Academic journal article Multinational Business Review

Policy Effectiveness and "Misalignment" with Firms' Strategies: A Study of Pro-Internationalization Incentives

Academic journal article Multinational Business Review

Policy Effectiveness and "Misalignment" with Firms' Strategies: A Study of Pro-Internationalization Incentives

Article excerpt

Introduction

In recent years, the official promotion of outward foreign direct investment (FDI) has undergone something of a transformation, becoming more widespread, and more popular. Yet, in past decades, governments of established foreign investing economies were often ambivalent towards outward investment, fearing the export of domestic employment. Many, if not all, of these governments now have switched to seeing internationalization via FDI as a means of ensuring the international competitiveness of their domestic firms. But it is the newest cohort of outward investors, e.g. from the economies of the "South", notably the economies of southern Europe, and those of Asia, particularly China, that are most often exhorted and incentivized by administrations that have embraced outward investment policy as a means of accelerating domestic economic development.

The theoretical link between economic development and outward investment has been a subject of academic interest, and has been influential in policy circles. The concept of the Investment Development Path pointed to the pro-development effects of inward FDI, but it also suggested that outward investment by domestic firms was associated with development at home (Dunning, 1981; Narula and Dunning, 2010) through hypothesized mechanisms such as reverse knowledge transfer back from overseas affiliates (Narula and Guimón, 2010). It is the possibility of a causal relationship between outward FDI and development that has been picked up by policymakers. Particularly so, when academic thinking and econometric studies have been supplemented by general recognition of the apparent growth in prosperity of those emerging and developing economies that have seen their outward investment accelerate.

This paper poses the question of how outward internationalization policy is currently designed, and how it should best be designed for maximum beneficial effect. This leads us, through a discussion of the principles of policy design, to investigate precisely how firms regard these policy measures, how they use them and the impact these tendencies have on firm performance. We investigate whether the conventional default policy approach of "one-size-fits-all" suffers from a poor fit to the needs of a significant, and arguably, the most important natural grouping of firms - those which are the least internationalized, and which stand to benefit most from pro-internationalization policy. To do this, we take the case of Portugal, which has the merit of being tractable in terms of research design as a small, open economy, and which has maintained a coherent and constant policy stance and suite of policy measures, consisting of support and incentives towards outward internationalization, for a period of some 15 years.

We can characterize policy design as being traditional, top-down and one-size-fits-all in nature. This may be sufficient in some circumstances, for example, in the initial stages of policy reform, when little evidence exists on which to base policy, a case in point is China's "Go Global Policy" (Clegg and Voss, 2012). However, this is the approach to policy design evident in the majority of policy actions by governments seeking to encourage outward internationalization by their domestic firms, and many of these economies are not in the early stages of policy reform. Therefore, it is reasonable to ask if policy might be inefficient or inefficacious, and capable of beneficial re-design. In this paper, we argue that an improvement in the alignment between a government's policy and firms' strategies should deliver higher levels of efficiency in the application of public resources to promote private activities of social value, and thus, will improve firms' performance.

To explore this issue, we start with reference to early writings on the "old", or original, institutional economics, that is, Veblen-Commons institutionalism (Commons, 1934; Veblen, 1899), which signal that considerable potential benefit exists in reviewing and reforming present day policy design. …

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