Internalization, International Diversification and the Multinational Enterprise, Volume 11: Essays in Honor of Alan M Rugman (Research in Global Strategic ... (Research in Global Strategic Management)

INTERNALIZATION, INTERNATIONAL DIVERSIFICATION AND THE MULTINATIONAL ENTERPRISE

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RESEARCH IN GLOBAL STRATEGIC MANAGEMENT Series Editor: Alan M. Rugman Volume 1: Volume 2:

International Business Research in the 21st Century Global Competition and European Community

Volume 3: Corporate Response to Global Change Volume 4: Global Competition: Beyond The Three Generics Volume 5: Beyond the Diamond Volume 6: Multinational Location Strategy Volume 7: Volume 8: Volume 9: Volume 10:

International Entrepreneurship: Globalization of Emerging Business Leadership in International Business Education and Research Multinationals, Environment and Global Competition North American Economic and Financial Integration

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RESEARCH IN GLOBAL STRATEGIC MANAGEMENT VOLUME 11

INTERNALIZATION, INTERNATIONAL DIVERSIFICATION AND THE MULTINATIONAL ENTERPRISE ESSAYS IN HONOUR OF ALAN M. RUGMAN EDITED BY

ALAIN VERBEKE Haskayne School of Business, Calgary, Canada and Solvay Business School, University of Brussels (VUB) and Templeton College, University of Oxford, UK

2005

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CONTENTS ix

LIST OF CONTRIBUTORS INTRODUCTION Daniel Van Den Bulcke and Alain Verbeke

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PART A: ALAN RUGMAN AS EMINENT SCHOLAR OF THE ACADEMY OF MANAGEMENT’S INTERNATIONAL MANAGEMENT DIVISION CAVE! HIC DRAGONES! ALAN M. RUGMAN’S CONTRIBUTIONS TO THE FIELD OF INTERNATIONAL BUSINESS Lorraine Eden THE MNE’S SPATIAL POSITIONING Bernard M. Wolf

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PART B: THE 25TH ANNIVERSARY OF ‘‘INTERNATIONAL DIVERSIFICATION AND THE MULTINATIONAL ENTERPRISE’’ RUGMAN AND THE GEOGRAPHY OF MNE ACTIVITY John H. Dunning

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FINANCIAL AND NON-FINANCIAL THEORIES OF INTERNATIONAL DIVERSIFICATION John Cantwell

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CONTENTS

INTERNALIZATION THEORY AND THE INTERNATIONAL DIVERSIFICATION: PERFORMANCE CONUNDRUM Jean-Franc- ois Hennart

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PART C: EXTENDING ALAN RUGMAN’S WORK ON REGIONAL STRATEGIES AND THE ENVIRONMENT REGIONAL STRATEGY AND PERFORMANCE IN THE GLOBAL AUTOMOTIVE INDUSTRY Alain Verbeke and Paul Brugman

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REGIONAL AND GLOBAL STRATEGIES IN THE INTERCONTINENTAL PASSENGER AIRLINE INDUSTRY: THE RISE OF ALLIANCE-SPECIFIC ADVANTAGES Alain Verbeke and Sarah Vanden Bussche

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ENVIRONMENTAL ISSUES AND THE MNE Ans Kolk

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PART D: A CAREER IN PROGRESS: RETROSPECTIVE ESSAYS RETHINKING INTERNATIONAL MANAGEMENT THEORY IN A WORLD OF REGIONAL MULTINATIONALS Alan M. Rugman

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TWENTY-FIVE YEARS OF ‘‘INTERNATIONAL DIVERSIFICATION AND THE MULTINATIONAL ENTERPRISE’’ Alan M. Rugman

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Contents

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OVERVIEW OF ALAN RUGMAN’S ACADEMIC OEUVRE

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SUBJECT INDEX

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LIST OF CONTRIBUTORS Paul Brugman

Free University of Brussels (VUB), Belgium

John Cantwell

Rutgers University, NJ, USA

John H. Dunning

University of Reading, UK

Lorraine Eden

Mays Business School, Texas A&M University, TX, USA

Jean-Franc- ois Hennart

Tilburg University, The Netherlands

Ans Kolk

University of Amsterdam Business school, The Netherlands

Alan M. Rugman

Kelley School of Business, Indiana University, IN, USA

Daniel Van Den Bulcke

University of Antwerp, Belgium

Sarah Vanden Bussche

Free University of Brussels (VUB), Belgium

Alain Verbeke

Haskayne School of Business, University of Calgary, Canada and Solvay Business School, University of Brussels (VUB), Belgium and Templeton College, University of Oxford, UK

Bernard M. Wolf

Schulich School of Business, York University, Toronto, Canada

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INTRODUCTION Daniel Van Den Bulcke and Alain Verbeke This research volume honours Alan M. Rugman, who is the L. Leslie Waters Chair in International Business (IB), Professor of Management and Professor of Business Economics and Public Policy at the Kelley School of Business, Indiana University. The work contains a set of essays developed to celebrate the Academy of Management’s (AoM) recognition of Professor Rugman as the ‘Booz Allen Hamilton Strategy and Business Eminent Scholar in International Management’ at the AoM 2004 Annual Meeting in New Orleans, Louisiana. Booz Allen Hamilton established this award to recognize eminent scholars whose research and writing have contributed significantly to international management scholarship and whose work has had an effect on the practice of international management. This great honour was not the only one Professor Rugman received in 2004. The European International Business Academy (EIBA) organized a special panel honouring Professor Rugman’s 25-year old landmark study on international diversification and the multinational enterprise (MNE) at its 2004 Annual Meeting in Ljubljana, Slovenia. The 10 chapters included in this volume were presented at one of these events or written as a direct result thereof. Alan M. Rugman will long be remembered as one of the founders and intellectual fathers of the modern field of international business studies. He has devoted most of his life to convincing other scholars and the public at large that the MNE is the most important organizational business form worthy of academic study in our globalizing society. MNEs are an efficient response to the economic opportunities provided by the growing interdeInternalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 1–5 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11001-8

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pendence among nations. They are also the key conduit for the transfer of ideas, values, innovative technology and best practices across national borders. Subject to a number of boundary conditions, mainly a well-functioning institutional structure at the macro-level and the presence of workable competition, MNEs permit developing and developed countries to move to a higher stage of economic, social and ecological development. Through literally hundreds of conceptual and empirical studies, Professor Rugman has developed a scientific oeuvre on the MNE that is second to none. Unlike other influential scholars, Professor Rugman did not limit himself to publishing in ‘A’ journals only. His impatience to disseminate his insights, his ambition truly to span the fields of economics, public policy studies, management and law, and his uncommon eagerness to engage in intellectual debates led to numerous appearances in non-mainstream venues and publication outlets with limited citation count impacts. But Professor Alan M. Rugman is what any great scholar should aspire to be: a person consumed by the goal of describing and explaining phenomena critical to the future of human society, and ready, at any time and place, to articulate and to defend what he believes is true. Simply stated, Professor Rugman studies what the world’s largest business organizations really do, and why this matters to society at large. In several university institutions, inter alia Dalhousie University in Halifax, the University of Toronto and Oxford University, his approach to research and teaching legitimized IB studies as a credible, mainstream area of academic inquiry. His spirited interventions at many academic meetings, especially the Academy of International Business, the AoM and EIBA, always focused on the ethical responsibility of IB scholars to describe accurately what MNEs do in the real world, and to assess their impacts from a comparative institutional perspective. We can distinguish among four stages in Professor Rugman’s intellectual and professional career. The first stage includes his 1979 book on International Diversification and The Multinational Enterprise, and that published a year later, Multinationals in Canada: Theory, Performance and Economic Impact. The contribution of this early work is that the performance impact of diversification is measured in terms of return and risk, with the outcome that more internationally diversified firms do not earn higher returns but do achieve a risk reduction. This outcome is intuitively appealing provided two conditions are satisfied. First, the home country does not provide the same opportunities to buy inputs or sell outputs as those available in international markets. Second, most international activities occur in an environment characterized by external market imperfections that hinder trade and simple

Introduction

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contracting across borders. Professor Rugman’s early work culminated in what is to date his best-known book, the influential Inside the Multinationals, published in 1981 by Columbia University Press. In this work, Professor Rugman sets forth the foundations of modern internalization theory, i.e., the transaction cost economics perspective (TCE) on the MNE. Interestingly, rather than focusing on transaction cost minimization, Professor Rugman articulated his understanding of the need for MNEs to maximize the net present value (NPV) of their foreign projects through the choice of a particular entry mode. In addition, he focused on the public goods nature of knowledge, rather than the danger of opportunistic behaviour as the key driver of internalization. By focusing on the NPV and on the public goods nature of knowledge, Professor Rugman avoided two of the key problems identified by critics of transaction cost economics more than a decade later. Indeed, those critics wrongly state that TCE scholars focus solely on transaction cost minimizing rather than value maximizing, and that they inappropriately adopt opportunism as a behavioural assumption. In fact, Professor Rugman always did focus on value maximization, and has been much more interested in the managerial challenge of knowledge appropriability than in assuming particular behavioural characteristics of the individuals involved in IB transactions. The 1980s represent the second stage of Professor Rugman’s distinguished publishing career. Here, the focus was on Canadian MNEs as the empirical basis for MNE theory development. The contribution of this work has three components. First, it identified the importance of downstream rather than upstream firm-specific advantages (FSAs) of Canadian resource based MNEs. Second, it also focused on the important role of subsidiaries, even if they are branch plants, in MNE networks. Third, it demonstrated the need for MNE market access (double diamond thinking) as the driver of the Canada–United States Free Trade Agreement (C-US FTA) and the subsequent North-American Free Trade Agreement (NAFTA). Through this work, Professor Rugman realized even more than before the need to link economics, public policy, law and management in a pro-active fashion. The third stage in Professor Rugman’s career as an IB scholar covers most of the 1990s, and is characterized by extensive new theory development. He conducted various studies on the effects of trade and investment liberalization on MNEs. Importantly, he observed that trade and FDI are often complements rather than substitutes after regional trade and investment liberalization. Another area of research developed by Alan M. Rugman in this stage is that of environmental regulation and corporate strategy, culminating in an influential article in the Strategic Management Journal in

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1998. Perhaps Professor Rugman’s most important contribution is the resource-based analysis of the conventional national responsiveness-integration dichotomy, and the related ‘transnational solution’ concept. Here, the key distinction is that between non-location bound (or internationally transferable) FSAs and location-bound FSAs. The former FSAs lead to benefits of integration (scale, scope and exploitation of national differences), whereas the latter FSAs, which cannot be deployed across national borders, lead to benefits of national responsiveness. The fourth stage in the development of Professor Rugman’s scientific oeuvre starts in the year 2000 and continues today. Here, a dual research agenda is apparent. First, Professor Rugman is adopting a descriptive focus on regionalization rather than globalization. Second, his analytical focus is on extending TCE/internalization theory to permit improved dialogue with the strategy field. This important work includes the development of radically new ideas, including the concept of subsidiary-specific advantage in MNEs, the revisiting of Edith Penrose’s true significance for the development of the resource-based view, and the study of internal mechanisms to economize on bounded rationality in network MNEs. It is safe to say, given the importance of both the descriptive and analytical perspectives in Professor Rugman’s new work, that the best is yet to come! The present volume includes ten chapters, in four sections. The first section contains insightful essays by Lorraine Eden and Bernard Wolf on Alan M. Rugman’s career. These chapters provide helpful perspectives on Alan M. Rugman’s intellectual contributions as an IB scholar. The second section includes three truly outstanding papers, by John Dunning, John Cantwell and Jean-Franc- ois Hennart. These papers focus on Rugman’s international diversification and internalization work, and they provide challenging new ideas for future research in these areas, especially regarding the linkages between international diversification and internalization. The third section addresses specific topics in Professor Rugman’s recent research portfolio, and attempts to extend in a substantive fashion Professor Rugman’s insights. Alain Verbeke and Paul Brugman discuss the significance of regional strategies in the global automotive industry, and the implications thereof for internalization and international diversification thinking. The essay by Alain Verbeke and Sarah Vanden Bussche explains alliance formation in the global airline industry, as a tool for regionally constrained companies to implement a global strategy. Finally, the paper by Ans Kolk discusses MNE environmental strategy, extending Profesor Rugman’s recent insights on this increasingly important subject matter.

Introduction

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The fourth and last section includes two retrospective essays by Professor Rugman himself that constitute interesting reading for readers less familiar with his scientific oeuvre. The book ends with a complete bibliography of Alan M. Rugman’s publications. We hope that the content of this volume will act as an incentive for younger IB scholars to familiarize themselves with Alan M. Rugman’s many novel ideas, and for more established academics to rediscover the many jewels written by Rugman in the first 30 years of his illustrious career. We would like to thank the distinguished contributors to this volume, and Mr. Nathan Greidanus for his excellent administrative support in preparing the manuscript.

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PART A: ALAN RUGMAN AS EMINENT SCHOLAR OF THE ACADEMY OF MANAGEMENT’S INTERNATIONAL MANAGEMENT DIVISION

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CAVE! HIC DRAGONES! ALAN M. RUGMAN’S CONTRIBUTIONS TO THE FIELD OF INTERNATIONAL BUSINESS Lorraine Eden

INTRODUCTION I am delighted to be here today to honor the work of Alan Rugman. Alain Verbeke (Calgary) and I will discuss Alan’s contributions, with me focusing primarily on his contributions to the field of international business (IB); Alain, his contributions to international management (IM). Alan and I first met 25 years ago, introduced by a mutual friend, Judy Alexander, at the Canadian Economics Association annual meetings I believe in 1979 (maybe Alan remembers). Judy and Alan had been office mates while doing their PhDs in Economics at Simon Fraser University. A couple of years later, Alan and I co-sponsored a conference together at Dalhousie University on multinational enterprises (MNEs) and transfer pricing and then co-edited the conference papers as Multinational Enterprises and Transfer Pricing (1985). We have participated in each other’s conferences, read and/or edited each other’s papers, and organized panels at annual

Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 9–27 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11002-X

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meetings on a regular basis since then. I have read and own copies of almost all of Alan’s published works. We have also taught occasional executive training courses together for the Canadian government. I have seen him give multiple conference and professional presentations over the years. In my opinion, Alan Rugman is one of the world’s leading scholars of IB, ranking with John Dunning and Raymond Vernon in terms of his contributions to the discipline. He is an extraordinarily prolific scholar, with more books and articles in top journals than almost anyone else in the Academy of International Business (AIB). If asked, I suspect Alan would identify himself as a professor and scholar of international (not global, see below) strategic management (ISM), with his research standing at the intersection of IB, strategic management, international economics and public policy. Trained as an international economist, Alan recognized early on that transaction costs provided an explanation for the existence and success of the MNE. Alan Rugman’s most important contribution to international business theory, in my opinion, revolves around two activities: first, his role in building the theory of internalization as a general theory of the MNE and, second, his bridging the gap between internalization theory and strategic management.1 Other major scholarly contributions are his work with Joe D’Cruz on the double diamond of competitiveness; with Alain Verbeke on political strategies of MNEs (e.g., shelter-based strategies) and MNE theory (location- and non-location bound firm-specific advantages (FSAs), linking internalization theory with the strategy literature); and his own work on regional integration (Canada–US Free Trade and NAFTA). I also believe that our co-edited book, Rugman and Eden (1985), is the seminal work in this area. Along with single and co-authored books, journal articles, book chapters, monographs, and so on, Alan has also been a prolific book series editor in IB and global strategic management, inviting and pulling together the works of dozens and dozens of scholars around the themes he has seen as key in the profession. Alan has also played an extraordinarily active role in professional associations, most notably the AIB where he has held the positions of Vice President, Program Chair, and now President. He is a long-time AIB Fellow also. We all know that Alan Rugman does not ‘‘suffer fools gladly’’; he can make very critical comments about academic papers, comments that others might judge unnecessarily harsh. He says what he thinks and gives honest, but blunt, criticism. Since he is almost always right, the comments are always useful even if they can be hard to hear!

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A SEGUE: SUSAN STRANGE AND THE DRAGONS In thinking about how to write this piece honoring the work of Alan Rugman, I was reminded of the similarities between Alan and another wellknown social scientist – Susan Strange (1923–1998).2 I am not sure how many members of the Academy of Management will recognize Susan’s name – certainly Steve Kobrin, John Stopford and Alan himself will – but she was and still is a legend within the International Studies Association (ISA). A long-time faculty member at the London School of Economics, Susan Strange was a British international relations scholar and pioneer in the field of international political economy (IPE). She was a former president of ISA and founder of the British International Studies Association. Susan saw IPE as the interaction between states and markets (firms), where structural power determined ‘‘Qui bono (who benefits)?’’ She enjoyed being contentious and provocative, seeing her role in the profession as a provocateur and agent of change. She regularly railed against what she saw as ‘‘fuzzy thinking’’ and lobbied actively for more interdisciplinary work, arguing that the mainstream social science disciplines were ‘‘silos’’ engaged in a ‘‘dialogue of the deaf’’. Late in life, she began to focus on MNEs, co-authoring with John Stopford the book, Rival States, Rival Firms, which won the Academy of Management’s book prize in 1992 (Stopford & Strange, 1991). Susan was much loved, by her colleagues and students, but perhaps not by those she regularly skewered with her sharp tongue at conferences and workshops. The article for which Susan is perhaps most famous is ‘‘Cave! hic dragones: a critique of regime analysis’’.3 The title comes from the Latin, ‘‘Beware! here be dragons!’’, which Susan notes was ‘‘an inscription often found on pre-Columbian maps of the world beyond Europe’’ (Strange, 1982, p. 479). A dragon was a pitfall for unwary scholars, a theory or concept that Susan saw as potentially not useful to students of IPE, and even possibly ‘‘actually negative in its influence, obfuscating and confusing instead of clarifying and illuminating, and distorting by concealing bias instead of revealing and removing it’’ (ibid., 479). In this particular article (which is on every IPE required reading list), she goes after international regime theory, accusing it of five dragons: that it is a passing fad that makes no long-term contribution to knowledge; it is imprecise and wooly; value biased (‘‘as dangerous as loaded dice’’); distorting by overemphasizing the static and underemphasizing the dynamic elements of change in world politics; and narrow minded. The article is not ‘‘entirely destructive’’ though, as she concludes by developing what she sees as

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a ‘‘more value free, more flexible, and more realistic approach’’ (ibid., p. 480). Susan’s own views about her role in academia are summarized in her biography:4 I have tried to teach both students and children not to expect justice in life – but to try hard to get it; to work hard – but to question authority, whether political or academic; to distrust ideologies – but to respect the evidence; to avoid following the crowd – but to trust your own judgment and to stand up for your own ideas. The freedom to do so is one of which, in free countries, the universities should be the most jealous guardians. That and not the service of the state is the true justification for their existence. (Strange, 1998)

After she died in 1998, the ISA established the Susan Strange Award to recognize her ‘‘unique and extraordinary role within the International Studies Association and the worldwide community of scholars’’. The award would go to ‘‘a person whose singular intellect, assertiveness, and insight most challenge conventional wisdom and intellectual and organizational complacency in the international studies community during the previous year’’ (see http://www.isanet.org/committee/Strange.html). I think Alan Rugman is eminently qualified to win the Susan Strange Award.

ALAN RUGMAN’S DRAGONS I hope Alan Rugman will forgive this segue to Susan Strange, but in many ways, their intellectual role in their own disciplines has been similar. Alan, like Susan, has played a unique role in not only the field of IB, but more generally in strategic management and international management. His intellect, assertiveness, and insights often challenge conventional wisdom and the intellectual and organizational complacency in our discipline. Alan, raised in Britain like Susan, works hard but questions authority; distrusts ideologies but respects the evidence; and avoids following the crowd but trusts his own judgment and stands up for his own ideas. Alan too regularly raises the call, ‘‘Cave! hic dragones!’’ in our own field. Scholars like Susan Strange and Alan Rugman are too rare in our profession. As George Bernard Shaw says in Man and Superman: The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.

We all benefit from the unreasonable man (or woman!) – even if we may find the criticism uncomfortable when it is at our own expense.

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What I want to do in the rest of my talk is to give you some examples of the dragons – and alternative solutions – Alan Rugman has developed over the 29 years since his first two articles were published in 1975. I could talk about many more dragons,5 but given the time, I will focus on four: the ‘‘big bad MNEs’’, the anti-free traders, Porter’s diamond, and globalization.

The ‘‘Big Bad’’ MNE versus Internalization Theory In the 1960s and 1970s, economists explained MNEs by explaining foreign direct investment (FDI) location patterns focusing on the activity and not the firm. It was highly popular in those days, particularly among the general public and the political science discipline, to see MNEs as big and bad. The first scholar specifically to take a micro look at firms (Stephen Hymer, another Canadian, in his 1960 dissertation) saw MNEs as taking advantage of barriers to entry to exploit monopoly rents. MNEs were therefore welfare reducing (Hymer, 1960/1976).6 Even Ray Vernon’s Sovereignty at Bay (Vernon, 1971) was interpreted as big MNEs taking power away from nation states (although that was not how he intended the book to be interpreted). Popular anti-MNE books at the time included, for example, Barnet and Muller’s Global Reach (1975), later updated in Barnet and Cavanaugh (1995).7 In Canada, Kari Levitt’s Silent Surrender (1970) was trumpeting the negative impacts of FDI on the Canadian economy. The sea change in thinking about MNEs came with the development of internalization theory.8,9 Along with Peter Buckley, Mark Casson, John Dunning and Jean-Francois Hennart, Alan was involved in developing the core theory of internalization that argued MNEs were a reaction to missing and imperfect markets. Their ability to make internal markets was therefore welfare enhancing, and not exploitative.10 Alan was also involved in all the early debates about internationalization versus internationalization, whether market imperfections were always exogenous or could be endogenous, and the roles played by FSAs and CSAs (country-specific advantages).11 His FSA–CSA framework, developed with Alan Verbeke, is a very simple yet telling way to explore firm strategies in different locations. From this simple 2  2 box graph, Rugman has developed a whole series of extensions (Figs. 1 and 2). Let me give two examples. First, one extension I particularly like is the concept of location- and non-location-bound FSAs and CSAs. Since non-location-bound FSAs are, in effect, the ‘‘resources’’ of the resourcebased view, Rugman was able to link Bartlett and Ghoshal’s national

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Fig. 1.

Fig. 2.

The FSA–CSA 2  2 Box.

Location and Non-Location Bound FSAs in a 2  2 Box.

responsiveness-global integration framework to the FSA–CSA framework. Standing between England (internalization theory sina qua non) and the United States (home of Williamson, Porter, and Barney), Alan Rugman from his Canadian location explored (and arbitraged) the overlaps, linkages, and missing links between international business and strategic management. In many ways, Alan Rugman may have been the first economist-trained IB scholar to link IB and SM (strategic management) to create the new field of ISM or IMS (international management strategy) – I will not call it global since ‘‘globalization is dead’’ (see below). Thus, Alan, because of his pioneering role in ISM, is particularly well suited for this new award from the International Management division of academy of management (AOM). A second extension links back to ‘‘Multinationals and Transfer Pricing’’ book (Rugman & Eden, 1985). We argue in the introductory chapter that transfer pricing should be viewed as an efficient response to exogenous structural market imperfections imposed by governments in the form of

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tariffs, non-tariff barriers, foreign exchange rate restrictions, and corporate income taxes. Multinationals are able to arbitrage these exogenous government-imposed imperfections and therefore earn higher rents than nonMNEs. In terms of Rugman’s later work, the capability to engage in (lawful) transfer pricing can be viewed as a non-location bound FSA of a transactional rather than asset-based nature. Unnatural market imperfections give rise to this type of FSA, similar to the situation whereby operating in a sector populated by government customers provides an incentive to develop FSAs in government relations. Interestingly, a higher level of international diversification, and thereby a higher number of tax regimes and arbitrage opportunities, may increase the propensity of MNEs to develop an FSA in transfer pricing. On the other hand, at the macro-institutional level, the OECD guidelines on transfer pricing are designed to reduce this propensity through harmonizing national tax rules, establishing meta-national rules of the game within which MNEs set their transfer pricing policies (Eden, 2001). This harmonization has proceeded more quickly within regions than across regions. See, for example, Eden, Dacin, and Wan (2001), on cross-border diffusion of the arm’s length standard within North America.12

The Anti-Free Traders: Alan Rugman and the CUSFTA/NAFTA Debates Alan Rugman has written extensively – and I extensively – on multinationals and government policy, particularly trade and FDI policy.13 If one believes that MNEs are inherently world welfare increasing, then government regulation of their behavior is likely to reduce overall welfare gains; first because regulation prevents MNEs from doing what they do best (internalizing markets) and second governments are likely to get it wrong, making matters worse. The natural implication is that MNEs are better not regulated, and that the role for governments should be to reduce natural and structural impediments to markets.14 In both trade and FDI policy, Alan has argued for liberalization of government policies. While I particularly like his work on administered protectionism (countervailing and antidumping duties) and firm strategies, his work in this area was less about slaying an existing dragon than bringing together concepts from the strategic management literatures and the strategic trade policy literatures to develop the new concept of shelter strategies.15 However, a real dragon appeared in the Canadian naysayers to Canadian free trade with the United States. Here, Alan threw himself into the public

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debate, as he says in his short biography, as an ‘‘outside advisor on free trade, foreign investment and international competitiveness to two Canadian Prime Ministers over the 1986–1993 period’’. This included serving on industry task forces advising the Canadian government during the CUSFTA and NAFTA negotiations (the sole academic among the CEO advisors) and frequent public debates with anti-free traders on national TV and in the press. I cannot think of any other academic who so stepped outside of his/ her normal academic routine and immersed himself in the public policy debate over CUSFTA and NAFTA as did Alan Rugman. His publications over this period related to Canada, multinationals and Canada–US free trade are prolific and argue strongly in favor of free trade.16 A key argument against Canada–US free trade, from the Canadian side, was that with the loss of the Canadian tariff, US subsidiaries in Canada would close up and go home. Alan argued persuasively that while the tariff might have been responsible for bringing US firms to Canada in the first place (a shelter strategy), they had now developed FSAs and Canada had sufficient location-bound CSAs to keep them there. He railed, however, against US countervailing and antidumping duties for their closing off access to the US market. Canadian MNEs, he argued needed to adopt a North American mindset and develop strategies for the region as a whole.

Porter’s Diamond versus the Double Diamond Perhaps Alan’s best-known dragon is Michael Porter’s diamond of competitive advantage. Alan has published at least 14 scholarly pieces, including one book, on this topic.17 The basic argument in Porter’s diamond, of course, we all know: that industries derive their competitive advantage from a strong home diamond. Rugman’s critique is that Porter’s views are conditioned by his being trained and employed as a US academic, in the largest and richest country in the world. For firms in small countries, such as Canada, the implications of Porter’s diamond are disastrous. Confined by geography, limited by locationally bound endowments and labor, what competitive future was open to small countries? Alan Rugman and Alain Verbeke’s key insight was that firms from small countries could access a regional diamond, particularly if they were in a regional trade agreement such as NAFTA. Hence was born the ‘‘double diamond’’ (see Fig. 3). Rugman’s critique of Porter’s diamond appears to have been successful as Porter has since admitted that firms can have multiple home bases.

Cave! Hic Dragones!

Fig. 3.

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The Rugman-D’Cruz Canada–US Double Diamond.

The Myth of Globalization versus the Reality of Regionalism The most recent dragon that Alan Rugman has tackled is globalization.18 His book, The End of Globalization (2000b) is quite blunt. Abstracting from the Preface: ‘‘I have written this book because I have been convinced by the evidencey . I have been surprised by the lightweight nature of the debate and saddened by the distorted criticisms leveled at multinational enterprises and their managers. It is to help redress this highly relevant but potentially sterile debate that I have written this booky . I have been struckyby the strong opinions, but lack of facts, presented by critics of multinational enterprises. Again, on the internet, a huge volume of material is available on the subject of globalization, but most of it is unscientific and insubstantial at best and downright wrong at worst. We need to move on and look at the evidence on the activities of multinational enterprises. This book is an attempt to redress the balance of the debate on globalization.’’ (Rugman, 2000b, p. xi)

In sum, his ‘‘theme is that a paradox of globalization is that it never really occurred; it is a myth’’ (p. 12). This is despite the large number of centers of globalization research that exist around the world.19

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Fig. 4.

LORRAINE EDEN

Exports in the Broad Triad, 1997 (US$ Billion). Source: Rugman (2000b, p. 116).

While the book covers a wide variety of topics including the WTO and the Multilateral Agreement on Investment (MAI), a core part of the book is statistical. A major theme in Alan’s work has been the Triad – over 90% of trade and investment activity takes place among the United States (sometimes replaced by North America), the European Union and Japan. Trade and FDI flows and stocks among these three regions are a common theme in Alan’s work; see for example, Figs. 4 and 5. However, if one examines the top MNEs by sales or assets, he argues with Alain Verbeke that multinationals are regional not global entities. They do not have global strategies but rather regional strategies because almost none of the top MNEs have a significant percentage of sales in all three regions of the Triad. Most firms sell most of their products within their home region. While their assets may be more globalized, sales are not. He concludes there is no evidence for globalization, nor evidence of a trend toward globalization, but rather that Triad blocs are hardening as a result of political and NGO pressures. MNEs have regional not global strategies.

CONCLUSION Alan’s paper presented here today includes all of the themes I have outlined above – and then some. He has been actively involved in academic and

Cave! Hic Dragones!

Fig. 5.

19

Total Outward FDI Stocks in the Broad Triad, 1997 (US$ Billion). Source: Rugman (2000b, p. 120).

public policy debates involving MNEs since the mid-1970s. He has fought a variety of dragons or pitfalls for the unwary, on both the academic and public policy fronts, over the past 25 years. In this brief note, I have highlighted four dragons – the ‘‘big bad’’ MNE, the anti-free traders, Porter’s diamond and the globalization debate – and tried briefly to show his own counter-arguments. Interestingly, he has fought these dragons almost entirely with theory, statistics and graphs (most notably 2  2 boxes of which there are dozens), not with weighty econometric regressions built around testing large datasets. He has extensively used qualitative methods, directly interviewing company CEOs and managers. He has brought the data to the theory and when he found the theory wanting, has developed his own. At the 2004 AOM International Management doctoral consortium, Bob Hoskisson (Arizona State) told the doctoral students that three things were critically important for success in this profession: passion, playfulness, and perseverance. Alan has exhibited all three characteristics over his 30-year career: a long-run passion about MNEs and public policy, a playfulness in his gently poking fun at others in the AOM and AIB (and occasionally himself!), and perseverance in his view of the world as it applies to MNEs.

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Therefore, in honor of Alan being honored today, I want to bestow on him a new title in addition to the one from Booz Allen Hamilton – Alan Rugman, the dragon slayer!

NOTES 1. Many of the core readings are brought together in Rugman (1996b). 2. Although Alan criticizes Susan for associating the large size of MNEs with political power; see Rugman, The End of Globalization (2000b, p. 6). 3. Strange (1982). 4. Strange (1988). 5. Some other examples are Rugman’s work on administered protectionism and shelter strategies of MNEs, subsidiaries with world product mandates, business networks and flagship firms, beyond the three generics, megafirms, MNEs and environmental regulations, and the ‘‘imbalance’’ in US–Japan FDI stocks. 6. See Dunning and Rugman (1985). 7. Barnet and Cavanagh (1995). For a review that illustrates the dragon is still alive and kicking, see http://www.innovationwatch.com/books/ bks_0671633775.htm. 8. Seminal works were Buckley and Casson (1976), Dunning (1977), and Hennart (1982). 9. I am putting internalization theory together here with John Dunning’s OLI Paradigm, which may upset some of the key participants, but this is not the time or place to discuss the differences. 10. A recent example that many AIB members will remember is Alan’s first remarks from the floor at the AIB meetings in Charleston, South Carolina, at a session on the Janus Face of Globalization organized by Stefanie Lenway. The session dealt with the Janus (positive and negative) aspects of the MNE. Alan’s remarks immediately after the presentations were about the ‘‘unambiguously welfare-enhancing’’ aspects of MNEs and asked for direct evidence (proof) that MNEs could potentially lower welfare. 11. The core internalization readings are: Rugman (1980a,b,c, 1981a,b,c, 1982a,b, 1985a, 1986a, 1996b, 1998a, 2001a), Rugman and Verbeke (1992, 2003a), and D’Cruz, Rugman, and Verbeke (1995). 12. I am indebted to Alain Verbeke for suggesting this point. 13. Some of his works on trade policy are reprinted in Rugman (1996a). 14. A recent piece outlining this view is Rugman and Verbeke (2000, 2003b). 15. See, for example, Rugman and Verbeke (1990c). 16. His work in this area includes: Anderson and Rugman (1990, 1987), Boyd, Rugman, and Weintraub (2004), D’Cruz and Rugman (1990, 1995a), Gestrin and Rugman (1993a,b, 1994, 1996a,b,c), Kirton and Rugman (1998, 1999), Luxmore, Rugman, and Verbeke (1991), Rugman (1986b, 1987, 1988, 1990a,b,c, 1991a, 1994a,b,c,d, 1997, 1998b, 2004a), Rugman and Verbeke (1988a,b,c, 1989, 1990a,b,d, 1991, 1994), Rugman and Warner (1988, 1989), Rugman and Waverman (1991).

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17. His work in this area includes: Chang Moon, Rugman, and Verbeke (1995, 1997, 1998, 2000), D’Cruz and Rugman (1993, 1995b), Rugman (1991b, 1992, 2001b), Rugman and Verbeke (1993a,b,c) and Rugman, Van Den Broeck, and Verbeke (1995). 18. His work on this topic includes: Anderson and Rugman (1993), Brain and Rugman (2004), Collinson and Rugman (2004), D’Cruz and Rugman (1995a), Girod and Rugman (2003), Hodgetts and Rugman (2001), Rugman (1985b, 2000a,b, 2001c,d, 2002a,b, 2003a,b,c, 2004b, 2005), and Rugman and Verbeke (1997a,b, 2003c,d, 2004a,b,c). 19. See, for example, the list of centers posted on the Internet at: http:// www2.warwick.ac.uk/fac/soc/csgr/activitiesnews/conferences/gsnconfpr.pdf.

ACKNOWLEDGMENTS This paper was first presented at the Booz Allen Hamilton IMD Eminent Scholar Session, 2004 Academy of Management, New Orleans, LA. I would like to thank Tim Devinney, Alan Rugman and Alain Verbeke for helpful comments and Celina Sconochini for her research assistance. I would also like to thank Randall Rothenberg and Booz Allen Hamilton for sponsoring the IMD Eminent Scholar award.

REFERENCES Anderson, A., & Rugman, A. (1987). U.S.–Canadian trade liberalization and adjustment mechanisms: A survey. International Trade Journal, 1(3), 219–250. Anderson, A., & Rugman, A. (1990). The Canada–U.S. free trade agreement and Canada’s agri-food industries. Northeastern Journal of Agriculture and Resource Economics, 19(2), 70–79. Anderson, A., & Rugman, A. (1993). Globalization of banking services: Canada’s strategies in the Triad. In: Y. Aharoni (Ed.), Coalitions and competition: The globalization of professional business services (pp. 253–279). London: Routledge. Barnet, R. J., & Cavanaugh, J. (1995). Global dreams: Imperial corporations and the new world order. New York: Simon & Schuster. Barnet, R. J., & Muller, R. E. (1975). Global reach: The power of the multinational corporations. London: Jonathan Cape. Boyd, G., Rugman, A., & Weintraub, S. (Eds) (2004). Free trade in the Americas. Cheltenham, UK: Elgar (296pp.). Brain, C., & Rugman, A. (2004). Regional strategies of multinational pharmaceutical firms. Management International Review, 3(special issue), 61–79. Buckley, P., & Casson, M. (1976). The future of the multinational enterprise. London: Macmillan. Chang Moon, H., Rugman, A., & Verbeke, A. (1995). The generalized double diamond approach to international competitiveness. In: A. Rugman, J. Van Den Broeck &

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A. Verbeke (Eds), Research in global strategic management (Vol. 5.) Beyond the Diamond (pp. 97–114). Greenwich: JAI Press. Chang Moon, H., Rugman, A., & Verbeke, A. (1997). The new global competitiveness of Korea: The generalized double diamond approach. The Korean Economic and Business Review(Fall), 48–57. Chang Moon, H., Rugman, A., & Verbeke, A. (1998). A generalized double diamond approach to the global competitiveness of Korea and Singapore. International Business Review, 7(2), 135–150. Chang Moon, H., Rugman, A., & Verbeke, A. (2000). The new global competitiveness of Korea and the generalized double diamond approach. Korean Economic and Business Review, 48–57. Collinson, S., & Rugman, A. (2004). The regional nature of the world’s automotive sector. European Management Journal, 22(5), 471–482. D’Cruz, J., & Rugman, A. (1990). Canadian strategies for international competitiveness. Business in the contemporary world, III(1), 93–100. D’Cruz, J., & Rugman, A. (1993). The double diamond model of international competitiveness: The Canadian experience. Management International Review, 33(2), 17–40. D’Cruz, J. R., & Rugman, A. (1995a). Strategic responses of Canadian firms to globalization. In: D. F. Simon (Ed.), Corporate strategies in the Pacific rim: Global versus regional trends (pp. 35–165). London: Routledge. D’Cruz, J. R., & Rugman, A. (1995b). The double diamond model: Canada’s experience. In: B. David & M. Foster (Eds), Regions at the crossroads: Strategic development case studies for the new economy (pp. 35–57). Sydney, NS: University College of Cape Breton Press. D’Cruz, J. R., Rugman, A., & Verbeke, A. (1995). Internalization and de-internalization: Will business networks replace multinationals? In: G. Boyd (Ed.), Competitive and cooperative macromanagement (pp. 107–128). Northampton, MA, USA; Cheltenham, UK: Edward Elgar. Dunning, J. (1977). The location of economic activity and the multinational enterprise: Search for an eclectic approach. In: B. Ohlin, P. Hesselborn & P. Wiskman (Eds), The international allocation of economic activity (pp. 395–418). London: Macmillan. Dunning, J., & Rugman, A. (1985). The influence of Hymer’s dissertation on the theory of foreign direct investment. American economic review: Papers and proceedings, 75(2), 228–232. Eden, L. (2001). International taxation, transfer pricing and the multinational enterprise. In: A. Rugman & T. Brewer (Eds), The Oxford handbook of international business (pp. 591– 619). London, UK: Oxford University Press. Eden, L., Dacin, T., & Wan, W. (2001). Standards across borders: Diffusion of the arm’s length standard in North America. Accounting, Organizations and Society, 26, 1–23. Gestrin, M., & Rugman, A. (1993a). The investment provisions of NAFTA. In: S. Globerman & M. Walker (Eds), Assessing NAFTA: A transnational analysis (pp. 271–292). Vancouver, BC: The Fraser Institute. Gestrin, M., & Rugman, A. (1993b). The strategic response of multinational enterprises to NAFTA. Columbia Journal of World Business, 28(4), 18–29. Gestrin, M., & Rugman, A. (1994). The impact of NAFTA upon North American investment patterns. Transnational Corporations, 3(1), 77–96. Gestrin, M., & Rugman, A. (1996a). The NAFTA investment provisions: Prototype for multilateral investment rules? In: P. Sauve´ & A. B. Zampetti (Eds), Market access after the

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Uruguay round (pp. 63–78). Paris: Organization for Economic Co-Operation and Development. Gestrin, M., & Rugman, A. (1996b). The North American free trade agreement and foreign direct investment. In: K. P. Sauvant (Ed.), Companies without borders: Transnational corporations in the 1990s (pp. 188–207). London: International Thomson Business Press. Gestrin, M., & Rugman, A. (1996c). Conceptual framework for a multilateral agreement on investment: Learning from the NAFTA. In: P. Sauve´ & D. Schwanen (Eds), Investment rules for the global economy: Enhancing access to markets (pp. 147–175). Toronto: C.D. Howe Institute. Girod, S., & Rugman, A. (2003). Retail multinationals and globalization: The evidence is regional. European Management Journal, 21(1), 24–37. Hennart, J. (1982). A theory of multinational enterprise. Ann Arbor, MI: University of Michigan Press. Hodgetts, R., & Rugman, A. (2001). The end of global strategy. European Management Journal, 19(4), 333–343. Hymer, S. (1960/1976). The international operations of national firms: A study of direct foreign investment. MIT Press: Cambridge, MA. Kirton, J., & Rugman, A. (1998). Regional environmental impacts of NAFTA on the automotive sector. Canadian Journal of Regional Science, 22(2), 227–254. Kirton, J., & Rugman, A. (1999). Multinational enterprise strategy and the NAFTA trade and environment regime. Journal of World Business, 33(4), 438–454. Levitt, K. (1970). Silent surrender: The multinational corporation in Canada. Ottawa: Carleton Library Series. Luxmore, S., Rugman, A., & Verbeke, A. (1991). Corporate strategy and the free trade agreement: Adjustment by Canadian multinational enterprises. Canadian Journal of Regional Science, 13(2/3), 307–330. Rugman, A. (1980a). A new theory of the multinational enterprise: Internationalization versus internalization. Columbia Journal of World Business, XV(1), 23–29. Rugman, A. (1980b). Implications of the theory of internalization for corporate international finance. California Management Review, XXIII(2), 73–79. Rugman, A. (1980c). Internalization as a general theory of foreign direct investment: A reappraisal of the literature. Weltwirtschaftliches Archiv, 116(2), 365–379. Rugman, A. (1981a). A test of internalization theory. Managerial and Decision Economics, 2(4), 211–219. Rugman, A. (1981b). Inside the multinationals: The economics of internal markets (Japanese edition) (186pp.). London: Columbia University Press. New York: Croom Helm. Rugman, A. (1981c). Internalization as a general theory of foreign direct investment. In: K. C. Dhawan, H. Etemad & R. Wright (Eds), International business: A Canadian perspective (pp. 282–301). Canada: Don Mills, Addison-Wesley. Rugman, A. (1982a). Internalization and non-equity forms of international involvement. In: A. M. Rugman (Ed), New theories of the multinational enterprise (pp. 9–23). London: St. Martin’s Press. New York: Croom Helm. Rugman, A. (Ed.). (1982b). New theories of the multinational enterprise (304 pp.) London: St. Martin’s Press. New York: Croom Helm. Rugman, A. (1985a). Internalization is still a general theory of foreign direct investment. Weltwirtschaftliches Archiv, 121(3), 570–575.

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Rugman, A. (1998b). The rules for foreign investment in NAFTA. Latin American Business Review, 1(1), 77–94. Rugman, A. (2000a). From globalisation to regionalism: The foreign direct investment dimension of international finance. In: J. Daniels, C. Kaiser & J. Kirton (Eds), Shaping a new international financial system (pp. 203–220). Ashgate: Aldershot. Rugman, A. (2000b). The end of globalization (237pp.). London: Random House Business Books. Paper edition 2001. Also published by McGraw Hill/Amacom, 2001. Rugman, A. (2001a). My contributions to internalization theory. Journal of International Business and Economy, 2(1), 1–13. Rugman, A. (2001b). The generalized double diamond approach to the global competitiveness of Korea and Singapore. In: D. Van Den Bulcke & A. Verbeke (Eds), Globalization and the small open economy (pp. 36–56). Cheltenham: Elgar. Rugman, A. (2001c). The illusion of the global company. In: J. Pickford (Ed.), Financial times mastering management 2.0 (pp. 129–133). London: Pearson Education. Rugman, A. (2001d). The myth of global strategy. International Marketing Review, 18(6), 583–588. Rugman, A. (2002a). Globalization and business strategy. In: Business: The ultimate resource (pp. 97–98). Cambridge, MA: Perseus Bloomsbury Publishing. Rugman, A. (2002b). Multinational enterprises and the end of global strategy. In: J. H. Dunning & J. Mucchielli (Eds), Multinational firms: The global-local dilemma (pp. 3–17). London and New York: Routledge. Rugman, A. (2003a). Multinational enterprises are regional, not global. Multinational Business Review, 11(1), 3–12. Rugman, A. (2003b). Regional strategies for service sector multinationals. European Business Journal, 15(1), 1–9. Rugman, A. (2003c). Regional strategy and the demise of globalization. Journal of International Management, 9(4), 409–417. Rugman, A. (Ed). (2004a). North American economic and financial integration (Vol. 10) of Research in Global Strategic Management (370pp.). Oxford: Elsevier. Rugman, A. (2004b). The regional nature of world banking. Multinational Business Review, 12(3), 5–22. Rugman, A. (2005). The regional multinationals. Cambridge, UK: Cambridge University Press. Rugman, A., & Eden, L. (1985). Multinationals and transfer pricing (336pp.). London: Croom Helm/New York: St. Martin’s Press. Rugman, A., Van Den Broeck, J., & Verbeke, A. (Eds) (1995). Research in global strategic management: (Vol. V) beyond the diamond. Greenwich, CT: JAI Press. Rugman, A., & Verbeke, A. (1988a). Strategic management and the Canada–U.S. free trade agreement. North American Review of Economics and Finance, 1(1), 63–93. Rugman, A., & Verbeke, A. (1988b). Strategic responses to free trade. Hitotsubashi Journal of Commerce and Management, 23(1), 69–79. Rugman, A., & Verbeke, A. (1988c). Strategic responses to free trade. In: M. Farrow & A. Rugman (Eds), Business strategies and free trade (pp. 13–29). Toronto: C.D. Howe Institute. Rugman, A., & Verbeke, A. (1989). The impact of free trade on small business in Canada. Journal of Small Business and Entrepreneurship, 6(3), 51–56. Rugman, A., & Verbeke, A. (1990a). Global corporate strategy and trade policy (179pp.). London and New York: Routledge.

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THE MNE’S SPATIAL POSITIONING Bernard M. Wolf INTRODUCTION Alan Rugman, in the course of his professional career, has not shied away from controversy, whether the issues were international diversification versus internationalization, internalization versus use of the external market, double diamonds versus single diamonds or global multinational enterprises (MNEs) versus regional MNEs. Whatever was the bone of contention, he has formulated strong hypotheses and then engaged in empirical work to provide evidence for his position. He has taken the issues to a wide audience – scholarly, government and business. To each group he has hammered the ideas home until he was associated with a position on the issues. In fact, Alan seems to have relished being in the middle of storms of controversy as he beat the drums furiously for what he saw as right regardless of whether he offended others taking an opposite view. The result has been that he has had a huge impact on the field of international strategic management and an influence on government policy and business activity.

CAREER PARALLELS Alan Rugman and I presented papers at the same session of the Canadian Economics Association, over two decades ago, way back in the spring of Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 29–37 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11003-1

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1974. At the time we had positions at Canadian universities; he at the University of Winnipeg and I at York University in Toronto. Alan was an immigrant to Canada from England and I from the United States. He spent his sabbatical at the University of Reading in 1976–1977, working with John Dunning, Peter Buckley and Mark Casson. The latter had just published their seminal work, The Future of the Multinational Firm (Buckley & Casson, 1976). I also had been at the University of Reading briefly in February 1975 and had already met Buckley and Casson in 1974 in Budapest, where we were participating in an International Economics Association World Congress. My discussions in Budapest with Buckley and Casson earned me an acknowledgement in the Buckley and Casson volume. Both Alan and I have been heavily influenced by Buckley and Casson. I stayed at York while Alan moved onto Dalhousie University in Halifax and then to the business school of the University of Toronto. With both of us in Toronto in the late 1980s, we collaborated on a proposal to the Ontario Government that resulted in the establishment of the Ontario Centre for International Business at Toronto and York. It was one of the rare occasions where the two rival business schools in the same city elected to cooperate for a common purpose. Unfortunately, the Centre was dissolved after the initial 5-year term because of a tightening in the government’s fiscal position. An outgrowth of the Centre was York’s International MBA Degree Program, which I currently direct. Hence, our paths crossed many times in those days. Alan, after leaving Toronto, went to Oxford in the UK and then to the University of Indiana, where he is at present. Unfortunately, in recent years our interaction has been limited mainly to participation at the same scholarly conferences, notably the Academy of International Business (AIB) and the International Management Division of the Academy of Management (AOM). Alan and I also have somewhat similar research interests, both taking the MNE as the key unit of analysis. Each of us was trained as an economist – I at Yale and he at Simon Fraser with Herb Grubel as his thesis supervisor, a Yale PhD degree holder. Alan in his early work (Rugman, 1979), stemming from his thesis, looked at international diversification by which he meant ‘‘ya financial economics term involving assessment of risk of a portfolio of assets, real rather than financial, when applied to the activities of MNEs.’’ He has argued that ‘‘[i]t should not be used as a term for variables used to explain internationalization, geographic sales dispersiony’’ (Rugman, 2004, pp. 6–7). In other words he was looking through the finance glass. In contrast, in my thesis and 1977 article, I was looking at internationalization more in the tradition of Edith Penrose, who was concerned about

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how firms use resources for growth. Thus, the internationalization or geographical expansion to different countries by MNEs was not strictly diversification in the sense of the finance literature, but it was still a way for MNEs to use their resources in multiple markets.

ADDING OUTSOURCING TO THE MNE’S SPATIAL POSITIONING In this essay, my objective is to illustrate how the MNE can position itself in various spaces. The firm can redefine itself in various markets over time making liberal use of concepts with which Alan is associated. These include internalization (Buckley & Casson, 1976; Rugman, 1980) and the firm-specific advantage – country-specific advantage (FSA–CSA) framework (Rugman, 1981). My major contribution here is developing a model that adds vertical integration or outsourcing. Basically, I want to incorporate a discussion of the upstream or downstream section of the value chain in terms of how much the firm does internally (internalize) and how much it does outside, as well as to what extent it engages in internationalization and also diversifies in terms of product mix. In other words, there are three avenues for firm expansion: geographical, horizontal and vertical in the value chain. All three can be done by contracting out on an arm’s length basis, with partners (strategic alliances) or by internalizing. In my Journal of Industrial Economics article (Wolf, 1977), I postulated that those firms successful at geographical expansion would also have the key ingredients for product diversification. Unlike most work done up to that time, the paper did ‘‘not consider domestic industrial diversification and the various forms of internationalization as isolated phenomena;’’ rather it suggested ‘‘ythat they have a common foundation as part of a firm’s complex innovating, producing and marketing strategy.’’ ‘‘The evidence provided seemed to suggest that large firm size and technical know-how stimulate the U.S. manufacturing firm to operate on a multi-national and multi-industry basis.’’ Large firms are able on average to achieve economies of scale (and scope) and firms with technical expertise are innovators who use their expertise in new markets (Wolf, 1977, p. 189). I still think the view is correct. More specifically, using firm size and the proportion of workers that could be classified as engaging in R&D (broadly defined) as my independent variables, I found empirically through regression analysis that the combination of (1) the sum of exports and the foreign sales of United

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States affiliates as a percentage of domestic production and (2) domestic product diversification could be explained better than individually. In other words, two independent variables explained more of the variation in the combined dependent variables than they did of the variation of the dependent variables when assessed separately. Thus, firms expand across industries and countries as they activate their under-utilized resources (and combine these with additional resources). Their choices depend upon CSAs as well as the prospects for product groups. Sometimes and perhaps most often, at least initially, the expansion paths are substitutes, but there may be, in addition, complementary elements. The empirical work was rather crude due to severe data limitations. There was also no discussion of vertical integration (the firm undertaking upstream or downstream activities related to the core activity) or outsourcing. Today, outsourcing is the subject of much scholarly work as well as a frequent issue in the media. Firms are tending to define their core competencies and then outsource whatever else they require, domestically or internationally. For example, call centers have multiplied like rabbits in India (downstream outsourcing) because of the availability of a relatively cheap, educated and English-speaking labor force. Even more sophisticated software engineering has migrated to India (upstream outsourcing). Developed countries find that more and more is being outsourced to the developing world. Fig. 1 illustrates how outsourcing can be viewed as part of the spatial positioning of the MNE. The inner ring represents the firm’s domestic core activities. The outer ring (or Wolf’s donut, in the tradition of Alan’s 2  2 matrices) is divided into international expansion or internationalization, product diversification and vertical integration. For MNEs, the configuration will differ from firm to firm and over time. Thus, the two concentric circles represent all the activities of the firm. Change can be indicated by shifting the proportions allocated to each activity. This is illustrated in Fig. 2 where international expansion has increased relative to product diversification and vertical integration. One additional benefit of the framework is the ability to illustrate not only expansion of the MNE, but contraction, including outsourcing and de-internationalization. Actually, product diversification can take place at home or be done abroad, something not taken into account in Fig. 1 or 2. The deficiency is corrected in Fig. 3. Product diversification that is done abroad is illustrated separately. Similarly, vertical integration could be domestic or international. The next three figures consider the components of the outer circle. Fig. 4 looks at the firm’s upstream and downstream activities that can be divided

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Product Diversification

International Expansion Domestic Core Activity

Vertical Integration

Fig. 1.

MNE’s Space: Equal Allocation.

Product Diversification International Expansion

Domestic Core Activity

Vertical Integration

Fig. 2.

MNE’s Space: Unequal Allocation.

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BERNARD M. WOLF International Product Diversification

Product Diversification

International Expansion

Domestic Core Activity

Vertical Integration

Fig. 3.

Domestic Outsourcing

Downstream

Fig. 4.

MNE’s Space Accounting for Overlap. Vertical Integration International Outsourcing

Upstream

MNE’s Space Dissected – Vertical Integration.

into those that are vertically integrated, outsourced domestically or outsourced internationally. Fig. 5 examines international expansion that can be divided into licensing, exporting and foreign direct investment (greenfield or acquisition.). The breakdown could be finer still such as separating production from marketing. Clearly, foreign direct investment embodies internalization, but exporting and even licensing, if accompanied by some equity ownership, have elements of internalization. The international expansion

The MNE’S Spatial Positioning

Internalization

35

Licensing

Ma rk et

Exporting

Fig. 5.

MNE’s Space Dissected – International Expansion.

Product Diversification: Importance of Other Industries

Fig. 6.

Foreign Direct Investment

[Product Diversification in One Other Industry]

MNE’s Space Dissected – Product Diversification.

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can be regional or global, in line with another of Alan’s themes (Rugman & Verbeke, 2004). Again each firm will have a different profile and each individual firm itself may have different profiles over time. Fig. 6 represents product diversification. Here the segment can be divided according to the number of industries. As shown the product diversification is into only one industry. If the firm had diversified into three industries, the circle segment would have been divided into three as in Figs. 4 and 5; the number of segments would equal the number of industries in which the firm has diversified. The framework can be extended to include linkages (strategic alliances) between firms. Each MNE would have its own circle drawn and a cable would link the relevant parts of the two circles. Virtually any relationship could be represented. Consider a few concrete examples from the automotive industry. First, if Toyota and General Motors establish a joint venture to research alternative fuels, the Toyota and General Motors circles would be linked by the cable between their respective vertical integration sections. Second, the GM–Toyota joint venture assembly plant in Fremont, California would be shown as a cable linking GM’s core activity with Toyota’s foreign expansion. Third, if GM outsources key auto parts from a Toyota factory in the United States, the cable would run from GM’s domestic outsourcing segment to the foreign direct investment section of Toyota’s foreign expansion section. If one desired, all three relationships could be shown using one circle for GM and the other for Toyota. Moreover, relationships among more than two companies can be depicted quite easily.

SIGNIFICANCE OF THE SPATIAL FRAMEWORK Alan Rugman and Alain Verbeke use FSAs and CSAs to explain the positioning of MNEs (Rugman & Verbeke, 2003). John Dunning uses the OLI (ownership specific advantages, location and internalization) paradigm (Dunning, 1973). In both cases, activities are internalized, internationalized and/or diversified. Once having explained the behavior, the framework outlined in this essay is a good accompaniment in that it provides a way to see where an MNE has positioned itself and where it might be heading. Various scenarios for the future then can be contemplated easily. At the same time it permits a comparison of the positioning of a number of MNEs. Extending the framework to the linkages between one firm and another, or among several firms is also easily doable.

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Thus, this framework, similar in its simplicity to the many Rugman– Verbeke 2  2 matrices, can readily be operationalized for the use of managers seeking to improve the international strategic management of their MNEs. In addition, it can prove to be valuable as a classroom expository tool. At my own business school, MBA students are required to engage in a firm strategy study in which they are expected to propose a strategic course for a firm. The framework should simplify the task by putting the elements of firm expansion or contraction in one context.

ACKNOWLEDGEMENTS I would like to thank Allen Goss, Schulich School of Business for assistance with the graphics.

REFERENCES Buckley, P. J., & Casson, M. (1976). The future of the multinational enterprise. London: Macmillan. Dunning, J. H. (1973). The determinants of international production. Oxford Economic Papers, 25(3), 289–339. Rugman, A. M. (1979). International diversification and the multinational enterprise. Lexington, MA: D.C. Heath. Rugman, A. M. (1980). A new theory of the multinational enterprise: Internationalization versus internalization. Columbia Journal of World Business, XV(1), 23–29. Rugman, A. M. (1981). Inside the multinationals: The economics of internal markets. New York: Columbia University Press. Rugman, A. M. (2004). Twenty five years of international diversification and the multinational enterprise . Paper for the 2004 European International Business Academy, Ljubljana, Slovenia. Rugman, A. M., & Verbeke, A. (2003). Extending the theory of the multinational enterprise: Internalization and strategic management perspectives. Journal of International Business Studies, 35(1), 3–18. Rugman, A. M., & Verbeke, A. (2004). A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1), 3–18. Wolf, B. M. (1977). Industrial diversification and internationalization: Some empirical evidence. The Journal of Industrial Economics, 26(2), 177–191.

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PART B: THE 25TH ANNIVERSARY OF ‘‘INTERNATIONAL DIVERSIFICATION AND THE MULTINATIONAL ENTERPRISE’’

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RUGMAN AND THE GEOGRAPHY OF MNE ACTIVITY John H. Dunning INTRODUCTION I think it would be fair to say that explaining the geography of multinational enterprise (MNE) activity has never been a major part of Alan Rugman’s scholarly research and writings. Nevertheless, over the last 25 years, he has provided us with several useful nuggets of understanding and empirical evidence about the territorial expansion of firms, and its impact on their global competitiveness. In this short contribution, I shall identify some of the benchmarks of Alan’s contribution to this subject area, from the time of his seminal volume on the international diversification of multinational enterprises MNEs in 1979 through to one of his latest papers (with Alain Verbeke) on the regionalisation of the sales of the largest MNEs (Rugman & Verbeke, 2004). In doing so, I shall try and set his writings within the framework of the then contemporary thinking on the international location of economic activity; and more particularly, of my own perceptions of how the determinants of the geography of MNE activity have changed over the last three decades, and the reason for this. In taking a chronological or dynamic perspective of Alan’s work, I shall consider four time frames, viz. the 1970s, 1980s, 1990s and 2000s. To keep Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 41–57 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11004-3

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this chapter within manageable proportions, I shall be deliberately selective in my review of both Alan’s writings and what is a very extensive literature on the geography of foreign direct investment (fdi),1 and content myself with identifying the main thrusts of research. However, in doing so, I shall take an interdisciplinary perspective, as indeed Alan has done in much of his work. More especially, I shall concern myself with three strands of literature dealing with locational issues, viz. those emanating, respectively, from economists, management scholars and geographers. Each of these strands, I believe, has contributed and is contributing to our appreciation of the geography of MNE activity.

