Emerging Market Firms' Internationalization: How Do Firms' Inward Activities Affect Their Outward Activities?

Research summary : In this study we examine how an emerging market firm's inward international activities (“inward activities”) are related to its outward international activities (“outward activities”) by focusing on the role of the firm's gain from its inward activities. On the one hand, drawing upon the organizational learning perspective, we propose that a firm's gain from inward activities may facilitate its outward activities through improving its resource fungibility. On the other hand, we draw upon the prospect theory to propose that a firm's gain from inward activities may hinder its outward activities by discouraging the firm's top managers from taking risks that are inherent in outward activities. With detailed data from a sample of manufacturing firms in China, we find empirical support for both lines of arguments . Managerial summary : Are emerging market firms with higher inward gain more likely to engage in outward internationalization activities? We argue that it depends upon how a firm uses its gain from inward activities. If the firm can improve its resource fungibility (particularly organizational resource fungibility) from its inward gain, it is more likely to engage in outward activities. If the firm cannot improve its resource fungiblity, the answer is no. Our findings suggest that for emerging market firms, internationalization is not just a path toward new markets; instead, it reflects how these firms exploit and explore what they have learned from their interactions with foreign firms at home in foreign markets. Therefore, managers must think more strategically on developing (organizational) resource fungibility from their inward activities . Copyright © 2017 John Wiley & Sons, Ltd.     

Political capabilities,policy risk,and international investment strategy: evidence from the global electric power generation industry

Whereas conventional wisdom holds that multinational enterprises (MNEs) invest less in host countries that pose greater policy risk—the risk that a government will opportunistically alter policies to expropriate an investing firm's profits or assets—we argue that MNEs vary in their response to host‐country policy risk as a result of differences in organizational capabilities for assessing such risk and managing the policy‐making process. We hypothesize that firms from home countries characterized by weaker institutional constraints on policy makers or greater redistributive pressures associated with political rent seeking will be less sensitive to host‐country policy risk in their international expansion strategies. Moreover, firms from home countries characterized by sufficiently weak institutional constraints or sufficiently strong redistributive pressures will seek out riskier host countries for their international investments to leverage their political capabilities, which permit them to attain and defend attractive positions or industry structures. We find support for our hypotheses in a statistical analysis of the foreign direct investment location choices of MNEs in the electric power generation industry during the period 1990–1999, the industry's first decade of internationalization. Copyright © 2010 John Wiley & Sons, Ltd.     

Shareholder valuation of foreign investment and expansion

This study analyzes when different foreign investment location choices are value creating for firms at different stages of international expansion. I argue that because direct investment in developing countries is riskier than in advanced countries, shareholders may not value a firm's investment in developing countries until that firm has experience from previous international investments and capabilities to better manage and hedge the higher levels of risk and uncertainty. Using a panel of 191 U.S. manufacturing firms and their foreign investments over a 20‐year period (1981–2000), the empirical results show that firm investments in advanced and developing countries are valued differently by shareholders, depending on the firm's prior international expansion, the firm's capabilities and experiences, and the knowledge intensity of the firm's industry. These results highlight the importance of considering firm location decisions, prior experiences, and resources when analyzing. Copyright © 2006 John Wiley & Sons, Ltd.     

Firm growth,adaptive capability,and entrepreneurial orientation

Research summary: This paper posits adaptive capability as a mechanism through which a firm's prior growth influences the exhibition of future entrepreneurial action. Defined as the firm's proficiency in altering its understanding of market expectations, increased adaptive capability is a consequence of the new resource combinations that result from expanding organizational boundaries. Increased adaptive capability in turn corresponds to expansion of entrepreneurial activity, as firms increase their entrepreneurial orientation as the strategic mechanism to capitalize on their improved understanding of market conditions. We find support for our research model in a two‐study series conducted in South Korea and the United Kingdom. Managerial summary: Most would agree that entrepreneurially oriented firms—being innovative, entering new markets, and taking risk—grow faster. But how a firm becomes entrepreneurial is a complicated question. In this study, we flipped the growth relationship around and found support for growth contributing to a firm's entrepreneurial orientation. But between growth and being more entrepreneurial is the firm's ability to recognize changes in market expectations. We argue that as a firm grows, it acquires new resources and new knowledge of how to use those resources. These new resource combinations increase its ability to recognize changes in market expectations—its adaptive capability. This capability uncovers new entrepreneurial opportunities for value creation. To capture this potential value, firms expand their entrepreneurial orientation. Copyright © 2016 John Wiley & Sons, Ltd.     

