the american model of the multinational firm and the “new” multinationals from emerging ...

7/29/2019 The American Model of the Multinational Firm and the New Multinationals From Emerging Economies

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The American Model of the Multinational Firm andthe New Multinationals From Emerging

Economiesby Mauro F. Guillen and Esteban Garc a-Canal

Executive OverviewThe traditional American model of multinational enterprise (MNE), characterized by foreign directinvestment (FDI) aimed at exploiting firm-specific capabilities developed at home and a gradual country-by-country approach of internationalization, dominated the global economy during much of the post-World War II period. In the last two decades, however, new MNEs from emerging, upper-middle-income,or oil-rich countries have followed completely different patterns of international expansion. In this paperwe analyze the processes through which these firms became MNEs and to what extent we need a new theoryto explain their international growth.

The modern multinational enterprise (MNE) aswe know it today has its origins in the secondindustrial revolution of the late 19th century.

British, North American, and continental Euro-pean firms expanded around the world on thebasis of intangible assets such as technology,brands, and managerial expertise. The climax of

their worldwide expansion was reached during the1950s and 60s, as trade and investment barriersgradually fell around the world (Chandler, 1990;Kindleberger, 1969; Vernon, 1979; Wilkins, 1974).

While significant variations in the strategy andstructure of North American and European mul-tinationals were documented at the time (e.g.,Stopford & Wells, 1972) and the rise of Japanesemultinationals during the 1970s and 80s addedyet more diversity to the global population ofmultinational corporations, firms expanding fromrelatively rich and technologically advancedcountries tended to share a core set of features.Chief among them were their technological, mar-keting, and managerial strengths, which enabled

them to overcome the so-called liability of for-

eignness in a variety of markets, investing for the

most part in wholly or majority-owned subsidiar-

ies, transferring technology, products, and knowl-

edge from headquarters to far-flung operations

around the globe, and relying on elaborate bureau-

cratic and financial controls.

This relatively straightforward state of affairs ischanging rapidly. Since the 1990s, the global

competitive landscape is becoming increasingly

populated by MNEs originating in countries that

are not among the most advanced in the world.

These new MNEs come from (a) upper-middle-

income economies such as Spain, Portugal, South

Korea, and Taiwan; (b) emerging economies such

as Brazil, Chile, Mexico, China, India, and Tur-

key; (c) developing countries such as Egypt, Indo-

nesia, and Thailand; and (d) oil-rich countriessuch as the United Arab Emirates, Nigeria, and

Venezuela. The new MNEs operate internation-

ally using multiple entry modes, ranging from al-

liances and joint ventures to wholly owned sub-

sidiaries. Some of them are small and product

focused, while others are large and diversifiedFinancial support provided by the Fundacion Rafael del Pino is grate-

fully acknowledged.

* Mauro F. Guillen ([email protected]) is Dr. Felix Zandman Professor in International Management; Professor of Manage-

ment and Sociology; and Director, Joseph H. Lauder Institute for Management & International Studies, The Wharton School.

Esteban Garca-Canal ([email protected]) is a Professor of Management, Universidad de Oviedo.

2009 23Guill en and Garca-Canal

Copyright by the Academy of Management; all rights reserved. Contents may not be copied, e-mailed, posted to a listserv, or otherwise transmitted without the copyright holders express writtenpermission. Users may print, download, or e-mail articles for individual use only.


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across many industries. The literature has referredto them in a variety of ways, including third-world multinationals (Wells, 1983), latecomerfirms (Mathews, 2002), unconventional multi-nationals (Li, 2003), challengers (BCG, 2008),and emerging multinationals (Accenture, 2008;

Economist, 2008; Goldstein, 2007). While theymay not possess the most sophisticated technolog-ical or marketing skills in their respective indus-tries, they have expanded around the world ininnovative ways. They have become key actors inforeign direct investment and cross-border acqui-sitions (UNCTAD, 2006).

The new multinationals from the BRIC1 coun-tries have made great inroads into the global econ-omy. Among Brazilian firms, Companhia Vale doRio Doce and Metalurgica Gerdau are among the

largest firms in mining and steel, Embraer holdswith Bombardier of Canada a duopoly in theglobal regional jet market, and Natura Cosmeticoshas a presence in both Latin America and Europe.Lukoil, Gazprom, and Severstal are among theRussian multinationals, while India boasts anarmy of firms not only in IT and outsourcingservices, in which companies such as Infosys,TCS, and Wipro are among the largest in theworld, but also in steel, automobiles, and pharma-ceuticals. Chinese firms have irrupted with forcein global markets not only as exporters but also asforeign investors, and in every industry from min-ing and oil to chemicals and steel. In electricalappliances and electronics, China boasts threeincreasingly well-known firms: Haier, Lenovo,and Huawei.

Multinationals from the so-called Asian tigereconomiesthose that industrialized during the1960sare among the earliest new multinationalsfrom countries other than the most advanced.

