Journal of World Business 44 (2009) 108–120
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MNEs and development: a review and reconceptualization Jennifer Oetzel a,*, Jonathan P. Doh b,1 a b
Department of International Business, Kogod School of Business, American University, 4400 Massachusetts Avenue, N.W., Washington, DC 20016, USA Rammrath Chair in International Business, Department of Management, Villanova School of Business, Villanova University, Villanova, PA 19085, USA
A R T I C L E I N F O
A B S T R A C T
Keywords: Economic development Liabilities of foreignness (LOF) Economic spillovers Multinational enterprises (MNEs) Nongovernmental organizations (NGOs)
In this paper, we review and critique two prominent theories in the international business and international economics literatures regarding the role of multinational enterprises (MNEs) in host country development: the ‘‘spillovers’’ perspective on the impact of MNE investment in host countries and the liabilities of foreignness (LOF) view that specifies the constraints MNEs must overcome to succeed in local, developing country markets. We then propose an alternative conceptualization of MNE-host country relations in which MNEs and local nongovernmental organizations (NGOs) pursue collaborative relationships that make a positive, collective contribution to host country development and to MNE and NGO strategic goals in ways that neither sector is positioned to do alone. ß 2008 Elsevier Inc. All rights reserved.
Debate over the impact of multinational enterprises (MNEs) on host country development, particularly in less developed countries (LDCs), has generated substantial controversy, not only in academia but among those engaged in international development, finance, and global governance. On the one hand, some researchers are optimistic about the impact of MNEs on developing countries. MNEs are important agents, they argue, for promoting economic growth since they complement domestic savings, transfer technology and management skills, increase competition, and stimulate entrepreneurship (Caves, 1974; Lowe & Kenney, 1999; Teece, 1977; Rugman, 1981). On the other hand, another group of researchers opposes this view suggesting that MNEs are more likely to crowd out local firms, use technology that is inappropriate for local circumstances, actively constrain potential technology spillovers, and reduce (rather than complement) the domestic capital stock and tax basis due to transfer price manipulation and excessive profit
* Corresponding author. Tel.: +1 202 885 1905. E-mail addresses:
[email protected] (J. Oetzel),
[email protected] (J.P. Doh). 1 Tel.: +1 610 519 7798; fax: +1 610 519 6566. 1090-9516/$ – see front matter ß 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.jwb.2008.05.001
repatriation (De Backer & Sleuwagen, 2003; Go¨rg & Greenaway, 2002; Haddad & Harrison, 1993). Controversy about the impact of MNEs on developing countries is not limited to economic effects alone. There has also been extensive research on the potentially damaging effects of MNE activity on social welfare (Baran, 1957) and the natural environment (Clapp & Dauvergne, 2005; Daly, 1993). Researchers have argued that MNEs operating in developing countries may have inadequate safety standards, employ child labor, pollute the host country environment, and create sweatshop conditions in their factories (Clapp & Dauvergne, 2005; Daly, 1993; Korten, 2001). Some researchers have argued that MNEs seek out countries with low environmental, labor and safety standards to reduce operating costs and maximize output (Daly, 1993; Porter, 1999; Wheeler, 2001). Developing countries wishing to attract and retain MNEs and foreign direct investment (FDI) are thus forced to participate in a global ‘race to the bottom’ where the country with the lowest standards receives a greater proportion of investment. Other scholars have criticized the ‘race to the bottom’ perspective suggesting that MNEs may actually raise the environmental, labor and safety standards in less developed countries (Christmann & Taylor, 2001; Dowell, Hart, & Yeung, 2000; Wheeler, 2001).
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This debate, and the more general concern about the role of MNEs in promoting development, leads to the two research questions we focus on in this conceptual paper: (1) what do the prominent theories in the international business literature suggest about the role of MNEs in host country development? To the extent that these theories do not sufficiently address the role of MNEs in social and economic development we then ask, (2) can collaboration between MNEs and NGOs offer a more promising approach for promoting economic development in developing host countries? To answer the first question, we begin by briefly reviewing past perspectives on MNEs and their impact on economic development, including the empirical evidence, where available. We then focus our analysis more narrowly by critically examining two of the most prominent theories in the international business literature that relate to MNE operations in developing countries and the potential for economic development; the ‘‘spillovers’’ perspective on the impact of MNE investment on host countries (Aitken & Harrison, 1999; Blomstrom & Persson, 1983; Rodriguez-Clare, 1996; Yamin & Sinkovics, in press) and the liabilities of foreignness (LOF) view that specifies the constraints MNEs must overcome to succeed in local, developing country markets (Zaheer, 1995, 2002; Zaheer & Mosakowski, 1997). In deconstructing these theories, we reveal their conceptual and practical limitations in an era in which expectations that MNEs should make positive contributions to host country development are intensifying. Building on our critique of the literature, we discuss the emergent role of NGOs, and borrowing from the literature on cross-sectoral alliances, we propose how the integration of global MNE and NGO capabilities can contribute to host country development and to MNE and NGO strategic goals. Toward this end, we suggest that MNEs and MNE capabilities can be harnessed by, and integrated with, locally based NGOs to advance development. We suggest an alternative conceptualization of MNE-host country relations in which MNEs and NGOs pursue collaborative relationships that make positive, collective contributions to host country development in ways that neither sector is positioned to do alone. We argue that a reconceptualization of the relationship between MNEs and host country development is necessary to go beyond the current perspectives that rely on the MNE merely contributing residual resources or simply assimilating to the local environment. 1. MNEs, development, and international business (IB) theory Given the increasing interdependence between developed and developing countries, the interests of both of these two country groupings must be fully considered and advanced for productive relationships to develop (Ghauri & Buckley, 2006; Ghauri & Cao, 2006). For MNEs to be credible partners in host country development, researchers must acknowledge the range of economic and social impacts of modern global capitalism, including its negative side-effects (Dunning, 2003). In this section, we briefly review some recent criticisms of IB research as it relates