THE 1970s In November 1973, Oxford Economic Papers published an article of mine entitled The determinants of international production (Dunning, 1973). In that article I tried to set out the (then) received wisdom on the geography of international production. I suggested that, at the time, the main contribution to this subject came from economists, who were essentially interested in identifying and evaluating the factors influencing the locational choices of MNEs. Broadly speaking, these scholars took a neoclassical approach to this topic, and used traditional locational theory to explain the ‘where’ of international production. The second group of economists took a more strategic perspective to understanding the internationalisation of business activity. Ray Vernon pioneered this approach (1966, 1974). His well-known product cycle offered one of the first dynamic explanations of the cross border locational choices, of MNEs, which he asserted would vary according to the market structure in which they competed, and the stage of the product cycle in which they were producing. One of Vernon’s students, Frederick Knickerbocker (1973) took up this theme by observing and explaining the clustering of the foreign subsidiaries of US MNEs in particular countries. The third approach was that of Stephen Hymer who took the view that the territorial expansion of firms added a new layer to their hierarchical decision-making. More particularly, he argued that the higher order activities were likely to be centralised in the head offices of MNEs, while the lower order functions were likely to be dispersed in both their home countries and abroad. Alan’s earlier work was perhaps most influenced by a third group of economists who took a capital theoretical approach to understanding the

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structure and scope of MNE activity. This group of scholars can itself be broken down into three sub-groups. The first consisted of economists who were dissatisfied with the ability of the received portfolio theory of capital movements to explain fdi. Second, there were those who sought to explain cross-border capital formation by the use of similar models to those which explained domestic capital formation. Essentially, these economists asserted that the geography of fdi would be determined by the expected profits offered by different locations. These, in turn, reflected differences in the type of demand and supply variables, which were then incorporated into the models. The third sub-group of economists specifically acknowledged the role of risk and uncertainty in influencing the international diversification of MNE activity.2 Their work was the direct antecedent of Rugman’s (1979) book, in that one of its critical hypotheses was that the cross-border location of value-added activity was likely to reflect both the expected profits likely to be earned, discounted by the risks involved, and the particular risks involved in the extent and pattern of the diversification itself. It was this second type of risk which particularly interested Alan. In his 1979f book, he cleverly integrated a traditional economic approach, based on the expectation of profits and a strategic approach, which recognised that stability of earnings was also an influencing factor in its own right. But in explaining the extent and pattern of diversification (and implicitly its geography), he (like Hymer) found financial explanations unsatisfactory. Instead, he argued that the explanation of such diversification could best be explained by their need to reduce the risks and volatility of individual intermediate product markets by internalising them. These insights were subsequently applied to explaining why particular MNE functions were centralised and others were decentralised. In this respect, Alan added an important new dimension to the earlier work of Hymer (1960, 1976), Vernon (1966, 1974) and Buckley and Casson (1976). A re-reading of Alan’s (1979) book confirms my earlier belief that he was not primarily interested in the determinants of the international diversification of MNE, and still less with its geography. Rather, his emphasis was first on how far the MNE could achieve one of the main benefits of diversification, i.e., the stability of its global earnings, as a risk-reduction measure, as compared with how such benefits might be captured by investing in the international stock market; and second, on his insistence that intra-firm diversification is best explained by the internalisation of market imperfections (of which exchange and political risks are examples) rather than by purely financial variables.

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At the same time, I would also assert that Alan’s analysis directly advanced our thinking on the geography of MNE activity in two ways. First, by specifically introducing risk reduction as a motivation for MNE activity, he opened the door for a strategic approach to understand the extent, structure and geography of International Business (IB) activity. Second, in his empirical work, he identified the extent to which the correlation between stock price indexes in different national markets might reflect the benefits of diversification, relative to the concentration, of MNE activity. However, what is not entirely clear from Alan’s writings is the extent to which the global profits of the investing firm and their stability is affected by the efficiency of resource usage, as compared with the internalisation of market risks associated with exchange and other imperfections. What of other work on location in the 1970s? Apart from that already mentioned, we might specifically identify three particular thrusts. The first was that of the Uppsala School, the proponents of which asserted that the stages of the internationalisation process were governed by the need to minimise spatial transaction costs (including those associated with psychic distance) and to maximise the benefits of knowledge acquisition and learning capabilities (Johanson & Vahlne, 1977). Though not explicitly incorporating Rugman type risk models into their analysis, implicitly this was done. Second, mention should be made of Seev Hirsch’s classic article in 1976, which formalised some of the critical variables affecting the export v. fdi mode of international business activity (Hirsch, 1976). Seev was one of the first trade economists to incorporate the additional intra-firm communications associated with international diversification into a model, which compared the production and transportation costs of servicing a foreign market from a home or foreign base. However, it was not until the 1980s that mainstream international economists began to take an industrial organisational approach to explaining the activities of MNEs, and the interface between received trade theory, increasing returns to scale and the cross border integration of intermediate product markets.3 Lastly, brief mention might be made of my own work on location in the 1970s. It was primarily directed towards the implications of the UK joining the European Common Market. In a paper presented to the Manchester Statistical Society, Dunning (1972), I set out some of the static and dynamic consequences of trade liberalization, and the extent to which UK firms were likely to be more or less geographically diversified. I must own I did not inject a risk component into my analysis. Instead, I concentrated on some 13 firm-, industry- and country-specific variables, which I hypothesised would influence the locational choice of MNEs; and, also, the extent to

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which such firms themselves possessed (or could acquire) particular competitive advantages. The results (which were essentially consistent with trade theory) were that the geographical diversification of MNE activity in Europe might be expected to increase in sectors in which there were few economies of scale, high transport costs and there were limited opportunities where intra-firm horizontal or vertical specialisation, and where there were few government (or other) imposed constraints on inward or outward investment. By contrast, it might be expected to decrease in sectors where there was little product differentiation, low transport or transaction costs, and where the product(s) could be produced under substantial scale economies.

THE 1980s Research on the geography of MNE activity took on a new lease of life in the 1980s. This was for three main reasons. The first was that both the data on the scope and distribution of MNE activity and on some of the locationspecific variables thought to influence that activity was starting to improve. This led to several empirical studies, particularly in respect of US fdi in Europe.4 Second, both economists and geographers were increasingly recognising that it was difficult to formulate any generalised theory of the location of international economic activity (and for that matter of trade!). So much depended on the type of motive for fdi (cf. e.g., those for resource seeking with those of market seeking and efficiency seeking fdi), and the functions performed by the foreign affiliate(s) (cf. e.g., the geography of innovation in the pharmaceutical industry with that of the assembly of motor vehicles). Third, due to the work of Paul Krugman and others, trade economists were now starting to take an interest in the geography of economic activity, and particularly the extent to which and the reasons for which particular value-adding activities were dispersed or concentrated. This stimulated a new generation of economists and geographers to direct their attention to spatially related issues.5 Yet, only a few scholars applied the models to understand the geography of fdi. Of these, James Markusen (1984), Elhanan Helpman (1985) and Wilfred Ethier (1986) took the lead, and, in doing so, used IB concepts, and more especially my own Ownership Location Internalisation (OLI) paradigm, in the construction of their formal models. Third, there were several emerging issues of the late 1970s and 1980s that demanded economists, geographers and business strategists should rethink

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many traditional approaches to the geography of MNE activity. At a macro level, perhaps the most important of these was the renaissance of marketbased economic systems – particularly in China and central and eastern Europe – and the burgeoning of regional integration schemes. These events led to a marked realignment of the geography of both intra- and interregional fdi, particularly in Europe, North America and East Asia. At a micro level, various new issues came to the fore, not least as a consequence of the more confrontational stance in the 1970s between governments and MNEs about the costs and benefits of fdi. One outcome of this confrontation was the introduction of a wide range of policy and legislature measures introduced by host governments in an attempt to discourage perceived unacceptable business practices on the part of MNEs or their affiliates. These included extra territoriality restrictions of technology transfer and exports, and, perhaps most contentious of all, the manipulation of transfer prices. It was in this latter area that Alan Rugman made his contribution in the early 1980s – along with one of his colleagues from Dalhousie University – Lorraine Eden. In a volume jointly edited with Lorraine in 1985, Alan and his contributors set out their views on the theory of, and empirical evidence for, cross-border transfer pricing. Again, although neither Alan nor his fellow contributors were primarily concerned with the implications of other than arms length intra-firm administered prices for the geography of MNE activity, their analysis and findings did help to identify the conditions under which the opportunity for such transfer pricing might affect this geography. Alan, in particular, made the critical distinction between transfer pricing designed to combat government-imposed market imperfections and/or endemic market failures, which might well be consistent with a more globally efficient spatial distribution of fdi; and that which was specifically designed to exploit and extend the monopoly power of MNEs, and to evade taxes. However, as Alan and Lorraine discovered, the question of ‘when is a transfer price a distorted price, and from whose viewpoint?’ is by no means easily answered. In the 1980s, much intra-corporate transfer pricing was designed to reduce their global tax burden, and to bypass governmentimposed restrictions on capital repayments and dividend transmissions. To the MNEs such a readjustment of prices was regarded as a legitimate business strategy. The taxation authorities, on the other hand, viewed such practices as a way of evading the legal obligations of the investing firms, and as a challenge to national sovereignty (Rugman & Eden, 1985, p. 9). Whatever the rationale for transfer pricing, it is a fact that, whenever it differs from its arms length counterpart it has consequences (for good or

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bad) on the geography of fdi. Clearly in its absence, and ceteris parabis, MNE activity would gravitate to low tax countries which impose the fewest regulations on remittances, and operate stable currencies. Accepting intrafirm price manipulation however, allows fdi to take place in higher tax, and in less stable and more regulatory regimes, provided, of course, that these regimes do not counteract the motive for, or the practice of, such pricing. In other words, the possibility of transfer pricing permits firms to better take advantage of differential demand and cost differences that might have been nullified by the actions of governments. Certainly, the findings of an empirical study by Roger Tang (1981) suggested that among the more significant environmental variables influencing the motivation for transfer pricing were the disincentives to fdi imposed by national governments;6 and, too, that there was some reason to suppose that the benefits gained by firms from transfer pricing shifted the geography of MNEs to countries which otherwise might have lost out. However, notwithstanding the attention paid to transfer pricing issues in the 1980s, to my knowledge, there were no serious attempts to either evaluate how important this variable was, in relation to other economic or strategic determinants of fdi, either from the perspective of individual firms or countries. However, one of the contributors to the Rugman and Verbeke (1995) volume (Benvignati, 1985) in her study of US manufacturing firms, found that the larger number of countries in which MNEs operated, the more likely they were to engage in administered cross-border pricing. It would then appear that, in the 1970s and early 1980s, geographical diversification and transfer pricing might have gone hand in hand, at least in those instances where MNEs were induced and were able to overcome both endemic and government-imposed market imperfections. My own interests in the geography of MNEs in the 1980s largely centred around the investment development path, (IDP), a concept I first put forward and tested in 1981 (Dunning, 1981).7 Though primarily intended to explain the changing pattern of inbound and outbound fdi for particular countries as they moved through various stages of their economic development, it also suggested how its geography might change. Inter alia, the IDP hypothesised that, at a particular stage in their development, most countries would begin to engage in outward fdi, while the destination of that MNE activity would become more diversified. It also asserted that the geography of fdi would very much depend on the motivation for such investment and the economic policies pursued by host governments. Thus, while asset-augmenting fdi was likely to be of an intra-Triad variety, natural resource-seeking fdi was likely to be directed to resource rich

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countries, most of which were located in the Southern Hemisphere. Or to take another example, restrictions placed on inward direct investment by Japan in the 1970s and 1980s caused it to be very much an outlier as far as its position in the IDP was concerned.

THE 1990s In my judgement, there were four critical features which fashioned the changes in the geography of MNE activity in the 1990s.8 The first was the emergence of the erstwhile Communist countries as major recipients of inbound fdi; and, in the case of China, of outbound fdi. In 1990, such countries accounted for 1.4% of the stock of inbound fdi; by 2003 this had risen to 89% (UNCTAD, 2004). The second feature was the growth of efficiency and market-seeking fdi, which was the direct result of the widening and deepening of regional economic integration, particularly in Europe and North America. Again, the share of the inbound fdi stock directed to developed countries accounted for the European Community (EC) and the North American Free Trade Area (NAFTA) rose from 91.3% in 1990 to 93.5% in 2003. The third feature was the growth of strategic asset-seeking MNE activity, particularly within the Triad. Such fdi was designed as much (if not more) to tap into, or augment, existing competitive, or ownership-specific, advantages of the MNEs, as to exploit them. Inter alia, this feature was illustrated by the huge growth of intra-Triad mergers and acquisitions (M&A), particularly in knowledge- and information-intensive sectors, throughout the 1990s.9 The fourth, and partly paralleling the second and third features, was the gradual geographical diversification of higher value functions of MNEs away from their home country locations to that of their foreign affiliates. Recent data both on the research and patenting activities of MNEs outside their national boundaries are showing an increasingly important role of affiliates, both in the creation of knowledge and human resource development, and as intermediaries between the local technological environment in which they operate, and their parent organisations (Cantwell & Kosmopoulou, 2002; Frost, 2001; Pearce, 1997, 1999; Pearce & Singh, 1992). In analysing the character, rationale and consequences of these features, both from the perspective of the firm and from that of national economies, IB scholars in the 1990s played a major role. Inter alia, this was reflected in (i) a plethora of papers on the determinants of fdi in Central and Eastern

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Europe;10 (ii) new theoretical models on asset seeking fdi (Makino, Lau, & Yeh, 2002; Wesson, 2002) and on the role of foreign-based R&D laboratories and strategic alliances in augmenting (both within and outside the firm) innovating activities (Kuemmerle, 1999; Narula, 2001, 2003; Narula & Guyster, 2004); (iii) an increasing interest in the role of collaborative ventures and that of the geographical clustering and networking of related activities;11 and (iv) a better appreciation by scholars of the dynamics of the interface between the changing locations and attractions of countries, and the ownership strategies of MNEs (Buckley & Ghauri, 2004). Alan Rugman was at the centre of many of these debates. I shall highlight just two of his contributions. The first was his criticism of Michael Porter’s diamond of competitive advantage (Porter, 1990) for inadequately taking account of the extent to which MNEs (and in Alan’s case, Canadian MNEs) might be able to advance their global competitive advantages as a direct result of their fdi. In several papers including those jointly authored with Joseph D’Cruz, Alan coined the term ‘‘double diamond’’, and, in doing so, confirmed the importance of the geography of a firm’s value-added activities as a factor influencing its competitiveness.12 Basically, his contention was that both the received theory of MNE and our understanding of the strategy of MNEs needed to be modified to take account of the fact that many MNEs were engaging in asset-seeking fdi. I supported Alan in this debate, and in a paper I wrote in 1996 (Dunning, 1996) documented the fact that the majority of the world’s largest manufacturing companies perceived they gained a significant proportion of their knowledge-based and managementrelated advantages as a consequence of their foreign activities; and that, and apart from fdi-directed to resource-based sectors, the geography of such gains originated from nations which were technologically the most advanced. Excluding China, for example, fdi flows directed to the US and Western Europe rose from 60.2% between 1991 and 1996 to 71.4% between 1993 and 2000, and the greater part of these took the form of M&As (UNCTAD, 2003). Alan’s recognition of the importance of the need for some firms to tap into the foreign diamonds of competitive advantage, and how this affected the geography of their fdi was confirmed by several empirical studies in a special issue of Management International Review which he edited in 1993 (Rugman, 1993), and in a volume which he jointly edited with J. Van Den Broeck and Alain Verbeke which was published in 1995. In his more recent writings, while still preferring his own nomenclature, Michael Porter is also increasingly accepting the idea of geographically diversified centres of competitive advantage.

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The second contribution by Alan in the 1990s to our understanding of the geography of MNE activity relates to his work on North American regional economic integration (Rugman, 1990, 1994). Both in respect of the Canadian US Free Trade Agreement and the North American Free Trade Agreement, Alan was at the forefront of the policy debate on how these moves towards regional integration might affect Canadian trade and fdi, both into and out of Canada. Once more, while his main concern centred on the extent and industrial composition of fdi between Canada and the US – and later Mexico – he also expressed views on the likely consequences of the reduction on intra-regional transaction costs on fdi diversion and fdi creation, and on how these might affect the intra-NAFTA distribution of different kinds of MNE activity. Alan’s conclusions on the likely reallocation of different kinds of economic activity between the member countries of the NAFTA very much accorded with my own findings with respect to the impact of the enlarged EU on the geography of intra-EU fdi. I expressed these first in a chapter in Lorraine Eden’s edited volume Multinationals in North America (Dunning, 1994) and later in the two articles in Journal of Common Market Studies (Dunning, 1997). In particular, like Alan, on the one hand, I foresaw an increased concentration of the higher order value-added activities of MNEs in the more advanced localities (hence the need for ‘cluster’ building in which such firms could play a flagship role) (Rugman & D’Cruz, 1994). On the other, I predicted a more geographical diversification of lower order value-added activities. At the same time, due to a removal or reduction of trade barriers, in both the NAFTA and EC, I foresaw that there would likely be an increase in rationalised or efficiency-seeking fdi and more geographical diversification, but a decrease in defensive (e.g., tariff-jumping) fdi, and less diversification. Inter alia, this suggested to me, that, to become globally competitive, MNEs from less prosperous parts of a regionally integrated area might wish to acquire an fdi stake in firms from more prosperous parts; while, to attract such investment, the governments of the former would need to give especial attention to upgrading the educational and innovatory infrastructure and institutions for which they were responsible.

THE 2000s Perhaps, however, the most influential contribution of Alan Rugman to our understanding of the geography of MNE activity has been made in the last

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5 years or so, in the form of his original and incisive analysis of the spatial distribution of the sales of the world’s largest MNEs. In one of his most recent papers, with Alain Verbeke (Rugman & Verbeke, 2004), he extended and updated his earlier work by revealing that 320 of the leading 380 MNEs in 2001 recorded at least 50% of their sales in their home regions (defined as North America, Western Europe or Japan). Another 25 were bi-regional in that they recorded at least 25% of their sales in each of two regions, but less than 50% in any one region. Only nine of the 280 MNEs were classified as being genuinely global in the sense they had an active sales presence (defined as 20% or more of their sales) in all three regions. To some extent, Alan’s findings are compatible with those of the Uppsala School which, nearly 30 years earlier, had asserted that firms first embarked on their internationalisation process by investing in territories most familiar to them; and then, with the knowledge gained from such ventures, further extended their boundaries (Johanson & Vahlne, 1977). They are also broadly consistent with the data on the geographical distribution of the fdi stock of the leading foreign investors, which two colleagues and myself have recently compiled (Dunning, Fujita, & Yakova, 2005). At the same time, I believe that the spatial distribution of MNE activity in the early 2000s is strongly influenced by the size and stage of development of both home and host countries. Thus, over the next half century or so, I would expect the geographical focus of fdi by all major investors to shift increasingly towards China and India.13 These are not only the two most highly populated countries in the world, but ones whose gdps per capita are currently rising considerably faster than those of the major industrialised countries. Yet again, as I read Alan’s writings, they are less directed to evaluating the rationale for, or economic determinants of, the (changing) location of MNE activity, and more to a description of it, and its implications for the diamond international competitiveness and of our understanding of the functioning of and organisational structure of MNEs. In each of these areas, Alan’s evaluations are both pertinent and valid a propos locational issues. In particular, the contributions by Rugman and Verbeke (2001, 2004) do much to integrate the economic and strategic approaches to cross border diversification by examining the significance of country- and firm- (ownership-) specific advantages to enhancing the global competitive advantages of both firms and countries. One of their critical conclusions is that the geography of MNE activity is influenced by the desire of their parent companies to tap into foreign knowledge-based clusters, and in doing so, leverage them to their global competitive advantage (Rugman & Verbeke, 2004).

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This finding is entirely backed up by our 1996 study, which not only showed that the largest industrial MNEs were increasingly deriving their competitive strengths from their foreign-based activities, but that the majority of these were based in countries that spent the most on R&D activities and had the most supportive innovatory institutions. Work by John Cantwell and Odile Janne (1999) and Tony Frost (2001) further demonstrates an increasing reliance of MNEs on their overseas subsidiaries for knowledgerelated expertise, and particularly so in those countries which have a strong innovatory support structure, and which offer good opportunities for collaborative research, learning capabilities and networking. At the same time, I would hope that in his future writings, Alan may use his rich database to examine the main determinants of fdi. For, in the last decade or so, a great deal of new empirical data has emerged on the firm and country-specific variables influencing the international location of valueadded activities. Some of these are in the outcome of surveys of business opinion, as, for example, conducted and/or published by such organisations as the Economist Intelligence Unit (2003) and the IMD in its World Competitiveness Yearbook (2004). Others relate to data collected and indices compiled by specialist organisations such as Transparency International and the International Country Risk Group. The quantity and quality of countrylevel data compiled and analysed by such international organisations, e.g., UNCTAD, OECD, the UNDP, WTO, World Bank and the European Bank for Reconstruction and Development (EBRD) have also greatly improved. Paralleling and partly consequential on developments in the world economy, data improvements and the changing character of fdi, IB scholars, geographers, economists and business strategists are giving more attention to location-related questions from both a firm and country perspective.14 In particular, the quality of institutions have become a more important variable affecting the spatial decision of firms. To give just one example. A good deal of research in the last 5 years has been directed to explaining the growth of inbound fdi into Central and Eastern Europe.15 Since the main feature of the countries in this region has been their transition from a centrally planned to market economy, scholars have paid especial attention to institutionally related variables. The upgrading of these has consistently been found to be one, if not the critical variable affecting the location decisions of foreign firms. This, coupled with the growing ease at which many kinds of knowledge can be transfered across national boundaries, the lessening or convergence of some kinds of spatial transaction costs, and the need for MNEs to participate in cross-border alliances and networks, has led scholars, business executives and governments to reappraise

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the relative significance of location-specific variables; and to better appreciate that these are likely to vary according to both the raison d’etre for particular kinds of MNE activity, and to the particular institutional and economic characteristics of the countries to which such activities might be directed.

CONCLUSIONS With the exception, perhaps, of his work on transfer pricing, Alan Rugman’s foray into the geography of MNE activity has been part and parcel of his wider interest into the economic and strategic determinants of the international diversification of the value-added activities of MNEs, and of how these might affect their global competitiveness. In extending and deepening our knowledge on these issues, Alan has made a significant and valuable contribution to the IB literature. But indirectly, he (with Alain in some of his more recent contributions) has also helped put location issues central to our understanding of the objectives and organisational operation of MNEs. Using his well-known 2  2 matrix, he has also greatly advanced our appreciation of the ways in which locational issues may and do affect the interface between the competitive advantages of countries and firms. Coupled with interdisciplinary research more directly related to the firm and country-specific determinants of fdi, and, in particular, to the content and quality of institutions as a locational attraction, our knowledge about the geography of MNE and its causes is now in a much richer state than it was when Alan wrote his seminal monograph on international diversification, a quarter of a century ago. No doubt the next 25 years will produce their own particular scholarly challenges. Equally I feel sure that Alan will respond to these, and to do so in a way which will benefit all of us.

NOTES 1. Recent reviews of this literature are contained in Cantwell (2004), Clark, Feldman and Gertler (2000), Dunning (1993, 1998a, b, 2000 and 2004), and Rugman and Verbeke (2001, 2004). 2. As typified by that of Grubel (1968), Stevens (1969), Miller and Whitman (1970), Prachowy (1972), Cohen (1972) and Mellors (1973). 3. See e.g. Krugman (1982). The later writings of trade economists are described in the next section.

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4. As, for example, summarised in Dunning (1993) and Caves (1996). However most of the location-related work of IB scholars in the 1980s centred on testing established theories. One exception was an attempt to explain the changing geography of fdi in terms of the investment development path (IDP). 5. As, for example, identified or discussed by various contributors in Clark, Feldman, and Gertler (2000), and especially by the editors (Chapter 1), Allen Scott (Chapter 2) and Paul Krugman (Chapter 3). 6. Foremost among these were the rate of custom duties, anti-dumping or antitrust legislation, limitations on repatriation of profits and dividends and on royalties or management fees, and import restrictions. 7. There have been several modifications to the concept over the last two decades. See, for example, those set out in Dunning and Narula (1996). 8. Others not mentioned include the growth of Third World fdi and the growth of all kinds of service fdi. 9. For example, between 1990 and 2000 the value of cross-border M&A sales as a proportion of the inward direct stock rose from 7.8 % to 18.8%. This proportion subsequently dropped back dramatically to 3.6% in 2003. 10. See, for example, Holland, Sass, Benacek, and Gronicki (2000) and Bevan, Estrin, and Meyer (2004). 11. See, for example, several contributions to Contractor and Lorange (2002). 12. See especially a collection of essays in Rugman (1993). 13. Already this is happening. To give just one example, between 1990 and 2003, the share of the world’s outward direct investment stock directed to mainland China increased from 1.1% to 6.1% (UNCTAD, 2004) 14. For a recent forward-looking appraisal of the evolving interface between locational issues and international business strategy see Ricart, Enright, Ghemawat, Hart, and Kharnea (2004). 15. For a review of the literature see Meyer (2004), Manea and Pearce (2004) and Dunning (2005).

REFERENCES Benvignati, A. M. (1985). An empirical investigation of international transfer pricing by US manufacturing firms. In: A. M. Rugman & L. Eden (Eds), Multinationals and transfer pricing (pp. 193–211). London and Sydney: Croom Helm. Bevan, A., Estrin, S., & Meyer, K. (2004). Foreign investment location and institutional development in transition economies. International Business Review, 13(1), 43–64. Buckley, P. J., & Casson, M. (1976). The future of multinational enterprise. London: Macmillan. Buckley, P. J., & Ghauri, P. M. (2004). Globalisation, economic geography and the strategy of multinational enterprises. Journal of International Business Studies, 35(2), 81–98. Cantwell, J. (Ed.) (2004). Globalisation and the location of firms. Cheltenham: Edward Elgar (Reference Collections). Cantwell, J. A., & Janne, O. E. M. (1999). Technological globalisation and the innovatory centres: The role of corporate technological leadership and locational hierarchy. Research Policy, 28(2–3), 119–144.

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Cantwell, J. A., & Kosmopoulou, E. (2002). What determines the internationalisation of corporate technology? In: M. Forsgren, H. Hakanson & V. Havila (Eds), Critical Perspectives on Internationalisation. Oxford: Pergammon Press. Caves, R. (1996). Multinational enterprises and economic analysis. Cambridge: Cambridge University Press. Clark, G. L., Feldman, M. P., & Gertler, M. S. (Eds) (2000). The Oxford handbook of economic geography. Oxford: Oxford University Press. Cohen, B. I. (1972). Foreign investment by US corporations as a way of reducing risk. Economic Growth Centre Discussion Paper No.151, Yale, Yale University, New Haven. Contractor, F. J., & Lorange, P. (Eds) (2002). Cooperative strategies and alliances. Amsterdam and London: Pergammon Press. Dunning, J. H. (1972). The location of international firms in an enlarged E.E.C. An exploratory paper. Manchester: Manchester Statistical Society. Dunning, J. H. (1973). The determinants of international production. Oxford Economic Papers, 25(November), 289–295. Dunning, J. H. (1981). Explaining the international direct investment position of countries: Towards a dynamic or developmental approach. Weltwirtschaftliches Archiv, 119, 30–64. Dunning, J. H. (1993). Multinational enterprises and the global economy. Wokingham, Berkshine addesion: Wesley. Dunning, J. H. (1994). MNE activity: Comparing the NAFTA and the European Community. In: L. Eden (Ed.), Multinationals in North America (pp. 277–308). Calgary: University of Calgary Press. Dunning, J. H. (1996). The geographical sources of competitiveness. Transnational Corporations, 5(3), 1–30. Dunning, J. H. (1997). The European internal market program and inbound foreign direct investment. Journal of Common Market Studies, 35(1), 1–30 (2), 189–223. Dunning, J. H. (1998a). Location and the multinational enterprise: A neglected factor. Journal of International Business Studies, 29(1), 45–66. Dunning, J. H. (1998b). Globalisation and the new geography of foreign direct investment. Oxford Development Studies, 26(1), 47–69. Dunning, J. H. (Ed.) (2000). Regions, globalisation and the knowledge based economy (pp. 8–44). Oxford: Oxford University Press. Dunning, J. H. (2004). Determinants of foreign direct investment: Globalisation-induced changes and the role of policies in World Bank (Ed.). Proceedings of Annual World Bank Conference on Development Economics, Europe, 2003, (pp. 279–290). Dunning, J. H. (2005). Institutional reform, FDI and European Transition Economies. In: R. Grosse (Ed.), International Business and Government Relations (pp. 51–78). Cambridge: Cambridge University Press. Dunning, J. H., Fujita, M., & Yakova, N. (2005). Some macro-data on the regionalisation/ globalisation debate. A comment on the Rugman/Verbeke analysis. Reading: Reading University and Geneva: UNCTAD. Mimeo. Dunning, J. H., & Narula, R. (1996). Foreign direct investment and governments. London and New York: Routledge. Economist Intelligence Unit. (2003). World investment prospects. London: E.I.U. Ethier, W. J. (1986). The multinational firm. Quarterly Journal of Economics, 101, 106–133. Frost, A. S. (2001). The geographical sources of foreign subsidiaries’ innovations. Strategic Management Journal, 22(2), 101–123.

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Grubel, H. G. (1968). International diversified portfolios: Welfare gains and capital flows. American Economic Review, 58, 1299–1314. Helpman, E. (1985). The multinational firm and the structure of trade. Review of Economic Studies, 52, 443–457. Hirsch, S. (1976). An international trade and investment theory of the firm. Oxford Economic Papers, 28(July), 258–270. Holland, D., Sass, M., Benacek, V., & Gronicki, M. (2000). The determinants and impact of fdi in Central and Eastern Europe: A comparison of survey and econometric evidence. Transnational Corporations, 9(3), 162–212. Hymer, S. (1960). The international operations of national firms: A study of direct investment. PhD. Thesis, MIT, Boston: Published by MIT. Hymer, S. (1976). The international operations of national firms: A study of direct investment. PhD. Thesis, MIT, Boston: Published by MIT. IMD. (2004). World Competitiveness Yearbook. Lausanne: IMD. Johanson, J., & Vahlne, J. E. (1977). The internationalisation process of the firm: A model of knowledge development and increasing market commitments. Journal of International Business Studies, 8, 23–32. Knickerbocker, F. T. (1973). Oligopolistic reaction and the multinational enterprise. Cambridge: MIT, Harvard University Press. Krugman, P. (1982). The new theories of international trade and the multinational corporations. In: D. Audretsch & C. Kindleberger (Eds), The multinational corporation in the 1980s. Cambridge: MIT Press. Kuemmerle, W. (1999). The drivers of foreign direct investment into research and development: An empirical investigation. Journal of International Business Studies, 30(1), 1–24. Makino, S., Lau, C.-M., & Yeh, R. S. (2002). Asset exploitation versus asset-seeking: Implications for location choice of foreign direct investment from newly industrialised economies. Journal of International Business Studies, 33(3), 403–422. Manea, J., & Pearce, R. (2004). Industrial restructuring in economies in transition and TNCs investment motivations. Transnational Corporations, 23(2), 7–27. Markusen, J. R. (1984). Multinationals, multi-plant economies and the gains from trade. Journal of International Economics, 16, 205–226. Mellors, J. (1973). International tax differentials and the location of overseas direct investment: A pilot study. Discussion Papers in International Investment and Business Studies, No. 4, University of Reading, Reading. Meyer, K. (2004). Perspectives on multinational enterprises in emerging economies. Journal of International Business Studies, 35(4), 259–276. Miller, N. C., & Whitman, M. V. N. (1970). A mean variance analysis of US long term portfolio foreign investment. Quarterly Journal of Economics, 84(May), 175–192. Narula, R. (2001). Choosing between internal and non internal R&D activities: Some technological and economic factors. Technological Analysis and Strategic Management, 13, 365–388. Narula, R. (2003). Globalisation and technology. Cambridge: Polity Press. Narula, R., & Guyster, G. (2004). Globalisation and trends in international R&D alliances. Journal of International Management, 10, 199–218. Pearce, R. D. (1997). Global competition and technology. London: Macmillan.

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Pearce, R. D. (1999). Decentralised R&D and strategic competitiveness: Globalised approaches to the generation and use of technology in multinational enterprise (MNEs). Research Policy, 28, 157–178. Pearce, R. D., & Singh, S. (1992). Globalising research and development. London: Macmillan. Porter, M. E. (1990). The competitive advantage of nations. New York: The Free Press. Prachowy, M. J. (1972). Direct investment and the balance of payments of the US: A portfolio approach. In: F. Machlup, W. Salant & L. Tarshis (Eds), International mobility and movement of capital. New York: National Bureau of Economic Research. Ricart, J. E., Enright, M. J., Ghemawat, P., Hart, S. L., & Kharnea, T. (2004). New frontiers in international strategy. Journal of International Business Studies, 35(3), 175–200. Rugman, A. M. (1979). International diversification and the multinational enterprise. Lexington, MA: Lexington Books. Rugman, A. M. (1990). Multinationals and the Canada–United States free trade agreement. Columbia, SC: University of South Carolina Press. Rugman, A. M. (Ed.). (1993). Management International Review, 33(2). Special issue on Michael Porter’s Diamond of Competitive Advantage. Rugman, A. M. (1994). Foreign Investment in NAFTA. Columbia, SC: University of South Carolina Press. Rugman, A. M., Broeck V. D. & Verbeke, A. (Eds). (1995). Beyond the diamond research in global management (Vol. 5). Greenwich, CT: JAI Press. Rugman, A. M., & D’Cruz, J. R. (1994). A theory of business networks. In: L. Eden (Ed.), Multinationals in North America (pp. 103–115). Calgary, University of Calgary Press. Rugman, A. M., & Eden, L. (1985). Multinational Enterprises and Transfer Pricing (pp. 193– 211). London and Sydney: Croom Helm. Rugman, A. M., & Verbeke, A. (2001). Location, competitiveness and the multinational enterprise. In: A. M. Rugman & T. L. Brewer (Eds), The Oxford Handbook of International Business (pp. 150–180). Oxford: Oxford University Press. Rugman, A. M., & Verbeke, A. (2004). A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1), 3–18. Stevens, G. V. G. (1969). Fixed investment expenditure of foreign manufacturing affiliates of US firms: Theoretical models and empirical evidence. Yale Economic Essays, 9(Spring), 137–200. Tang, R. Y. (1981). Multinational transfer pricing: Canadian and british perspectives. Toronto: Butterworth. UNCTAD. (2003). World Investment Report: FDI Policies for Development: National and International Perspectives. New York and Geneva: UN. UNCTAD. (2004). World investment report: The shift towards services. New York and Geneva: UN. Vernon, R. (1966). International investments and international trade in the product cycle. Quarterly Journal of Economics, 80, 190–207. Vernon, R. (1974). The multinational enterprise and the location of economic activity. In: J. H. Dunning (Ed.), Economic analysis and the multinational enterprise (pp. 89–114). London: Allen and Unwin. Wesson, T. (2002). Foreign direct investment and competitive advantage. Cheltenham: Glos Edward Elgar.

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FINANCIAL AND NON-FINANCIAL THEORIES OF INTERNATIONAL DIVERSIFICATION John Cantwell BACKGROUND Alan Rugman was one of the first to examine in a systematic way the connection between the internationalization of the firm and the diversification of assets within the multinational enterprises (MNE). He has since moved on to deal with many other issues surrounding the MNE, but his major contribution to the subject of international diversification (Rugman, 1979) was for many years essential reading for anyone with serious pretensions to be or to become an international business scholar. Rugman (2005) himself sees the key idea in his early book as being an appreciation of the role of risk in foreign direct investment (FDI). MNEs in the place of individual investors, diversified their portfolio of assets, and thereby served as a vehicle for risk reduction. This argument can be applied especially before 1970, before advances in financial markets and international asset instruments enabled individual investors (or funds acting on their behalf) to directly conduct for themselves such strategies of international diversification to reduce risk.

Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 59–73 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11005-5

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Although it is true that Rugman’s empirical study fits well into this framework – since his data were of US MNEs in the 1960s – in many ways it does his book an injustice to say that the applicability of its central contention was confined to the time when it was written. There is a further and more general underlying theme in Rugman (1979), and that lies in its notion of the MNE as a holder of a diversified portfolio of locational assets. Placed in these terms, then far from it having described a phenomenon that in retrospect represents little more than an historical curiosity, Rugman’s (1979) was a book ahead of its time. In this wider context of the MNE as the creator of asset diversification through an appropriate combination of geographically dispersed location-specific resources, there is now a great topical research interest. A recent literature has proposed that location heterogeneity provides critical opportunities for MNEs and so must now be at the heart of business strategy considerations (e.g. Ghemawat, 2001; Ricart, Enright, Ghemawat, Hart, & Khanna, 2004). Yet in this wider international business strategy context, the risk reduction motive for a diversified locational portfolio (the conventional finance perspective) is only one element of a broader story. The alternative nonfinancial perspective suggests another motive in constructing a coherent portfolio of locational assets that together represent a good fit with one another. When considered as a whole the diversified structure of locationspecific assets becomes a source of competitive advantage where the particular combination that has been found is synergistic or superadditive. Note that this portfolio-type argument is rather different from another recent strand of thought that has emphasized the attractions of an individual location on its own terms (such as, say, a cluster of companies in a location) as a source of competitive advantage to the firm that situates there (e.g. Porter, 2000). In connection with the diversified locational portfolio approach, it is important to reiterate (as does Rugman, 2005) that internationalization – which is defined as the international (or geographical cross-border) dispersal of activity – is not the same as or a sufficient condition for international diversification. Internationalization may entail no more than the conduct of the same activity in multiple locations, in which case it is not accompanied by diversification (except in the obvious sense of geographical diversification, but if that was all that was meant then there would be no need for a different term). International diversification is instead defined as the conduct of different activities in different locations, for which internationalization is necessary but not sufficient. The first motive for international diversification, as originally stressed by Rugman (1979) and in the finance perspective,

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is the reduction of risk over a cross-locational portfolio of dispersed assets. The second motive for international diversification is the creation of new value through the development of internationally interdependent structures that connect together a range of complementary activities.

A SHIFT IN FOCUS IN DISCUSSIONS OF CORPORATE DIVERSIFICATION The second motive for international diversification has become steadily more important over the period since Rugman’s (1979) book was published. In recent years, technological capabilities have been diversifying in large multiproduct firms to the extent that this type of diversification has become increasingly the focus of analytical attention in contrast to the other ‘classic’ types of diversification, namely product and market diversification. This has brought the ‘multi-technology corporation’ centre stage (Pavitt, Robson, & Townsend, 1989; Granstrand, Patel, & Pavitt, 1997; Silverman, 2002; Fai, 2003; Cantwell, Gambardella, & Granstrand, 2004). A critical importance of information and communication technology (ICT) to the now more complex management of innovation in MNEs is that it enables firms to better exploit their corporate technological diversification across national boundaries, as well as across business areas. This owes to the dual role of ICT as being both a means of combining fields of knowledge creation that were previously kept largely apart, and a managerial process technology that lowers internal coordination costs, and thus extends the potential boundaries of firms. The first facet of ICT entails the greater facility to develop related combinations of formerly separate lines of technological development. With respect to the second facet, the methods of managing more complex combinations and greater diversity have also improved. Thus, the social technology of management practice has itself developed to facilitate technological diversification (Granstrand, 2004). This implies the feasibility of the kind of organizational structure that is needed to sustain a more diverse firm, and one that is more flexible and potentially adaptable. However, while this use of ICT has led many smaller firms to extend the breadth of their technological diversification to create new combinations, in some of the very largest MNEs the extent of technological diversification has been reduced, so as to better focus on the most promising possible combinations from among the broader initial dispersion of innovative

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activity that such companies have inherited from the past (Cantwell & Santangelo, 2000). The particularly pronounced trend towards a wider dispersion of innovative effort in ICT across firms seems to be evidence of a paradigm shift in the general conditions for innovation and growth, according to the neo-Schumpeterian perspective upon long-run techno-socioeconomic change (Freeman & Perez, 1988). However, empirical investigations also show that industries differ in the propensity of their firms to diversify into technologies that lie in complementary or non-primary fields for the industry. Two Strands of Analysis While the expanded contribution of ICT is a widely acknowledged feature of the so-called ‘new economy’ or a new paradigm, with its associated need for more general and multiple skills on the part of the workforce, the greater significance of business process re-engineering and the more frequent changing and reconstitution of firm boundaries may not have been so widely appreciated. The new paradigm is one of continual experimentation over the right mix at the firm level, seeking out the most productive combinations of business areas and technologies. Since individual locations are inevitably specialized in their activity, and indeed increasingly specialized in part owing to greater subsidiary-level specialization within MNEs (Cantwell & Vertova, 2004), the most suitable and potentially innovative combinations of activity now commonly require international connections. For this purpose, the MNE is the principal vehicle. Of course, this combinatory rationale for experimenting with different resource mixes is at odds the traditional finance perspective on diversification. In the finance perspective on the subject, diversification is believed to be a means of reducing risk by holding a portfolio of distinct lines of activity. In the finance perspective we should observe diversification into unrelated assets, whereas in the alternative view we should see the reverse, namely diversification into related assets and the establishment of patterns of corporate coherence (Rumelt, 1974; Teece, Rumelt, Dosi, & Winter, 1994; Piscitello, 2004). From the standpoint of international business, the former finance perspective can best be applied to local market-seeking activities, in which diversification across unrelated products or geographically unconnected markets (and preferably both) may reduce risk. Local marketseeking was the dominant motive for FDI in the 1960s, which fits well with the arguments and data of Rugman (1979). It remains crucial today, although markets are now much less segmented than they once were.

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In the latter non-financial perspective, diversification is instead a business strategy for bringing together combinations of related assets as a means of constructing corporate coherence. In the international business context, this perspective can be applied most readily to asset–seeking activities that become locally competence-creating. Asset–seeking strategies have become gradually more important as a motive for FDI especially since the 1980s. MNEs are now increasingly undertaking investments (especially through mergers and acquisitions) or divestments as a means of developing new structures of relatedness between in-house activities. One key aspect of this that relies on corporate technological diversification is to bring together new combinations of technologically complementary fields of activity to promote a greater ease of innovation (Schumpeter, 1934, had long ago argued that innovation generally entails such ‘new combinations’). The relationship between technological diversification and the internationalization of production is a complex one, in that it is mediated by the accumulation of competence and competence creation in the MNE. It has also changed in nature over the years, from being an historically negative relationship (a choice between greater diversification in established markets and entry into new markets) when most international investments were local market-seeking, to a positive one in the most recent period (there being a complementarity between extending the competence base of the multinational firm at home and abroad) when a rising share of international investments are technology or asset-seeking (Cantwell & Piscitello, 2004). Both the financial and non-financial strands of analysis of MNE operations are valid, since MNEs have a mix of risk-reducing unrelated diversity and value-creating synergy in their strategies. However, a closer recent association between technological diversification and internationalization has been the outcome of more closely internationally integrated MNE networks. The newer perspective on innovation and the MNE sees MNEs as evolutionary learning organizations, that create (and draw upon) a regular and cumulative flow of knowledge and capabilities from locationally differentiated sources.

Innovation in the MNE as an Evolutionary Process: The Analytical Background The view that technological change is an endogenous property of firms (and especially, although not exclusively, large firms) as evolutionary learning institutions, can be traced back in recent times to the pioneering contribution

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of Penrose (1959). In other words, the new competences a firm is able to create are a product of its prior capabilities or resources and not a simple response to external markets or discoveries. Innovative new competences (capacities to introduce new products and processes) are achieved through an internal search and problem-solving process that can only be revealed by opening up the black box of the firm (Rosenberg, 1982, 1994). It is true that interactions between the learning firm and its markets, with the science and discovery base, and with other firms (especially through cooperative relationships within the same industry, as emphasized by Richardson, 1972) all play important roles. However, technological change is essentially the outcome of continual experimentation within each firm along some path-dependent course with a certain logic of its own, which have been usefully described as technological trajectories (Dosi, 1982). Hence, the evolving profiles of technological competence of firms tend to remain stable over long periods of time and to change only gradually and incrementally, despite the much more dramatic changes in their markets or discovery base (Cantwell & Fai, 1999). Once the black box of the firm has been opened to examination, the organizational and social aspects of technological capability become clear; technology consists of a localized and tacit element which is context-specific, as well as potentially public knowledge (Nelson, 1992). Nelson and Winter (1982) provided the pioneering analysis of how, when technological change is rightly understood as a path-dependent and localized process of experimental learning and search activities undertaken within firms, the fruits of innovative improvements become embodied not just in new devices, equipment or products, but also in the organizational routines of companies. Therefore, it is not surprising that the innovation systems of countries depend largely on the accumulated capabilities of large local firms, which become repositories of technological competence, even if their activities in turn depend upon the supporting structure of other institutions that characterizes the local environment (Nelson, 1993). The technological paths or trajectories that are followed by firms can also be described as a process of corporate technological diversification, which depends upon gradual changes in the degree of relatedness between competences in different technological fields. Firms can be expected to move away from combinations of technological development that have become less related, and towards new combinations of fields of activity between which there is an increase in technological complementarity. If there is a general background rise in technological interrelatedness then this will be associated with a broadening in the average degree of corporate technolog-

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ical diversification relative to any given extent of product or market diversification (Piscitello, 2004). However, for some very large firms that had achieved an already high degree of technological diversification, the effect may run in the opposite direction (Cantwell & Santangelo, 2000). That is, greater interrelatedness implies that each firm must utilize more carefully than in the past the most complementary combinations of technologies, which may entail a sharper focus on those combinations in an existing portfolio that are most closely complementary, partially at the expense of other lines of development which have only ever fitted moderately well. Somewhat more distant but still relevant capabilities may be better accommodated through supporting some in-house facilities as a means of monitoring and accessing developments in alliance partners or suppliers or customers, for which the fields in question are more critical and a central area of competence. The other aspect of the localization of technological change is that it tends to be not just firm-specific but also location-specific, as confirmed by the continuing significance of regional and national systems of innovation (Nelson, 1993), and by the tendency towards geographical proximity in the linkages between science and technology (Jaffe, Trajtenberg, & Henderson, 1993; Rosenberg & Nelson, 1996; Cantwell & Piscitello, 2005). As a result, MNEs can gain competitive advantage by strategically integrating complementary streams of innovation across geographically dispersed facilities (Cantwell, 1989). By further developing the technological capacities in which a location is already specialized, such international integration of networks for innovation within MNEs may thereby have the effect of reinforcing established national and regional systems of innovation (Cantwell, 1995). In this event the closer international integration of complementary lines of technological development within the MNE also becomes bound up with the process of technological diversification at the level of the global corporate group as a whole (Cantwell & Piscitello, 2000). Although the measures of technological diversification and product diversification may be similar, our arguments thus far suggest that the dispersion of technological competence within firms is not theoretically the same as the dispersion of their product markets, even if we would expect a correlation of the two across firms. Over time there could well be periods in which technological diversification and product diversification move in different directions on average. It has been suggested that in recent times there has been a tendency for product ranges to become more concentrated while technological capabilities have become more diversified. More substantively, cumulativeness and path-dependency apply to the process of corporate

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technological competence development, but not necessarily (or only to a lesser extent) to the composition of a firm’s markets.

Implications for the Analysis of MNEs At a general level, a firm’s operations may be dispersed across different types of productive activity (the diversification of technologies or products), or over geographical space (the internationalization of the same). However, the analysis of technologies and product markets is different in this respect. Spreading the product markets in which the firm is involved may be a matter of exploiting more effectively established competencies, while moving into new areas of technological development means creating new competence. In terms of product markets, diversification and internationalization have often been considered and analysed separately as two distinct phenomena or alternative routes to growth, in the analytical framework that originated from Penrose (1959). Historically, it was usually a matter of how established competences could be more fully exploited in new markets in related industries, or in other countries. More recently, Penrose’s resource-based view of the firm as a collection of productive assets has given rise to a competence-based theory of the firm (Teece, Pisano, & Shuen, 1997; Chandler, Hagstro¨m, & So¨lvell, 1998), in which the firm is seen as an institution that constructs capabilities through internal learning processes in the form of evolutionary experimentation. In this event the major issue is not so much how the firm exploits a given competence, but rather how it establishes a (spatially and sectorally) diffuse system for the creation of new competence. In order not just to exploit effectively but also to consolidate an existing capability, it is generally necessary for a firm to extend that capability into new related fields of production and technology, and across a variety of geographical sites. The corporate internationalization and diversification of technological activity are indeed both ways of spreading the competence base of the firm, and of acquiring new technological assets, or sources of competitive advantage. In this context, recent studies have shown that firmspecific technological competence may be diversified and internationalized thus leading to the most recent emergence of corporate international networks more and more resembling heterarchies rather than hierarchies (Hedlund, 1986). At the same time, the increasing role of MNEs in the generation of technology has been facilitated by their recent trend to ‘globalize’ their activities; that is, to establish internal and external cross-border networks for inno-

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vation which may lead to an improvement of innovation capacity both of the MNE and of host locations (Cantwell & Iammarino, 2000). Globalization and in particular the international integration of technological activities is indeed a process leading to structural transformation of firms, nations and regions (Dunning, 2000), both when directed to augmenting home-based assets – often tapping into foreign research and development (R&D) – and to more effectively deploying existing technological capabilities (Kuemmerle, 1999). The growing role of the reorganization of technological activities by MNEs as a source of competitive advantage has been indeed recently recognized to have an important impact on the shape and character of national systems of innovations and local growth prospects both for the home and host countries.

International Diversification of the Technological Competence Base in the MNE In the earlier stages of development of large firms in the interwar and early post-war periods until around 1970, it is reasonable to depict diversification and internationalization of markets as two alternative strategies for corporate growth, as suggested by Penrose (1959). However, in this phase while large firms were commonly diversifying their technological competence in the normal course of growth (as shown by Chandler (1990) and in company case studies by those such as Hounshell & Smith (1988) and Warner (1978), their internationalization of R&D was aimed at the wider exploitation of the basic competence they had already established at home rather than at extending that competence into new fields or ‘sourcing’ technology abroad). Subsidiary R&D concentrated upon the adaptation of products to local tastes, and the adaptation of processes to local resource availabilities and production conditions (Cantwell, 1995). Thus, in the early stages, although the internationalization of corporate technology should not be underestimated (a criticism of some recent literature advanced by Cantwell, 1995), it was motivated mainly by the extent of dissimilarity between home and foreign markets rather than by the rationale of the process of further competence accumulation. This motivation of the dissimilarity of markets is also entirely consistent with Rugman’s (1979) explanation of international diversification. In the second phase, from about 1970 until around the mid-1980s, the old technology paradigm ran into difficulties (Freeman & Perez, 1988), as the opportunities for integrating diverse technologies in large scale plants had been gradually exhausted. Thus, it seems reasonable to expect that at

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around this time the relationship between the accumulation and diversification of competence may have broken down. Technological diversification was now increasingly based instead on the growing interrelatedness between formerly separate technologies (Kodama, 1986), but like with the formation of corporate international networks, the new opportunities for innovative development were still at an early stage in the 1970s. Even in the second phase, after the early post-war period, there seems to have been a general widening of the internationalization and diversification of technology across a wider range of firms (Cantwell, 1995). The most common explanation is that lower transport and communication costs contributed to a general expansion across large firms in the internationalization of technological activity (Vernon, 1973), while an increase in technological interrelatedness prompted a broader cross-section of firms into technological diversification (Pavitt et al., 1989; Patel & Pavitt, 1997, 1998). Another aspect which has recently entered into the discussion is the changing nature of technological knowledge itself (Nelson & Thomson, 1997), that with the development of scientific and engineering communities became more susceptible to transmission between fields of activity and between countries. More recently, however, from the mid-1980s the nature of the competence creation process seems to have entered a third phase in the technologically leading firms (Cantwell, 1995). What previously had been a dispersed set of loosely connected efforts for the consolidation and adaptation of competence within the firm (achieved through some combination of diversification and internationalization), has been transformed in some companies into a more complex integrated and interactive network for the generation of new competence. This new system for corporate development relies on the interrelatedness between specialized activities conducted in particular locations, each of which takes advantage of spatially specific resources or capabilities. In this event internationalization, diversification and competence creation become for the first time necessarily interconnected and thus mutually positively related parts of a common process. The wider picture of which this is part is one which formerly local market oriented affiliates have been increasingly integrated into international networks within their respective multinational companies, such networks coming to resemble ‘heterarchies’ more than hierarchies (Hedlund, 1986; Doz, 1986; Porter, 1986; Bartlett & Ghoshal, 1989; Dunning, 1992), and affiliates have increasingly pursued ‘asset-seeking’ motives (Dunning, 1995, 1996). Beyond the emergence of a new interrelationship between the accumulation, diversification and internationalization of corporate technological competence, the third phase is distinctive in changes in the cross-firm pat-

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tern of activity in another respect too. Given that the internationally dispersed development of technology is now a source of competitive advantage, two different types of firm behaviour can be observed, depending upon whether a firm that begins with relatively little international activity needs to ‘catch-up’ (Cantwell & Sanna-Randaccio, 1990), or an established multinational reorganizes its existing international network to better exploit the respective comparative advantages in innovation of the locations in which it operates (Cantwell & Sanna-Randaccio, 1993). Due to the first kind of consideration, we expect that the absolute extension of company networks for technological development has become linked on average to a widening of their international scope. Yet due to the second factor, we have reason to also believe that the firms with the fastest proportional increase in competence will tend in the latest phase to be established multinationals that are restructuring their international networks to better effect, and hence selectively concentrating the development of key fields in the most suitable centres (Cantwell & Piscitello, 1999).

Patterns of International Technological Diversification The most typical pattern of international specialization in innovative activity within the MNE is for the development of technologies that are core to the firm’s industry to be concentrated at home, while other fields of technological activity may be located abroad, and in this sense the internationalization of research tends to be diversified and complementary to the home base (Cantwell & Kosmopoulou, 2002). Thus, when science-based technology creation is internationally dispersed it is most often attributable to foreign technology acquisition by the firms of ‘other’ industries – for example, chemical industry MNEs developing electrical technologies abroad, or electrical equipment MNEs developing specialized chemical processes outside their home countries (Cantwell & Santangelo, 2000). From the other side of host countries as opposed to investing MNEs, a local centre of excellence for some specialized field of innovation (say in chemicals) will tend to attract investments in local chemical research not so much by foreign-owned MNEs in the chemical industry, but to a greater extent by MNEs from other industries, whose objective is to tap into the resources of the centre in order to diversify their own technological base (Cantwell & Kosmopoulou, 2002). Evidence has now emerged that the choice of foreign location for technological development in support of what is done in the home base of the

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MNE depends upon whether host regions within countries are either major centres for innovation or not (termed ‘higher order’ regions by Cantwell & Iammarino, 2000; Cantwell & Janne, 1999). Whereas most regions are not major centres and tend to be highly specialized in their profile of technological development, and hence attract foreign-owned activity in the same narrow range of fields; in the major centres much of the locally sited innovation of foreign-owned MNEs does not match very well the specific fields of local specialization, but is rather geared towards the development of technologies that are core to the current techno-economic paradigm (notably ICT) or earlier paradigms (notably mechanical technologies) (Cantwell, Iammarino, & Noonan, 2000). The need to develop these latter technologies is shared by the firms of all industries, and the knowledge spillovers between MNEs and local firms in this case may be inter-industry in character. Thus, ICT development in centres of excellence is not the prerequisite of firms of the ICT industries, but instead involves the efforts of the MNEs of other industries in these common locations. A deficiency of the literature on innovation and the MNE to date, and of most of the literature on the MNE in general, is that either the MNE is essentially treated as being bi-polar (the key distinction is between the home base and foreign operations considered collectively), or the focus is on the subsidiary as the unit of analysis and on the characteristics of the location in which it is situated. Too little still is known of strategies to construct portfolios of locationally differentiated activities that between them represent beneficial combinations for the corporate group as a whole. The focus here needs to be on the precise locational spread of the MNE network, and not so much on what is done abroad as a whole, or on what is done in specific locations when treated in isolation. Although the context of this discussion is admittedly very different from that supposed in the financial perspective on the subject, in many ways this critical and emergent issue in international business strategy today requires the conceptualization of international diversification as an overall portfolio of locational assets as suggested by Rugman (1979).

REFERENCES Bartlett, C. A., & Ghoshal, S. (1989). Managing across borders: The transnational solution. Boston, MA: Harvard Business School Press. Cantwell, J. A. (1989). Technological innovation and multinational corporations. Basil Blackwell: Oxford. Cantwell, J. A. (1995). The globalisation of technology: What remains of the product cycle model? Cambridge Journal of Economics, 19, 155–174.