Taiwan, a country that excels both at technolog-ical and process innovation, has proved to be themost fertile ground for outward foreign investors,including such powerhouses as Formosa Plastics,Taiwan Semiconductor, and Acer. Following apath to development much more oriented towardlarge-scale industry, South Korea is home to someof the best known names in the electronics and

appliances industries (Samsung and LG) and au-tomobiles (Hyundai and Kia). The city-state ofSingapore has bred multinationals in food andbeverages (Fraser and Neave, Want Want), elec-tronics (Olam), telecommunications (Singtel),real estate (Capitaland), transportation (Neptune

Orient Lines), and hotels (City Developments).For its part, Hong Kong is home to a large numberof multinationals in a similar set of industries, ledby Hutchinson Whampoa, the worlds largest portoperator.

In addition to South Korea and Taiwan, Spainhas produced the largest number of truly globalmultinationals among the countries that back inthe 1960s were still attempting to develop a solidindustrial base. In food processing, Spanish com-panies have made important acquisitions in Eu-

rope, Asia, and the Americas, turning themselvesinto the worlds largest producers of rice and oliveoil and the second-largest of pasta. In the textilesand clothing sector, Spain has also produced com-panies of international stature, such as globaldenim leader Tavex (now merged with BrazilsSantista); Inditex, which owns the worlds sec-ond-most valuable brand (Zara); and Pronovias,the largest bridal wear designer and manufacturer.Spanish firms in telecommunications (Telefo-nica), electricity (Endesa, Iberdrola), and banking(Santander, BBVA) are among the largest MNEsin their respective industries.

In Spanish-speaking Latin America some firmsfrom Mexico and Argentina stand out as formida-ble global competitors. In food processing, Bimboand Gruma are among the largest in their respec-tive market niches, namely, packaged bread andtortillas. In cement, Cemex is the second- orthird-largest, depending on the specific product.Grupo Modelo is the third-largest brewery in the

world. These companies have made acquisitionsor greenfield investments in North America, Asia,and Europe. Argentinas Tenaris is the globalleader in seamless steel tubes, and IndustriasMetalurgicas Pescarmona is a major firm in thecrane business.

The Middle East is also becoming the homebase of major multinational corporations, includ-ing DP World of Dubai (the worlds second-largestport operator), Orascom (the Egyptian construc-1 Brazil, Russia, India, and China.

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tion and telecommunications group with majoroperations throughout Africa and the MiddleEast), Mobile Telecommunications Company(the Kuwaiti giant), and Enka Insaat ve Saayi (theTurkish infrastructure group).

The proliferation of the new MNEs has taken

observers, policymakers, and scholars by surprise.Many of these firms were marginal competitorsjust a decade ago; today they are challenging someof the worlds most accomplished and establishedmultinationals in a wide variety of industries andmarkets. The unexpected rise to prominence offirms such as Cemex of Mexico, Embraer of Brazil,Haier of China, Tata Consultancy Services ofIndia, and Banco Santander of Spain raises threefundamental questions: First, do these firms sharesome common features that distinguish them from

the traditional American model of the MNE? Sec-ond, what advantages have made it possible forthem to operate and compete not only in hostcountries at the same or lower level of economicdevelopment but also in the richest economies?Third, why have they been able to expand abroadat dizzying speed, in defiance of the conventionalwisdom about the virtues of a staged, incrementalapproach to international expansion? Before be-ing in a position to answer these questions, onemust begin by outlining the established theory ofthe MNE.

TheTheoryoftheMultinationalFirm

Although MNEs have existed for a very longtime, scholars first attempted to understandthe nature and drivers of their cross-border

activities during the 1950s. The credit for provid-ing the first comprehensive analysis of the MNEand of foreign direct investment goes to econo-mist Stephen Hymer, who in his doctoral disser-

tation observed that the control of the foreignenterprise is desired in order to remove competi-tion between that foreign enterprise and enter-prises in other countries . . . or the control isdesired in order to appropriate fully the returns oncertain skills and abilities (Hymer, 1960, p. 25).His key insight was that the multinational firmpossesses certain kinds of proprietary advantagesthat set it apart from purely domestic firms, thushelping it overcome the liability of foreignness.

Multinational firms exist because certain eco-nomic conditions and proprietary advantagesmake it advisable and possible for them to profit-ably undertake production of a good or service ina foreign location. It is important to distinguishbetween vertical and horizontal foreign expansion

in order to fully understand the basic economicprinciples that underlie the activities of MNEs ingeneral and the novelty of the new MNEs inparticular.

VerticalExpansion

Vertical expansion occurs when the firm locatesassets or employees in a foreign country with thepurpose of securing the production of a raw ma-terial, component, or input (backward verticalexpansion) or the distribution and sale of a good

or service (forward vertical expansion). The nec-essary condition for a firm to engage in verticalexpansion is the presence of a comparative advan-tage in the foreign location. The advantage typi-cally has to do with the prices or productivities ofproduction factors such as capital, labor, or land.For instance, a clothing firm may consider produc-tion in a foreign location due to lower labor costs.

