(Alan M. Rugman, Jonathan P. Doh) Multinationals A (BookFi) PDF

Multinationals and Development
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Multinationals
and Development
Alan M. Rugman
and
Jonathan P. Doh
Yale University Press
New Haven & London

Published with assistance from the foundation established in memory of Philip
Hamilton McMillan of the Class of 1894, Yale College.
Copyright © 2008 by Alan Rugman and Jonathan Doh.
All rights reserved.
This book may not be reproduced, in whole or in part, including illustrations,

in any form (beyond that copying permitted by Sections 107 and 108 of the U.S.
Copyright Law and except by reviewers for the public press), without written
permission from the publishers.
Set in Garamond and Stone Sans types by The Composing Room of Michigan, Inc.
Printed in the United States of America.
Library of Congress Cataloging-in-Publication Data

Rugman, Alan M.
Multinationals and development / Alan M. Rugman and Jonathan P. Doh.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-300-11561-1 (cloth : alk. paper) 1. International business enterprises.
2. International trade. 3. Economic development. I. Doh, Jonathan P.
II. Title.
HD2755.5.R8355 2008
338.9—dc22
2007041709
A catalogue record for this book is available from the British Library.
The paper in this book meets the guidelines for permanence and durability of the
Committee on Production Guidelines for Book Longevity of the Council on Library
Resources.
10 9 8 7 6 5 4 3 2 1
Contents
Preface, vii
Acknowledgments, ix
1 Introduction to the Key Issues, 1
2 Foreign Direct Investment and Development, 11
3 Multinational Enterprise Strategies and Development, 32
4 The Role of International Institutions, 59
5 The Contributions and Impact of Civil Society, 83
6 Institutional Governance and Development, 103
7 Multinational Enterprises from Emerging Economies, 124
8 Multinationals and Development in Asia, 153
9 Yang Multinationals, 179
10 Conclusions, 200
Glossary, 205
References, 209
Index, 231
Preface
The topic of multinational enterprises (MNEs) and development is

not without controversy. In fact, there may be more controversy sur-
rounding this subject than any other at the intersection of the fields of
international business and development studies. Never to shy away
from a challenge, we embarked on this project with the goal of revisit-
ing some of the questions that have plagued scholars regarding the in-
teractions between MNEs and developing economies, and to open
new ways of thinking regarding these questions.
We bring to this discussion a unique perspective. Both of us are
scholars in international business; hence we have a deep knowledge of
what motivates MNEs to do the things they do. We are, however, also
well versed in aspects of development from both a macro- and a mi-
croeconomics perspective. Both of us also have had direct experience
in negotiating, advising, and implementing trade and investment
agreements designed to foster growth and development; notably, the
North American Free Trade Agreement, which was one of the first
agreements to integrate the economies of developed and developing
countries. Through this experience we have gained a keen apprecia-
vii
viii Preface
tion for the importance of both multinational strategy and government policy
to development. Indeed, a premise of this book is that it is the interaction be-
tween these two sets of actors that determines whether—and how—the devel-
opment process succeeds or fails.
The international business research community of which we are a part has re-
cently argued that international business research topics and approaches should
be revisited and reinvigorated. One area that consistently arises as needing
greater attention is the role of MNEs in development. We see our book as re-
sponding directly to this call. We also view our contribution as bridging some of
the gaps that have existed between the fields of international business and de-
velopment studies, especially because this book recognizes and analyzes the spe-
cific role of MNEs in development, rather than looking at them only in aggre-
gate or as part of a broader system. We do, however, recognize the importance of
that system—or context, as some would call it—and explore the interactions
among MNEs, host country policies and practices, global institutions and
agreements, and the nongovernmental or civil society sector.
Our contribution should therefore be seen as part of a broader dialogue
about the strategies of MNEs, the development programs of countries, and the
global responses to uneven progress in world regions. We have focused on what
we believe are essential—indeed the essential—elements of this process,
namely, the interactions of the capabilities and assets of countries and compa-
nies. It is this complementary exchange that is at the core of the development
process, and the one where we believe new insights must be brought.
Acknowledgments
We thank our editor, Michael O’Malley, Alex Larson, and the rest of
the Yale University Press team for all their hard work in bringing the
book to fruition. We acknowledge Anne Z. Hasiuk of Indiana Uni-
versity for her expert work in preparing the manuscript and index and
Anna Mancevova and Elizabeth Stewart of Villanova University for
research assistance.
Professor Rugman is pleased to acknowledge the contributions of
Professor Alain Verbeke to earlier drafts of the material in chapter 3,
and of Dr. Simon Collinson to an earlier version of chapter 8. He also
acknowledges the research assistance of Chang Hoon Oh in the
preparation of the tables in chapters 1, 6, and 7 and the contribution
of Ian Lee to the preparation of chapter 9.
Professor Doh is pleased to acknowledge the contributions of
Professors Hildy Teegen, Sushil Vachani, Jennifer Oetzel, and Sarah
Bauerle to the preparation of drafts of parts of chapter 5, and of Pro-
fessors Lorraine Eden, Peter Rodriguez, Klaus Uhlenbruck, Jamie
Collins, Kalpana Seethepali, Scott Newbert, and Nicolas Dahan to
the preparation of drafts of parts of chapter 6. The generous financial
support of the Halloran Foundation is also gratefully acknowledged.
We also thank the Academy of Management for permission to re-
produce tables 6.2 and 6.3 and the Nonprofit and Voluntary Sector
Quarterly for permission to reproduce figure 5.1.
ix
Chapter 1 Introduction
to the Key Issues
The impact of multinational enterprises (MNEs) on host country

development is an important but controversial topic. For more than
half a century, this subject has generated considerable disagreement
among researchers and practitioners—those directly engaged in inter-
national development policy, finance, and multinational manage-
ment strategy. In its simplest form, one side in this debate has hailed
the foreign direct investment (FDI) undertaken by MNEs for induc-
ing economic growth by complementing domestic savings, transfer-
ring technology and management skills, and increasing competition.
On the other side, some have argued that MNEs crowd out local
firms, use technology that is inappropriate for local circumstances, ac-
tively constrain potential technology spillovers, and reduce (rather
than complement) the domestic capital stock and tax basis through
transfer price manipulation and excessive profit repatriation.
A critical missing variable in these analyses is the explicit consider-
ation of MNEs as organizational actors in the development process.
MNEs are an important—perhaps the most important—vehicle
through which economic development in developing countries oc-
1
2 Introduction to the Key Issues
curs, yet the role of MNEs in the economic progress of developing countries is
widely overlooked. In this book, we seek to fill that gap. In doing so we focus on
the outward FDI by MNEs, from such developing economies as China and
Korea, as well as on the more traditional inward FDI, by Western MNEs into
developing economies.
OUR CONTRIBUTION
Our purpose in writing this book is to provide a fresh perspective on this sub-
ject, offering a contemporary and balanced assessment of the influence of
multinationals on development. We question some of the traditional develop-
ment assumptions and paradigms, arguing that many are outmoded, outdated,
and misguided. Drawing from recent research in international business and
multinational management, we bring a more microeconomic “on the ground”
focus to the mechanisms by which MNEs affect growth and development.
Hence, this is a book about the relationship between MNEs and the poorer
countries in the world, sometimes referred to as less-developed or developing
economies.* These economies include the poorer parts of Asia, Africa, Europe,
and Latin America. Through the process of economic development, many of
these countries have both increased their per capita incomes and improved the
internal distribution of these incomes, moving into a smaller group of develop-
ing economies that are viewed as “emerging.” Some recent examples of the
transformation from a poorer developing economy into an emerging economy
include the Republic of Korea, Singapore, Hungary, the Czech Republic,
South Africa, and Jordan. However, many countries in Africa, as well as the
poorer economies of Asia and Latin America, continue to have extremely low
per capita incomes. Most of the more successful emerging economies have
* The World Bank and other development agencies use various categorizations to refer to a
country’s level of development. In general, we adopt the generic terms “developing coun-
tries” or “developing economies” to refer to the large groups of nonindustrialized or semi-
industrialized countries outside the traditional group of developed countries represented
by the Organization for Economic Cooperation and Development (OECD). However,
for purposes of exposition, we may use a more specific definition (UNCTAD’s categories
of “developed,” “less-developed,” and “least-developed” countries), or the term “emerging
economies” to refer to the subset of developing countries (e.g., China, India, Brazil, and
the Republic of Korea) that have become more fully integrated into the global economic
system. In chapter 7, we use the term “emerging economies” to refer to developing coun-
tries that have “emerged” from their less-developed status, in particular, Korea and China.
Introduction to the Key Issues 3
achieved their success through economic reform, including policies of trade

liberalization and concerted efforts to attract inward FDI. In this book we ex-
plore some of the reasons for the successful development of economies in terms
of FDI and trade liberalization; however, we also consider the reasons some
economies have failed in terms of sustainable economic development.
To assign some ordering to the complexities of economic development and
FDI, we have developed a simple framework, presented in the following chap-
ter and used throughout the book. In this framework we bring together two ba-
sic sets of factors governing the relationship between the governments of host
economies and MNEs: country factors and firm factors. We advance a series of
propositions based on the actual experiences of countries and firms that
demonstrate that country factors alone are not sufficient to sustain economic
development. Even if an economy has abundant natural resources (such as
minerals, oil, forests, water power, or cheap labor), economic development is
not assured. Rather these country factors need to be commercialized through
the activities of firms and entrepreneurs, including MNEs. By the same token,
without stable supporting institutions to protect and encourage investment,
firms are unlikely to be drawn to a given country. Hence, the nexus of this book
is the interaction between such firm and country factors.
A key finding in this book is that on balance, MNEs contribute positively to
the economic development of poorer and emerging economies—both directly
and indirectly. Direct contributions emanate from the role of the MNE in
bringing new knowledge assets to developing countries in the form of technol-
ogy and managerial skills. We term these knowledge assets “firm-specific ad-
vantages” (FSAs). The FSAs are internalized by MNEs and represent the core
competences and capabilities of MNEs used in both home and foreign mar-
kets. MNEs also contribute indirectly to economic development. They provide
technology spillovers and linkages, and contribute to improvements in the
business infrastructure in developing economies. These contributions, how-
ever, are not automatic; host-country institutional conditions, as well as poli-
cies of the MNEs themselves, determine the degree to which these benefits are
fully realized.
A second finding of this book is that the FSAs of MNEs can help generate
new capabilities and business competences in developing economies. In fact, a
novel finding of this book is that developing economies are now generating
their own MNEs. Initially, the MNEs from emerging economies build on their
country-specific advantages (CSAs), including relatively cheap labor and the
potential to achieve economies of scale in the harvesting and marketing of nat-
ural-resource products. Later, the indigenous MNEs develop knowledge-based

