Academic journal article Indian Journal of Industrial Relations

Internationalization of Emerging Economy Firms-Need for New Theorizing

Academic journal article Indian Journal of Industrial Relations

Internationalization of Emerging Economy Firms-Need for New Theorizing

Article excerpt

Emergence of Third World MNCs

The emergence of firms from developing countries as important players in global markets has been a distinctive phenomenon of globalization in the twenty first century. Not only have the emerging market economies (1) been among the top destinations for foreign direct investment (FDI), but the outward FDI flows from these economies have also been growing steadily. FDI from emerging economies accounted for 17% of world outward flows at US $133 billion in 2005 (UNCTAD 2006). The value of the stock of FDI from emerging economies was about $1.4 trillion in 2005 constituting around 13% of the world total. All these have resulted in a resurgence of interest in internationalizing firms from emerging economies, a number of which have been transforming themselves into 'third orld multinationals or TMNCs' (Wells 1983).

The international expansionary activities of TMNCs from emerging economies are fraught with many challenges. To begin with, they have to overcome the 'late mover' disadvantage. In addition, they hail from less munificent resource environments and have to acquire resources and capabilities to successfully compete with established players from the developed economies (Guillen 2000). Most of the theories offered as explanations for international expansion behaviour of TMNCs were modifications of the prevailing theories of internationalization developed primarily in the developed economy context (Dunning 1981, Dunning et al. 1998, Mathews 2006). In this paper, we attempt to review the predominant theories of internationalization and examine whether they adequately explain the internationalization behaviours of emerging economy firms, particularly taking into account the empirical evidence on internationalization of firms from India. We argue that the extant theories of internationalization are too broad to explain certain attributes of the internationalization process adopted by emerging economy firms and seek to strengthen the existing theories by suggesting directions for new theorization in the context of internationalization of firms from emerging economies such as India. The remainder of the paper is organized as follows. The next section reviews the relevant theoretical literature--first of international expansion of firms in general, followed by TMNCs in particular. Then we examine evidence from the unique context of the internationalization of emerging economy firms and offer an argument for the need for fresh theorizing.

Theories of Internationalization

A rich body of work exists that attempts to explain international expansion activities of firms, though almost all of it was developed in the context of MNCs from the developed economies. This literature can be broadly grouped under two theoretical streams namely the internationalization process models (Vernon 1966, Johanson & Wiedersheim-Paul 1975) and internalization theories (Buckley & Casson 1976, Dunning 1980). Some aspects of the international expansion phenomenon primarily addressed by these theories include selection of foreign markets, choice of the entry mode and pace of internationalization and choice of partners.

One of the important early attempts to explain foreign expansion activities was that of Vernon (1966), which focused on the effect of product cycle on investment in foreign markets by US firms. Vernon argued that initially firms focused on exploiting the advantages of the country of origin, but subsequently, as the products became more mature and competition became more intense, firms tended to shift production abroad. A four-phase trade cycle was posited for most international products consisting of export dominance in the first phase, production in the foreign country in the second phase, foreign firm competition in foreign markets in the third phase, and foreign firm competition in the home market in the fourth phase.

Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977) put forward a sequential or incremental approach to deepening of foreign commitments of firms that came to be known as the 'Uppsala School' or the 'stages' model. …

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