It is important, though, to realize that the mereexistence of a comparative advantage in a foreignlocation does not mean that the firm ought tovertically expand. The necessary condition oflower factor costs or higher factor productivity, orboth, is not sufficient. After all, the firm couldbenefit from the comparative advantage in theforeign location simply by asking a local producerto become its supplier. The sufficient conditionjustifying a vertical foreign investment refers tothe possible reasons encouraging the firm to un-dertake foreign production by itself rather thanrelying on others to do the job. The two main

reasons are uncertainty about the supply and assetspecificity. If uncertainty is high, the firm wouldprefer to integrate backward into the foreign lo-cation to make sure that the supply chain func-tions smoothly, and that delivery timetables aremet. Asset specificity is high when the firm andthe foreign supplier need to develop joint assets inorder for the supply operation to take place. Inthat situation the firm would prefer to expandbackward in order to avoid the hold-up problem,



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that is, opportunistic behavior on the part of theforeign supplier trying to extract rents from thefirm. These necessary and sufficient conditionsalso apply in the case of forward vertical expan-sion into a foreign location. Uncertainty and assetspecificity with, say, a foreign distributor would

compel the firm to take things into its own handsand invest in the foreign location in order to makesure that the goods or services reach the buyer inthe appropriate way and at a reasonable cost.

HorizontalExpansion

Horizontal expansion occurs when the firm sets upa plant or service delivery facility in a foreignlocation with the goal of selling in that market,and without abandoning production of the goodor service in the home country. The decision toengage in horizontal expansion is driven by forcesdifferent than those for vertical expansion. Pro-duction of a good or service in a foreign market isdesirable in the presence of protectionist barriers,high transportation costs, unfavorable currencyexchange rate shifts, or requirements for localadaptation to the peculiarities of local demandthat make exporting from the home country un-feasible or unprofitable. As in the case of verticalexpansion, these obstacles are a necessary condi-

tion for horizontal expansion, but not a sufficientone. The firm should ponder the relative merits oflicensing a local producer in the foreign market orestablishing an alliance against those of commit-ting to a foreign investment. The sufficient con-dition for setting up a proprietary plant or servicefacility has to do with the possession of intangibleassetsbrands, technology, know-how, and otherfirm-specific skillsthat make licensing a riskyoption because the licensee might appropriate,damage, or otherwise misuse the firms assets.2

Scholars in the field of international manage-ment have also acknowledged that firms in pos-session of the requisite competitive advantages donot become MNEs overnight, but in a gradualway, following different stages. According to theframework originally proposed by researchers at

the University of Uppsala in Sweden (Johanson &Vahlne, 1977; Johanson & Wiedersheim-Paul,1975), firms expand abroad on a country-by-coun-try basis, starting with those more similar in termsof sociocultural distance. They also argued that ineach foreign country firms typically followed a

sequence of steps: on-and-off exports, exportingthrough local agents, sales subsidiary, and produc-tion and marketing subsidiary. A similar set ofexplanations and predictions were proposed byVernon (1966, 1979) in his application of theproduct life cycle to the location of production.According to these perspectives, the firm commitsresources to foreign markets as it accumulatesknowledge and experience, managing the risks ofexpansion and coping with the liability of foreign-ness. An important corollary is that the firm ex-

pands abroad only as fast as its experience andknowledge allow.

EntertheNewMultinationals

The early students of the phenomenon of MNEsfrom developing, newly industrialized, emerg-ing, or upper-middle-income countries focused

their attention on both the vertical and the hor-izontal investments undertaken by these firms, butthey were especially struck by the latter. Verticalinvestments, after all, are easily understood interms of the desire to reduce uncertainty andminimize opportunism when assets are dedicatedor specific to the supply or the downstream activ-ity, whether the MNE comes from a developedcountry or not (Caves, 1996, pp. 238241; Lall,1983; Lecraw, 1977; Wells, 1983). The horizontalinvestments of the new MNEs, however, areharder to explain because they are supposed to bedriven by the possession of intangible assets, andfirms from developing countries were simply as-

sumed not to possess them, or at least not topossess the same kinds of intangible assets as theclassic MNEs from the rich countries (Lall, 1983,p. 4). This paradox becomes more evident withthe second wave of FDI from the developingworld, the one starting in the late 1980s. In con-trast with the first wave of FDI from emergingcountries that took place in the 1960s and 70s,the new MNEs of the 1980s and 90s aimed atbecoming world leaders in their respective indus-

2 For a summary of the basic economic model of the multinational firm,

see Caves (1996). Stephen Hymer (1960) was the first to observe that firms

expand horizontally to protect (and monopolize) their intangible assets.



