The New MNE: 'Orchestration' Theory as Envelope of 'Internalisation' Theory.

VerfasserPitelis, Christos N.
PostenRESEARCH ARTICLE

1 Introduction

The need for a theory that provides the raison d'etre of the multinational enterprise (MNE) separate from a general theory of the firm has not always been self-evident to scholars. As Hymer (1960) observed in his PhD thesis, conventional international economics viewed the MNE as a form of portfolio investment, motivated by macro-economic considerations, in particular by interest rate differentials. Eminent scholars such as Edith Penrose (1956, 1959) had argued that a theory of the (growth of) the firm suffices to explicate international expansion and hence the MNE, once some additional subsidiary assumptions were added. Gradually, however, it became apparent that treating the MNE as a mere extension of domestic firms was inadequate. That was in part because 'international operations' need not automatically involve foreign direct investment (FDI); cross-border activity could be limited to exports, licencing, or contracting. A separate theory was also needed because the potential quasi-autonomy of MNE overseas subsidiaries embedded in different regulatory regimes and cultures was felt to be distinct from such differences within nations and present distinct questions, challenges and opportunities. The pursuit of these lines of research led to a theory of the MNE and, eventually, what we now call International Business (IB) scholarship (Dunning and Pitelis 2008).

International Business (IB) today feels like a success story, with its own theories, conferences, key journals, and leading scholars. Among the theories, a special place belongs to 'internalisation' theory and its main envelope theory, Dunning's Ownership, Location, Internalisation (OLI) approach. Key proponents of internalisation theory are Buckley and Casson (1976), Rugman (1975), Teece (1976, 1977), Hennart (1982), Williamson (1981), and Dunning (1980). The mid-1970s and early 1980s were a high-water mark for internalisation research, establishing it as the basis for most IB models. Below we note that work by Hymer (1960, 1968) and by Kogut and Zander (1993), which were originally not seen as being internalisation theories, are actually variants.

In spite of the apparent success of MNE theory in general and internalisation theory in particular, they may well have become outmoded in their existing form. Shifts in the global landscape, new conceptual developments and novel strategies and practices by MNEs require revisiting the nature and scope of the MNE. We discuss some key developments and suggest that the role of entrepreneurial agency, externalisation, complementarities, co-opetition, co-creation, learning and (dynamic) capabilities are critical factors in appreciating the why, what, where, when and how of the MNE. We submit that while internalisation remains an important part of MNE activities, it is just that--a part. MNEs do much more than internalise; they also orchestrate the global process of value and wealth creation and capture. It is time to consider what this orchestration entails and hence expand beyond internalisation theory to a theory of orchestration that can explain more phenomena than the existing toolkit.

The next section critically examines key conceptual foundations of, and extant perspectives on, the theory of the MNE. The subsequent section pays particular attention to limitations of internalisation in all its variants. We then discuss developments that call for a new, more appropriate conceptual lens, and propose that orchestration theory can fill this role. In contrast to the focus of internalisation theory on the choice of modality for cross-border operations, orchestration theory aims to address the wider issue of the entrepreneurial process of creation and co-creation of organizations, markets, (business) ecosystems and institutions--in short, value and wealth--across borders, with an eye to capturing such co-created value in a sustainable way. Co-creation implicates complementarities, co-opetition, externalisation-open innovation, and (hence) orchestration. A focus on orchestration helps address a major lacuna of extant theory, namely, that of delineating what is distinct in IB as compared to the (internalisation) theory of the national firm (Pitelis and Boddewyn 2009). Orchestration theory provides different predictions than internalisation theory, and it is better aligned to new theoretical developments and the strategy and actions of today's real-life MNEs. The final section provides discussion and concluding remarks, as well as policy implications.