assets of their own, which become FSAs.
We explore these arguments primarily with reference to the world’s largest
MNEs and the larger developing countries. We examine specific MNEs and
their performance in particular developing countries, with special attention on
the foreign MNEs in Asian economies such as China and Korea. We also ex-
plore the role of MNEs from China and Korea, as these contribute to the eco-
nomic development of their home countries.
We also find strong regional linkages between and among developed and de-
veloping economies. This finding echoes earlier arguments presented by Rug-
man (2001, 2005). Hence, as in the case of trade and investment more broadly,
because the world is not fully integrated, economic development cannot be un-
derstood by a simplistic model of globalization. Economic development is a
more complex process than simply developing international institutions to
promote trade, investment, and development.
Throughout our analysis, we evaluate the impact of MNEs on the process
and outcome of development and assess the evolution of the role of MNEs in
development, from mere “spillover” effects to more embedded linkages, in-
cluding the emerging role of MNEs in the implementation of development
goals and the impact of interactions among civil society, nongovernmental or-
ganizations (NGOs), and MNEs on development. Finally, we offer some ob-
servations about the future role of MNEs in development.
THE LITERATURE ON MULTINATIONALS

AND DEVELOPMENT
Since the 1960s, political scientists and economists have attempted to deter-
mine the relevant variables that contribute positively to economic progress in
developing countries, and the potential role of FDI and MNEs within that
process (Caves 1974; De Backer and Sleuwagen 2003; Görg and Greenaway
2002; Haddad and Harrison 1993; Lowe and Kenney 1999; Teece 1977). An-
other set of literature, often characterized as the “dependency” view of devel-
opment, has openly suggested a conspiracy between MNEs and developed-
country government elites who seek to pave the way for MNEs to access raw
materials and cheap resources in the developing world (Baran 1957; Palma
1978). More recently, a popular literature has emerged within a broader debate
over the efficacy of economic globalization, advocating for or criticizing FDI
and MNEs and their impact on development (Barber and Schulz 1996; Fried-
man 1999; Singer 2002; Soros 2002; Stiglitz 2002).
The study of the broad development impacts of MNEs on host countries is
extensive but unsettled (see Hymer 1976 for an early analysis and Meyer 2004
for a recent review). 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 and Har-
rison 1999; Blomstrom and Persson 1983; Globerman 1979; Mansfield and
Romeo 1980; Teece 1977). In our view, the focus on spillovers misses the point,
in that MNEs have a much more direct and meaningful contribution to make
beyond these residual, latent effects. We term these more direct impacts “link-
ages.”
Although an occasionally thoughtful and carefully argued volume emerges
(Rodrik 1999), collectively, this literature presents contradictory and confusing
conclusions, partly a result of ideological assumptions and agendas. Most im-
portant, this literature has failed to generate strong normative implications of
use to researchers and policymakers, especially those who have observed that
MNEs have an increasingly important role to play in the development process.
This absence of a clear analysis of the role of the MNE as an instrument of de-
velopment has been noted in the literature (Meyer 2004) and provides the fun-
damental motivation for our book. In chapter 2 we explore this literature fur-
ther, and in chapters 4, 5, and 6 we integrate more recent work on the role of
multilateral and regional institutions, nongovernmental organizations, and in-
stitutional governance to the process of development.
We also survey research in strategic management, building on the work of
Porter (1980, 1990) and literature in international business and management,
and drawing from the insights of Dunning (1988, 1998a), Caves (1996), Rug-
man (1981, 1996a), Rugman and Verbeke (1998b), and others. We believe that
strategic management and international business theory, when properly speci-
fied, can provide useful heuristics for understanding the process of MNEs’ con-
tribution to development. We explore these connections in chapter 3 and then
apply them in chapters 7–9.
OUTLINE OF THE BOOK
In the first part of the book, we review existing perspectives on the influence of
MNEs and FDI on host country development. Chapter 2 focuses on the
growth of FDI to the developing world and the potential impact of FDI on the
development process, and evaluates the development impact of FDI. We intro-
duce two basic frameworks to analyze the interaction between MNEs and de-
veloping economies. The first framework relates country and firm factors,
bringing together CSAs and FSAs, as discussed above. We use this framework
to study the interaction between governments and the FSAs of the firm. FSAs
are the proprietary capabilities owned by MNEs, and MNEs must protect
them from dissipation. This interaction between governments and MNEs is
the critical one studied throughout the book. The second framework is called
the social triangle. It introduces society on an equal footing with governments
and firms. Naturally, a three-dimensional framework generates greater com-
plexity than the two-dimensional FSA-CSA framework. To simplify somewhat
such complexities, one can reformulate the social triangle as a matrix in which
the role of corporate social responsibility (CSR) is separated from the activities
of states and profit-maximizing firms. This triangular framework uses a stake-
holder-model perspective rather than the pure efficiency-enhancing perspec-
tive of the FSA-CSA framework. We use these frameworks throughout the
book. We continue in chapter 2 with a review of the literature on spillovers and
linkages. Finally, we provide some basic data dealing with the interaction be-
tween FDI, trade, and economic development.
In chapter 3 we focus on the role of MNEs in economic development. We
examine the business strategies of MNEs as these affect economic develop-
ment. We include a discussion of the potential for capital and technology trans-
fer and the role of MNEs as knowledge-based organizations and in developing-
country absorptive capacity. We explore the potential for developing countries
to access capital and technology via the MNE and review the factors that facil-
itate and constrain that access. Finally, we discuss the evolving understanding
of some MNEs as knowledge-based organizations that organize and deploy
knowledge assets in their various locations. We assess the potential for develop-
ing countries to benefit from the knowledge-diffusion process and the con-
straints to their “absorptive capacity” that may be overcome through MNE
knowledge and managerial expertise.
Throughout chapter 3 we explore how foreign MNEs enter developing
economies and help stimulate and foster economic development. To a large ex-
tent, such foreign MNEs are from the wealthier economies of North America,
Western Europe, and countries such as Japan and Australia within the Asian re-
gion. The typical developing economy is either a large but poor country such as
China, Indonesia, and Ukraine, or a small open economy such as those in the
Caribbean. We examine the basic strategies pursued by MNEs in such devel-

oping economies. We also investigate the extent to which indigenous firms and
entrepreneurs can benefit from spillovers or linkages with these MNEs. Much
of chapter 3 is based on the mainstream thinking in strategic management, but
we adapt it to the context of economic development. We do not discuss in that
chapter the way in which the developing economies can develop their own
MNEs; this process is discussed in chapters 7 and 8. We conclude chapter 3
with some basic data on the largest global MNEs and their presence in devel-
oping countries.
In chapters 4, 5, and 6 we focus on institutional actors and other stakehold-
ers that influence the impact of MNEs in the development process, including
international institutions and agreements, civil society and NGOs, and the ad-
ministrative apparatus and governance systems of the countries themselves. We
argue that the strategies of MNEs are both constrained and facilitated by these
actors, institutions, and the laws and regulations that emerge from them, and
that the development process is shaped by the interactions among these differ-
ent stakeholders and the broader institutional environment in which they op-
erate.
Chapter 4 examines the international institutions—such as the World Trade
Organization (WTO), the World Bank, and the International Monetary Fund
(IMF)—that are central players in the economic development of developing
economies. We begin with a review of the historic evolution of the multilateral
institutions established in the post–Bretton Woods environment—the World
Bank, the IMF, the WTO, and the United Nations—and assess their contri-
bution to development. We then review the role of regional institutions—the
European Bank for Reconstruction and Development (EBRD), the Inter-
American Development Bank (IDB), and the Asian Development Bank (ADB)
—and agreements, for example, the North American Free Trade Agreement
(NAFTA), and assess their contribution to development. We then focus on two
initiatives—the Doha Development Round of the WTO and the Millennium
Development Goals—as concrete examples of efforts by the multilateral sys-
tem to focus specifically on contemporary development challenges. Finally, we
review the growing role of MNEs in the international trade and international
development agenda, building on the framework introduced in chapter 2.
In chapter 5 we review the emergence of civil society and NGOs as impor-
tant actors in international development. Drawing from the work of Teegen,
Doh, and Vachani (2004) and others, we introduce a classification of NGOs to
help differentiate among their goals, purposes, and organizational structures.
Using this schema, we assess and critique the role of NGOs in development,
the factors that have facilitated and constrained their success, and the potential
for closer federations with MNEs and governments to increase the effectiveness
of NGOs. We also review the inherent tensions and conflict between civil soci-
ety and NGOs on the one hand and MNEs on the other, and introduce a
framework for understanding civil society–MNE interactions in the context of
international development. Finally, we discuss the need for a more objective
understanding of the roles and goals of MNEs by civil society and NGOs, and
of civil society and NGOs by MNEs, and the potential for this understanding
to lead to more collaborative efforts and better development outcomes. Toward
the end of chapter 5, we introduce some frameworks to analyze the interactions
between MNEs and NGOs.
In chapter 6 we draw on the growing literature on the importance of gover-
nance and institutional advancement as a precondition for successful develop-
ment and the damaging effects of institutional deficiencies on development.
We use corruption as an illustration to underscore the importance of the rela-
tionships between governance and development and to show how MNEs (in
conjunction with NGOs, home and host governments, and international insti-
tutions) can support institutional development and good governance. We re-
view the historic MNE –host government bargaining model and critique that
model in light of (1) a greater understanding of the benefits of MNE invest-
ment for host developing countries and (2) the growth of international institu-
tions and agreements under which host countries voluntarily agree to improve
their institutional development and governance.
In the final section of the book, we turn our attention to the experience of
MNEs and development in Asia. It is here that the interactions between MNEs
and host countries—and their indigenous firms—have been especially pro-
ductive and successful. We believe the examples discussed here have important
implications for the potential of MNEs to contribute positively to develop-
ment in other regions of the world.
Chapter 7 explores the way in which MNEs have developed in China and
Korea. The chapter begins with an assessment of all MNEs from emerging
economies. In general, we find that these MNEs build on CSAs. This is espe-
cially true of MNEs from China. The chapter uses the FSA-CSA matrix of
chapter 2 and applies it to individual firms. We then extend this matrix to
differentiate between upstream (production-based) and downstream (market-
ing-based) FSAs. We provide new data on the extent of the intraregional sales
and production of Chinese and Korean MNEs and show how MNE FSAs and
regional CSAs have combined to help develop increasingly successful indige-