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tries, not just marginal players (Mathews, 2006).In addition, the new MNEs do not come onlyfrom emerging countries. Some firms, labeled as

born-globals or born-again born-globals (Bell, Mc-Naughton, & Young, 2001), have emerged fromdeveloped countries following accelerated paths ofinternationalization that challenge the conven-tional view of international expansion.

The main features of the new MNEs, as com-pared to the traditional ones, appear in Table 1.The dimensions in the table highlight the keydifferences between new and conventional MNEs.Perhaps the most startling one has to do with theaccelerated pace of internationalization of thenew MNEs, as firms from emerging economieshave attempted to close the gap between theirmarket reach and the global presence of the MNEsfrom developed countries (Mathews, 2006).

A second feature of the new MNEs is that all ofthem, no matter the home country, have beenforced to deal not only with the liability of for-eignness, but also with the liability and competi-tive disadvantage that stem from being latecomerslacking the resources and capabilities of estab-

lished MNEs from the most advanced countries.For this reason, the international expansion of thenew MNEs runs in parallel with a capability up-grading process through which newcomers seek togain access to external resources and capabilitiesin order to catch up with their more advancedcompetitors, that is, to reduce their competitive-ness gap with established MNEs (Aulakh, 2007;Li, 2007; Mathews, 2006). However, despite lack-ing the resource endowment of MNEs from devel-

oped countries, the new MNEs usually have anadvantage over them, as they tend to possess bet-ter political capabilities. As the new MNEs are

more used to dealing with discretionary and/orunstable governments in their home country, theyare better prepared than the traditional MNEs tosucceed in foreign countries characterized by aweak institutional environment (Cuervo-Cazurra& Genc, 2008). Taking into account the highgrowth rates of emerging countries and their pe-culiar institutional environments, political capa-bilities have been especially valuable for the newMNEs.

The first two features taken together point toanother key characteristic of the new MNEs: Theyface a significant dilemma when it comes to in-ternational expansion because they need to bal-ance the desire for global reach with the need toupgrade their capabilities. They can readily usetheir home-grown competitive advantages inother emerging or developing countries, but theymust also enter more advanced countries in orderto expose themselves to sophisticated, cutting-edge demand and develop their capabilities. This

tension is reflected in Figure 1. Firms may evolvein a way that helps them upgrade their capabilitiesor gain geographic reach, or both. Along the di-agonal, the firm pursues a balanced growth path.Above the diagonal it enters the region of capa-bility building, in which the firm sacrifices thenumber of countries entered (its geographicreach) so as to close the gap with other competi-tors, especially in the advanced economies. Belowthe diagonal the firm enters the unsustainable

Table1TheNewMultinationalEnterprisesComparedto TraditionalMultinationals

Dimension New MNEs Traditional MNEs

Speed of internationalization Accelerated Gradual

Competi tive advantages Weak: Upgrading of resources required Strong: Required resources available in-house

Poli tical capabil it ies Strong: Firms used to unstable pol it ical

environments

Weak: Firms used to stable political

environmentsExpansion path Dual path: Simultaneous entry into

developed and developing countriesSimple path: From less to more distantcountries

Default entry modes External growth: Alliances andacquisitions

Internal growth: Wholly owned subsidiaries

Organizational adaptability High, because of their meagerinternational presence

Low, because of their ingrained structure andculture



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region because prioritizing global reach withoutimproving firm competencies jeopardizes the ca-pability upgrading process. The tension betweencapability upgrading and gaining global reachforces the new MNEs to enter developed anddeveloping countries simultaneously from the be-ginning of their international expansion. Enteringdeveloping countries helps them gain size andoperational experience and generate profits, whileventuring into developed ones contributes primar-ily to the capability upgrading process. The newMNEs have certainly tended to expand into de-veloping countries at the beginning of their inter-national expansion and limit their presence indeveloped countries to only a few locations wherethey can build capabilities, either because theyhave a partner there or because they have ac-quired a local firm. As they catch up to establishedMNEs, they begin to invest more in developedcountries.

A fourth feature of the new MNEs is their

preference for entry modes based on externalgrowth. Global alliances (Garca-Canal et al.,2002) and acquisitions (Rui & Yip, 2008) are usedby these firms to simultaneously overcome theliability of foreignness in the country of the part-ner/target and to gain access to their competitiveadvantages with the aim of upgrading their ownresources and capabilities. When entering intoglobal alliances, the new MNEs have used theirhome market position to facilitate the entry of

their partners in exchange for reciprocal access tothe partners home markets and/or technology.Besides the size of the domestic market, the stron-ger the position of new MNEs in it the greatertheir bargaining power to enter into these alli-ances. This fact is illustrated by the case of some