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MNEs and development before examining two specific IB literatures in detail. 1.1. MNEs, IB, and development: critical perspectives In a critical analysis of international management (IM) research and its application to economic development, Cooke (2004) argues that despite the fact that management theories and practices now permeate social and economic development thought and policy, IM research has largely ignored the third world. Much of the IM research over the last several decades has focused on countries in the Triad (the United States, Western Europe and Japan), rather than emerging market and developing country contexts. Cooke (2004) further asserts that the economic efficiency goals adopted in the developed world, espoused by the World Trade Organization (WTO) and promoted for the developing world, are actually mechanisms that advance first world MNE expansion and profit motives rather than economic development. For example, he suggests that the policies of the WTO and World Bank are aimed at diminishing the role of the state, expanding global markets, and promoting labor market flexibility. These goals, Cooke (2004) argues, directly support MNE interests over third world development concerns. Joseph Stiglitz, the Nobel Prize winning economist and former Senior Vice President and Chief Economist at the World Bank (1997–2000), made similar arguments in his critique of the International Monetary Fund (IMF) and World Bank policies. He asserted that these organizations advise clients (host country governments) to liberalize their industries without informing them about the consequences of such actions (Stiglitz, 2002; Dalgic, 2005). More ardent critics have even suggested that economic progress in the developing world is inimical to the interests of advanced capitalist countries (Baran, 1957). Palma (1978) asserts that MNEs and governments from the developed world may form alliances with developing country elites in order to pave the way for easy access to their countries’ raw materials and cheap resources. A number of IM researchers also recognize the importance of a more critical approach to MNEs and their impact on host countries. As Eden and Lenway (2001) have argued, MNEs, by definition, span national borders, but local firms and organizations in developing countries may be more geographically restricted. The resulting ‘‘asymmetry in mobility means that the less mobile may pay more of the costs of globalization, incur greater instability in earnings, and see their relative bargaining power fall’’ (Eden & Lenway, 2001: 388) Although skeptical of MNEs’ need to engage in non-business activities, Rugman (1993: 87) has recognized that. . .‘‘the single goal of efficient economic performance through a simplistic globalization strategy will be compromised by the need for the MNE to be more responsive to social needs and national interests’’ (as quoted in Eden & Lenway, 2001: 389–90). 1.2. MNES, development, and spillovers Specific studies of the developmental impact of MNEs on the host countries in which they do business are
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extensive and unsettled (see Meyer, 2004 for a review; Wells, 1998). One stream of research that has sought to integrate insights from development with the study of MNEs has focused on spillovers—the residual benefits that MNEs contribute to the local economy (Aitken & Harrison, 1999; Blomstrom & Persson, 1983; Globerman, 1979; Kosova, 2004; Mansfied & Romeo, 1980; Teece, 1977). Researchers advocating the benefits of MNE spillovers to developing host countries suggested that foreign firms would bring advanced technologies, knowledge, and skills that would spillover to local individuals, firms, and industries and be used by them to enhance their productivity and increase their knowledge and skills base (Caves, 1974; Lowe & Kenney, 1999; Teece, 1977). Indeed bargaining power theorists have advocated that MNEs should use the promise of technology spillovers to strengthen their position vis-a`-vis host country governments (Fagre & Wells, 1982; Kindleberger, 1969). An assumption of the spillover perspective is that by conducting their normal business activities, benefits will naturally accrue and be absorbed by local firms. Under the spillover view, there is no need or necessity for the MNE to contribute in any direct manner to the development of the host country in which it operates since economic progress will be a by-product of its operations. Research on spillover effects tends to assume that knowledge and technology will spill over in a similar fashion across countries. More recent work in this area suggests that there may be necessary conditions in place before even the potential of skills and technology transfer is possible. The level of institutional development, advanced skills base, and absorptive capacity in the industry may be crucial conditions for spillover success (Buckley, Clegg, & Wang, 2002; Caves, 1996; Rodrik, 1999; Spencer, 2008). Empirical research on the existence and prevalence of positive spillover effects, such as technology transfer, skills transfer, knowledge transfer, and backward and forward linkages with local suppliers and distributors between MNEs and the host country, is not encouraging. In a review of the literature, Go¨rg and Greenaway (2002) find an extensive body of empirical research on intra-industry spillovers, including work in developing, transitioning, and developed economies. Across all three country types, the authors find that evidence of productivity spillovers is weak at best ‘‘with only a small proportion of studies finding supportive evidence’’ (Go¨rg & Greenaway, 2002: 4). In explaining the lack of empirical support for spillovers, Go¨rg and Greenaway (2002) note that MNEs may actively try to prevent or reduce the possibility of spillovers from occurring in the first place since spillovers indicate that the firm is not capturing the full benefits (or rents) from its investment (Go¨rg & Greenaway, 2002). In another study, researchers found that the presence of MNEs did little to generate technology spillovers in Hungary (Gunther, 2002). Moreover, while MNEs operating in Hungary tended to cooperate among themselves, they had little interaction with locally owned firms (Gunther, 2002). Researchers have begun to focus on some additional variables in the MNE-spillover equation. In particular, attention has shifted to the potential for local firms to
absorb and internalize the potential benefits of technology spillovers. These limits to ‘‘absorptive capacity’’ could originate in both country and firm-level conditions. Some research (e.g., Kokko, 1994) has found such ‘demand-side’ (i.e. local firm) effects to be significant, while others (e.g., Haskel, Pereira, & Slaughter, 2002) have found that they are not as relevant. Another group of researchers has sought to examine heterogeneous factors on the ‘‘supply side’’ (namely the MNE side of the equation), which may affect the spillover of technology to local firms. These MNE factors have been argued to include characteristics of the industries in which MNEs operate (Narula & Dunning, 2000) and heterogeneity in MNE strategy (Wang & Blomstrom, 1992). Although the empirical evidence has shown limited support for positive spillover effects, research has found evidence of negative economic, social, and environmental spillovers from MNE activity (Aitken & Harrison, 1999; Go¨rg & Greenaway, 2002; Gunther, 2002; Haddad & Harrison, 1993). Several studies have found that foreign firms tend to crowd out local firms and that knowledge sharing and technology and skills transfers do not tend to occur over the long-term (Aitken & Harrison, 1999; Chang & Xu, 2006; De Backer & Sleuwagen, 2003). More serious negative social and environmental spillovers – also termed externalities – include human rights violations such as the use of child labor, exploitation of workers, unsafe working conditions, corruption, violent conflict, pollution and environmental degradation, have also been associated with MNEs activity in developing countries (Clapp & Dauvergne, 2005; Dunning, 2006; Korten, 2001; Porter, 1999). In short, the spillovers perspective reinforces an assumption that MNEs will capture the bulk of the financial benefits, leaving those in developing host countries only marginal or residual benefits; benefits that according to the research, may not even exist. In addition, the spillover view also assumes that the MNE does not necessarily take an active role in generating positive spillover benefits (or minimizing negative spillovers); rather, spillovers are considered a by-product of the MNE’s operations. In the following section, we discuss the LOF perspective and how it relates MNEs to developing host countries. 