nous MNEs.
Chapter 8 continues the theme of the role of indigenous MNEs in promot-
ing economic development. We focus again on MNEs from Asia. In addition
to the Chinese and Korean MNEs examined in chapter 7, chapter 8 analyzes
the regional activities of all MNEs in Asia. The twist here is that most Asian
MNEs are from Japan. We find that on average, over 80 percent of the sales and
production of Japanese MNEs is in Asia. Thus, Japanese MNEs are major ve-
hicles for economic development in Asia. Japanese MNEs are not global firms
but regional firms. We relate these findings to the FSA-CSA framework of
chapter 2 and detail several case studies of successful Asian MNEs. We also ex-
tend the upstream and downstream framework developed in chapter 7.
In chapter 9 we discuss “yang” MNEs—those MNEs that provide especially
beneficent investment to developing economies. We focus on the role of yang
MNEs as conduits of inward and outward FDI by MNEs from China, Korea,
Singapore, and Taiwan (the major Asian-based emerging-economy MNEs).
We use the case of Korea to illustrate how complementary CSAs and FSAs in-
teract in both inward and outward FDI, creating positive and sustained devel-
opment impacts. The case of Korea shows that when governments leverage
their CSAs, when firms deploy their most productive FSAs, and when MNEs
and host governments work cooperatively to advance economic development,
the result is a complementary and mutually reinforcing flow of inward and out-
ward FDI that generates positive and sustained impacts on development.
SUMMARY POINTS
In advancing our understanding of the role of MNEs in development, we offer

the following insights. MNEs are motivated primarily by efficiency, not by rent
seeking; as such their impact on development has been misunderstood. Coun-
tries possess important geographically located assets that are necessary—but
not sufficient—for advancing the process of economic development. MNEs
possess important firm-specific assets that, when properly leveraged and inte-
grated with CSAs, can have dramatically positive impacts on development.
Hence, MNEs are vehicles through which capital and technology are transmit-
ted to developing economies; they have the potential to increase consumer wel-
fare, provide jobs, raise labor and environmental standards, and contribute to
improved living standards and poverty alleviation. The potential impact of
MNEs on development is influenced by international institutions and agree-
ments, civil society and NGOs, and home and host country policies; the poli-
cies and practices of each of these groups must be considered and balanced
alongside the motivation of MNEs themselves, to maximize the potential pos-
itive impact of MNEs. MNEs have resources and capabilities absent in host
and home governments, international institutions, and NGOs; as such, collab-
orative initiatives among these sectors will have a greater development impact
than those that exclude MNEs. MNEs not only act as agents of economic de-
velopment but also have the potential to serve as catalysts for individual liberty
and freedom in poorer or overly regulated societies.
Although we have attempted to fill a number of gaps in research discussions
about the role of MNEs in development, our hope is that this volume is just the
beginning of a serious and vigorous debate about how MNEs can and do influ-
ence the development process in the regions, countries, and communities in
which they do business.
Chapter 2 Foreign Direct
Investment and Development
In this chapter, we introduce our analytical framework for under-

standing the interactions between advantages and resources at the
country level and those at the firm level. We term these advantages
“country-specific advantages” (CSAs) and “firm-specific advantages”
(FSAs), respectively. In its simplest form, the development impact of
MNEs in developing countries has to be understood as the interaction
of these two sets of factors. Next, we briefly review the literature on
FDI and development, focusing on research related to spillovers, tech-
nology transfer, and linkages. Finally, we review key data on FDI and
development to provide an empirical context for our subsequent
analysis.
OUTLINE OF THE ANALYTICAL APPROACH
As discussed in chapter 1, the issue of FDI in developing countries has

been the subject of intense study and debate. In this chapter, we pro-
pose a simple framework for understanding the interactions between
CSAs and FSAs. In figure 2.1, we present these two sets of advantages
11
12 Foreign Direct Investment and Development
in a matrix. On one axis we specify the multinational enterprise and its FSAs.
On the other, we specify the environmental factors, usually at the country level,
relevant to business strategy and public policy (CSAs). The traditional method
of incorporating social values and pressures is put on the CSA axis. Such social
issues are usually addressed by government policy, a major driver of the CSA
axis. In other words, the CSA axis is a mediating variable for government pol-
icy and social issues.
Figure 2.2 presents an alternative framework. This model emphasizes soci-
etal stakeholder interests as a distinct and independent set of influences. Al-
though this model has strong merit, we will adopt the matrix approach in fig-
ure 2.1, modified to account for nonstate stakeholder interests and influences.
The reason we emphasize the core interactions among country and firm factors
is that it enables us to conduct an analysis of the influence on development of
the MNE as an efficiency-seeking entity. Thus, we can identify, prioritize, and
assess the strategic objectives and performance of the MNE and use data on its
operations and performance to gauge its development impact. We can contrast
the operations and performance of the MNE with the activities of rival firms
and decouple the activities of local subsidiaries from those of the parent firm.
Below we examine each of these models in more detail. We then illustrate the
key issues surrounding the use of either model by relating the models to several
examples relevant to multinationals and development.
MODEL 1: THE FSA-CSA MATRIX

OF MULTINATIONALS
There are two basic building blocks in analyzing the strategies of MNEs. First,
there is a set of firm-specific factors that determine the competitive advantage
of an organization. We call these firm-specific advantages (FSAs). An FSA is de-
fined as a unique capability proprietary to the organization. It may be built on
product or process technology, marketing or distribution skills, or managerial
know-how. Second, there are country factors unique to the business in each
country. They can lead to country-specific advantages (CSAs). The CSAs can
be based on natural-resource endowments (minerals, energy, forests), on the la-
bor force, or on less-tangible factors that include education and skills, institu-
tional protections of intellectual property, entrepreneurial dynamism, or other
factors unique to a given country.
Managers of most MNEs use strategies that build on the interactions of
CSAs and FSAs, so that they can be positioned in a unique strategic space. The
Foreign Direct Investment and Development 13
CSAs represent the natural factor endowments of a nation or those that are de-
veloped or acquired as part of government or other investments. The FSAs pos-
sessed by a firm are based ultimately on its internalization of an asset, such as
production knowledge, and managerial or marketing capabilities, over which
the firm has proprietary control. FSAs are thus related to the firm’s ability to co-
ordinate the use of the advantages in production, marketing, or the customiza-
tion of services (Rugman 1981).
The CSAs form the basis of the global platform from which—using Porter’s
terminology—the multinational firm derives a home-base “diamond” advan-
tage in global competition (Porter 1990). Tariff and nontariff barriers to trade
and government regulations also influence CSAs. Building on these CSAs, the
firm makes decisions about the efficient global configuration and coordination
between segments of its value chain (operations, marketing, R&D, and logis-
tics). The skill in making such decisions represents a strong managerial FSA.
To help formulate the strategic options of the MNE, it is useful to identify
the relative strengths and weaknesses of the CSAs and FSAs that the MNE pos-
sesses. Figure 2.1, the FSA-CSA matrix, provides a useful framework for dis-
cussing these issues. It should be emphasized that the “strength” or “weakness”
of an FSA or a CSA is a relative notion. It depends on the relevant market and
the CSAs and FSAs of potential competitors. A strong FSA implies that under
identical CSAs, a firm has a potential competitive advantage over its rivals.
MNEs in quadrants 1, 2, and 3 can pursue different generic strategies. Quad-
rant 1 firms are the cost-leadership enterprises; they are resource based or ma-
ture internationally oriented firms producing a commodity-type product. Given
their late stage in the product life cycle, production FSAs flowing from the pos-
session of intangible skills are less important than the CSAs of location and en-
ergy costs, which are the main sources of the firm’s competitive advantage.
Quadrant 2 firms represent inefficient, floundering firms with no consistent
strategy, nor any intrinsic CSAs or FSAs. These firms are preparing to exit or to
restructure. Quadrant 2 can also represent domestically based small and
medium-sized firms with little global exposure. Firms in quadrant 4 are gener-
ally differentiated firms with strong FSAs in marketing and customization.
These firms usually have strong brands. In quadrant 4 the FSAs dominate, so in
world markets the home-country CSAs are not essential in the long run. Quad-
rant 3 firms generally can choose either the cost or differentiation strategies, or
perhaps combine them, because of the strength of both their CSAs and their
FSAs.
In terms of business strategy, quadrants 2 and 3 are unambiguous in their im-
Figure 2.1 The FSA-CSA Matrix
plications. A quadrant 3 firm can benefit from strategies of both low cost and
differentiation. Such a firm is constantly evaluating its strategy. Quadrants 4
and 1 require specific strategies for different types of firms. For instance, a quad-
rant 4 firm that has strong FSAs in marketing (customization) can operate in-
ternationally without reliance on its home-market CSAs or the CSAs of the
host nation. For such a firm in quadrant 4, CSAs are not relevant. In contrast,
quadrant 1 has mature multinationals or product divisions driven more by
CSAs than by FSAs. By improving potential FSAs in marketing or product in-
novation and increasing value added through vertical integration, the quadrant
1 firm can move to quadrant 3.
Although quadrants 1, 3, and 4 represent appropriate strategic positions for
some firms, there exists an asymmetry between quadrants 4 and 1. A quadrant
4 strategic choice may be a stable one for some firms; however, quadrant 1 firms
should be able to aim for quadrant 3. The reason for this asymmetry is rooted in
the fact that CSAs are for the most part exogenous to the firm, whereas FSAs are
not. Even to the extent that CSAs can be influenced by government policy,
there is always increased uncertainty associated with such strategies. For the
firm in quadrant 4 already following an efficiency-based strategy, there is no in-
centive, no need, to move to quadrant 3.
It is useful to note two points. First, if the firm is a conglomerate, it should