Hidden but in plain sight: The role of scale adjustment in industry dynamics

While much is understood about the general pattern of industry dynamics, a critical element underlying these dynamics, the rate of the expansion of individual firms, has been largely overlooked. We argue that the rate at which firms can reliably increase their scale of operations is a critical factor in understanding the structure of industries. Further, success at scaling‐up the firm's operations provides a dynamic‐isolating mechanism that insulates established firms from new competition. We show that the bases of profitability in the industry (monopoly‐like profits stemming from the restriction of output, efficiency rents based on firm‐specific productivity differences, or transitory Schumpeterian profits) can be traced to the scale adjustment process. We explore these issues in a computational model of industry dynamics. Copyright © 2013 John Wiley & Sons, Ltd.     

Sunk Costs,Extensive R&D Subsidies and Permanent Inducement Effects

Using firm‐level data on Spanish manufacturing firms we estimate a model of the firm's optimal R&D decisions (whether to perform R&D and how much to invest). We quantify the fixed (proper fixed costs plus firms' outside option) and sunk costs of R&D and find the former to be substantially higher than the latter. While sunk costs act as a barrier to entry into R&D for some firms, fixed costs are the binding obstacle for many more firms. Simulation based on the estimated model reveals that one‐shot trigger subsidies cause a substantial increase in both the share of R&D firms and average R&D expenditures. This effect shows persistence over time, but totally fades away after seven years as firms are gradually hit by negative R&D profitability shocks.     

The nature of partnering experience and the gains from alliances

We examine the conditions under which the prior partnering experience of firms contributes to value creation in their new alliances. We propose that prior experience with the same partners, that is, ‘partner‐specific experience,’ provides greater benefits than ‘general partnering experience’ that encompasses all prior alliances with any partner. We further explore some of the boundary conditions for the effects of partner‐specific experience. We suggest that the effect of partner‐specific experience on value creation in alliances is moderated by the extent to which the assets of the new partner differ from those of the firm's prior partners. We also propose that the firm's own technological and financial resources increase the benefits of partner‐specific experience. Finally, we predict that the value of partner‐specific experience will increase under high levels of firm‐specific uncertainty. We test these hypotheses with comprehensive longitudinal multi‐industry data on joint ventures formed among Fortune 300 firms between 1987 and 1996. Based on stock market returns to joint venture announcements, the results provide support for the contingent value of partnering experience. The implications for managing alliances and advancing organizational learning are discussed. Copyright © 2009 John Wiley & Sons, Ltd.     

Unraveling the mechanisms of reputation and alliance formation: A study of venture capital syndication in China

Extant research shows that resources are significant to a firm's choice of alliance formation. We focus on an important form of intangible resource—firm reputation—and examine how it affects a firm's propensity to form alliances. We propose an inverted U‐shaped relationship between a firm's reputation and its likelihood of alliance formation, resulting from the opposing mechanisms of opportunity and need. We also examine how this relationship may vary across two contingencies: (1) foreign and domestic firms; and (2) different levels of institutional development. Empirical analyses of China's venture capital (VC) industry provide support for our hypotheses. Copyright © 2013 John Wiley & Sons, Ltd.     

