Academic journal article Management International Review

Foreign Direct Investment and Capability Development: A Dynamic Capabilities Perspective

Academic journal article Management International Review

Foreign Direct Investment and Capability Development: A Dynamic Capabilities Perspective

Article excerpt

Abstract:

* This study uses a dynamic capabilities perspective to illustrate how global configurations of value chain activities are able to contribute to a firm's capability development through foreign direct investment.

* Using Taiwanese firms as an empirical sample, we develop testable hypotheses regarding the impact of global configuration in terms of entry timing, entry location, and completeness of value chain activities.

* Results indicate that foreign investment made by a multinational corporation (MNC) at an earlier time will enable a higher level of technological and manufacturing capability development than that made at a later time. We also find that MNCs are likely to make foreign investment in developed countries for the development of technological and marketing capabilities, and in less developed countries for the development of manufacturing capabilities. In addition, we discover that the more complete an MNC's value chain configuration is, the higher the level of capability development the MNC is likely to achieve.

Keywords: Foreign direct investment" Capability development-Dynamic capabilities. Global configuration' Entry location' Value chain activities

Introduction

Understanding the role of foreign direct investment (FDI) in sustaining competitive advantages has a long history in the international business (IB) literature. Following this stream of research, the traditional perspective generally assumes that firms should possess certain types of proprietary resources to exploit in a host country (e.g., Caves 1971, Hymer 1976). Recently, most studies have recognized that firms invest in a host country not only to exploit existing firm-specific resources, but also to acquire necessary resources (e.g., Chang 1995, Almeida 1996, Shah/Song 1997, Chen/Chen 1998, Frost 2001, Makino/Lau/ Yeh 2002). Taking a perspective of dynamic capabilities in international expansion (Luo 2000), exploitative FDI is viewed as the transfer of a firm's specific advantage across borders (capability exploitation), while explorative FDI is regarded as a means to acquire strategic resources in a host country (capability development). Expanding this line of research, we argue below that the global configuration of value chain activities is able to contribute to a firm's capability development through FDI. This issue has received much less attention from IB researchers.

Following the dynamic capabilities perspective, firms will try to integrate, build, and reconfigure their internal and external competences to address rapidly changing environments (Teece/Pisano/Shuen 1997). A firm is required to fully utilize existing resources and to develop new capabilities simultaneously. More importantly, a firm's competitive advantage is resting on distinctive processes, shaped by the firm's asset positions, and the evolution paths it had adopted (Teece/Pisano/Shuen 1997). Eisenhardt and Martin (2000) conceptualize dynamic capabilities as the firm's distinctive processes relating to the transformation of resource reconfiguration to cope with environmental change. In summary, the dynamic capabilities perspective has made theoretical contribution by addressing the evolutionary nature of firm resources and capabilities in relation to environmental changes and enabling identification of firm- or industry-specific processes that are critical to firm evolution (Wang/Ahmed 2007). The aim of this study is to examine these distinctive processes involving the transformation of resource reconfiguration and their relation to the global configuration of value chain activities across borders.

We attempt to address the importance of the global configuration of value chain activities through FDI. We theorize and examine the importance of this global configuration of value chain activities and its association with firms' capability development. Several studies support the argument of dynamic capabilities whereby a firm is enhanced through the integration, building, and reconfiguration of its resources and through continuous learning in the areas of technological capability (Figueiredo 2003), project capability (Brady/Davies 2004), organizational capability (Sako 2004), service capability (Athreye 2005), and integrative capability (Woiceshyn/Daellenbach 2005). …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.