1.3. MNEs, development, and liabilities of foreignness Another important perspective in international business relating the MNE to the host country environment is the liabilities of foreignness view. While the spillovers perspective focuses on the residual effects of the MNE on host country development, the LOF view is more concerned with how the MNE conceptualizes and relates to the host country. This conceptualization has important implications for business’ impact on economic and social development because the LOF perspective determines how the MNE views its relationship with the host country and the ability of the MNE to consider host country organizations as partners. The LOF view originated in response to empirical research and practical observations demonstrating that
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MNEs continued to face challenges in foreign markets. Beginning with Hymer’s (1976) seminal work in the area, researchers have identified the importance of the social, political, and economic costs – termed liabilities of foreignness (LOF) – associated with identification and operation as a foreign firm within a particular host country context (Eden & Miller, 2004; Luo, Shenkar, & Nyaw, 2002; Zaheer, 1995, 2002; Zaheer & Mosakowski, 1997). Since these liabilities create added operating costs for foreign firms – costs not incurred by locals – researchers concluded that foreign firms may be less profitable visa`-vis their local counterparts, all else being equal (Hymer, 1976; Sethi & Guisinger, 2002; Zaheer, 1995). Although drawing from economic, normative, and cognitive streams of institutional theory, LOF research has generally advocated tactical rather than strategic solutions, arguing that foreign firms can work to mitigate liabilities by hiring local staff, putting a local face on the firm, and otherwise seeking to become isomorphic with the local society and culture (Hymer, 1976; Zaheer, 1995, 2002; Zaheer & Mosakowski, 1997). While this interpretation may be useful in some instances, in many developing countries foreign MNEs are rarely viewed as local. Further, attempts to define their international character as a ‘‘liability’’ to be overcome may constitute a misspecification of the relationship between multinational and local organizations, especially in emerging economies where there is a clear demarcation between indigenous and foreign firms. This relatively recent focus on liabilities is an insufficient perspective for understanding the role of MNEs in developing countries for several reasons. First, the majority of studies on LOF have focused on firms from Triad countries entering other Triad countries (Zaheer, 1995; Zaheer & Mosakowski, 1997). This focus ignores the increasing frequency of MNE entry and operation in developing countries, and the social and economic consequences of their growing presence. Second, efforts to ‘‘adapt’’ to the local environment via human resources, marketing, or alliance relationships may be viewed by local institutions and communities as transparent strategies, potentially generating political backlash. Instead, MNEs may be better served by recognizing and emphasizing their uniqueness and identifying how their resources can be used to directly contribute to the host country environment. Although MNEs may rarely be viewed as local, we argue that defining their international character as a ‘‘liability’’ to be overcome under-specifies the potential of MNEs to leverage their international connections and linkages and make significant contributions to the development process. For example, in an external evaluation of the developmental impact of Unilever’s operations in Indonesia, it appears that rather than displacing local goods, the company was providing useful products that would not otherwise be available (Clay, 2005). Noting as much in his study of MNEs, Hymer (1976: 43) explicitly recognized that domestic firms operating in foreign countries that are not well integrated into the world economy – that lack liquid capital markets and have relatively few skilled workers – would be at a competitive disadvantage relative
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to foreign firms. In such situations, he suggested, MNEs could bring valuable assets related to their foreignness; assets that we argue can be combined with those of locally based organizations to intentionally promote development. MNEs also possess knowledge of specific trends in global markets such that they can serve as conduits to resolve information asymmetries which often plague local businesses. An example is in agricultural commodities where large MNEs such as Starbucks and others have much greater insight as to commodity pricing trends and projections such that this knowledge could be used by local farmers to better plan investments, crop rotation, and specific marketing decisions. Existing indigenous businesses and organizations may actually be perceived as less legitimate than foreign firms. Under these conditions, there may be little competition for this market segment and foreignness may constitute an asset rather than a liability. Research on country-of-origin effects supports the notion that foreignness can be an advantage. Empirical studies have shown that a brand’s country-of-origin is an important signal of product quality (Han, 1989) and that brands from highly developed Western nations are often preferred by developing country consumers (Batra, Ramaswany, Alden, Steenkamp, & Ramachander, 2000; Han, 1989). Although we have reviewed only two of the theories relating MNEs and developing host countries, they – and related perspectives2 – are two of the more influential perspectives relating the MNE to the host country and they exemplify the wider limitations inherent throughout much of the international business literature. Namely, these IB theories do not conceptualize the MNE as taking an active role in the economic, social and environmental development of the host countries in which it operates. In fact, both the LOF and spillover views have been used to identify firm- and investment-specific capabilities and assets that can be used to gain superior bargaining power over host country governments (Fagre & Wells, 1982; Kindleberger, 1969; Vernon, 1971) and competitive advantages of foreignness (e.g., firm size, economies of scale, resource advantages, etc.) over host country firms (Porter, 1990). Conceptualizing the MNE-host country relationship in this way encourages MNEs to engage in a win-lose dynamic with developing host countries. Furthermore, both perspectives have largely ignored the role of NGOs; if considered, LOF would likely view them as mechanisms to assist the MNE in overcoming its disadvantages not as partners for development. Some scholars have argued that the research on the base of the pyramid (BOP) goes beyond this prior research by redirecting attention from an almost exclusive focus on market opportunities in the Triad and wealthy consumers in developing country markets to consider the poorest people in the world as potential consumers (Prahalad, 2004; Prahalad & Hammond, 2002; Prahalad & Hart, 2002; 2 For example, the LOF view is an extension of Hymer’s (1976) original views on the cost of doing business abroad, and the spillovers perspective extends to other contemporary research on the global distribution of work, the location of economic activity, etc.