Revisiting the firm,industry, and country effects on profitability under recessionary and expansion periods: A multilevel analysis

Research summary: Despite voluminous past research, the relevance of firm, industry, and country effects on profitability, particularly under adverse contexts, is still unclear. We reconcile institutional theory with the resource‐based view and industrial organization economics to investigate the effects of economic adversity, such as the 2008 global economic crisis. Using a three‐level random coefficient model, we examine 15,008 firms across 10 emerging and 10 developed countries for the 2005–2011 period. We find that firm effects become stronger under adversity, whereas industry effects become weaker, as well as country main and interaction effects, particularly among the emerging economies. These findings confirm our assumptions that the firm's own fate is, to a great extent, self‐determined; a reality that is even more pronounced during periods of extreme economic hardship. Managerial summary: In this research, we examine how generalized economic adversity affects the balance across the firm‐, industry‐, and country‐specific factors determining firm profitability. We specifically examine 15,008 firms from 10 emerging and 10 developed countries during the 2005–2011 period to investigate the effects of the 2008 global economic crisis on firm performance. We find that in such adverse conditions, the role of the industry and the country are reduced and the firm's own resources and capabilities become more pertinent for firm performance. This phenomenon is more pronounced across emerging markets. We conclude that the firm's own fate is, to a great extent, self‐determined, a reality that is markedly more evident during periods of extreme economic hardship. Copyright © 2015 John Wiley & Sons, Ltd.     

Measuring strategic performance

This paper demonstrates the inadequacy of traditional measures, that are based on a firm's profitability, for evaluating its strategic performance. Two other measures, one that attempts to assess the quality of a firm's transformations (and not merely its outcomes) and the other that attempts to measure the satisfaction of all of the firm's stakeholders (and not merely its stockholders), are shown here to be important discriminators of strategic performance. The performances of seven ‘excellent’ firms from the computer industry, featured in the recent book by Peters and Waterman, are contrasted with that of seven ‘non-excellent’ firms from the same industry, to develop a framework for measuring strategic performance.     

Playing dirty or building capability? Corruption and HR training as competitive actions to threats from informal and foreign firm rivals

Research summary : We examine why a firm takes specific competitive action in nonmarket and resource‐market spaces, particularly when it perceives threats from informal and foreign competitor groups, respectively. We address this question by combining insights from competitive rivalry, strategic groups, and nonmarket strategy literatures in an emerging economy context. Specifically, we theorize how threats from informal and foreign rival firms in an emerging market influence a firm's engagement in corruption activities and its investments in HR training, respectively. We also argue that the likelihoods of such focal firm actions against competitor group threats differ, contingent on the focal firm's market and resource profiles. Results from the empirical analyses, with survey data from the Indian IT industry, provide broad support to our hypotheses. Managerial summary : Based on a World Bank dataset on the Indian IT industry, this study finds that corruption and HR training are pursued by firms in emerging economies as mindful strategies against specific types of rivals—informal and foreign firm rivals, respectively, and are not pursued simply as culturally‐based practices. Multinational companies may need to understand that domestic firms in emerging countries will engage in corruption strategically to reduce their costs and time to market of their products/services. Therefore, multinational firms may need to devise suitable strategies other than corruption to reduce their costs and time to market if they wish to compete with firms in emerging economies for customers who don't care about ethical issues and will buy a cheaper product/service that is delivered quickly. Copyright © 2015 John Wiley & Sons, Ltd.     

Power dependence,diversification strategy,and performance in keiretsu member firms

Conceptualizing the keiretsu as a power‐dependence system, we propose that benefits accruing from keiretsu affiliation differ across member firms, depending on their power in (or dependence on) the keiretsu. By integrating power with governance and internal market perspectives on group affiliation, we develop and find general support for the hypotheses that powerful keiretsu member firms are able to place more emphasis on growth in pursuing product and international diversification, whereas less powerful keiretsu member firms are subject to strong monitoring and emphasize profitability. These findings provide support to the study's proposition that power‐dependence relationships in a keiretsu influence member firms' appropriation of group affiliation benefits in pursuing diversification strategies. Copyright © 2004 John Wiley & Sons, Ltd.     