new MNEs competing in the domestic appliancesindustry, such as Chinas Haier, Mexicos Mabe,and Turkeys Arcelik, whose international expan-sion was boosted by alliances with world leadersthat allowed them to upgrade their technologicalcompetencies (Bonaglia et al., 2007). Capabilityupgrading processes based on acquisitions havebeen possible in some cases due to the new MNEsprivileged access to financial resources, because ofgovernment subsidies or capital market imperfec-tions, as illustrated by the Chinese MNEs (Buck-

ley et al., 2007).A final feature of the new MNEs is that they

enjoy more freedom to implement organizationalinnovations to adapt to the requirements of glob-alization because they do not face the constraintstypical of established MNEs. As major global play-ers with long histories, many MNEs from thedeveloped economies suffer from inertia and pathdependence due to their deeply ingrained values,culture, and organizational structure. Mathews(2006) showed how the new MNEs from Asiahave adopted a number of innovative organiza-tional forms that suited their needs, includingnetworked and decentralized structures.

When analyzing the foreign investments of thenew MNEs of the 1960s and 1970s, scholars fo-cused their attention on two important questions:their motivations and their proprietary, firm-spe-cific advantages, if any. The following sectionsdeal with these two issues.

MotivationsofNewMNEsTable 2 summarizes the main motivations identi-fied in the literature. As noted above, scholarsdocumented and readily explained the desire ofsome of the new MNEs to create backward link-ages into sources of raw materials or forward link-ages into foreign markets in order to reduce un-certainty and opportunism in the relationshipbetween the firm and the supplier of the rawmaterial, or between the firm and the distributor

Figure1ExpansionPathsofNewMNEsinDevelopedandDevelopingCountries

Geographic Reach

ExtentofCapabilityU

pgrading

CAPABILITY BUILDING

REGION

UNSUSTAINABLE

REGION

Balanced

Growth Path

Expansion path

into developed

countries

Expansion path

into developing

countries

45

100%

100%



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or agent in the foreign market. Research docu-mented, especially in the cases of South Koreanand Taiwanese firms, their drive to internalizebackward and forward linkages through the cre-ation of trading companies, in some cases withgovernment encouragement and financial support(Fields, 1995, pp. 183237). For example, whileduring the 1960s a tiny proportion of South Ko-reas exports reached foreign markets through thedistribution and sale channels established bySouth Korean firms, by the 1980s roughly 50% ofthem were fully internalized, that is, handled bythe exporters themselves (Cho, 1987). As wouldbe expected, the new MNEs felt the pressures of

uncertainty and asset specificity more strongly ifthey had developed intangible assets. For in-stance, using evidence from a representative cross-sectional sample of 837 Spanish exporting firms asof 1992, Campa and Guillen (1999) found thatthose with greater expenditures on R&D weremore likely to internalize export operations. Arecent survey of the empirical evidence concludedthat many of the new MNEs, especially in theextractive and manufacturing sectors, became

multinationals when they internalized backwardor forward linkages (UNCTAD, 2006).

Scholars also documented that developing-country MNEs wished to expand abroad in orderto overcome limitations imposed by the home-country government in the domestic market. Inmany developing and newly industrialized coun-tries, limitations such as licensing systems, quotaallocations, and export restrictions kept firms fromhaving enough growth opportunities at their dis-posal, hence the desire to expand abroad (Lall,1983; Wells, 1983). In part related to the previousmotive, firms felt the need to spread risks bylocating assets in different countries (Lecraw,

1977). This motivation was driven by the macro-economic and political volatility characteristic ofso many developing and newly industrializedcountries. A variation on this effect has to do withthe case of family-owned MNEs from developingcountries under the threat of government scrutinyor confiscation (Wells, 1983).

The early literature on the new MNEs alsoidentified buyer-supplier relationships as motivesfor a supplier establishing production facilities in a

Table2MotivationsforForeignDirect InvestmentbytheNewMultinationalEnterprises

Motivation Description References

Backward linkage into raw materials Firm seeks to secure supplies of crucial inputsin the face of uncertainty or asset specificity

Fields, 1995; Lall, 1983; UNCTAD,2006; Wells, 1983

Forward linkage into foreign markets Firm seeks to secure access to the market in

the presence of asset specificity

Fields, 1995; UNCTAD, 2006;

Wells,1983Home-country government curbs Firm attempts to overcome growth

restrictions imposed by the government in itshome market

Lall, 1983; UNCTAD, 2006; Wells,1983

Spreading of risk Firm locates assets in different countries tomanage risk

Lecraw, 1977

Movement of personal capital abroad Firm invests abroad so that owners diversifytheir exposure to any one country

Wells, 1983

Following a home-country customerto foreign markets

Firm follows home-country customers as theyexpand horizontally to other countries

UNCTAD, 2006; Wells, 1983

Investment in new markets inresponse to economic reforms in thehome country

Firm enjoying monopolistic or oligopolisticposition in the home market is threatened byliberalization, deregulation, and/orprivatization policies

Goldstein, 2007; Guillen, 2005

Acquisition of firm-specific intangibleassets

Firm invests or acquires assets in moredeveloped countries

Lall, 1983; UNCTAD, 2006

Exploitation of firm-specificintangible assets

See Table 3



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foreign country in which the buyer already had apresence (UNCTAD, 2006; Wells 1983). In somecases, both the buyer and the supplier are home-country firms that followed each other abroad,while in others the buyer is a multinational froma developed country that asks its supplier in a

developing or newly industrialized country to co-locate either in its home country or in othercountries (Guillen, 2005).