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Prahalad & Lieberthal, 1999). By highlighting the business opportunities at the BOP and emphasizing their importance to MNEs, BOP scholars have certainly made a substantial contribution to the research. Like the majority of the literature in IB however, this research emphasizes the financial benefits and incentives of doing so for the MNE (Prahalad, 2004; Prahalad & Hart, 2002). As such, the framework may be limited in terms of directly addressing development objectives since sustainable economic development depends more on developing the poor as producers rather than consumers (Karnani, 2006). We argue that by engaging with NGOs and other locally based actors, MNEs may be able to promote sustainable economic and social development, not just short-term economic growth, in the developing host countries where they operate. In the following sections, we discuss the role of civil society and how MNEs can begin to work with locally based organizations to promote development. We argue that the limitations associated with the spillovers, LOF and other mainstream IB perspectives suggest a reframing of the role of MNEs in developing countries that acknowledges the foreign character of the MNE and the need for more direct contributions to local economic development. Such a perspective argues for productive exchange of the respective resources and advantages of both the MNE and local institutions that can be leveraged through a collaborative relationship. These collaborations – that exploit the MNE’s foreign character – can help embed the MNE in the social fabric of the developing country (but without replicating local contributions), and thereby create a powerful long-term competitive advantage that will be difficult for competitors to imitate. 2. Reconceptualizing the role of MNEs in development: a resource complementarity perspective In this section, we introduce our reconceptualization of the role of MNEs in development, a perspective we term resource complementarity. We begin with a discussion of the emerging role of NGOs in business in society and link that discussion to the potential for MNE-NGO engagement to generate positive contributions to development.
the literature on development and underdevelopment. Theoretical avenues include the full incorporation of spatial issues in the strategy of MNEs, the integration of the role of new institutions such as NGOs and fuller attention to the political implications of the activities and changing organization of MNEs.’’ Given this confluence of developments, there is now an opportunity to move beyond the view that developing countries are either an easy source for cheap raw materials or a dumping ground for outmoded products and technologies and that MNEs’ and NGOs’ values are inherently incompatible. While there are many definitions of NGOs (UNDP, 2002; Vakil, 1997), we follow a simple definition offered by Teegen, Doh, and Vachani (2004: 466) who refer to social purpose NGOs as ‘‘private, not-for-profit organizations that aim to serve societal interests by focusing on social, political, and economic goals, including, inter alia, equity, education, health, environmental protection, and human rights.’’ According to a 1995 World Bank report, ‘‘since the mid-1970s, the NGO sector in both developed and developing countries has experienced exponential growth. It is now estimated that over 15% of total overseas development aid is channeled through NGOs’’ (World Bank, 1995: 16). Indeed, a report published by the United Nations and the NGO SustainAbility notes that the global non-profit sector, with its more than $1 trillion turnover, could rank as the world’s eighth largest economy (Hooper, 2003). Teegen et al. (2004) propose that the emergence of civil society in general, and the activism of civic NGOs in particular, have broad implications for the role, scope and definition of corporations in the global economy, and therefore for international management as a research field. They suggest that traditional research paradigms, such as the historically conceived MNE-host country government dyadic, must be relaxed to account for these new actors. In addition, the alliance literature, with its emphasis on resource exchange between private firms, must also be re-specified when nonprofit NGOs occupy one side of the equation. Next, we discuss how MNEs and NGOs can work together to further economic development along with the challenges these partnerships may face. 2.2. Leveraging MNE and NGO capabilities for development
2.1. The role of nongovernmental organizations (NGOs) Echoing Shenkar’s (2004) argument that contemporary interpretations of international business have overemphasized the strategic and financial benefits of internationalization for the MNE, neglecting broader and potentially much more important questions related to the very nature of IB and its utility in serving broader societal needs, we propose that scholars consider the role of NGOs in IB and development. The study of NGOs is a promising area of emerging research that is consistently identified as requiring further exploration for scholars of the MNE and international business (Buckley & Ghauri, 2004; Doh, 2005; Peng, 2004). Buckley and Ghauri (2004: 95) note that, ‘‘The external effects of MNEs (linkages, spillovers) need to be more closely related to the analysis of strategy so that IB researchers can contribute more to
In considering emerging relationships between MNEs and locally based stakeholders such as NGOs, we see a range of potentially complementary benefits. The MNE brings size, scale, experience, and resources to the table and the NGO enables the MNE to access stakeholders that would be difficult to reach without the partnership. Together, these two organizational forms may be in a position to fill institutional voids (Khanna & Palepu, 1997) in a way that preserves the separation between local and foreign status. For the resource complementarity perspective to truly contribute to development the MNE cannot simply bring new or advanced resources to the host country in hopes that the NGO or other actors will absorb the knowledge and that it will ‘trickle down’ to others in the economy. Instead, this model requires that MNEs actively work to build local capacity through partnerships with NGOs that generate
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more sustainable capabilities and skills. In this section, we elaborate on how this may be achieved. NGOs may seek opportunities to bypass existing institutions and organizations in the host country (either because of corruption, inefficiency, lack of competency in an area, etc.) and may therefore prefer the MNE as a partner rather than working with a local private firm or going it alone. In many cases, governments in developing countries may simply lack the capacity and resources to assist NGOs in their efforts and to create the type of institutions that are able to promote development. In others, host country elites may consider the presence of NGOs, and perhaps even MNEs, as a threat to their political and business interests. In such situations, NGOs may prefer to work outside the local political and economic system in the host country and obtain the influence and support of powerful MNEs. For these reasons, MNEs may find that local organizations – such as churches, community groups, and other stakeholders – are willing partners that not only provide access to valuable markets and resources, but may also confer legitimacy on firms. Through such collaborations, NGOs that are respected in the community can share and transfer some of their reputation advantages to partnering firms. Firms may cooperate with locally based NGOs and other stakeholder organizations to learn more about the genuine needs of the host country, to contribute to social development efforts, and to gain legitimacy in the host country market. The firm-specific advantages of MNEs may in turn help NGOs and other stakeholder organizations to provide improved products and services to their constituent groups and to provide access to international markets. Research on alliances and networks among firms in competitive commercial environments suggests that each partner benefits when the other brings resources, capabilities, or other assets that it cannot easily attain on its own. These ‘‘combinative capabilities’’ allow the firm to acquire and synthesize resources and build new applications from those resources, generating innovative responses to rapidly evolving environments (Kogut & Zander, 1992). We extend this notion to collaborative relationships among MNEs and NGOs in developing country environments, a conceptualization which challenges some of the established orthodoxies of both IB and development theory.