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Cantwell, J. A., & Fai, F. M. (1999). Firms as the source of innovation and growth: The evolution of technological competence. Journal of Evolutionary Economics, 9, 331–366. Cantwell, J. A., Gambardella, A., & Granstrand, O. (Eds) (2004). The economics and management of technological diversification. London and New York: Routledge. Cantwell, J. A., & Iammarino, S. (2000). Multinational corporations and the location of technological innovation in the UK regions. Regional Studies, 34, 317–332. Cantwell, J. A., Iammarino, S., & Noonan, C. (2000). Sticky places in slippery space the location of innovation by MNCs in the European regions. In: N. Pain (Ed.), Inward investment, technological change and growth (pp. 210–239). London: Macmillan. Cantwell, J. A., & Janne, O. E. M. (1999). Technological globalisation and innovative centres: The role of corporate technological leadership and location hierarchy. Research Policy, 28, 119–144. Cantwell, J. A., & Kosmopoulou, E. (2002). What determines the internationalisation of corporate technology? In: M. Forsgren, H. Ha˚kanson & V. Havila (Eds), Critical perspectives on internationalisation (pp. 305–334). Oxford: Pergamon. Cantwell, J. A., & Piscitello, L. (1999). The emergence of corporate international networks for the accumulation of dispersed technological capabilities. Management International Review, 39(Special Issue 1), 123–147. Cantwell, J. A., & Piscitello, L. (2000). Accumulating technological competence – its changing impact on corporate diversification and internationalization. Industrial and Corporate Change, 9, 21–51. Cantwell, J. A., & Piscitello, L. (2004). The relationship between technological diversification and internationalization. In: J. A. Cantwell, A. Gambardella & O. Granstrand (Eds), The economics and management of technological diversification (pp. 101–115). London: Routledge. Cantwell, J. A., & Piscitello, L. (2005). Recent location of foreign-owned R&D activities by large multinational corporations in the European regions: The role of spillovers and externalities. Regional Studies, 39, 1–16. Cantwell, J. A., & Sanna-Randaccio, F. (1990). The growth of multinationals and the catchingup effect. Economic Notes, 19, 1–23. Cantwell, J. A., & Sanna-Randaccio, F. (1993). Multinationality and firm growth. Weltwirtschaftliches Archiv, 129, 275–299. Cantwell, J. A., & Santangelo, G. D. (2000). Capitalism, profits and innovation in the new techno-economic paradigm. Journal of Evolutionary Economics, 10, 131–157. Cantwell, J. A., & Vertova, G. (2004). Historical evolution of technological diversification. Research Policy, 33, 511–529. Chandler, A. D. (1990). Scale and scope: The dynamics of industrial capitalism. Cambridge, MA: Harvard University Press. Chandler, A. D., Hagstro¨m, P., & So¨lvell, O¨. (Eds) (1998). The dynamic firm: The role of technology, strategy, organization and regions. Oxford and New York: Oxford University Press. Dosi, G. (1982). Technological paradigms and technological trajectories: A suggested interpretation of the determinants and directions of technical change. Research Policy, 2, 147–162. Doz, Y. (1986). Strategic management in multinational companies. Oxford: Pergamon. Dunning, J. H. (1992). Multinational enterprises and the global economy. Wokingham: AddisonWesley.

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Dunning, J. H. (1995). Reappraising the eclectic paradigm in an age of alliance capitalism. Journal of International Business Studies, 26, 461–491. Dunning, J. H. (1996). The geographical sources of the competitiveness of firms: Some results of a new survey. Transnational Corporations, 5, 1–29. Dunning, J. H. (2000). Regions, globalisation and the knowledge economy: The issues stated. In: J. H. Dunning (Ed.), Regions, globalisation and the knowledge based economy. Oxford and New York: Oxford University Press. Fai, F. M. (2003). Corporate technological competence and the evolution of technological diversification. Cheltenham: Edward Elgar. Freeman, C., & Perez, C. (1988). Structural crises of adjustment, business cycles and investment behaviour. In: G. Dosi, C. Freeman, R. R. Nelson, G. Silverberg & L. L. G. Soete (Eds), Technical change and economic theory. London: Frances Pinter. Ghemawat, P. (2001). Distance still matters: The hard reality of global expansion. Harvard Business Review, 79, 137–147. Granstrand, O. (2004). Multi-technology management. In: J. A. Cantwell, A. Gambardella & O. Granstrand (Eds), The economics and management of technological diversification (pp. 297–332). London: Routledge. Granstrand, O., Patel, P., & Pavitt, K. L. R. (1997). Multi-technology corporations: Why they have ‘‘distributed’’ rather than ‘‘distinctive core’’ competencies. California Management Review, 39, 8–25. Hedlund, G. (1986). The hypermodern MNC: A heterarchy? Human Resource Management, 25, 9–25. Hounshell, D. A., & Smith, J. K. (1988). Science and corporate strategy: Du Pont R&D. 1902– 1980. Cambridge and New York: Cambridge University Press. Jaffe, A. B., Trajtenberg, M., & Henderson, R. (1993). Geographic localization of knowledge spillovers as evidenced by patent citations. Quarterly Journal of Economics, 63, 577–598. Kodama, F. (1986). Technological diversification of Japanese industry. Science, 233, 291–296. Kuemmerle, W. (1999). The drivers of foreign direct investment into research and development: An empirical investigation. Journal of International Business Studies, 30, 1–24. Nelson, R. R. (1992). What is ‘‘commercial’’ and what is ‘‘public’’ about technology, and what should be? In: N. Rosenberg, R. Landau & D. C. Mowery (Eds), Technology and the wealth of nations. Stanford: Stanford University Press. Nelson, R. R. (Ed.) (1993). National innovation systems: A comparative analysis. Oxford and New York: Oxford University Press. Nelson, R.R., & Thomson, R. (1997). The internationalization of technology, 1874–1929: Evidence from US, British and German patent experience. Mimeo, University of Vermont and Columbia University, New York. Nelson, R. R., & Winter, S. G. (1982). An evolutionary theory of economic change. Cambridge, MA: Harvard University Press. Patel, P., & Pavitt, K. L. R. (1997). The technological competencies of the world’s largest firms: Complex and path-dependent, but not much variety. Research Policy, 26, 141–156. Patel, P., & Pavitt, K. L. R. (1998). The wide (and increasing) spread of technological competencies in the world’s largest firms: A challenge to conventional wisdom. In: A. D. Chandler, P. Hagstro¨m & O¨. So¨lvell (Eds), The dynamic firm: The role of technology, strategy, organization and regions. Oxford and New York: Oxford University Press.

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Pavitt, K. L. R., Robson, M., & Townsend, J. (1989). Technological accumulation, diversification, and organisation in UK companies, 1945–1983. Management Science, 35, 81– 99. Penrose, E. T. (1959). The theory of the growth of the firm. Oxford and New York: Oxford University Press. Piscitello, L. (2004). Corporate diversification, coherence and economic performance. Industrial and Corporate Change, 13, 757–787. Porter, M. E. (1986). Competition in global industries: A conceptual framework. In: M. E. Porter (Ed.), Competition in global industries. Boston, MA: Harvard Business School Press. Porter, M. E. (2000). Location, competition and economic development: Local clusters in a global economy. Economic Development Quarterly, 14, 15–34. Ricart, J. E., Enright, M. J., Ghemawat, P., Hart, S., & Khanna, T. (2004). New frontiers in international strategy. Journal of International Business Studies, 35, 175–200. Richardson, G. B. (1972). The organisation of industry. Economic Journal, 82, 883–896. Rosenberg, N. (1982). Inside the black box: Technology and economics. Cambridge and New York: Cambridge University Press. Rosenberg, N. (1994). Exploring the black box: Technology, economics and history. Cambridge and New York: Cambridge University Press. Rosenberg, N., & Nelson, R. R. (1996). The roles of universities in the advance of industrial technology. In: R. S. Rosenbloom & W. J. Spencer (Eds), Engines of innovation: US industrial research at the end of an era. Boston, MA: Harvard Business School Press. Rugman, A. M. (1979). International diversification and the multinational enterprise. Lexington, MA: DC Heath. Rugman, A. M. (2005). The twenty-five years of ‘‘International diversification and the multinational enterprise. In: A. Verbeke (Ed.), Internalization, international diversification and the MNE: Essays in honor of Alan M. Rugman. Amsterdam: Elsevier. Rumelt, R. P. (1974). Strategy, structure and economic performance. Cambridge, MA: Harvard Business School Press. Schumpeter, J. A. (1934). The theory of economic development. Cambridge, MA: Harvard University Press. Silverman, B. S. (2002). Technological resources and the logic of corporate diversification. London and New York: Routledge. Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic capabilities and strategic management. Strategic Management Journal, 18, 509–533. Teece, D. J., Rumelt, R. P., Dosi, G., & Winter, S. G. (1994). Understanding corporate coherence: Theory and evidence. Journal of Economic Behavior and Organization, 23, 1–30. Vernon, R. (1973). Sovereignity at bay. Harmondsworth: Penguin. Warner, J. C. (1978). Radio, corporation of America: Part I – the years to 1938. In: RCA: Five historical views (pp. 2–8). New York: RCA.

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INTERNALIZATION THEORY AND THE INTERNATIONAL DIVERSIFICATION: PERFORMANCE CONUNDRUM Jean-Franc- ois Hennart The last 10 years have witnessed an explosion of empirical studies trying to explore the relationship between a firm’s size and scope of international operations and its profitability. An unsystematic search of the recent literature yields 39 empirical studies in journals such as the Journal of International Business Studies, the Academy of Management Journal, the Strategic Management Journal, and Management International Review that have investigated the relationship between multinationality and performance. While the various authors who have contributed to this literature cite each other, and seem to suggest that they are working within a well-known and accepted framework, this literature seems based on ad hoc theorizing, and uses dependent and independent variables that do not necessarily measure the same concept. Not unexpectedly, its findings are mixed: the relationship between multinationality and performance ranges from negative (e.g. Michel & Shaked, 1986) to zero (e.g. Tallman & Li, 1996), to inverted U-shaped (Gomes & Ramaswamy, 1999), and to sigmoid (Contractor, Kundu, & Hsu, 2003).

Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 75–93 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11006-7

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Part of the reason for the lack of robust findings is that this literature has in fact investigated two separate research questions (1) how a firm’s international diversification (i.e. the geographical dispersion of its sales or assets) affects its profitability or the variance of its profits and (2) how a firm’s ratio of foreign sales (or foreign assets, employment, or income) to total sales (assets, employment, income) affects its profitability or the variance of its profits. These two research questions are distinct, both conceptually and empirically. Conceptually, geographic diversification may yield some advantages which are separate from those that accrue from the relative size of foreign operations. Empirically, a firm can be highly geographically diversified, with sales offices in the four corners of the globe, but with foreign assets that are small relative to domestic assets. Inversely, many US-based multinational enterprises (MNEs) have extensive operations in Canada, but few elsewhere, resulting in a high ratio of foreign to domestic sales, but very little dispersion across countries. ‘‘Multinationality’’ covers therefore very different realities. In general the literature does not seem to see this as two separate questions, both in terms of theoretical arguments and of measurement. First, authors often confuse the two in the terminology they use. Geringer, Tallman, and Olsen (2000, p. 61) describe under the heading ‘‘international diversity’’ their main independent variable, which is the share of foreign subsidiary sales over total sales, a measure that does not reflect diversification, but rather the relative importance of foreign over domestic business (the common understanding of diversification is that it refers to ‘‘dispersion into more or less related categories’’ as in ‘‘product diversification’’). Theoretical arguments that purport to explain why firms with more geographically spread activities should be more profitable (for example the argument that having geographically diversified operations allows firms to develop more diverse capabilities, which themselves lead to higher profitability) are used to explain a dependent variable which is in fact the ratio of foreign to total sales (see for example Kotabe, Srinavasan, & Aulakh, 2002). To make comparisons even more difficult, some authors have used as dependent variable a composite measure of ‘‘multinationality’’ that incorporates both the share of foreign sales and its dispersion across countries (e.g. Gomes & Ramaswamy, 1999). It is not my goal here to do a comprehensive review of this very large and heterogeneous literature. Because the arguments made for a relationship between multinationality and performance (under their various measurements) are highly complex, I will only discuss a few of them. Within these limitations, my goal is to show how the hypotheses, the variables, and the

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measurements of this literature would benefit from a firmer theoretical grounding, and in particular from a grounding in the internalization theory put forth by Rugman (1981) and his colleagues. I first review the arguments made in the literature as to why the relative importance of a firm’s foreign activities and its geographical diversification should affect its profitability, starting with the international diversification/ performance relationship, then examining the reasons put forth why a firm’s ratio of foreign to total sales should affect its profitability. The arguments are found to be less than persuasive, in part because of a failure by most authors to see the presumed advantages of MNEs in comparison to those available on markets. I then show that internalization theory provides such a comparative-institutional framework. Its implications are that, everything else constant, the size and scope of firms should have no impact whatsoever on their performance, and that any statistical relationship between multinationality and performance is due to measurement biases and/or omitted variables.

A CRITICAL REVIEW OF THE THEORETICAL REASONS WHY INTERNATIONAL DIVERSIFICATION AND INTERNAL EXPANSION SHOULD AFFECT PERFORMANCE International Diversification and Performance We start by looking at the arguments put forth as to why having operations evenly spread in a large number of countries should make firms more profitable. Kim, Hwang, and Burgers (1993) argue, for example, that global market diversification, which they measure as the dispersion of a firm’s business between seven global market areas, provides a series of advantages that should allow globally diversified firms to earn both higher return on assets and lower risk. Because their arguments are complex and multifaceted, I cite them in extenso. First, global market diversification offers possibilities for exploitation of economies of scale and scope above and beyond the potential of product diversification (Grant, Jammine, & Thomas, 1988). Second, the diversity of national markets exposes firms to multiple stimuli which provides [sic] with a broader learning opportunity and the ability to develop more diverse capabilities than are available to purely domestic firmsy. Third, different nations have different factor endowments which, in the absence of efficient markets, lead to intercountry differences in factor costs. Global market

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JEAN-FRANC - OIS HENNART diversification allows firms to gain cost advantages by configuring their value added chain in such a way that each link is located in the country which has the least cost for that link (Kogut, 1985a). Global market diversification thus provides firms with unique opportunities to increase returns by spreading its [sic] activities [emphasis in original] across multiple global market areas, rather than by choosing higher risk activities. At the same time, global market diversification endows firms with three unique options [emphasis in original] over domestic firms which are reasoned to reduce the level of corporate risk. First, global market diversification provides a firm with multiple national market bases from which it can retaliate against aggressive moves made by competitors (Hamel & Prahalad, 1985; Kim & Mauborgne, 1988). This option reduces the risk for the global firm of having to face aggressive challenges from its competitors. Second, the multiplicity of national markets allows firms to minimize the effect of adverse changes in a country’s interest rates, wage rates, and commodity and raw material prices by providing the added option to more readily shift production and sourcing sites to other more favorable national markets (Kogut, 1983, 1985b; Porter, 1986). Finally, global market diversification releases firms from the mercy of supply and demand fluctuations of any one national market, smoothing the peaks and troughs of firms’ revenue streams. In sum, the spreading of activities across global market areas provides the firm with operational flexibilities that will serve to reduce earning and profit fluctuations. Taken together, the above discussions suggest that the unique opportunities and options of global market diversification may simultaneously increase firms’ returns and reduce their risk.’’ (Kim et al., 1993, pp. 276–277)

Once duplication is taken out, Kim et al.’s arguments can be summarized as follows: global market diversification increases profitability at a given level of risk because it (1) reduces risk; (2) makes it possible to choose optimal locations and to access cheap resources; (3) allows for the exploitation of scale economies; (4) provides greater learning opportunities; and (5) reduces competition. While much can be said on reasons (4) and (5), I will concentrate on the first three, starting with the argument that an important reason why MNEs have a better profit/risk profile than domestic firms is because their operations are geographically dispersed.

The ‘‘Portfolio Diversification’’ Argument Kim et al.’s last argument in the citation above is that ‘‘global market diversification releases firms from the mercy of supply and demand fluctuations of any one national market, smoothing the peaks and troughs of firms’ revenues streams.’’ In other words, Kim et al. are arguing that owning revenue-yielding assets whose returns are uncorrelated will reduce risk at any level of profits. This is the argument made by Markowitz (1959) that individuals who want to reduce the risk of any given portfolio at a given level of returns should invest in assets whose returns are uncorrelated. If

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economic conditions are less than fully correlated across countries, then investing in securities of firms or institutions located in a number of countries may reduce the variance of one’s portfolio. Kim et al.’s argument can be seen as an application of this portfolio diversification model to MNEs. If returns are not perfectly correlated across countries, then a firm which generates profits in a large number of countries may have more stable returns than a firm which earns its income in a smaller number of countries. Markowitz has in mind individuals diversifying their assets, and a first question is why it is firms that should build diversified portfolios of assets rather than individuals. In other words, why should individuals invest in a small number of partly diversified MNEs rather than in a highly diversified portfolio of ‘‘pure plays,’’ i.e. single product, single country firms? The reason has to be that the costs of building internationally diversified portfolios of income earning assets are higher for individuals than for firms. The best way for individuals to geographically diversify their portfolios would then be to buy securities in partly geographically diversified MNEs. Portfolio investors buying shares in foreign firms run the risk that the firms in which they have invested will defraud them. Since direct investment carries control, this particular risk is somewhat alleviated for those who invest abroad through home MNEs. On the other hand, MNEs lack knowledge of the foreign markets they enter, have fewer contacts, may be victims of discriminatory treatment, and shoulder the added costs of having to manage their investments at a distance (Hennart, 1982). For these reasons, we would expect them to make worse investments on average than local firms, and to incur higher management costs. The relative efficiency of capital market diversification vs. MNE diversification hinges therefore on a comparison of the transaction costs incurred by individuals in diversifying in the share market vs. the management costs MNEs incur in running their foreign affiliates. The latter are likely to both limit the scope and increase the costs of MNE diversification. The question then is how efficient are MNEs as mechanisms for diversification? One way to answer this question is to ask what MNEs would be like if they were designed to reduce portfolio risk at any level of returns. In other words, how does the actual pattern of investments by MNEs compare to one that would be predicted by portfolio diversification? Roughly, it can be argued that an MNE whose main goal was to reduce risk would look like a global mutual fund: it would take small stakes in a variety of industries in as large a number of countries as possible, making sure that the business cycles of the countries where it invests are uncorrelated with each other and with its home country.

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The typical configuration of most MNEs is quite different. Most affiliates of MNEs are wholly owned: 57% of all US foreign affiliates were wholly owned in 1975, with only 18% minority owned (Vernon, 1977, p. 34). Most MNEs manufacture abroad what they manufacture at home: in 1966, 83% of the sales of the foreign affiliates of US firms were in the same Bureau of Economic Analysis (BEA) classification (roughly equivalent to a 3-digit Standard Industrial Classification industry) as that of their parents. Likewise, 80% of the US affiliates of Japanese firms were manufacturing in the United States the same product as was manufactured by their parent in Japan (Hennart & Park, 1993). Lastly, the geographical dispersion of MNE assets does not seem to reflect a desire to reduce risk. Hennart (1982) compared the 1966 geographical pattern of US investments abroad with that which would be predicted if investments were located so as to maximize returns and minimize risk, i.e. the optimal country portfolio for US investors calculated by Levy and Sarnat (1970) for the 1951–1967 period. The two patterns were drastically different. In fact, almost half the assets of US MNEs were then held in Canada and Europe, countries with business cycles highly correlated with that of the US. To sum up, MNEs do not seem to be primarily designed to reduce risk, and hence their risk-reduction potential must be limited compared to what can be achieved on stock exchanges. This appears clearly from a study by Jacquillat and Solnik (1978), who compared the reduction of risk achieved by US investors buying a portfolio of securities to that of buying stock in US-based MNEs. Buying shares of US MNEs reduced risk by 10% over a portfolio of US domestic securities, whereas an international diversified portfolio of stocks reduced risk by 50–70%. It is therefore not surprising that the evidence on the impact of a firm’s multinationality on its risk profile is mixed, with Rugman (1979, Chapter 3) finding that a firm’s ratio of foreign to domestic sales lowers the variability of its rate of return on equity capital, while Reeb, Kwok, and Baek (1998) find that it increases a firm’s systematic risk. To conclude, if an MNE‘s geographical dispersion brings some risk reduction benefits, we would expect them to be modest.

The Resource Access Argument The second argument put forth by Kim et al. as to why firms should obtain higher returns at lower risk as they spread their operations in a wider circle

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of countries is that this allows them to access cheaper resources. They argue that ‘‘global market diversification allows firms to gain cost advantages by configuring their value added chain in such a way that each link is located in the country which has the least cost for that link (Kogut, 1985a)’’ and further that ‘‘the multiplicity of national markets allows firms to minimize the effect of adverse changes in a country’s interest rates, wage rates, and commodity and raw material prices by providing the added option to more readily shift production and sourcing sites to other more favorable national markets (Kogut, 1983, 1985b; Porter, 1986).’’ Does having affiliates evenly dispersed across global market areas (Kim et al.’s measure of geographical dispersion) actually increase the ability of MNEs to access cheaper resources? Firms can access cheap inputs by buying products incorporating these inputs on the international product market. For the argument to be persuasive, one must be able to show that the only, or the most efficient way, of obtaining cheap or idiosyncratic resources is to own them through wholly or partly owned affiliates. For example, one must show that the most efficient way to take advantage of China‘s cheap labor costs is to have manufacturing operations there. Clearly a firm can take advantage of China’s cheap labor costs by buying Chinese parts or intermediate products through supply contracts. Toy manufacturers have been doing this for years. Which is the most profitable sourcing method depends on the costs of organizing interactions within MNEs (internalizing them) as opposed to through the market. Hence, absent some convincing argument that internalization is always preferable to market transactions, a firm with subsidiaries in a large number of countries (i.e. more geographically diversified) may not have any advantages, and indeed, as we will argue below, may have disadvantages, over a less geographically diversified one. As to the similar argument that an MNE, which is operating in a large number of countries is more able than the one present in only few countries to minimize the adverse effects of changes in the country’s environment by shifting production or sourcing to more favorable markets or sources of supply, again the argument seems to hinge on the assumption that the only way a firm can shift production or shift procurement is to an affiliate; but firms can also use the market, so the issue of whether a firm with more dispersed affiliates is more flexible than one with less dispersed affiliates depends on whether MNEs can shift production faster within their existing network of affiliates than a firm without foreign affiliates using an equivalent network of arm’s length agreements. There are arguments in both directions. On one hand, we would expect the greater difficulty of estimating the costs of internal supply than those of

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external purchases, which are likely to be put to bids periodically, to make it more difficult for managers to know when prices have changed, and to adjust in consequence. Certainly this has been the case in the US automobile industry, which did not know that the prices of the parts they sourced internally were out of line until this was made obvious by Japanese competition (Keller, 1989). Williamson (1985, pp. 150–151) argues that internal sourcing is less flexible than market sourcing because internal sourcing decisions are more influenced by due process than market ones. On the other hand, Rangan (2000) argues that the efficient global location of production requires good information on where to locate production (search costs) and whom to trust with it (deliberation costs). MNEs may have an advantage over firms with no preexisting foreign activities because their preexisting network of affiliates may reduce the costs of gathering information on relative prices and reliable producers. Hence, they might be able to make quicker and larger adaptations to changes in the environment. Rangan compared total US imports from nine countries in four industries to the intra-firm imports by US MNEs for the same industry and country. He found that MNE imports reacted more strongly to changes in exchange rates than overall US imports, suggesting that US MNEs can use their network of affiliates to more quickly adjust to environmental changes than the average US firm. However, this is not the whole story. Rangan’s test is in terms of marginal, not total costs. In other words, it presupposes a preexisting MNE network of affiliates in the right places. Assume that unit labor costs converge between India and the United States, but continue to diverge between China and the United States. An MNE will capture the advantages of a faster transfer of production from the United States to China through its internal network only if it has a preexisting affiliate there. Having operations in India does not help. If the MNE does not have operations in China, then setting them up there is likely to take more time and money than contracting with an independent Chinese firm. Given the difficulty of forecasting trends in production costs and trade barriers, it is very difficult for an MNE to know in which countries it should pre-position subsidiaries.1 Using the market involves lower fixed costs and may be more efficient if the environment is subject to rapid and unpredictable changes. Hence once we take into account the fixed costs of setting up operations in many countries, only a subset of which will turn out to be useful locations, it is unclear whether an MNE has a clear advantage over arm’s length transactions. Once again, flexibility seems to be a rather marginal by-product of the real reasons that lead to MNE expansion.

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The Economies of Scale Argument The third argument of Kim et al. as to why an MNE‘s geographical dispersion of operations would lead to superior performance is that ‘‘global market diversification offers possibilities for exploitation of economies of scale and scope above and beyond the potential of product diversification.’’ It is obvious, however, that exploiting economies of scale and scope does not necessarily require foreign expansion, let alone foreign market diversification. Inversely, a firm can have a high ratio of foreign to domestic sales for reasons that have nothing to do with scale economies. Let us start with this last point before considering economies of scale and their exploitation. There are two main strategies that explain foreign sales, arbitrage and aggregation (Ghemawat, 1993). Arbitrage takes advantage of comparative or absolute advantages. It is made possible by the unequal geographic dispersion of unique factors or by differences in their comparative abundance. These differences lead to exports. While some exports result from the exploitation of scale economies (see below), a substantial part is based on comparative or absolute advantage, and has nothing to do with scale economies or any of the arguments used by Kim et al. and by other scholars who have studied the multinationality/performance relationship. Note, however, that whenever exports based on absolute or comparative advantage are sold abroad by sales affiliates (as opposed to by independent agents), these exports enter the ‘‘foreign sales’’ numerator and denominator of the ‘‘foreign sales/total sales’’ ratio used as a measure of multinationality.2 Aggregation takes advantage of economies of scale at the plant and firm level. Plant scale economies lead to sales to foreign market through exports whenever the Minimum Efficient Scale (MES) of production of the plant is for a level of output that is larger than that which can be absorbed in the country where the plant is located. Given low transport costs, trade barriers, and the absence of adverse government regulations, the firm will exploit these scale economies through exports. Note again that some measures of multinationality may take these exports into account if they are handled by the MNE‘s sales affiliates, while others do not. For example, a multinationality measure that is based on foreign sales will count these exports more heavily than one based on foreign assets. Firm-level scale economies arise because R&D programs and brand building are often characterized by high fixed and low variable costs. When the MES of producing these intangibles is greater than the size of the domestic market for the products incorporating the intangibles, the firm will seek to amortize its fixed costs by exploiting its knowledge beyond its home base.

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There are many options. First, the MNE can export products incorporating its intangibles. If these exports are handled by the MNE’s sales affiliates, they will increase some of the measures of multinationality used in the literature, such as its ratio of foreign to total sales. Second, the MNE can rent its intangibles to foreign producers. I do not know of any measure of multinationality used in the literature that actually picks up the sales that result from this option. Lastly, the firm can exploit its intangibles by setting up operations abroad that produce products and services that incorporate these intangibles. Selling and manufacturing abroad almost always involves some adaptation of the marketing mix (product, price, promotion, and distribution) to local conditions. Adaptation tends to reduce some of the gains available from the exploitation of intangibles. Optimum exploitation of intangibles occurs when the firm can sell abroad exactly the same product as at home using exactly the same marketing mix (same packaging, advertising campaigns, etc.). Hence, when it comes to the exploitation of intangibles, the most desirable situation is one where they can be exploited without crossing borders, or if this is not possible, in a way that requires as few adaptations as possible, i.e. in a small number of countries with similar characteristics. Consequently, at a given level of intangibles, firms which can amortize them at home will be more profitable than those that need both domestic and foreign markets to do so. And among the latter, those which have to operate in a large number of disparate markets are in the worst position. From this line of reasoning, one would predict exactly the opposite relationship than that postulated by Kim et al.: at a given level of intangible investments, the greater the ratio of foreign to domestic sales, the worse the performance. Note also that the conditions under which economies of scale are optimally exploited (little foreign presence, or if so in homogeneous countries) are exactly the converse of those that lead to global learning (exposure to varied stimuli through operations in a heterogeneous group of countries).

INTERNATIONAL EXPANSION AND PERFORMANCE As argued before, the literature on the impact of multinationality on performance has addressed two issues: (1) does international diversification lead to better performance? and (2) does international expansion (i.e. the share of foreign sales over total sales) also lead to higher profits? We have seen that the arguments as to why geographical diversification should

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improve performance are less than persuasive. Let us now turn to the reasons given why firms which have a higher ratio of foreign to total sales (or a higher ratio of foreign to total assets or of foreign to total employment) should enjoy higher profitability.

The Economies of Scale Argument The main argument why having a relatively higher ratio of foreign to domestic sales should lead to superior profitability is that foreign sales allow the firm to spread its fixed costs. Contractor et al. (2003), for example, argue that ‘‘advantages of international expansion accrue by spreading common and central overheads over more and more nations: this is especially critical in R&D-intensive industries that require amortization of R&D from more than a few markets.’’ As we have seen above, amortizing a given level of R&D requires a particular market size. But if this market size can be had by selling to domestic customers, then the firm can avoid the additional costs of having to adapt the product to one or many foreign markets. Everything else constant, the less the firm needs to sell to foreign customers to amortize its R&D investment (e.g. the lower the ratio of its foreign to total sales), the more profitable it should be, in contradiction to the argument made by Contractor et al. (2003) and others.

The Resource Access/Learning/Competition Arguments Other arguments as to why a high ratio of foreign to local sales should improve performance parallel those used to support the international diversification/performance relationship. Contractor et al. (2003), for example, argue that ‘‘international expansion provides access to cheaper and idiosyncratic resources in foreign countries,’’ that ‘‘international expansion provide greater learning or international experience,’’ and that it provides ‘‘better cross-subsidization, price discrimination, and arbitrage potential with larger geographic scope.’’ The resource access argument is based on the fact that MNEs with a dispersed network of affiliates may be able to switch production faster than a firm relying on market contracts. We have seen earlier the limits of such an argument. Whatever its strength, the hypothesized relationship relates geographical diversification to performance, not the relative share of foreign operations to performance. Since Contractor et al.’s measure of multinationality is the ratio

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of domestic to foreign operations, the argument has less power than those used by Kim et al. while remaining subject to the same criticisms.

INTERNALIZATION THEORY TO THE RESCUE It stands to reason that the proper basis for an investigation of how the size or the geographic dispersion of an MNE‘s foreign operations affects its profitability is a clear understanding of why firms operate abroad. The remaining part of this chapter will show that the internalization theory of the MNE (Buckley & Casson, 1976; Rugman, 1981; Hennart, 1982) can throw considerable light on this issue. Internalization theory is a theory of the size and scope of firms. It argues that interdependencies between economic agents can be organized through the price system or through hierarchy (through employment contracts). MNEs arise whenever interdependencies between agents located in different countries are more efficiently organized through hierarchical processes than on a market through spot prices or contracts. There are many types of interdependencies which are typically more efficiently organized within an MNE than on a market, and which provide motives for MNEs to expand abroad (Hennart, 1982, 2001). MNEs internalize some markets for raw materials and marketing services (backward and forward integration), capital, and intangibles (knowledge and reputation). Whenever they do this, they replace potential or actual independent agents by their employees. Hence the foreign operations of MNEs (and hence their foreign sales and assets) are a mix of extractive, marketing, and manufacturing and service operations set up to exploit or to acquire raw materials, marketing services, and intangibles. Some intangibles, such as tacit knowledge, which are costly to transact on markets, will be transferred within MNEs because such transfer will earn higher rents than exchange through the market: MNEs will set up abroad affiliates to sell products or services that incorporate their knowledge and/or reputation, and/or they will acquire foreign firms so as to access the brand names and knowledge that is embedded in these firms. International operations which are not justified by these considerations will incur the higher costs of operating in a foreign country without the corresponding advantages of internalization, and hence should make net losses. As we have just seen, internalization (i.e. coordination through employment contracts) is only one of the many possible ways to organize the purchase of inputs, the sale of outputs, or the exploitation or acquisition of

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knowledge and goodwill. An alternative is the market (market sales or contracts). Hence firms can choose between purchasing foreign inputs through contracts or setting up subsidiaries, between selling their output through independent agents and distributors or through their own sales force, and between exploiting intangibles by renting them on the market through licensing or franchising or by setting up foreign operations that sell products or services that incorporate their knowledge and goodwill. This has a number of implications for the study of the relationship between multinationality and performance. First, the theory explains why MNEs are relatively poor vehicles for risk reduction. Second, it explains the connection between intangibles and foreign expansion. Third, it throws light on the relationship between multinationality and performance.

Multinationality and Risk Reduction For internalization theory, international expansion is the replacement of market by hierarchical coordination. Hierarchical coordination is based on central direction and behavior constraints (Hennart, 1982). In firms bosses tell employees what to do and constrain their behavior. This is more costly when the target market is both geographically and culturally distant because geographical distance increases the cost of observing behavior and cultural distance that of obtaining the information necessary to direct the behavior of employees (Hennart, 1991). Hence, the well-noted preference of MNEs for investing in geographically and culturally close countries (Davidson, 1980; Rugman, 2000). Since countries which are geographically close and culturally similar to the MNE’s home country are often also economically integrated with it,3 a substantial share of a firm’s foreign investments will be in countries whose business cycle is closely linked with that of its home country, thus reducing geographic diversification benefits. Second, because both knowledge and reputation are to a large extent industry specific, MNEs end up producing abroad the same products and services they produce at home (most exceptions being cases of backward and forward vertical integration). Hence MNEs provide little product diversification benefits. Third, since managerial control is obtained by equity ownership, and the raison d’etre of MNEs is to replace prices by managerial control, it is not surprising that most affiliates are majority or wholly owned by their parents. This means that MNEs will not spread their investments into a large number of small stakes, thus reducing the diversification benefits they can offer.

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To sum up, internalization theory shows that risk reduction can only be a weak side effect of the foreign expansion of firms. MNEs did not arise to provide diversification, and they are not particularly good at risk reduction.

Investment in Intangibles and Foreign Operations We have seen that MNEs operate abroad to obtain access to raw materials and parts and to knowledge and brand names, and to exploit abroad their own knowledge and reputation. This suggests that foreign expansion that is not motivated by internalization should have negative profitability consequences. To the extent that intangible-exploiting affiliates dominate the mix of foreign affiliates, and that MNEs exploit their intangibles through foreign direct investment, we would expect a noisy statistical relationship between a firm’s investment in intangibles (as measured by its R&D and advertising intensities) and the extent or spread of their foreign operations. The relationship will be noisy because (1) intangibles can be exploited through other means than foreign manufacturing and/or service operations, namely through exports and contracts (e.g. licensing and franchising), (2) foreign operations are also established for other reasons than the internalization of intangibles, e.g. to vertically integrate backward or forward and to internalize capital flows (Hennart, 2000), and (3) R&D and advertising expenditures are input measures, which do not necessarily correspond to the outputs that are being internalized. Nevertheless, R&D intensity has been found to be a statistically significant determinant, ceteris paribus, of the ratio of net foreign sales to domestic sales for Swedish firms (Swedenborg, 1979, Table 5.7) and of the probability that a firm will manufacture in the United States a product it manufactures in Japan (Hennart & Park, 1994). Similarly, Morck and Yeung (1991) found that the market value of a firm’s intangibles (its Tobin’s q) was positively associated with its R&D and advertising intensities (and more weakly with the cross-product of its R&D and advertising intensities and the number of foreign countries in which it was operating), but not with the number of foreign countries in which the firm was operating. This suggests that multinationality has no significant value to firms which do not invest in R&D or advertising. Since Tobin’s q is the ratio of the market value of the firm to its fixed assets (i.e. the part of the stock market value that is due to intangibles), this finding casts doubt on the contribution of geographical diversification per se to a firm’s profitability. Specifically, contrary to the global learning hypothesis, a firm’s stock of knowledge does not seem to benefit from geographical diversification unless

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the firm is also investing in intangibles. Note, however, that existence of a relationship between multinationality and investment in intangibles does not imply one between multinationality and performance. Multinationality and Profitability Internalization theory also throws light on the possible relationship between the relative size and dispersion of international operations and profitability. MNEs expand abroad when they have to. Their foreign network will survive as long as the rents obtained by organizing internal transactions are at least as high as those obtained by organizing transactions on the market. For example, an MNE will use its affiliate in a given country to source transactions as long as the alternative of using independent suppliers is less profitable. While it may take some time for MNEs to compare the rents that can be obtained by internal and external links and to adjust accordingly, we would expect MNEs to ultimately decide at the margin whether each of their specific affiliate brings them net rents. For example, whether an MNE will keep or get rid of a specific affiliate will hinge on whether the inputs it supplies can be more cheaply bought on the market; whether it makes more sense to franchise local producers than to operate company-owned outlets; or whether knowledge is more efficiently exploited through licensing foreign producers than through investment in manufacturing plants abroad. The configuration of MNE affiliates abroad is thus likely to be in constant flux, with MNEs adding and closing affiliates in specific countries and industries (Boddewyn, 1983). At the margin, the profitability of internalizing the transaction and that of externalizing it should be the same, the only exception being cases where the MNE has failed to make the right decision and is either internalizing a transaction that should be externalized or doing the reverse (Chiles & McMackin, 1996; Brouthers, Brouthers, & Werner, 2003). Aggregating over all transactions, it is hard to see why, keeping everything else constant, the proportion of a firm’s foreign sales to total sales, or the dispersion of its sales abroad, should have any impact on its profitability. The only profitability differences one should observe are those between firms which have the right, and those which have the wrong degree of internalization, either because they are making mistakes, or because they have not yet fully adapted to new conditions. Since it is difficult to assess the appropriateness of MNE decisions and to identify the misfits from Compustat data, it is unlikely that differences in MNE performance can be satisfactorily investigated within the present framework of the multinationality/performance literature.

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In spite of my predictions, a number of studies report a positive correlation between a firm’s return on assets on one hand, and its share of foreign to total sales (and/or some index of the geographical dispersion of operations) on the other (e.g. Geringer, Tallman, & Olsen, 2000; Contractor et al., 2003; Gomes & Ramaswamy, 1999). How can this be explained? It is difficult to guess what factors may account for these results, but, at least when performance is measured as return on assets, there would seem to be a simple explanation. Accounting rules do not treat expenditures incurred in building intangibles as assets. Hence firms which invest large amounts in R&D and in building up brand names have undervalued assets, in the sense that the assets they report in their balance sheet are systematically lower than their ‘‘real’’ assets. Because they have undervalued assets, their return on assets should be higher, ceteris paribus, than firms which invest less on intangibles (and hence whose assets are less undervalued). Since the firms which invest a lot in intangibles are also those with operations abroad, measuring performance by a firm’s ROA leads to a spurious correlation between multinationality and performance.

CONCLUSIONS An important and apparently growing strain of research in international business tries to establish a statistical relationship between a firm’s relative importance and spread of international operations (its multinationality) and its performance. After nearly 40 empirical studies, we are no closer to understanding this relationship, in part because of a lack of a clear consensus on how to measure the ‘‘multinationality’’ concept. This lack of consensus arises from a lack of solid theoretical grounding. In this chapter, I critically examine some of the theoretical arguments used in this literature to support the existence of a theoretical link between multinationality and performance. The discussion is split in two parts: (1) why should a firm’s geographical dispersion of its foreign operations lead to higher performance and (2) why should a firm’s relative size of foreign operations lead to superior performance. Five main reasons have been given why firms which have geographically spread foreign operations should perform better. I examine three of them. The first reason is that MNEs are better able to diversify risk. I show that the empirical evidence suggests that the diversification benefits of MNEs should be modest. Another reason advanced why MNEs with dispersed foreign operations should be more profitable is that they are able to minimize the impact

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of changes in the environment because of their superior ability to shift production between markets. My point is that, when the fixed cost of setting up a network of foreign affiliates is taken into account, the benefits of intra-firm trade vs. market transactions are not that obvious. A third reason why firms with diversified foreign operations should be more profitable is that such firms can better amortize the fixed costs of generating intangibles. However, at a given level of intangible investments, it is clear that the reverse is true: firms which can exploit them without having to go abroad will in fact be more profitable. The same arguments can be made a fortiori when the dependent variable is the share of foreign over total operations. If one agrees with me that the theoretical arguments made in the literature leave much to be desired, then what theoretical framework should we use to understand the relationship between multinationality and performance? The last part of the paper reviews internalization theory. This theory shows that the size and scope of an MNE‘s foreign operations results from a comparison of the rents that can be derived from organizing interactions within an MNE network as opposed to on the market. At the margin, the rents derived from internal coordination should be exactly the same as those that accrue from effecting the transaction on the market. Hence, absent mistakes, and keeping everything else constant, there should be no performance differences between an MNE with operations in 50 countries and a firm with no operations abroad at all, or between a Swiss-based MNE with 95% of its sales abroad and a US firm with 2%. In each case, unless we believe that firms commit systematic errors and fail to correct for them for long periods of time, the size and scope of a firm’s international operations should be the ones that maximize its profits. This suggests that any observed profitability differences between firms with different degrees of multinationality are likely to be due to measurement biases or to omitted variables. Since the usual databases used in this literature do not provide the detailed data necessary for controlling for all the variables that may affect profitability, this suggest looking at more micro data, such as detailed comparisons of firms in the same industry.

NOTES 1. The optimal location of production changes in often unpredictable ways. Japan was a highly profitable production location for aluminum in the 1960s, but the 1973 oil crisis put quickly an end to that. Similarly, the expiration of the Multifiber

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agreement is casting doubt on the long-term viability of textile production in Cambodia and Vietnam, where production was located to get around US quotas on Chinese imports. 2. This can be deduced from the description in Tallman and Li (1996). 3. For example, Canada and the United States, or the Netherlands and Germany.

REFERENCES Boddewyn, J. (1983). Foreign and domestic divestment and investment decision: Like or unlike? Journal of International Business Studies, 14, 23–35. Brouthers, K., Brouthers, L., & Werner, S. (2003). Transaction cost-enhanced entry mode choices and firm performance. Strategic Management Journal, 24, 1239–1248. Buckley, P., & Casson, M. (1976). The Future of Multinational Enterprise. London: Macmillan. Chiles, T., & McMackin, J.-F. (1996). Integrating variable risk preferences, trust, and transaction cost economics. Academy of Management Review, 21(1), 73–99. Contractor, F., Kundu, S., & Hsu, C. C. (2003). A three-stage theory of international expansion: The link between multinationality and performance in the service sector. Journal of International Business Studies, 34, 5–18. Davidson, W. H. (1980). The location of foreign direct investment activity: Country characteristics and experience effects. Journal of International Business Studies, 11, 9–22. Geringer, J., Tallman, S., & Olsen, D. (2000). Product and international diversification among Japanese multinational firms. Strategic Management Journal, 21, 51–80. Ghemawat, P. (1993). The forgotten strategy. Harvard Business Review(November), 77–84. Gomes, L., & Ramaswamy, K. (1999). An empirical examination of the form of relationship between multinationality and performance. Journal of International Business Studies, 30, 173–188. Grant, R., Jammine, A., & Thomas, H. (1988). Diversity, diversification and profitability among British manufacturing companies. Academy of Management Journal, 31, 771–801. Hamel, G., & Prahalad, C. K. (1985). Do you really have a global strategy? Harvard Business Review(July/August), 139–148. Hennart, J.-F. (1982). A theory of multinational enterprise. Ann Arbor: University of Michigan Press. Hennart, J.-F. (1991). Control in multinational firms: The role of price and hierarchy. Management International Review, 31(special issue), 71–96. Hennart, J.-F. (2000). Transaction costs theory and the multinational enterprise. In: C. Pitclis, & R. Sugden (Eds.), The Nature of the Transnational Firm, (2nd ed.). London: Routledge. Hennart, J.-F. (2001). Theories of the multinational enterprise. In: A. Rugman & T. Brewer (Eds), The Oxford handbook of international business (pp. 127–149). Oxford: Oxford University Press. Hennart, J.-F., & Park, Y. R. (1993). Greenfield vs. acquisition: The strategy of Japanese investors in the United States. Management Science, 39(9), 1054–1070. Hennart, J.-F., & Park, Y. R. (1994). Location,governance and strategic determinants of Japanese manufacturing investment in the United States. Strategic Management Journal, 15, 419–436.

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Jacquillat, B., & Solnik, B. (1978). Multinationals are poor tools for diversification. Journal of Portfolio Management, 4, 8–12. Keller, M. (1989). Rude awakening. New York: Morrow. Kim, W. C., Hwang, P., & Burgers, W. (1993). Multinationals’ diversification and the riskreturn trade-off. Strategic Management Journal, 14, 275–286. Kim, W. C., & Mauborgne, R. (1988). Becoming an effective global competitor. Journal of Business Strategy, 9(January/February), 33–37. Kogut, B. (1983). Foreign direct investment as a sequential process. In: C. Kindleberger & D. Audretsch (Eds), The multinational corporation in the 1980s (pp. 38–56). Cambridge: MIT Press. Kogut, B. (1985a). Designing global strategies: Comparative and competitive value-added chains. Sloan Management Review, 26(Summer), 27–38. Kogut, B. (1985b). Designing global strategies: Profiting from operational flexibility. Sloan Management Review, 26(Fall), 27–38. Kotabe, M., Srinavasan, S., & Aulakh, P. (2002). Multinationality and firm performance: The moderating role of R&D and marketing capabilities. Journal of International Business Studies, 33(1), 79–97. Levy, H., & Sarnat, M. (1970). International diversification of investment portfolios. American Economic Review, 60, 668–675. Markowitz, H. (1959). Portfolio selection: Efficient diversification of investments. New York: Wiley. Michel, A., & Shaked, I. (1986). Multinational corporations vs. domestic corporations: Financial performance and characteristics. Journal of International Business Studies, 17(3), 89–101. Morck, R., & Yeung, B. (1991). Why investors value multinationality. Journal of Business, 64(2), 165–187. Porter, M. (1986). Competition in global industries: A conceptual framework. In: M. Porter (Ed.), Competition in global industries (pp. 15–60). Boston: Harvard Business School Press. Rangan, S. (2000). Search and deliberation in international exchange: Microfoundations to some macro patterns. Journal of International Business Studies, 31, 205–222. Reeb, D., Kwok, C., & Baek, H. Y. (1998). Systematic risk of the multinational corporation. Journal of International Business Studies, 29, 263–279. Rugman, A. (1979). International diversification and the multinational enterprise. Lexington: Lexington Books. Rugman, A. (1981). Inside the multinationals. New York: Columbia University Press. Rugman, A. (2000). The end of globalization. London: Random House. Swedenborg, B. (1979). The multinational operations of Swedish firms. Stockholm: Almqvist and Wiksell. Tallman, S., & Li, J. (1996). Effects of international diversity and product diversity on the performance of multinational firms. Academy of Management Journal, 39, 179–196. Vernon, R. (1977). Storm over the multinationals. Cambridge: Harvard University Press. Williamson, O. (1985). The economic institutions of capitalism. New York: Free Press.

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REGIONAL STRATEGY AND PERFORMANCE IN THE GLOBAL AUTOMOTIVE INDUSTRY Alain Verbeke and Paul Brugman In this paper, we address regional strategy and performance in the global automotive industry. We briefly review two strands of literature that explain the limited geographical dispersion of multinational activity across industries. We then confront these theories with an original dataset from the automotive industry. After analysing this sample, we predict that competitive pressures will force firms in the automotive industry to increase further the size and scope of their foreign operations. The presence of firm-specific advantages explains the performance differences observed among the firms.

INTRODUCTION Twenty years ago, Kenichi Ohmae (1985) published Triad Power, a pathbreaking book, which has become a classic in the international business literature. Ohmae concluded that the world was far from global, but rather regionally organised, with the United States, Europe and Japan as the ‘triad powers’, dominating world trade and investment. Extending this line of thought, Rugman demonstrated that the vast majority of trade is intraregional (meaning it takes place within either North America, the European Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 97–117 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11007-9

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Union or Asia), rather than inter-regional (Rugman, 2000, 2005). The following statement on the automotive industry is illustrative: y more than 85% of all the automobiles produced in North America are built in North American factories owned by Japanese and European MNEs as well as by General Motors, Ford and Daimler-Chrysler. In Europe the story is the same, as it is in Japan. (Rugman, 2000, p. 2)

Rugman concluded in his 2000 book, The End of Globalization, that there is no global automotive firm, and his 2005 follow-up book, The Regional Multinationals, confirms this result. Rugman suggests in his 2000 book that most large multinational enterprises (MNEs), and not only automotive firms, sell the vast majority of their products in the same region as they are produced. Because of this absence of inter-regional activity, Rugman advises managers to adopt a regional, rather than a global view of operations. In addition, the 2005 book demonstrates that no single automotive firm has a balanced spread of its sales across the triad (with less than 50% of sales in the home region, and at least 20% in each of the two other triad regions), meaning that automotive firms are systematically more successful in one region than in the other ones. However insightful, Rugman (2005) leaves some issues open to refinement. These issues are the content of the regional sales distribution in the automotive industry, and the linkage with firm performance. For example, Rugman’s regional distribution of sales is based on total automotive sales. This means that no distinction is made between firms that also sell trucks and busses (i.e. commercial vehicles), and those that do not. Although Rugman’s main findings are corroborated, correcting for this difference yields less outspoken results with respect to sales concentration.1 The fact that these results are less outspoken is important, as it lends support to our hypothesis that in the future, automotive firms are likely to become more global, a hypothesis that is in sharp contrast with Rugman’s predictions.2 A second issue that requires closer scrutiny than provided by Rugman is that of performance. In Rugman (2005), a firm’s total revenues and/or sales are given. However, total revenues and/or sales are not good indicators of financial performance. Therefore, making use of our own dataset, we calculate operating income per car, to provide a credible proxy of financial performance. The results we obtain add further support to our expectation of an increase in the geographic spread of MNEs. The remainder of this paper is organised as follows: in the second section, we analyse the reasons for the observed narrow geographic spread of multinational activity. We do this by making use of both a transaction cost

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economics (TCE) approach and the latest insights from the multinationality-performance (M-P) literature. In the third section, we present and analyse the dataset, and confront the results with the theory. In the fourth section, we discuss the issue of competitive pressures and explain how these affect geographical dispersion.

TRANSACTION COST ECONOMICS Rugman and Verbeke (2004a, b) have established that only 9 of the 500 largest MNEs in the world are truly global while the vast majority of MNEs are regional. A firm is considered global when it has at least 20% of total sales in each of the triad regions: North America, the European Union and Asia and less than 50% in the home region. TCE helps to explain this relative absence of global firms. Any firm that sells abroad is considered to possess a bundle of firmspecific advantages (FSAs) that it can successfully exploit.3 Foreign sales can be realised through various options such as exports and foreign direct investment (FDI). The latter occurs in the presence of internalisation advantages, i.e. benefits of hierarchy vis-a`-vis the market. In such a case, a location needs to be found to serve as production or distribution point. Given that locations are non-homogenous, there will be at least one location with country-specific advantages (CSAs).4 However, a firm cannot just establish production or distribution operations in a foreign country and expect to make a profit. Rather, investments must be made to overcome the liabilities of newness (Stinchcombe, 1965) and foreignness (Hymer, 1976). The former concept implies that a foreign subsidiary is essentially a new firm and is therefore confronted with a variety of start-up issues such as finding good personnel and establishing local relations. The second concept implies that what may work in one location does not necessarily work in another. In other words, the MNE will need to adapt some of its products and practices to local conditions in order to be successful. The required adaptation investments are ‘melding investments’ as they meld the firm’s existing knowledge base with the local environment. However, as Ronen & Shenkar (1985) have shown in their work, we can distinguish among nine different country clusters, each representing a specific geographic region of the world.5 In this context, as the distance between the country of origin and the country of destination increases, in terms of cultural, administrative, economic and cultural differences (Ghemawat, 2001),

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the required melding investments will also increase. In the spirit of Fujita, Krugman, and Venables (1999), we will represent the above distance components through a single variable t. If t increases, melding investments need to increase as well for the MNE to be successful. Importantly, the size of these melding investments is not equal across value-chain activities. Downstream activities such as marketing and distribution typically require more local knowledge and embeddedness than upstream activities due to the one-sided nature of the investments intended to increase sales in host regions. In contrast, upstream activities such as R&D, component sourcing and production involve the MNE as a purchaser and combiner of inputs rather than a seller of outputs. In this context, not all types of FDI entail the same risk. Specifically, market-seeking FDI is more risky than strategic asset-seeking FDI or resource-seeking FDI. The reason is that in the former case, a firm makes a one-sided investment to try and service a local market. In the latter two cases however, several partners, both foreign and local ones, tend to engage in simultaneous commitments, which make the investments worthwhile for all parties involved (Rugman & Verbeke, 2005). In other words, there are substantial costs and risks associated with investing abroad, especially for market-seeking FDI in another region, and these act as an entry barrier. It follows immediately that a firm will remain within its ‘home region’ as long as the expected benefits of expanding intraregionally (¼ EBintra ) are equal or larger than the expected benefits of expanding inter-regionally (¼ EBinter ) when corrected for the melding investment alpha (a). In simple formulae,6 if EBintra X½EBinter
a-expand intra-regionally if EBintra p½EBinter
a-expand inter-regionally and if t "! a " if t #! a # Thus, if t "! P [expand intra-regionally] m and ! P [expand inter-regionally] k if t #! P [expand intra-regionally] k and ! P [expand inter-regionally] m We can also represent this trade-off with graphs. On the vertical axis, we visualise the expected benefit of an investment at location 1, while on the vertical axis we show the expected benefit of an investment at location 2.

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A, B and C each represent investment opportunities that can be undertaken in either location. However, the site of the investment will have an impact on its performance. Project A is expected to yield 28 if undertaken at location 1, while it would yield 8 when undertaken at location 2. Project B will yield 32 at either location, while project C leads to locational outcomes that are the opposite of those for project A. Graph 1 shows a hypothetical situation in which no melding investments are required, i.e. we assume that t and a are zero; the two regions are homogenous. The firm can be expected to choose investment opportunity B since it has a higher expected benefit than either A or C. The site of this investment is of no importance, since the expected benefit in either location is identical. This situation is more likely to occur when choosing between sites in the same nation, rather than in an international setting. Graph 2 introduces melding investments (a), associated with investing in location 2. Because of these, an investment in location 2 must now have a higher expected benefit before it is undertaken. This means that B will now decisively be undertaken in location 1. However, since C is still expected to yield a higher benefit in location 2 than in location 1, the firm will likely also consider this international investment. Finally, Graph 3 represents the issue of investments in a ‘high distance’ host region (in this case region 2), vis-a`-vis a more ‘low distance’ region

Expected Benefit Location 1

40

B

30

A 20

10

C 0

0

10

20

30

40

Expected Benefit Location 2

Graph 1.

Hypothetical Situation of Zero Melding Investments.

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Expected Benefit Location 1

40

B

30

A 20

α 10

0

C

-10

0 10 20 Expected Benefit Location 2

30

Graph 2. Inter-Regional Melding Investment.

Expected Benefit Home Region

40

B

30

A 20

α 10

C 0 -30

-20

-10

0

10

Expected Benefit Host Region

Graph 3. Inter-Regional Melding Investment.

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(typically the home region, in this case region 1). The required melding investments (a) are much higher in the distant host region. Clearly, even project C is no longer undertaken, as the costs outweigh the benefits. A firm will choose to expand within its home region unless a spectacular opportunity is found. To summarise, downstream activities of MNEs typically face higher melding investments than upstream activities. Thus, barriers to invest abroad (especially outside the home region) are higher for those firms. In addition, especially if downstream activities are contemplated outside the home region, the likelihood of success is low, given the one-sidedness of contracts. This situation is exemplified by the unsuccessful attempt of Renault to enter the US market, or the exit of supermarket chain Albert Heijn from South America. The managerial implication is clear: firms should be very selective when choosing their geographical spread of activities, and typically abstain from a truly global roll out. In addition, market-seeking firms should either stay in their home region or expand in regions with a low distance from the home region.

MULTINATIONALITY AND PERFORMANCE In addition to the TCE-based rationale for a narrow geographic focus, especially as regards market-seeking FDI, it is also useful to investigate possible performance differences between firms that are at different stages of their international expansion. For the past 30 years, a large research stream has focused on this topic, commonly known as the literature on the M-P relationship. Despite (or perhaps because of) 30 years of research on this topic, the empirical results of this research have been ambiguous, and many results are contradictory, ranging from linear and negative to cubed and positive relationships.7 In the past few years, the cubed form has been postulated as the ‘‘true’’ form of the relationship. The hypothesis is that as a firm commences with foreign operations the costs are higher than the benefits due to the liability of foreignness and the liability of newness. As a firm learns how to operate in the new environment, the operating costs decline (since fewer mistakes are made) while benefits increase (due to the increased scale and scope of operations) so total performance increases as well. However, as the firm increases its foreign operations, it is argued that a threshold will be reached. That is, there is an ‘optimal firm size’ or a ‘maximum efficient scale’

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after which the business gets too complex for management to handle. Once a firm crosses that threshold, performance will decline as the costs of for example monitoring, communication or management outweigh the benefits. This behaviour, when represented graphically leads to a horizontal ‘S’-curve. Recent research however, has suggested that this S-curve is not universal but dependent upon many factors such as firm size, firm nationality and the locus of destination. For example, smaller firms may encounter more difficulties and have fewer benefits when initially entering a foreign market than larger firms (Lu & Beamish, 2001). The reason is that smaller firms have fewer resources to make a foreign venture a success while at the same time they have not yet achieved enough critical mass that would yield substantial economies of scale or scope. Also, firm nationality plays a significant role. For example, MNEs from small nations that share cultural, administrative and economic similarities with a large neighbour in the context of a regional trading block will face reduced costs of newness and foreignness, for example within NAFTA, ASEAN or EU-15. Although most research on the M-P relationship focuses on foreign expansion per se (rather than expansion within regions vis-a`-vis expansion to other regions, i.e. true regional diversification), a recent paper by Lei (2005) has shown that a regional strategy yields a superior performance over a global strategy in the US services industry.8 More specifically, not only did this author find an S-curved relation between multinationality and performance (a dubious outcome given that internalisation theory would not predict any specific M-P relationship when a large sample of firms is studied, rather than the behaviour and performance of a single firm over time), he also demonstrated that a home-triad region orientation will result in an upward-shift of that curve (see Graph 4). Multinationality is shown on the horizontal axis, while performance is represented on the vertical axis. Multinationality is defined in Lei’s paper as foreign sales over total sales, while performance is defined as return on assets. In the graph, there are three S-curves, labelled I, II and III. The idea is that a firm that invests more in its home region (curve I) will encounter fewer problems than firms with the highest geographic sales diversification (curve 3), both in the early phase of internationalisation, and in the later phases. This translates in higher comparative performance, and also a larger ‘zone of internationalisation’, as indicated by the arrows. It should be noted that the three curves are shown here for illustrative purposes only, as the actual figure would look more like a single, massive, S-shaped wave, i.e. I and III define the boundaries of the above curve.

Regional Strategy and Performance

Graph 4.

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Shifting S-curves.

To our knowledge, Lei has been the first author to use a home-triad orientation in the M-P literature in this way, but his ideas can be traced back to the work of Kim9 and Vachani.10 In other words, there is a growing body of empirical and theoretical literature that lends support Rugman and Verbeke’s (2004) work on the impact of regional strategy, as described above, since it shows that a focused, home-region oriented strategy yields the highest returns. To summarise, most MNEs are regional rather than global with respect to foreign operations. Despite the uncertainty over the exact M-P relationship, performance tends to be higher when firms stay in their home region, rather than venture out of it. We now contrast these results with the sales and profit performance of the global automotive industry.