Location,governance, and strategic determinants of japanese manufacturing investment in the united states

A firm's decision to manufacture abroad depends on location, governance, and strategic factors. Governance factors are firm-specific. In spite of this, most empirical studies of foreign direct investment (FDI) have been conducted at the industry level (making it impossible to look at firm-specific determinants), and only a handful have considered governance, location, and strategic factors simultaneously. This paper is the first large sample study of the determinants of foreign direct investment at the product and firm-level. It examines the impact of location and governance factors, and of four types of strategic interactions, on a Japanese firm's propensity to manufacture in the U.S. The results support the view that foreign direct investment is explained by location, governance, and strategic variables. Economies of scale and trade barriers encourage Japanese FDI in the U.S. The larger a Japanese firm's R & D expenditures, the greater the probability it will manufacture in the U.S., but this is not the case for advertising expenditures. Some strategic factors are also important: Japanese firms with medium domestic market shares have the highest propensity to invest in the U.S. There is evidence of follow-the-leader behavior between firms of rival enterprise groups, but none of ‘exchange-of-threat’ between American and Japanese firms. Japanese investors are also attracted by concentrated and high-growth U.S. industries.     

Absorptive capacity and performance: The role of customer relationship and technological capabilities in high-tech SMEs

This study focuses on how the interplay between a firm's absorptive capacity (ACAP), and its technological and customer relationship capability contributes to its overall performance. Using structural equation modeling in a sample of 158 firms (316 questionnaires, two respondents per firm) from South Korea's semiconductor industry, we find that a firm's ACAP leads to better performance in terms of new product development, market performance and profitability when used in combination with the firm's capability to engage state of the art technologies in its new product development program (NPD) (technological capability) as well as cultivate strong customer relationships to gain customer insight in NPD (customer relationship capability). By highlighting the interactive nature of absorptive capacity's antecedents and how these relate to firms' performance, this study contributes to the understanding of the role of ACAP as a mechanism for translating external knowledge into tangible benefits in high-tech SMEs, thus leading to important theoretical and practical implications.     

Brand versus generic advertising and the decision to advertise collectively

This study uses Lancaster's (1966, 1979) characteristics model of consumer theory, combined with imperfect information, to support a firm's advertising choice of a combination of brand and generic advertising. However, as consumers become well educated about a firm's product, spillovers from generic advertising become large. When spillovers are large, firms have a greater incentive to collude on generic advertising. The firm's decision to include advertising collectively with its competitors will follow from its own analysis of the benefits versus the costs of such a union. The success of collective advertising may, however, depend on the control of free-riders.     

Multinationality and downside risk: The roles of option portfolio and organization

Multinational operations confer firms a portfolio of switching options that offer potential operating flexibility in the context of input cost variability, helping firms reduce downside risk. We suggest that two conditions may shape the relationship between multinationality and downside risk. When subadditivity is present in a firm's option portfolio, such as when the firm operates affiliates in host countries with similar labor cost developments, multinationality is less likely to reduce downside risk since less valuable opportunities exist for shifting operations. Multinationality is more likely to reduce downside risk if a firm's organization facilitates the coordination of cross‐border activities, enabling the exploitation of the shifting opportunities. Analysis of a comprehensive panel dataset of Japanese manufacturing firms and their foreign manufacturing affiliates provides support for these conjectures. Copyright © 2013 John Wiley & Sons, Ltd.     

AN EVOLUTIONARY PERSPECTIVE ON DIVERSIFICATION AND CORPORATE RESTRUCTURING: ENTRY,EXIT, AND ECONOMIC PERFORMANCE DURING 1981–89

This study proposes a theoretical perspective that firms engage in continuous search and selection activities in order to improve their knowledge base and thereby improve their performance. This general framework is applied to the context of corporate evolution. Entry and exit activities are understood as search and selection undertaken by the firm to improve their performance. One of the compelling features of this framework is that firms learn from their past entry experience and approach the next entry in a more focused and directed manner over time. Also, firms acquire additional knowledge from each entry event while applying their existing knowledge base. With a longitudinal (1981–89) data base on entry and exit activities of all publicly traded manufacturing firms in the United States, this study shows that applicability of the firm's knowledge base plays an important role in predicting which businesses a firm enters or exits. Firms sequentially enter businesses of similar human resource profiles and firms are more likely to divest lines of business of different profiles. Corporate-level analysis shows that such well-directed entry and exit contribute to the improvement of a firm's profitability.     