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capabilities than those that are otherwise available within their organization or that might result from alliances with for-profit organizations. According to Rondinelli and London (2003), cross-sector alliances – collaborative relationships among nonprofit organizations and private corporations – may provide opportunities for MNEs to achieve the legitimacy and develop the capabilities needed to respond to increasing pressure from stakeholders to address environmental and other social issues (Waddock, 1998; Westley & Vredenburg, 1991). This is an increasingly important prerequisite for successful operation in developing countries. They note that firms seek to learn new skills or acquire tacit knowledge through alliances: ‘‘Alliance, in fact, may be the only option for companies interested in accessing the knowledge held by (NGOs) since internal development of such expertise may be too costly, inefficient, and time-consuming for most companies, and merger with or acquisition of an (NGO) is highly unlikely’’ (Rondinelli & London, 2003: 62). Doh and Ramamurti (2003) report that in infrastructure sectors, legal guarantees and commitments by host governments are often illusory, and only through effective relationships with all stakeholders – including NGOs – are MNEs’ investments likely to be sustainable over the longer term. Host country populations and firms benefit from the international capabilities of MNEs when MNEs partner with local NGOs and other organizations to facilitate direct access to consumers in developed country markets. MNENGO collaborations provide host country producers opportunities to compress the supply chain and circumvent price mark-ups by intermediaries. They can also facilitate the establishment of premium brand recognition for products produced or harvested in the host country and otherwise promote greater awareness of and support for developing country working conditions and income needs. Collaboration among MNEs and NGOs can also create emergent institutions at the micro-level to the benefit of both the MNE and the local system. For example, in developing countries, capital markets imperfections, lack of knowledge of credit assessment and risk, macroeconomic risk, and bureaucratic inefficiencies severely constrain access to credit in poor and rural areas. MNE experience and establishment of parallel – but highly functional – financial infrastructure can improve provision of these services.
2.3. Potential mutual gains from MNE-NGO collaboration
2.4. Challenges to MNE-NGO collaboration and potential mechanisms for success
Although they may be inherently unstable, MNE-NGO collaborations benefit from the tensions and frictions that are intrinsic to the nature of these relationships. One fundamental element of these collaborations is the different organizational characteristics of MNEs and NGOs that include disparate organizational types, mandates, missions, goals, incentive structures, and sponsors. Collaborative relationships among NGOs and MNEs are qualitatively different than those with private firms, yet these differences may be the source of mutual gains. For example, network relationships with NGOs may provide MNEs with access to different skills, competencies, and
We do not mean to suggest that MNE-NGO collaborations are a cure-all for the complex and deeply embedded challenges on how best to leverage MNE investment for development goals. For NGOs, participation in a crosssector alliance, especially with foreign MNEs, is not without risk. Relations between large corporations and NGOs, especially in the emerging markets context, have often been characterized by hostility and mistrust. Crosssector alliances face an additional challenge because organizational learning among alliance partners requires some level of common experience, a condition that is often weak or missing in alliances between profit-making and
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nonprofit organizations (Rondinelli & London, 2003). This lack of common experience, trust, and communication can sometimes result in conflict, even when partnerships have been established that appear to signal shared values and commitments. For MNEs, partnerships with NGOs may sometimes open a path to escalating (and unrealistic) demands for firms to upgrade their commitments to social development (Yaziji, 2004). Although NGOs often have distinct advantages in reaching local stakeholders, they may lack assets or capabilities that MNEs bring to collaborative relationships. NGOs’ altruistic motives and social consciousness, arguably two of their strengths, may result in less organizational focus on organizational performance or on acquiring financial expertise. To the extent that they are small and dispersed, NGOs may be more agile; however, they may also have a higher cost structure because they are not able to capitalize on economies of scale and scope. The NGO culture of social mission translates to operational practices that may not reflect the financial discipline of either the institution or the program recipient. NGOs also operate under different organizational models than for-profit entities and are often not prepared to manage the organization’s financial accounting needs, maintain sufficient cash flow, engender client confidence, design and maintain information systems, or address important human resource issues necessary to implement savings and credit programs. Researchers have also raised concerns about the ultimate effect that some NGO networks may have on development. They argue that the conceptualization of social networks and social capital, defined by Woolcock and Narayan (2000) as the norms and networks that enable people to act collectively, is overly optimistic and neglects the possibility that some networks and social ties may actually perpetuate dysfunctional and exclusive network relationships (Dolfsma & Dannreuther, 2003; Dalgic, 2005). Research has shown, for instance, that organizations may inadvertently perpetuate discrimination and perhaps even fuel violent conflicts through their hiring and other management practices (Banfield, Haufler, & Lilly, 2003). Under these conditions, simply bringing market-based approaches to the developing world may exacerbate rather than alleviate sources of inequality in these societies. For this reason, NGOs should evaluate the wider networks in which they are involved to determine whether there is a systematic bias in membership. Other challenges related to the idiosyncratic features of MNE-NGO collaboration include the ability of each partner to credibly commit to the other (Williamson, 1983) and the likelihood that the absence of credible commitment will breed distrust. Given that MNEs may possess greater economic power and influence in the relationship, NGOs must use their power to ensure that the MNE’s objectives and interests will not dominate the relationship. Although the firm may have greater financial resources, the NGO may hold greater social power and influence because of its reputation and high perceived social legitimacy. As such, NGOs may effectively hold the MNE’s reputation hostage as a means of ensuring commitment to the alliance. Further, since network ties and organizational legitimacy are often the valuable resources NGOs bring to a partner-
ship, the NGO must be assured that the MNE will not devalue these assets by using contacts and networks for profit seeking purposes and renege on their commitment to fulfill the social mission of the relationship. MNEs also have legitimate concerns when selecting an appropriate NGO partner. Additional obstacles may be created by the structure of the partnership itself. Should the NGO and MNE develop a contractual relationship with shared resources? How will decisions be made within the alliance? As researchers have noted, when boundaries change between organizations, in this case between MNEs and NGOs joining an alliance, communication and other costs can also change significantly (Casson & Wadeson, 1998; Dolfsma & Dannreuther, 2003). Changing organizational boundaries and the roles of organizational members can also lead to changes in the power structures and systems of meaning within the partnering organizations (Llewellyn, 1994). Even in alliances between for-profit firms, where each firm seeks to maximize profits, meshing different organizational cultures and deciding how disagreements will be resolved can be extremely challenging (Gulati, 1995). In collaborations between MNEs and NGOs, resolving differences can be even more challenging. Generally, MNEs and NGOs face different types of costs and cost structures and the managers of these organizations frequently do not share the same educational backgrounds, mindsets or organizational mandates (Doh, 2006). For MNE-NGO collaboration to be successful, each organization must identify strategies for minimizing the costs of partnering and credibly committing to one another. For example, Pearce and Doh (2005) argue that collaborative social initiatives among corporations and nonprofit NGOs is most effective