Firm-SpecificAssets

Scholars also devoted attention to the proprietary,firm-specific intangible assets of the new MNEs,noting that they engaged in foreign direct invest-ment with the purpose of not only acquiring suchassets but also exploiting existing ones. Foreignexpansion with a view to acquiring intangible

assets, especially technology and brands, was notvery important during the 1970s and 1980s, buthas become widespread in the last two decades(UNCTAD, 2006). With the advent of currentaccount and currency exchange liberalization inmany developing and newly industrialized coun-tries, the new MNEs have enjoyed more of a freehand in terms of making acquisitions, includingmultibillion-dollar deals. Many of these have tar-geted troubled companies or divisions located inthe United States and Europe that possess somebrands and product technology that the new MNEis in a better position to exploit because of itssuperior or more efficient manufacturing abilities.

Acquisitions have not been the only way togain access to intangible assets. The evidence sug-gests that the acceleration in the internationalexpansion of the new MNEs has been backed by anumber of international alliances aimed at gain-ing access to critical resources and skills that allowthese firms to catch up to MNEs from developed

countries. As argued above, these alliances andacquisitions have been critical for these firms tomatch the competitiveness of MNEs from devel-oped countries. For this reason the internationalexpansion of new MNEs runs in parallel with theprocess of upgrading their capabilities. Sometimes,however, capability upgrading precedes interna-tional expansion. This is the case, for instance, forsome state-owned enterprises that undergo a re-structuring process before their internationaliza-

tion and privatization (Cuervo & Villalonga,2000).

In other cases the capability upgrading processcan follow international expansion. This can hap-pen in regulated industries, where firms facestrong incentives to commit large amounts of re-

sources and to establish operations quickly, when-ever and wherever opportunities arise, and fre-quently via acquisition as opposed to greenfieldinvestment (Garca-Canal & Guillen, 2008; Sarkaret al., 1999). As opportunities for internationalexpansion in these industries depend on privatiza-tion and deregulation, some firms lacking compet-itive advantages expand abroad on the basis of freecash flows as opportunities arise.

As noted above, horizontal investments seemedto pose a challenge to established theories of the

MNE. The literature had emphasized since thelate 1950s that MNEs in general undertake hori-zontal investments on the basis of intangible assetssuch as proprietary technology, brands, or know-how. The early literature on the new multination-als simply assumed that firms from developing ornewly industrialized countries lacked the kind ofintangible assets characteristic of American, Jap-anese, and European multinationals (Lall, 1983, p.4). In fact, study after study found that the newmultinationals scored lower on technology, mar-keting skill, organizational overhead, scale, capitalintensity, and control over foreign subsidiariesthan their rich-country counterparts (e.g. Lall,1983; Lecraw, 1977; Wells, 1983).

Still, horizontal investments cannot be ex-plained without the presence of intangible assetsof some sort. Table 3 summarizes the main types ofintangible assets possessed by the new MNEs, asreflected in the existing literature. During the1970s and 1980s, the scholarly attention focused

on capabilities such as the adaptation of technol-ogy to the typically smaller scale markets of de-veloping and newly industrialized countries, theircheaper labor, or imperfect input markets (Fer-rantino, 1992; Heenan & Keegan, 1979, Lall,1983; Lecraw, 1977; Tolentino, 1993). Consumer-good MNEs from these countries were also foundto possess a different kind of intangible asset,namely, ethnic brands that appealed to custom-ers not only in the home market but also to the



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ethnic diaspora in foreign countries, especially inEurope and the United States (Ferrantino, 1992;Goldstein, 2007, pp. 117122; Lecraw, 1977;Wells, 1983). Other scholars noted that the newMNEs possessed an uncanny ability to incremen-tally improve available products and to developspecialized variations for certain market niches(Lall, 1983; UNCTAD, 2006).

