The Nature of the International Firm

Citation

Leonidou, L.C. (1998), "The Nature of the International Firm", International Marketing Review, Vol. 15 No. 5, pp. 427-432. https://doi.org/10.1108/imr.1998.15.5.427.1

Introduction

The internationalization of the firm, as well as the process of developing, managing, and controlling international business strategies and operations, have been the object of numerous studies conducted by researchers all over the world. Nordic scholars have made a remarkable and constructive contribution to this type of research, as demonstrated by the plethora of innovative and creative writings on the subject since the early 1960s. The Nature of the International Firm, meticulously edited by Björkman and Forsgren, continues this tradition by providing an overview of research on international business recently conducted in the Nordic states. The book consists of a total of 20 articles written by 29 researchers from Denmark, Finland, Norway, and Sweden. Most of the papers were presented at a workshop organized by the Institute of International Economics and Management, at Copenhagen Business School, in 1995. Following a comprehensive overview of Nordic contributions to international business research, the book is organized into three major parts: perspectives on the international firm; driving forces behind internationalization; and managing the international firm. The second part is further divided into two sections, one focusing on the internationalization process of the firm, and the other explaining foreign direct investments and divestments. The third part also deals with two aspects, namely managing inter‐organizational relationships and management control.

Nordic research in international business (chapter 1)

In their introductory article, Björkman and Forsgren provide an outline of the ongoing Nordic research in the international business field. They argue that the stimulus for this research has been the outward‐looking behaviour of indigenous firms, largely attributable to the smallness of the region, as well as to a number of factors pertaining to the characteristics and histories of the countries it comprises. Some distinct features of research into the international business firm and its operations are identified: (a) it is behavioural rather than instrumental or deterministic in nature, considering the international firm as an organization characterized by bounded rationality, action‐based learning processes, and a complex structure; (b) it is based on a market concept dominated by an industrial market perspective, characterized by long‐lasting links between firms, rather than associations with more or less anonymous end‐users; (c) its main concern has been to understand the underlying forces of the internationalization process of the firm, rather than why and in what forms foreign direct investments take place, probably due to the relatively strong influence of firm behaviour researchers on Nordic thought; (d) its tendency to use, apart from large‐scale samples, qualitative investigation methods, such as case studies and in‐depth longitudinal data; (e) its inclination to study the internationalization of firms using pioneering models and frameworks, such as the one offered by the Uppsala School, which is based on the interplay between knowledge of foreign markets/operations and increasing resource commitment; and (f) its tendency to look upon a firm’s collaboration with an external counterpart involving its own competence as an opportunity rather than as a problem.

Perspectives on the international firm (chapters 2‐4)

In an attempt to elaborate on the concept of the international business enterprise, Andersson and Johanson argue that, contrary to the prevailing view that production and the way this is organized is the key element of competitive advantage, the firm’s competitiveness largely depends on its capability to connect foreign business relationships; in addition, important business relationships are assumed to influence the control structure of the international firm. In Thomsen’s article, corporate and national competitive advantage is analyzed as a question of comparative institutional advantage; adopting an institutional typology, combining markets/institutions and economic efficiency/ inefficiency, and using data from Europe, Japan, and the USA, the author posits that the key to productivity and wealth is lowering transaction costs rather than production costs. With respect to the competitive advantage of the multinational corporation and its ability to develop new products, processes and methods, Forsgren attempts to establish a link with the firm’s capability to transfer knowledge about innovations developed in one subsidiary to the rest of the organization. In doing so, he is confronted with a paradox: the greater the variety among the environments within which the various subsidiaries operate, the greater the possibility of generating new knowledge in the organization, but also the greater the difficulty in disseminating and applying this knowledge on a larger scale. This has been attributed both to differences in subsidiaries’ business networks and the lack of incentive for the subsidiary to participate in knowledge transfer within the multinational firm.

The internationalization process (chapters 5‐10)

The internationalization process of the firm has hitherto attracted a significant stream of international business research, this being also the case with this book, in which six articles are exclusively devoted to this issue. Using a case study approach, Zander and Zander critically assess some of the logic and assumptions underlying the prevailing view of the firm’s internationalization process; specifically, their empirical observations contradict the incremental and irreversible nature of the internationalization process out of a single country, as well as complicate the identification of the “home country” of the multinational firm. In Petersen and Petersen’s article, an attempt is made to test the Uppsala internationalization model at both theoretical and empirical levels, using information extracted from Danish multinational companies; the authors conclude that, while on theoretical grounds this model remains empirically unchallenged and the fundamental idea of incremental progression along the internationalization path seems quite robust, on the operating level, the very restrictive premises regarding the establishment chain need to be relaxed. Using an anthropological approach, Langhoff provides an alternative way of looking into the issue of psychic distance ‐ a key element in understanding internationalization processes; he claims that, as opposed to the existing models which are operating on an individual cognitive level, the adoption of an intercultural approach to company internationalization is more appropriate because it focuses on both the behavioural and the interactionist levels. In exploring the role of managerial factors in the internationalization of a small exporting firm over its full life cycle, McGaughey, Welch, and Welch find a different pattern of export development from that depicted by existing internationalization models; however, a closer examination revealed that the firm under study was able to lower risk and experiment with exporting, this being largely attributable to the development of personal networks by the principal decision maker(s). The article by Nieminen and Törnross centres on the initiation and development of business networks between Finnish and Estonian enterprises, where some interesting theoretical and practical insights are offered, particularly as regards the interrelationships between learning, commitment, and adaptation. Andersen, Blenker, and Christensen study the expansion of international activity by subcontractors, arguing that this can be explained in association with the functional dimensions of the collaborative interface with their contractors; in their desire to internationalize, subcontractors were found to rely on the combined efforts of a number of inter‐dependencies to attract value from their basic market contribution.