THE DATA The sample contains data from the 11 largest car assemblers in the world as found in the Fortune Global 500 of 2004. By making use of this dataset, we ensure comparability with the dataset as used by Rugman and Verbeke (2004b). This yielded the 11 firms as shown in Table 1. With the exception of Peugeot-Citroen SA, the entire set of firms is also present in the world’s top 100 non-financial transnational companies, ranked by foreign assets.11 The sample period is from 1998 to 2003 (6-year

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Table 1. Fortune Global 500 (2004). Fortune Global 500 Rank 5 6 7 8 15 25 32 39 58 74 89

Company General Motors (GM) Ford Motor Co. (Ford) DaimlerChrysler AG (DC) Toyota Motor Corp. (Toyota) Volkswagen AG (VW) Honda Motors Co. (Honda) Nissan Motor Co. (Nissan) Peugeot-Citroen SA (PSA) FIAT S.p.A. (FIAT) BMW Group (BMW) Renault SA (Renault)

period). Before 1997, many firms did not report a geographic breakdown of results. No annual reports for 2004 had been published at the time of writing. To make sure we could compare the different firms, we decided to calculate passenger car and light truck sales only, rather than compare total unit sales of each firm. The reason, as noted above, is that some firms are also engaged in selling commercial vehicles (a fundamentally different business), while others are not. Light trucks are included since these represent the increasingly popular sport utility vehicles (SUVs). The fact that not all firms sell SUVs is a strategic choice within the sphere of non-commercial vehicles and we should therefore not correct our data for it. The passenger car sales provide an accurate indication of downstream performance.12 In conjunction with unit car sales, we also calculated operating income per car. It has become common practice for some car assemblers to push sales by giving huge discounts in order to maintain market share. As a result, a firm could sell a large number of cars, but still make very low profits. If we did not correct for this phenomenon, a firm with a systemic discount strategy, imposed by competitive pressures, could be mistakenly perceived as successful. We chose to analyse operating income (OI), otherwise known as operating profit, as a measure of financial performance. OI is the pre-tax, preinterest profit from a company’s operations and it reflects the profit a firm makes from its main activities.13 By using this measure, we can easily compare profitability among firms, since we do not have to take into account their differential capital structures, nor do we need to take into account

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differences in tax regimes, and related firm responses. We do need to take into account the fact that the overall OI of the various companies may be expressed in different currencies though, so we re-calculated all OI to US dollars. We used the monthly averages of the dollar–yen and dollar–euro exchange rates and then calculated yearly averages. The exchange rate obtained was then used to express in US dollars the OI of every firm for each year considered. Finally, the OI per car was calculated to compensate for differences between firms with respect to the volume of cars sold.

WHERE DO FIRMS SELL? Following the terminology introduced by Rugman and Verbeke (2004), we classified the firms as either home oriented, bi-regional, host oriented or global. The distinction is based on relative sales distributions, as shown in Table 2. The average sales distribution of the 11 firms in our sample is shown in Table 3. Before discussing these results, it should first be noted that the list above is not identical to the list in Table 1. Specifically, Daimler-Chrysler is present in this table as a single entity, but it is also unbundled into its two main business units, namely Daimler and Chrysler. In other words, we made a distinction between the two main automotive divisions of the firm and the firm as a whole. The reason is that Chrysler and Daimler-Benz merged in 1998, but senior management treats both divisions separately.14 This also means that the annual reports provide for separate sales and profit figures. Chrysler is the originally US-based car manufacturer, well known for its Chrysler and Dodge brands. Daimler is the originally EU-based firm, best known for its flagship brand: Mercedes. Besides these differences in geographical origin, there is a difference in business structure. That is, Table 2. Home, Host, Bi-regional and Global firms. Sales Home Home-oriented Bi-regional Host-oriented Global

450% 420%,o50% 420%,o50%

2nd Region

3rd Region

420%,o50% 450% 420%,o50%

420%,o50%

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Table 3.

Chrysler (US) Renault (EUROPE) PSA (EUROPE) FIAT (EUROPE) DaimlerChrysler Daimler (EUROPE) VW (EUROPE) BMW (EUROPE) GM (US) Honda (ASIA) Toyota (ASIA) Ford (US) Nissan (ASIA)

Average Regional Sales Distribution. ASIA

US

EUROPE

Other

0 0.01 0.07 0 0.02 0.08 0.10 0.10 0.04 0.33 0.45 0.05 0.30

0.94 0 0 0 0.73 0.20 0.12 0.24 0.54 0.51 0.31 0.44 0.37

0 0.82 0.82 0.76 0.19 0.71 0.66 0.63 0.34 0.09 0.12 0.43 0.19

0.06 0.17 0.11 0.24 0.05 0.01 0.11 0.03 0.09 0.07 0.11 0.08 0.14

Chrysler’s line-up is characterised by SUVs, other light pick-up trucks and passenger cars. Daimler, however, focuses largely on high-end passenger cars.15 It should be noted that behind the name of the firm, the firms’ home region is stated in brackets. Naturally, Daimler-Chrysler does not have a home region, as it is the result of a merger rather than an acquisition. The firms are ranked from the most narrow to the widest geographic spread. We can observe that all European firms are home-region oriented, while the Asian firms are more globally spread in terms of sales. Ford is a bi-regional firm, while GM is close to becoming one. If we were to consider the alliance between Renault and Nissan as having resulted in a single company, it would be a (European) home oriented firm, though close to becoming a global firm.16 The distributions in Table 3 have not been stable throughout the sample period. Specifically, the non-American firms in the United States saw their relative sales increase in North America, while all European firms in Asia also saw an increase of their relative weight in that region. In other words, these are firms operating in a host region and succeeding in attracting more customers annually.17 However, the regional orientation (home, host, biregional or global) of the firms has remained almost the same throughout the sample period.18 The above results and their persistency support the suggestion that most automotive MNEs are focused primarily on their home region. However, all automotive firms have also been investing heavily in regions other than their

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own. Examples are South America (until a financial crisis struck Brazil in the early 1990s), Eastern Europe (both before and after entry to the European Union) and Asia. Most recently, large investments have been directed at China. For example, Ford opened its first plant in January 2004 and is considered a late entrant in that market.19 In addition, General Motors recently announced a $3 billion investment over 3 years in China, while according to FDI magazine Toyota is among the top three investors in China.20 In other words, there are substantial efforts being made to enter foreign markets and many analysts expect the importance of these new markets to grow. For example, according to PriceWaterhouseCoopers, total assembly is expected to grow with 45% in the Asia-Pacific region until 2011, with 14% in Eastern Europe and with 9% in South America.21 Likewise, CSM worldwide predicts a doubling of production volume in developing countries, to a level of 14 million vehicles in 2009.22 This means that as a group, the developing countries will overtake Japan and Korea with an estimated 13 million vehicles in 2009 and will approach North American production levels, estimated at 17 million vehicles in 2009. The above has two implications. First, despite the huge melding investments required, most car assemblers (have) decide(d) to enter new foreign markets, typically in host regions of the world. Second, the importance of these new markets is likely to grow and thus we may expect a rise in global, or bi-regional firms in the future. Before we elaborate further on this point, it is useful to study the automotive companies’ profitability figures.

WHO MAKES MONEY Although all firms in the sample provide a geographical breakdown of unit sales for (nearly) all years in the period considered, some information on operating income is missing. As a result, total profitability figures are available for each firm, but not regional performance data. Table 4 gives an overview of the financial performance data. Column 2 in Table 4 gives the operating income per car in US dollars, and column 3 shows the index numbers with Toyota as base. We chose Toyota, rather than BMW or Daimler as base since the latter two operate largely at the high-end of the market and thus command higher price premiums per vehicle. In contrast, Toyota with its extensive car lines, covering all segments of the market is more representative for the overall automotive industry.

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Table 4. Company BMW Daimler Toyota (Base) Honda Nissan DC VW GM Renault PSA Chrysler Ford FIAT

OI per Car in dollars. OI/CAR (in $)

Index Number

2907.03 2634.14 1454.09 1343.55 1241.03 1104.81 639.37 573.76 529.89 526.66 487.31 436.87
253.89

199.92 181.15 100 92.4 85.35 75.98 43.97 39.46 36.44 36.22 33.51 30.04
17.46

When we compare this table with Table 3, we see that the three Asian firms have a very high OI per car, but also a very broad geographical distribution of sales. The data for the entire sample of firms do not support the specific prediction of the recent M-P literature on the impact of regions, that a narrow geographical focus is preferable over a wide geographic spread. In other words, despite the need for substantial melding investments in host regions, car assemblers are attempting to increase their presence outside their home region. Our data also suggest that a wider geographic spread of sales does not automatically lead to lower profitability. How should we interpret these results?

CONCEPTUAL ANALYSIS Essentially, we are addressing two different questions: ‘first, why do we see firms investing outside of their home region? Second, why does a broader geographic scope of sales not always lead to lower profitability?’ With respect to the first question, all car assemblers face severe competition in all markets. Seven or more competitors typically vie for the same customers in most markets. In addition, the American and European markets have been quite stable with respect to total sales in recent years, while the Japanese market has actually declined in size. In order to ensure that

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firms are able to sell more cars in foreign markets, it has become common practice to locate sales and production activities as close to consumers as possible.23 However, by doing so, substantial excess capacity has been created worldwide.24 In other words, the car markets in the traditional triad regions are saturated and the profit margins are small. However, whereas profits have been reduced, there is an ever-increasing push for technological innovation, for example for lower emissions and increased safety. Only GM, Fiat and Renault have at any point in time reduced their R&D expenditures in the sample period.25 The cutthroat competition has already led to some industry consolidation as exemplified by the Renault–Nissan alliance, and the merger of DaimlerBenz and Chrysler. In addition, many joint ventures have been established, while smaller firms have been taken over.26 To ensure survival, no one car assembler can allow itself to stay behind in the competitive race for new customers. Hence, new markets are sought, such as South America in the early 1990s, the ASEAN region, China, India and even Russia. If we denote competitive pressure as g, the following relationship between expected regional benefits and competitive pressures can be assumed: ð1
gÞðEBintra Þ Our formulae above would then change to if ð1
gÞðEBintra ÞX½EBinter
a-expand intra-regionally if ð1
gÞðEBintra Þp½EBinter
a-expand inter-regionally Given the above situation, it is rational for firms to try to find a location outside the home region that would be more attractive than any location within the home region. That is, the potential gains within the home region may be smaller than the potential gains outside the region, even when corrected for substantial melding investments. In other words, competition inside the home region drives the process of inter-regional expansion.27 Graphically, we could introduce competitive pressures in the home region as a horizontal line, as exemplified in Graph 5. We assume for now that competitive pressures are higher in the home region than in the host region. In this situation, only project D would be undertaken. D has a high, expected benefit, while there are no projects with a similar return available in the home region. We can also hypothesise a situation with strong competitive pressures in more than one region, as is the case in the automotive industry. In North America, Europe and Japan, competition is strong and investment opportunities limited. In this situation, we may have high-melding investments in region 3 (a) but stronger competitive pressures in regions 1 and 2 (g) than 3.

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Expected Benefit Home Region

0

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-5

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-10

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Graph 5.

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Competitive Pressures.

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Graph 6.

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VII 20

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Investing in a 3rd Region Under Competitive Pressure.

Despite normal competitive pressure in region 3, substantial investment opportunities remain in that region, and expected benefits are high compared to those in regions 1 and 2 (see Graph 6).

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In region 3 investment opportunities are denoted by V–VII and the expected benefits are high as compared to those in regions 1 and 2, denoted by I–IV. This situation is not merely hypothetical, as the enormous inflows of FDI in Asia, and more specifically in China, have shown. As to the question why a wider geographic scope does not always lead to lower profitability, a simple (and mistaken) explanation could be that the firms involved have not yet reached their optimal size. Therefore, an increase in geographic spread would lead to an increase in performance, as predicted by some of the M-P literature. If this were true, however, we would expect some firms to start experiencing a decline in performance very soon, since both Nissan and Honda already have close to 70% of their total sales outside of Asia. In addition, Ford, GM and Toyota all have about 50% of their total sales in host regions and they have very diverging profitability figures. One could also interpret the profitability results differently. As a firm’s profitability increases, it has more resources to invest in attractive host regions. Due to these investments, a firm becomes closer to its customers and is therefore better able to tap into local preferences, which should result in higher sales. In other words, multinationality does not drive performance but performance drives multinationality! However, all firms appear to have production and sales facilities in each of the triad regions, with clearly different performance outcomes. In addition, the Asian firms manage to earn higher profits in Europe than the American firms. For example, GM has not made a profit in Europe in 5 consecutive years, and Ford is also struggling there.28 One explanation for the observed performance differences is that the Japanese firms have superior FSAs as compared to the American firms, and to a lesser extent the European companies. One critical element appears to be the Japanese management style. As Dyer and Nobeoka have argued, for example, Toyota has been able to transplant successfully and manage a learning network.29 That is, Toyota has developed a system whereby all actors in the production system meet, compare and learn from each other. This, it is argued, is a root cause of the superior performance of Toyota, be it in North America or Europe.30 The related operational emphasis of Japanese companies on improving efficiency and increasing flexibility is overall much stronger than in American and European companies. The above is of course consistent with internalisation theory and it suggests that the hypothesised linkages between geographic diversification and financial performance in the M-P literature are simply erroneous. To summarise, competitive pressures in the home region induce MNEs to try and establish a presence in a host region, despite the fact that substantial,

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risky investments must be made. Superior FSAs explain the phenomenon of superior profitability, just as they would in the home market.

CONCLUSION In this paper, we have demonstrated that there is no global automotive industry, yet. After describing two conceptual frameworks with implications for globalisation, we have shown that firms do invest in host regions, and that a higher geographic diversification (that would include host regions) does not necessarily lead to lower performance. Increased competitive pressures drive international diversification, whereas superior FSAs (or the lack thereof) explain the performance differences among firms.

NOTES 1. See Rugman (2005, p. 138, Table 8.1). 2. At one point, however, Rugman (2005, p. 7) does suggest that in the consumer electronics industry a strategy of global integration is possible, and further ‘If the auto industry is to become more like the electronics industry (as many believe may occur), vehicle brand owners (VBOs), such as Toyota, GM, VW, will be the equivalent of original equipment manufacturers (OEMs) in the electronics industryy.’ (Rugman, 2005, p. 146). 3. FSAs are otherwise known as ownership advantages in Dunning’s eclectic paradigm. 4. CSAs are otherwise known as locational advantages in Dunning’s eclectic paradigm. 5. Other authors have differentiated among different types of geographic clusters of countries. The point is, however, that substantial differences undeniably exist between various regions in the world, and that these differences increase the costs of international operations for ‘outsiders’. 6. E ¼ Expected; P ¼ Probability: 7. For a survey of the literature see Ruigrok and Warner (2004), or, Contractor, Kundu, and Hsu (2003). 8. See Lei (2005). 9. See Kim (1993). 10. See Vachani (1991). 11. Source: UNCTAD, (2003). World Investment Report (2003, Annex A, pp. 187/188). 12. Because of this data refinement, our sales dispersion is not identical to that of Rugman (2005), who appears to have used total vehicle sales.

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13. In France, operating income also includes ‘‘other operating income and expenses’’ which cover restructuring costs, gains or losses from the disposal of activities, the amortisation of goodwill, etc. To ensure comparability across the board, operating margin was used for French firms, which is identical to the ‘international’ definition of operating income. 14. Although the merger was announced as a ‘‘merger of equals’’ in 1998, a lawsuit filed in 2000 by billionaire investor Kirk Kerkorian alleged that the deal was actually a takeover. In practice, the two divisions are managed separately to prevent brand dilution, although recently, some Mercedes parts have been used in Chrysler vehicles. Source: Detroit News. (http://www.detnews.com/2005/autosinsider/0503/ 04/autos-107763.htm) 15. In our sample, we leave out activities such as commercial vehicles, hence Daimler’s description. 16. Although Rugman (2005, p. 24) considers Daimler-Chrysler to be a hostregion oriented firm, we should be cautious when using that designation. The reason is that Daimler-Chrysler is the result of an inter-regional merger, and as such is not subject to the cultural, administrative and economic distances normally faced by non-US firms, when attempting to establish themselves in the United States. 17. Both the relative weight and total sales from non-American firms increased. Nissan and Honda sold more cars annually in the US, while Toyota sold more cars both in the US and Europe. VW, Renault and PSA each sold more cars annually in Asia, while BMW sold more cars annually both in Asia and the US. 18. The sole exception was Honda which moved from bi-regional to host-oriented. 19. The Economist (2003, p. 55), February 1. 20. http://www.fdimagazine.com/news/fullstory.php/aid/1023/China.html 21. Source: [14]PriceWaterhouseCoopers, Global Automotive Financial Review (2003). 22. Source: CSM worldwide website. 23. This is the ‘‘end of globalisation’’ Rugman refers to. 24. It has been estimated that this overcapacity amounts to 25% of total capacity, or 20 million vehicles. Source: PriceWaterhouseCooper, Global Automotive Financial Review (2003). 25. Based on R&D data as published in the firms’ annual reports. 26. For example, Peugeot cooperates with Ford, Toyota and BMW on various projects. Daimler-Chrysler owned 39% of Mitsubishi until the beginning of 2004, while Ford owns 33% of Mazda. Source: The Economist (2004, p. 59), February 21. 27. As an aside, due to these competitive pressures, many analysts expect a further consolidation in the industry. When more firms merge (e.g. Fiat with GM), one automatically will see a rise in more global or bi-regional firms. 28. Source: Wall Street Journal, October 15, 2004, various WSJ articles, Annual Reports. 29. The ‘‘Toyota way’’ as it is known inside the firm was established by its founder Kiichiro Toyoda and emphasises ‘‘y consensus-style decision-making, merciless cost-cutting, and fanatical devotion to quality and customer satisfaction.’’ Source: Business Week online (2002), April 15. 30. See Dyer and Nobeoka (2000).

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REFERENCES Business Week Online. (2002). The Americanization of a Japanese icon. New York, NY: The McGraw-Hill Companies Inc. Contractor, F., Kundu, S., & Hsu, C. (2003). A three-stage theory of international expansion: The link between multinationality and performance in the service sector. Journal of International Business Studies, 34(1), 5–18. CSM Worldwide, website. Detroit News. (2005). No more DaimlerChrysler mergers for now, Schrempp tells paper. Detroit, MI: Gannett Co. Dyer, J., & Nobeoka, K. (2000). Creating and managing a high-performance knowledge-sharing network: The Toyota case. Strategic Management Journal, 21, 345–367. FDI Magazine. (2004). General Motors’ $3bn investment plans. London, UK: Financial Times Business Ltd. Fujita, M., Krugman, P., & Venables, T. (1999). The spatial economy – cities, regions and international trade. Cambridge, MA: The MIT Press. Ghemawat, P. (2001). Distance still matters–The hard reality of global expansion. Harvard Business Review, 79(8), 137–147. Hymer, S. (1976). The international operations of national firms – A study of direct foreign investment. Cambridge, MA: MIT Press. Kim, W. (1993). Developing a global diversification measure. Management Science, 35, 376– 383. Lei, L. (2005). Is regional strategy more effective than global strategy in the U.S. services industry? Management International Review, 45(Special Issue 1), 37–58. Lu, J., & Beamish, P. (2001). The internationalisation and performance of SMEs. Strategic Management Journal, 22, 565–586. Ohmae, K. (1985). Triad power, the coming shape of global competition. New York: The Free Press. PriceWaterhouseCoopers, Global Automotive Financial Review 1998, 1999, 2000, 2001, 2002, 2003. Ronen, S., & Shenkar, O. (1985). Clustering countries on attitudinal dimensions: A review and synthesis. Academy of Management Review, 10(3), 435–454. Rugman, A. (2000). The end of globalisation. London: Random House Business Books. Rugman, A. (2005). The regional multinationals – MNEs and ‘‘global’’ strategic management. Cambridge, UK: Cambridge University Press. Rugman, A., & Verbeke, A. (2004a). A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1), 3–18. Rugman, A., & Verbeke, A. (2004b). Regional Multinationals: The New Research Agenda. In: P. Buckley (Ed.), What is international business? (pp. 110–132). New York, NY: Palgrave Macmillan. Rugman, A., & Verbeke, A. (2005). Towards a theory of regional multinationals: A transaction cost economics approach. Management International Review, 45(Special Issue 1), 5–17. Ruigrok, W., & Warner, H. (2004). Internationalization and firm performance: Meta analytic review and future research directions. Working Paper. Stinchcombe, A. (1965). Social structure and organisations. In: J. March (Ed.), Handbook of organisations (pp. 142–193). Chicago, IL: Rand McNally. The Economist. (2003). The great leap forward. London, UK: The Economist Newspaper Ltd.

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The Economist. (2004). The also-rans. London, UK: The Economist Newspaper Ltd. UNCTAD. (2003). World Investment Report 2003: FDI policies for development: National and International Perspectives. New York: United Nations Publications. Vachani, S. (1991). Distinguishing between related and unrelated international geographic diversification: A comprehensive measure of global diversification. Journal of International Business Studies, 22, 307–322.

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REGIONAL AND GLOBAL STRATEGIES IN THE INTERCONTINENTAL PASSENGER AIRLINE INDUSTRY: THE RISE OF ALLIANCE-SPECIFIC ADVANTAGES Alain Verbeke and Sarah Vanden Bussche This paper extends the analysis of regional and global strategies, as developed by Rugman and Verbeke (2004). These authors focused on the presence of multiple barriers associated with multinational enterprise (MNE) entry in host regions (i.e., other regions than the MNE’s home triad region of the European Union, the North-American Free Trade Agreement zone, or Asia), as an explanation for the continued dominance of large business firms’ sales in the home region. The present paper suggests that global (in the sense of inter-regional) cooperative agreements or strategic alliances can be used as a vehicle for overcoming inter-regional barriers to MNE expansion. More specifically, global alliances allow access to location-bound firmspecific advantages (FSAs) a`nd the development of new, globally exploitable advantages. However, because of isolating mechanisms, the advantages (including learning) gained within an inter-regional alliance cannot be Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 119–146 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11008-0

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captured by the participating firms outside of the alliance (i.e., the source of competitive advantage would be lost if the firm leaves the alliance). The new advantages are therefore really alliance-specific advantages (ASAs) rather than FSAs. We apply our findings to a sector where the demand side requires global strategy, but where we do not find any truly global enterprise, namely the intercontinental passenger airline industry.

REGIONAL AND GLOBAL STRATEGIES IN THE INTERCONTINENTAL PASSENGER AIRLINE INDUSTRY In his article ‘Regional strategies of service sector multinationals’, Rugman (2003) came to the conclusion that most MNEs in service industries are home region-based, i.e., they have more than 50% of their sales in the home region. In a more recent article, Rugman and Verbeke (2004) found that the vast majority of MNEs included in the Fortune 500, are home-region based. That was a surprising result, as the increasing economic interdependence among nations, the presence of substantial demand for high knowledge intensive goods and services throughout the triad of North America, the European Union and Asia, and the presence of large MNEs in each of the triad regions, all suggest that fierce rivalry for market share would take place throughout the triad. A transaction-cost economics explanation offered by Rugman and Verbeke (2005a) was that the required, location-specific linking investments are far more substantial when firms establish activities outside their home region than inside the home region. Linking investments are critical to permit the profitable deployment of the MNE’s non-location bound FSAs across borders. Linking investments are necessary to develop or access location-bound FSAs in host countries (thus permitting national responsiveness), and sometimes to create new, recombined bundles of nonlocation bound FSAs (permitting increased economies of scale, scope or exploitation of national differences). Because of the considerable adaptation investments required to increasing sales in host regions, Rugman and Verbeke (2004) suggested that a regional strategy may well be the most efficient option for most MNEs. These authors applied the ‘remediableness’-criterion of modern transaction cost economies, which states: ‘‘an outcome for which no superior alternative can be described and implemented with net gains [y], is presumed to be efficient’’ (Williamson, 1999, p. 7). A limited geographic scope of downstream activities, including

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marketing and sales, may thus be optimal for many MNEs from a transaction cost economy (TCE) perspective. However, in a number of economic sectors, a global strategy is critical to achieve competitive advantage; the intercontinental passenger airline industry is a case in point. In the intercontinental passenger airline industry, the benefits of integration through the deployment of non-location bound FSAs are so significant that a global strategy is required. Unfortunately, the location-specific linking investments necessary to penetrate host region markets through fullfledged internalization, may be insurmountably high. These investments can be reduced by cooperation with host-region enterprises. Indeed, in the airline industry this has proven to be a viable strategy, permitting the global market reach of all carriers involved in global alliances. In this paper, we assess specifically how cooperation among multiple partners, spanning most of the world’s geographic markets, can contribute to global competitive success. In the next section, we revisit the theory of regional MNEs, as developed by Rugman and Verbeke (2001, 2004, 2005b). In the third section, we extend their theoretical framework to include the use of alliances as the foundation of global competitive success. More specifically, we show how global cooperative agreements can help the firms involved to access or develop the strengths required to operate in host regions. In the fourth section, we apply our new framework to the intercontinental passenger airline industry.

A TRANSACTION COST APPROACH TO REGIONAL MULTINATIONALS Conventional internalization theory (Buckley & Casson, 1976; Hennart, 1982; Rugman, 1981) as well as the eclectic paradigm (Dunning, 1988), provide a coherent explanation for the international expansion path of MNEs. The eclectic paradigm suggests that international activities (which can take the form of exports, licensing or FDI) arise because a firm possesses FSAs. The precise location of these international activities is determined by differential location advantages found in geographic space. The presence or absence of internalization advantages determines which mode of entry a firm will choose to enter the foreign market (Rugman, 1981). However, according to Rugman and Verbeke (2005a), the scope of geographic expansion, i.e., the level of international diversification, is determined by the MNE’s ability to link its FSAs with location advantages

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abroad. Here, the linking investments constitute the key parameter, not the endogenous FSAs, nor the exogenous location advantages per se. For example, the transaction costs associated with the internal transfer of knowledge may be low, but the value of this knowledge may be very limited if not connected with location-bound elements. Linking-investments can take several forms: yespecially (a) investments in the development of location-bound FSAs in foreign markets (leading to benefits of national responsiveness) to complement non-locationbound FSAs, and (b) investments in the development of new non-location-bound FSAs in foreign subsidiaries’’ (Rugman & Verbeke, 2005a, p. 116).

Recently, it has become clear that most MNEs consist of a regionalized rather than a globalized set of businesses. Indeed, there is little evidence that MNEs are global (Rugman & Verbeke, 2004). Most MNEs (320 out of 365 with data available) are actually home-region based. This means that they have more than 50% of their sales in their home region. Only nine of the Fortune 500 firms are truly global, with at least 20% of their sales in each region of the triad, but less than 50% in any one region. Most of these firms are in the computer, telecom and high-tech sectors. Each of the global firms, except Flextronics, builds upon a strong brand name.1 As noted above, the scope of geographic expansion is determined by the MNE’s ability to link its FSAs with location advantages abroad. Nevertheless, in spite of many MNEs’ efforts to augment their non-locationbound FSAs with a location-bound component, most of them do not succeed in achieving a balanced geographical dispersion of sales. A transactioncost explanation offered by Rugman and Verbeke (2005b) is that these linking investments are far more substantial in host regions. Their argument goes as follows. When investing abroad, firms make ‘implicit contracts with foreign locations’, whereby the intended outcome is stronger embeddedness of the firm’s extended knowledge base (non-location bound (NLB) FSA) in these foreign locations, in order to achieve higher sales. These locationspecific linking investments are typically asset specific, meaning that the resources committed to these adaptation investments cannot be redeployed to alternative uses or by alternative users, without a substantial sacrifice of productive value (Williamson, 1985). Because of the higher cultural, administrative, geographic and economic distance (in the sense of Ghemawat, 2001), that typically separates the home country from the host country outside the home region, these linking-investments are far more substantial in host regions.

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The difference between the home and host region is accentuated by the regional integration policies of institutions such as the EU, the NorthAmerican Free Trade Agreement (NAFTA) and the Association of Southeast Asian Nations (ASEAN). Regional integration policies usually imply a stronger need for additional linking investments by outsiders. The conventional bundle of non-location-bound FSAs needs to be adapted to the location advantages of the region where the MNE operates. These adaptation investments then lead to so-called region-bound FSAs (Rugman & Verbeke, 2005a). For most MNEs, this poses no problems in the home region, yet, few MNEs have been capable of developing the required region-bound FSAs in host regions. Rugman and Verbeke (2004) suggest this is indicative of a competence gap when MNEs operate in host regions. In the home region, on the contrary, region-bound FSAs can be created at low cost, because home country, location-bound FSAs can easily be ‘tuned up’ and NLB-FSAs ‘regionally sharpened’ at a low cost. The purpose of Rugman and Verbeke (2004, 2005b) was primarily to explain why MNEs adopt a regional rather than a global strategy. They did not, or only to very limited extent, attempt to identify strategies MNEs can adopt to overcome the disadvantages of foreignness. Indeed, they argued that the failure to implement global strategies might not be ‘remedied’ in practise, because of the high transaction costs when operating in host regions. As a consequence, when they formulated the implications of their research for management strategy (Rugman & Verbeke, 2005a), they argued that MNEs should adopt a narrow geographic market focus, to achieve more easily economies of scale and scope, as well as differentiation advantages in the market place, without the need for additional, one-sided location-specific investments. Whereas this suggestion of non-remediableness may be appropriate in many industries, our case study of the intercontinental air passenger industry will demonstrate that in some industries a global strategy may still be preferable over a regional strategy because of the considerable benefits of integration associated with it (economies of scale, scope and exploitation of national differences). In that case, MNEs must explore alternative governance mechanisms that may allow overcoming the liability of regional foreignness, and the successful execution of global strategy as expressed by global market presence. One possibility is the incorporation of regional components in the MNE’s organizational structure (Rugman & Verbeke, 2004). Several recent papers have indicated the importance of regional management centres to MNEs (Enright, 2005a, b; Lasserre, 1996; Schu¨tte, 1997). In this paper we will focus

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on a second possibility, namely the creation of a global, cooperative network with host region enterprises.

ALLIANCE SPECIFIC ADVANTAGE AS A VEHICLE TO HOST REGION MARKET SUCCESS In this section, we will explore whether cooperation can be a viable strategy to reduce or eliminate the disadvantages of regional foreignness. It is not our purpose here to provide an in-depth overview of the inter-business cooperation literature. We shall focus on those elements significant to understanding the relevance of cooperation to reducing regional foreignness. Transaction cost economizing will lead to cooperation as preferred entry mode above market contracts or hierarchy, if two or more firms have complementary FSAs that cannot be purchased in the market, and that can be protected under a system of efficient safeguards (Brown, Rugman, & Verbeke, 1989). The value derived from pooling FSAs is reflected in higher revenues and/or lower costs through resource combinations (Madhok, 2000). From a resource-based perspective-firms search for partners with complementary resources that are valuable (i.e., with revenue-enhancing or costreducing potential), rare and imperfectly imitable (Barney, 1991, 1996). These characteristics are empirical indicators of how useful resources are to achieve competitive advantage or, in other words, how strategic they are (Barney, 1991). Clearly, if it were possible to replicate needed resources or to acquire them in the market, there would be no need to engage in cooperation. First, a firm must be unable to replicate the same or equivalent resources within an acceptable time frame or cost structure (Tallman, 2000). This is because creating and deploying tacit and complex resources is usually path-dependent and subject to diseconomies of scale, scope and time as compared to the situation of a firm which already possesses them (Madhok & Tallman, 1998). Indeed, development and integration of new knowledge is an incremental process which is more costly and less efficient relative to competitors who are already present and more experienced in a particular domain (Hagedoorn & Duysters, 2002). Furthermore it must be impossible to buy these resources in the market, because they are organizationally embedded and ‘not for sale’. Once firms have decided to cooperate, they can choose among a range of different strategic alliance types, and the possibility of a merger or

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acquisition (M&A). Strategic alliances can be defined as organizational arrangements that use resources (including governance structure components) from more than one organization (Borys & Jemison, 1989) and in which each partner has limited control (Gomes-Casseres, 1996). The question then still arises when a strategic alliance will be preferred over a M&A. The resource-based view suggests that firms will enter into a strategic alliance if the rents realized from the resources deployed in the alliance are higher than those obtained from other organizational arrangements. Alliances will be preferred over M&As when two conditions are satisfied. First, the resources each partner needs are only a subset of those held by the partner. Second, it is impossible to dispose of the unusable assets because the assets are firm-specific (Hennart & Reddy, 1997). Thus, the advantage of strategic alliances is to have access to precisely those assets needed. In addition, strategic alliances may be preferred because the synergistic potential of the human and organizational resources is likely to disappear under the new identity in the case of a complete merger or takeover (Tallman, 2000). Of course, greenfield investments and M&As may be legally prohibited as a result of anti-trust policy, restrictions on foreign ownership and so on (Buckley & Casson, 1988). In this case, firms form alliances as a ‘secondbest’ solution (Gomes-Casseres, 1996). If the MNE faces a competence gap when operating outside its home region, and is unsuccessful in linking its FSAs with location advantages in host regions, the question arises whether this problem can be solved through cooperating with (host region) enterprises that do have the resources required to establish such a link. Here, cooperation is a valid strategy because in most cases, and especially for customer-end activities, the required resources cannot be acquired in the market and replicated within an acceptable time frame and cost structure. More specifically, strategic alliances can lead to rapid local embeddedness and access to social network ties in a way that is not possible by acting alone (Rugman & Verbeke, 2005a). Cooperative agreements can help to link the MNE’s FSAs to location advantages abroad in two ways: first, by accessing the location-bound FSAs of the local enterprise (Beamish & Banks, 1987); second, by bundling its own NLBFSAs in the host region with non-location-bound FSAs of host region (international) enterprises (Hamel, Doz, & Prahalad, 1989), thereby creating new NLB-FSAs in that host region. Cooperation thereby makes it possible to avoid high location-specific adaptation investments. Because strategic alliances reduce the needed resource commitments, they enable the MNE ‘‘to cover more of the globe with the same assets’’ (Mjoen & Tallman, 1997, p. 258).

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Of course the benefits of cooperative agreements must be weighed against the costs. First, the MNE’s FSAs could be appropriated by the alliance partner. Here, a carefully designed hierarchical structure and in last instance an M&A may alleviate this danger (Oxley, 1997). Second, an alliance may reduce coherence within the MNE, if the MNE becomes biased towards maintaining its initial arrangements with the alliance partner at the expense of long-term profit or cost considerations. Yet, several steps can be taken to ensure that profit goals are not subordinated to other considerations, and that strategic alliances are not maintained without effective monitoring of their value added. For instance, profitability goals can be maintained by giving the general manager an equity position in the joint venture (Beamish & Banks, 1987). This provides a strong incentive for him to ensure that profits are earned in the joint venture itself and are not unequally drained off to one partner over the other. Approaches to ensure that the strategic alliance is not uncritically maintained include the explicit recognition that the parties may resort to opportunistic behaviour at some point even if this was absent in their behaviour at the outset (Beamish & Banks, 1987). The objective of the cooperative agreement has important implications for its stability. If the goal is simply to extract resources from the partner, alliances result in a learning race (Hamel, 1991). The partner who first acquires the desired resources may dissolve the alliance even if the other partner has not completed his learning. If, however, the main purpose of the alliance is to create value by combining resources of both firms, the resulting synergies can take the form of new FSAs, that can be exploited globally but cannot necessarily be captured by individual alliance members, at least if these FSAs require the sustained infusion of resources from the various partners in the alliance. The above suggests the presence of ASAs that go beyond the concept of endogenous FSAs and exogenous location advantages: these are somewhat similar to the concept of subsidiary-specific advantages as identified by Rugman and Verbeke (2001). Conventional FSAs are either non-locationbound FSAs (‘‘easily diffused internally and with the benefits of global exploitation, typically through scope economies’’) or location-bound FSAs (‘‘difficult to diffuse internally and with the benefits of national responsiveness’’) (Rugman & Verbeke, 2001, p. 244). In contrast, subsidiary-specific advantages are described as follows by Rugman and Verbeke (2001): Subsidiary-specific advantages do not reflect a subsidiary’s competences and capabilities to be nationally responsive (the conventional location-bound FSAs [y]). Instead, subsidiary-specific advantages reflect competencies and capabilities that can be exploited

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globally [y] without, however, the bundle of knowledge itself being easily diffused internally (p. 244).

In this case, the alliance leads to ASAs. As is the case with subsidiaryspecific advantages, they can be exploited globally, e.g., through world product mandates given to the alliance, but they cannot be simply diffused within the partner-organizations because of alliance-specific isolating mechanisms. Isolating mechanisms or mobility barriers exist, inter alia, because knowledge is tacit (difficult to codify), context specific (each individual alliance partner’s contribution may actually be locally embedded and these individual contributions may be dependent upon the alliance’s own technological and organizational trajectories), and dispersed across several individuals within the alliance (embedded in teams with members belonging to the different partner companies). Thus, the essential difference with subsidiary-specific advantages is that the relevant knowledge base is not embedded within the subsidiary but within the alliance. The knowledge base depends upon the synergies gained by combining in an evolutionary process, the resources of the various partners. This knowledge base is lost to the individual firm if it leaves the alliance or if the alliance is dissolved. As ASAs grow stronger, the partner companies face weaker incentives to leave the alliance. This enhances the alliance’s stability. To summarize, in order to be successful internationally, the MNE needs to engage in investments to link its FSAs with location advantages abroad. These investments will likely be considerably higher when a firm operates outside its home region. Linking investments can take several forms. First, the MNE can attempt to create itself new location-bound FSAs or gain access to such FSAs by cooperating with a host region firm. Second, the MNE can also adapt to the local environment by creating new, globally exploitable FSAs, i.e., a knowledge base from which value can be derived in the host a`nd home regions. In this situation, there are four sub-options: the creation of non-location-bound FSAs within the subsidiary; the creation of subsidiary-specific advantages in the host region subsidiary; the creation of non-location-bound FSAs through the use of a strategic alliance; and the creation of ASAs (see Fig. 1). Note that several of these options can be entertained at the same time, and it is the net economic benefits accruing to the firm that will determine the optimal mix of knowledge bundles to be developed (Rugman & Verbeke, 2001). In the next sections, we shall discuss the case of the international passenger airline industry, where ASAs have become a critical tool to earn global (as in ‘outside the home region’) competitive advantage.

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Investments in: Entry mode Go-alone Cooperate

Location-bound complements to existing NLB-FSAs Creating LB-FSAs Gaining through alliance access to LB-FSAs

Fig. 1.

New, globally exploitable, sources of competitive advantage Creating a) NLB-FSAs or b) SSAs Creating through alliance a) NLB-FSAs or b)ASAs

Strategies for Operating Outside the Home Region.

THE INTERNATIONAL PASSENGER AIRLINE INDUSTRY Absence of Global Carriers The international passenger airline industry presently consists of three market segments: the no-frills market of low-cost carriers; the regional network market and the transcontinental passenger market. Airlines that operate in the first two markets are niche players, with a restricted geographic reach of their activities. In this paper our focus is on the transcontinental passenger market. The world’s airlines carried a total of about 1.7 billion passengers, equivalent to approximately 25% percent of the world population in 2003 (ICAO, 2004). With an average annual traffic growth of 5% – the long-term trend – , it is estimated that in 2010, the world’s airports will process close to 2.3 billion passengers. Most of the intercontinental passenger airline traffic is highly concentrated in a limited number of hubs. As is the case for most economic activities (Ohmae, 1985; Rughman, 2000), airline services are highly concentrated within the triad of the Asia-Pacific, Europe and North America. The airlines registered in the three legs of the triad accounted for 90% of revenue passenger kilometres (RPKs) – a widely used measure of airline industry outputs – flown in 2003. Fig. 2 provides an overview of the proportion of RPKs per region for the 200 largest passenger airlines. The question arises whether any global carriers are active in the intercontinental passenger market. A global carrier can be defined as ‘‘an airline which can gather feed traffic from many widely separated points throughout the world, and channel that feed onto its long haul routes’’ (Tretheway & Oum, 1992, p. 105). Put differently, a global carrier has ‘sales’ throughout the world, and operates hubs in several countries around the globe. When applying this definition, it appears that, at present, no true global carrier exists.

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North America 36%

Middle East 4% Latin-America 4%

Fig. 2.

Europe 29%

Share of Passenger Traffic (in RPK Million) Per Region (2003). Source: Airline Business (August 2004).

Most international airlines operate under ‘fifth freedom rights’ only, i.e., they carry traffic between two countries originating or terminating in their own country of registry.2 As a general rule, passengers carried under fifth freedom rights originate primarily in the carrier’s home country. A few carriers do transport primarily passengers from countries other than their home base. These are the ‘sixth freedom’ carriers, i.e., they carry traffic between two foreign countries via their own country of registry. The Netherlands’s KLM and Singapore Airlines are typical examples. Yet, even such firms are not global carriers because they continue to operate out of a single hub (Tretheway & Oum, 1992). Single-hub carriers are usually capable of attracting traffic from small-to medium-sized communities at a short distance from the hub. However, as the distance from the hub increases, it becomes more likely that the carrier would transport origin-destination passengers only (and no ‘connecting’ traffic, which would travel through the hub but would originate/have a destination elsewhere). Some single-hub carriers operating with multiple spokes do have a limited ability to collect ‘feed’ traffic from the small- and medium-sized communities around one of their spoke stations,3 but this is still a far stretch from the global carrier as defined by Tretheway and Oum (1992).

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At present, carriers with multiple hubs around the globe do not exist. There are a few examples of full-fledged M&As that have created truly multinational airlines. Yet, so far those have been limited to airlines from neighbouring countries agreeing to pool their resources and form consortia on a narrow regional basis: SAS in Scandinavia, Gulf Air in the Middle East, LIAT in West Indies, Air Afrique in francophone West Africa and more recently TACA international airlines in Central America.4 These cross-border acquisitions were made by state-owned airlines and were promoted by national governments. Their success or failure depended almost entirely on political considerations, and their overriding objective was to save on operating costs (Hanlon, 1999). One exception is the recently formed Air France-KLM group (May 2004), which is now the fourth largest carrier in the world and the largest European carrier in terms of passenger traffic (RPK million), but which still lacks a global presence. Today the main interest in cross-border acquisitions is shown by privately owned (usually privatized) airlines seeking to break free from inter-governmental air service agreements, and to extend their marketable networks by taking equity stakes in carriers operating complementary services, not just in neighbouring countries but, increasingly, in regions at the other ends of long haul routes. In the airline context, the ability to acquire shares in foreign companies is heavily constrained by government regulation. Most national regulation to date adheres to the principle that air carriers should be ‘substantially owned and effectively controlled’ by nationals of the state in which the carrier is registered (cfr. infra). Many governments are now beginning to relax restrictions on foreign ownership, but the number of airlines with stakes in foreign carriers remains very limited. In 2003, approximately 65 airlines (6%) of the world’s 1,010 carriers held shareholdings in foreign airlines, while some 230 airlines (23%) had equity owned by foreign investors to various degrees (ICAO, 2004).

The Need for Global Strategy Although intercontinental passenger airline traffic lacks truly global carriers at present, airlines around the globe are attempting to offer global services by way of cooperative agreements or strategic alliances with airlines in other regions. At the end of 2003, there were over 600 commercial agreements among airlines worldwide (ICAO, 2004).5 Alliances are widespread but still evolving with relations between partners becoming more complex and more intertwined. In this paper our focus is on airline-to-airline alliances with a

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global scope.6 Here the prime purpose is effectively linking large airlines operating in geographically distinct regions, so as to provide worldwide network coverage (Doganis, 2001). These intercontinental alliances, covering different regions, such as the Asia-Pacific, Europe and North America, are the largest and fastest growing type of alliances (Wang & Evans, 2002). Oum, Park, and Zhang (2000) classified alliances into three categories: simple route-by-route alliances, broad commercial alliances and equity alliances. The simple route-by-route alliances are the simplest form of alliances and involve a relatively low level of commitment from the partners, typically involving activities, such as code sharing or shared operations on a few routes only. The global alliance groupings are typically broad commercial alliances (Wang & Evans, 2002). This second category of alliances involves linking the partners’ networks to a substantial degree and feeding traffic into each other’s hub airports. Members of broad commercial alliances cooperate via the following activities: coordination of flight schedule and ground handling, joint use of ground facilities, shared frequent flyer programmes, flight code-sharing and joint advertising and promotion (Oum et al., 2000). These global alliances typically do not involve equity investments. At present, there are three large global alliance groupings: Oneworld, Skyteam and Star Alliance (see Figs. 3 and 4). The three global alliances accounted for 56% of the world total RPKs in 2003. The Star Alliance network is the largest and most integrated network, having 17 members in Oneworld 15%

Others 44%

SkyTeam 19%

Star Alliance 22%

Fig. 3.

Global Alliance Groupings: World Share of Passenger Traffic (in RPK Million). Source: Field and Pilling (2004).

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Europe Aer Lingus British Airways Finnair Iberia Airlines Skyteam Korean Air Air France Alitalia CSA Czech KLM Star Alliance Air New Zealand Austrian Air All Nippon Bmi Asiana LOT-Polish Airlines Singapore Airlines Lufthansa Thai Airways SAS Spanair TAP Air Portugala Oneworld

Asia/Pacific Cathay Pacific Qantas Airways

N-America L-America American Airlines LAN

Africa

Continental Aeromexico Delta Air Lines Northwest Airlines Canada United Airlines US Airways

Varig

South Africana

Source: Field and Pilling (2004) Note: a. Will join Star Alliance in 2005.

Fig. 4.

Global Alliance Groupings: Members Across Regions.

its group. Star Alliance transported 342 million passengers and the total group revenues were $87 billion in 2003. In July 2004 its network offered approximately 798 destinations in 140 countries. After the merger of Air France and KLM, Skyteam became the second largest airline network in terms of passenger traffic. The nine members of Skyteam serve 512 destinations in 125 countries worldwide. Its network transported 316 million passengers and earned revenues of $65 billion. The third global alliance, Oneworld, has eight members, representing 591 destinations in 210 countries. It carried 209 million passengers in 2003 and achieved revenues of over $50 billion (Field & Pilling, 2004). The individual members of these global partnerships each have a number of route-specific and regional alliances. Thus, the network spread and influence of the global alliances are even more substantial than is apparent at first sight (Doganis, 2001). Each of the three global alliances includes carriers from all regions of the triad. Yet, it can be expected that they will continue to grow as they are all striving to achieve global coverage. In fact, each of the major alliances pursues the few remaining unaligned carriers or seeks to seduce key players away from other groupings (Field & Pilling, 2004). The alliances are especially eager to extend their geographic scope with Asian carriers, more in particular with one of the three, large unaligned Chinese carriers (Air China, China Southern Airlines and China Eastern Airlines) and with Japan Airlines.

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The question arises why airlines set up global networks in order to provide worldwide services. The primary reason is that the airline industry is characterized by substantial benefits of integration or exploitation potential of non-location-bound FSAs. While economies of scale appear to be negligible (as demonstrated by the presence of small, but highly profitable carriers in the airline industry), economies of scope are the main source of benefits for intercontinental global alliances. As a result of these economies of scope, international passenger airlines that are members of a global network can gain a substantial competitive advantage over airlines that are not. Empirical evidence suggests that scale is of minor importance in the airline industry. Indeed, beyond a certain level of traffic in a city-pair market, the airline industry exhibits constant returns to scale (e.g., Caves, Christensen, & Tretheway, 1984; Call & Keeler, 1985; White, 1979). This indicates that large carriers have no cost advantage over small airlines. However, there remain limited increasing returns to scale in the operational air services themselves (OECD, 2000), especially on a regional level. Larger jet aircraft have lower per passenger operating costs than smaller aircrafts. Economies of scale can be achieved by the shared use of airport facilities and ground staff, joint procurement of externally supplied goods and services such as ground handling, catering, maintenance, fuel and aircrafts, etc. Yet, the members of the global alliance networks have already achieved such a scale that the potential benefits of joint projects in most cases do not outweigh increased management costs. Actually, of the three global alliances, only Star Alliance engages in joint fuel purchasing. The project has enabled the alliance members to save $50 million over the past years. However, a similar plan for the joint acquisition of regional jets – involving Air Canada, Austrian, Lufthansa and SAS – has been put back for at least 5 years (Field & Pilling, 2004). Some observers are sceptical about the actual, net benefits of coordinated deals. As John McCulloch, managing partner of Oneworld, stated in Airline Business (Field & Piling, 2004): ‘‘Each member had enough buying power that the savings would not justify the added costs of the project’’ (p. 47). The competitive advantage gained by providing integrated, worldwide air services is achieved primarily through economies of scope. Economies of scope arise in intercontinental aviation because the net benefits of jointly offering different air services across regions are higher than for a number of airlines to provide these services separately. As an illustration (see Fig. 5), assume a passenger wants to travel from spoke station A (e.g., Lyon) in Europe to spoke station G (e.g., Springfield) in the United States. This passenger needs to buy three air services: a flight from A to HE (a European

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B

A

C

HE

HUS

D

I

Fig. 5.

Operational Base IT External relations

F

G

Economies of Scope in Global Alliances.

Assets shared across markets Brand Name

Fig. 6.

E

Type of cooperation Code share agreement Joint advertising Schedule coordination Coordination of ground handling Shared CRS FFP

Sources of Scope Economies in the Intercontinental Airline Industry.

hub such as Paris), a second flight from HE to HUS (a US hub such as Chicago) and finally a flight from HUS to G. As there are economies of scope, the net benefits of jointly providing the three services are higher than if the services were provided separately. The source of scope economies is the sharing of assets across different markets (Bartlett & Ghoshal, 1989). The global airline groupings share brand names, operational bases, computer reservation systems and external relationships across regional markets. Fig. 6 gives an overview of the main sources of scope economies provided by global alliances in the airline industry. Sharing brand names across markets leads to higher revenues as it raises demand. Actually, customers favour carriers offering ‘seamless’ services to a large number of communities (Oum et al., 2000). Sharing brand names can take the form of joint advertising or code sharing,7 whereby all flights of the airlines carry the code of all alliance members. Airlines that share operational bases across markets can become more efficient because they are able to take into account the effects that a delay, an unforeseeable event or overbooking may have on further segments. The

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coordination of schedules enables airlines to provide a fully integrated service to potential customers and thus to increase the potential volume of traffic across their combined networks. By using the same computer reservation system (CRS) it becomes possible to offer alliance-wide, interline ticketing. For example, Oneworld, with most of its members using the Amadeus platform, has been offering alliance-wide ticketing since the end of 2004 (Field & Pilling, 2004). Moreover, joint CRSs offer many display benefits to those airlines involved in code sharing agreements (Oum et al., 2000). The same service using different airline designation codes and flight numbers may appear a great number of times, due to code sharing services. For example, a code-shared flight with one connection gets listed three times in the screen. The members of the global alliances also share their ‘relations’ across markets through programmes such as frequent flyer programmes (FFPs). FFPs allow passengers to accrue miles on their home carrier’s planes even if they fly on a partner’s flight and also permit them to use FFP rewards on each other’s flights (Oum et al., 2000). This leads to added benefits compared to carriers that operate alone. Indeed, airlines with very extensive networks have much more attractive FFPs because they offer more opportunities both to earn points and to spend them (Doganis, 2001). These factors increase a traveller’s cost to switch airlines (Tretheway & Oum, 1992). The sharing of brand names and relations across markets enables airlines to expand their existing markets through the extra traffic generated by the feed to and from the foreign airline partner. As more passengers use the alliance network, the average costs decrease (‘economies of density’) since it becomes possible to use larger, more cost-efficient aircraft or to achieve higher load factors. This is the dynamic effect of economies of scope. The importance of scope economies has been confirmed by a variety of empirical research (Caves et al., 1984; Brueckner, 2001; Brueckner & Whalen, 2000; Liu & Lynk, 1999). The substantial benefits arising from scope economies make service route networks the single most critical resource in the airline industry (Park, Mezias, & Song, 2004). Given the above, the question arises why carriers make use of strategic alliances and do not set up their own networks to operate in other regions?

Why is there No Global Carrier? The presence of scope economies suggests substantial benefits of global integration. It is therefore puzzling that we cannot observe a single global

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carrier in the airline industry in terms of the balanced geographic distribution of sales across the Asia-Pacific, Europe and North America (and beyond). The most important – and in most cases only – rationale offered in the academic literature is that institutional obstacles make a global MNE airline carrier impossible. The intercontinental airline industry is fraught with paradoxes. Cosmopolitan by its very nature and dedicated to increasing opportunities for mobility, this industry is also one that has been notorious for being cloaked in the mantle of nationalism. Air transport was the one topic that participants in original negotiations on the General Agreement on Trade in Services (GATS) unanimously agreed to exclude from their agenda (Staniland, 1999). This ‘unique sectoral exclusion’ (WTO, 1998) was unanimous on the part of all 108 delegations to the Uruguay round negotiations. The exclusion is embodied in a specific annex which provides that, while the WTO Agreement will apply to selling and marketing air services, aircraft maintenance and computer reservation systems, it will not apply to measures affecting: (a) traffic rights, however granted; or (b) services directly relating to the exercise of traffic rights.8 A truly global MNE airline cannot yet be established because of a whole range of institutional restrictions. A complex web of bilateral air service agreements, comprising over 3,000 bilateral agreements regulates international trade in air services. These agreements often limit the number of possible flights, the number and the identity of the carriers, the capacity to be provided by each airline and the airports that can be served. In most cases, only third and fourth freedoms are granted9 and the agreements contain conditions for authorizing fares. In the past decade, a growing number of such agreements have been liberalised, largely as a result of the US open skies initiatives that started in the 1990s. Since 1992, 89 open skies bilateral agreements have been concluded, involving 74 partners, with the United States being one of the partners in 60 cases (ICAO, 2004).10 Yet, even the most liberal of these bilateral agreements, such as the US open skies agreements, contain nationality clauses. This means that companies designated to provide services are limited to airlines owned and controlled by the nationals of the parties to the agreement. Hence, if an airline of one state takes over the airline of another one, this could invalidate the international traffic rights held by the airline being taking over, on the grounds that it no longer qualifies as a national airline of the state concerned. For this reason, it makes little sense for an American airline to buy a controlling interest in a European airline. The nationality rules mean that the acquired company would cease to be a ‘national’ or ‘community’ carrier. It would then risk losing international rights acquired under bilateral air

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service agreements with states outside the EU (Staniland, 1998). Moreover cabotage (i.e., the right of an airline to carry traffic between two points located within the territory of a foreign state) is almost never permitted. In most countries, the air service agreements are not the only basis for restricting of competition. The laws of many countries place statutory limits on foreign ownership and control of domestic carriers. In many cases, only these domestic carriers are given permission to serve the domestic markets and most of their international markets. For example, current US federal law makes it mandatory that United States airlines be owned and controlled by citizens of the United States, that at least two-thirds of the board of directors and other managing officers be American citizens, and that at least 75% of the voting interest be owned by persons who are American citizens. In the EU, foreigners cannot own more than 49% of equity (Chang, Williams, & Hsu, 2004). In Fig. 7, we give an overview of foreign ownership limits in a selected number of countries. Country Australia

Maximum % foreign ownership limits in selected countries 49% for international airlines 100% for domestic airlines Brazil 20% of the voting equity Canada 25% of the voting equity The maximum single holding in Air Canada by any investor is limited to 15% Chile Designation as a Chilean carrier (domestic or international) has principal place of business as the only requirement China 35% Colombia 40% India 26% for Air India 40% for privately owned domestic carriers Indonesia Requires airlines designated under bilateral agreements to be substantially owned and effectively controlled by the other party Israel 34% Japan One-third Kenya 49% Korea 50% Malaysia 45% for Malaysia Airlines, but the maximum holding by any single foreign entity is limited to 20% 30% for other airlines Mauritius 40% New Zealand 49% for international airlines 100% for domestic airlines Peru 49% Phillippines 40% Singapore 27,51% Taiwan One-third Thailand 30% US 25% of the voting equity

Fig. 7.

Foreign Ownership Limits in Selected Countries. Source: Chang et al. (2004).