2 Conceptual Foundations of--and Contributions to--the Theory of the MNE

The genesis and development of the core foundations of the theory of the MNE lie in economics, particularly industrial economics and the theory of the firm. Early works on international production and the MNE, especially those by Penrose (1956) and Dunning (1958), acknowledged the significance of the MNE and international production, but failed to address the issue of why international operations should take place within an organizational hierarchy rather than through the use of alternative modalities, notably exports and/or licencing. Hymer (1960/1976) helped found the theory of the MNE--and also IB as a new field (Dunning and Pitelis 2008)--by posing and addressing this key question. He claimed that the pursuit of profits by firms established and growing in their developed home nations would eventually motivate them to consider undertaking exports, licensing, franchising and/or foreign direct investment (FDI). These cross-border modalities had their own advantages and disadvantages, but, on balance, Hymer thought FDI was superior because it afforded the firm control of operations plus a presence on the ground and the degree of influence that went with it (Pitelis and Teece 2010). For Hymer, this superior control allowed firms to achieve simultaneously three things. First was to reduce Rivalry (R) in international markets. Second was to exploit their monopolistic Advantages (A) by leveraging them in-house, that is, by internalising them (I), instead of doing so through the price mechanism (the market). Third was that FDI also had the potential benefit of risk diversification (D) through operating in more than one country. Hymer felt that internalisation-engendered diversification was less important than the other two because it did not entail control of operations and production (Hymer 1960/1976: 25). Overall, Hymer's RAID-based approach helped explicate the MNE and FDI as well as (in his subsequent Marxist phase) why the MNE was able to literally RAID developing countries (Hymer 1970, 1972).

Hymer saw the internalisation of advantages as overcoming market failures such as the appropriation of the advantages by rivals and even the creation of new rivals potentially entailed from the licencing of technology and other resources to third parties. In a 1968 article published in French, he also saw internalisation as a means of avoiding the potentially high costs of market transactions. These included instances of 'bilateral interdependencies' (popularised later by Oliver Williamson 1975), as well as the relative slowness and inefficiency of inter-firm transfers of knowledge. The benefits of FDI went some way toward explaining both the existence of the MNE and why MNEs were able to out-compete locally-based rivals in foreign countries, despite the alleged inherent disadvantages or the 'liability' of being foreign (Hymer 1960/1976, 46; Zaheer 1995).

Subsequent development of the theory of FDI and the MNE focused on the Advantages and, in particular, their Internalisation (AI). Contributions from Buckley and Casson (1976), Teece (1976, 1977), Rugman (1980), Williamson (1981), Dunning (1998) and Kogut and Zander (1993) explored the various reasons why intra-firm exploitation of advantages was preferable to the exploitation of advantages through market-based operations. Buckley and Casson (B&C) and Williamson focused on transaction costs resulting either from the public goods nature of intangible intermediate assets in the case of B&C, or from 'asset specificity' (such as the co-specialisation of investments) in the case of Williamson. Teece (1976) focused on the differential cost of technology transfer intra- versus inter-country. Hennart (1982) focused on the superior ability of firms to coordinate and manage foreign resources, including labour, and Kogut and Zander (1993) on the differential benefits of intra-firm technology transfer. Dunning's (1980) eclectic theory--and, later, his Ownership, Location, Internalisation (OLI) paradigm--generalized the Hymerian and B&C contributions in terms of the three sets of O, L and I advantages, all of which should, in his view, be present in order to explain FDI and the MNE. In the OLI framework, ownership advantages involve more than the 'monopoly' advantages of Hymer.

Over time, the Rivalry element of Hymer's theory was gradually almost forgotten in IB, except in a few works such as Vernon (1966, 1979), Graham (1978), and Buckley and Casson (1998). This is a challenge for numerous reasons, not least because rivalry can be a reason why firms internalise. As highlighted for example in the work of Porter (1980), a reason for both horizontal and vertical integration (internalisation) can be the reduction of the forces of competition. That Porter's approach continues to command respect in strategy, including IB, without recognition that his views reflect a variant of 'internalisation' theory, arguably points to a major limitation of the transaction cost focus of the latter.

The Diversification of risk idea has also not been very influential, although it was championed by, among a handful of others, Alan Rugman (1980). This could be partly due to a widespread idea that shareholders can diversify risk by themselves, and therefore there is no benefit to owners for firms to do this (e.g., Porter 1987). The possibility can also be noted that...

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