Explaining foreign direct investments and divestments (chapters 11‐13)

In exploring the issue of foreign direct investment, Randøy develops a company‐based model, capitalizing on Dunning’s eclectic paradigm. His model consists of strategic, firm‐specific, location‐specific, and transaction‐specific factors affecting foreign market involvement, which is operationalized in terms of level of equity control, level of foreign production, and level of foreign market resource commitment. Based on this conceptual framework, the author methodically develops a number of hypotheses linking these two sets of variables. In another article, Larimo attempts to analyze the determinants of ownership arrangement in foreign direct investment based on transaction cost theory and behavioural theory. His empirical study, conducted among Finnish firms with manufacturing investments in the European Union, although successfully predicting the direction of the hypothesized associations, found that only a few variables could determine ownership structures; of those, intensity of earlier operation and timing of foreign direct investment exhibited the strongest impact. Benito takes an opposite perspective from the previous two authors, by trying to shed light on a very interesting but unexplored topic of international business: why and under what circumstances do foreign divestments take place? Based on industrial organization theory and strategic management theory, the author builds a framework which indicates that the probability of exiting foreign markets depends on the relative strength of incentives versus barriers to exit, which is affected by four groups of factors, namely environmental stability, attractiveness of current operations, strategic fit, and governance issues.

Managing inter‐organizational relationships (chapters 14‐17)

A crucial aspect in managing inter‐organizational relationships in international business is that of human resources, which is the subject of Björkman’s paper. Specifically, the author examines the practice of human resource management in international joint ventures from a number of different perspectives ‐ institutionalization, resource dependence, economic efficiency, political process, and organizational learning. Based on data obtained from Chinese‐Western joint ventures, a theoretical framework is developed which calls for future analysis at three levels: organizational fields, the joint venture as a whole, and the individuals and groups of managers in the joint venture. In a similar vein, Sharma and Wallström‐Pan analyze the internal management process in Sino‐Swedish joint ventures based on in‐depth interviews. The authors conclude that: (a) introducing changes at technical levels in the joint venture are less problematic, compared to changes in values, norms, and work ethics; (b) managing the transition period in a joint venture is crucial, but it is at the same time troublesome due to mixtures of foreign and local work cultures and ethics; and (c) the qualities possessed by individual managers in a joint venture are very likely to affect its performance. Davis investigates the special problems and opportunities arising from cross‐border buyer‐supplier development collaborations, with special emphasis on the introduction of commercially important innovations and the enhancement of competence building. In this respect, two basic concepts are introduced, namely relational contracting and core competence, based on which a number of tentative hypotheses are set. In Holm and Jonanson’s article, an exploration is made as to how different kinds of network connections affect certain dimensions of the atmosphere characterizing dyadic business relationships. Using the data base of the second European International Marketing and Purchasing (IMP) project, the authors found that, although trust and understanding are generally not affected by network connections, networks have a strong conditioning effect on power balance and ties in the working relationship.

Management control (chapters 18‐20)

The final part of the book consists of three papers focusing on management and control aspects of the multinational corporation. In studying the process of moving toward less hierarchical structures, Marschan identifies five key dimensions: (a) delegation of decision‐making authority to appropriate levels; (b) delayering of organizational levels; (c) dispersal of key functions across units in different countries; (d) de‐bureaucratization of formal rules and procedures; and (e) differentiation of work, responsibility, and authority among subsidiary units. In another article, Pahlberg discusses the issue of cultural differences as a source of problems in the relationships between headquarters and subsidiaries of the multinational corporation; using information from Swedish firms, she found that subsidiaries which are of lesser importance for other units in the firm and with most of their critical counterparts outside the multinational corporation experienced fewer problems due to cultural variations, as opposed to subsidiaries that are important to other units and have critical relationships with counterparts inside the multinational organization. Finally, Forsgren, Holm, and Thilenius attempt to identify if and what operative functions are important or not in the local subsidiary business network, for both the subsidiary and the corporation as a whole. Based on data received from Swedish multinational companies, the authors conclude that there is a significant connection between the characteristics of the subsidiary network and the role that the same subsidiary plays in the division; however, the degree of network infusion was found to vary across different functions, with some functions having no, or only a limited, impact on the subsidiary’s role in the division.

Conclusion

In light of the challenges confronted by contemporary business, due to growing liberalization, integration and competition in world economies, this book provides an excellent overview of current research on the nature of the international firm. It covers, in a well written and rigorously organized manner, a wide array of interesting, resourceful, and challenging issues that range from the competitive advantage of multinational firms and the internationalization of subcontractors to the divestment of foreign subsidiaries and cross‐border buyer‐supplier relationships. It also provides hints for new avenues of future research on the subject, such as the internationalization of the R&D, the international corporation’s efficiency to transfer knowledge across borders, and the difficulties encountered in managing networks of subsidiaries with different resources and environments. Undoubtedly, this book will stimulate the interest in further research on the subject, not only in the Nordic region, but in other parts of the world as well. Moreover, large portions of it can be used as reading material for courses in international business, particularly those taught at postgraduate level. It is also a helpful and insightful reference for international business practitioners, especially those responsible for organizational design, policy‐making, and strategy implementation in multinational corporations. In conclusion, this is a very useful book that certainly deserves a place in the library of anyone interested in being at the forefront of research, education, and practice in international business.