be more useful to situate each division or product line individually, recognizing
that different units of the diversified firm would use different generic strategies.
Second, changes in the trading environment, such as the European Union’s
deeper integration measures, the adoption of a single currency by the Euro-
pean Union in 1999, or the United States– Canada Free Trade Agreement and
NAFTA, will affect the relative CSAs of the firm.
MODEL 2: THE SOCIAL TRIANGLE
In model 2 there are three axes: the state, the markets and the firm, and society.
The relationship is shown in figure 2.2.
In figure 2.2 the first axis refers to the activities of the state. The state can be
a national government, but it can also represent international organizations,
such as the WTO, the IMF, the World Bank, or the United Nations. It can also
represent a more generic type of political regime, using various combinations of
national and international institutions.
The second axis relates to the economic aspects of markets. In a world char-
acterized by free trade and the perfect mobility of financial capital, there would
Figure 2.2 The Social Triangle

be no role for MNEs. In contrast, in a world of market imperfections, with

transaction costs, there is a need for the firm. In an international context, the
firm is the MNE (Rugman 1981). This axis, therefore, combines either perfect
markets or MNE activities as substitute units of analysis.
The third axis represents the activities of society. The institutions that drive
this axis are likely to be civil society actors, including NGOs. As a result, the
third axis can be distinguished from the first axis, which represents govern-
ment. On this third axis the activities of civil society can be analyzed separately
from those of the state and of the markets and firms, and issues of corporate re-
sponsibility can be assessed from a perspective that differs from that of the firm
or government. For example, the third axis yields arguments for social respon-
sibility and environmental conservation as ends in themselves, rather than as
instruments to be negotiated by government with firms.
Model 2 presents us with difficulties in the choice of the unit of analysis. For
example, consider geography. In the triangular model, if we consider a home-
country government with its own MNEs, then is the third axis of civil society
to be limited to NGOs in the home country, or are foreign NGOs to be con-
sidered? This is relevant if we assume the home country to be an African coun-
try such as Kenya. In such a triangular analysis of Kenya, it is not clear that U.S.
NGOs have standing with the Kenyan government and Kenyan firms. Second,
the triangular model poses challenges in terms of analyzing the nature of the
MNE. The MNE operates in a home country but has foreign subsidiaries.
Across the world’s 500 largest MNEs, the vast majority of the output of foreign
subsidiaries takes place in the home region of the MNE. U.S. MNEs, on aver-
age, have few subsidiaries in Africa, which is more of a sphere of influence for
European MNEs. Similarly, U.S. MNEs have a relatively small presence in
Asia, where the concerns of civil society about poor working conditions and
other abuses of local workers need to be directed toward other Asian MNEs
rather than North American or European MNEs. Third, there is a concern that
the extent to which the third axis of society represents an agenda of NGOs
from wealthier countries may be at odds with the preferences of local society in
host nations. In other words, it is possible that the values of wealthier societies
can be imposed on developing societies, given that the host government is re-
moved from its role as a potential mediator between conflicting value systems.
In general, the apparent simplicity of the triangular model begins to disappear
once these substantive issues confronting MNEs in poorer countries are ana-
lyzed.
RECONCILING MODEL 1 WITH MODEL 2
Rather than use two alternative models to analyze multinationals and develop-
ment, in this book we shall use the logic of model 1. The reason is that model 2
can be collapsed into model 1. In this section we explain how this happens.
Within the framework of model 1 it is possible to position the activities of the
firm in quadrant 4. In quadrant 4 the FSAs are high and the CSAs are low, so
the exogenous environmental factors are largely irrelevant when compared
with firm factors. In other words, only the firm-market axis of model 2 is rele-
vant. Conversely, the activities of the state can be shown in quadrant 1. In quad-
rant 1 CSAs are high and FSAs are low. Thus, in terms of model 2, only the ac-
tivities of the state matter and the firm and market are largely irrelevant in
quadrant 1. The state is a mediating variable for NGOs and civil-society pres-
sures in quadrant 1, as Doh and Teegen (2003) and others have argued. Finally,
in quadrant 3 both the state and the firm are relevant. Here, the FSAs and CSAs
are both high. Thus quadrant 3 is unique in dealing with the society axis of
model 2. Here, the role of civil society is relevant. In terms of model 1, the way
to handle this is through analysis of corporate social responsibility (CSR).
Model 1, then, nicely encapsulates all three axes of model 2: the three relevant
quadrants of model 1 represent the three axes of the triangular model 2, as illus-
trated in figure 2.3.
The extent to which we are able to use model 1 will, of course, depend on the
empirical evidence governing the positioning in each quadrant. Our basic
premise in this book is that we wish to evaluate the presence, activities, perfor-
mance, and contribution to economic development of MNEs. Thus we choose
to use an analytical framework that relates the activities of MNEs to the issues
of public policy and economic development. Everything that needs to be ana-
lyzed can be handled within the broad framework of model 1. In later chapters
we shall evaluate the performance of the MNE in quadrant 4 of figure 2.3; the
activities of the state and other institutions in quadrant 1 of figure 2.3; and the
CSR activities representing the interaction of the firm and state in quadrant 3
of figure 2.3. We believe that the analytical device of model 1 will bring fresh
insight into the understanding of the relationships between MNEs, govern-
ments, and society, in particular as these interactions affect economic develop-
ment. We now relate this framework to the literature on multinationals and
development.
Figure 2.3 Reconciling the Models
SPILLOVERS, TECHNOLOGY TRANSFER,

AND LINKAGES
A broad body of literature argues that MNEs contribute to economic develop-

ment by spillovers. Spillovers are external benefits brought to the host country
through inward FDI and the associated presence of foreign MNEs. Basically,
these MNEs normally have production systems that embody more advanced
technology than is found, on average, within the host country. At the purest
level of economics, there is a transfer of technology to local consumers when
they purchase the goods and services provided by the more technologically ad-
vanced foreign MNEs. Indeed, it has been found that local firms frequently fail
to develop and commercialize new technologies and that foreign MNEs over-
come this technological gap facing poor host countries. MNEs also transfer
scarce management skills and thereby transfer knowledge and learning ability
to host countries. The modern theory of the MNE, incorporated in model 1,
argues that FSAs will be internalized by the MNE and thereby partially trans-
ferred to host-country consumers through subsidiary production in that coun-
try. There may also be a direct transfer of technology and skills to local man-
agers and workers through local production by MNEs. Since the evidence is
that well over 90 percent of the employees of a subsidiary are from the local
country, it is clear that the potential for skill transfer exists once MNEs enter a
poor country.
Empirical Analyses of Spillovers and Linkages
There is a long history of empirical analysis of FDI-related technological

spillovers, running from the early work in the 1970s (for example, Caves 1974;
Globerman 1979) to more recent studies in the past ten years (for example,
Kokko 1994; Aitken and Harrison 1999; Blomstrom and Sjoholm 1999; Haskel,
Pereira, and Slaughter 2002). Since the work of Stephen Hymer in the 1960s
(published as Hymer 1976), a core element in the theoretical framework under-
lying this work has concerned the MNE’s possession and exploitation of tech-
nological assets—an ownership advantage seen as the main reason for the
MNE’s existence. A second, usually implicit, element is the assumption that
the MNE is a tightly integrated organization, with the behavior of subsidiaries
closely shaped by central strategies and decisions. The combination of centrally
accumulated technological assets and tightly integrated organizational behav-
ior sets the basis for the two-step “pipeline” that delivers spillovers of superior
technology from MNE parents to domestic firms without any significantly ac-
tive role on the part of the local MNE subsidiaries. These local subsidiaries are
simply “leaky containers” at the end of the transfer stage of the process.
Empirical studies have failed to predict with consistency the spillover effects
one might expect on the basis of this model (Görg and Greenaway 2004), and
much of the evidence is contradictory (Görg and Strobl 2001; Lipsey 2004).
Early studies using industry-level and cross-sectional designs (for example,
Caves 1974 or Globerman 1979) found positive results but were unable to iden-
tify the relevant causality. More recent studies have used firm level designs, typ-
ically combined with panel data analysis. Although such studies have found ev-
idence of spillovers in some cases (for example, Haskel, Pereira, and Slaughter
2002; Keller and Yeaple 2003), the generally positive results in the earlier re-
search have not been replicated in a wide range of countries.
Analyses of the technological spillover impact of FDI on host economies
have typically assumed the impact to be the outcome of two linked steps. The
first involves the MNE parent-to-subsidiary international transfer of technol-
ogy that is superior to the prevailing technology in the host economy. The sec-
ond involves the subsequent spread of this technology to domestic firms—a
technological spillover effect. The latter has been addressed in a growing num-
ber of spillover studies in various host economies (Görg and Strobl 2001; Lipsey
2004).
Researchers have begun to focus on some additional variables in the MNE-

spillover equation. In particular, focus 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 (for example, Kokko 1994) has found such
“demand side” effects to be significant, whereas others (for example, Haskel,
Pereira, and Slaughter 2002) have found that such effects are not as relevant.
Another group of researchers has sought to bring in the “supply side”—namely,
the heterogeneity in the strategy and behavior of the MNE itself. Two kinds of
MNE diversity have been identified: characteristics of the industries in which
MNEs operate (Narula and Dunning 2000) and heterogeneity in the strategies
of MNEs themselves (Wang and Blomstrom 1992). In our analyses, we focus on
both the demand and supply side factors, using the FSA-CSA matrix.
Recent literature on linkages argues that MNEs offer opportunities to local
firms and NGOs to link to outside business activities. These linkages represent
a more direct and embedded connection among MNEs and local private and
not-for-profit organizations. Such linkages capture not just the ancillary bene-
fits of MNE investment but, in theory, more substantial activities that would
otherwise be fully internalized in the MNE.
Spillovers and Linkages to the Bottom

of the Pyramid
A recent extension of the spillover linkages argument is captured in the work of