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Many authors have argued (Fan, Vigeant-Langlois, Geissler, Bosler, & Wilmking, 2001; Hanlon, 1999; Oum et al., 2000; Staniland, 1998) that these obstacles are the principal, if not the only reason why global carriers do not exist. In reality, even without such institutional barriers, it is unlikely that a carrier operating multiple hubs around the globe would emerge without using cooperative agreements. Seamless global services will continue to be provided to customers by way of strategic alliances (cfr. supra). Indeed, evidence from more liberalized markets suggests that other parameters act as critical impediments to global MNE activity in the airline industry. In line with our conceptual analysis in the first part in this paper, these obstacles appear to be much larger outside the home region than inside it. Put differently, carriers can only offer worldwide services if they rely on the FSAs of other carriers located in host regions. British Airways (BA) is one example that suggests global carriers will not come into existence soon. BA sold its 18.25% stake in the Australian firm Qantas in September 2004, in order to move closer to the European carrier Iberia. BA became a shareholder in Qantas in 1993. At that time, global alliances had not emerged yet, and airlines viewed equity links as the key to successful strategic alliances (Knibb & Baker, 2004). At present, not only BA and Qantas are partners in the Oneworld alliance, but they have also both operated for 9 years under a joint service agreement with antitrust immunity on the so-called Kangaroo route linking Australia and the United Kingdom. In fact, the decision by Australia’s competition commission to approve the BA–Qantas joint service agreement for 5 more years was a major reason why BA decided it could sell its Qantas stakes (Knibb & Baker, 2004). This has given new life to speculation that BA will follow the example of the Air France–KLM merger of May 2004 and will merge with its European alliance partner Iberia. BA’s chief executive officer, Mr. Rod Eddington has made it clear that the airline’s future lies in closer cooperation in Europe, and Iberia – in which BA already has a 9% stake – could be at the heart of this strategy (‘European outlook good’, 2004). The above suggests BA has become less ambitious as far as its global strategy is concerned. Before the terrorist attacks of 11 September, 2001, the airline had planned to establish a global brand via partnerships, franchises and stakes in other airlines (Noakes, 2004). It now seems that BA is concentrating more on European consolidation while maintaining access to host regions through its membership in Oneworld.11 As a second example, though United States carriers have free access to a number of European countries, they appear to prefer offering European services via their European alliance partners instead of operating the routes

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themselves. Although the transatlantic market is not yet liberalized,12 15 Member States of the EU-25 have already concluded open skies agreements with the United States. These contain fifth Freedom rights, allowing United States airlines the right to operate flights from the US to any EU country and then beyond to another country with open skies. However, a recent study of the US Government Accountability Office (GAO, 2004) suggests that, according to airline officials and industry experts, fifth Freedom rights available from foreign countries through open skies agreements, have proven to be of limited commercial value to passenger airlines. The study refers to the company ‘United’ that attempted to exercise fifth freedom rights for operations with open skies countries in Europe, but abandoned those operations after determining that they were not profitable. ‘United’ officials explained that, with the development of alliances, it is more cost efficient to use alliance partners to provide connecting services into ‘beyond’ markets. Of the American passenger airlines that benefit from fifth freedom rights with EU countries only two airlines exercise these rights. Northwest operates fifth freedom rights on flights from Minneapolis that stop in Amsterdam and continue to Mumbai, India. Delta flies from Atlanta to Mumbai using fifth freedom rights over Paris. The limited use of fifth freedom rights suggests that even without legal restrictions, airlines prefer to provide global services through their alliance partners. In fact, only a very small number of airlines has attempted to obtain equity stakes in carriers in other regions, within the confines of national ownership restrictions. We can also observe a declining trend in the percentage of equity alliances (Oum et al., 2000). There is only one Top 200 airline from the triad with a substantial (more than 25%) stake in a carrier of another triad, namely Singapore Airlines, which owns 49% of Virgin Atlantic. The Virgin Group, in turn, is the only example of an airline that is attempting to set up carriers in each region of the triad. Indeed the UK-based group has already set up a branch in the Asia-Pacific (Virgin Blue) and is now looking for ways to enter the US market. Although Virgin Blue only operates domestic services and 100% foreign equity is allowed for domestic services in Australia, Virgin preferred to work with a local partner, the Australian ports, stevedoring and freight company, Patrick Corp., which has a 50% equity stake in Virgin Blue.13 The above instances indicate there must be other reasons why carriers do not set up their own, worldwide service network and instead rely on cooperative agreements to establish efficient global networks. Using the theoretical framework developed in this paper, two key reasons explain why carriers will continue to rely on strategic alliances. First, like most other

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business firms, air carriers face a competence gap when operating outside their home region. They cannot succeed in successfully linking their nonlocation-bound FSAs (which should lead to scope economies) with location advantages in host regions. It is extremely costly, time consuming and risky to establish a major operational and marketing base in a new country. It is even more difficult to obtain strategic landing slots at major airports in other regions. Thus, the location-specific adaptation investments are substantial. This problem can be addressed effectively by cooperating with host region carriers, which do have the necessary operational and marketing bases. In the intercontinental airline industry, carriers will not only use cooperative agreements to obtain location-bound FSAs (e.g., landing slots) from their partners, but also to create new FSAs that can be exploited globally, and lead to scope economies. Second, a global airline alliance leads to unique benefits for the individual firms involved that would be lost if the alliance were dissolved or if the individual companies left the alliance. It could be argued that airlines should simply set up their own operational and marketing bases in host regions, at a substantially lower cost than those associated with an alliance, after they have learned everything there is to learn from their host region partners. However, global airline alliances lead to a number of advantages that can be exploited globally but cannot necessarily be acquired by the alliance’s partner organizations through ‘learning’. This is what we have called earlier, ASAs. In the airline industry, the benefits of scope result not only from sharing existing brand names (e.g., through code sharing) and external relations (e.g., through FFPs), but also from creating new ones. For example, an airline that decides to leave Star Alliance, would obviously lose the brand name ‘Star Alliance’, and all the services provided by the alliance, after leaving.

CONCLUSION In the intercontinental passenger airline industry, offering airline services across dispersed geographic markets leads to higher consumer benefits than the alternative of a number of airlines providing these services in narrow geographic markets. In the latter case, the passengers must themselves create connections between carriers that operate at arm’s length of each other. In other words, there are significant customer benefits associated with international integration. At the firm level, airline carriers can obtain a competitive advantage by offering global services. Yet, multiple institutional obstacles often make it impossible to set up wholly owned networks in other

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countries. Moreover, even in the more liberalized markets, it is extremely costly and difficult to set up the required operational and marketing bases in host regions. The required investments are usually higher in countries outside the home region, making internalization across regions a poor alternative as compared to the use of alliances. Thus, in order to provide global services, air carriers must cooperate with carriers at the other end of their long haul routes. Global strategic alliances make it possible to reduce the location-specific adaptation investments required in the case of market seeking FDI, and they make the related internalization outcome less attractive. First, alliances permit the MNE to link its non-location-bound FSA bundles with host region location advantages and required location-bound FSAs, without the need to engage in expensive linking investments. For example, local alliance partners provide access to landing slots and marketing bases. Second, strategic alliances facilitate the creation of new, non-location-bound strengths (e.g., the alliance’s own brand name and FFP), benefiting all partners. However, many of the advantages created are specific to the alliance itself, meaning that they would be lost to any airline leaving the alliance. ASAs are thus advantages that can be exploited globally, but cannot be appropriated by individual firms in the alliance. ASAs, therefore, create an incentive for the individual airlines to sustain the alliance over time. In the case of the intercontinental passenger airline industry, even if all institutional obstacles to geographical diversification were removed, individual airlines would still face strong incentives not to break up the global alliance they are part of, because they would then lose access to the related ASAs. ASAs result from the inability of individual firms to implement global strategies: even with extensive learning, FSAs of individual carriers cannot substitute for ASAs. ASAs thus reflect the comparative institutional efficiency of inter-regional alliances vis-a-vis both global and home region-only internalization strategies.

NOTES 1. These global firms include: International Business Machines (IBM), Sony, Royal Philips Electronics, Nokia, Intel, Canon, Coca-Cola, Flextronics International and Moe¨t Hennessy-Louis Vuitton (LVMH) (Rugman & Verbeke, 2004). 2. See Appendix A. 3. Tretheway and Oum (1992) illustrate this by the following example: ‘‘British Airways may be effective in obtaining a share of Toronto originating passengers going to Europe (or beyond) on its own system. But it is not likely to pick up feed traffic in Toronto. [y] BA’s Toronto competitor, Air Canada, is more likely to pick

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up feed (from say Windsor or Timmins, ON), bring it to Toronto, and keep it on-line for the long haul to the European destination’’ (p. 105). 4. Of these airlines only SAS, Gulf Air and TACA are in the Top 200 ranking by passenger traffic. At the end of June 2004 their shareholder structure looked as follows: SAS (publicly held 50%; Denmark 21.4%; Sweden 21.4% and Norway 14.3%); Gulf Air (Abu Dhabi 33.3%; Bahrain 33.3% and Oman 33.3%) and TACA was formed among five smaller airlines from Costa Rica, El Salvador, Honduras, Guatemala and Nicaragua. 5. This number includes alliances formed at a domestic level. 6. Alliances that operate on global basis can be distinguished from route-specific alliances (i.e., covering one route or a limited number of city pairs) and alliances that link airlines in the same region (Doganis, 2001). 7. Button, Haynes, and Stough (1998) define a code-share agreement as follows: ‘‘y a marketing agreement between two or more carriers allowing them to sell seats on each other’s flights under their own designator code. [y] A stronger form of code sharing involves blocked space arrangements. In this case, one carrier buys space on another airline’s aircraft which it then sells under its own name and designator code’’ (p. 106). 8. Traffic rights were defined in the widest sense to include routes, capacity, pricing and the criteria for designation of airlines (Staniland, 1999). 9. See Appendix A. 10. The first open skies agreement was concluded by the United States and the Netherlands in 1992. A typical open skies agreement allows carriers from either signatory country to fly to any point in the other country with no restrictions on fares or frequency of services. Additionally, the agreements allow for unlimited fifth freedom rights, allowing airlines to pick up passengers in the other country and fly them to a third country. Finally, carriers from the two countries can engage in code sharing and other commercial agreements. 11. It should be noted, however, that BA had already sold its subsidiaries in France and Germany, respectively, Air Liberte´ in 2001 and Deutsche BA in 2003, because they were making financial losses. This suggests that in the airline industry, even within the home region market, cooperation with local enterprises is sometimes necessary. 12. The EU and the US started negotiations on an Open Aviation Area (OAA) in October 2003. The OAA concept goes beyond the US Open Skies model; it aims to create a single EU/US aviation market with no cabotage or foreign ownership limitations, and no fly-US policy for USA government officials. However, at present it seems improbable that the agreement will go as far as initially envisaged by the Commission. 13. However, the Virgin Blue subsidiary, Pacific Blue provides international air services and here, rules do require a local partner.

REFERENCES Barney, J. (1991). Firm resources and sustainable competitive advantage. Journal of Management, 17(1), 99–120. Barney, J. (1996). Gaining and sustaining competitive advantage. New York: Addision-Wesley.

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Bartlett, C. A., & Ghoshal, S. (1989). Managing across borders: The transnational solution. Boston, MA: Harvard Business School Press. Beamish, P. W., & Banks, J. C. (1987). Equity joint ventures and the theory of the multinational enterprise. Journal of International Business Studies, 18(2), 1–16. Borys, B., & Jemison, D. B. (1989). Hybrid arrangements as strategic alliances. Academy of Management Review, 14(2), 234–249. Brown, L. T., Rugman, A. M., & Verbeke, A. (1989). Japanese joint venture with western multinationals: Synthesizing the economic and cultural explanation of failure. AsiaPacific Journal, 6(2), 225–242. Brueckner, J. K. (2001). The economics of international codesharing: An analysis of airline alliances. International Journal of Industrial Organization, 19(10), 1475–1499. Brueckner, J. K., & Whalen, W. T. (2000). The price effects of international airlines alliances. Journal of Law and Economics, 43(2), 503–546. Buckley, P., & Casson, M. C. (1976). The future of the multinational enterprise. London: Macmillan. Buckley, P. J., & Casson, M. C. (1988). New forms of international industrial co-operation in international business. In: F. J. Contractor & P. Lorange (Eds), Co-operative strategies in international business. Lexington, MA: Lexington Books. Button, K. J., Haynes, K., & Stough, R. (1998). Flying into the future: Air transport policy in the European Union. Cheltenham & Northampton: Edward Elgar. Call, G. D., & Keeler, T. E. (1985). Airline deregulation, fares, and market behavior: Some empirical evidence. In: F. Daugherty (Ed.), Analytical Studies in Transport Economics. Cambridge: Cambridge University Press. Caves, D. W., Christensen, L. R., & Tretheway, M. W. (1984). Economies of density versus economies of scale: Why trunk and local service airline costs differ. Rand Journal of Economies, 15(4), 471–489. Chang, Y. C., Williams, G., & Hsu, C.-J. (2004). The evolution of airline ownership and control provisions. Journal of Air Transport Management, 10, 161–172. Doganis, R. (2001). The airline business in the twenty-first century. London & New York: Routledge. Dunning, J. (1988). Explaining international production. London: Unwin Hyman. Enright, M. J. (2005a). Regional management centers in the Asia-Pacific. Management International Review, 45(Special Issue 1), 59–82. Enright, M. J. (2005b). The roles of regional management centers. Management International Review, 45(Special Issue 1), 83–102. ‘European outlook good’ (2004). Business Travel World, 12, October. Fan, T., Vigeant-Langlois, L., Geissler, C., Bosler, B., & Wilmking, J. (2001). Evolution of global airline strategic alliance and consolidation in the twenty-first century. Journal of Air Transport Management, 7, 349–360. Field, D., & Pilling, M. (2004). Team spirit. Airline Business, 20(9), 46–49. Government Accountability Office. (2004) Transatlantic aviation: Effects of easing restrictions on US–European markets (GAO-04-835). Washington, DC: US Government Accountability Office. Ghemawat, P. (2001). Distance still matters: The hard reality of global expansion. Harvard Business Review, 79(8), 137–147. Gomes-Casseres, B. (1996). The alliance revolution: The new shape of business rivalry. Cambridge: Harvard University Press.

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Rugman, A. M., & Verbeke, A. (2004). A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1), 3–19. Rugman, A. M., & Verbeke, A. (2005a). Towards a theory of regional multinationals: A transaction cost economics approach. Management International Review, 45(Special Issue 1), 5–18. Rugman, A. M., & Verbeke, A. (2005b). Regional multinationals: The new research agenda. In: A. M. Rugman (Ed.), The regional multinationals: MNEs and ‘global’ strategic management (pp. 110–132). Cambridge: Cambridge University Press. Schu¨tte, H. (1997). Strategy and organisation: Challenges for European MNCs in Asia. European Management Journal, 15, 436–445. Staniland, M. (1998). The vanishing national airline? European Business Journal, 10(2), 71–77. Staniland, M. (1999). Transatlantic air transport: Routes to liberalization. European Policy Paper, no. 6. Tallman, S. (2000). Forming and managing shared organization ventures: Resources and transaction costs. In: D. O. Faulkner & M. De Rond (Eds), Cooperative strategy: Economic, business and organizational issues (pp. 96–118). Oxford: Oxford University Press. Tretheway, M. W., & Oum, T. H. (1992). Airline economics: Foundations for strategy and policy. Vancouver: Centre for Transportation Studies University of British Columbia. Wang, Z. H., & Evans, M. (2002). Strategic classification and examination of the development of currrent alliance activities. Journal of Air Transportation, 7(3), 73–101. White, L. J. (1979). Economies of scale and the question of ‘natural monopoly’ in the airline industry. Journal of Air Law and Commerce, 44, 545–573. Williamson, O. E. (1985). The economic institutions of capitalism. New York: The Free Press. Williamson, O. E. (1999). The mechanisms of governance. Oxford & New York: Oxford University Press (First published 1996). World Trade Organisation. (1998). Air transport services. Background note by the secretariat (S/C/W/59) (98-4346). Geneva: Council for Trade in Services. Retrieved on January 10, 2005, from http://www.wto.org/english/tratop_e/serv_e/transport_e/ transport_air_e.htm.

APPENDIX A. THE FREEDOMS OF THE SKIES The architecture for the international system of air transport was set out more than half a century ago in Chicago. The Chicago convention (1944) developed a system of narrowly defined access rights or ‘freedoms’. The system was based on the principle that each state has complete and exclusive sovereignty over the airspace above its territory. Five such freedoms were established, although now eight to nine such freedoms are generally recognized (Table A.1). They formed the fundament for the multilateral agreements concluded in Chicago and the subsequent bilateral agreements. The Chicago convention only established first and second freedom rights or technical rights. Commercial rights were left to bilateral agreements to be negotiated between the two countries involved.

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Table A.1. First freedom Second freedom

Third freedom

Fourth freedom

Fifth freedom

Sixth freedom

Seventh freedom

Eighth freedom

Ninth freedom

Freedoms of the Skies.

The right of an airline of one country to fly over the territory of another country without landing The right of an airline of one country to land in another country for nontraffic reasons, such as maintenance or refuelling, while en route to another country. The right of an airline of one country to carry traffic from its country of registry to another country, e.g., a flight by American Airlines from New York to London The right of an airline of one country to carry traffic from another country to its country of registry, e.g., a flight by American Airlines from London to New York The right of an airline of one country to carry traffic between two countries outside of its own country of registry as long as the flight originates or terminates in its own country of registry (i.e., ‘beyond rights’), e.g., an American Airlines flight from New York to London that picks up additional passengers in London before travelling on from London to Frankfurt The right of an airline of one country to carry traffic between two foreign countries via its own country of registry (i.e., ‘behind feed’),a e.g., an American Airlines flight from London to Mexico City by way of New York The right of an airline to operate stand-alone services, entirely outside of the territory of its home states, to carry traffic between two foreign states, e.g., a direct flight by American Airlines from London to Mexico City The right of an airline to carry traffic between two points within the territory of a foreign state, as part of a service from the home country of the airline (i.e., ‘consecutive’ or ‘fill-up’ cabotage), e.g., a British Airways flight from London to New York to Los Angeles The right of an airline to carry traffic between two points within the territory of a foreign state, without any connection with the home country (i.e., ‘pure’ cabotage),b e.g., a British Airways flight from New York to Los Angeles

Note: aSome experts challenge the idea of sixth freedom flights, arguing it is actually a coordination of two flights under third and fourth freedoms (Harrison, 2003). b In most cases only eight freedoms are recognized. ‘Consecutive’ or ‘fill-up’ cabotage and ‘pure’ cabotage are then taken together. Source: Adapted from Button et al. (1998, p. 5) and GAO (2004, p. 60).

ENVIRONMENTAL ISSUES AND THE MNE Ans Kolk INTRODUCTION In evaluating Alan Rugman’s work on MNE environmental strategies, the subject of this chapter, it is too tempting not to start with a 2  2 matrix. Fig. 1 is meant to roughly indicate four different types of work that might characterise an academic’s research portfolio. Obviously, all the well-known caveats of such a scheme apply, and perhaps more than usual. However, the main purpose is, by way of introduction, to situate Alan’s output on environmental issues and the MNE, compared and related to other topics. While the horizontal axis of Fig. 1 refers to a regular division into theoretical and empirical work, the vertical axis differentiates main foci of research from other, more sideline, areas. Applied to Alan Rugman’s research portfolio, the latter category characterises his work on environmental strategies of MNEs best, particularly quadrant 2, although some of it (generally more exploratory work) can be placed in quadrant 4 as well. It should be noted, however, that the ‘sideline’ category is certainly not meant to indicate something peripheral or marginal in this case. Although some academics, in more advanced stages of their career, sometimes wander off their original core focus to other topics that are real ‘asides’, such a characterisation cannot be made of Alan Rugman’s work on environmental

Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 147–162 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11009-2

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Main focus (core areas) ‘Sideline’ (‘other’ topics)

Fig. 1.

Theoretical

Empirical

(1) (2)

(3) (4)

Characterisation of a Research Portfolio.

issues. First, because it has led to a (usual) considerable output – one could count at least four articles in main management journals (Rugman & Verbeke, 1998a, b, 2000; Rugman & Kirton, 1998), a book chapter (Rugman & Verbeke, 2001) and a book (Rugman, Kirton, & Soloway, 1999), all co-authored. Second, it has been clearly linked to themes noticeable in Rugman’s other publications (and addressed in other chapters of this book). These include internalization, location-bound and nonlocation-bound firmspecific advantages, competitiveness, public policy, regional integration and MNE strategy. Presumably, it is precisely this linkage that has made the contribution so worthwhile. The different papers have been especially important because they have helped to ‘set the agenda’ in a sense, thus ‘clearing the road’ for those interested in studying environmental strategies of MNEs and publishing the results in mainstream journals. Rugman’s publications have given directions on how to embed green topics in more ‘mainstream’ debates, particularly in the IB strategy and policy literatures. The value also originates from the fact that, until the mid-1990s, hardly any journal articles were published on environmental issues and the MNE. One can identify some reports and books from this period, but the more accessible and substantial output started to come out only in later years (for an overview see Kolk, 2000; Rugman & Verbeke, 2001). The early 1990s apparently provided a clear impetus for this kind of research as an outflow of a wave of societal and policy attention that had rapidly increased in preceding years. This resulted not only from accidents such as the Bhopal pesticide gas leak (1984), the Chernobyl nuclear explosion (1986) and the Exxon Valdez oil spill (1989), but also from policy developments such as the 1987 Brundlandt report (which coined the phrase ‘sustainable development’; WCED, 1987) and the 1989 decision to hold a UN conference on environment and development (in 1992 in Rio de Janeiro). All this led to much policy activity on a whole range of environmental issues and also to concomitant business responses. In this period,

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especially international business associations undertook specific activities on the environment. They emphasised firms’ own responsibility to care for the environment and to take the lead; instead of a regulatory approach, solutions would have to be found in market-oriented instruments and voluntary initiatives, such as codes of conduct. The years 1990–1992 indeed witnessed the adoption of a large number of environmental guidelines by industry associations (for a list, see Kolk, 2000, p. 56; cf. Kolk, Van Tulder, & Welters, 1999). These developments did not pass IB academics unnoticed. Ray Vernon (1994, p. 149), for example, noted the ‘‘swiftly growing importance of environmental issues’’, adding that ‘‘these promise to figure in a major way in every aspect of future research on TNCs’’.1 It has been Alan Rugman who has given further support to this initial assertion of interest, and has specified the what, how and why of environmental issues and the MNE in more detail. This chapter will briefly discuss the main elements of this contribution, followed by an indication of outstanding work and issues to be further investigated.

FROM ‘GREEN AND COMPETITIVE?’ TO GREEN FSAS The most comprehensive article is the one published in Strategic Management Journal (Rugman & Verbeke, 1998a). It conceptualised and combined different perspectives on strategy, environmental regulation and firmspecific capabilities, considering the peculiarities of MNEs. To classify existing views and literature on environmental regulation and firms’ performance, a 2  2 matrix was introduced (see Fig. 2). This 1998 article was written in a period in which the impact of environmental regulation on firms’ economic performance and on competitiveness was the subject of considerable debate. The tone here was largely set by Porter and Van der Linde (1995) through an article entitled ‘Green and competitive: ending the stalemate’. They argued that compliance with strict home-country (in their case, US) legislation would offer firms new market opportunities by increasing resource productivity and driving innovation (cf. Porter, 1990). These so-called ‘first-mover’ advantages could then be exploited by firms in global markets which could perform better than their competitors originating from a different (laxer) regulatory context. Porter and Van der Linde thus emphasised the compatibility with firms’ economic

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Static perspective Dynamic perspective

Fig. 2.

Harmful to economic performance

Beneficial to economic performance

green burden (1) forced green internalisation (2)

low-hanging fruit (3) green and competitive (4)

Perspectives on the Impact of Environmental Regulation on Firms’ Performance. Adapted from Rugman and Verbeke (1998a, p. 365).

performance, taking a dynamic perspective by considering longer-term effects (quadrant 4 in Fig. 2). As the figure indicates, Rugman and Verbeke also distinguished three other views. Quadrant 3 involves a static perspective on win–win situations, which implies that the recognition of environmental demands has become inevitable, and that the development of green capabilities may improve the firm’s image and performance. This also entails that so-called ‘low-hanging fruit’ is reaped: forced to watch the environmental effects of operations, managers discover that not all inefficiencies had already been eliminated and that significant improvements, both financial and environmental, can be made. By contrast, the conventional view on the relationship between environmental regulation and performance holds that if some firms are to conform to stricter environmental measures than others, the competitiveness of the former will be harmed. Regulation then implies a burden to the firm’s economic performance (quadrant 1 in Fig. 2). Considered from a more dynamic perspective, firms try to minimise the impact of environmental regulation by internalising external costs (quadrant 2). The question that arises from this categorisation, particularly from a managerial perspective, is obviously which of these positions best represent the impact of environmental regulations on economic performance. It is here where Rugman and Verbeke have added insights from the resourced-based perspective and the international business literature, on respectively firm- and country-specific advantages (FSAs and CSAs). The firm-specific green capabilities will be addressed first (for the FSA–CSA configuration see the next section). Fig. 3 shows the dimensions identified by Rugman and Verbeke (flexibility and leveraging potential), together with four possible scenarios. If the flexibility of resource commitments is high, it is easier for firms to decide upon them as mistakes can be corrected. Such a correction may take place if the contribution to the improvement of industrial performance is insignificant or uncertain as well. This situation can be characterised as a reversible green mistake (quadrant 2). If the leveraging potential is high,

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Leveraging potential of resource commitments for environmental performance Flexibility of resource commitments Low High

Fig. 3.

Low

High

irreversible green mistake (1) reversible green mistake (2)

green gamble (3) green success (4)

The Development of Firm-Level Green Capabilities: Four Scenarios. Adapted from Rugman and Verbeke (1998a, p. 368).

environmental commitments help to improve competitive advantage by developing firms’ competencies and capabilities. Such a green success story may result from a better performance in existing markets, from entering new markets, or from creating new technological capabilities (quadrant 4). Examples of this scenario include pollution prevention and waste reduction programmes. In many cases, however, resource commitments for environmental improvement are not very flexible and cannot easily be reversed. What firms want to prevent are irreversible green mistakes, in which inflexibility is accompanied by a weak leveraging potential (quadrant 1). As a result of this looming danger, firms may be hesitant to engage in this kind of investments. Irreversibility thus works as a barrier to entry. If uncertainties exist in the environmental area, for example, with regard to regulatory instruments, consumer responses and industry standards, firms are likely to postpone decisions until new environmental options are economically superior as well. Or they may lobby for the acceptance of certain performance criteria or standards, thus increasing the barriers to entry for other firms. In this case, a green gamble scenario unfolds (quadrant 3). Besides entry barriers, exit barriers also characterise inflexible resource commitments. If firms have decided to commit resources, they will not easily withdraw their activities. This also means that, if the leveraging potential seems high, investments are likely to contribute to unique firm capabilities with high complexity and much tacit knowledge. This may include, for example, attempts to reckon with environmental aspects during the entire product life-cycle, or to use integrated systems for packaging and take-back.

FSA-CSA CONFIGURATIONS The real meat, from the MNE perspective, is when Rugman and Verbeke add the country-specific advantages, enabling the analysis of location and

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nonlocation-bound green FSAs. This allows for the identification of the ‘green and competitive’ dimensions in the international context. Although the peculiarities of MNEs arise from nonlocation-bound FSAs, the situation in specific countries, for example, as a result of stakeholder or government pressure, may create location-bound FSAs as well (related to local responsiveness). In some cases these can only be used in the country in question; in others they might help to increase MNEs’ competitiveness elsewhere. Fig. 4 shows the four possibilities distinguished in terms of the impact of environmental regulation on MNEs’ FSA–CSA configurations. Perhaps the most well-known, though largely unsubstantiated, situation is the ‘pollution haven’ case (quadrant 3), in which lax environmental regulations attract MNEs, which relocate to countries that have strengthened their CSAs in this way. Largely similar, but then representing the ‘push’ rather than the ‘pull’ factor, is the ‘industrial flight’ hypothesis, where MNEs move production because countries adopted environmental regulations that firms perceive as too strict (quadrant 1). Quadrant 1 (‘declustering’) can also point at a situation, highlighted for example in studies on US regulation (Jaffe, Peterson, Portney, & Stavins, 1995), in which the impact on the FSA–CSA configuration is neutral on both counts. Like pollution haven and flight, strategic environmental policy (quadrant 2) implies a defensive approach. Firms emphasise the need for particular types of regulation or environmental measures in specific areas to seek shelter against competitors (cf. Rugman & Verbeke, 1990). Domestic firms convince their governments to create entry barriers against foreign rivals; CSAs will then be strong to domestic firms, but weak to foreign firms. Quadrant 4, finally, is the Porter innovation thesis, which holds that strict environmental regulation improves both CSAs and FSAs: firms profit from it and are more willing to invest in the country. It in fact reversed the traditional explanation that strict regulation harms firms’ competitiveness,

Impact on CSA configuration Impact on FSA configuration Weakening or neutral Strengthening

Fig. 4.

Weakening or neutral

Strengthening

declustering (1) strategic environmental policy (2)

pollution haven (3) environmental innovation (4)

The Impact of Environmental Regulations on MNE Strategies: Four Cases. Adapted from Rugman and Verbeke (1998a, p. 371).

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Driver of FSA-development process National regulation International regulation

Fig. 5.

Location-bound FSAs

Nonlocation-bound FSAs

(1) (2)

(3) (4)

The Development of ‘Green’ Firm-Specific Advantages. Rugman and Verbeke (2001, p. 549).

inciting them to refrain from investments or even moving production sites. Rugman and Verbeke are fairly critical about this argument, which falls in line with other work in which Porter was contested on other aspects (e.g. Rugman, Van den Broek, & Verbeke, 1995; Rugman & Verbeke, 2000). Applied to this case, the innovation-argument presupposes that the US is a first mover on a path in which other countries’ environmental regulation and international guidelines will also develop. This may be the case for large, influential countries (usually the Triad), but likely to be different when smaller economies are concerned (Rugman & Verbeke, 1998b). The framework, therefore, is not directly applicable to firms from smaller countries; they may be oriented much more towards other types of regulation (international, regional or of large host countries) (cf. Rugman, Kirton, & Soloway, 1999). Moreover, the Porter thesis assumes that governments will be able (and have the information) to foresee such developments, and that possible benefits might accrue to domestic firms and clusters only – depending on which country takes environmental measures to protect domestic firms, a shelter-type of scenario might then enfold. In short, no account is taken of the peculiarities of MNEs, transferability of green capabilities (Rugman & Verbeke, 2000) and the different levels of regulation. These last two aspects have been addressed to some extent in the final 2  2 matrix introduced here. Fig. 5 posits MNEs’ choice to develop location or nonlocation-bound FSAs, on the one hand, against the driver of green FSA development, on the other – in this case national or international regulation. In this figure, quadrant 3 represents the contested Porter-hypothesis.

EVALUATING MNES AND ENVIRONMENTAL STRATEGIES: FURTHER STEPS Considering this work, of which the last publication was written around 2000, an obvious question relates to outstanding issues and further areas.

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This section will identify the main ones as I see them, and reflect upon general aspects related to MNEs and the environment in relation to Alan Rugman’s contribution.

The (Un)Importance of Environmental Regulation It is crucial to pay some attention to the significance of the environment for MNEs in economic terms, especially in view of, as also noted by Rugman and Verbeke (1998a), the lack of an impact of environmental regulation on relocation decisions. Several reasons account for the weak overall correlation between international investment patterns and environmental regulation, and thus the absence of a clear proof for pollution havens or industrial flight. Firstly, environmental costs seem to be relatively low in general, except for a few specific instances, with small cost differentials between countries and within sectors as well (Kolk, 2000, pp. 29–32). This means that the overall influence on competitiveness is limited. At the firm level, the savings incurred by MNEs as a result of relocation would not be high whereas the costs and efforts of setting up a subsidiary elsewhere can be formidable. If a firm considers a new plant or an acquisition, environmental aspects are certainly considered. Clean-up costs and potential liabilities receive special attention. In mergers and acquisitions, the assessment of environmental costs and risks has become common practice. New plants are, however, generally built according to the current state of technology, regardless of the country of investment. For older plants, the regulatory context may make a difference, in the environmental measures to be taken or its economic lifespan. Secondly, counting on environmental evasion brings many risks to firms. Regulation may be changed, which means that the advantage is lost. Furthermore, the firm’s image may be damaged, especially relevant in the case of MNEs which are usually more visible and easier outlets for protests. They are also more vulnerable: a scandal in one country can have detrimental effects for their reputation and brands all over the world. Related to this, applying different standards in different countries causes coordination problems for MNEs. Staff functioning in accordance with an international system of job rotation have to get accustomed to other sets of rules every time. Similar or identical procedures for every subsidiary facilitates the exchange of experiences, it breeds internal consistency, enables for benchmarking and is clear to outsiders. Some MNEs, therefore, strive to

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harmonise their environmental management system and standards at all locations. These factors, plus the actual adoption of state-of-the-art technology worldwide, has led to the designation of MNEs’ role in developing countries as ‘leading edge’, as firms which might positively influence environmental management, also of local firms at other locations (e.g. Tsai & Child, 1997). This rather optimistic perspective does not mean, however, that all MNEs adopt such a policy (let alone implement them). Overall, it can be concluded that a general assessment of environmental regulation in relation to MNE competitiveness is rather difficult. This also means that the predominant focus in the frameworks discussed above on regulation needs to be broadened, to include broader non-market as well as market factors (cf. Buysse & Verbeke, 2003; Christmann, 2004; Kolk & Pinkse, 2004; Levy & Kolk, 2002; Lundan, 2004). And although Rugman and Verbeke do not deny the importance of, for example, other stakeholders, their work has concentrated predominantly on environmental regulation, perhaps influenced to some extent by Porter’s concomitant focus as far as his ‘green and competitive’ contribution is concerned. It must be noted, however, that Rugman and Verbeke (2000) in another article precisely add environmental regulation to Porter’s ‘five-forces model’, to show that such a government intervention can have a ‘five-forces’ impact (on firms’ market context) and/or a ‘sixth-force’ impact (on firms’ non-market context), leading to an indirect respectively direct effect on strategy.

Environmental/Social Issues and Related FSA Development Perhaps more important, however, than the inclusion of other factors than only environmental regulation is the simultaneous need to focus more directly on issues and particular instances where the environment plays a role in MNE strategy and/or where strategic decisions can be discerned. This can be in relation to specific regulation, for example in the case of air pollution or chemical substances laws, but usually it is part of a broader conglomerate of factors involving not only governmental but also societal and market forces, and at different levels, national, regional and/or international. Particularly because of the fact that an overall assessment of the impact of the environment in general on firm strategy has proven to be difficult, some of the literature has likewise proceeded towards an analysis of so-called ‘issue arenas’, ‘issue networks’ or ‘organisational fields’ (Hoffman, 1999; Levy & Kolk, 2002). Such an approach helps to differentiate between topics that become important to firms or not (e.g. Wartick & Mahon, 1994), and

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account can also be taken of the lifecycle of issues (Mahon & Waddock, 1992), and the different implications that novelty or maturity of an issue may have (for an examination of the climate change issue in relation to MNE strategy over time, see Levy & Kolk, 2002). In addition, a specification also enables a more detailed analysis of the FSAs that firms (may) develop as a result of the environment. This is likely to differ considerably across issues, with some having a negligible or no effect, and others a (potentially) more substantial one. The issue of climate change is a case in point of the latter situation. Societal and regulatory attention to climate change has led to a variety of responses, particularly by MNEs, both market and non-market (political) in nature (Kolk & Levy, 2004; Kolk & Pinkse, 2004). The consequent market strategies that have emerged, seem to hint at the development of FSAs, at least for some firms. Examples include the development of capabilities in emission trading, internally and/or on an external market, and active exploration of new product opportunities (for new markets), frequently in cooperation with other parties (Kolk & Pinkse, 2005). Issue-oriented examinations, such as the one of climate change, raise interesting questions regarding the conditions for and the determinants of FSA development in the particular case. In other words, why do some firms develop more or less FSAs than others; what are distinguishing characteristics of these firms; what is the nature of FSAs, are they specifically ‘green’ or (also) ‘conventional’, location-bound or nonlocation-bound; which peculiarities of an issue determine the potential for FSA development; and which issue drivers (for example regulation) have been most important? Such analyses do not only help to uncover the FSA development ‘chain’ but also provide insight into the possibilities for firms to develop conventional FSAs as a result of environmental issues. Climate change, for example, may in some instances induce FSA development that positively contributes to firms’ growth, survival and perhaps even performance, but not to the development of pure ‘green’ FSAs (valued only for this peculiarity in the market place). In that sense, the concept of ‘green’ FSAs may well give way to ‘green-induced’ (but conventional) FSA development. In some specific instances, where markets really attach value to for example environmental product properties, green FSAs might perhaps still be possible, but in most cases, especially when it comes to (efficiency) improvements in production processes, such purely green FSA development seems unlikely. It must be noted that the idea of ‘green-induced’ FSA development could be extended to social and ethical issues as well (designated here as ‘blueinduced’, parahrasing ‘blue washing’). In such a situation, firms might

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develop specific capabilities as a result of, for example, the way they have addressed societal concerns regarding child labour, marketing efforts targeted at children, or managers’ ethical behaviour (corporate governance). While this is certainly an area that needs further investigation, some MNEs, for example in the garment industry, have developed capabilities with high complexity and much tacit knowledge about how to deal with complex intangible issues in a large supply and production network, also related to the boundaries of corporate responsibility, following child labour campaigns (Kolk & Van Tulder, 2002; Van Tulder & Kolk, 2001). To what extent this has really involved ‘blue-induced’ but conventional FSA development can be discussed, but it seems that some MNEs have been able to increase coordination and control worldwide, and have learned how to address all the internal and external dimensions that came with the issue in question. This has applied most to the ones with the largest (complex) international production networks and that have experienced most societal (customer) pressure (initially US MNEs, particularly Nike). In other cases as well, a learning over time and across ‘blue’ issues and locations can be seen. An example is Nestle´, whose response to the global coffee crisis (overproduction, low prices and poverty for farmers and their families) has been more elaborate, explicit and forward-looking than other large MNEs in the same sector, and with a greater reliance on international norms. Its large experience with NGO campaigns in a much earlier stage in relation to the marketing and sales of breast-milk substitutes, one of its other products, has certainly played a role in this regard, as has the structure of its supply and production network (Kolk, 2005a). In situations where organisations enable such international ‘learning’, MNEs may be seen as better equipped to address global problems than more locally based firms.

Multinationality, Regionalisation and Environmental/Social Issues The examples just given hint at the possibility that the way in which firms address incidents in corporate history influences FSA development related to these and other issues. They also point at the transferability of FSAs, which means that ‘blue’ or ‘green’ (induced) FSA development in one location under influence of particular societal or regulatory pressure, can be used at other locations as well, with the potential to improve MNE competitiveness. This is again likely to vary across issues, and to range from some effect to none at all (or even turn out to be a disadvantage). The highest potential impact can be expected for global issues, the ones that are

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relevant at many different (or even all) locations where MNEs have production and/or sales. An obvious example is climate change, which has become a global issue arena in the past decade (Levy & Kolk, 2002) with implications for almost all firms; the precise impact depends on peculiarities of products, production process, activities and location (Kolk & Pinkse, 2004). In spite of a global agreement (Kyoto Protocol), regulatory responses have varied considerably, with the EU emission trading scheme (started per 1 January 2005 for a limited number of sectors) and the US rejection of Kyoto as two extremes. While the precise effect remains to be seen, also in terms of flexibility and reversibility of resource commitments, this may well be(come) a typical case involving location-bound, or more precisely ‘region-bound’ (cf. Rugman & Verbeke, 2004), green-induced FSAs. The emission trading scheme has implications for home-region firms, but also (potentially) for ‘outsiders’, hostregion MNEs for which the EU is important in terms of production facilities and/or sales, and/or which compete with EU firms on non-EU markets. Adaptation costs (in order to realise location-specific investments) are likely to be higher for non-EU firms (cf. Rugman & Verbeke, 2005). Formulated more broadly, the emergence and transferability of (for example) ‘climate change’-induced FSAs can be analysed in relation to MNEs’ loci of origin and destination, as well as their upstream (back-end) and downstream (customer-end) characteristics. An issue such as this can thus build on concepts developed by Rugman and Verbeke (2004, 2005). Moreover, it potentially may also provide further insights if the division between upstream and downstream is permeated to some extent: climate change, for example, might impact product properties and/or production processes; child labour is likely to have not only implications for (the organisation of) production, but also for sales (cf. Nike). Finally, the whole, usually complex, supply chain and network of the MNE will, particularly in the case of the high-profile, flagship firms (Rugman & D’Cruz, 1997), be involved as NGOs scrutinise for irregularities beyond the boundaries of the firm. Some environmental and social issues thus add new dimensions to what regionalisation or globalisation in terms of production and/or sales might mean for an MNE and its network, also regarding possible spillovers of such concerns to other (core) activities and other locations, and how (central/ decentral) organisational responses are coordinated and controlled. It can also be investigated to what extent, and in which cases, aggregation or arbitrage is more appropriate (Ghemawat, 2003), particularly in view of societal expectations and reputational aspects that vary considerably across institutional contexts. The continued importance of the local/regional

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institutions has, for example, emerged in studies on the adoption and contents of manifestations of corporate social accountability such as codes of conduct and sustainability reports. Codes of conduct, which embody the principles, the ‘rules of behaviour’ of a firm turn out to have been adopted at a much earlier stage by US MNEs, followed later by European MNEs, with Japanese MNEs lagging behind (Van Tulder & Kolk, 2001). Regarding implementation and monitoring, European codes have been much clearer and specific (Kolk & Van Tulder, 2002). Environmental reporting has also exhibited Triad-based patterns, with an initial front-runner role again for US MNEs, but this lead has been quickly taken over by European firms, soon followed by Japanese MNEs, with US firms currently lagging much behind (Kolk, 2005b). Regional differences are even more pronounced when the contents of these reports is considered. This particularly involves the scope of reporting (internal environmental accounting in Japan versus external, broader sustainability in the other two regions) and the reliance on external verification, a notable trend in North-western Europe but largely absent in US reports, with Japan closest to the US pattern. This divergence means that, if stakeholders attach value to accountability on social, ethical and environmental issues, MNEs that operate outside their home regions, upstream and/or downstream, may have difficulty in accommodating such host-region concerns and approaches appropriately. Japanese MNEs, for example, need to address international social issues in a way that is meaningful to US and European audiences, respectively. Internationalising US MNEs have to deal with the expectations of more explicit, often verified data, from which they have frequently refrained because of fears for litigation. The reverse holds for European and Japanese MNEs that are or become active in the US. Regardless of whether such regional characteristics are seen as a potential advantage or as a disadvantage, liability or risk, it is something to be faced by MNEs; the exact implications of such general regional differences obviously need to be assessed per issue.

CONCLUDING REMARKS Alan Rugman’s contribution on ‘MNEs and the environment’ has particularly consisted of the linkage established with his more core research areas, thus not only furthering insights but also embedding green issues in ‘mainstream’ IB and strategy debates. In this way, it has helped others who are

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interested in studying environmental strategies and MNEs not so much as a ‘sideline’ but as their main focus (quadrants 1 and 3 in Fig. 1). This chapter started with a brief evaluation of the main themes of Alan’s environmental work as published in the period 1998–2001, paying particular attention to the ‘green and competitive’ debate, to green FSAs and their relationship with CSAs. The second part has subsequently concentrated on outstanding issues and further research steps as they have, in my view, developed since then. This has firstly involved the broadening of the focus on merely environmental regulation to an inclusion of broader non-market and market factors in general. Secondly, the importance to shift from environment in general to specific environmental (and also social) issues has been underlined, also because this enables a more detailed analysis of the development of green (and ‘blue’) FSAs. In many cases this will not be purely green (or blue) FSAs, but green-induced (blue-induced) conventional FSAs. Thirdly, the multinational dimension has been added specifically by addressing the ability of MNEs to profit from transferability of green/blueinduced FSAs, particularly in the case of global issues. Using the example of climate change, the potential impact of region-bound FSAs has been suggested, in relation to MNEs loci of origin and destination, for both downstream and upstream activities. The overall implications of environmental and social issues for MNE strategy have thus also been placed in the context of current debates about regionalisation and (semi)globalisation, ongoing core research areas of Alan Rugman.

NOTES 1. In an article published one year earlier, Vernon (1993) had already emphasised the existence of differences in environmental policies in the Triad.

REFERENCES Buysse, K., & Verbeke, A. (2003). Proactive environmental strategies: A stakeholder management perspective. Strategic Management Journal, 24, 453–470. Christmann, P. (2004). Multinational companies and the natural environment: Determinants of global environmental policy standardization. Academy of Management Journal, 47(5), 747–760. Ghemawat, P. (2003). Semiglobalization and international business strategy. Journal of International Business Studies, 34, 138–152.

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Hoffman, A. J. (1999). Institutional evolution and change: Environmentalism and the US chemical industry. Academy of Management Journal, 42(4), 351–371. Jaffe, A. B., Peterson, S. R., Portney, P. R., & Stavins, R. (1995). Environmental regulation and the competitiveness of US manufacturing. Journal of Economic Literature, XXXIII(1), 132–163. Kolk, A. (2000). Economics of environmental management. Harlow: Financial Times PrenticeHall. Kolk, A. (2005a). Corporate social responsibility in the coffee sector. The dynamics of MNC responses and code development. European Management Journal, 23(2), 228–236. Kolk, A. (2005b). Environmental reporting by multinationals from the Triad: Convergence or divergence? Management International Review, 2005/1 special issue, 145–166. Kolk, A., & Levy, D. (2004). Multinationals and global climate change: Issue for the automotive and oil industries. In: S. Lundan (Ed.), Multinationals, environment and global competition (pp. 171–193). Oxford: Elsevier. Kolk, A., & Pinkse, J. (2004). Market strategies for climate change. European Management Journal, 22(3), 304–314. Kolk, A., & Pinkse, J. (2005). Business responses to climate change: Identifying emergent strategies. California Management Review, 47(3), 6–20. Kolk, A., & Van Tulder, R. (2002). The effectiveness of self-regulation: Corporate codes of conduct and child labour. European Management Journal, 20(3), 260–271. Kolk, A., Van Tulder, R., & Welters, C. (1999). International codes of conduct and corporate social responsibility: Can transnational corporations regulate themselves? Transnational Corporations, 8(1), 143–180. Levy, D. L., & Kolk, A. (2002). Strategic responses to global climate change: Conflicting pressures on multinationals in the oil industry. Business and Politics, 4(3), 275–300. Lundan, S. (2004). Multinationals, environment and global competition: A conceptual framework. In: S. Lundan (Ed.), Multinationals, environment and global competition (pp. 1–22). Oxford: Elsevier. Mahon, J. F., & Waddock, S. A. (1992). Strategic issues management: An integration of issue life cycle perspectives. Business and Society, 31(1), 19–31. Porter, M. E. (1990). The competitive advantage of nations. New York: Free Press. Porter, M. E., & Van der Linde, C. (1995). Green and competitive: Ending the stalemate. Harvard Business Review, 73(5), 120–134. Rugman, A. M., & D’Cruz, J. (1997). The theory of the flagship firm. European Management Journal, 15(4), 403–412. Rugman, A. M., & Kirton, J. (1998). Multinational enterprise strategy and the NAFTA trade and environment regime. Journal of World Business, 33(4), 438–454. Rugman, A. M., Kirton, J., & Soloway, J. (1999). Environmental regulations and corporate strategy. A NAFTA perspective. Oxford: Oxford University Press. Rugman, A. M., Van den Broeck, J., & Verbeke, A. (Eds) (1995). Beyond the diamond. Greenwich: JAI Press. Rugman, A. M., & Verbeke, A. (1990). Global corporate strategy and trade policy. London: Routledge. Rugman, A. M., & Verbeke, A. (1998a). Corporate strategies and environmental regulations: An organizing framework. Strategic Management Journal, 19, 363–375. Rugman, A. M., & Verbeke, A. (1998b). Corporate strategy and international environmental policy. Journal of International Business Studies, 29(4), 819–834.

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Rugman, A. M., & Verbeke, A. (2000). Six cases of corporate strategic responses to environmental regulation. European Management Journal, 18(4), 377–385. Rugman, A. M., & Verbeke, A. (2001). Environmental policy and international business. In: A. M. Rugman & T. L. Brewer (Eds), The Oxford handbook of international business (pp. 537–557). Oxford: Oxford University Press. Rugman, A. M., & Verbeke, A. (2004). A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35, 3–18. Rugman, A.M. & Verbeke, A. (2005). Towards a theory of regional multinationals: A transaction cost economics approach. Management International Review, 1(Special Issue), 5–17. Tsai, T., & Child, J. (1997). Strategic responses of multinational corporations to environmental demands. Journal of General Management, 23(1), 1–22. Van Tulder, R., & Kolk, A. (2001). Multinationality and corporate ethics: Codes of conduct in the sporting goods industry. Journal of International Business Studies, 32(2), 267–283. Vernon, R. (1994). Research on transnational corporations: Shedding old paradigms. A review of the United Nations Library on Transnational Corporations. Transnational Corporations, 3(1), 137–156. Vernon, R. (1993). Behind the scenes: How policymaking in the European Community, Japan, and the United States affects global negotiations. Environment, 35(5), 13–43. Wartick, S. L., & Mahon, J. F. (1994). Toward a substantive definition of the corporate issue construct. Business and Society, 33(3), 293–311. WCED. (1987). Our common future. Oxford: Oxford University Press.

PART D: A CAREER IN PROGRESS: RETROSPECTIVE ESSAYS

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RETHINKING INTERNATIONAL MANAGEMENT THEORY IN A WORLD OF REGIONAL MULTINATIONALS Alan M. Rugman INTRODUCTION I am honored to receive the Booz Allen Hamilton/strategy+business Eminent Scholar Award in International Management. I am even more honored to follow in the footsteps of such distinguished previous recipients of the AOM-IMD (Academy of Management-International Division) Distinguished Scholar Award as: John Child, Christopher Bartlett, Sumantra Ghoshal, John Dunning, and Yves Doz. Like them, I shall reflect here on my past contributions to scholarship, and then use this work as a building block for the major part of this paper, which is on the need for new and relevant theory in the field of international management. In my scholarly career, I have attempted to develop theory based on the empirical realities of the field. I define the key unit of analysis in the field of international business (IB) to be the multinational enterprise (MNE). Theories of IB need to explain the existence, performance and strategic positioning of MNEs. In my earliest work I studied the Fortune 500 from 1960

Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 165–202 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11010-9

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to 1969 to assess the benefits of international diversification (Rugman, 1976, 1979). I found that these large U.S. firms had more stable earnings over time the greater the degree of multinationality, where the latter was proxied by the ratio of foreign-to-total sales. This was an early study of multinationality and performance, where the latter included risk measures (such as variance of earnings) as well as level of return. In subsequent work I was able to apply the pathbreaking work of Buckley and Casson (1976) on internalization theory in a North American context (Rugman, 1980c). That book brought the new theory of internalization to the analysis of the performance of foreign-owned firms in Canada, advancing on the pioneering work of Safarian (1966) in this area of public policy and corporate strategy. Internalization theory was anticipated in my discussion of international diversification and market interpretation, in Rugman (1975), based on a chapter in my earlier doctoral dissertation, but this article only has a sketch of the theory, whereas Buckley and Casson (1976) were the first scholars to develop a serious analytical framework to explain the MNE (Rugman & Verbeke, 2003). I visited the University of Reading in 1976/1977 and interacted with Mark Casson, John Dunning, Bob Pearce and others working on theoretical and empirical aspects of MNEs. I wrote one of the first scholarly reviews of Buckley and Casson (1976) and discussed internalization theory with them on a regular basis. Upon my return to North America I was a Visiting Professor at Columbia Business School in 1978/1979 where I worked with Ian Giddy to develop several papers on the theory of the MNE. I presented these, from 1979 on, at annual and regional meetings of the Academy of International Business and brought many of these papers together in my classic re-statement of internalization theory (Rugman, 1981). In that book I also tested internalization theory, mainly in a Canadian context, building on and extending the earlier applications in Rugman (1980c). One of my key findings was that the Canadian subsidiaries of U.S. MNEs in Canada undertook approximately one half of the R&D of their parents. However, as a control I also found that Canadian-owned firms of comparable size and industry, also did half the R&D of U.S. firms. There was a country factor explaining the R&D gap rather than a foreign-ownership factor. I continued to explore the role of Canadian MNEs in Rugman (1985) and Canadian outward FDI in Rugman (1987). About that time I started to work with Alain Verbeke and we subsequently presented papers on the strategic management of MNEs at the IMD and BPS divisions of the AOM, starting in the late 1980s.

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I regard the AIB and the IMD of the AOM as twin organizations. There is a large overlap in membership and the two organizations now encompass all serious scholars working on the strategic management aspects of MNEs, which is my key area of research. Previously I have discussed the melding of the IB and international management (IM) fields (Rugman, 2002), which I have attributed largely to the development of useful frameworks, such as the integration/responsiveness model, especially by Bartlett and Ghoshal (1989).This crosses over theories of organization with theories of the MNE (Rugman & Verbeke, 1992). In the twin field of IM, I would also argue that the MNE is the key unit of analysis. It is usually at the center of clusters and networks of other firms; indeed, the MNE is sometimes a ‘‘flagship’’ firm (Rugman & D’Cruz, 1992, 2000). Again, IM theories need to have a strong empirical base. In IM, however, it is necessary to find data on the organizational structure, internal processes, internal learning, and knowledge transfers, both within the MNE, and between firms in a network. These organizational data may be more difficult to obtain than the more economics-based data for research in IB. Yet, in principle, the overarching point is that, in IB and IM, it is necessary to build theories based on sound empirical observations. It is also apparent that the IB and IM fields are closely linked, indeed that they overlap into one common area of research. This was discussed in the book recognizing Bartlett and Ghoshal as distinguished scholars (Hitt & Cheng, 2002). There I argued that the ‘‘rich context and organizational complexity of the MNE’’ had led to the development of the integration and responsiveness framework and its application to relevant ‘‘triad’’ cases by Bartlett and Ghoshal (1989) and Rugman (2002). Today the major empirical fact is that the world’s 500 largest MNEs perform most of their activities in their home region – they have an average of 70% of their sales as intra-regional. In this paper, I shall review and then further develop some relevant theoretical frameworks to analyze these data. The frameworks consist of the following key building blocks: (1) The firm-specific advantages (FSAs) and country-specific advantages (CSAs) framework first discussed in Rugman (1981) and used in detail in Rugman and Verbeke (1990). (2) The integration-responsiveness framework of Bartlett and Ghoshal (1989). (3) The work of Rugman and Verbeke (1992) which demonstrated that the FSAs of integration are non-location bound (NLB) and the FSAs of national responsiveness are location bound (LB).

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(4) The recent work of Rugman and Verbeke (2004) developing a new analysis of regional, rather than global, MNEs. The following sections of the paper build on this material and are distilled from the theoretical Chapters 3, 4, and 10 of a new book on The Regional Multinationals (Rugman, 2005). In the first half of the paper a basic firm and country framework of corporate strategy is revised and then extended to take triad regions into account as well as the local and country levels. In the second half of the paper, an extension of the well-known integration/responsiveness matrix is developed and extended to permit analysis of regional and global strategies.

THE EMPIRICAL REALITY OF REGIONAL, NOT GLOBAL, ACTIVITY Today, much economic activity (both in manufacturing and services) is location bound, taking place in clusters in the principal regions of the broad ‘‘triad’’ of the European Union (EU), North America, and Asia. The choice of entry mode and choice of location are complementary strategic management decisions of profound importance to multinational enterprises. A key theoretical insight from MNE scholars, such as Dunning (2001), Enright (2000), and Rugman and Verbeke (2001b), is that in most regional clusters of value-added activities in the triad, the MNEs are embedded as leading participants. The most lucid and extreme articulation of this viewpoint is that of Rugman and D’Cruz (2000) who argue that MNEs act as ‘‘flagship firms’’ to lead, direct, coordinate, and manage strategically the value-added activities of partner firms in a business network, including key suppliers, key customers, and the non-business infrastructure. While Dunning (2001) refers to flagships as leaders only of vertical clusters (as in autos), Rugman and D’Cruz (2000) also include horizontal clusters (as in textiles, financial services, etc.). Rugman and Verbeke (2004) found that the average intra-regional sales of the world’s 500 MNEs is 71.9%. Of the 380 firms studied, over 80% (320) derive most of their sales in their home-region of the triad. This relative sales dominance in a specific regional market, rather than a very wide and evenly distributed spread of sales, reflects five underlying issues critical to the MNE’s functioning. First, it demonstrates the fallacy of the so-called ‘global’ products. If most MNEs’ sales are unevenly distributed across the globe, and mostly concentrated in just one geographic market, this means

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that products are not really global in the sense of being equally attractive to consumers all around the world. Second, the lack of global market success reflects the limits to the NLB nature of the MNEs’ knowledge base, i.e., its FSAs. Firms may have sophisticated and proprietary technological knowledge, brand names, etc., but there appear to be severe limits to the joint international transferability of this knowledge and its acceptance by customers across regions, irrespective of whether this knowledge is embodied in final products and then exported, transferred as an intermediate product through licensing or used in foreign affiliates through FDI. Third, the perceived lack of market performance across regions also points to a relative inability to access and deploy the required location bound FSAs, which would lead to benefits of regional and national responsiveness. Fourth, if the MNE’s market position is very different in the various regions of the world this indicates the need for very different competitive strategies: a leadership role in one market requires very different patterns of decisions and actions than the role of a (perhaps ambitious) junior player in another market. This should obviously be reflected in the deployment of specific combinations of NLB- and LB-FSAs in each region. Unfortunately, in spite of much ‘‘think global, act local’’ rhetoric in both the academic and popular business press, there appears to be little empirical evidence that this approach has permitted host-region market penetration levels similar to the ones obtained in the home region. Fifth, the four elements above have important implications for MNE governance. It might be incorrect to attribute the present relative lack of overseas market success of many firms to an inappropriate governance structure. The presence of multiple environmental circumstances may also be critical here (powerful foreign rivals in other triad regions; government shelter of domestic industries; buyer preferences for local products; cultural and administrative differences as compared to the home region, etc.). However, the need for regional strategies does suggest the parallel introduction of a regional component in the MNEs’ governance structure to deal appropriately with the distinctive characteristics of each leg of the triad, and with the regions outside of it, much in line with Ohmae’s (1985) prescriptions. This perspective is developed further in the later sections of the paper. This need for distinct regional strategies is an important observation as many well known strategy and IB scholars keep developing normative models that advocate simple globalization strategies as a set of purposive decisions and actions instrumental to a broad and deep penetration of

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foreign markets, i.e. extreme geographical fragmentation of sales. Authors who have recently argued in favor of a global strategy and ignore the realities of regionalization include: Vijay Govindarajan and Anil K. Gupta (2001), J. P. Jeannet (2000) and George Yip (2002). Regionalization should be viewed as an expression of semi-globalization (Ghemawat, 2003). It implies that international markets are characterized neither by extreme geographical distribution of sales, nor complete integration. Incomplete integration means that location specificity, in this case regional specificity, matters. Only in a context of incomplete integration is there scope for international MNE strategy that is conceptually distinct from conventional domestic strategy.

The Meaning of Regional Strategies The majority of the world’s largest 500 companies are MNEs; i.e., they produce and/or distribute products and/or services across national borders. Yet, very few MNEs are ‘global’ firms, with the ability to sell the same products and services around the world. The challenge of selling standardized products and services across borders, as originally advocated by Levitt (1983), has been dealt with appropriately in most of the mainstream IB literature. It is now widely recognized that benefits of integration resulting from global scale economies can only be reaped if accompanied by strategies of national responsiveness, guided by both external pressures for local adaptation and internal pressures for requisite variation. What is unfortunately not correctly understood is that, irrespective of MNEs’ efforts to augment their alleged NLB-FSAs with a LB component, no balanced geographical dispersion of sales is achieved in most cases. Instead, the data indicate that most MNEs are regionally based in their home-triad market, of either North America, the EU, or Asia (principally Japan). An apparent paradox is that a very large MNE in terms of overall foreign sales volume can have a concentration of its international activities in its home-triad region and lack a truly global dimension. While it could be argued that there is more to globalization than sales dispersion, for example, foreign assets and foreign employment have sometimes been used together with foreign sales to compose a ‘‘transnationality index’’, it should be recognized that only sales dispersion constitutes a true performance measure at the output level. If MNEs have exhausted their growth potential in the home-triad region and then decide to venture into other regions, they may face a liability of regional foreignness, including several additional risks that were absent in

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the host region and may be of an economic, cultural, administrative, or geographic nature, in accordance with Ghemawat’s (2001) recent observation that distance still matters. Given the size of each triad region, most of the advantages of standardization can often be achieved within the hometriad region, and this process is enhanced if governments in this region pursue policies that promote internal coherence via social, cultural, and political harmonization (as in the EU) or even merely via economic integration (as in North American Free Trade Agreement (NAFTA) and Asia). A related point is that inter-block business is likely to be restricted relative to intra-regional sales by government imposed barriers to entry. For example, the EU and the United States are likely to fight trade wars and be responsive to domestic business lobbies seeking shelter in the form of subsidies and/or protection. Cultural and political differences among members of a single-triad region may remain, but these will mostly be less significant than across triad regions (Rugman, 2000). The end result is the persistence of MNEs that will continue to earn 80% or more of their income in their home-triad region. There will only be a limited number of purely ‘global’ MNEs in the top 500. For 365 of the 380 firms included in our study, data were available that permitted a further decomposition of their foreign sales. It should be noted that many of the remaining 135 large 500 companies are actually operating solely in their home region, with no sales elsewhere, and for others there are insufficient data. As reported earlier, of the 365 with data, the vast majority (320) are home-region based, having few sales in the other two regions of the triad. A limited set (36) is ‘bi-regional’, which we define as having at least 20% of sales in two legs of the triad. Only nine MNEs are truly ‘global’, with at least 20% of their sales in all three regions of the triad (see Table 1). Table 1. Classification of the Top 500 MNEs. Type of MNE

No. of MNEs

% of 500

% of 380

Weighted average % Intra-regional Sales

Home-region oriented Global Bi-regional Host-region oriented Insufficient data No data

320 9 25 11 15 120

64.0 1.8 5.0 2.2 3.0 24.0

84.2 2.4 6.6 2.9 3.9

80.3 38.3 42.0 30.9 40.9 NA

Total

500

100.0

100.0

71.9

Source: Rugman and Verbeke (2004).