when each draws on its core capabilities, thus lowering the adjustment and adaptation costs of partnering. Organizational intent in entering an alliance is also important to the ultimate success of the relationship. The past policies, practices, and beliefs of an organization can provide valuable information about the organization’s possible intent in forming the alliance. Does the MNE have a history of attempting to hide inappropriate or unethical practices? Alternatively, does the NGO have a history of constructive relationships with partner organizations? How does each organization handle interactions with the media? Such issues should be thoroughly considered before entering into an alliance. Vachani (2006) and Vachani and Smith (2004) detail some of the inherent challenges and difficulties associated with MNE-NGO interactions in the context of pressure by NGOs on governments and pharmaceutical companies to liberalize trade rules in order to permit the compulsory licensing and/or price reduction of AIDS drugs. They report that MNEs initially pushed back when NGOs urged them to respond to this health crisis, but that ultimately, some collaborative relationships were developed among the pharmaceutical companies, generic producers from developing countries, foundations, and NGOs. In reviewing the theoretical framework and illustrations cited previously, it is clear that inter-organizational collaborations will have mixed success, depending on a
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range of environmental, institutional, organizational, and individual variables. Specifically, country, industry, company, NGO, and managerial level factors will all influence the potential success of these collaborations. For example, the sector and orientation of NGOs will affect the potential compatibility of a given NGO with a given company, and this strategic fit will influence the likelihood, form, and satisfaction of the collaboration. We also would highlight that prior experience with ‘‘the other’’ sector will influence affective perceptions of managers from that sector and that these perceptions will shape managerial inclination to collaborate. Overall, we believe the degree of complementarity among the resources and capabilities of the MNE and NGO will be a principal variable affecting success. Table 1 summarizes the three main perspectives discussed in this paper and Table 2 summarizes some of the differences and similarities between MNE alliances with for-profit corporations and collaboration with NGOs. 3. Conclusions, limitations, and implications We have argued that two strands of IB theory have systematically compromised the ability of IB research to value the potential for MNEs to contribute to host country development while also fulfilling their strategic objectives. We offer an alternate view that seeks to more fully capture the role and character of MNEs and locally based NGOs and stakeholder organizations, and use their distinctive competencies to advance social and economic objectives in developing countries. In this final section, we summarize our contribution, identify limitations, discuss managerial implications, and offer suggestions for future research. 3.1. MNEs, economic and social development, and the rationale for engagement While the overall impact of MNEs is of obvious interest to policy makers in developing countries and to development studies scholars in general, some may wonder why this impact should be of concern to MNEs. Aside from altruistic motivations, the main reason MNE managers should pay increasing attention to host country development is that foreign firms increasingly operate at the will of the local communities and MNEs need to be more aware of their economic, social, and environmental needs (Jain & Vachani, 2006). Without a social license to operate and the legitimacy it confers, MNEs should prepare themselves for potential host government policy shifts and changing geopolitics regarding foreign firm access to local markets (Doh & Ramamurti, 2003). Regarding host government policy, over the last two decades many developing countries have undertaken a dramatic shift by moving from isolationist, import-substitution policies to open market policies aimed at increasing foreign direct investment (FDI). While these policy changes have created an abundance of new business opportunities, developments in Venezuela, Bolivia, and elsewhere in Latin America attest to the fact that these changes are not irreversible (Wells, 1998). Host country governments have opened
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their markets in order to generate economic growth. Should policy makers begin to believe that MNEs are not generating benefits in the host country, their attitudes toward FDI could (and many already have) become decidedly pessimistic, leading to increased barriers to entry and greater host country regulation on FDI. Historically, MNEs from the Triad have also had an important geopolitical advantage. Governments from the Triad countries have largely controlled the WTO and global trade policies. As the economic and political power of Brazil, Russia, India, and China increase over the coming years, foreign investors from the Triad may find that certain countries in the developing world have increasing influence over the terms of trade. The Indian and Brazilian governments, for example, have chosen not to enforce multinational pharmaceutical firms’ intellectual property rights over patented medicines in order to meet medical needs of their citizens and foster domestic development in the industry. This policy shift has led pharmaceutical firms from the U.S. and Western Europe to reevaluate their strategies and face a new competitive environment characterized by downward pressure on prices. China has sought to promote domestic development by controlling the terms of trade. Since opening the country to foreign competition, the government has required foreign investors to form joint ventures with local firms to promote learning and technology spillovers. A second reason MNEs should be concerned about economic development abroad is that, just like international development institutions and host country policy makers, MNEs have a direct interest in the long-term growth and prosperity of developing countries. MNEs are under pressure to continuously increase shareholder return. To accomplish this, MNEs not only need to identify new market opportunities, but also continually generate firm-specific advantages that are difficult for competitors to imitate. As large MNEs saturate their home markets and those of the other developed countries, developing countries are necessary for continued growth. To succeed in these markets, however, firms must understand how to compete, particularly in the face of institutional and economic underdevelopment. MNE-NGO collaborations may provide market access to geographic and demographic groups that would otherwise be out of their reach. These relationships may enable MNEs to access resources and products that would otherwise be reserved for locally based organizations. Firms involved in these collaborations may also gain intangible benefits such as the legitimacy that arises from the firm’s status as a contributor to local development (see Table 1 for a summary of the MNE-NGO relationship discussed under the Resource Complementarity Perspective). 3.2. Limitations and implications for research and practice Our objective in this paper was to critique the LOF and spillover perspectives and propose an alternative framework in which to consider the relationship of MNEs to their developing country hosts. We argued that MNEs are inextricably intertwined with local communities and have a positive stake in the development process. That is, MNEs
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Table 1 A comparison of the spillovers, liabilities of foreignness, and resource complementarity perspectives Spillovers
Liabilities of foreignness
Resource complementarity
Principal perspective on role of MNEs in host country development
Foreign direct investment by MNEs is thought to indirectly result in positive economic spillovers in developing countries through: Technology transfer Skills transfer Knowledge transfer The creation of backward and forward linkages with local suppliers and distributors This perspective also recognizes that FDI by MNEs can lead to negative spillovers that include: The crowding out of local firms No long-term transfer of knowledge, technology or skills Negative environmental impacts
Foreign firms face certain liabilities of being foreign that result in added costs of doing business. These liabilities result from the MNEs’: Unfamiliarity with the host country’s culture, language, and policies Need to coordinate across geographic distance Lack of experience in managing risks associated with increased economic and political risks in many developing countries MNEs can overcome these liabilities of foreignness through firm-specific advantages such as: Economies of size and/or scale Advanced organizational or managerial capabilities.