C. K. Prahalad (2005) on the bottom of the pyramid. Essentially, this is a model
1 efficiency argument. Prahalad provides examples of the ways in which MNEs
from advanced economies can adapt their processes and technologies to local
conditions, thereby unleashing potential entrepreneurial incentives in local
managers. His examples relate to the commercialization of technologies for
small and medium-sized enterprises in countries like India and China. Praha-
lad suggests that local NGOs can work with local firms and managers to de-
velop new ventures using the insights of foreign MNEs. However, the strength
of these alliances is difficult to predict, and the potential value of bottom-of-
the-pyramid products and services may have been exaggerated.
The basic premise of Prahalad’s analysis is that of the world’s current popula-
tion of 6.5 billion, as many as 4 billion people live on under $2 a day. On aver-
age, individuals in this group of 4 billion people earn under $1,500 a year in
terms of purchasing power. These are the people at the bottom of the pyramid.
Another 2 billion people have annual incomes between $1,500 and $20,000. At
the top of the pyramid, only 100 million people have incomes greater than
$20,000 per annum.
The main point of Prahalad’s work is to argue that although the 4 billion
people at the bottom of the pyramid appear to have little purchasing power, it
may be possible to commercialize this sector. This will require a change in the
dominant logic of traditional business practice. Instead of looking at this vast
market in terms of the marketing of low-cost products and services, it is better
business practice to consider how existing management methods can be
adapted to generate new market opportunities. To commercialize the bottom
of the world’s pyramid, the subsidiary managers will need to develop new
methods of delivery, assembly, production, and cooperation with local firms
and NGOs. In particular, the MNE needs to generate a new entrepreneurial
orientation in its subsidiary managers.
Another useful insight by Prahalad is that the commercialization of the bot-
tom of the pyramid can be fostered in a climate where MNEs engage in CSR.
Prahalad argues that the MNE, by developing an entrepreneurial orientation in
its subsidiaries, can develop what we would call an FSA. This FSA is one where
the firm adapts its products and processes to the bottom of the pyramid and
thereby performs better than competitor MNEs and local firms. This process of
adaptive commercialization of poorer markets will require that the firm co-
operate with local NGOs and local host-country governments, such that it
engages in the elements of CSR. To this extent, we can see that CSR is a mod-
erating variable. It moderates the relationship between the entrepreneurial ori-
entation and the performance of MNEs in the markets at the bottom of the
pyramid.
Previous literature has explored the issue of CSR and the linkages of the
MNE to what has been called the “nonbusiness infrastructure.” This is part of
the five partners “flagship” framework developed and tested in Rugman and
D’Cruz (2000). In the flagship framework the MNE engages in relational con-
tracts with key suppliers, key consumers, key competitors, and institutions in
the nonbusiness infrastructure. This method of analysis, which analyzes the
strategic behavior of MNEs and their key partners across national borders, is
very similar to the analysis presented by Prahalad.
There are, however, a number of shortcomings in the Prahalad analysis.
When Prahalad argues that innovations can be consumer driven, he may exag-
gerate the effective demand at the bottom of the pyramid. Moreover, the bot-
tom-of-the-pyramid framework may not be as appropriate for addressing de-
velopment policy, since this also depends on addressing the poor as producers
as well as consumers (Karnani 2007). A more promising area is the integration

of MNE FSAs with local CSA capabilities and the linkages, supply relation-
ships, and positive economic impacts that result.
Although much of Prahalad’s analysis of the innovative process within firms
and across business networks is valid, the institutional differences (especially in
financial markets) between wealthy and poorer countries make it difficult for
the long-term viability of new small and medium-sized enterprises lacking state
support or very deep pockets.
REGIONAL MNES AND DEVELOPMENT
One of the unresolved problems facing the MNE in a foreign country is that
the MNE suffers from a liability of foreignness. From the viewpoint of the
MNE’s managers, foreign markets present risks, as there are social, political,
and economic costs associated with entry into unfamiliar markets (Zaheer
1995; 2002). The liability-of-foreignness literature suggests that the MNE has
to make an investment in learning about foreign markets (Eden and Miller
2004). In general, this follows a process of internationalization. The MNE first
goes to nearby countries. The liability-of-foreignness theory is thus consistent
with the empirical finding that the great majority of international business is
conducted by MNEs in their home regions.
The new insight that comes from this analysis is that we cannot analyze the
role of MNEs in economic development in a generic sense. Instead, MNEs that
are dominant within each region should be analyzed to determine how they
affect development in that region. For example, we focus primarily on the im-
pact of Asian MNEs, mostly Japanese (66 of the 75 largest MNEs in Asia are
Japanese), on the rest of Asia. Although we do not explore U.S., Canadian, and
European MNEs in depth, the relevant approach is the same: U.S. and Cana-
dian MNEs are the primary drivers of development in the Americas, including
the Caribbean. Likewise, European MNEs are the most relevant focus for
analysis of the impact of MNEs on Eastern Europe, the Middle East, and
Africa. Although there are a few exceptional MNEs that operate across all three
regions of the broad triad (of North America, Europe, and Asia), they are so few
in number (9 out of 380) that a generic study of multinationals and develop-
ment would be based on the false premise that all MNEs are global. Instead,
320 of the 380 of the world’s 500 largest MNEs (for which data are available)
generate an average of 80 percent of their sales in their home regions (see Rug-
man 2005). Their distribution of foreign assets is even more regionalized.
Hence, a book on multinationals and development is actually a book about

economic development in each region of the triad. We focus especially on Asia
because it is there that the impacts of MNEs on development—including on
the rise of MNEs from developing countries—have been most profound. We
believe these experiences provide important lessons for other regions, and these
experiences are therefore the focus of the final section of the book.
DATA ON FOREIGN DIRECT INVESTMENT,

TRADE, AND DEVELOPMENT
Here we present some basic data on FDI and trade flows among and between
developed and developing economies to give the reader a sense of the size, scale,
and direction of these important economic exchanges that are central to the fo-
cus of this book.
The basic data on FDI, published annually by the United Nations in the
World Investment Report of the United Nations Conference on Trade and De-
velopment (UNCTAD), demonstrates that cross-border economic activities
are asymmetrically dispersed throughout the world, with developed countries
accounting for the vast majority of both outward and inward FDI in compari-
son with developing countries. However, developing countries are increasing
their share of both outward and inward flows of FDI. Developing countries
such as China, Brazil, and Mexico are now leading recipients of FDI. Devel-
oped countries remain the leading sources of such FDI outflows; however,
there were recent significant increases in outward investment by developing
economies, with 2005 outflows from these economies totaling $133 billion, or
17 percent of the world total. As a result of this growth in outflows, the stock
of outward FDI emanating from the top fifteen developing and transition
economies reached $1.4 trillion in 2005 (table 2.1.). Such a reality provides the
basis for our discussion of MNEs from emerging economies in chapter 7 and
our discussion of the complementarity of inward and outward FDI flows in
Asia in chapters 8 and 9.
In terms of trends in FDI and trade between and among developed and de-
veloping countries, we follow UNCTAD’s definition and classify the world
economies into three major categories: developed countries, less-developed
countries, and least-developed countries. UNCTAD identifies fifty least-devel-
oped countries using three criteria: low income, human resource weakness, and
economic vulnerability.
Table 2.2 shows that an asymmetry existed in FDI for each of the three cate-
Table 2.1 Top 15 developing and transition

economies in terms of stock of outward FDI,
2005 (billions of U.S. dollars)
Rank Economy FDI stock
1 Hong Kong, China 470

2 British Virgin Islands 123
3 Russian Federation 120
4 Singapore 111
5 Taiwan Province of China 97
6 Brazil 72
7 China 46
8 Malaysia 44
9 South Africa 39
10 Korea, Republic of 36
11 Cayman Islands 34
12 Mexico 28
13 Argentina 23
14 Chile 21
15 Indonesia 14
Source: Data from UNCTAD 2005.
gories of countries in 2004. The UNCTAD data include three OECD coun-
tries—Mexico, the Republic of Korea, and Turkey—in the less-developed-
country category that are now no longer less developed and should properly be
termed “emerging economies” or “near-developed economies”; hence we in-
clude these three countries in the developed-country category in table 2.2.
As shown in table 2.2, approximately 76 percent of the world’s inward FDI
stocks and 89 percent of outward FDI stocks are concentrated in the developed
countries. The less-developed countries also have a substantial amount of in-
ward FDI stocks, at 23 percent, but only 11 percent of the world’s outward
stock. Table 2.2 also shows that FDI stocks in the least-developed countries are
almost negligible, at under 1 percent.
In terms of flows of FDI, for 2004, the less-developed countries received 36
percent of inward flows but provided only 12 percent of outward flows. The
current engine for outward flows of FDI is the group of developed countries, at
88 percent. We conclude that in aggregate, the developed countries account for
most of the world’s FDI, and so we need to study the MNEs from these ad-
vanced economies to understand their contribution to economic development.
Using table 2.2’s comparison of inward and outward FDI stocks for each of
the three groups, we can identify each net receiving group. Developed coun-
tries provide 89 percent of the world’s FDI and receive 76 percent. Less-devel-
oped countries receive 23 percent and provide 11 percent. The least-developed
countries receive under 1 percent of the world’s FDI and provide essentially
zero. In general, less-developed countries obtain net inflows from the world’s
cross-border FDI activities, and these inflows come from developed countries.
Least-developed countries do not play a significant role in FDI.
The data in table 2.2 are for 2004. But to examine trade data (as well as FDI
data) we need to reconstruct table 2.2 for 2002, as trade data are available (at the
time of writing) only for 2002. Thus we generate table 2.3 for 2002. The FDI
stock percentage data for 2002 are much the same as for 2004. However, the
FDI flow data show higher percentages of both outward (94 percent) and in-
ward (81 percent) FDI flows for developed countries, with lower FDI shares for
Table 2.2 Stock and flows of inward and outward FDI, 2004 (millions of
U.S. dollars)
Panel A. Inward FDI
Inward stock Inward flows
FDI stock % of total FDI flow % of total
Developed countries 6,742,883 75.80 407,044 62.80