During the 1980s, students of the so-called East

Asian miracle highlighted yet another intangibleasset, one having to do with the ability to organizeproduction and to execute large-scale projects ef-ficiently with the help of technology borrowedfrom abroad in industries as diverse as steel, elec-tronics, automobiles, shipbuilding, infrastructuredevelopment, and turnkey plant construction(Amsden & Hikino, 1994). Scholars also pro-posed that these capabilities facilitated the growthof diversified business groups (Guillen, 2000;

Kock & Guillen, 2001), which in turn made iteasier for firms within the same group to expandand invest abroad by drawing on shared financial,managerial, and organizational resources (Gold-stein, 2007, pp. 8793; Guillen, 2002; Lall, 1983,p. 6; Mathews, 2006; UNCTAD, 2006). A spe-cific type of managerial skill that becomes criticalin accelerated internationalization is the ability toeffectively manage mergers and acquisitions or

strategic alliances. These abilities become criticalwhen extracting value from such organizationalcombinations, which are necessary to learn andgain access to critical external knowledge andresources (Kale et al., 2000; Zollo & Singh, 2004).Guillen (2005) has shown that the accrued skillsin the management of M&A and corporate re-structuring by large Spanish firms competing inregulated industries have been critical for theirinternational expansion in Latin America. Buck-

Table3IntangibleAssetsof theNewMultinationalEnterprises

Intangible Asset Description References

Technology adaptation Adaptation of available technology to small-scaleproduct markets, cheap labor, and/or imperfectinput markets

Ferrantino, 1992; Heenan & Keegan,1979; Lall, 1983; Lecraw, 1977;

Tolentino, 1993

Early adoption of new technology Implementation of new technology developed bysomeone else, especially in infrastructureindustries such as construction, electricity, ortelecommunications

Guillen, 2005; UNCTAD, 2006

Ethnic branding Consumer brands with appeal to immigranthome-country communities abroad

Ferrantino, 1992; Heenan & Keegan,1979; Lall, 1983; Lecraw, 1977;Wells, 1983

Efficient production and projectexecution

Ability to absorb technology, combine resources,and innovate from an organizational point ofview in ways that reduce costs and enhancelearning

Amsden & Hikino, 1994; Goldstein,2007; Guillen, 2000; Kock & Gui llen,2001; Mathews, 2006; UNCTAD,2006

Product innovation Incremental product improvements; spec ialized

products for market niches

Lall, 1983; UNCTAD, 2006

Institutional entrepreneurial ability Skills or know-how needed to operate in thepeculiar institutional conditions of less developedcountries

Caves, 1996; Lall, 1983; Lecraw,1993

Expertise in the management ofacquisitions

Experience gained in the home country in themanagement of M&As and corporaterestructuring that help to extract value fromcross-border acquisitions

Guil len, 2005

Networking skills Ability to develop networks of cooperativerelationships

Buckley et al., 2007; Dunning, 2002;Mathews, 2006

Political know-how Advantage in dealing with host governments andwith political risk in less developed countries

Garca-Canal & Guillen, 2008; Lall,1983; Lecraw, 1977



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ley et al. (2007), analyzing the success of Chinesefirms capitalizing on the Chinese diaspora, arguedthat some firms have the ability to engage inbeneficial relationships with other firms that havevaluable resources needed to succeed in globalmarkets. The adoption of network-based struc-

tures has also helped the development of the newMNEs by making easier the coordination of theinternational activities (Mathews, 2006). How-ever, home-country networks in several cases havealso allowed these firms to take advantage of theexperience of the firms from the network (Elango& Pattnaik, 2007; Yiu et al., 2007).

In more recent years, students of the newMNEs have drawn attention to other types ofintangible assets. On the technology side, researchhas documented that firms in developing, newly

industrialized and upper-middle-income countriesface lower hurdles when it comes to adopting newtechnology than do their more establishedcounterparts in rich countries. This is especiallythe case in industries such as construction, elec-tricity, port operations, and telecommunica-tions, in which companies from Brazil, Chile,Mexico, South Korea, Spain, and Dubai, amongother countries, have demonstrated a superiorability to borrow technology and organize efficientoperations across many markets (Guillen, 2006;UNCTAD, 2006).

Another area of recent theoretical and empir-ical research has to do with the political know-how that the new MNEs seem to possess by virtueof having been forced to operate in heavily regu-lated environments at first, and then rapidly de-regulating ones, as illustrated by the expansion ofSpanish banking, electricity, water, and telecom-munications firms throughout Latin America and,more recently, Europe (Garca-Canal & Guillen,

2008). This political capability was not lost onthe early students of the new MNEs; they dulypointed out that these firms possessed an institu-tional entrepreneurial ability that enabled themto operate effectively in the peculiar political,regulatory, and cultural conditions characteristicof developing countries (Caves, 1996; Goldstein,2007, pp. 99102; Lall, 1983; Lecraw, 1993). Po-litical and regulatory risk management was iden-tified in some early studies as a key competitive

capability (Lall, 1983; Lecraw, 1977). In the last20 years, a new twist has been added to thistheoretical insight after the observation that thenew MNEs are making acquisitions and increasingtheir presence in the infrastructure industries ofthe rich countries of Europe and North America,

including electricity generation and distribution;telecommunications; water; and airport, port, andtoll-highway operation, among others (Guillen,2005). The recent corporate expansion into LatinAmerica of Spanish firms from regulated indus-tries illustrates how firms tend to invest in thosecountries where their political capabilities aremore valuable, that is, those with high politicalinstability, as shown by Garca-Canal and Guillen(2008). An interesting result of this study is thatSpanish firms from regulated industries reduced

over time their propensity to invest in politicallyunstable countries, showing that it is easier tomove from politically unstable countries to stableones than the other way around.