Taking industry structuring seriously: A strategic perspective on product differentiation

Given legal impediments to consolidation and collusion, firms often resort to product differentiation to attain market power. This paper provides a formal analysis of product differentiation as a tool for such industry structuring at both the firm and industry level. We examine: how industry structure differs when firms collaborate on their differentiation decisions, and when the profitability of such collaboration is greatest; how an individual firm's differentiation decisions affect subsequent market outcomes under price competition, such as margin, market share, and profit; how mere differentiation differs from a ‘differentiation advantage’; and how changing a firm's differentiation affects its rivals through both positive externalities (by restraining rivalry) and negative externalities (by shifting competitive advantage). Our results have implications for empirical research, strategy theory, and pedagogy.     

When Product Development Performance Makes a Difference: A Statistical Analysis in the Electronics Industry

Throughout the pages of JPIM and other publications, researchers and practitioners devote considerable effort to identifying the dimensions of new-product development (NPD) performance that relate most closely to business success. Although we may hope to unveil a set of universal truths about the relationship between NPD performance and business success, the relevant NPD performance measures appear to depend on the industry in which a firm competes. In fact, Christian Terwiesch, Christoph Loch, and Martin Niederkofler suggest that the overall relevance of NPD performance to business success depends on the firm's competitive market environment. In a study of 86 business units operating in 12 different electronics industries worldwide, they develop a market contingency framework for understanding the impact of NPD performance on a firm's profitability. Their study uses data from the “Excellence in Electronics” project, a joint research effort by Stanford University, the University of Augsburg, and McKinsey & Co. They describe market context in terms of three dimensions: market share, market growth, and external stability—that is, the average product life cycle duration in the market. Looking at all 86 business units in the study, they find that industry membership accounts for 23% of the variance in profits, with 18 percent of the variance determined by industry profitability and 5% by the three dimensions of market context. For the firms in the study, development performance has the most significant effect in slow-growth markets and in markets with long product life cycles. In these stable industries, low development intensity, product line freshness, and technical product performance increase profitability. The results indicate that NPD performance plays a much more important role for explaining the profitability of dominant firms than that of the low-market-share firms in the study. NPD performance explains 30% of the profitability variance among the high-market-share business units in the study, but none of the variance for the low-market-share business units. Although the profitability of the smaller firms in the study is driven primarily by the industry environment, these firms can compete on the basis of superior technical performance.     

The Augmented Service Offering: A Conceptualization and Study of Its Impact on New Service Success

Unlike companies that produce tangible goods, service firms typically cannot rely on product advantage as a means for ensuring the success of a new service. Developing a competitive response to a tangible product may require significant investments of time and effort. In many cases, however, competitors can easily duplicate the core elements of a firm's new service. This fundamental difference between new products and new services means that managers who hope to find the keys to new-service success must look to factors other than sustainable product advantage. Chris Storey and Christopher Easingwood suggest that managers must understand the totality of the service offering from the customer's perspective. They explain that the purchase of a service is influenced not only by the service itself, but also by such factors as the service firm's reputation and the quality of the customer's interaction with the firm's systems and staff—in other words, by the augmented service offering (ASO). Using the results of a study they conducted in the consumer financial services industry in the U.K., they identify the components of the ASO, and they examine the relative contributions of these components to the success of new services. In their model, the ASO comprises three elements: the service product, service augmentation, and marketing support. The core of the ASO—the service product—includes such dimensions as product quality, product distinctiveness, and perceived risk. The study's results suggest that improvements in the service product open up new opportunities for the firm, but have only modest effects on sales and profitability. Rounding out the ASO model are service augmentation and marketing support. Service augmentation encompasses such dimensions as distribution strength, staff-customer interactions, and reputation. The customer recognizes and responds to these elements of the ASO, but they are not part of the product core. Marketing support involves those marketing and management actions that affect the quality of the product and its augmentation, even though customers typically are not aware of them. These elements include knowledge of the marketplace, training of contact staff, and internal marketing. Enhanced service augmentation has significant effects on profitability and sales for the firms in this study, but it does not offer enhanced opportunities. The marketing support elements contribute significantly to all aspects of performance for the firms in this study.