Less-developed countries 2,080,447 23.39 230,421 35.55
Least-developed countries 71,874 0.81 10,648 1.64
Total 8,895,204 100.00 648,113 100.00
Panel B. Outward FDI
Outward stock Outward flows

Least-developed countries 3,601 0.04 110 0.02
Total 9,732,233 100.00 730,257 100.00
Source: Data from UNCTAD 2004.
Note: Mexico, the Republic of Korea, and Turkey were moved from the UNCTAD “less-developed” cat-
egory to the “developed” category. There are 38 developed countries, 118 less-developed countries, and
49 least-developed countries. The “least-developed” category is from UNCTAD 2004 and UNCTAD
2002. Percentages may not sum to 100 percent because of rounding error.
Table 2.3 Stock and flows of inward and outward FDI, 2002 (millions of
U.S. dollars)
Panel A. Inward FDI

Least-developed countries 138,877 1.44 4,919 0.70
Total 9,641,157 100.00 700,584 100.00

Less-developed countries 650,441 9.20 39,610 6.16
Least-developed countries 1,755 0.02 103 0.02
Total 7,068,492 100.00 642,868 100.00
Source: Data from UNCTAD 2004, 2002.
egory to the “developed” category. There are 33 developed countries, 82 less-developed countries, and 31
least-developed countries. The “least-developed” category is from UNCTAD 2004 and UNCTAD
less-developed countries. This volatility in flow data is one of the reasons that
we prefer to analyze FDI stock data.
We can now extend this analysis to include trade data, as well as the FDI data
included so far. There is a data limitation. Trade data (at the time of writing) are
available only for 2002, so the stocks of table 2.3 for 2002 are used to compare
to trade data for 2002.
The regional nature of MNEs, as demonstrated by Rugman (2000, 2005),
indicates that the great majority of world trade, FDI, and sales by large firms
takes place within the three blocs of the “broad triad”—North America, Eu-
rope, and Asia—rather than between them. In table 2.4, we compare FDI
stocks and trade flows for 2002 in these three blocs. Among the three regions,
Europe has the highest percentage of the world’s FDI stock and trade. The
Asia-Pacific region has the lowest percentage of the world’s FDI stock, but it has
almost the same percentage of the world’s trade as the Americas. Given this
Table 2.4 Inward and outward FDI stocks and trade as a percentage of the
world, 2002
Inward Outward
Region FDI stock Trade FDI stock Trade
Americas 31.81 22.24 28.27 27.25

North Americaa 27.23 19.55 26.81 24.94
South Americab 4.58 2.69 1.46 2.31
Asia-Pacific 16.08 25.07 12.42 23.06

Asia 13.53 23.77 11.00 21.64
Oceania 2.55 1.30 1.42 1.42
Europe, Africa, and Middle East 52.11 52.69 59.31 49.69

Africa—Middle East 3.60 5.45 0.81 5.12
Europe 48.51 47.24 58.49 44.56
Total 100.00 100.00 100.00 100.00

Sources: FDI data are from UNCTAD 2004. Trade and GDP data are from World Bank 2005.
a Central American countries are included in North America.
b Caribbean countries are included in South America.
higher level of FDI and outward cross-border activity, we can say that Europe is
a more open region than the Americas and the Asia-Pacific region.
FDI and trade as a percentage of GDP are reported in table 2.5, again for
2002. As in the previous table, Europe has the highest level of FDI as a share of
gross domestic product (GDP). It is worth noting that the Asia-Pacific coun-
tries, in particular the Asian countries, have a heavy focus on trade: total ex-
ports (imports) of Asian countries were more than 20 percent of GDP in 2002,
whereas the outward (inward) FDI stock was about 10 percent of GDP. This
pattern can be observed in other developing regions: South America and the
Africa–Middle East region. However, as we discussed above, less-developed
countries receive benefits from FDI. The differences between exports and im-
ports were ⫺3.01 percent, ⫺2.22 percent, and ⫺2.06 percent for South Amer-
ica, Asia, and the Africa–Middle East region, respectively, whereas the differ-
ences between inward FDI and outward FDI were 19.8 percent, 1.17 percent,
and 14.07 percent.
Developing countries have benefited more from FDI than from interna-
tional trade, but they still rely too heavily on international trade. MNEs as well
Table 2.5 Inward and outward FDI stocks and trade as a percentage of GDP,
2002
Inward Outward
Americas 15.83 13.34 15.57 16.34

North Americaa 14.65 12.68 15.96 16.16
South Americab 30.51 21.54 10.71 18.53
Asia-Pacific 13.02 24.46 11.13 22.49

Asia 11.65 24.66 10.48 22.44
Oceania 34.72 21.30 21.43 23.29

Europe 30.80 36.16 41.10 34.09
World FDI / world GDP 19.96 24.05 22.08 24.04

Sources: FDI data are from UNCTAD 2004. Trade and GDP data are from World Bank 2005.
as governments in developing countries should change their engine of growth

from international trade to FDI.
Table 2.6 compares the intraregional stocks of outward FDI in the three re-
gions of the triad, using FDI outflow into the home region as a percentage of
FDI outflow into the world. As we discussed earlier, the OECD developed
countries receive about 90 percent of the world’s outflow FDI, so OECD data
can represent the world’s FDI. The first four rows of the table show intra-
regional stocks of outward FDI for five-year intervals from 1988 to 2003, and the
next two rows show average annual changes over ten- and fifteen-year periods.
Intraregional stocks of outward FDI increased during the ten years ending in
2003 for all regions of the triad. E.U. countries have over 50 percent of their
FDI stocks with each other. In the earlier section, we argued that the European
Union is a more open region than the Americas and the Asia-Pacific region.
The evidence in table 2.6 suggests that the European Union is open to its mem-
ber countries but not to others: the average annual change, from 1988 to 2003,
in the intraregional stock of outward FDI in the European Union was the high-
est of the three regions, at 1.49 percent. After signing NAFTA in 1994, partici-
Table 2.6 Changes in the intraregional outward FDI stocks in the triad,
1988 –2003
Intraregional stock of outward FDI (%)
Year European Uniona NAFTA Asia-Pacificb
2003 51.82 18.80 21.55

1998 44.92 16.85 23.02
1993 45.67 15.77 19.84
1988 29.49 21.00 17.72
Average annual change

1993 –2003 0.62 0.30 0.17
1988 –2003 1.49 ⫺0.15 0.26
Source: Authors’ calculation based on Organization for Economic Cooperation and Development, In-
ternational Direct Investment Statistics Yearbook, electronic ed. (Paris: OECD, 2004).
Note: FDI stock is estimated by cumulating the OECD’s FDI flow from 1980. Intraregional stock of
outward FDI means the FDI outflow into the home region as a percentage of the FDI outflow into the
world.
a The European Union includes 15 countries: Australia, Belgium, Luxembourg, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, and the United
Kingdom.
b The Asia-Pacific region includes 12 countries: Australia, China, Hong Kong, India, Indonesia, Japan,
Malaysia, New Zealand, the Republic of Korea, Singapore, Taiwan, and Thailand.
pating countries began to increase their outward intraregional FDI (the average
annual change was 0.3 percent during the period 1993–2003), reversing a trend
of decreasing intraregional FDI before the agreement. We have calculated the
outward FDI stocks of Australia, Japan, New Zealand, and the Republic of Ko-
rea with respect to the twelve Asia-Pacific countries, and the intraregional stock
of outward FDI in the Asia-Pacific region also rose over the fifteen-year period
to over 20 percent in 2003.
One might argue that the growing economic power of the Asia-Pacific re-
gion would attract FDI stocks not only from countries inside the region but
also from the rest of the world. In table 2.7 we compare outward FDI stocks in
the Asia-Pacific region for the three regional triad blocs. The European Union’s
outward FDI stock into the Asia-Pacific region was less than 5 percent in 2003
(compared with an intraregional stock of outward FDI of 52 percent). NAFTA
countries send a substantial portion, about 13 percent, of their outward FDI
stock to the Asia-Pacific region, but this figure is less than their intraregional
stock of outward FDI, which is about 19 percent.
Table 2.7 Changes in the outward FDI stocks in the Asia-Pacific region,
1988–2003
Outward FDI stock in Asia-Pacific region (%)
Year European Uniona NAFTA Asia-Pacificb
2003 4.15 12.61 21.55

1998 5.30 12.06 23.02
1993 5.07 11.32 19.84
1988 5.82 9.09 17.72
Average annual change

1993 –2003 ⫺0.09 0.13 0.17
1988 –2003 ⫺0.11 0.23 0.26
Source: Authors’ calculation based on Organization for Economic Cooperation and Development, In-
ternational Direct Investment Statistics Yearbook, electronic ed. (Paris: OECD, 2004)
Note: FDI stock is estimated by cumulating the OECD’s FDI flow from 1980. Outward FDI stock in the
Asia-Pacific region means the FDI outflow into the Asia-Pacific region as a percentage of the FDI out-
flow into the world.
a The European Union includes 15 countries: Austria, Belgium, Luxembourg, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden, and the United
Kingdom.
b The Asia-Pacific region includes 12 countries: Australia, China, Hong Kong, India, Indonesia, Japan,
Malaysia, New Zealand, the Republic of Korea, Singapore, Taiwan, and Thailand.
The European Union has been reducing its FDI stocks into the Asia-Pacific
region (the average annual change during the period 1988 –2003 was ⫺0.11 per-
cent) but has been increasing its intraregional stock of outward FDI. NAFTA
countries have been increasing their FDI stocks into the Asia-Pacific region, av-
eraging annual increases of 0.23 percent during the period 1988 –2003, but this
figure is less than the average annual change for Asia-Pacific countries, 0.26 per-
cent. And the average annual change for NAFTA countries with respect to
outward FDI into the Asia-Pacific region is decreasing: 0.23 percent for 1988–
2003, but only 0.13 for 1993 –2003. This trend could be interpreted as a substi-
tution effect. The evidence suggests that countries are strengthening their eco-
nomic interdependence with nearby countries in their own region.
SUMMARY POINTS
The role of FDI in development is complex and dynamic. We argue that it is