PatternsofExpansion

An important point that early students of the newMNEs underplayed was that, depending on thehome country, these foreign-investing firmstended to emerge from certain industries and notothers (UNCTAD, 2006). Thus, the South Ko-rean MNEs have excelled in automobiles andelectronics, the Taiwanese in component manu-facturing, the Brazilian in automotive and aero-space products, the Mexican in ethnic brands andin producer goods such as cement, the Spanish inregulated and infrastructure industries, the Indianin information services, the Chinese (so far) insimple assembled goods, and so on. In so doing,firms originating from developing, newly industri-alized, and upper-middle-income countries have

accumulated proprietary intangible assets thathave enabled them to successfully competethrough internalized exports and horizontal in-vestments even in the most advanced countries inthe world.

This process of reverse foreign direct invest-ment from home countries at a lower level ofdevelopment than the host countries to which it isdirected is anomalous only in a superficial way.The overall level of development of a country, as



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measured by such aggregate indicators as GDP percapita, more likely than not conceals a heteroge-neous mix of backward and world-class industriesand firms. Many countries around the world in-clude pockets or enclaves of excellence sur-rounded by relatively mediocre or even inefficient

producers. The literature on geographical clustersand agglomeration economies has shown thatfirms build capabilities as they interact with otherslocated in close proximity (Cortright, 2006; Por-ter, 1998). This literature emphasizes that thecountry level of analysis is not the appropriate onefor understanding the impact of location and ge-ography. Ironically, one of the facilitating factorsin the development of these clusters and enclavesof excellence could be incoming FDI and out-sourcing agreements from firms located in devel-

oped countries that contributed to the formationof industrial clusters in less developed ones (Mc-Kendrick et al., 2001; Meyer, 2004).

The new MNEs have tended to follow some ofthe patterns of expansion consistent with productlife cycle and staged theories of internationaliza-tion, as they have tended to expand first intocountries located within the same region (Gold-stein, 2007; Lall, 1983; Wells, 1983). In addition,when stepping outside their home region, theyhave tended to emphasize areas culturally, politi-cally, or economically similar, as in the case of theSpanish firms expansion into Latin America(Guillen, 2005). However, notable exceptions tothis pattern have to do with investments in searchof strategic assets (Goldstein, 2007, pp. 8587)and the rapid pace at which they have expandedtheir global reach (Mathews, 2006).

Conclusion

The new MNEs are the result of both imitation

of established MNEs from the rich countrieswhich they have tried to emulate both strate-

gically and organizationallyand innovation inresponse to the peculiar characteristics of emerg-ing and developing countries. The context inwhich their international expansion has takenplace is also relevant. The new MNEs haveemerged from countries with weak institutionalenvironments, property rights regimes, legal sys-tems, and so on. Experience in the home country

was especially valuable for the new MNEs becausemany countries with weak institutions are growingfast, and these MNEs developed the capabilities tocompete in such challenging environments.

In addition, the new MNEs have flourished ata time of market globalization in which, despite

local differences that still remain, global reach andglobal scale are crucial. The new MNEs haveresponded to this challenge by embarking on anaccelerated international strategy based on exter-nal growth aimed at upgrading their capabilitiesand increasing their global market reach. Whenimplementing this strategy, the new MNEs tookadvantage of their market position in the homecountry, and, ironically, their meager interna-tional presence allowed them to adopt a strategyand organizational structure that happens to be

most appropriate to the current international en-vironment in which emerging economies aregrowing very fast.

It is also important to note that the estab-lished MNEs from the rich countries haveadopted some of the behaviors of the new mul-tinationals. Increased competitive pressure fromthe latter in industries such as cement, steel,electrical appliances, construction, banking,and infrastructure has prompted many Ameri-can and European firms to become much lessreliant on traditional product-differentiationstrategies and vertically integrated structures.To a certain extent, the rise of networked or-ganizations (e.g., Bartlett & Ghoshal, 1989)and the extensive shift toward outsourcing rep-resent competitive responses to the challengesfaced by established MNEs. Finally, a specialtype of new MNE is the so-called born-globalfirm, which resembles the new MNE in manyways but has emerged from developed countries.

Taking all these developments into account, itis clear that the American model of MNE is fad-ing. In effect, globalization, technical change, andthe coming of age of the emerging countrieshave facilitated the rise of a new type of MNE inwhich foreign direct investment is driven notonly by the exploitation of firm-specific compe-tencies but also by the exploration of new pat-terns of innovation and ways of accessing mar-kets. In addition, the new MNEs have expanded



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