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The definitions adopted earlier in the paper are as follows: (a) Home-region oriented. Three hundred and twenty firms have at least 50% of their sales in their home-region of the triad. The threshold of 50% was chosen as we assume that a region representing more than 50% of total sales will systematically both shape and constrain most important decisions and actions taken by the MNE. It also implies a concentration of the MNE’s customer-end-related FSAs in that region. The concept of customer-end FSA is explained in the next section. (b) Bi-regional. Twenty five MNEs are bi-regional, defined as firms with at least 20% of their sales in each of two regions, but less than 50% in any one region. This set includes 25 firms with sales ranging between 20% and 50% in the home region and 20% or over in a second region. The threshold of 20% was chosen because we assume that having two regional markets each representing at least one-fifth of a ‘$10+billion’ firm’s sales reflects impressive market success resulting from extensive ‘customer-end’ FSAs in those two markets. The question could then be raised whether a particular absolute volume of sales, irrespective of the 20% threshold percentage, would make a firm bi-regional. In our framework, an absolute sales volume is, in itself, insufficient. We view the status of a region from a micro-level, corporate strategy perspective; here, this status is fully dependent on the relative sales achieved vis-a`-vis market performance in other regions. (c) Host-region oriented. Eleven firms have more than 50% of their sales in a triad market other than the home region. (d) Global. Only nine of the MNEs included are global, defined as having sales of 20% or more in each of the three regions of the triad but less than 50% in any one region of the triad. The 20% figure is less than the one-third required for an equal triad distribution, and so is biased downwards in favor of finding global MNEs. Conceptually, it implies the successful deployment of customer-end FSAs in three distinct markets. The North American and European region of the broad triad are of approximate equal size, as measured by GDP. Asia is smaller than either as measured by GDP, but is nearly equal in terms of purchasing power parity (PPP). In other words, weighing the broad triad by GDP or PPP will not generate more global firms. Within each of the groups above, the home-triad region sales weighted averages are as follows: (a) Home-region oriented (320 firms): 80.3% (b) Bi-regional (25 firms): 42%

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(c) Host-region oriented (11 firms): 30.9% (d) Global (9 firms): 38.3%

ANALYSIS OF REGIONALIZATION The basic model of the international business field distinguishes between country-effects and firm-level effects. In earlier work a matrix of CSAs and FSAs was developed (Rugman, 1981; Rugman & Verbeke, 1992). A simple framework of CSAs and FSAs is the basic building block for international business strategy. (An alternative approach, Dunning’s ‘‘eclectic’’ framework, has been analyzed recently by Eden (2003). I prefer the CSA/FSA approach, as developed below.) First, there is a set of firm-specific factors that determine the competitive advantage of an organization; we call these FSAs. An FSA is defined as a unique capability proprietary to the organization. It may be built upon product or process technology, marketing, or distributional skills. The FSAs possessed by a firm are based ultimately on its internalization of an asset, such as production knowledge, managerial, or marketing capabilities over which the firm has proprietary control. FSAs are thus related to the firm’s ability to coordinate the use of the advantage in production, marketing, brands, or the customization of services. Second, there are country factors. These, of course, are highly relevant to firms involved in international trade and investment. They can lead to CSAs which affect a firm’s strategy. For example, the CSAs can include political, cultural, economic, and financial factors which are parameters exogenous to the firm. The CSAs can be based on home-country natural resource endowments (minerals, energy, forests), or on the labor force and cultural factors. If CSAs draw on natural factor endowments of a nation then they include the key variables in its aggregate production function. For example, CSAs can consist of the quantity, quality, and cost of factor endowments such as natural resources, labor, and land. But CSAs also include demand conditions, the political, cultural and regulatory systems, and infrastructure. In Porter (1990) terminology, the CSAs form the basis of the global platform from which the multinational firm derives a home-base ‘‘diamond’’ advantage in global competition. Tariff and non-tariff barriers to trade and other government regulation also influence CSAs. Building on these CSAs, the firm’s leading managers make decisions about the efficient global configuration and coordination between segments of its value chain (operations,

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marketing, R&D, and logistics). The skill in making such decisions represents a strong managerial, indeed organizational, FSA, which can be dynamic in a Penrose sense (Rugman & Verbeke, 2002).

THE CSA/FSA MATRIX Managers of most MNEs use strategies that build upon the interactions of CSAs and FSAs. They do this so that their firm or business units can be positioned in a unique strategic space. To help formulate the strategic options of the MNE, it is useful to identify the relative strengths and weaknesses of the CSAs and FSAs they possess. Fig. 1, the CSA/FSA matrix, provides a useful framework for discussion of these issues. It should be emphasized that the ‘‘strength’’ or ‘‘weakness’’ of FSAs and CSAs is a relative notion. It depends upon the relevant market, the CSAs and the FSAs of potential competitors. Cell 1 firms are generally resource based and/or mature firms producing a commodity-type product. They have production-based FSAs due to location and low costs, which are then the main sources of the firm’s competitive advantage. Thus, these firms are following low-cost price competition strat-

Firm-Specific Advantages CountrySpecific Advantages

Strong

Weak 1

3

2

4

Strong

Weak

Weak Fig. 1.

The CSA/FSA Matrix.

Strong

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egies. Some firms can be positioned in cell 1 when they benefit from government policies such as discriminatory subsidies, taxes and/or tariffs, a type of ‘‘shelter’’ CSA. Firms in cell 4 are firms with strong FSAs in marketing and customization. These firms may, for example, have strong brand-name products, and they can follow a differentiation strategy. In cell 4, the FSAs dominate, and the home-country CSAs are not essential. Cell 2 firms represent inefficient, floundering firms with no strong CSAs or FSAs; these firms are preparing to exit or to restructure. Cell 2 can also represent domestically based small- and medium-sized enterprises (SMEs) with little foreign exposure. In cell 3, both FSAs and CSAs are strong, e.g., where resource-based CSAs are complemented with strong FSAs in production and/or marketing. In terms of business strategy, cells 3 and 2 are unambiguous in their implications. A cell 3 firm can benefit from strategies of both low cost and differentiation. Such a firm is constantly evaluating its production mix. By adopting new product lines, developing dynamic organizational capabilities, and maintaining an effective strategy, the firm can maintain its overall position in cell 3. In cell 2 there is no alternative but to restructure or to eventually leave the market. Cells 4 and 1 are credible positions for different types of firms. For instance, a cell 4 firm that has strong FSAs in marketing (brands or customization) can operate internationally without reliance on the CSAs of the home or host nations. For such a firm, cell 4 does not signal a CSA weakness; the CSA is not relevant. In contrast, cell 1 can have resource-based multinationals with product lines determined more by CSAs than by FSAs. By improving potential FSAs in marketing or product innovation and increasing value added through vertical integration, the cell 1 firm can move to cell 3, where it is no longer just a producer of staple products, but it has added new FSAs in marketing or innovation. It is useful to note the following two points. First, if the firm has a conglomerate structure it would be more useful to situate each division or product line individually, recognizing that different units of the diversified firm would use different generic strategies. Second, changes in the trading environment, such as the EU 1992 single-market measures, or the EU 1999 single currency, or the Canada–U.S. Free Trade Agreement and NAFTA, could affect the relative CSAs of the firms. To the extent that CSAs are improved, the firms will tend to move to cell 3, and to the extent that the CSAs are hampered, the firm or some of its product lines may move to exit, as in cell 2. In other words, regulatory changes directly affect the CSAs whereas the FSAs are indirectly affected.

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THE REGIONAL AND GLOBAL SCOPE MATRIX This two-by-two FSA/CSA matrix can now be modified into a new matrix, as shown in Fig. 2. On the horizontal axis is shown the regional or global reach of the FSAs of a firm. On the vertical axis is shown the regional or global scope of the locational advantages of a firm. The regional matrix can now be used for analysis of firm strategy in connection with the geographic reach of FSAs and the geographic scope of locational factors. It differs from the CSA/FSA matrix as now both axes represent aspects of corporate strategy. On the horizontal axes the firm’s FSAs are exploited either regionally or globally. On the vertical axis the firm’s geographic scope (either regional or global) determines the locus of competitive advantage for the firm. In turn, this depends upon the nature and impact on the firm of relevant CSAs, but the CSAs themselves are parameters to which managers react. The regional matrix will allow us to position the 380 firms for which data on intra-regional sales can be obtained. The vertical axis becomes operational for managers as, for each firm there are data available reflecting its geographic scope. Of course for 320 of the 380 firms with data, there is an average of 80% of their sales in their home region – all of these firms will be on the lower (regional) half of the vertical axis. Only nine of the 380 firms

Geographic Reach of FSAs Geographic Scope of Locational FSAs

Regional

Global

1

3

2

4

Global

Regional

Fig. 2.

The Regional and Global Dimensions of FSAs.

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are unambiguously ‘‘global’’ in their geographic scope. The bi-regional firms are also constrained in their geographic scope to the regional half of the vertical axis. We now turn to analysis of these three types of firms, using this new regional matrix. On both axes of the regional matrix, a distinction is made between regional and global dimensions. For example, on the vertical axis, at the regional level, the relevant indirect CSA affecting a firm’s geographic scope can be a national government regulation or an EU or NAFTA regulation; at the global level it is a World Trade Organization (WTO), IMF, or UN type of instrument. As discussed earlier, other locational effects of CSAs on a firm can also be modeled to include culture, infrastructure, and resourceendowment factors at local/regional, or world levels. On the horizontal axis the geographical reach of an FSA can be based, for example, on a national patent or a regional EU ‘‘eco’’ labels green capability (Rugman & Verbeke, 1998b). For a global reach to the FSAs it is necessary for the FSA to become a global standard or a global brand, and/or have global benefits of integration, with economies of scale and scope. This matrix does not handle ‘‘national responsiveness’’ directly, and a second matrix to handle LB-FSAs is introduced later to do so. In this regional matrix, only cell 3 is purely global. A firm can be both global in the reach of its FSAs and in the scope of its locational advantages; the latter based on the CSAs relevant to the firm. In contrast, cell 2 is purely regional. By regional is meant home region. A firm can be purely regional when the reach of its FSAs is limited to its home country and/or home region, while the geographic scope of its locational advantage is also limited to its home region. In contrast, in cell 4, bi-regional firms appear. These have a global reach to their FSAs, but their geographic scope of location is not fully global but is limited to two regions. The bi-regionals have more than 20% of their sales in two regions of the triad and less than 50% in any one region. They are more ‘‘global’’ than the home-region firms in their reach of FSAs, and individual cases will need to be analyzed to find the specific reasons for their positioning in the regional matrix. Finally, cell 1 is a case not observed often, where there is only a regional reach of FSAs, despite a potentially global scope for locational advantages. Firms remain in cell 2 when the regional reach of their FSAs acts as a constraint on the development of their geographic scope. This leads to the following key analytical classifications: Cell 3: Global firms – these have a global reach of their FSAs and a global scope for locational advantages; they are in all three regions of the triad.

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Cell 4: Bi-regional firms – these have a global reach for their FSAs, but they are not global in their geographic scope, as they only have a significant presence in two regions of the triad. Cell 2: Home-region firms – they have FSAs with a reach only in their home region, and they also have a home-region locational scope. Cell 1: Firms with home-region FSAs but a global scope in location – there are very few of these in practice, although many firms think that they are global in scope; data show, however, that they are actually home-region based, in cell 2. We call cell 1, the ‘‘myth’’ of global scope. In cell 1, firms cannot develop the complementary FSAs with a global reach that are required to exploit the global scope of their locational advantages. While the environment of international business is becoming more global, it is very difficult for firms to transfer their successful regional FSAs into global FSAs. Often it requires developing new FSAs in ‘‘national responsiveness’’, discussed later. Thus many of the potential cell 1 firms remain in cell 2, where their regional reach of FSAs is matched by a locational advantage in one specific region – usually their home region. The literature on globalization and global strategy has tended to ignore the complexities involved in this cell of the myth of global scope, and it has usually been assumed that global scope is all a firm needs to become global. But firms also need a global reach of their FSAs, and this can only be achieved by a new alignment of strategy and structure, since a global reach of FSAs needs a different type of firm than one with a local or regional reach of FSAs. These complexities of global and regional strategy and structure will be explored later. Next, we apply the framework of Fig. 2 to analyze some specific firms in each of the major cells. This will help us to classify the differences between regional and global strategies of the world’s largest firms. Cell 3: Here a firm follows a pure global strategy, such as Levitt’s standardization of production with economies of scale, or a global brand, but there are few such examples. One is the luxury products of LVMH, whose global FSAs in branding and distribution is only possible as a result of its relatively homogeneous customer base of wealthy individuals around the world. For other global firms, strategy is more complex. For example, CocaCola, though global in terms of sales, needs to adapt its products to local tastes. This type of firm has a strong global FSA in terms of its brand name, but it is also ‘‘nationally responsive’’ in its product lines, distribution, and even the recipe of its best-known product, to local tastes. The strategy of national responsiveness cannot be fully analyzed in Fig. 2, so we will develop another framework later in this paper to look into this issue.

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Cell 2: Here local companies are affected by local, home-country regulations – a good example in the list of the world’s 500 largest companies is the U.S. Post Office. Others are retail firms like Kroger. Carrefour is a cell 2 firm with regional FSAs. It is subject to regional regulations affecting its location. Carrefour expanded from its French-based FSAs across Europe as a result of the expansion of the EU (a regional level locational factor). It is discussed in more detail below (in the retail section). Cell 4: Here a bi-regional company, such as Toyota Motors (which has 36.6% of its sales in NAFTA) has a regional scope for its location but a global reach in its FSAs. Toyota has developed global brands in quality and style, but it has to operate bi-regionally. It can assemble cars across the Canada–U.S. border, as there is regional free trade in NAFTA, see Rugman (1990). In addition, Toyota has a strong home base, with 49.2% of its sales in Asia; it is bi-regional, as are many other firms in cell 4. Some European pharmaceutical firms are also bi-regional, with large sales in North America. An example is GlaxoSmithKline. While most pharmaceutical firms think that they have global FSAs in their patented drugs, in practice local regulations prevent the development of a standardized distributional system. Even within the EU there are country differences in the healthcare systems which can prevent a regional solution. These local regulatory pressures keep pharmaceutical firms in cell 4. News Corp. is a host-region company in cell 4 that has regionally based locational factors, but it has global reach to its FSA. The Australian firm, News Corp., operates on a North American and European basis; it is a hostregion oriented company with over 75% of its sales in North America, 16% in Europe, and only 9% in the home region of Asia. It benefits from a global reach in entertainment FSAs based on satellite TV technology. Yet, it has only regional scope for its locational advantages as its brand names of Fox in North America and Sky in Europe and Asia are segmented by telecommunications regulations. Nike is an example of a home-region company in cell 4 with a global reach of FSAs. It has 58% of its sales in North America and 29% in Europe, but with only 13% of sales in all of Asia, making it bi-regional rather than global. This firm outsources 99% of its production to South East Asia, but its brand is now subject to lobbying by NGOs on a global basis. In terms of employment, of the 22,000 Nike employees, over half are located in the United States (54.7%). If we include other countries in the Americas, this number rises to 60.2%. Europe, the Middle East, and Africa account for another 24.9%. Asia and the Pacific account for about 14.9% (or 3,000 employees), but this region is also home to about 660,000 employees of

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independent contract companies that supply Nike products. These independent contractors are not owned by Nike, but are part of its supply network. Nike is only indirectly responsible for the working conditions of the employees working for these independent firms. Yet, due to the adverse perceived impact to its brand image of ‘‘sweatshop’’ conditions in these factories, Nike is now assuming some responsibility for the labor conditions in the factories of its independent suppliers. The Nike case indicates the importance of understanding the precise FSAs (or capabilities) of an MNE. Nike is not successful because it outsources in Asia. Instead, it beats other competitors because of its business model, in which its brand name is the dominant FSA. This brand name signifies high quality, stylish, ‘‘cool’’ shoes. All its competitors also outsource significant portions of production in Southeast Asia. This access to cheap labor is a country-factor condition, not an FSA. In a similar vein, Wal-Mart (discussed next) beats other firms due to its unique business model, not by outsourcing to China. The Nike and Wal-Mart cases illustrate the crucial importance of the sales data used in this paper. These are the best data available on the strategic positioning and success of MNEs. In general, as shown in Fig. 3, most of the firms can be generically classified as global in cell 3; home-region based in cell 2; and bi-regional in cell 4. Next, we develop a framework to analyze the actual strategies and structures of firms, and the changes in strategy required by the regional effect. Geographic Reach of FSAs Geographic Scope of Locational FSAs

Regional 1

Global 3 Global

Global 2

4 Home-regional

Bi-regional

Regional

Fig. 3.

Firms in the Regional and Global Matrix.

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This will allow us to take account of strategies of national responsiveness in a more detailed manner than the current framework allowed.

THE INTEGRATION/RESPONSIVENESS MATRIX A major trend that has affected the thinking of corporate MNE strategists over the last 20 years is that of balancing a concern for economic integration with national responsiveness. Integration can be defined as the production and distribution of products and services of a homogeneous type and quality on a worldwide basis. Sometimes integration is confused with globalization. It has been argued (by Yip, 2002, and others) that to a large extent MNEs have homogenized products and helped to spread international consumerism. Yet while throughout the triad of North America, the wealthier nations of Europe and Japan, there has been a growing acceptance of standardized consumer electronic goods, automobiles, computers, calculators, and similar products, the data in this paper indicate that sales are regional rather than global. Thus the goal of efficient economic performance through a universal integration strategy may be achieved regionally, not just globally. The vertical axis can thus represent either global or regional integration. MNEs are open to the charge that they are overlooking the need to address local concerns. National responsiveness is the ability of MNEs to understand different consumer tastes in segmented regional or country markets and/or to respond to different national standards and regulations that are imposed by autonomous governments and agencies. This axis is driven by CSAs, but the firm makes the ability to deliver national responsiveness into a LB-FSA. Multinationals continually have to deal with the twin goals of economic integration and national responsiveness. Both axes deliver FSA; the vertical has NLB-FSA while the horizontal has LB-FSAs. Conceptually, the twin issues of integration and national responsiveness can be analyzed through the use of Fig. 4, which has been adapted from Bartlett and Ghoshal (1998). The vertical axis measures the benefits of economic integration. The movement up the axis results in a greater degree of economic integration; this generates economies of scale as a firm moves into international markets selling its products or services. These economies are captured as a result of centralizing specific activities in the value-added chain. They also occur by reaping the benefits of increased coordination and control of geographically dispersed activities.

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Economic Integration

National Responsiveness 1

3

2

4

High

Low

Low Fig. 4.

High

The Integration and National Responsiveness Matrix.

The horizontal axis measures the benefits of corporations being nationally responsive. Companies can address local tastes and government regulations. This may result in a geographical dispersion of activities or a decentralization of coordination and control for individual firms. Firms with the ability to be nationally responsive have an organizational capability in the form of a LB-FSA. It is location bound as the firms need a different strategy in each country or regional market. On the basis of the two axes in Fig. 4, four situations can be distinguished. Cells 1 and 4 are the simplest cases. In cell 1 the benefits of integration are high, and the benefits of national responsiveness are low. This focus on economies of scale leads to competitive strategies that are based on price competition and/or brand-name recognition. The opposite situation is represented by cell 4, where the benefits of national responsiveness are high, but the benefits of integration are low. In this case companies adapt products and services to satisfy the high demands of sovereign consumers and governments, and they can ignore economies of scale or other FSAs. Cells 2 and 3 of Fig. 4 reflect opposite situations. Cell 2 incorporates those cases where the benefits of both integration and national responsiveness are low. Both the potential to obtain economies of scale and the benefits of being sensitive to country differences are of little value. Many small- and medium-sized firms (SMEs) are here. In cell 3 the benefits of integration and national responsiveness are both high. There is a

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strong need for integration in production, along with high requirements for country or regional adaptations in marketing. Cell 3 is the most challenging cell and one in which many successful ‘‘transnational’’ MNEs operate. Using this framework, we can analyze the impact of various exogenous policy shocks and trends on different industries, firms, banks, and other private sector institutions.

THE REGIONAL STRATEGY MATRIX Fig. 5 presents a new framework that distinguishes between global, regional and national strategies for MNEs with geographically strongly dispersed sales, assets, and employees. The vertical axis represents the actual product characteristics (ex post) of an MNE at these three levels: world (or ‘‘global’’) product, regional (or triad) product; and nation-based product. The extent to which products are standardized at the global, regional, or national level represents the ‘‘revealed preferences’’ of MNEs to institutionalize a particular approach at the world scale or to adapt to the requirements of national/regional markets. In contrast, the horizontal axis is more a reflection of ‘‘stated preferences’’, i.e., the extent to which MNE Firm’s Organizational Structure and Decision-making Power Corporate Headquarters

Firm’s Product Characteristics Global Product

Region-based Product

LocalCountry Product

Regional Centers

National Subsidiaries

1

4

7

2

5

8

3

6

9

Fig. 5.

The Regional Strategy Matrix.

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managers view strategic, decision making as a process concentrated in one home base or dispersed across regions or countries. More specifically, the horizontal axis represents the location of decisionmaking power (ex ante) for corporate, business, or functional strategy issues. Here, the question to be answered is whether all of the MNE’s key strategic decisions (e.g., choice of product/market niches, choice of strategic management tools to outperform rivals, key decisions made in each functional area, including R&D, production, marketing, distribution, human resources management), are taken in a single location, or whether at least a substantial portion of these decisions is taken in several ‘‘home bases’’ at the national or regional levels. Fig. 5 is an adaptation of Rugman and Verbeke’s (1993) framework on ‘‘global’’ strategies. They argued that the truly important decisions to be taken by MNEs are related to two parameters. First, the number of home bases with which they function, i.e. the number of locations where important strategic decisions are taken (equivalent to the horizontal axis of Fig. 5, where the number of home bases determines strategic decision making). Second, the use of NLB versus LB FSAs, (equivalent to the vertical axis of Fig. 5, whereby the nature of the MNE’s FSAs determines its product offering). The NLB-FSAs allow various approaches to standardize the MNE’s product offering across borders and to earn benefits of integration (related to scale, scope and benefits of exploiting national differences). The LB-FSAs provide the potential to gain benefits of national responsiveness. The difference with Rugman and Verbeke’s (1993) resource-based perspective on the integration–national responsiveness model is that Fig. 5 explicitly introduces a regional dimension to the analysis. This is now needed due to the emerging empirical work, Rugman (2000), which suggests that ‘‘global’’ strategies are not appropriate for most MNEs that actually operate on a triad/regional basis. More specifically, on the horizontal axis this regional dimension implies that a number of strategic decisions are left to region-based headquarters, rather than nation-based ones. The vertical axis implies the development of FSAs useful at the level of the set of nations that form the region. These are region-bound company strengths: they can contribute to survival, profitability, and growth beyond the geographic scope of a single nation, but these ‘‘regionally responsive’’ strategies are still location bound, in the sense that they cannot be deployed globally (Morrison, Ricks, & Roth, 1991; Morrison & Roth, 1991). In this context, Yip’s (2002, p. 7) view of a global company and global strategy is confined to movement between cells 1, 2 and 3 of Fig. 5, which is a limited subset of all MNEs.

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Indeed, most MNEs rely on larger sets of LB and region-bound FSAs as the basis for their competitiveness. Fig. 5 helps identify some of the more important mistakes made by proponents of globalization and a global strategy for MNEs. They view as a reflection of a global strategy not only cell 1, but also cells 2, 3, 4, and 7 (where strategies other than globalization are required). In cells 2 and 3, they focus on the decisions and actions of corporate leaders, typically the CEO, the top management committee, and the MNE’s board of directors. It is undoubtedly the case that most key financial decisions in MNEs are taken at that level. However, even if all major corporate strategy decisions are taken centrally, typically in the home country (left column of Fig. 5), as is the case for many companies in, e.g., the computer business (both hardware and software), cells 2 and 3 reflect, respectively, the existence of substantial regional and national responsiveness regarding the product offering (including its service component) that actually is provided to the market. In other words, MNEs that tailor their product offering to regional and national circumstances do not pursue a simple global strategy as suggested by cell 1. Considerable resources must be allocated to allow for the required level of sub-global responsiveness in terms of what is being delivered to the market. In addition, even if the MNE’s product offerings were largely global, this does not necessarily imply that all important decisions on market penetration, distribution, advertising, etc. can be taken centrally. Bounded rationality constraints are likely to force corporate management to delegate important decisions to the regional and national levels, thereby positioning the firm closer to cells 4 and 7 of Fig. 5. This point is vitally important, as, at the other end of the academic and policy-oriented spectrum, many anti-globalization critics suffer from a similar misperception; they view MNEs as centrally directed, profit maximizing entities, eager to sell standardized products around the globe. Anti-globalization critics state that MNEs are insensitive to host-country and hostregion demands, especially those of host-country governments. In fact, the presence of intense international rivalry and the liability of foreignness that every MNE faces in foreign regions of the world, forces MNEs to be particularly sensitive to the requirements of host-country governments and other salient stakeholders (Rugman & Verbeke, 1998a). Of course, this does not imply that MNEs can or should adopt an approach in cell 9, and be fully polycentric, with products carefully tailored to each national market and most strategy decisions left to host-country subsidiary managers. Much conceptual and empirical evidence suggests that a ‘‘multi-national’’ approach leads to overlapping efforts and duplication in

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innovation, inconsistent national strategies, opportunistic behavior by subsidiary managers, and more generally a waste of resources and lack of clear strategic direction (Bartlett & Ghoshal, 2000). The great strength of an MNE is to overcome market imperfections characterizing national markets and to develop systemic, network-related rather than asset-based FSAs (see Dunning & Rugman, 1985). Even for MNEs with a polycentric administrative heritage, cells 6 and 8 are likely much more relevant than cell 9 of Fig. 5. In cell 6, attempts are made to achieve decision-making synergies across regional markets, e.g., by developing pan-European or pan-American strategies in particular functional areas (Rugman & Verbeke, 1992). In cell 8, economies of scale and scope are pursued by the national subsidiary managers themselves, through standardizing at the regional level their product offering across those national markets that have strong similarities in demand. In that case, subsidiary initiative is critical (Birkinshaw, 2000; Rugman & Verbeke, 2001a). The strategy and international management literature has done a good job of distinguishing between cells 1 and 9, but it has not addressed most of the other cells. For example, the basic matrix of integration (cell 1) and national responsiveness (cell 9) popularized by Bartlett and Ghoshal (1989) distinguished between a pure global cell 1 strategy and the ‘‘act local’’ national responsiveness strategy of cell 9 of Fig. 5. In addition, the key contribution of their ‘‘transnational solution’’ framework was the prescription that MNEs should usefully combine strategies in cells 1 and 9. They should attempt to develop appropriate strategies for each separate business, for each function within that business, and for each task within that function. MNEs need the capability to implement either a national or a global approach across all these dimensions. The Bartlett and Ghoshal (1989) framework thus can usefully explain cell 3 (centralized, global strategic decision making combined with local product offering), i.e., the think global – act local approach. It also allows the analysis of less common cases in cell 7, whereby powerful national subsidiaries are responsible for delivering global products, but choose themselves which products have the most potential in their national markets and largely take responsibility for the delivery, an approach found in many global professional services companies. Yet their framework cannot readily handle cell 5, regional triad-based strategies, nor the intermediate cases of cells 2, 4, 6, and 8, i.e. all cases whereby the regional level is important. Data suggest that an increasing number of MNEs operate largely at the regional level. Therefore, regional elements are becoming increasingly important in many MNEs, either in terms of strategic decision making, or

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actual product offering. If, as this empirical evidence suggests, many MNEs are at least partially operating in cell 5 on a triad basis, then any strategy-related analysis of the MNE’s functioning first needs to take into account the requirement to decompose its strategic decision-making processes and product offering along global, regional, and national lines building upon a more complex analytical tool than a conventional integration–national responsiveness matrix. Only then can a correct analysis be performed of the actual extent of triad-based decision-making power and can the rationale for region-based and/or adapted products and services from these MNEs be properly investigated. If the theoretical construct itself of a ‘‘regional solution’’ (cell 5 in Fig. 5) is neglected, little can be expected from empirical research on strategy and structure in MNEs to portray accurately the present importance and future potential of the regional approach. The regional solution of cell 5 of Fig. 5 should be viewed as an efficient, corporate response to several factors. First, internal information processing requirements are critical. If the ‘‘rules of engagement’’ are different in each region (different industry structure, different regulatory system, different competitive position of the firm, different optimal expansion pattern, different product scope, different strategy tools required to outperform rivals, etc.) intra-regional information processing must be sufficiently dense so as to permit affiliates to cope optimally with shared external circumstances and to develop regionally consistent strategies. Second, customer requirements may vastly differ across regions depending upon the level of economic development, culturally determined preferences, etc. Third, region-based cluster requirements may impose specific types of behavior on firms in order for these firms to be perceived as legitimate within the context of regional clusters, especially suppliers, related and supporting industries, the non-business infrastructure, etc. Here, region-based, isomorphic flexibility may be critical for firms to function effectively as true insiders in the region. Finally, political requirements at the regional level are increasingly important. It could be argued that regional cooperation agreements such as the NAFTA and the EU single-market measures mainly represent the elimination of trade and investment barriers, and therefore allow a reduced attention devoted by MNEs to government policy; in fact, regional agreements usually imply not merely the elimination of national regulation, but a shift of regulatory authority to the regional level, and thereby the need to allocate firm resources to monitor and manage relationships at that level. The rigidity of the triad has been explored in Rugman (2000). It is reinforced by the new trade regime of the WTO, which has to devote enormous managerial resources to arbitrate triad-based trade disputes and

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trade-remedy law-type protectionism (as in the bananas, beef hormones, export subsidies, and steel cases). The new protectionism of health, safety, and environmental regulations is preventing an open world market and reinforcing triad markets. The NAFTA is being expanded into the Free Trade Agreement of the Americas (FTAA) and 20 countries are in negotiations to be added to the EU. These political developments reinforce the triad and the need for regional government policies and triad-based firm strategies.

REGIONAL STRATEGY AND THE INTEGRATION/ NATIONAL RESPONSIVENESS FRAMEWORK Perhaps the most important implications of the empirical data on triadbased MNE activities are for research adopting a resource-based approach to MNE functioning. The integration/national responsiveness framework developed by Bartlett and Ghoshal (1989) was made dynamic by DeVinney, Midgley, and Venaik (2000). Earlier, it was given a resource-based interpretation by Rugman and Verbeke (1992). The latter authors have argued that benefits of integration, in the form of scale economies, scope economies and benefits of exploiting national differences require NLB-FSAs. In contrast, benefits of national responsiveness require LB FSAs. The data presented in this paper, however, suggest the need for a radical extension of the framework, as suggested in Fig. 6A–C. Fig. 6A provides a stylized, alternative representation of the conventional integration/national responsiveness framework. Here, the horizontal axis describes the discrete set of critical activities (elements of the various value chain functions) to be performed by MNEs in order to be successful in foreign markets in terms of effectively selling a particular product in those foreign markets. The tasks, numbered from 1 to n, are arranged as a function of the relative needs for NLB-FSAs (area NLB) and LB-FSAs (area LB), with an increasing need for the latter. Bartlett and Ghoshal’s (1989) ‘‘transnational solution’’ case can then simply be interpreted as a firm that can effectively access and deploy the required dual knowledge bundles (of NLB and LB areas) for each activity to be performed for each product within each strategic business unit. In addition, each ‘generic’ subsidiary type (namely strategic leaders, contributors, implementers, and black holes), receives access to an idiosyncratic set of FSA bundles or resources to create such bundles, thereby guaranteeing appropriate selectivity in resource

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Fig. 6. (A) A Resource-Based Re-interpretation of the Integration-Responsiveness Framework. (B) A Conceptual Extension of the Resource-based Integration-Responsiveness Framework: The Home-Region Case. (C) A Conceptual Extension of the Resource-based Integration-Responsiveness Framework: The Host-Region Case.

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allocation. The basic framework described in Fig. 6A does not take into account the learning imperative, the resource-based implications of which have been discussed elsewhere (Rugman & Verbeke, 2001a). The conventional framework needs to be augmented since operating in the ‘‘home’’-triad region may be associated with new needs for the development of ‘‘region-bound’’ FSAs, imposed by regional integration see e.g., the nine cases discussed by Rugman and Verbeke (1991), especially the Volvo Trucks case. This situation is represented in Fig. 6B, where many activities require a set of region-bound FSAs. Hence, regional integration creates both a threat and an opportunity for MNEs as they need to complement the conventional bundles of NLB-FSAs and LB-FSAs with a set of region-bound FSAs. The data in this paper suggest that many of the world’s largest and most international MNEs have been quite successful in doing so. Finally, for the case of MNEs in ‘‘host’’-triad regions, few of these firms are capable of developing and deploying the required set of region-bound FSAs. Instead, a too limited set of region-bound FSAs is usually created, leading to a competence gap. This is represented by the area within the dotted lines in Fig. 6C. Here, the decay of the NLB-FSAs occurs at a much faster rate (depending upon the differences between the regions involved) than in the home-triad region, and it also becomes much more difficult to access and deploy the required conventional LB-FSAs. This is compounded by the fact that region-bound FSAs cannot be simply created to fill the competence gap. This is in contrast with the home-triad leg case, whereby the reach of conventional LB-FSAs is extended across borders or NLBFSAs are ‘‘regionally sharpened’’, and a competence gap can be avoided. This explains why many MNE operations in host regions are primarily sensing instruments with little real effectiveness in market terms, thus giving these operations a ‘‘black hole’’ status. In this context of two generic FSA types, it is interesting to observe that many large MNEs are much less home-region based in terms of their sourcing, both in resource industries and manufacturing, but appear incapable of capitalizing on this broader geographical sourcing to achieve global sales penetration. This has two critical implications. First, it means that the concept of LB- versus NLB-FSAs needs to be extended. The former concept usually implies that profitable deployment is possible only in the home country. The latter concept assumes global transferability. The data suggest that many MNEs have FSAs that are region bound, i.e., they can be deployed across national borders, but only in a limited geographic region. Here, value added through aggregation, in the sense of exploiting similarities across countries (Ghemawat, 2003), can be achieved in the home region

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but appears difficult across regions. Second, the required MNEs’ FSAs in ‘‘back-end’’ activities to achieve broad geographic sourcing (of R&D outputs, raw materials, intermediate inputs, labor, and capital) and production, may be very different from the FSAs required in ‘‘customerend’’ activities to achieve a global distribution of sales. Here, value added through arbitrage (Ghemawat, 2003), i.e., exploiting differences among countries, appears to be achievable more often across regions. Customerend activities that require specific FSA bundles are defined here as all activities included in the interface with the firm’s customers and that are significant to the customer’s decision to purchase goods and services from the firm, irrespective of the value chain function to which these activities belong. The back-end activities requiring specific FSA bundles include all activities outside this critical interface with customers, but which are also significant to the firm’s success, again irrespective of the value chain function in which these activities occur. In this context, there are two hypothetical accumulation patterns over time, of the MNE’s FSAs at the back end (sourcing/production) and the front end (sales). At either end of the value chain, these resource bundles consist of NLB-FSAs, conventional location (read country) bound FSAs and region bound FSAs. The poor market performance achieved in hosttriad regions suggests that most firms are not capable of accessing and deploying the required knowledge bundles at the customer-end side, because these bundles are likely to be quite different from the knowledge combinations effective in the home-triad region, whereas this does not necessarily hold for back-end activities. In broader terms, national and home region organizing principles adopted by MNEs, and engrained in their FSAs, appear to limit most MNEs’ repertoire of customer-end strategies required to be effective in the host-region market. This is particularly interesting given that many markets, especially for commodity products, are characterized by ‘global’ (uniform) prices, driven by ‘global’ competition. In contrast, it appears much easier to adopt effective sourcing (and manufacturing) strategies associated with a broad geographical coverage. The liability of foreignness faced by the MNE (Hymer, 1976; Zaheer, 1995), thus needs to be unbundled into customer-end and back-end components. The new perspective implies that IB research should perhaps be redirected from trying to analyze an MNE’s FSAs through conventional measures (such as R&D expenditures, advertising expenditures, etc.) toward finding appropriate proxies for these firms back- and front-end FSAs. This requires making a distinction between those that are truly transferable globally and those that are location (country) bound and region bound, meaning that

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they are characterized by a rapid decay once attempts are made to deploy them outside the home region. To a large extent, much of the recent work on the globalization of particular value chain functions, such as finance, R&D, purchasing and logistics, production, etc. has focused solely on the back-end portion of the MNE’s FSA bundles. This largely reflects an arbitration issue, with the MNE taking advantage of the incomplete integration of factor markets (Ghemawat, 2003). This may reflect a ‘‘global logic’’ in the minds of managers, but is distinct from a strong global market performance. The most extreme case of this perspective is Porter’s (1986) focus on the MNE’s configuration, i.e., the concentration versus dispersion of its valueadded activities, and the coordination thereof. The limited relevance of the configuration/coordination framework for international business strategy has already been explained elsewhere (Rugman & Verbeke, 1993). It is also useful to note that the important issue of comparative market share performance in different regions, irrespective of how value-added activities are distributed and coordinated across borders, is not taken into account by Porter. In practice, any value chain function can have substantial back-end and customer-end components. The back-end/customer-end dichotomy can therefore not be reduced to the simple distinction between upstream and downstream activities.

REGIONAL MNEs AND STRUCTURE A large body of work has been written on the need for a fit between strategy and structure in MNEs, as a precondition for survival, profitability and growth, much in line with mainstream work in strategy and industrial organization on domestic firms. In this particular case, the strategic importance of each triad region, combined with the different market characteristics faced by MNEs in each of these regions, would suggest the introduction of geographic components in the MNEs’ structure. Some of the more grounded work on MNE strategy/structure interfaces can be attributed to Egelhoff (1982) and his follow-up work, including Wolf and Egelhoff (2002). Egelhoff adopted an information-processing model to study the strategy-structure fit. He viewed the use of geographic divisions in MNEs as appropriate in cases whereby, ‘‘operations within a region are relatively large, complex and sufficiently different from other regions that opportunities for specialization and economies of scale are greater within a region than they are along worldwide product lines’’. His empirical work suggested that three variables are critical to choose geographical divisions:

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relatively large operations (measured as F/T sales), foreign manufacturing (share of foreign manufacturing in foreign sales) and a large number of foreign subsidiaries. Two comments can be made here. First, although the mean foreign sales percentage of the 34 Fortune 500 firms included in his initial research was 50%, no distinction was made between intra-regional and inter-regional sales. Second, the research assumed that one particular organizational structure always dominates the MNE (functional structure, international division, product divisions, geographic divisions, and a matrix structure) and can be readily identified based upon statements made by managers and the analysis of publicly available information. However, the data in this paper suggest that the geographical distribution of foreign sales does matter and that a strong discrepancy between intra-regional and inter-regional sales has important implications for MNE structure. More specifically, the differentiation between back-end and customer-end building upon different sets of FSAs should be reflected in the MNE’s organizational structure, systems and perhaps even culture. Interestingly, several papers have been written on regional components in MNE organizational structure, such as regional headquarters, Heenan (1979), Grosse (1981), D’Cruz (1986), Daniels (1987), Dunning and Norman (1987), Morrison et al. (1991), Lasserre (1996), Yeung, Wai-chung, Martin, and Martin (2001). To the extent that these papers discuss customer-end related structural elements, these appear to be largely of a normative nature, i.e. intended to improve the firm’s market position, without much empirical evidence that such structural elements are actually effective in practice. For example, Lasserre (1996) has argued that Western MNEs’ regional headquarters in Asia serve entrepreneurship enhancing roles (scouting out new business opportunities, processing and distributing relevant information on the region, and signaling commitment to regional stakeholders) and integrative roles (exploitation of synergies across national subsidiaries, executing activities in areas where regional resource allocation should occur). However, little, if any, evidence is provided that any of these roles fundamentally improved the MNEs’ effectiveness in bringing their products to the Asian customer. Yeung et al.’s (2001) analysis of such regional headquarters in Singapore, building on Lasserre (1996) argues that their roles will depend on a number of parameters, which include geographical distance, familiarity with the host region, commitment to the host region, and regional integration, etc., thus implicitly suggesting the importance of using the regional headquarters to complement in an idiosyncratic way each MNE’s existing FSA bundles.

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More research is needed that links the required knowledge bundles for each critical value added activity in host-triad regions with specific structural elements, that may also include elements of organizational physiology and psychology (Bartlett & Ghoshal, 2000). Here, it should be recognized that such regional elements may increase the difficulty of managing multidivisional (M-form) companies since performance evaluation should be differentiated for units operating in the various regions, even within similar businesses, given the enormous differences in environmental circumstances faced by the affiliates in each region. In other words, even at a single point in time, MNEs may adopt both participative decentralization and administrative centralization simultaneously. These two approaches have traditionally been viewed as inefficient corruptions of the M-form (Williamson, 1975; Freeland, 1996), but may in reality constitute a pre-condition for the effective governance of MNEs with regional strategies. Here, participative decentralization reflects the involvement of regional divisions in corporate-strategic planning, and this may be critical for successfully conducting customer-end activities in host regions, given both the relative lack of appropriate information at the corporate headquarters’ level on host regions, and the need to preserve subsidiary commitment and initiative in those host regions. In contrast, administrative centralization may be more appropriate for the management of back-end activities across regions, given the relative availability of information at corporate headquarters on these activities and the possibility of reducing both production and coordination costs through optimally exploiting imperfections in national and regional factor markets.

MULTINATIONALITY AND PERFORMANCE Much of the literature on geographical diversification has attempted to evaluate the linkage between multinationality and (profit) performance (e.g., Rugman, 1976; Buckley & Dunning, 1977; Buckley, Dunning, & Pearce, 1984; Geringer, Beamish, & daCosta, 1989; Morck & Yeung, 1991; Hitt, Hoskissm, & Kim, 1997). Usually, some proxy is adopted for the share of foreign sales in total sales (or in some cases, a more back-end-related measure, such as the number of subsidiaries abroad) to assess the degree of geographical diversification. Recent research has established the importance of the home-country environment, i.e., the locus of origin of geographic diversification efforts, for the scope and financial performance effects of geographic diversification (Wan & Hoskisson, 2003).

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In this paper, however, we emphasize the importance of the locus of destination. The relative sales in host-triad regions, vis-a`-vis the home-triad region, are themselves a critical performance parameter. Perhaps the mixed results in past research on the profit impact of geographical diversification, may be partly explained by: (1) a lack of investigation of the locus of destination of the diversification efforts (intra-regional versus inter-regional) and (2) the fact that market share success in non-home triad markets may be at the expense of profit performance. Thus, future research on the impacts of geographic diversification should study explicitly the regional patterns and scope of MNE sales growth. In addition, it could include relative sales in host-region markets as a performance parameter (dependent variable), rather than as a mere independent variable affecting financial profitability. Recent work by Vermeulen and Barkema (2002) correctly points out that some benefits of international expansion (such as tax benefits, common purchasing, and improved access to inexpensive labor) are easier to accomplish than other benefits, which require learning. Although these authors do not view host-region market penetration performance relative to home-region performance as a proxy for international success, their work does suggest that a broader geographic scope of the expansion process negatively moderates the impact of a firm’s foreign subsidiaries on its profitability. More specifically, they demonstrate that a broader geographic scope strains the MNE’s absorptive capacity (Cohen & Levinthal, 1990), particularly in the short run, leading to time compression diseconomies. They also show that foreign expansion is easier to absorb for MNEs if it occurs in ‘related’ countries, following the classification of countries into clusters developed by Ronen and Shenkar (1985). Another recent paper by Ruigrok and Warner (2003) with a focus on back-end FSAs confirms this perspective. Ruigrok and Wagner suggest that U.S. firms are usually characterized by an inverted J-curve, in terms of an internationalization impact on performance (measured by return on assets). Internationalization is associated with performance improvements, until a threshold is reached, when performance starts to decline. The reason is that U.S. firms can usually expand (from a back-end perspective) in a first stage to culturally proximate countries such as Canada, the United Kingdom, and Australia. In contrast, German firms face a U-curve in terms of performance effects of internationalization. A low psychic distance is found in only two small economies, namely Austria and Switzerland, which implies that German firms are required to target a much wider and varied market (the EU) from the outset, thereby incurring higher learning costs. Ruigrok and Wagner’s (2003) perspective on back-end internationalization suggests that

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even there, the linkages between country-of-origin and country-of-destination are critical in determining the optimal route of internationalization and organizational learning. This is an important observation as influential work in IB has argued that the operational flexibility of MNEs, resulting from their internationally dispersed network of affiliates confers arbitraging advantages, informationrelated network externalities, etc. (Kogut, 1983; Kogut & Kulatilaka, 1994). However, the analysis above suggests that location determines the extent to which such benefits can be earned. More specifically, a lower (cultural, administrative, geographic, and economic) distance, although reducing the hypothetical, maximum arbitraging and network externality benefits, will facilitate earning such benefits in practice. A question to be answered by future research is whether the prior existence of a strong internal network in the home region (and the related proven ability to learn and to manage risks) is critical for subsequent positive performance effects associated with interregional expansion. The creation of a strong competitive position in the home region may reflect one step in an evolutionary strategy of resource re-combinations, that follows a clear sequential pattern, and creates platforms for future investments (Kogut & Zander, 1993). However, it is unclear whether such platforms are themselves truly NLB, or can only be applied in a limited geographic space.

NORMATIVE IMPLICATIONS What are the normative implications of regional MNEs? It could be argued that these few examples of global corporate success should be viewed as best practices and benchmarks to be carefully studied and emulated by other large MNEs, most of them are characterized by a much more narrow and shallow penetration of host-region markets. However, the observed weak market position in host regions, as compared to the home-triad market, may also be interpreted as the outcome of a rational preference for regionally based activities, resulting from a careful cost benefit calculation. Here, strategic interactions among large players, taking the form of ‘inter-regional chess’, may influence international sales patterns and the selection of target markets. More generally, it could be argued, from a co-evolutionary perspective, that regional strategies of MNEs are embedded in – and co-evolve with – the broader competitive, organizational and institutional contexts at the regional

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level, in the spirit of Koza and Lewin (1998). In this situation, MNE regional strategy choices evolve interdependently with changes in prevailing industry practices, legitimate organizational forms, government regulations, etc. It should be recognized that regions themselves may change over time (as with the inclusion of the Americas in NAFTA and further EU expansion), and therefore provide new opportunities for MNE growth. The triad perspective developed in this paper should therefore be viewed as a starting point for future empirical analyses, recognizing that regionalization is open-ended over time. Where globalization does occur, it is only at the back end of the value chain. Some of the world’s largest MNEs master the art of connecting globally dispersed inputs. These can be in the form of financial capital, human capital, R&D knowledge, components, etc., and can be integrated to better serve home-region clients. Hence, it appears possible to be global at the back end of the value chain, and much can undoubtedly be learned from observing and imitating the routines of global leaders in this portion of the value chain. Does this imply that large MNEs should be complacent as far as the customer end is concerned and solely focus on their home region of the triad? Probably not, but senior MNE management should understand that widespread geographic diversification may well have managerial pitfalls similar to the conventional drawbacks of product diversification. A clear focus is required in terms of scope of geographic expansion, and the economic evaluation of international growth plans must take into account the costs of inter-regional ‘‘distance’’ and the liability of inter-regional foreignness. The recognition of the fallacy of customer end, global strategies may go a long way to improving the ability of world’s largest MNEs to profitably exploit international growth opportunities. Perhaps it is time for ‘‘global strategy’’ scholars to recognize the limited usefulness of simple messages advocating the globalization of MNE strategy and structure. Such globalization is not being achieved by the vast majority of MNEs, which operate mainly in their home region of the triad.

CONCLUSIONS In this paper, we explored the implications of introducing a regional dimension in MNE strategy and structure. Such a regional dimension is warranted, given the observed geographic concentration of sales in most MNEs.

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This paper has uncovered two fundamental paradoxes of IB, which so far have eluded most, if not all, scholars in the field. First, at the downstream end, national responsiveness and localized adaptation are almost universally advocated as a panacea for penetrating international markets, but in reality most MNEs attempt to add value primarily by capitalizing on similarities across markets. This is an aggregation strategy often met with success in the home region. Second, at the upstream end (including FDI-driven foreign manufacturing), opportunities for scale and scope are usually considered abundant. Yet, in reality, MNEs add value primarily through arbitrage, i.e. exploiting differences across nations and regions. Successful integration thus reflects locational specificities. We live in a world of semi-globalization, where IB research needs to fundamentally rethink the substance of aggregation and arbitrage opportunities; this paper has suggested that the region may be a good starting point for such an endeavor. HThe regional issues discussed in this paper cast doubts on the validity of the transnational solution model as the panacea for global corporate success. The main weakness of the transnational solution model is its internal complexity. The regional aspects identified here further compound this complexity, and this despite the financial markets’ demands for transparency and simplicity in strategy and structure. Regional components in strategy and structure may go a long way toward improving large MNEs’ management of distinct geographic zones, especially in the triad regions of NAFTA, the EU, and Asia. However, the main implication of our analysis for smaller MNEs may well be the introduction of more selectivity in the geographic scope of their international expansion, especially as far as downstream, or customer-end activities are concerned. Rather than engaging in a path of rapid ‘global roll out’ of their products and services, these firms should select a narrow geographic market focus, as well as a narrow product focus. This will help to develop the FSAs capable of providing maximum value added to customers. If MNEs face a higher liability of foreignness in downstream activities as compared to upstream activities, this has significant managerial implications from a dynamic perspective. Learning (in the sense of lowering the liability of foreignness) occurs at a different pace in different activities of the value chain. Foreign market penetration success ultimately is constrained by the activity area with the lowest rate of learning. Managers should thus try to identify the most constraining activities in the critical time paths to achieve international market growth. To put it simply, managers need to recognize that parts of the firm (especially at the downstream end) may operate regionally, whereas other parts (at the upstream end) may function globally.

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Ghemawat, P. (2003). Semiglobalization and international business strategy. Journal of International Business Studies, 34(2), 138–152. Govindarajan, V., & Gupta, A. (2001). The quest for global dominance. San Francisco: JoseyBass/Wiley. Grosse, R. (1981). Regional offices of MNCs. Management International Review, 21(1), 48–55. Heenan, D. A. (1979). The regional headquarters division: A comparative analysis. Academy of Management Journal, 22(2), 410–415. Hitt, M. A., & Cheng, J. (2002). Managing transnational firms: Resources, market entry and strategic alliances. Oxford: Elsevier. Hitt, M. A., Hoskisson, R. E., & Kim, H. (1997). International diversification: Effects on innovation and firm performance in product-diversified firms. Academy of Management Journal, 40, 767–798. Hymer, S. (1976). The international operations of national firms. Cambridge: MIT Press. Jeannet, J. (2000). Managing with a global mindset. London: Financial Times/Prentice-Hall, Pearson. Kogut, B. (1983). Foreign direct investment as a sequential process. In: C. P. Kindleberger & D. B. Audretsch (Eds), The multinational corporation in the 1980s (pp. 38–56). Cambridge, MA: MIT Press. Kogut, B., & Kulatilaka, N. (1994). Operating flexibility, global manufacturing, and the option value of a multinational network. Management Science, 40(1), 123–139. Kogut, B., & Zander, U. (1993). Knowledge of the firm and the evolutionary theory of the multinational enterprise. Journal of International Business Studies, 24(4), 625–645. Koza, M. P., & Lewin, A. Y. (1998). The co-evolution of strategic alliances. Organization Science, 9(3), 255–264. Lasserre, P. (1996). Regional headquarters: The spearhead for Asia Pacific markets. Long Range Planning, 29, 30–37. Levitt, T. (1983). The Globalization of markets. Harvard Business Review, (May-June), 92–102. Morck, R., & Yeung, B. (1991). Why investors value multinationality. Journal of Business, 64(2), 165–187. Morrison, A., Ricks, D., & Roth, K. (1991). Globalization versus regionalization: Which way for the multinational? Organizational Dynamics, 19(3), 17–29. Morrison, A., & Roth, K. (1991). The regional solution: An alternative to globalization. Transnational Corporations, 1(2), 37–55. Ohmae, K. (1985). Triad power: The coming shape of global competition. New York: The Free Press. Porter, M. (1990). The competitive advantage of nations. New York: Free Press-Macmillan. Ronen, S., & Shenkar, O. (1985). Clustering countries on attitudinal dimensions: A review and syntheses. Academy of Management Review, 10, 435–454. Rugman, A. (1981). Inside the multinationals: The economics of internal markets. New York: Columbia University Press. Rugman, A. (1985). Megafirms: Strategies for Canada’s multinationals. Toronto, Canada: Methuen. Rugman, A. (1987). Outward bound: Canadian direct investment in the United States. Toronto, Canada: C.D. Howe Institute. Rugman, A. (1990). Multinationals and Canada U.S. free trade. Columbia, SC: University of South Carolina Press.

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Rugman, A. (2000). The end of globalization. London: Random House and New York: Amacom-McGraw-Hill. Rugman, A. (2005). The regional multinationals. Cambridge, UK: Cambridge University Press. Rugman, A. M. (1975). Motives for foreign investment: The market imperfections and risk diversification hypotheses. Journal of World Trade Law, 9(5), 567–573. Rugman, A. M. (1976). Risk reduction by international diversification. Journal of International Business Studies, 7(2), 80–85. Rugman, A. M. (1979). International diversification and the multinational enterprise. Lexington: D.C. Heath. Rugman, A. M. (1980c). Multinationals in Canada: Theory, performance and economic impact. Boston: Martinus Nijhoff/Kluwer. Rugman, A. M. (2002). Commentary: The influence of ‘managing across borders’ on the field of international management. In: M. A. Hitt & J. Cheng (Eds), Managing transnational firms (pp. 37–56). Oxford: Elsevier. Rugman, A., & D’Cruz, J. (1992). Business networks for international competitiveness. Business Quarterly, 56(4), 101–107. Rugman, A., & D’Cruz, J. (2000). Multinationals as flagship firms: Regional business networks. Oxford: Oxford University Press. Rugman, A., & Verbeke, A. (1990). Global corporate strategy and trade policy. London and New York: Routledge. Rugman, A., & Verbeke, A. (1991). Environmental change and global competitive strategy in Europe. In: A. Rugman & A. Verbeke (Eds), Research in global strategic management (2): Global competition and the European community (pp. 3–28). Greenwich, CT: JAI Press. Rugman, A., & Verbeke, A. (1992). A note on the transnational solution and the transaction cost theory of multinational strategic management. Journal of International Business Studies, 23(4), 761–771. Rugman, A., & Verbeke, A. (1993) (Eds). Global competition: Beyond the three generics research. In: Global strategic management (4). Greenwich, Connecticut/London, England: JAI Press Inc. Rugman, A., & Verbeke, A. (1998a). Multinational enterprises and public policy. Journal of International Business Studies, 29(1), 115–136. Rugman, A., & Verbeke, A. (1998b). Corporate strategies and environmental regulations: An organizing framework. Strategic Management Journal, 19(3), 363–375. Rugman, A., & Verbeke, A. (2001a). Subsidiary-specific advantages in multinational enterprises. Strategic Management Journal, 22(8), 237–250. Rugman, A., & Verbeke, A. (2001b). Location, competitiveness and the multinational enterprise. In: A. Rugman & T. Brewer (Eds), The Oxford handbook of international business (pp. 150–180). Oxford: Oxford University Press. Rugman, A., & Verbeke, A. (2002). Edith Penrose’s contribution to the resource-based view of strategic management. Strategic Management Journal, 23(8), 769–780. Rugman, A., & Verbeke, A. (2003). Extending the theory of the multinational enterprise: Internalization and strategic management perspectives. Journal of International Business Studies, 34(2), 125–137. Rugman, A., & Verbeke, A. (2004). A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1), 3–18. Ruigrok, W., & Warner, H. (2003). Internationalization and performance: An organizational learning perspective. Management International Review, 43(1), 63–83.

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Safarian, A. (1966). Foreign ownership of Canadian industry. Toronto: McGraw-Hill. Vermeulen, F., & Barkema, H. (2002). Pace, rhythm, and scope: Process dependence in building a profitable multinational corporation. Strategic Management Journal, 23, 637–653. Wan, W. P., & Hoskisson, R. E. (2003). Home country environments, corporate diversification strategies and firm performance. Academy of Management Journal, 46(1), 27–45. Williamson, O. (1975). Markets and hierarchies: Analysis and antitrust implications. New York: Free Press. Wolf, J., & Egelhoff, W. G. (2002). A reexamination and extension of international strategystructure theory. Strategic Management Journal, 23, 181–189. Yeung, H., Wai-chung, P., Martin, J., & Martin, P. (2001). Towards a regional strategy: The role of regional headquarters of foreign firms in Singapore. Urban Studies, 38(1), 157– 183. Yip, G. (2002). Total global strategy II. Upper Saddle River, NJ: Prentice-Hall. Zaheer, S. (1995). Overcoming the liability of foreignness. Academy of Management Journal, 38(2), 341–363.