the interaction of FSAs and CSAs that determines how MNE capabilities are
converted into significant contributors to economic development through

spillovers or linkages. MNEs have had and continue to have important impacts
on development through the FDI they bring to developing countries. In the
next chapter, we focus more specifically on the micro-level dynamics of this
process.
Chapter 3 Multinational
Enterprise Strategies
and Development
In this chapter, we draw from literature in corporate strategy and

international business across three dimensions. First, we review the
competing perspectives on MNE strategies and operations in devel-
oping countries. Second, we introduce a framework for understand-
ing the strategic choices of Western MNEs (from the triad) and the re-
sponse to those strategies by firms in developing countries with small
open economies. By small open economies, we mean all “non-core-
triad” economies (where the core triad consists of the huge markets of
the European Union, the United States, and Japan). Third, we discuss
the ways in which MNE activities contribute to development.
Using the first framework developed in the last chapter, here we will
focus on the nature of FSAs. As shown in the previous chapter, FSAs
are often contingent upon, or interact with, CSAs. The basic argu-
ment follows two key steps.
First, the MNEs from North America, the European Union, and
Japan tend to develop knowledge-based FSAs that depend on skilled
labor, innovative technology, and marketing skills. The FSAs of such
triad-based MNEs build on CSAs in both human capital research and
32
Multinational Strategies and Development 33
development (R&D), as well as a large domestic market. Most of the literature

in strategic management has obviously been developed to explain and analyze
the performance of the world’s largest MNEs. Over 400 of the world’s largest
MNEs come from the advanced markets of the “core triad” of the United
States, the European Union, and Japan. The theories of strategic management
for these firms are applied here to explain the presence of MNEs in developing
economies. But some new thinking is required to explain the other side of the
coin, the presence of MNEs from developing markets in developed economies.
Second, firms in developing economies tend to lack knowledge-based FSAs.
In general, developing economies do not have infrastructures that produce ad-
vanced human capital, technology, or large and sophisticated domestic mar-
kets. Even China lacks CSAs across these three areas. Instead, China’s CSAs
consist of relatively cheap and unskilled labor, natural resources, and an unso-
phisticated (but growing) demand in its domestic market. Aside from China,
the vast majority of developing economies are small, characterized by relatively
small and unsophisticated markets in economic terms. They lack home de-
mand in terms of size and sophistication of consumers. They lack R&D and
technology. They lack the infrastructure to produce firms with FSAs. These
types of small but open economies need special consideration in the applica-
tion of traditional strategic-management thinking, especially in consideration
of the impact of MNEs on development.
Several interesting points will emerge in this chapter. The MNEs from the
triad markets can contribute to economic development by indirectly trans-
ferring technology through the sale of products and services in developing
economies. Such products and services are built on knowledge-based FSAs, so
the consumption of these products and services helps provide the benefits of
knowledge-based FSAs in developing economies. In this manner MNEs serve
as vehicles for economic development. Of course, some MNEs are natural-re-
source seeking, and such a motive for FDI is based on the extraction and har-
vesting of the CSAs in a developing economy. In these situations it is necessary
for the host government to bargain with the MNE to apportion equitably the
potential rents available from resource exploitation. In general, foreign MNEs
that are vertically integrated will retain proprietary FSAs in production and
marketing. Thus, government bargaining in a host economy is limited to the
potential rents available from the harvesting and extraction activities, not the
other components of the FSAs of the MNE, although many host governments
seek to leverage the access they provide to these resources to attain greater
value-added investments.
34 Multinational Strategies and Development
Another issue we explore in this chapter is how firms from small open
economies can develop their own FSAs. This is incredibly difficult since most
firms in developing economies start out to build on indigenous CSAs. Many
are small entrepreneurial firms. The firms from small open economies tend to
be natural-resource based (in mining, forestry, or energy production), or they
develop businesses based on cheap labor. Inevitably the growth of such firms is
limited by the relatively small size of the home market. When these firms seek
to internationalize, they face severe competition since they lack sustainable
knowledge-based FSAs.
One strategy to overcome this lack of FSAs is to develop a sustainable niche.
Firms in small open economies can specialize in a new product or service cate-
gory and attempt to grow it internationally. In doing so, they suffer from entry
barriers to the advanced triad markets. Government-imposed barriers to entry,
in the form of tariffs and nontariff measures, can make entry even more diffi-
cult. It is hard to overcome the liability of foreignness without a strong FSA.
The MNEs from developing economies will lack knowledge-based FSAs, and
so they must rely on economies of scale in CSA-related natural-resource prod-
ucts, or on products and services based on cheap labor. In other words, the
MNEs from developing economies will tend to exploit their home-country
CSAs when going abroad. Few of them will have sustainable FSAs, except in
niche markets.
We now turn to a review of the literature in strategic management as it ap-
plies to economic development. We focus on theories that are relevant for
MNEs from the large triad markets, and also attempt to develop some new
thinking about the potential activities of MNEs from developing markets.
MULTINATIONALS IN DEVELOPING
ECONOMIES
Firms in developing economies, many of which have been isolated from the
world economy, may urgently need restructuring after any move toward trade-
and investment-liberalizing policies. Some countries can serve as interesting
models of transition, such as Mexico, which prepared for entry into the man-
aged trade of NAFTA with a brief period of internal market liberalization and
privatization under President Salinas and his predecessor. Today Mexico is de-
veloping competitive MNEs with access to the large U.S. market, especially in
such sectors as cement and glass. The Mexican model is, in many instances, re-
placing the import-substitution policies of the 1960s and 1970s. Mexico’s mar-
ket-access policies provide opportunities for domestic firms to develop global

best-practice technologies and processes, whereas “shelter-type” strategies do
not develop such long-run competitive advantages (Rugman and Verbeke
1990).
In this chapter, the unit of analysis is the firm, and the literature to be incor-
porated is from business policy and strategy. Virtually all this literature has been
developed for analysis of decision making by managers in triad-based firms.
The “core triad” consists of the United States, the European Union, and Japan.
MNEs from these triad markets account for over 80 percent of the world’s stock
of FDI (Rugman 1996b, 2000, 2005).
The most influential work on business strategy is that by Michael Porter
(1980, 1990). In particular, his “diamond” framework of international compet-
itiveness demonstrates how a triad-based firm can build on the four domestic
diamond components (factor conditions, home demand, rivalry and market
structure, and related and supporting activities) to enhance the country’s inter-
national competitiveness. Government and chance also affect competitiveness
but are not central determinants. According to Porter (1990), the firm is the ve-
hicle through which a country can achieve competitiveness. The company uses
the home-country diamond as a staging ground to develop new technology,
products, and processes, and then it exports these on a global basis. In the
Porter framework (1990), inward FDI is not a source of competitive advantage,
but outward FDI by strong home-based MNEs is a way to expand to supple-
ment exports from the home country.
These ideas have been modified and adapted to the strategies of firms from
small open economies such as those of Canada, Norway, and New Zealand
by Rugman (1996a). In comparison with the core triad markets, all other
economies, including those of Canada, India, Korea, and China, are “small”
(see Rugman 2000). By definition, all developing economies are “small” (al-
though some—like China, India, and Brazil—are larger) and are also becom-
ing “open,” so the adapted “small open economy” double-diamond is particu-
larly relevant to this chapter.
Two points are especially important. First, non-triad firms will need access to
one or more of the triad markets if they are to build a successful global business.
Thus, political factors governing market access become vital, including the suc-
cessful completion of the Doha Round of multilateral trade negotiations. We
take up these issues in the next chapter. Second, much of the modern literature
on FDI contradicts Porter’s implied assertion (1990) that inward FDI does not
promote competitiveness. Rather, a substantial portion of this literature finds
that inward FDI serves to transfer technology, increase productivity and em-
ployment, and, arguably, provide overall net social benefits (Dunning 1958,
1998a; Caves 1996; Rugman 1981, 1996a; Rugman and Verbeke 1998b). We take
up these points as they apply to the Asia in chapters 7, 8, and 9.
The literature on strategy for MNEs, for both large and small open econo-
mies, as well as the FDI literature, has focused on advanced economies. There-
fore, it is necessary to reevaluate and apply this literature from the perspective
of a firm in a developing country (developing economy). Some recent work has
done this, such as that of Barclay (1998). She has applied the eclectic paradigm
of Dunning (1980) and other FDI models to analyze the strategies of all the
MNEs in the three Caribbean countries of Trinidad, Jamaica, and Barbados.
The interaction between strategy and FDI literature is a rich feeding ground for
writers, and some of the more useful ideas need to be surfaced.
MNEs, whether foreign or domestic, are not the whole answer, but modern
business-school research demonstrates that they are usually at the hubs of busi-
ness networks and clusters of successful industries. As briefly mentioned in
chapter 2, the MNE is often a “flagship” firm, and its presence in a cluster offers
opportunities for key suppliers and customers to act as intermediaries and part-
ners in the promotion of growth and development (Rugman and D’Cruz 1997,
2000). The role of government and other parts of the “nonbusiness infrastruc-
ture” is also important, since these too could potentially form partnerships
with MNEs and other businesses to develop flagship relationships.
The flagship framework is particularly useful for developing countries since
it explicitly incorporates the role of government in facilitating the development
of competitiveness. The government sector is included with other services in
the nonbusiness infrastructure in the model of Rugman and D’Cruz (1997,
2000). It is possible for agents in the nonbusiness infrastructure to become net-
work partners with flagship firms. However, government itself does not act as a
flagship, a point also made by Porter (1990). The role of government in facili-
tating competitiveness is perhaps the most important insight to be drawn from
the application of business-school research to issues of developing economies.
BUSINESS STRATEGY IN DEVELOPING

ECONOMIES
Business-enterprise strategy has been usefully synthesized by Porter (1980,