MNEs serve dual purposes: generate income for owners/ investors and contribute to development process. These purposes are complementary. MNEs bring specific benefits to development process, including: Providing local firms access to global markets Providing greater access to capital at more competitive rates Transferring knowledge, managerial skill, and financial leverage unavailable in the local context Attempts to mask foreign character not productive for long-term MNE interests or development In order to activate the above benefits, MNEs must: Identify needs of local communities Work with local NGOs in order to activate above benefits
Role of MNE
The MNE does not take an active role in generating positive spillover benefits (or minimizing negative spillovers) although the MNE may use the promise of spillovers in negotiations with the host country government Spillovers are considered a by-product of normal MNE activity.
In order to overcome the LOF, MNEs must adopt local practices and become ‘‘isomorphic’’ with the host country environment. Doing so confers legitimacy on the organization and thus increases the MNE’s prospects for long-term survival and financial success
In addition to the role of MNEs in coordinating and arbitraging knowledge, capabilities, and expertise, MNEs: Serve as vehicles to integrate foreign and local capabilities Help fill institutional voids Provide long-term economic, technological, and managerial contributions
Role of civil society/NGOs
No formal NGO role.
NGOs can aggravate liabilities by highlighting negative impact of foreign investment and influence
NGOs: Provide knowledge and information on local social and economic context. Confer legitimacy and credibility to MNE. Contribute expertise and services not available to the MNE
Assumptions about power relations, MNE strategy, and the basis for MNE legitimacy
MNEs are market and rent seekers who tend to be powerful actors The power of domestic stakeholders may influence whether MNEs can be pressured to make positive economic and social impacts in developing host countries, albeit as a by-product of primary activities
MNEs are market seekers who desire to become embedded in the local community for instrumental goals; power is limited primarily by their ability to overcome LOF
Although MNE economic power is strong, this power is subject to influence by other social actors such as NGOs. For this reason, MNEs do not maintain exclusive control over their perceived legitimacy and social license to operate in developing countries MNEs may therefore seek long term sustainable positions in developing countries and are willing to sacrifice some short term gain in order to attain those positions; long term survival is facilitated by contributing to development through their foreign character and access and collaboration with local civil society organizations
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Table 2 Differences and Similarities in MNE alliances with private corporations vs. collaboration with NGOs Alliances with for-profit organizations
Collaboration with NGOs
Purposes of relationship from MNE perspective
Local knowledge of markets Local connections with government Market presence and penetration Legitimacy with customers
Expression of corporate social responsibility Legitimacy with civil society
Purposes of relationship from local partner perspective
Access to technology Access to managerial expertise Access to global markets
Access Access Access Access
Strategic mandate of local partner
Seek to maximize profits and shareholder returns and rely primarily on economic measures of performance
Results measurement
Return on investment/sales/profits Market entry Market growth Greater market penetration Higher legitimacy
Seek to maximize operational reach and scope, providing services to as many clients as possible, particularly those most in need who also may be the least able to pay Social, environmental, and economic impact
Key stakeholders
Shareholders
Clients/customers of the collaboration Donor/grant making organizations
Governance and potential sustainability of the relationship
Generally have a shared understanding of financial, managerial, marketing and other professional business skills Must agree on decision-making and organizational control issues in alliance
MNEs and NGOs must agree on financial and managerial practices since these are likely to differ between organizations Potentially greater communication costs because of differences in backgrounds of personnel and organizational objectives and the a priori mistrust that each organization may have of the other Potentially unstable due to differences in culture, motivations, and historic power relationships; if restructured, higher likelihood of dissolution as merger or acquisition is not possible due to different organizational forms described above
Potentially unstable due to differences in size, scale, and objectives; if dissolved or restructured, may result in power shift in which one party acquires the assets of the other
are in a position to make a much greater impact on society than is generally recognized in the literature or in practice (Westney, 1993). Some MNEs have simply overlooked the opportunities for engaging in host country development and the possibilities of mutual benefit. Others have disregarded or minimized their ethical or social obligations when operating abroad, while some MNEs have even intentionally taken advantage of the social and economic conditions in developing host countries to further their short-term financial interests. NGOs and other civil society organizations can provide important services that complement MNE resources. Indeed, MNEs and NGOs have an increasingly collaborative relationship that can generate positive economic returns to the firm and social benefits to the region or community in which they operate (Teegen et al., 2004). Furthermore, MNE subsidiaries can play a major role in establishing institutions in developing host countries (Meyer & Rowan, 1977; Westney, 1993). For example, local firms may imitate the practices of MNEs that have an edge in R&D (Westney, 1993). We are not alone in pointing out the need for new thinking regarding the role of MNEs in development (see Ramamurti, 2004; Wells, 1998). However we have offered a specific critique of current theory by discussing how basic assumptions of the spillover literature and the research on LOF serve to constrain the role of MNEs in
to to to to
technology managerial expertise MNE financial resources global markets
economic development. In addition, we offer an alternative perspective for considering MNEs’ involvement in host developing countries. Our goal is to make obvious the fact that MNEs and NGOs may have overlapping interests and complementary resources and capabilities that make joint collaboration highly beneficial for both parties. Existing theories have overlooked these opportunities for collaboration. We do not intend to suggest that MNE-NGO collaborations are a panacea for third world development, nor is such collaboration right for every firm or NGO. Indeed, corporations and NGOs have fundamentally different structures and values (Rondinelli & London, 2003) and relations between corporations and NGOs, especially in emerging markets, have often been characterized by hostility and mistrust. Cross-sector alliances face an additional challenge because organizational learning generally requires some level of common experience, a condition that is often weak or missing in alliances between profit-making and nonprofit organizations (Rondinelli & London, 2003). This lack of common experience, trust, and communication can sometimes result in conflict, even when partnerships have been established that appear to signal shared values and commitments. Identifying appropriate partners with whom to collaborate may be even more challenging than forming traditional alliances between foreign and