TWENTY-FIVE YEARS OF ‘‘INTERNATIONAL DIVERSIFICATION AND THE MULTINATIONAL ENTERPRISE’’$ Alan M. Rugman THE GENESIS OF INTERNATIONAL DIVERSIFICATION My first book was published in 1979 while I was a visiting professor at the Graduate School of Business at Columbia University. However, the book, International Diversification and the Multinational Enterprise, consisted of materials prepared from my doctoral dissertation of 1974 at Simon Fraser University and a set of articles prepared subsequently while I was in my first job as a professor at the University of Winnipeg in Canada. The title of my doctoral dissertation is ‘‘Foreign Operations and the Stability of U.S. Corporate Earnings: Risk Reduction by International

$

A previous version was prepared for the 2004 EIBA Panel on ‘‘International Expansion, Geographic Diversification and the Multinational Enterprise: Alan Rugman’s Contribution to International Business 25 Years Later’’ (Ljubljana, Slovenia, December 6, 2004).

Internalization, International Diversification and the Multinational Enterprise: Essays in Honor of Alan M. Rugman Research in Global Strategic Management, Volume 11, 203–217 Copyright r 2005 by Elsevier Ltd. All rights of reproduction in any form reserved ISSN: 1064-4857/doi:10.1016/S1064-4857(05)11011-0

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Diversification’’. It was supervised by one of the world’s leading international monetary economists, Herbert E. Grubel. Herb was an ideal thesis supervisor. He identified a publishable topic for my thesis. His advice was to take his 1968 AER article on internationally diversified portfolios (Grubel, 1968) and apply this thinking on international financial diversification to foreign direct investment (FDI). As FDI involves real asset diversification by multinational enterprises (MNEs) and is essentially different in concept to financial investment, this task proved to be more subtle and technically difficult than first envisaged by either of us. Basically, it meant that I needed to work on developing an early understanding of the activities of MNEs and what subsequently became known as internalization theory. I addressed this issue in the literature review in Chapter 2 of my thesis which later became my first publication, ‘‘Motives for Foreign Investment: The Market Imperfections and Risk Diversification Hypotheses’’ (Rugman, 1975). This appears as Chapter 1 of Rugman (1979). The ideas are based on Hymer’s 1960 dissertation as re-interpreted by his MIT supervisor, Charles Kindleberger, in his 1968 book on American Business Abroad (Kindleberger, 1968). My thesis and 1975 article contain this classical statement by Kindleberger: For direct investment to thrive there must be some imperfection in markets for goods or factors including among the latter technology, or some interference in competition by government or by firms, which separates markets (Rugman, 1979, p. 4).

This chapter of my thesis was drafted in 1971, and it contains no reference to transaction cost economics (TCE) or the more sophisticated thinking about market imperfections that led to the classic statement of internalization theory by Buckley and Casson (1976). Neither does it develop a TCE rationale for the MNE, as is achieved in its purest form in Hennart (1982). However, it does have a restatement of the basic Hymer type market imperfections rationale for FDI, and it acted as a spur for me to interact with Buckley, Casson, and Dunning during my sabbatical at the University of Reading in 1976/1977. There I began to put together the basic ideas on internalization theory in a North American context, later published in Rugman (1981). However, this was not the main focus of the 1979 book, which was an empirical study. The opening line of the Rugman (1974) thesis states the focus and contribution of the work: ‘‘This thesis analyzes the foreign operations of firms in a setting of uncertainty’’ (p. 1). At the conclusion of the introductory

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thesis chapter the contributions are listed: In this respect this thesis introduces uncertainty as a new variable in the explanation of the determinants of direct investment by United States corporations. This thesis:

(a) offers an introduction to the topic and places the hypothesis in perspective (Chapter 1); (b) reviews existing theories of the motivating of foreign investment, suggests a synthesis of these, and links the modern theory of foreign investment (which emphasizes market imperfections) to a portfolio theory explanation of the operations of multinational firms (Chapter 2); (c) formally introduces uncertainty as a motive for direct investment and develops equations suitable for empirical testing (Chapter 3); (d) tests empirically the relevance of uncertainty as a motive for the foreign operations of large U.S. corporations, while giving attention to other factors influencing instability of the stream of profits of such firms (Chapters 4 and 5); (e) summarizes the findings and advances policy implications (Chapter 6) (Rugman, 1974, p. 5). From these statements it is clear that the focus of this thesis, and the subsequent 1979 book, was empirical (see Appendix A). This produced a major technical issue to be overcome. The key empirical model suggested to me by my thesis advisor was the Tobin–Markowitz mean–variance model. This early application of portfolio theory to international investment was used by Grubel in his 1968 article on internationally diversified portfolios. Tobin was Grubel’s doctoral supervisor at Yale. Tobin subsequently won the Nobel Prize in economics for this work, somewhat simplistically portrayed by the media as ‘‘economists win Nobel Prize for saying do not put all your eggs in one basket’’. Following this distinguished heritage, in the basic regressions in my thesis I used measures of standard deviation (or variance) of corporate earnings over time as a proxy measure for risk. However, in most of the articles reprinted in the 1979 book I moved on to use the more sophisticated capital asset pricing models, which were being developed and applied in financial theory as I was conducting research for my thesis. Indeed, other colleagues were quicker to publish on international diversification and MNEs using asset pricing models, notable Agmon and Lessard (1977). While my 1979 book has the majority of chapters calculating beta coefficients from an international asset pricing

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perspective, the basic 1976 JIBS article tested this equation: VARðE=KÞi ¼ f½ðF =TÞi ; SIZEi ; DUMi
where Var (E/K)

(F/T)

SIZE DUM i

¼ variance ¼ rate of return on capital, using annual data, where E is defined as net income (profits) and K is defined as net worth of the corporation ¼ ratio of foreign to total operations, where F is defined as exports by home firms plus sales by overseas subsidiaries and T is total sales ¼ a variable representing the size of a firm as measured by sales, assets, employees, or a size index ¼ an industry dummy variable ¼ a subscript denoting individual firms

The results were robust in showing that the (F/T) proxy for degree of multinationality for each firm was inversely related to risk of earnings, and that this variable was statistically significant, as was size, whereas an industry dummy for each firm was insignificant. To that extent this was an early study of the links between multinationality (F/T) and performance (E/K), with the new dimension that risk of earnings was tested rather than rate of return. For an outline of the contents of Rugman (1979), see Appendix B.

CRITICISMS OF INTERNATIONAL DIVERSIFICATION My research on MNEs was somewhat unfairly criticized by Jacquillat and Bruno Solnik in an article saying that multinationals are poor tools for international diversification (see my unpublished rebuttal in Appendix C). In this finance article it was demonstrated that an individual investor can achieve the benefits of international diversification by purchasing stocks in an optimal world market portfolio (Jacquillat & Solnik, 1978). Yet, this is an illegitimate comparison as investors at the time of my study of U.S. MNEs (1960–1969) could not assemble optimal world market portfolios. I was careful to argue this, even identifying the financial market imperfections of the time, such as the U.S. interest equalization tax. Unfortunately Solnik, in this and other articles, was influential with professors of finance,

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who thereby missed the boat for many years by ignoring TCE issues in international finance and only belatedly addressing agency issues some 10–15 years after the pioneering work on the theory of the MNE in the mid1970s. In a parallel manner, world mutual funds and similar financial instruments have developed since the early 1970s. The generation of these new instruments has reduced the need for investors to seek out MNEs as surrogate vehicles for international diversification. Largely, as a result of these advances in financial markets and international asset instruments I lost interest in analysis of the MNE as a vehicle for international diversification, and I have not undertaken research on this topic for 25 years.

INTERNATIONALIZATION IS NOT INTERNATIONAL DIVERSIFICATION Yet, in one area of the field of current research I am troubled by the misuse of the term ‘‘international diversification’’ by scholars in strategic management. I have discussed this issue with Alain Verbeke in a section of our recent JIBS paper on the regional strategies of MNEs (Rugman & Verbeke, 2004). In a set of badly mistitled papers various authors mistake international diversification for geographic diversification; where the latter is simply internationalization. The recent definition of international diversification is foreign activity, i.e. geographic diversification. This is not international diversification. For example, in a recent paper in AMR, Tihanyi, Johnson, Hoskisson, and Hitt (2003) define international diversification along the lines of a partial Sullivan (1994) composite variable for internationalization, namely the combination of foreign-to-total sales, assets, and subsidiaries (p. 202). Many other studies in this stream also define international diversification as the geographic dispersion of sales, assets, employees, or subsidiaries. For example, other misleading articles include: Hitt, Hoskisson, and Kim (1997); Tihanyi, Griffith, and Russell (2005); Tihanyi et al. (2003); Tihanyi, Ellstrand, Daily, and Dalton (2000). This is a serious misuse of the well-defined term international diversification which has been used in the literature for over 25 years. International diversification is a financial economics term involving assessment of the risk of a portfolio of assets, real rather than financial, when applied to the activities of MNEs. It should not be used as a term for variables used to explain internationalization, geographic sales dispersion, or other types of (F/T). I can only speculate that the misuse of the international diversification term comes from strategy scholars more familiar with Rumelt’s industry and product diversification than with the geographic sales of IB.

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One piece of evidence for this is the influential article by Geringer, Beamish, and daCosta (1989) which uses (F/T) sales as a measure of international diversification (when it is a measure of internationalization). They are better at assessing Rumelt’s finding that related international diversification outperforms unrelated diversification. Another of the many studies using (F/T) sales and assets as measures for international diversification is Sambharya (1995). An earlier possible misuse of the term international diversification can be traced back to Bernie Wolf (1977), where his measure of international diversification (at industry level) was F (exports plus foreign sales of U.S. affiliates) over T (domestic production). Actually, Wolf refers to this, correctly, as a measure of internationalization, in the title of his paper. Vachani (1991) addresses measures of global diversification and proposes an entropy measure; again one that ignores the portfolio aspects of international diversification.

POLICY IMPLICATIONS Although the Rugman (1979) book is a collection of a set of technical papers, with 50 tables (often each a page long) of empirical results in a book of only 137 pages, there are also policy implications. One of my favorite chapters is the last one on ‘‘Foreign Investment and Quebec Separation’’. This was written in late 1976, after the surprising election of the separatist Rene´ Le´vesque P.Q. government in the province of Quebec. As a purely intellectual piece it uses the logic of international diversification and the theory of the MNE to demonstrate that FDI into Quebec (and Canada) will not be adversely affected in the long run by Quebec’s proposed separation from the rest of Canada. However, there would be short-run adjustment costs. Although this chapter is a theoretically correct, even astute, analysis of the long-run logic of fully integrated North American financial goods and factor markets, it was a politically naive study. As it was only published in this 1979 academic book, it fortunately failed to generate any public notice in Canada and Quebec during the subsequent stormy debate, and vote, on Quebec separation while I was a resident of Montreal in June 1980. Thereafter, I deliberately ignored any reference to this chapter as my understanding of the ‘‘short-term’’ adjustment costs of Quebec separation somewhat increased in sophistication, and I became an advocate of a unified Canada with a free trade agreement with the United States (Rugman, 1980, 1981, 1985, 1987, 2000).

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In this context, I can only echo my introduction to that public policy Quebec chapter in Rugman (1979): The application of economic theory to current problems of public policy is a hazardous business. Sometimes the conclusions of the analysis are highlighted, and the theoretical procedure by which those policy implications are reached is ignored. Since this study is concerned with a controversial issue, it starts with an explicit statement of the economic model being used. Several vital assumptions are made. The argument proceeds logically from this foundation. Basically this chapter applies international trade theory, specifically the modern theory of foreign direct investment, to a model in which Quebec’s separation is assumed. The analysis ignores problems of short-run adjustment to Quebec independence and searches for answers to some of the long-run questions about the future of foreign investment in Quebec. Thus the issues of uncertainty and business disruption following Quebec’s separation, which tend to dominate our thinking, can be put aside as we attempt to place the economic basis for foreign investment in its true perspective. This work is motivated by the realization that the election of the new Quebec government on 15 November 1976 has changed the parameters of traditional policy models of international trade and finance (Rugman, 1979, p. 117).

TWENTY-FIVE YEARS OF MULTINATIONALITY AND REGIONAL INTEGRATION One of the remaining puzzles of international finance is that, despite the risk reduction advantages of international diversification, individual investors remain wedded to their domestic stock markets. French and Porterba (1991) reported these percentages of the world’s five largest stock markets held by domestic investors: United States Japan UK Germany France

92.9% 95.7% 92% 79% 89.4%

This evidence of a strong equity market home bias is partly explained by TCE reasoning. For example, U.S. investors have better information about companies and U.S. stocks, compared to foreign stocks, so this information asymmetry is a rational explanation of the home equity bias. In general, U.S. investors are relatively more unfamiliar with foreign financial and legal systems and thus prefer home investments (La Porta, Lopez-De-Silanes, Shleifer, & Vishny, 1997).

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This home equity market bias observed by scholars in international finance is reflected in a home goods consumption bias observed by scholars in international economics. Starting with Feldstein and Horioka (1980), it has been found empirically that international financial investment is not fully determined by relative national interest rates, but is biased towards the domestic capital markets. In aggregate terms, across nations, the savings and investment ratios (relative to GDP) are co-determined. Economists also usually find that there is a home bias towards locally produced goods relative to foreign goods (Blonigen & Wilson, 1999). In related work, using the gravity model of economics, John McCallum (1995) found that trade between the Canadian provinces is 20 times greater than is any province’s trade with the United States, after controlling for distance and market size. This is explained by strong inter-provincial institutional linkages such as in transportation infrastructure, legal systems, absence of a national border with customs and immigration, etc. While Canada–U.S. free trade and NAFTA have reflected tighter economic integration between Canada and the United States, this national bias in the goods market remains strong. The implication of these related empirical findings are consistent with the recent empirical work by Rugman and Verbeke (2004) and Rugman (2005) which finds a strong regional bias in firm-level sales. Briefly, across the 500 largest firms the following percentage of intra-regional sales occur: North America Europe Asia

77.2% (for 185 firms) 62.8% (for 118 firms) 74.3% (for 75 firms)

This is evidence of a lack of globalization in the business activity of the world’s largest firms, most of which are MNEs. As smaller firms are even more likely to be local and/or regional, it is also most likely that business is rarely globalized. In short, the world’s markets can be interpreted as follows: International capital markets Goods markets Labour market

Highly integrated and globalized Regional (on a triad basis) Local and national

As discussed above, even within these broad generalizations, there is evidence of a strong home country bias, even in the world’s international equity markets, which are clearly the most highly integrated globally. As we

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move to goods markets, the vast majority of the firms doing this business are clearly intra-regional, not global. At factor level, labour is largely immobile and is national. The TCE logic is that market imperfections (including regulations) are stronger in the labour market and are least of a problem for international capital mobility. In between, goods activity is highly affected by national and regional regulations and is restricted by domestic institutional pressures. This leads to a regional solution for business activity. My conclusion is that the basic theoretical insights of the International Diversification and the Multinational Enterprise book remain valid 25 years later. While, in principle, there are advantages to international diversification, in practice there remain institutional barriers which prevent it from occurring to the theoretical degree predicted. The relatively greater degree of market imperfections in goods and factor markets prevent full capital market integration. Finally, the persistence of market imperfections requires a TCE/ internalization theory of the MNE in order to explain the simultaneous observations of a high degree of international activity (F/T) but a low degree of globalization. In other words, the market imperfections approach of the 1979 book is fully consistent with the Rugman and Verbeke (2004) findings of a bias towards intra-regional sales across the world’s 500 largest firms.

REFERENCES Agmon, T., & Lessard, D. (1977). Investor recognition of corporate international diversification. Journal of Finance, 32, 1049–1055. Blonigen, B. A., & Wilson, W. W. (1999). Explaining Armington: What determines substitutability between home and foreign goods? Canadian Journal of Economics, 32(1), 1–20. Buckley, P. J., & Casson, M. (1976). The future of multinational enterprises. London: Macmillan. Feldstein, M., & Horioka, C. (1980). Domestic savings and international capital flows. The Economic Journal, 90, 314–329. French, D. R., & Porterba, J. M. (1991). Investor diversification and international equity markets. American Economic Review, 81, 222–226. Geringer, J. M., Beamish, P., & daCosta, R. C. (1989). Diversification strategy and internationalization: Implications for MNE performance. Strategic Management Journal, 10(2), 337–360. Grubel, H. G. (1968). Internationally diversified portfolios: Welfare gains and capital flows. American Economic Review, 58(December), 1299–1314. Hennart, J. F. (1982). A theory of multinational enterprise. Ann Arbor: University of Michigan Press. Hitt, M. A., Hoskisson, R. E., & Kim, H. (1997). International diversification: Effects on innovation and firm performance in product-diversified firms. Academy of Management Journal, 40, 757–798.

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Jacquillat, B., & Solnik, B. (1978). Is there a superior route to international portfolio investment? Journal of Portfolio Management, 5(Winter), 8–12. Kindleberger, C. P. (1968). American business abroad: Six lectures on direct investment. New Haven, CO: Yale University Press. La Porta, R., Lopez-De-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of external finance. Journal of Finance, 52(3), 1131–1150. McCallum, J. (1995). National borders matter: Canada–US regional trade patterns. American Economic Review, 95(June), 615–623. Rugman, A.M. (1974). Foreign operations and the stability of U.S. corporate earnings-risk reduction by international diversification. Unpublished doctoral dissertation. Department of Economics, Simon Fraser University, Canada. Rugman, A. M. (1975). Motives for foreign investment: The market imperfections and risk diversification hypotheses. Journal of World Trade Law, 9(5), 567–573. Rugman, A. M. (1979). International diversification and the multinational enterprise. Lexington, MA: D.C. Heath. Rugman, A. M. (1980). Multinationals in Canada: Theory, performance and economic impact. Boston: Martinus Nijhoff/Kluwer. Rugman, A. M. (1981). Inside the multinationals: The economics of internal markets. New York: Columbia University Press. Rugman, A. M. (1985). Megafirms: Strategies for Canada’s multinationals. Toronto, Canada: Methuen. Rugman, A. M. (1987). Outward bound: Canadian direct investment in the United States. Toronto, Canada: C.D. Howe Institute. Rugman, A. M. (2000). The end of globalization. London: Random House and New York: Amacom-McGraw Hill. Rugman, A. M. (2005). The regional multinationals. Cambridge, England: Cambridge University Press. Rugman, A. M., & Verbeke, A. (2004). A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1), 3–18. Sambharya, R. B. (1995). The combined effect of international diversification and product diversification strategies on the performance of U.S.-based multinational corporations. Management International Review, 35(3), 197–218. Sullivan, D. (1994). Measuring the degree of internationalization of a firm. Journal of International Business Studies, 25, 325–342. Tihanyi, L., Ellstrand, A. E., Daily, C. M., & Dalton, D. R. (2000). Composition of the top management team and firm international diversification. Journal of Management, 26, 1157–1177. Tihanyi, L., Griffith, D. A., & Russell, C. J. (2005). The effect of cultural distance on entry mode choice, international diversification, and MNE performance: A meta-analysis. Journal of International Business Studies, 36(3). Tihanyi, L., Johnson, R. A., Hoskisson, R. E., & Hitt, M. A. (2003). Institutional ownership differences and international diversification: The effects of board of directors and technological opportunity. Academy of Management Journal, 46, 195–211. Vachani, S. (1991). Distinguishing between related and unrelated international geographic diversification: A comprehensive measure of global diversification. Journal of International Business Studies, 22(2), 307–322. Wolf, B. M. (1997). Industrial diversification and internationalization: Some empirical evidence. The Journal of Industrial Economics, 26, 177–189.

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APPENDIX A. ABSTRACT Foreign Operations and the Stabilility of U.S. Corporate Earnings: Risk Reduction by International Diversification The theory of portfolio selection under conditions of uncertainty as developed by Tobin and Markowitz has been applied to the international sector in recent years. It has been demonstrated on both theoretical and empirical grounds that it is possible for individual asset holders to reduce risk by holding a portfolio of internationally diversified assets. This thesis extends such work by considering the benefits from international diversification through foreign operations of firms, rather than portfolio investment by individuals. On a theoretical level it is shown that a multinational firm will provide greater benefits to its shareholders than will a comparable firm which has few foreign operations. This is because individual investors are concerned about the risk of their earnings as well as the expected rate of return. In an international setting it may not be possible for investors to achieve portfolio diversification themselves, especially if there are institutional, or other, barriers to the free flow of financial capital. Instead, such investors can purchase the shares of multinational corporations and thereby enjoy the benefits of international diversification. The theoretical model develops the argument that the stability of a firm’s earnings is an increasing function of the degree of foreign operations, ceteris paribus. Foreign operations are defined as sales by overseas subsidiaries plus exports from the parent corporation. The benefits from international diversification originate from sales of goods to, or within, foreign countries whose economic fluctuations are less than perfectly positively correlated with the fluctuations in the home country. The empirical investigation uses the theoretically specified model to test the hypothesis that variance of earnings is inversely related to foreign operations (F/T). Other independent variables are size of the firm and dummies for industry classification. Data on alternative measures of size, and on industry classification, for the 500 largest mining and manufacturing corporations in the United States in 1965 are recorded from the Fortune listing. The (F/T) variable in 1965 for each of these firms has been calculated in studies by Bruck and Lees, and their data are used in the tests. Rates of return for each corporation are recorded for the 1960–1969 period, and variances of these profit rates are calculated in order to provide a risk

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measure, used as the dependent variable in the regressions. The regression results support the hypothesis that (F/T) is negatively related to variance of profits, and this relationship is statistically significant. The other specified independent variables perform as expected. Several implications arise from these results. First, the portfolio theory and capital asset pricing models can be modified successfully to take account of direct investment. Second, the (F/T) ratio is an important new analytical variable affecting risk in an international context. Third, as the benefits of international diversification are enjoyed by multinational firms and their shareholders, national governments in both the home and host countries may wish to take notice of this previously unrealized gain from international trade. Finally, recognition of the role of multinational corporations as international diversifiers, along with their increasing importance, may eventually lead to greater integration of world capital markets.

APPENDIX B Following is the publishers’ introduction to Rugman (1979):

International Diversification and the Multinational Enterprise by Alan M. Rugman, Lexington Books: D.C. Heath, 1979 This book is a novel application of the modern theory of finance to the international arena. The book demonstrates that multinational firms benefit from international diversification by having more stable earnings than uninational firms. The first part of the book is on the theory of foreign investment and introduces risk diversification as a new motive. The book then proceeds to aggregative work on international diversification and then to industry-level work in oils, mines, and banking. There is a final policy section, using mainly Canadian examples. The key theme is that it is possible to reduce the risk of any domestic portfolio by going international. A unique advantage of international diversification is that it permits the systematic risk of any one economy to be reduced by holding an international portfolio of assets. This gain from international risk diversification is not available from industrial diversification within an economy. The multinational corporation (MNC), as an international producer, is a vehicle for international diversification since it has operations in many

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nations. Given that economies are not perfectly positively correlated the foreign operations of an MNC should ensure a more stable pattern of both sales and earnings than can be achieved by a non-multinational firm of similar size. A second theme of the study explores recent developments in the international monetary system, to the extent that these have created barriers to the free movement of capital between nations. The regulation of capital flows for balance of payments reasons has an important implication for international portfolio diversification. Due to such barriers a risk adverse individual cannot construct an efficient international portfolio on a private basis. Instead, the individual must seek to achieve the benefits of international diversification in an indirect manner. The outstanding feature of the book is its focus upon international diversification. This has become an important new sub-field of international finance in the last few years, following upon the work by Grubel, Solnik, Lessard, and others. The theory of portfolio diversification has been mainly applied to financial investment, but the author has been the first to apply it in detail to direct investment. Since direct investment is undertaken by multinational firms, there is great interest in the risk reduction hypothesis of the author by those engaged in the management of international business firms. The 13 chapters cover the following topics: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Introduction Motives for Foreign Investment Risk Reduction by International Diversification International Correlation Coefficients as Indicators of Real and Financial Diversification Risk, Direct Investment, and International Diversification International Diversification by Financial and Direct Investment Market and Earnings Betas for Multinational Firms The Interrelationships of World Equity Markets, 1972–1976 Risk and Return in the Petroleum Industry Beta Coefficients for U.S. and Canadian Oil Firms Risk and Return in the Canadian Mineral Resource Industry Do Multinational Banks Have Stable Earnings? Foreign Investment and Quebec Separation

The book also features a Preface by John Dunning and a Foreword by Herbert G. Grubel. Note: Chapter 3 was published in JIBS (1976).

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APPENDIX C Jacquillat and Solnik investigated 300 European and 100 American firms whose monthly stock prices were available from April, 1966 to June, 1974. Of these, 40 European and 23 American firms were selected as multinationals. They calculated the standard deviation of the risk of a purely domestic U.S. portfolio. The risk of an internationally diversified portfolio is only 20–50% of the risk of a U.S. domestic portfolio. This finding can be represented as follows: Sample group 1. Domestic U.S. 2. U.S. MNEs 3. World stock markets

Index of Risk (Standard Deviation of Sample Portfolio) 100 90 30–50

According to Jacquillat and Solnik, this result shows that international diversification through direct investment is a poor substitute for international portfolio diversification. While this may be true, it is irrelevant. The point simply is that there are no such financial market alternatives to international diversification via direct investment. It is because there are TCE barriers to international portfolio diversification that individual investors need to purchase of shares in an MNE. An MNE is a surrogate vehicle for international diversification in a world of market imperfections. The second test performed by Jacquillat and Solnik consisted in regressing the stock returns of each MNE on all the various national stock indices in order to determine whether the foreign factors significantly influenced the MNE’s stock price behaviour. They find that only the domestic betas are significant. The foreign betas are small or insignificant. They also find that eight foreign indices explain less than two additional percent of the stock prices behaviour of U.S. MNEs. The first difficulty with this result is that it attempts to value an MNE in two or more foreign nations (stock markets) and then to show that the compounded influence of these foreign indices explain very little of the stock behaviour of MNEs. The reason for this is that each domestic market index already incorporates a world influence in its stock prices, as both multinational and export/import firms appear on it. In Jacquillat and Solnik’s analysis the variables have not been chosen in such a manner that values in one sample have no relation or connection with

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the values in the next sample. Some of the independent variables chosen are highly correlated, and we have the problem of multicollinearity. There is no proper valuation model for MNEs. Real market imperfections affect the discounted cash flows of a firm; financial market imperfections affect the discount rate itself. It is not clear why Jacquillat and Solnik are attempting to value the stock price of the MNE in two or more foreign nations/stock markets. The MNE is owned and valued in the home nation. Therefore, a model from the perspective of the home nation should be used. Also the stock markets coefficients (betas) are not directly proportional to domestic/world sales.

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OVERVIEW OF ALAN RUGMAN’S ACADEMIC OEUVRE BOOKS Authored (co-authored if applicable) International Diversification and the Multinational Enterprise (Lexington, MA: D.C. Heath, 1979), 155 pages. Multinationals in Canada: Theory, Performance and Economic Impact (Boston: Martinus Nijhoff, 1980, reprinted 1983), 2l2 pages. Inside the Multinationals: The Economics of Internal Markets (London: Croom Helm and New York: Columbia University Press, 1981), 186 pages. Japanese edition, 1982. Megafirms: Strategies for Canada’s Multinationals (with J. McIlveen) (Toronto: Methuen, 1985), 270 pages. Administered Protection in America (with A. Anderson) (London: Croom Helm and New York: Methuen, 1987), 150 pages. Multinationals and Canada–United States Free Trade (Columbia: University of South Carolina Press, 1990), 205 pages. Global Corporate Strategy and Trade Policy (with A. Verbeke) (London and New York: Routledge, 1990), 179 pages. The Theory of Multinational Enterprises: The Selected Scientific Papers of Alan M. Rugman, Volume One (Cheltenham, UK and Brookfield, USA: Edward Elgar, 1996), 318 pages.

219

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Multinational Enterprises and Trade Policy: The Selected Scientific Papers of Alan M. Rugman, Volume Two (Cheltenham, UK and Brookfield, USA: Edward Elgar, 1996), 428 pages. Environmental Regulations and Corporate Strategy: The NAFTA Experience (with J. Kirton and J.A. Soloway) (Oxford: Oxford University Press, 1999), 267 pages. Multinationals as Flagship Firms: Regional Business Networks (with J. D’Cruz) (Oxford: Oxford University Press, May 2000), 231 pages. Paper, 2002. The End of Globalization (London: Random House Business Books, 2000), 237 pages. Paper Edition, 2001. Also published by (McGraw-Hill/Amacom, 2001). The Regional Multinationals (Cambridge, UK: Cambridge University Press, 2005), 288 pages. Analysis of the Strategic Management of Multinationals (with A. Verbeke) (Cheltenham, UK: Edward Elgar, 2005), in press. Edited (co-edited, if applicable) New Theories of the Multinational Enterprise (London: Croom Helm and New York: St. Martin’s Press, 1982), 304 pages. Multinationals and Technology Transfer: The Canadian Experience (New York: Praeger, 1983), 208 pages. Multinationals and Transfer Pricing (with L. Eden) (London: Croom Helm and New York: St. Martin’s Press, 1985), 336 pages. Research in Global Strategic Management: Volume I: International Business Research for the Twenty-First Century: Canada’s New Research Agenda (Greenwich, CT: JAI Press, 1990), 238 pages. Research in Global Strategic Management: Volume II: Global Competition and the European Community (with A. Verbeke) (Greenwich, CT: JAI Press, 1991), 287 pages.

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Research in Global Strategic Management: Volume III: Corporate Response to Global Change (with A. Verbeke) (Greenwich, CT: JAI Press, 1992), 245 pages. Research in Global Strategic Management: Volume IV: Beyond the three Generics (with A. Verbeke) (Greenwich, CT: JAI Press, 1993), 253 pages. Foreign Investment and NAFTA (Columbia, SC: University of South Carolina Press, 1994), 353 pages. Research in Global Strategic Management: Volume V: Beyond the Diamond (with A. Verbeke and J. Van Den Broeck) (Greenwich, CT: JAI Press, 1995), 295 pages. Euro-Pacific Investment and Trade: Strategies and Structural Interdependencies (with G. Boyd) (Cheltenham, UK: Edward Elgar, 1997), 317 pages. Trade and the Environment: Economic, Legal and Policy Perspectives (with J. Kirton and J.A. Soloway) (Cheltenham, UK: Edward Elgar, 1998), 616 pages. Deepening Integration in the Pacific Economies: Corporate Alliances, Contestable Markets and Free Trade (with G. Boyd) (Cheltenham, UK: Edward Elgar, 1999), 301 pages. The Oxford Handbook of International Business (with T. Brewer) (Oxford and New York: Oxford University Press, 2001), 895 pages. The World Trade Organization in the New Global Economy (with G. Boyd) (Cheltenham, UK: Edward Elgar, 2001), 250 pages. International Business: Critical Perspectives (an edited set of four volumes of 100 leading articles in international business) (London: Routledge, 2002), 1,780 pages. Leadership in International Business Education and Research: Volume 8 of Research in Global Strategic Management (Oxford: Elsevier, 2003), 353 pages. Alliance Capitalism for the New American Economy (with G. Boyd) (Cheltenham, UK: Edward Elgar, 2003), 260 pages.

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North American Economic and Financial Integration Volume 10 of Research in Global Strategic Management (Oxford: Elsevier, 2004), 370 pages. Free Trade in the Americas (with S. Weintraub and G. Boyd) (Cheltenham, UK: Edward Elgar, 2004), 296 pages. Real Options and International Investment (with J. Li) (Cheltenham, UK: Edward Elgar, 2005), in press. European–American Trade and Financial Alliances (with G. Boyd and P.C. Padoan) (Cheltenham, UK: Edward Elgar, 2005), in press. New Perspectives on Global Governance (with M. Fratianni, J. Kirton and P. Savona) (Cheltenham: Elgar, 2005), 153–166.

Texts International Business (with D. Lecraw and L. Booth) (New York: McGrawHill, 1985), 478 pages. Japanese edition, 1987; Indonesian Edition, 1991. Also an Instructor’s Manual of 139 pages. International Business in Canada: Strategies for Management (ed.): (Toronto: Prentice-Hall of Canada, 1989), 426 pages. Also an Instructor’s Manual of 86 pages. International Business: A Strategic Management Approach 1st edition (with R. Hodgetts) (San Francisco: McGraw-Hill, 1995), 655 pages. Spanish edition, 1997; Chinese edition, 1999. Also an Instructor’s Manual of 588 pages. International Business: A Strategic Management Approach 2nd edition (with R. Hodgetts) (London: Financial Times – Prentice-Hall/Pearson Education, 2000), 659 pages. Also a revised Instructor’s Manual. International Business: 3rd Edition (with R. Hodgetts) (London: Pearson/ Prentice-Hall, 2003), 700 pages. Russian edition, 2005. Also a web site and revised Instructor’s Manual with Cecilia Brain.

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Policy Studies Outward Bound: Canadian Direct Investment in the United States (Toronto: Canadian–American Committee and Prentice-Hall of Canada, 1987), 83 pages. Business Strategies and Free Trade: Focus on Corporate Adjustment (with M. Farrow) (Toronto: C.D. Howe Institute, 1988), 104 pages. Japanese Direct Investment in Canada (Ottawa: Canada–Japan Trade Council, 1990), 63 pages. Translated into Japanese. New Visions for Canadian Business: Strategies for Competing in the Global Economy (with J. D’Cruz) (Toronto: Kodak Canada Inc., 1990), 48 pages. Also in French. Fast Forward: Improving Canada’s International Competitiveness (with J. D’Cruz) (Toronto: Kodak Canada Inc., March 1991), 52 pages. Also in French. New Compacts for Canadian Competitiveness (with J. D’Cruz) (Toronto: Kodak Canada, March 1992), 60 pages. Also in French. Global Perspective: Internationalizing Management Education (with W. Stanbury) (Vancouver, B.C.: Centre for International Business Studies U.B.C., 1992), 360 pages. The Templeton Global Performance Index (with M. Gestrin and R. Knight) (Templeton College: University of Oxford, November 1998), 36 pages, 1st edition. The Templeton Global Performance Index 2000 (with M. Gestrin and R. Knight) (Templeton College: University of Oxford, May 2000), 32 pages. Also a 2001 edition, on line.

CHAPTERS IN BOOKS ‘‘Transfer Pricing Problems and the Multinational Corporations,’’ in A.R. Negandhi (ed.), Functioning of the Multinational Corporation (New York: Pergamon Press, 1980): 51–73.

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‘‘Internalization as a General Theory of Foreign Direct Investment,’’ and ‘‘A Note on Internalization in a Canadian Context,’’ in R. Wright, K.C. Dhawan and H. Etemad (eds.), International Business: A Canadian Perspective (Don Mills: Addison–Wesley Canada, 1981): 282–301. ‘‘Internalization and Non-Equity Forms of International Involvement,’’ in A.M. Rugman (ed.), New Theories of the Multinational Enterprise (London: Croom Helm and New York: St. Martin’s Press, 1982): 9–23. ‘‘Multinational Enterprises and World Product Mandates,’’ and ‘‘Canadian Multinationals and Developing Countries,’’ in A.M. Rugman (ed.), Multinationals and Technology Transfer: The Canadian Experience (New York: Praeger, 1983): 1–11, 73–90, 165–186. ‘‘Should Multinational Corporations be Regulated?’’ in L. Michaud (ed.), Multinational Corporations and Regional Development: Conflicts and Convergences (Rome: Herder, 1983): 43–67. ‘‘The Determinants of Intra-Industry Direct Foreign Investment,’’ in A. Erdilek (ed.), Multinationals as Mutual Invaders: Intraindustry Direct Foreign Investment (London: Croom Helm, 1985): 38–59. ‘‘Transfer Pricing in the Canadian Petroleum Industry,’’ and ‘‘Introduction,’’ in A.M. Rugman and L. Eden (eds.), Multinationals and Transfer Pricing (London: Croom Helm and New York: St. Martin’s Press, 1985): 1–12, 173–192. ‘‘The Behaviour of U.S. Subsidiaries in Canada: Implications for Trade and Investments,’’ in D. Fretz, J. Whalley and R. Stern (eds.), Canada–United States Trade and Investment Issues (Toronto: Ontario Economic Council, 1985): 460–473. ‘‘Comment on Trade in Technological Services,’’ in R.M. Stern (ed.), Trade and Investment in Services: Canada/U.S. Perspectives (Toronto: Ontario Economic Council, 1985): 119–125. ‘‘European Multinationals: An International Comparison of Size and Performance,’’ in K. Macharzina and W.H. Staehle (eds.), European Approaches to International Management (De Gruyter Verlag: New York and Berlin, 1986): 15–22.

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‘‘Canadian Foreign Direct Investment in the United States’’ (with J. McIlveen), in P. Gray (ed.), ‘‘Uncle Sam as Host,’’ Research in International Business and Finance Volume 5 (Greenwich, CT: JAI Press, 1986): 289–307. ‘‘Strategic Management of Multinational Enterprises’’ (with S. Douglas), in H. Etemad and L.S. Dulude (eds.), Managing the Multinational Subsidiary (London: Croom Helm, 1986): 90–101. ‘‘U.S. Protectionism and Canadian Trade Policy,’’ in E.H. Fry and L. Radebaugh (eds.), Canada/U.S. Free Trade Agreement (Provo, UT: Brigham Young University, 1986): 4–24. ‘‘Canadian Foreign Direct Investment,’’ in A.E. Safarian and G.Y. Bertin (eds.), Multinationals, Governments and International Technology Transfer (London: Croom Helm, 1987): 120–134. ‘‘International Diversification and Multinational Banking’’ (with S. Kamath), in S.J. Khoury and A. Gosh (eds.), Recent Developments in International Banking and Finance (Lexington: D.C. Heath, 1987): 35–59. ‘‘Multinational Enterprises and Strategies for International Competitiveness,’’ in R.N. Farmer and E.G. McGoun (eds.), Advances in International Comparative Management, Volume 3 (Greenwich, CT: JAI Press, 1988): 47–58. ‘‘The Multinational Enterprise,’’ in I. Walter (ed.), Handbook of International Management (New York: Wiley, 1988): 1–18. ‘‘Strategic Responses to Free Trade’’ (with A. Verbeke) in M. Farrow and A. Rugman (eds.), Business Strategies and Free Trade (Toronto: C.D. Howe Institute, 1988): 13–29. ‘‘Patterns of Bilateral Foreign Direct Investment,’’ in D. McKee (ed.), Canadian–American Economic Relations (New York: Praeger, 1988): 181–198. ‘‘Multinationals and the Free Trade Agreement,’’ in M. Gold and D.L. Brown (eds.), Trade-Offs on Free Trade: The Canada–U.S. Free Trade Agreement (Toronto: Carswell, 1988): 4–12.

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‘‘U.S. Administered Protection and Canadian Trade Policy,’’ in A.M. Rugman (ed.), International Business in Canada: Strategies for Management (Toronto: Prentice-Hall of Canada, 1989): 106–122. ‘‘Trade Policy and Corporate Strategy’’ (with A. Verbeke), in A.M. Rugman (ed.), International Business in Canada: Strategies for Management (Toronto: Prentice-Hall of Canada, 1989): 144–159. ‘‘Strategies for the Canadian Multinationals’’ (with M. Warner), in A.M. Rugman (ed.), International Business in Canada: Strategies for Management (Toronto: Prentice-Hall of Canada, 1989): 200–229. ‘‘Strategies for Canadian and Korean Multinational Enterprises,’’ in D. Kim and B.L. Evans (eds.), Korea and Canada: New Frontiers in the Asia-Pacific Era (Seoul, Korea: Institute of East and West Studies, Yonsei University, 1989): 215–238. Also translated in The Korean Journal of Canadian Studies (Vol 1, 1989): 189–213. ‘‘Country-Factor Bias in the Administration of Antidumping and Countervailing Duty Cases’’ (with A. Anderson), in M. Trebilcock and R. York (eds.), Fair Exchange: Reforming Trade Remedy Laws (Toronto: C.D. Howe Institute, 1990): 147–194. ‘‘Trade Policy in the Asia-Pacific Region: A United States–Japan Comparison’’ (with A. Verbeke), in P. Nemetz (ed.), The Pacific Rim: Investment, Development and Trade, 2nd Edition (Vancouver, B.C.: U.B.C. Press, 1990): 211–227. ‘‘The Canada–U.S. Free Trade Agreement and Its Impact on Canadian Business’’ (with A. Verbeke), in J.E. McConnell (ed.), Canada–United States Trade Centre Annual: An Economic Profile of North America 1990 (Buffalo: State University of New York at Buffalo, 1990): 17–26. ‘‘Competitive Strategies for Non-European Firms’’ (with A. Verbeke), in B. Burgenmeier and J.L. Mucchielli (eds.) Multinationals and Europe 1992: Strategies for the Future (London and New York: Routledge, 1991): 22–35. ‘‘Adjustments by Multinational Firms to Free Trade,’’ in F.C. Menz and S.A. Stevens (eds.), Economic Opportunities in Freer U.S. Trade with Canada. (Albany, NY: State University of New York Press, 1991): 53–66.

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‘‘Corporate Strategy after the Free Trade Agreement and Europe 1992,’’ in J. Longair (ed.), Regional Integration in the World Economy: Europe and North America (Ottawa: Conference Board of Canada, 1990): 92–101. ‘‘Japanese Joint Ventures with Western Multinationals’’ (with L. Brown and A. Verbeke), in H. Singer, N. Hatti and R. Tandon (eds.), Joint Ventures and Collaborations (New Delhi: Indus, 1991): 417–437. ‘‘Environmental Change and Global Competitive Strategy in Europe’’ (with A. Verbeke), in A.M. Rugman and A. Verbeke (eds.), Research in Global Strategic Management, Volume 2: Global Competition and the European Community (Greenwich, CT: JAI Press, 1991): 3–27. ‘‘Japanese and Canadian Direct Investment in the United States’’ (with A. Anderson), in L. Heroux and P. Gandhi (eds.), The Canada–U.S. Economic Relationship: Global and Regional Dimensions (Plattsburgh, NY: Centre for the Study of Canada, S.U.N.Y. Plattsburgh, 1991): 47–55. ‘‘Globalization and Industrial Policy: An Assessment of the Report of the Premier’s Council of Ontario’’ (with A. Verbeke), in D. Conklin and L. Deschenes (eds.), Canada’s Information Revolution (Halifax: Institute for Research on Public Policy, 1991): 59–69. ‘‘Foreign Ownership and Corporate Strategy’’ (with L. Waverman), in L. Waverman (ed.), Corporate Globalization through Mergers and Acquisitions (Calgary: University of Calgary Press, 1991): 59–87. ‘‘Effective Dispute Settlement: A Case Study of the Initial Panel Decisions under Chapter Nineteen of the Canada–U.S. Free Trade Agreement’’ (with T. Boddez), in E.H. Fry and L.H. Radebaugh (eds.), Investment in the North American Free Trade Area: Opportunities and Challenges (Provo, UT: Brigham Young University, 1991): 93–126. ‘‘Multinational Enterprise and National Economic Policy’’ (with A. Verbeke), in P.J. Buckley and M. Casson (eds.), Multinational Enterprises in the World Economy: Essays in Honour of John Dunning (Aldershot, UK: Edward Elgar, 1992): 194–211. ‘‘Shelter, Trade Policy, and the Strategic Management of Multinational Enterprises’’ (with A. Verbeke), in A.M. Rugman and A. Verbeke (eds.),

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Research in Global Strategic Management: Volume 3, Corporate Response to Global Change (Greenwich, CT: JAI Press, 1992): 3–25. ‘‘Globalization of Banking Services: Canada’s Strategies in the Triad’’ (with A. Anderson), in Y. Aharoni (ed.), Coalitions and Competition: The Globalization of Professional Business Services (London: Routledge, 1993): 253–279. ‘‘The Investment Provisions of NAFTA’’ (with M. Gestrin), in S. Globerman and M. Walker (eds.), Assessing NAFTA: A Transnational Analysis (Vancouver, B.C.: The Fraser Institute, 1993): 271–292. ‘‘Research in International Business: A Canadian Perspective,’’ in D. Wong–Rieger and F. Rieger (eds.), International Management Research: Looking to the Future (Berlin, NY: deGruyter, 1993): 105–113. ‘‘Drawing the Border for a Multinational Enterprise and a Nation State,’’ in L. Eden and E. Potter (eds.), Multinationals in the Global Political Economy (London: Macmillan, 1993): 84–100. ‘‘Multinational Banking Strategies in the Pacific’’ (with A. Verbeke), in G. Sletmo and G. Boyd (eds.), Pacific Service Enterprises and Pacific Cooperation (Boulder: Westview Press, 1993): 203–215. ‘‘Generic Strategies in Global Competition’’ (with A. Verbeke), in A.M. Rugman and A. Verbeke (eds.), Research in Global Strategic Management Volume 4: Beyond the Three Generics (Greenwich, CT: JAI Press, 1993): 3–15. ‘‘Comments on Business Location Decision,’’ in B. Purchase (ed.), Competitiveness and Size of Government (Kingston, Ont.: School of Policy Studies, Queen’s University, 1993): 108–112. ‘‘United States Trade Laws as Barriers to Globalization’’ (with M. Gestrin), in T. Agmon and R. Drobnick (eds.), Small Firms in Global Competition (New York: Oxford University Press, 1994): 62–69. ‘‘A Theory of Business Networks’’ (with J. D’Cruz), in L. Eden (ed.), Multinationals in North America (Calgary: University of Calgary Press, 1994): 103–116.

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‘‘FDI and NAFTA: A Canadian Perspective’’ (with A. Verbeke), in K. Fatemi and D. Salvatore (eds.), The North American Free Trade Agreement (Oxford: Pergamon, 1994): 249–263. ‘‘Strategic Management and Canadian Multinational Enterprises’’ in S. Globerman (ed.), Canadian-Based Multinationals (Calgary: University of Calgary Press, 1994): 241–262. ‘‘North American Economic Integration and Canadian Sovereignty,’’ in M.D. Baer and S. Weintraub (eds.), The NAFTA Debate: Grappling with Unconventional Trade Issues (Boulder and London: Lynne Rienner, 1994): 97–116. ‘‘Transnational Networks and Global Competition: An Organizing Framework’’ (with A. Verbeke), in A. Rugman, J. Van Den Broeck and A. Verbeke (eds.), Research in Global Strategic Management Volume 5: Beyond the Diamond (Greenwich, Conn: JAI Press, 1995): 3–24. ‘‘The Generalized Double Diamond Approach to International Competitiveness’’ (with C. Moon and A. Verbeke), in A. Rugman, J. van den Broeck and A. Verbeke (eds.), Research in Global Strategic Management Volume 5: Beyond the Diamond (Greenwich, CT: JAI Press, 1995): 97–114. ‘‘Internalization and De-Internalization: Will Business Networks Replace Multinationals?’’ (with J.R. D’Cruz and A. Verbeke), in G. Boyd (ed.), Competitive and Cooperative Macromanagement (Aldershot, Hants: Edward Elgar, 1995): 107–128. ‘‘Strategic Responses of Canadian Firms to Globalization’’ (with J.R. D’Cruz), in D.F. Simon (ed.), Corporate Strategies in the Pacific Rim: Global Versus Regional Trends (London: Routledge, 1995): 135–165. ‘‘The Double Diamond Model: Canada’s Experience’’ (with J.R. D’Cruz), in M. Foster and B. David (eds.), Regions at the Crossroads: Strategic Development Case Studies for the New Economy (Sydney, N.S.: University College of Cape Breton Press, 1995): 35–57. ‘‘Business Network Theory and the Canadian Telecommunications Industry’’ (with J.R. D’Cruz), in W.T. Stanbury (ed.), Perspectives on the New Economics of Regulation of Telecommunications (Montreal: Institute for Research on Public Policy, 1996): 63–79.

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‘‘The NAFTA Investment Provisions: Prototype for Multilateral Investment Rules?’’ (with M. Gestrin), in P. Sauve´ and A.B. Zampetti (eds.), Market Access after the Uruguay Round (Paris: Organization for Economic Co-operation and Development, 1996): 63–78. ‘‘The North American Free Trade Agreement and Foreign Direct Investment’’ (with M. Gestrin), in K.P. Sauvant (ed.), Companies without Borders: Transnational Corporations in the 1990s (London: International Thomson Business Press, 1996): 188–207. ‘‘A Conceptual Framework for a Multilateral Agreement on Investment: Learning from the NAFTA’’ (with M. Gestrin), in P.S. and D. Schwanen (eds.), Investment Rules for the Global Economy: Enhancing Access to Markets (Toronto: C.D. Howe Institute, 1996): 147–175. ‘‘Strategies of Multinationals and Governments: The Theory of the Flagship Firm’’ (with J.R. D’Cruz), in A. Rugman and G. Boyd (eds.), Investment and Trade in the Euro-Pacific: Strategies for Structural Interdependencies (Cheltenham: Edward Elgar, 1997): 37–68. ‘‘Global Strategies for Multinational Enterprises,’’ (with A. Verbeke) in I. Islam and W. Shepherd (eds.), Current Issues in International Business (Cheltenham: Edward Elgar, 1997): 137–150. ‘‘Canada,’’ in J.H. Dunning (ed.), Governments, Globalization and International Business (Oxford: Oxford University Press, 1997): 175–202. ‘‘Trade Policies and Strategy of MNEs in an Era of Globalization’’ (with A. Verbeke), in N. Kobayashi (ed.), Management: A Global Perspective (Tokyo: The Japan Times, 1997): 40–59. ‘‘The Five Partners/Flagship Model and the Scottish Electronics Cluster,’’ in Multinational Location Strategy: Volume 6 of Research in Global Strategic Management, edited by J.L. Mucchielli (Greenwich and London: JAI Press, 1998): 165–181. ‘‘Foreign Direct Investment and Internalization in Processed Foods,’’ in D.H. Pick, D.R. Henderson, J.D. Kinsey and I.M. Sheldon (eds.), Global Markets for Processed Foods (Boulder, CO: Westview Press, 1998): 121–134.

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‘‘North American Sectoral Profiles and Corporate Strategy in the Automobile Industry,’’ in G. Boyd (ed.), The Struggle for World Markets: Competition and Cooperation between NAFTA and the E.U. (Cheltenham: Edward Elgar, 1998): 59–79. ‘‘Corporate Strategies and the Environment,’’ in J. Dunning and G. Boyd (eds.), Structural Change and Cooperation in the Global Economy (Cheltenham: Edward Elgar, 1999): 244–264. ‘‘Corporate Strategy and NAFTA when Environmental Regulations are Barriers to Trade’’ (with J.A. Soloway), in J.L. Mucchielli, P.J. Buckley and V.C. Cordell (eds.), Globalization and Regionalization (Binghampton, NY: Haworth Press, 1998): 231–252. ‘‘The World Trade Organization’’ (pp. 541–543) and ‘‘The North American Free Trade Agreement’’ (pp. 463–466) in R. Tung (ed.), The Handbook of International Business (London: International Thompson Press, 1998). ‘‘Negotiating Multilateral Rules to Promote Investment,’’ in M. Hodges, J. Kirton and J. Daniels (eds.), The G8’s Role in the New Millennium (Aldershot: Ashgate, 1999): 143–157. ‘‘Multinational Enterprises in APEC’’ (with C. Brain), in A.M. Rugman and G. Boyd (eds.), Deepening Integration in the Pacific Economies: Corporate Alliances, Contestable Markets and Free Trade (Cheltenham: Edward Elgar, 1999): 124–148. ‘‘Multinational Enterprise Strategy, Green Capabilities and Government Environmental Regulations,’’ essays in honour of K. Macharzina, J. Engelhard and W. Oechsler (eds.), International Management: Effects of Global Change on Competition, Corporate Strategies and Labor Marks (Wiesbaden: Gabler Verlag, 1999): 174–192. ‘‘Environmental Regulations and the Global Strategies of Multinational Enterprises’’ (with A. Verbeke), in A. Prakash and J.A. Hart (eds.), Coping with Globalization (London: Routledge, 2000): 77–93. ‘‘Multinational Enterprises and Public Policy’’ (with A. Verbeke), in C. Muller, R. Grant and C. Choi (eds.), International Business: Emerging Issues and Emerging Markets (London: Macmillan, 2000): 21–43.

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‘‘The Theory of the Flagship Firm’’ (with J. D’Cruz), in D. Faulkner and M. De Rond (eds.), Cooperative Strategy: Economic, Business and Organizational Issues (Oxford: Oxford University Press, 2000): 57–73. ‘‘From Globalisation to Regionalism: The Foreign Direct Investment Dimension of International Finance,’’ in C. Kaiser, J. Kirton and J. Daniels (eds.), Shaping a New International Financial System (Aldershot: Ashgate, 2000): 203–220. ‘‘The Generalized Double Diamond Approach to the Global Competitiveness of Korea and Singapore,’’ in D. Van Den Bulcke and A. Verbeke (eds.), Globalization and the Small Open Economy (Cheltenham: Edward Elgar, 2001): 36–56. ‘‘Location, Competitiveness and the Multinational Enterprise’’ (pp. 150–180); ‘‘Environmental Policy and International Business’’ (pp. 537–557); ‘‘Multinational Enterprises and Public Policy,’’ (pp. 818–842) (all with A. Verbeke) in A.M. Rugman and T. Brewer (eds.), The Oxford Handbook of International Business (Oxford: Oxford University Press, 2001). ‘‘The World Trade Organization and International Political Economy,’’ in A.M. Rugman and G. Boyd (eds.), The World Trade Organization in the New Global Economy (Cheltenham, UK: Edward Elgar, 2001): 1–22. ‘‘The Illusion of the Global Company,’’ in J. Pickford (ed.), Financial Times Mastering Management 2.0 (London: Pearson Education, 2001): 129–133. ‘‘Multinational Enterprises and the End of Global Strategy,’’ in J.H. Dunning and J.-L. Mucchielli (eds.), Multinational Firms: The Global–Local Dilemma (London and New York: Routledge, 2002): 3–17. ‘‘NAFTA, Environmental Regulations and Firm Strategies’’ (with J. Kirton), in S.M. Murshed (ed.), Issues in Positive Political Economy (London: Routledge, 2002): 130–146. ‘‘The Impact of Globalization on Canadian Competition Policy’’ in D.W. Conklin (ed.), Canadian Competition Policy: Preparing for the Future (Toronto: Pearson Education Canada, 2002): 30–44.

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‘‘Britain, Europe and North America’’ (with A. Kudina), in M. Fratianni, P. Savona and J. Kirton (eds.), Governing Global Finance (Aldershot: Ashgate, 2002): 185–195. ‘‘Globalization and Business Strategy,’’ in Business: The Ultimate Resource (with D. Goleman) (Cambridge, MA: Perseus Bloomsbury Publishing, 2002): 97–98. ‘‘New Rules for International Investment: The Case for a Multilateral Agreement on Investment at the WTO,’’ in C. Milner and R. Read (eds.), Trade Liberalization, Competition and the WTO (Cheltenham: Edward Elgar, 2002): 176–189. ‘‘The Influence of ‘Managing across Borders’ on the Field of International Management,’’ in M. Hitt and J. Cheng (eds.), Advances in International Management Volume 14: Managing Transnational Firms (Oxford: JAI Press/ Elsevier, 2002): 37–56. ‘‘Strategies for Multinational Enterprises’’ (with A. Verbeke), D. Faulkner and A. Campbell (eds.), Oxford Handbook of Strategy Volume 2 (Oxford: Oxford University Press, 2003): 183–205. ‘‘Corporate Alliances and Competition Policy,’’ (with G. Boyd) in J. Dunning and G. Boyd (eds.), Alliance Capitalism and Corporate Management (Cheltenham, UK: Edward Elgar, 2003): 154–170. ‘‘Multinational Enterprises and Public Policy’’ (with A. Verbeke), in T.L. Brewer, S.E. Guisinger and S. Young (eds.), The New Economic Analysis of Multinationals (Cheltenham: Edward Elgar, 2003): 122–144. ‘‘American Alliance Capitalism: Flagship-led Clusters’’ (with A. Verbeke), in A.M. Rugman and G. Boyd (eds.), Alliance Capitalism for the New American Economy (Cheltenham: Edward Elgar, 2003): 178–187. ‘‘Regional Multinationals and Triad Strategy’’ (with A. Verbeke), in A.M. Rugman (eds.), Research in Global Strategic Management Volume 8: Leadership in International Business Education and Research (Oxford: Elsevier, 2003): 253–268. ‘‘Regional Multinationals: The Location-Bound Drivers of Global Strategy’’ (with A. Verbeke), in J. Birkinshaw, G. Yip, C. Markides, S. Ghoshal

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and J. Stopford (eds.), The Future of the Multinational Company (London: Wiley, 2003): 45–58. ‘‘The World Trade Organization, Multinational Enterprises and the Civil Society’’ (with A. Verbeke), in J. Kirton (ed.), Sustaining Global Growth and Development (Aldershot, UK: Ashgate, 2003): 81–97. ‘‘Towards a Theory of Multinational Enterprises and the Civil Society’’ (with A. Verbeke), in A. Ghobadian N. O’Regan, D. Gallear and H. Viney (eds.), Strategy and Performance: Achieving Competitive Advantage in the Global Market Place (London: Wiley, 2004): 35–53. ‘‘North American Intra-Regional Trade and Foreign Direct Investment,’’ in A. Rugman (ed.), North American Economic and Financial Integration (Oxford: Elsevier, 2004): 3–16. ‘‘Globalization and Regional International Production,’’ in D. Ravenhill (ed.), Global Political Economy (Oxford: Oxford University Press, 2004): 263–290. ‘‘Economic Integration in North America: Implications for the Americas,’’ in S. Weintraub et al. (eds.), Free Trade in the Americas (Cheltenham, UK: Edward Elgar, 2004): 90–106. ‘‘Regional Multinationals: The New Research Agenda’’ (with A. Verbeke), in P. Buckley (ed.), What is International Business? (London: Palgrave, 2005): 110–132. ‘‘Continental Integration and Foreign Ownership of Canadian Industry: A Retrospective Analysis,’’ in L. Eden and W. Dobson (eds.), Governance, Multinationals and Growth: Essays in Honor of A. E. Safarian (Cheltenham, UK: Edward Elgar, 2005), in press. ‘‘Multinational Enterprise Strategy for Developing Countries,’’ in S. Vachani and S. Jain (eds.), Multinational Corporations and Global Poverty Reduction (Cheltenham: Edward Elgar, 2005), forthcoming. ‘‘Regional Multinationals and Government Policy: The End of Global Strategy and Multilateralism,’’ in R. Grosse (ed.), International Business – Government Relations in the 21st Century (Cambridge, UK: Cambridge University Press, 2005), forthcoming.

