--the case of Chinese EMNEs, foreign acquisitions by Indian MNEs and the involvement of EMNEs in tax havens, using the four key strands of theory. The relevance and predictive power of internalisation theory is shown throughout.
1.1 Research Approaches to Emerging Market Multinational Enterprises
There are four research approaches to the explanation of the rise of outward foreign direct investment (OFDI) by emerging market multinational enterprises (EMNEs). These are: (1) a focus on the international investment strategy of EMNEs, (2) the role of domestic (capital) market imperfections, (3) the role of international business networks and (4) the effect of domestic institutions. All four have implications for, and derivations of, internalisation theory embedded in them.
This paper starts with a consistent and theoretically grounded approach based on internalization theory (Buckley and Casson 1976; Buckley 2014). In fact a "purist", "stripped-down" version of the theory is utilized in contrast, starkly, with the RBV's emphasis on 'competitive advantages' 'ownership advantages' (Dunning 2000) or 'dynamic capabilities' (Pitelis and Teece 2010; Teece 2003, 2012). This version relies on two explanatory factors--locational determinants (L) and internalisation (or externalisation) decisions (I). The interaction of these two variable sets determines the location and mode of operation of the firm--recognising that the combination of the two is not necessarily automatic (Hennart 2009). Locational determinants are either market based or resource driven, where resources include natural resources, labour or strategic assets. The multinational enterprise (MNE) is conceived as a vehicle originating, controlling and extending a network of activities where intangible, or mobile resources (mainly knowledge and information) is circulated to combine with fixed points given by locationally fixed resources (L). This provides an example of the use of "Ockham's razor" in reducing the number of entities necessary to achieve explanatory value (compare the myriad variables adduced in Deng's 2012 survey). It should also help researchers to focus on how far new theory (and explanatory variables) are necessary to explain outward foreign direct investment from China and other emerging source countries. A similar approach is taken by Verbeke and Kano (2015) who illustrate internalisation theory from a historical perspective and use case study evidence on EMNEs.
Following a discussion of the four research approaches, the paper applies the analysis based on these four rubrics to the case of outward foreign direct investment from China, Indian foreign acquisitions and tax haven investment by EMNEs.
2 Approach 1: International Investment Strategy
Papers such as (Wu and Chen 2001; Wu and Sia 2002), among others, argue that market-seeking motives have predominantly driven historical investment behaviour of Chinese MNEs, especially during the 1980s. This investment behaviour was conducted mainly to raise familiarity with international market behaviour and requirements, to collect market information for subsequent investments and exports, to circumvent trade barriers, and, eventually, to facilitate exports of Chinese domestic firms. During the 1990s, the strategic focus of market-seeking FDI shifted from these trade supporting, defensive functions to a more offensive approach (Buckley et al. 2008; Liu et al. 2005). Further push factors were the inadequate distribution and logistics networks and regional protectionism in domestic markets, which became highly competitive and saturated in some sectors, especially after China's accession to the World Trade Organization (WTO) in 2001 (Sauvant 2005; Zeng and Williamson 2007; Boisot and Meyer 2008). Market seeking investment behaviour has seen Chinese firms increasingly invest, for example, in developing countries across Asia and Africa (Pangarkar and Yuan 2009; Deng 2004; Zhan 1995) also highlight asset-seeking strategies as important drivers for Chinese OFDI in developed countries. This is reflected in, inter alia, acquisitions and the establishment of R&D affiliates in Europe. The efficiency-seeking motive has been argued to be only a minor driver of Chinese OFDI in the 1980s and 1990s (Buckley et al. 2007), although it is arguable that, with the rise of Chinese labour costs, the efficiency motive is beginning to become significant.
In internalisation theory the firm can continuously choose its foreign operational mode (including entry mode to new markets). The relative costs and benefits of foreign operation modes vary over time and lead to a dynamics of choice. Internalisation theory includes the hazards of doing business in foreign locations including the liability of foreignness and risks of dissipation of knowledge assets.
Market imperfections in international intermediate product markets are necessary and sufficient to explain the existence of MNEs (Eden and Dai 2010, p. 18).
In order to capture the rent from innovation (to appropriate the returns), firms (MNEs) need to integrate the output of innovation with marketing and production (Buckley and Casson 1976). Thus, FDI, with its associated control (of knowledge) is needed to protect the value of 'the patent' (the internal Intellectual Property Rights). FDI is therefore a proxy for the supporting assets needed to protect and appropriate the value of the original innovation (note the similarity of the argument with Aliber (1970, 1971).
In contrast, firm specific advantages are defined in the short run (against contemporary competitors) and ignore difficulties of invitation dissipation and misidentification of "the advantage". FSAs are necessarily temporary and the analysis underestimates the risks and costs of protection of intellectual property that is built into internalisation theory.
The difference from the transaction cost economics of Williamson (1975, 1985) is that internalisation theory concentrates on external market imperfections, TCE focuses on small numbers conditions and opportunism (Lundan 2010, p. 53) which can be incorporated as special cases in general internalisation theory. Internalisation theory does not include behavioural assumptions such as opportunistic behaviour, in the general case, which makes it more attractive--and more general.
It is arguable that opportunism "self-seeking behaviour with guile" is more prevalent in EMNEs than other types of multinationals. This is based on the short tenure of managers in SOEs, on corrupt behaviour arising from certain countries' management mores and possibly on lassitude in corporate governance standards in emerging countries. It is doubtful that opportunism per se can be a sustainable long term explanation for outward investment, although it might have some localised significance. The burden of proof rests with those who utilise such an explanation.
Internalisation theory incorporates home (source) country factors by examining those intermediate goods and services markets which firms from a particular home market are most likely to internalise. Where markets are internalised across national frontiers, then MNEs are created. Thus the national firm is a special case of the MNE where only domestic intermediate goods and services markets are internalised. Home country context thus plays a major role in determining the growth of MNE and their associated foreign direct investments (Buckley and Casson 1976).
In the specific case of emerging countries, the crucial imperfections are often in the financial markets (Buckley et al. 2007; Morck et al. 2008). State owned enterprises (SOEs) often have access to capital at below market cost rates, through soft loans, channelling of state funds or dominance in the financial markets. Conglomerate firms (as in India) may use their internal capital market to channel funds to the potential foreign investor units and family firms may subsidise outward FDI. The motive for these internal subsidies may vary--it may be a version of 'capital flight', it may be to avoid restrictions at home, it may involve prestige or vanity projects or it may be a roundabout means of improving the firm's competitive position at home (Witt and Lewin 2007). More conventionally, it may represent strategic asset acquisition [one of the four key motives to invest abroad along with market seeking, resource seeking or improved efficiency (cost driven)].
Home country context matters not only in the ability to undertake FDI, but also in its direction. MNEs are influenced by cultural links and barriers (Johanson and Vahlne 1977; Johanson and Wiedersheim-Paul 1975) by the relative costs and liabilities of foreignness (Zaheer 1995), by perceptions of risks (Liesch et al. 2011; Buckley et al. 2016) and by relative costs--all of which depend on the home country location. Source government institutions can also have an effect--it is frequently argued that China's OFDI is induced by Government policy (Buckley et al. 2007). This institutional push can range from outright government dictat to simply knowledge sharing among current and potential direct foreign investors. A 'bandwagon' or follow my leader effect (Knickerbocker 1973) may occur naturally through imitative behaviour or may be induced by Government policy (the 'Go Global' phase of Chinese government policy for instance) (Buckley et al. 2007).
The extent, direction, timing and mode of OFDI are therefore partially determined by source country conditions. However, to call these 'Country specific advantages' is misleading...
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