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local firms (Hitt, Dacin, Levitas, Arregle Edhec, & Borza, 2000). NGOs may decide that local firms may be viable, or perhaps preferred, partners. In situations where the NGO or other host country actors are concerned that MNEs may crowd out local enterprises or lack a long-term commitment to the host country, alliances with local organizations may better fit the NGO’s social mission. Nevertheless, we argue that this alternative perspective for conceptualizing MNE involvement in developing countries offers new approaches for enhancing the performance of MNEs and furthering wider development objectives of their host developing countries. Our analysis has clear managerial implications. Specifically, MNE managers might invest less time and attention in masking the international character of the companies they represent and devote more to identifying and collaborating with local organizations and actors that can facilitate more direct contributions to local economic and social development. The stability afforded by MNENGO collaborations may also enable foreign firms to consider long-term commitments to developing countries rather than short-term investments. More broadly, policymakers engaged in innovative and alternative approaches to the development challenge in emerging markets should consider these potential ‘‘combinative capabilities.’’ Indeed, there is some evidence that donor agencies and other development policymakers are beginning to embrace the joint role of private corporations and NGOs in supporting development. One measure of this shift is the growing reliance on private capital and NGO initiatives in developing countries. In the 1970s, approximately 70% of resource flows from the United States to the developing world were from official development assistance and 30% were private. By 2003, just 15% of $102.5 billion of these resource flows were comprised of direct government assistance, with 85% coming from nongovernmental resources. 4. Conclusion A redirection of the IB literature towards the issue of MNE impact on host country development is vital as scholars are questioning the relevance of international management to contemporary global challenges, arguing that IB must address broader issues beyond the narrow questions of MNE performance (Buckley, 2002; Buckley & Ghauri, 2004; Shenkar, 2004). The IB field has arguably lagged other disciplines such as economics and international relations in its relatively limited contributions to the study of interactions among MNE activities and social and economic development, and has omitted the important emerging role of NGOs in global economics and management. New host country actors such as nongovernmental organizations (NGOs) must be incorporated into the study and practice of international management (Teegen et al., 2004). The process of development, and the role of MNEs in it, has posed intense challenges for researchers, government officials, international development institutions, and societies. In this paper, we have sought to contribute toward addressing these challenges by redirecting discus-
sion away from traditional perspectives, and offering a new conceptualization that we believe is more appropriate for current circumstances. Our contribution is intended to stimulate future research regarding the potential contribution of MNEs to the social and economic progress of developing host countries and to recognition of, and interest in, the opportunities posed by MNE-NGO collaborations. This proposed research perspective is not only important for developing countries, but also to MNEs. A large number of unanswered questions remain for MNEs seeking to manage investment risk and to understand how different institutional and political environments in developing countries affect firm strategy and performance. Finally, we believe MNE and host country objectives can be better reconciled such that there is greater potential for mutual gain, generating the possibility for more sustainable development paths that have more lasting impact. Acknowledgements We thank the Guest Editors of this special issue, Pervez Ghauri and Mo Yamin, and three anonymous reviewers for their helpful guidance and feedback during the review process. We would also like to acknowledge research assistance provided by Sarah Bauerle. Doh acknowledges financial support from the Halloran Philanthropies. References Aitken, B. J., & Harrison, A. E. (1999). Do domestic firms benefit from direct foreign investment? Evidence from Venezuela. The American Economic Review, 605–618. Banfield, J., Haufler, V., & Lilly, D. (2003). The political economy of armed conflict: Beyond greed and grievance. Boulder and London: Lynne Rienner Publishers. Baran, P. A. (1957). The political economy of growth. NY, New York: Monthly Review Press. Batra, R., Ramaswany, V., Alden, D., Steenkamp, J. E. M., & Ramachander, S. (2000). Effects of brand local and nonlocal origin on consumer attitudes in developing countries. Journal of Consumer Psychology, 9(2): 83–95. Blomstrom, M., & Persson, H. (1983). Foreign investment and spillover efficiency in an underdeveloped economy: Evidence from the Mexican manufacturing industry. World Development, 11(6): 493–501. Buckley, P. J., & Ghauri, P. N. (2004). Globalization, economic geography and the strategy of multinational enterprises. Journal of International Business Studies, 35(2): 81–98. Buckley, P. (2002). Is the international business research agenda running out of steam? Journal of International Business Studies, 33(2): 365–373. Buckley, P., Clegg, J., & Wang, C. (2002). The impact of inward FDI on performance of Chinese manufacturing firms. Journal of International Business Studies, 33(4): 637–655. Casson, M., & Wadeson, N. (1998). Communication costs and the boundaries of the firm. International Journal of the Economics of Business, 5: 5–27. Caves, R. (1974). Multinational firms, competition, and productivity in host countries. Economica, 38: 176–193. Caves, R. (1996). Multinational enterprise and economic analysis. Cambridge, UK: Cambridge University Press. Chang, S. J., & Xu, D. (2006). Competitive dynamics among foreign entrants and local firms in an emerging market. Paper presented at the 2006 Academy of International Business Conference, Beijing, China. Christmann, P., & Taylor, G. (2001). Globalization and the environment: Determinants of firm self-regulation in China. Journal of International Business Studies, 32: 439–458. Clapp, J., & Dauvergne, P. (2005). Paths to a green world: The political economy of the global environment. Cambridge, MA: MIT Press. Clay, J. (2005). Exploring the links between international business and poverty reduction: A case study of Unilever in Indonesia. Accessed at http:// oxfam.intelli-direct.com/e/d.dll?m=234&url=http://www.oxfam.org. uk/what_we_do/issues/livelihoods/downloads/unilever.pdf. Cooke, B. (2004). The managing of the (third) world. Organization, 11(5): 603–629.
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