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ARTICLES IN REFEREED JOURNALS ‘‘A Note on Internationally Diversified Firms and Risk Reduction,’’ Journal of Business Administration, 7:1 (Fall 1975): 182–184. ‘‘A Comment on Corporate International Diversification,’’ Journal of Financial and Quantitative Analysis, X: 4 (November 1975): 651–652. ‘‘Risk Reduction by International Diversification,’’ Journal of International Business Studies, 7:2 (Fall 1976): 75–80. ‘‘International Correlation Coefficients as Indicators of Real and Financial Diversification,’’ Rivista Internazionale di Scienze Economiche e Commerciali, XXIII: 10–11 (October–November 1976): 954–967. ‘‘Risk, Direct Investment and International Diversification,’’ Weltwirtschaftliches Archiv, 113:3 (September 1977): 487–500. ‘‘International Diversification by Financial and Direct Investment,’’ Journal of Economics and Business, 30:1 (October 1977): 31–37. ‘‘Risk and Return in the Canadian Mineral Resource Industry,’’ Revista Internazionale di Scienze Economiche e Commerciali, XXXVI:5 (May 1979): 432–449. ‘‘Internalization as a General Theory of Foreign Direct Investment: A Reappraisal of the Literature,’’ Weltwirtschaftliches Archiv, 116:2 (June 1980): 365–379. ‘‘A New Theory of the Multinational Enterprise: Internationalization versus Internalization,’’ Columbia Journal of World Business, XV:1 (Spring 1980): 23–29. ‘‘Implications of the Theory of Internalization for Corporate International Finance,’’ California Management Review, XXIII:2 (Winter 1980): 73–79. ‘‘A Test of Internalization Theory,’’ Managerial and Decision Economics, 2:4 (September 1981): 211–219.

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‘‘Research and Development by Multinational and Domestic Firms in Canada,’’ Canadian Public Policy, VII:4 (Autumn 1981): 604–616. ‘‘Technology Transfer and World Product Mandating,’’ (with J. Bennett) Columbia Journal of World Business, XVII:4 (Winter 1982): 58–62. ‘‘The Comparative Performance of U.S. and European Multinational Enterprises,’’ Management International Review, 23:2 (1983): 4–14. ‘‘The Influence of Hymer’s Dissertation on the Theory of Foreign Direct Investment’’ (with John Dunning), American Economic Review: Papers and Proceedings, 75:2 (May 1985): 228–232. ‘‘Multinationals and Global Competitive Strategy,’’ International Studies of Management and Organization, XV:2 (Summer 1985): 8–18. ‘‘Multinational Oil Ltd.’’ (with J. McIlveen), Journal of Management Case Studies, 1:2 (Summer 1985): 108–118. ‘‘Internalization is Still a General Theory of Foreign Direct Investment,’’ Weltwirtschaftliches Archiv, 121:3 (September 1985): 570–575. ‘‘Canadian Multinationals: Identification: Performance and Strategic Management’’ (with J. McIlveen), Management International Review, 25:3 (1985): 41–56. ‘‘A Subway Story,’’ Journal of Management Case Studies, 2:1 (Spring 1986): 56–67. ‘‘The Strategic Management of Multinationals and World Product Mandating’’ (with S. Douglas), Canadian Public Policy, XII: 2 (June 1986): 320–328. ‘‘New Theories of the Multinational Enterprise: An Assessment of Internalization Theory,’’ Bulletin of Economic Research, 38:2 (May 1986): 101–118. Translated into Japanese in Kobe Gakuin Economic Papers, 18:3 (December 1986). ‘‘The Role of Multinational Enterprises in U.S.–Canadian Economic Relations,’’ Columbia Journal of World Business, XXI:2 (Summer 1986): 15–27.

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‘‘The Firm Specific Advantages of Canadian Multinationals,’’ Journal of International Economic Studies, 2 (March 1987): 1-14. Also published in International Studies of Management and Organization, XVIII:1 (Spring 1988): 67–85. ‘‘U.S.–Canadian Trade Liberalization and Adjustment Mechanisms: A Survey’’ (with A. Anderson), International Trade Journal, 1:3 (March 1987): 219–250. ‘‘Strategies for National Competitiveness,’’ Long Range Planning, 20:3 (June 1987): 92–97. ‘‘A Fishy Business: The Abuse of American Trade Law in the Atlantic Groundfish Case of 1985–1986,’’ (with A. Anderson), Canadian Public Policy, XIII:2 (June 1987): 156–64. ‘‘Canada’s Reversal from Importer to Exporter of Foreign Direct Investment’’ (with R. Tilley), Management International Review, 27:3 (1987): 13–25. ‘‘Business and Trade Policy: The Structure of Canada’s New Private Sector Advisory System’’ (with A. Anderson), Canadian Journal of Administrative Sciences, 4:4 (December 1987): 367–380. ‘‘Multinationals and Trade in Services: A Transaction Cost Approach,’’ Weltwirtschaftliches Archiv, 123:4, (December 1987): 651–667. ‘‘Does Competitive Strategy Work for Small Business?’’ (with A. Verbeke), Journal of Small Business and Entrepreneurship, 5:3 (Winter 1987/1988): 45–50. ‘‘Trade Policy for the Asia–Pacific Region: A U.S.–Japan Comparison’’ (with A. Verbeke), Journal of Business Administration, 17:1–2 (1987/1988): 89–107. ‘‘Strategic Responses to Free Trade’’ (with A. Verbeke), Hitotsubashi Journal of Commerce and Management, 23:1 (December 1988): 69–79. ‘‘Strategic Management and the Canada–U.S. Free Trade Agreement’’ (with A. Verbeke), North American Review of Economics and Finance, 1:1 (December, 1988): 63–93.

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‘‘Foreign Ownership, Free Trade and the Canadian Energy Sector’’ (with M. Warner), Journal of Energy and Development, 14:1 (Autumn 1988): 1–18. ‘‘Trade Policy and Global Corporate Strategy’’ (with A. Verbeke), Journal of Global Marketing, 2:3 (Spring 1989): 1–17. ‘‘Japanese Joint Ventures with Western Multinationals: Synthesizing the Economic and Cultural Explanations of Failure’’ (with L. Brown and A. Verbeke), Asia-Pacific Journal of Management, 6:2 (April 1989): 225–242. ‘‘Strategic Management and Trade Policy’’ (with A. Verbeke), Journal of International Economic Studies, 3 (March 1989): 139–152. ‘‘The Impact of Free Trade on Small Business in Canada’’ (with A. Verbeke), Journal of Small Business and Entrepreneurship, 6:3 (Spring 1989): 51–56. ‘‘Trade in Services and Returns on Multinational Activity’’ (with B. Yeung), Weltwirtschaftliches Archiv, 125:2 (1989): 386–391. ‘‘Subsidies in the U.S. Steel Industry: A New Conceptual Framework and Literature Review’’ (with A. Anderson), Journal of World Trade, 23:6 (December 1989): 59–84. ‘‘Strategic Capital Budgeting Decisions and the Theory of Internalization,’’ (with A. Verbeke), Managerial Finance, 16:2 (Spring 1990): 17–24. ‘‘Multinational Corporate Strategy and the Canada–U.S. Free Trade Agreement’’ (with A. Verbeke), Management International Review, 30:3 (Summer 1990): 253–266. ‘‘Strategic Change in the European Flexible Packaging Industry,’’ (with A. Verbeke and Alexandria Campbell), European Management Journal, 8:3 (September 1990): 380–387. ‘‘Canadian Strategies for International Competitiveness,’’ (with J. D’Cruz), Business in the Contemporary World, III:1 (October 1990): 93–100. ‘‘The Canada–U.S. Free Trade Agreement and Canada’s Agri-Food Industries’’ (with A. Anderson), Northeastern Journal of Agriculture and Resource Economics, 19:2 (October 1990): 70–79.

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‘‘Strategic Trade Policy is not Good Strategy’’ (with A. Verbeke), Hitotsubashi Journal of Commerce and Management, 25:1 (December 1990): 75–97. ‘‘Imperial Oil versus the Queen: A Case Study in Transfer Pricing’’ (with A. Verbeke), Journal of Teaching in International Business, 2:2 (1990): 5–15. ‘‘Mintzberg’s Intended and Emergent Corporate Strategies and Trade Policy’’ (with A. Verbeke), Canadian Journal of Administrative Sciences, 8:3 (September 1991): 200–208. ‘‘Trade Barriers and Corporate Strategy in International Companies: The Canadian Experience’’ (with A. Verbeke), Long Range Planning, 24:3 (1991): 66–72. ‘‘Europe 1992 and Competitive Strategies for North American Firms,’’ (with A. Verbeke), Business Horizons, 34:6 (November–December 1991): 76–81. ‘‘Corporate Strategy and the Free Trade Agreement: Adjustment by Canadian Multinational Enterprises,’’ (with A. Verbeke and S. Luxmore), Canadian Journal of Regional Science, 13:2/3 (Summer/Autumn 1991): 307–330. ‘‘E.C. Anti-dumping Laws as a Barrier to Trade’’ (with M. Gestrin), European Management Journal, 9:4 (December 1991): 475–482. ‘‘Quebec Separatism and Canadian Competitiveness’’ (with J.R. D’Cruz), The North American Review of Canadian Studies, 21:2/3 (Summer/Autumn 1991): 253–259. ‘‘U.S. Trade Laws as Barriers to Globalization’’ (with M. Gestrin), The World Economy, 14:3 (1991): 335–352. ‘‘Japanese and Canadian Direct Investment in the United States’’ (with A. Anderson), Singapore Economic Review, 26:2 (October 1991): 68–83. ‘‘A Note on the Transnational Solution and the Transaction Cost Theory of Multinational Strategic Management’’ (with A. Verbeke), Journal of International Business Studies, 23:4 (Fall 1992): 761–772.

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‘‘Entry Barriers and Bank Strategies for the Europe 1992 Financial Directives’’ (with R. Theil and A. Verbeke) European Management Journal, 10:3 (September 1992): 327–333. ‘‘Internationalization of the Curriculum,’’ Journal of Business Administration, 21:1/2 (1992/1993): 13–27. ‘‘The Double Diamond Model of International Competitiveness: The Canadian Experience’’ (with J. D’Cruz), Management International Review, 33:2 (1993): 17–40. ‘‘Foreign Subsidiaries and Multinational Strategic Management: An Extension and Correction of Porter’s Single Diamond Framework,’’ (with A. Verbeke), Management International Review, 33:2 (1993): 71–84. ‘‘How to Operationalize Porter’s Diamond of Competitive Advantage,’’ (with A. Verbeke), The International Executive, 35:4 (July–August 1993): 283–299. ‘‘The Strategic Response of Multinational Enterprises to NAFTA’’ (with M. Gestrin), Columbia Journal of World Business, 28:4 (Winter 1993): 18–29. ‘‘Strategic Management, Networks and International Competitiveness,’’ (with J.R. D’Cruz), Competitiveness Review, 3:2 (1993): 3–7. ‘‘Business Networks, Telecommunications and International Competitiveness’’ (with J.R. D’Cruz), Development and International Cooperation, 9:2 (December 1993): 223–243. ‘‘A Canadian Perspective on NAFTA,’’ The International Executive, 36:1 (January–February 1994): 33–54. ‘‘The Five Partners Model: France Telecom, Alcatel and the Global Telecommunications Industry’’ (with J. D’Cruz), European Management Journal, 12:1 (March 1994): 59–66. ‘‘The Impact of NAFTA upon North American Investment Patterns’’ (with M. Gestrin), Transnational Corporations, 3:1 (February 1994): 77–96.

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‘‘Business Network Theory and the Canadian Telecommunications Industry’’ (with J.R. D’Cruz), International Business Review, 3:3 (September 1994): 275–288. ‘‘Economic Regionalism in Latin America’’ (with M. Gestrin), International Journal, 49:3 (Summer 1994): 568–587. ‘‘Does the United States have a Deficit with Japan in Foreign Direct Investment?’’ (with S. Gray), Transnational Corporations, 3:2 (August 1994): 127–137. ‘‘Environmental Regulations and International Competitiveness: Strategies for Canada’s Forest Products Industry,’’ The International Executive, 37:5 (September–October 1995): 451–465. ‘‘Foreign Direct Investment – How Much is it Worth: A Reply,’’ (with S.J. Gray), Transnational Corporations, 5:1 (April 1996): 98–100. ‘‘A Test of Internalization Theory and Internationalization Theory: The Upjohn Company’’ (with E. Fina), Management International Review, 36:3 (September 1996): 199–213. ‘‘Partners across Borders: The Five Partners Business Network Model’’ (with J.R. D’Cruz), International Management, 1:1 (1996): 15–26. ‘‘New Rules for Multinational Investment’’ (with M. Gestrin), The International Executive 39:1 (January–February 1997): 21–33. ‘‘The Theory of the Flagship Firm’’ (with J.R. D’Cruz), European Management Journal, 15:4 (August 1997): 403–412. ‘‘An Environmental Agenda for APEC: Lessons from NAFTA’’ (with J.A. Soloway), The International Executive, 39:6 (November–December 1997): 735–744. ‘‘Canadian Corporate Strategy in a North American Region’’ (with J. Kirton and J.A. Soloway), American Review of Canadian Studies, 27:2 (Summer 1997): 199–219. ‘‘Environmentally Related Trade Disputes between the United States and Canada’’ (with D. Vogel), American Review of Canadian Studies, 27:2 (Summer 1997): 271–292.

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‘‘NAFTA and the Dispute Settlement Mechanisms: A Transaction Costs Approach’’ (with A. Anderson), The World Economy, 20:7 (November 1997): 935–950. ‘‘Towards an Investment Agenda for APEC,’’ Transnational Corporations, 6:2 (August 1997): 115–125. Also published in Asia Pacific Journal of Marketing and Logistics, 9:3 (1997): 16–25. ‘‘Corporate Strategies When Environmental Regulations are Barriers to Trade’’ (with J.A. Soloway), Journal of Transnational Management Development, 3:3 (1998): 231–251. ‘‘The Rules for Foreign Investment in NAFTA,’’ Latin American Business Review, 1:1 (1998): 77–94. ‘‘Multinational Enterprises and Public Policy’’ (with A. Verbeke), Journal of International Business Studies, 29:1 (March 1998): 115–136. ‘‘Corporate Strategies and Environmental Regulations: An Organizing Framework’’ (with A. Verbeke), Strategic Management Journal, 19:4 (April 1998): 363–375. ‘‘A Generalized Double Diamond Approach to the Global Competitiveness of Korea and Singapore,’’ (with H.C. Moon and A. Verbeke), International Business Review, 7:2 (1998): 135–150. ‘‘Corporate Strategy and International Environmental Policy’’ (with A. Verbeke), Journal of International Business Studies, 29:4 (1998): 819–833. ‘‘Regional Environmental Impacts of NAFTA on the Automotive Sector’’ (with J. Kirton), Canadian Journal of Regional Science, 22:2 (1998): 227–254. ‘‘Forty Years of the Theory of the Transnational Corporation,’’ Transnational Corporations, 8:2 (1999): 51–70. ‘‘Multinational Enterprise Strategy and the NAFTA Trade and Environment Regime’’ (with J. Kirton), Journal of World Business, 33:4 (1999): 438–454.

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‘‘NAFTA, Environmental Regulations and International Business Strategies’’ (with J. Kirton), Global Focus: An International Journal of Business, Economics and Social Policy, 11:4 (1999): 33–47. ‘‘Six Cases of Corporate Strategic Responses to Environmental Regulation’’ (with A. Verbeke), European Management Journal, 18:4 (August 2000): 377–385. ‘‘Subsidiary Specific Advantages of Multinational Enterprises’’ (with A. Verbeke), Strategic Management Journal, 22:3 (2001): 237–250. ‘‘The End of Global Strategy’’ (with R. Hodgetts), European Management Journal, 19:4 (August 2001): 333–343. ‘‘The Myth of Global Strategy,’’ International Marketing Review, 18:6 (December 2001): 583–588. ‘‘My Contributions to Internalization Theory,’’ Journal of International Business and Economy, 2:1 (Fall 2001): 1–13. ‘‘Edith Penrose’s Contribution to the Resource-Based View of Strategic Management’’ (with A. Verbeke), Strategic Management Journal, 23:8 (2002): 769–780. ‘‘Retail Multinationals and Globalization: The Evidence is Regional’’ (with S. Girod), European Management Journal, 21:1 (February 2003): 24–37. ‘‘Regional Strategies for Service Sector Multinationals,’’ European Business Journal, 15:1 (2003): 1–9. ‘‘Extending the Theory of the Multinational Enterprise: Internalization and Strategic Management Perspectives’’ (with A. Verbeke), Journal of International Business Studies, 34:2 (2003): 125–137. ‘‘Multinational Enterprises are Regional, Not Global,’’ Multinational Business Review, 11:1 (Spring 2003): 3–12. ‘‘Multinational Enterprises and Clusters’’ (with A. Verbeke), Management International Review, Special Issue 3 (2003): 151–169.

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‘‘Regional Strategy and the Demise of Globalization,’’ Journal of International Management, 9:4 (2003): 409–417. ‘‘A Final Word on Edith Penrose’’ (with A. Verbeke), Journal of Management Studies, 41:1 (2004): 205–217. ‘‘A Perspective on Regional and Global Strategies of Multinational Enterprises’’ (with A. Verbeke), Journal of International Business Studies, 35:1 (2004): 3–18. ‘‘Regional Strategies of Multinational Pharmaceutical Firms’’ (with C. Brain), Management International Review, 44:3 (2004): 7–25. ‘‘The Regional Nature of the World’s Automotive Sector’’ (with S. Collinson), European Management Journal, 22:5 (October 2004): 471–482. ‘‘Regional Transnationals and Triad Strategy’’ (with A. Verbeke), Transnational Corporations, 13:3 (2004): 1–20. ‘‘The Regional Nature of World Banking’’ Multinational Business Review, 12:3 (Winter 2004): 5–22. ‘‘Towards a Theory of Regional Multinationals: A Transaction Cost Economics Approach’’ (with A. Verbeke), Management International Review, 45:1 (Special Issue 1/2005): 5–17. ‘‘Regional Business Networks and the Multinational Retail Sector’’ (with S. Girod), Long Range Planning, 38:2 (2005), forthcoming. ‘‘Multinational Enterprises in the New Europe: Are they Really Global?’’ (with S. Collinson), Organizational Dynamics, 34:3 (2005), forthcoming.

ARTICLES IN APPLIED, LAW, AND POLICY JOURNALS ‘‘Motives for Foreign Investment: The Market Imperfections and Risk Diversification Hypotheses,’’ Journal of World Trade Law, 9:5 (September– October 1975): 567–573.

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‘‘The Foreign Ownership Debate in Canada,’’ Journal of World Trade Law, 10:2 (March–April 1976): 171–176. ‘‘The Regulation of Foreign Investment in Canada,’’ Journal of World Trade Law, 11:4 (July–August 1977): 322–333. ‘‘World Product Mandates: How will Multinationals Respond?’’ (with T.A. Poynter), Business Quarterly, 47:3 (October 1982): 54–61. ‘‘Canada’s Foreign Investment Review Agency: An Update,’’ Journal of World Trade Law, 17:4 (July–August 1983): 352–355. ‘‘Canadian Resources and American Interests,’’ Inter-American Economic Affairs, 37:2 (Autumn 1983): 87–96. ‘‘The Strategic Management of Canada’s Multinationals’’ J. McIlveen), Business Quarterly, 49:3 (Fall 1984): 64–70.

(with

‘‘A Canadian Strategy for International Competitiveness,’’ Business Quarterly, 50:3 (Fall 1985): 18–21. ‘‘Canada’s Agenda for Bilateral Trade Negotiations,’’ Business Quarterly, 51:1 (Spring 1986): 37–41. ‘‘U.S. Protectionism and Canadian Trade Policy,’’ Journal of World Trade Law, 20:4 (July–August 1986): 363–380. ‘‘Living with Free Trade: How Multinationals will Adjust to Trade Liberalization,’’ Business Quarterly, 52:3 (Fall, 1987): 85–90. ‘‘The Softwood Lumber Decision of 1986: Broadening the Nature of U.S. Administered Protection’’ (with S. Porteous), Review of International Business Law, 2:1 (March 1988): 35–58. ‘‘A Canadian Perspective on U.S. Administered Protection and the Free Trade Agreement,’’ Maine Law Review, 40:2 (Fall 1988): 305–324. ‘‘The Free Trade Agreement and the Global Economy,’’ Business Quarterly, 53:1 (Summer, 1988): 13–20.

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‘‘Business Concerns about Implementing the Free Trade Agreement’’ (with A. Anderson), Business Quarterly, 53:4 (Spring 1989): 23–26. ‘‘Canadian Unfair Trade Laws and Corporate Strategy’’ (with S. Porteous), Review of International Business Law, 3:3 (November 1989): 237–270. ‘‘The Canada–U.S. Free Trade Agreement: A Legal and Economic Analysis of the Dispute Settlement Mechanisms’’ (with A. Anderson), World Competition: Law and Economics Review, 13:1 (September 1989): 43–59. Also published in Journal of International Arbitration, 6:4 (December 1989): 65–82. ‘‘Canadian and U.S. Unfair Trade Laws: A Comparison of their Legal and Administrative Structures,’’ (with S. Porteous) North Carolina Journal of International Law and Commercial Regulation, 15:1 (Winter 1990): 67–84. Also published in Canadian Business Law Journal, 16:1 (December 1989): 1–20. ‘‘Can Business Live with the Report of the Premier’s Council of Ontario?’’ (with A. Verbeke), Business Quarterly, 54:2 (Autumn 1989): 38–43. ‘‘American Trade Policy and Corporate Strategy’’ (with A. Verbeke), World Competition: Law and Economics Review, 13:4 (June 1990): 79–90. ‘‘Le roˆle du Canada dans l’e´conomie internationale’’ (with A. Verbeke), Revue Internationale de Gestion, 15:3 (September 1990): 22–31. ‘‘The Dispute Settlement Mechanisms’ Cases in the Canada–United States Free Trade Agreement’’ (with A. Anderson), The George Washington Journal of International Law and Economics, 24:1 (Fall 1990):1–43. ‘‘Red Raspberries: Effective Dispute Settlement in the Canada–United States Free Trade Agreement’’ (with T. Boddez), Northwestern Journal of International Law and Business, 11:3 (February 1991): 401–422. ‘‘The ‘Replacement Parts’ Binational Dispute Panel Cases: Reining in Administered Protection in America’’ (with G. Gwynne-Timothy and A. Anderson), Canada–U.S. Business Law Review, 5:1 (1991): 1–33. ‘‘Diamond in the Rough,’’ Business Quarterly, 55:3 (Winter 1991): 61–64.

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‘‘Canada-U.S. AD and CVD Trade Disputes: Litigation or Arbitration?: An Examination of the FTA and GATT Dispute Settlement Mechanisms’’ (with A. Anderson), Zeitschrift der Gesellschaft fur Kanada-Studien, 11:1 (1991): 189–208. ‘‘Porter Takes the Wrong Turn,’’ Business Quarterly, 56:3 (Winter 1992): 59–64. ‘‘Business Networks for International Competitiveness’’ (with J. D’Cruz), Business Quarterly, 56:4 (Spring 1992): 101–107. ‘‘Canada at the Crossroads: Dialogue,’’ Business Quarterly, 57:1 (Summer 1992): 7–10. ‘‘Investing in the United States After NAFTA,’’ Business Quarterly, 57:4 (Spring 1993): 26–31. ‘‘Developing International Competitiveness: The five Partners Model’’ (with J.R. D’Cruz), Business Quarterly, 58:2 (Winter 1993): 60–72. ‘‘‘Competitiveness’: An Emerging Strategy of Discrimination in U.S. Antitrust and R&D Policy?’’ (with M.A.A. Warner), Law and Policy in International Business, 25:3 (Spring 1994): 945–982. ‘‘Recent U.S. Protectionist R&D Policies: Are Canadian Multinationals Exempted?’’ (with M.A.A. Warner), Canadian Business Law Journal, 23:3 (June 1994): 395–431. ‘‘NAFTA, Environmental Regulations and Canadian Competitiveness’’ (with J. Kirton and J.A. Soloway), Journal of World Trade, 31:4 (August 1997): 129–144. ‘‘A Research Professor’s work can’t be ‘Codified’, ‘‘Business Quarterly, 62:2 (Winter 1997): 32. ‘‘Dialogue: Environmental Regulations and Multinational Corporate Strategy’’ (with A. Verbeke), Academy of Management Review, 23:4 (October 1998): 653–655. ‘‘The Myth of Global Strategy,’’ European Retail Digest, 28 (December 2000): 5–9.

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‘‘The Myths of Globalization’’ (with K. Moore), Ivey Business Journal, 66:1 (September, 2001): 64–68. ‘‘Twelve Books on Globalization: How Relevant for Managers?’’ Business Strategy Review, 12:2 (Summer 2001): 69–76. ‘‘Is Globalization a Myth?’’ The Futurist, (November–December 2001): 16–17. ‘‘Don’t Think Global-Think Regional’’ (with K. Moore), Strategy + Business 28:3 (Summer 2002): 8–9. ‘‘The Myth of Globalization,’’ Market Leader, 20 (March 2003): 29–35. ‘‘Faulty Perspectives on the WTO,’’ (with A. Verbeke), Northwest Journal of International Affairs, 5 (March 2003): 39–59. ‘‘The Regional Solution: Triad Strategies for Multinationals,’’ Business Horizons, 46:6 (November–December 2003): 3–5. ‘‘Think Regional, Not Local, Forget Global.’’ Business Management U.S., 1:1 (2005): 20–22. ‘‘The Myth of Global Business’’ (with K. Moore), European Business Forum, 21 (2005), forthcoming.

OTHER PUBLICATIONS (EXCLUDING NEWSPAPER COLUMNS) Foreign Operations and the Stability of U.S. Corporate Earnings. Doctoral Dissertation: Supervisor: Herbert G. Grubel, University Microfilms (1974). Abstracts of Ph.D. Thesis: ‘‘Foreign Operations and the Stability of U.S. Corporate Earnings,’’ in Journal of International Business Studies, (Fall 1974), Journal of Finance (March 1975) and Eastern Economic Journal (1975). Risk and Return in the Canadian Mining Industry (Kingston, Ontario: Center for Resource Studies, Queen’s University, 1977), 25 pages.

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Brief on Foreign Investment in Report of the Manitoba Regional Working Groups, Man and Resources Program, Canadian Council of Resource and Environment Ministers, Winnipeg (1973). ‘‘Relationship Positive, But Not Perfectly Correlated,’’ Financial Analysts Journal, (March–April 1976). Foreword to Sarkis Khoury’s Dynamics of International Banking (New York: Praeger, 1980). ‘‘Going Multinational to Reduce Risk,’’ Montreal Business Report, 1:2 (June 1980). ‘‘Multinational Mandating,’’ (with J. Bennett) Policy Options, (September– October 1982). ‘‘The Profits of Canadian Multinational Banks,’’ Montreal Business Report, (November–December 1982). ‘‘Banks Don’t Need Higher Profits,’’ Policy Options, (January–February 1983). ‘‘Free Trade Zones in Canada,’’ Policy Options, (July–August 1983). ‘‘Management Should Copy Japan’’ (with J. McIlveen), Policy Options, (January–February 1984). ‘‘Taxing Multinationals’’ (with S. Douglas), Policy Options (November– December 1984). ‘‘Multinacionales y precios de transferencia: una introduccio´n su problema´tica,’’ (‘‘Multinationals and Transfer Pricing: An Introduction’’) Informacio´n Comercial Espan˜ola (Madrid) num, 6l6 (Diciembre 1984): 35–40. ‘‘Mercantilism at Harvard,’’ Policy Options, (April 1985). ‘‘The Strategic Management of Canadian Multinationals: The Pulp and Paper Industry,’’ Multinational Business Quarterly, (1985): 18–26.

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OVERVIEW OF ALAN RUGMAN’S ACADEMIC OEUVRE

‘‘National Strategies for International Competitiveness,’’ Multinational Business Quarterly, 3 (1985): 1–9. ‘‘Implications of the Theory of the Multinational Enterprise in a Canadian Context,’’ Gestion Cientifica, 1:2 (1985):131–144. ‘‘Escaping Anarchy in Trade,’’ Policy Options, (November 1986): 22–26. ‘‘Estrategias de competitividad internacional’’ (Strategies for International Competitiveness), Informacio´n Commercial Espan˜ola num, 643 (March 1987): 65–71. ‘‘Canada in the USA: Foreign Direct Investment Flows Reversed,’’ Multinational Business Quarterly, 1 (1987): 12–22. ‘‘United States Foreign Direct Investment in Canada,’’ CA Magazine, (May 1987): 46–52. ‘‘Free Trade and Regional Development,’’ Policy Options, (July 1987): 40–41. ‘‘A Canadian–U.S. Dispute Settlement Mechanism: Binding or Effective?’’ (with R. Lipsey), C.D. Howe Institute Commentary, 15 (September 1987). ‘‘Bilateral Trade: Opportunities and Challenges in the Agri-Food Sector,’’ Proceedings of the Ontario Agricultural Outlook Conference, (October 1987): 8–11. ‘‘U.S. Protectionism: A Competitive Strategy Aimed at Foreigners,’’ Multinational Business Quarterly, 4 (1987): 38–42. ‘‘How the Free Trade Deal Affects Canada’s Megafirms’’ (with M. Warner), Canadian Shareholder, 1:4 (March–April 1988): 14–16. ‘‘Why Business Supports Free Trade,’’ in J. Crispo (ed.), Free Trade: The Real Story (Toronto: Gage, 1988): 95–104. ‘‘Trade Liberalization and International Investment,’’ Discussion Paper No. 347 (Ottawa: Economic Council of Canada, April 1988), 275 pages.

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‘‘Corporate Responses to Free Trade: Strategies for Canada’s Multinationals,’’ (with M. Warner) Discussion paper for National Centre for Management Research and Development (1988). ‘‘Direccion Estrategica y Politica Comercial’’ (Trade Policy and Strategic Management) (with A. Verbeke), Informacion Comercial Espanola, 662 (October 1988): 7–16. ‘‘Foreign Investment and the Free Trade Agreement,’’ Policy Options, (November, 1988): 20–24. ‘‘The Powers of Concentration,’’ CGA Magazine, 23:5(1989): 40–43. ‘‘Where the Judge Erred: A Trade Expert Examines Bowker’s Book,’’ Alberta (Western) Report, 15:48 (1988): 28. ‘‘Research in International Business: A Canadian Perspective,’’ Selected Reviews in 10 Management Disciplines, Administrative Sciences Association of Canada, Supplement No. 2, (1989): 123–134. ‘‘Dispute Settlement Panels of the FTA’’ (with A. Anderson), Canadian Law Newsletter, 13 (Spring 1989): 11–15. ‘‘How to Make the Free Trade Agreement Work: Implementing the Dispute Settlement Measures and Subsidies Code’’ (with A. Anderson), Trade Monitor No. 11 (Toronto: C.D. Howe Institute, July 1989). ‘‘Canada’s International Competitiveness: Its OECD Rankings’’ (with J.R. D’Cruz), The G.7 Report, (Summer 1992): 27–36. ‘‘Investment Under NAFTA’’ (with M. Gestrin), Policy Options, 13:10 (January 1993): 32–35. ‘‘The Essence of Canadian Competitiveness’’ (with J. D’Cruz), CABE News, (Winter 1993). ‘‘The NAFTA’s Impact on the North American Investment Regime’’ (with M. Gestrin), C.D. Howe Commentary, 42 (March 1993).

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OVERVIEW OF ALAN RUGMAN’S ACADEMIC OEUVRE

‘‘NAFTA and Canadian Investment in the United States,’’ The G7 Report, 2:2 (Spring 1993): 39–42. ‘‘Irving Oil versus the Queen,’’ (with A. Verbeke) in H.A. Poniachek (ed.), Cases in International Finance (New York: Wiley, 1993): 514–519. ‘‘Canadian Trade Policy After the Election,’’ The G7 Report, 2:4 (Fall 1993): 31–34. ‘‘Current Protectionist U.S. R&D Policy Initiatives: Is Canada Excluded?’’ (with M. Warner) The G7 Report, 2:5 (Winter, 1994):33–36. ‘‘Is WHFTA after NAFTA? Will Latin America Join NAFTA?’’ (with M. Gestrin), The G7 Report, 3:4 (1994):42–44. ‘‘The Northern Peso,’’ The G7 Report, 4:1 (March 1995): 31–37. ‘‘Halifax Summit’s Hidden Agenda: Time has come for formal agreements on investment,’’ The G7 Report, 4:3 (June 1995): 32–33. ‘‘Building on NAFTA: Extend National Treatment to R&D Funding’’ (with P. Haberling), Policy Options 15:8 (November 1995): 11–14. ‘‘North American Free Trade Agreement,’’ International Encyclopedia of Business and Management (London: Routledge, 1996). ‘‘Quebec’s Fear of Free Trade: Issues Behind the Move towards Separation,’’ The G7 Report, IV:VII (February 1996): 21–22. ‘‘Why Quebec is Afraid of a NAFTA-type Arrangement with Canada,’’ Canada Watch, 4:4 (April–May 1996): 84–85. Foreword to Lane Kelley et al. Business Strategy: An Asia-Pacific Focus (Englewood Cliffs, NT: Prentice-Hall, 1997). Foreword to Scott Liu Foreign Direct Investment and the Multinational Enterprise: A Reexamination Using Signaling Theory (New York: Praeger, 1998).

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‘‘Multinationals as Regional Flagships,’’ Financial Times, Mastering Global Business, Part 1, (January 1998): (6–7) and in Financial Times Mastering Global Business (London: FT/Pitman, 1999): 11–16. ‘‘The Multinational Agreement on Investment is Ten Years Old,’’ Canada Watch, 6:2 (March 1998): 22–23. ‘‘A Regional Fix for Multinationals’’ (with R. Knight), Global Finance, 12:12 (December 1998). ‘‘Free Trade and the Environment: Lessons from NAFTA,’’ FT Mastering Management Review, 27 (September 1999): 38–41. ‘‘The Illusion of the Global Company’’ Mastering Management Financial Times, (January 8, 2001). ‘‘Real Multinationals,’’ Foreign Policy, (November–December 2002): 1–19. ‘‘Does Globalization Wear Mickey Mouse Ears?’’ (with K. Moore), Across the Board (January–February, 2003): 11–12. ‘‘The Myth of Globalization,’’ Sloan Management Review, 44: 2 (Winter 2003): 11. ‘‘Canadian Multinationals are Regional’’ (with K. Moore), Policy Options, 24:07 (August 2003): 44–46. ‘‘U.S. Multinationals are Regional, not Global’’ (with K. Moore), Business Strategy Review, (Winter 2003). ‘‘Oil Men or Straw Men?’’ Literary Review of Canada, 12:10 (December 2004): 8–9.

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SUBJECT INDEX 500 largest companies 179, 210–211 1970s 13, 41–42, 44–48, 68, 207 1980s 3, 30, 41, 44–48, 63, 166 1990s 3, 41, 48, 50, 108, 111, 136, 148, 230 2000s 41, 50–51 2  2 13, 19, 32, 37

AoM 1–2, 14, 19, 30 arbitrage 15, 83, 85, 158, 191, 198 ASEAN 104, 111, 123 Asia 46, 98–99, 108–109, 112–113, 119–120, 128, 131, 136, 139, 168, 170–172, 179–180, 193, 198, 226, 237–238, 242, 252 asset pricing models 205, 214 asset-seeking 48–49, 63, 100 Australian 138–139, 179 automotive industry 4, 36, 82, 97–98, 105, 109, 111, 113, 231

absorptive capacity 195 Academy of International Business 2, 10, 19, 30, 166–167 Academy of Management Journal 75 back-end 158, 191–195 Academy of Management’s 7, barrier to entry 151 11, 21 Bartlett and Ghoshal 13, 167, 181, 186, Africa 130, 179 188 aggregation 83, 158, 190, 198 BEA classification 80 Air Afrique 130 benchmarking 154 Air Canada 133 Bernard Wolf 4 Air France 130, 132, 138 beta coefficients 205, 215 air service agreements 130, 136–137 Bhopal pesticide gas leak 148 airline industry 4, 119–121, 127–128, bi-regional 51, 107–109, 172, 177–180 133–136, 138, 140–141 Alain Verbeke 2, 4, 9–10, 16, 18, 36, 41, black box 64 49, 51, 98, 100, 102, 104, 106, 108, 110, BMW 109 112, 114, 116, 120, 122, 124, 126, 128, Booz Allen Hamilton 1, 20, 165 130, 132, 134, 136, 138, 140, 142, 144, bounded rationality 4, 185 146, 166, 207 brand names 86, 88, 90, 134–135, 140, 169, 179 Albert Heijn 103 Brazil 108 alliance partners 65, 138–139, 141 British Airways 138 alliance-specific advantage (ASA) 65, 119–120, 126–127, 138–141 Brundlandt report 148 anti-globalization 185 business strategy 60, 63, 70, 173, 175, antidumping 15–16, 226 192, 233, 248, 252–253 255

256 call centers 32 Canada 2–3, 10, 13, 16, 30, 50, 76, 80, 166, 175, 179, 195, 203, 208, 210, 219–220, 222–229, 232, 236–238, 241, 245–246, 249–253 Canadian 3, 10, 13–16, 30, 49–50, 166, 210, 214–215, 220, 223–229, 232, 234–242, 245–252 Canadian MNEs 3, 16, 49, 166 Capabalities development centre of excellence 69 centres for innovation 70 chemical industry 69 Chernobyl 148 Chicago convention 145 child labour 157–158 China 46, 48–49, 51, 81–82, 109, 111–112, 132, 180 China Southern Airlines 132 Chrysler 107, 111 climate change 156, 158, 160 cluster 51, 60, 99, 153, 167–168, 187, 195, 230, 233, 243 clustering 42, 49 Coca-Cola 178 codes of conduct 149, 159 Columbia Business School 166 Columbia University 3, 203, 219 Columbia University Press 3, 219 commercial alliances 131 comparative advantages 69 competence creation 63, 68 competence gap 123, 125, 140, 190 competence-based theory 66 competitive advantage 16, 45, 49, 51, 53, 60, 65–67, 69, 120–121, 124, 127, 133, 140, 151, 173–174, 176, 234, 240 competitive pressures 97, 99, 106, 111, 113–114 complementary activities 61 Compustat 89 configuration/Coordination frame work 192

SUBJECT INDEX contracting across borders 3 cooperative network 124 corporate governance 157 corporate income taxes 15 corporate strategy 3, 166, 168, 172, 176, 185, 219–220, 226–227, 231, 238–239, 241, 246–247 cost advantages 78, 81 country specific advantage (CSA) 13, 16, 31–32, 36, 99, 150–152, 160, 167, 173–177, 181 cross-border networks 66 CUSFTA 15–16 customer-end 125, 158, 172, 191–194, 198 Daimler-Benz 107 Daimler-Chrysler 98, 107–108 Dalhousie University 2, 9, 30, 46 decision making 184, 186 deliberation costs 82 differentiation strategy 175 disadvantages of foreignness 123 diseconomies of scale 124 disincentives to fdi 47 dispersed geographic markets 140 diversification 1–2, 4, 15, 29–31, 41, 43–44, 50–51, 53, 59–63, 65–69, 71, 73, 75–79, 81, 83–85, 87–91, 93, 104, 113–114, 121, 141, 166, 194–195, 203–209, 211, 213–216, 225, 235, 244 diversified locational portfolio 60 diversified MNEs 79 diversified portfolio 60, 79–80, 204–205, 216 doctoral dissertation 166, 203, 248 double diamonds 29 downstream 3, 32, 100, 103, 106, 120, 158–160, 192, 198 eclectic paradigm 121 economic distance 122

Subject Index economic integration 48, 50, 171, 181, 210, 229 Economics 1–3, 9–11, 30–31, 99, 120, 167, 204–205, 207, 210, 219, 229, 235, 237–238, 243–244, 246 economies of scale 31, 45, 77, 83–85, 104, 120, 123, 133, 177–178, 181–182, 186, 192 economies of scope 133–135 Edith Penrose 4, 30, 244 efficiency seeking 45 EIBA 1–2, 203 emission trading 156, 158 empirical work 29, 32, 44, 147, 184, 192, 210 entry barrier 100, 151–152 environmental regulation 3, 149–150, 152–155, 160, 188, 220, 231–232, 242–243, 247 environmental strategies 4, 147–148, 153, 160 equity alliances 131, 139 ethical behaviour 157 EU 50, 104, 107, 123, 137, 139, 158, 168, 170–171, 175, 177, 179, 187–188, 195, 197–198 Europe 11, 45–46, 48–49, 51–52, 80, 97–98, 108–109, 111, 113, 128, 131, 133, 136, 138–139, 159, 179, 181, 226–227, 233, 240, 244 European Common Market 44 European International Business Academy (EIBA) 1–2 evolutionary experimentation 66 evolutionary learning organizations 63 evolutionary strategy 196 exchange rates 82, 107 experimental learning 64 external markets 64 Exxon Valdez 148

257 FDI 3, 13, 15, 18, 42–53, 59, 62–63, 99–100, 103, 109, 112, 121, 141, 198, 204, 208 Fiat 111 fifth freedom rights 129, 139 finance perspective 60, 62 financial performance 98, 106, 109, 113, 194 firm nationality 104 firm size 31, 103–104 firm specific advantage (FSA) 3–4, 10, 13, 15–16, 24, 31, 36, 99, 113–114, 119–127, 133, 138, 140–141, 149–153, 155–158, 160, 167, 169–170, 172–182, 184–186, 188, 190–193, 195 first-mover advantages 150 five-forces model 155 flagship 50, 107, 158, 168, 220, 230, 232–233, 241, 253 flexibility 82, 113, 150, 158, 187, 196 Flextronics 122 Ford 98, 108–109, 113 foreign operations 70, 76, 85–88, 90–91, 97, 103, 105, 204–205, 213, 215, 248 foreign sales 31, 76, 83–86, 88–89, 99, 104, 170–171, 193–194, 208 foreign to domestic sales 76, 80, 83–85 Fortune 500 120, 122, 165, 193 Fortune Global 500 105 franchising 87–88 Free Trade 3, 10, 15–16, 48, 50, 119, 171, 175, 179, 188, 208, 219, 221–223, 225–227, 229–231, 234, 237–239, 245–246, 250–252 frequent flyer programmes 131, 135 FSA 2, 4, 10, 13–16, 36, 99, 113, 114, 119, 120, 128, 133, 138, 140, 141, 149, 150, 152, 153, 156–158, 160, 167, 169–170, 172–186, 188, 190, 191, 193, 195, 198 FSA–CSA framework 13–14 FSAs 14 FSA/CSA matrix 176

258 General Agreement on Trade in Services 136 General Motors 36, 98, 109 geographic 30, 76, 83, 85–87, 98–99, 103–105, 108, 110, 112–113, 120–122, 128, 132, 136, 140, 168, 171, 176–178, 184, 190–193, 195–198, 207 geographic market focus 123 geographical distance 87, 193 geographical diversification 45, 47 geographically dispersed activities 181 geographically dispersed facilities 65 geographically diversified 44, 49, 76, 79, 81 geography of economic activity 45 Geography of MNE 41–51, 53, 55, 57 GlaxoSmithKline 179 global alliances 119, 121, 131–135, 138 global brand 138, 177–179 Global Carrier 128–130, 135–136, 138 global competitive success 121 global firms 99, 122, 172, 177–178 global market diversification 77, 78, 81, 83 Global Reach 13, 176–179 global strategies 18, 119–121, 123, 125, 127, 129, 131, 133, 135, 137, 139, 141, 143, 145, 168, 178, 197, 231, 244 global strategy 4, 104, 120–121, 123, 130, 138, 170, 178, 184–185, 232–234, 243, 247 globalization 4, 13–14, 17–19, 67, 169–170, 178, 181, 185, 192, 197, 210–211, 220, 227–232, 239, 243–244, 248, 253 GM 36, 108, 111, 113 governance mechanisms 123 governance structure 125, 169 government policies 15, 29, 175, 187–188, 234 government regulation 15, 83, 130, 173, 177, 182, 197

SUBJECT INDEX government relations 15, 234 green capabilities 150, 153, 231 Grubel 30, 204–205, 215, 248 Gulf Air 130 heterarchies 66 hierarchical coordination 87 hierarchies 66, 68, 86, 99, 124 home base 16, 69–70, 83, 129, 179, 184 home country 2, 48, 79, 87, 122–123, 129, 177, 185, 190, 210, 213 home oriented 107–108 home region 18, 98–99, 103–105, 108, 110–111, 113, 119–120, 122–123, 125, 127, 138, 140–141, 167, 169, 171–172, 176–179, 190–192, 196–198 home regions 51, 127, 159 home-base ‘‘diamond’’ 173 home-country regulations 179 home-region based 120, 122, 171, 178, 180, 190 home-region firms 158, 177–178 Honda 113 horizontal clusters 168 host countries 51, 67, 69, 120, 153, 214 host oriented 107 host region 101, 103, 108, 111, 113, 121, 123–125, 127, 140–141, 171, 193 host regions 70, 100, 109–110, 113–114, 119–123, 125, 138, 140–141, 190, 194, 196 Host-region oriented 172–173, 179 IB 1–5, 9–10, 12, 14, 45, 48, 52–53, 148–149, 159, 165, 167, 169–170, 191, 196, 198, 207 ICT 61–62, 70 IDP 47–48 IMD 52, 166–167 India 32, 51, 82, 111, 139 information asymmetry 209

Subject Index innovation 45, 61–65, 67, 69–70, 111, 149, 152–153, 175, 186 innovative 2, 61–62, 64, 68–69 Inside the Multinationals 3, 219 institutional barriers 138, 211 inter-regional alliance 119, 141 inter-regional barriers 119 inter-regional expansion 111 intercontinental passenger market 128 interdependence 2, 120 interdependencies 86, 221, 230 interest rates 78, 81, 210 internal markets 13, 219 internal search 64 internal sourcing 82 internalisation advantages 99 internalising 43, 150 internalization 3–4, 10, 13–14, 29, 31, 34, 36, 75, 77, 79, 81, 83, 85–89, 91, 93, 121, 141, 148, 166, 173, 204, 224, 230, 235–236, 238, 241, 243 internalization theory 3, 10, 13–14, 75, 77, 79, 81, 83, 85–89, 91, 93, 121, 166, 204, 235–236, 241, 243 International Business 1, 9–10, 14, 44, 59–60, 62–63, 70, 90, 97, 149–150, 165, 173, 178, 192, 215, 220–226, 228, 230–234, 239, 241–243, 245–247, 251 international diversification 70 international divorsity 76 International Diversification and the Multinational Enterprise 39, 57 international expansion 32, 34, 84–85, 87, 103, 121, 195, 198 International Management 1, 7, 9, 12, 14, 19, 30, 165, 167, 169, 171, 173, 175, 177, 179, 181, 183, 185–187, 189, 191, 193, 195, 197, 199, 201, 224–225, 228, 231, 233, 241, 244 international markets 2, 137, 170, 181, 198 international monetary system 215 international networks 66, 68–69

259 international political economy 11, 232 international regime theory 11 International Studies Association 11–12 international trade theory 209 internationalisation 13, 29–32, 42, 44, 51, 59–60, 63, 66–69, 104, 195–196, 207–208, 235, 241 internationally diversified 2, 79, 204–205, 213, 216, 235 intra-regional 50, 97, 167–168, 171, 176, 187, 193, 195, 210–211, 234 investment development path 47 ISM 10, 14 Jacquillat and Solnik 80, 216–217 Japan 18, 48, 51, 80, 88, 97–98, 109, 111, 132, 159, 170, 181, 223, 226, 230, 237, 241, 249 Japanese firms 80, 113 Jean-Franc- ois Hennart 4, 76, 78, 80, 82, 84, 86, 88, 90, 92 Jean-Francois Hennart 13 JIBS 207, 215 Joe D’Cruz 10 John Cantwell 4, 52, 60, 62, 64, 66, 68, 70, 72 John Dunning 4, 10, 13, 30, 36, 165–166, 215, 227, 236 John Stopford 11 joint advertising 131, 134 joint venture 36, 111, 126, 227, 238 Joseph D’Cruz 49 Journal of International Business Studies 26, 54, 56–57, 145 Kim 78–81, 83–84, 86, 105, 194, 207, 226 KLM 129, 132, 138 knowledge base 99, 122, 127, 169 Kroger. Carrefour 179 Kyoto 158 labor conditions 180 large 500 companies 171

260 law 2–3, 137, 155, 188, 226, 228, 237, 239, 244–247, 251 learning network 113 liabilities of newness 99 liability of foreignness 103, 185, 191, 198 liability of inter-regional foreignness 197 liability of regional foreignness 123, 170 LIAT 130 liberalization 3, 15, 233, 237, 245, 250 location advantages 121–123, 125–127, 140–141 location patterns 13 location-bound 4, 16, 119–120, 122–123, 125–127, 140–141, 148, 152, 156, 158, 233 location-specific resources 60 locational assets 60, 70 locus of destination 104, 195 London School of Economics 11 Lorraine Eden 4, 10, 12, 14, 16, 18, 20, 22, 24, 26, 46, 50 low-hanging fruit 150 Lufthansa 133 LVMH 178 M-form 194 M-P 99, 103–105, 110, 113 management costs 79, 133 Management International Review 49, 75, 236–238, 240–241, 243–244 Mark Casson 13, 30, 166 market forces 155 market imperfections 2, 13–15, 43, 46–47, 186, 204–206, 211, 216–217, 244 market seeking 45, 141 market-oriented 149 marketing mix 84 melding investments 100–101, 103, 109–111 mergers and acquisitions 27, 144 MES 83 meta-national 15

SUBJECT INDEX Mexico 50 Middle East 130, 179 minimize risk 80 Minimum Efficient Scale 83 minority owned 80 MNE 1–4, 9–11, 13, 15, 17–19, 29–33, 35–37, 41–53, 59–63, 65–67, 69–70, 76–91, 98–100, 103–105, 108, 113, 119–123, 125–127, 136, 138, 141, 147–149, 151–161, 165–172, 174, 180–181, 183–188, 190–198, 204–208, 210–211, 216–217, 219–220, 224–236; 239–240, 243–244, 250, 252 MNE competitiveness, 155, 157 MNE Entry 119 MNE network 3, 63, 70, 82, 91 MNE scholars 168 MNE’s product offerings, MNEs’ structure monopoly rents 13 multinationality 80, 83–85, 87–91, 99, 104, 113, 157, 166, 194, 206, 209 multiproduct firms 61 myth of global scope 178 NAFTA 3, 10, 15, 16, 48, 50, 104, 123, 171, 175, 177, 179, 187, 188, 197, 198, 210 nation-based product 183 national markets 44, 77–78, 81, 186 national regulation 130, 187 national responsiveness 4, 14, 120, 122, 126, 167, 169–170, 178, 181–182, 184–188, 198 national responsiveness-integration 4 natural resources 173 neo-Schumpeterian 62 neoclassical 42 Nestle´ 157 net present value 3 Netherlands 129

Subject Index network of affiliates 81–82, 85, 196 new competence 64, 66, 68 News Corp 179 NGOs 18, 157–158, 179 Nike 157–158, 179–180 Nissan 108, 111, 113 Nobel Prize 205 non-location bound 4, 10, 13, 15, 120–123, 125–127, 133, 140–141, 148, 152, 156, 167 normative models 169 North America 15, 18, 46, 48, 50–51, 97–99, 108, 111, 113, 120, 128, 131, 136, 166, 168, 170, 179, 181, 226–228, 233–234 North American 16, 48, 50, 98, 109, 166, 171–172, 179, 204, 208, 222, 227, 229–231, 234, 237, 239–241, 251 North-American Free Trade Agreement (NAFTA) 3, 10, 15–16, 48, 50, 104, 123, 171, 175, 177, 179, 187–188, 197–198, 210, 220–221, 228–231, 240–242, 247, 251–252 Northwest 139, 248 OECD 52, 133, 251 oeuvre 2, 4–5, 219–253 OLI 36 Oneworld 131–133, 135, 138 Ontario Centre for International Business 30 open skies initiatives 136 operating income 98, 106, 109 opportunism 3 opportunistic behaviour 3, 126 Outsourcing 31–32, 36, 180 Oxford University 2, 220–221, 228, 230, 232–234 path-dependent 64, 124 Peter Buckley 13, 30 Peugeot-Citroen 105 pharmaceutical firms 179, 244

261 pharmaceutical industry 45 policy implications 205, 208–209 pollution haven 152, 154 polycentric 185–186 Porter 14, 16, 49, 60, 68, 78, 81, 149, 152–153, 155, 173, 192, 209, 240 Porter’s diamond 13, 16, 19, 26, 49, 57 Portfolio investors 79 portfolio theory 43, 205, 214 Price Waterhouse Coopers 109 product diversification 31–36, 65, 76, 77, 83, 197, 207 protectionism 15, 188, 225, 245, 250 public goods 3 Public Policy 1–3, 10, 16, 19, 148, 166, 209, 227, 229, 231–233, 236–237, 242 Qantas 138 Quebec Separation 208, 215 R&D 31, 49, 52, 67, 83, 85, 88, 90, 100, 111, 166, 174, 184, 191–192, 197, 247, 252 Rates of return 213 raw materials 86, 88, 191 Ray Vernon 13, 42, 149 Raymond Vernon 10 re-engineering 62 reduces risk 78 regional approach 187 regional management centres 123 regional matrix 176–177 regional strategies 4, 18, 95, 169–170, 194, 196, 207 Regional Strategy 97, 99, 101, 103–105, 107, 109, 111, 113, 115, 120, 123, 178, 183, 188, 197 regionalisation 4, 41, 157–158, 160, 170, 173, 197, 231 regionally responsive 184 regulation 15, 47, 150, 152–156, 177, 179, 181, 211, 215, 229, 231, 241, 245–246

262

SUBJECT INDEX

remediableness 120, 123 Renault 103, 108, 111 reputation 86–88, 154 resource commitments 125, 150–151, 158 resource seeking 45 resource-based 4, 13, 49, 66, 124–125, 175, 184, 188, 190, 243 risk 2, 30, 43–44, 52, 59–63, 77–80, 87–88, 90, 100, 136, 154, 159, 166, 170, 196, 203–207, 209, 213–216, 235, 244, 248–249 risk reduction 2, 44, 59–60, 80, 87–88, 203, 209, 213, 215, 235 Rival States, Rival Firms 11, 27 route-by-route alliances 131 Rugman 1–5, 7, 9–17, 29–31, 36–37, 41, 43–47, 49–51, 53, 55, 57, 59–62, 67, 77, 80, 86–87, 95, 97–99, 105, 107, 119–123, 125–127, 147–155, 158–159, 166–168, 170–174, 176–180, 182, 184–188, 190, 192, 194, 196, 198, 200, 202, 204–212, 214, 216, 219–253

Stephen Hymer 13, 42 stock markets 209, 216–217 strategic alliance 124–127 strategic alliances 31, 36, 49, 119, 125–126, 130, 135, 138–139, 141 Strategic Management 3, 10, 12, 14–15, 29, 37, 166–168, 184, 207, 220–222, 227–230, 233, 236, 239–240, 243, 245, 249, 251 Strategic Management Journal 55, 144 subsidiaries 3, 16, 42, 52, 81–82, 87, 122, 166, 186, 193–195, 206–207, 213, 224, 240 subsidiary 4, 62, 67, 70, 76, 99, 126–127, 154, 185–186, 188, 194, 225 subsidiary initiative 186 subsidiary-specific advantages 126–127, 144 supply and demand 78 supply contracts 81 Susan Strange 11–12

sales dispersion 30, 170, 207 SAS 130, 133 scope economies 126, 134–135, 140, 188 search activities 64 semi-globalization 170, 198 shelter strategies 15, 16 Silent Surrender 13 Simon Fraser University 9, 203 Singapore Airlines 129, 139 Sixth freedom 129, 146 Skyteam 131–132 SMEs 175, 182 social network 125 South America 103, 108–109, 111 Sovereignty at Bay 13 spatial distribution 46, 51 Spatial Positioning 29, 31–33, 35, 37 spillovers 70, 158 stakeholders 152, 155, 159, 185, 193 Star Alliance 131–133, 140

TACA international airlines 130 tacit knowledge 86, 151, 157 tariffs 15, 175 TCE 3–4, 99, 103, 204, 207, 209, 211, 216 technological diversification 61, 63–65, 68, 69 technology 2, 46, 61, 63–69, 154–155, 173, 179, 204, 220, 224–225 the Canadian Economics Association 29 The End of Globalization 17, 98 The Regional Multinationals 98, 168, 220 theory of foreign investment 205, 214 Think Global act local, 169 Tobin’s q 89 Tobin-markowitz mean-variance model 205 Toyota 36, 109, 113, 179 transaction cost economics 3, 99, 120, 204

Subject Index transaction costs 10, 44–45, 50, 52, 79, 122–123, 242 transfer pricing 9, 14–15, 46–47, 53, 220, 224, 239, 249 transferability 153, 157–158, 160, 169, 190 transnational 105, 198, 228, 230, 233, 239–242, 244 transnational solution 198, 239 transnationality index 170 Triad 18, 48, 97–99, 110, 113, 119–120, 122, 128, 132, 139, 153, 159, 168–169, 171–172, 177–178, 181, 183–184, 186–188, 192, 195, 197–198, 210, 228, 233, 244, 248 U.S. Post Office 179 UNCTAD 48–49, 52 uninational firms 214 unit of analysis 30, 70, 165, 167 United States 3, 10, 14–16, 18, 30, 32, 36, 41, 45, 47, 49–50, 53, 76, 80–83, 85, 88, 91, 97, 103–104, 107, 109, 133, 134 136–139, 149, 152–153, 157–159, 171, 176, 178–179, 181, 204, 205, 208, 210, 213, 219, 223–227, 239, 241, 246–247, 252

263 University of Indiana 30 University of Reading 30, 166, 204 University of Toronto 2, 30 University of Winnipeg 30, 203 Uppsala School 44, 51 upstream 3, 31–32, 100, 103, 158–160, 192, 198 Uruguay 136, 230 US Government Accountability Office 139, 143 value chain 31, 173, 188, 191–192, 197–198 vertical clusters 168 vertical integration 31–32, 36, 87, 175 vertically integrate 88 Virgin Group 139 Volvo Trucks 190 wage rates 78, 81 Wal-Mart 180 wholly owned 80, 81, 87, 140 WTO 18, 52, 136, 177, 187, 233, 248 Zone of internationalisation 104

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