1990). He suggests (1980) that there are three type of generic strategies: cost,
differentiation, and focus. A firm can compete on price by being the lowest-
cost producer. Internationally, this requires that economies of scale be achieved

through high levels of worldwide sales, using at least one triad market as a base.
In developing countries, firms in the minerals, forestry, and energy sectors are
positioned as seeking a competitive advantage in cost. However, the danger is
that sectors like these can become commodities (with no proprietary competi-
tive advantage) rather than products. A second strategy is to differentiate, for
example, with brand-name products. Not many MNEs from small open
economies have succeeded here (except perhaps for Hyundai, Samsung, and
LG from Korea, and Acer from Taiwan). Certainly, few small and medium-
sized businesses from small open economies have any hope of building global
brand recognition. The third strategy, niching, is used much more by small and
medium-sized businesses and other firms from developing countries. But
again, achieving a global niche is difficult.
Under Porter’s framework of three generic strategies, an “offensive” strategy
could incorporate either the cost, differentiation, or focus strategies, with man-
agers of the firm using global benchmarks and best available practices across the
value chain as reference points for their strategic decision making. A “defen-
sive” strategy could be viewed as one that seeks shelter from foreign competi-
tion and worldwide best practice, through government protection. This option
is assumed to be unavailable, given the market-liberalization measures facing
small open economies. It is also assumed that government institutions wish to
support efficiency-seeking firms with modern offensive strategies, rather than
inefficient and protected firms with shelter strategies.
Porter (1980) also advocates the use of entry barriers to maintain competitive
advantage. In his “five forces” model he argues that a firm needs to gain com-
petitive advantage by holding market power over its suppliers, buyers, rivals,
potential entrants, and potential substitutes. It is a competitive framework
where entry barriers are erected by scale, capital (financing) requirements,
differentiation, cost of switching from both suppliers and buyers, and govern-
ment. There has also been extensive discussion in the business-strategy litera-
ture about the nature and relevance of core competencies (Hamel 1991; Rug-
man and Hodgetts 2003).
With its drivers of competition and strategic entry barriers, Porter’s five-
forces model is basically incompatible with the “five partners” long-run coop-
erative framework of international competitiveness developed by D’Cruz and
Rugman (1992a, 1992b, 1993), and Rugman and D’Cruz (2000). It is not neces-
sary to dwell here on the different approaches of these two models, since useful
insights into management strategy in small open economies can be obtained by
adapting Porter’s five-forces framework (1980) to a relevant framework for

managers in small open economies. To do so requires that a basic aspect of com-
petitive strategy be modified and extended for developing countries. Porter’s
three generics must be transformed into truly global strategies, which leads to
five generics.
Porter’s three domestic generic strategies can be extended to take into ac-
count the issue of geographic scope in a global industry. The original three do-
mestic generic strategies have been transformed into a set of five global generic
strategies (Rugman and Verbeke 1993b); see figure 3.1. This is a relabeling of
Porter’s work, where global cost leadership, global differentiation, and global
segmentation represent the global versions of overall cost leadership, overall
differentiation, and focus.
There are two main issues associated with this extension of Porter’s frame-
work of five generic strategies, as shown in figure 3.1. First, in practice it is very
difficult for managers, especially in developing countries, to identify patterns in
decisions and actions that are associated with only one of Porter’s types of com-
petitive advantage. The strategic intensity (and related economic performance)
of a dual focus on cost leadership and differentiation is much more important
than choosing between the pursuit of a cost or differentiation advantage (Reit-
sperger, Daniel, and Tallman 1993). For example, the three largest automobile
manufacturers in the world, General Motors, Ford, and Toyota, all pursue a
combined cost leadership–differentiation strategy; that is, economies of scope
are relevant. A dual focus on both cost leadership and differentiation is often re-
quired across the various segments of the value chain.
A second issue, and one that is much more important for public policy pur-
poses, is that Porter’s strategy of “protected markets” does not fit with his other
four strategies. In each of the four other cases (excluding protected markets),
cost or differentiation advantages remain important, although, as discussed,
these do not appear to be mutually exclusive in the cases of global segmentation
and national responsiveness. In each of these four cases, efficiency (as measured
by relative output-input differentials throughout the value chain) determines a
firm’s economic performance in terms of survival, profitability, and growth. In
contrast, as Porter (1986, 48) recognizes himself, protected-market strategies are
not efficient in economic terms, since their choice depends on government be-
havior. Thus, even the extended framework of five generic strategies is not able
to incorporate the protected-market strategy properly, despite its being consid-
ered one of the five generics by Porter himself.
A final problem for international management in small open economies is
Figure 3.1 Rugman and Verbeke’s Five Generic Strategies

Adapted from Rugman and Verbeke 1993a, p. 5, fig. 1.
Porter’s peculiar treatment of “national responsiveness.” In defining this term,

he states correctly that a firm aims to “focus on those industry segments most
affected by local country differences” and meets “unusual local needs in prod-
ucts, channels and marketing practices in each country, foregoing the compet-
itive advantages of a global strategy” (Porter 1986, 48). However, he also uses the
term “national responsiveness” to describe the behavior of “domestic firms
without the resources to become international as well as multinationals who
lack the resources or skills to concentrate/coordinate their activities world-
wide” (Porter 1986, 48). But properly interpreted, national responsiveness is a
strategic alternative to other strategies based on globalization and integration;
it builds on firm-specific strengths (Rugman 1981, 1996b; Baden-Fuller and
Stopford 1991, 1993).
National responsiveness is certainly not the result of a firm’s internal weak-
nesses. Porter’s view is in sharp contrast to most of the mainstream interna-
tional business literature, such as that of Bartlett (1986), Bartlett and Ghoshal
(1989), and Rugman and Verbeke (1992a), which describes national responsive-
ness as a strategy that builds on location-bound FSAs and MNEs. The “admin-
istrative heritage” of a firm that leads to national responsiveness is just as valu-

able as one that leads to global scale economies. Porter’s definition of national
responsiveness is inconsistent with international business literature and is
misleading for policy purposes in developing countries. Firms in small open
economies should consider national responsiveness as a separate efficiency-
based strategic option on its own merits.
Many authors, including Bartlett (1986), Bartlett and Ghoshal (1989), Doz
(1986), Ghoshal (1987), Kogut (1985a; 1985b), Prahalad and Doz (1987), and
Roth and Morrison (1990), have established the intellectual foundations that
distinguish between two fundamentally different types of FSAs. Rugman and
Verbeke (1991a, 1992a, 1992b) have developed this framework in some detail.
There is an important distinction between location-bound FSAs and non-loca-
tion-bound FSAs. The former benefit a company only in a particular location
(or set of locations) and lead to benefits of national responsiveness. In the con-
text of international business operations, these location-bound FSAs cannot be
effectively transferred as an intermediate output (for example, a tangible or in-
tangible asset) or embodied in the final outputs of the organization, to be sold
across borders. In contrast, non-location-bound FSAs are easily transferred and
exploited abroad, whether as intermediate outputs or embodied in final out-
puts. They lead to benefits of integration in terms of economies of scale and ex-
ploitation of national differences.
Rugman and Verbeke (1993a) have demonstrated that a firm may actually
have several home bases contributing substantially to the development of new
FSAs and improving international competitiveness. Birkinshaw (1996) has ex-
tended this point with research on “subsidiary initiatives.” It is important to
distinguish between the existence of a single home base or multiple home bases
in the pursuit of international competitiveness, because it reflects the impact of
the CSAs of specific locations on strategic behavior. A single home base implies
the dominating impact of one set of national “diamond” characteristics on the
firm’s overall competitiveness. In contrast, with multiple home bases, competi-
tiveness, both now and in the future, depends crucially on decisions and ac-
tions taken in various locations, as well as on the characteristics of these loca-
tions. Firms in small open economies need to be in the latter camp; then they
can be more “nationally responsive” to the triad markets.
To the extent that the development and exploitation of non-location-bound
FSAs require coordination of decisions and actions across borders, a single
home base requires only direct, centralized control of all foreign operations.
This is unlike the case of a global subsidiary mandate, where the “corporate
headquarters” role shifts toward managing a dispersed federation of sub-

sidiaries while ensuring that their strategies are aligned with overall corporate
goals. In that case, typical home-base activities are concentrated in the various
nations where subsidiaries have received global subsidiary mandates.
BUSINESS ENTERPRISES IN SMALL

OPEN ECONOMIES
This section bridges the gap between Porter (because of the missing ingredients
in his work) and making strategy operational for firms in small open econo-
mies. The missing link discussed here is the nature of truly generic strategies;
they generate efficiency-based rather than shelter-based FSAs. Efficiency-based
FSAs can be non-location-bound or location-bound, with the latter encom-
passing the national-responsiveness strategy that is of interest to developing
countries.
Firm-Specific Advantages
as Generic Strategies
FSAs include proprietary know-how (unique assets) and transactional advan-

tages with potential cost-reducing or differentiation-enhancing effects. In a
number of cases, it may be difficult to assess the actual impact of an FSA in
terms of cost reduction or differentiation enhancement. Rugman and Verbeke
(1991a) have suggested that in such cases, the contribution of an FSA to a firm’s
organizational learning should be considered. All strategies that build on such
FSAs or aim to develop new advantages can be classified as efficiency based.
In contrast, strategies that do not build on FSAs to achieve a satisfactory eco-
nomic performance in terms of survival, profitability, growth, or any other goal
considered relevant by managers are classified as non-efficiency-based or shel-
ter-based strategies. If the economic performance of a firm or set of firms does
not result from FSAs with cost-reducing, differentiation-enhancing, or infra-
structure-building characteristics, such performance must result from shelter-
based behavior. Many policies in developing countries can lead to such ineffi-
cient firm strategies, as is now discussed.
Shelter-Based Strategies
Shelter-based behavior by firms takes two main forms: an attempt to impose

“artificial” costs or barriers to differentiation on (foreign) rivals through gov-
ernment regulation (such as by tariff and nontariff barriers); and an attempt to
reduce the market incentives for cost reduction, differentiation enhancement,

or infrastructure building themselves (for instance, by collusive behavior and
cartel formation aimed primarily at exploiting the consumer) or to limit the
potential effects of these incentives (for example, by government subsidies). In
both cases, such strategies reduce competition and efficiency.
Shelter-based strategies are often pursued in the context of international
business and developing countries, where firms located in a particular nation
may convince policymakers that protectionist measures will lead to higher out-
put in terms of value-added production, or to a special type of public good in
terms of the creation of domestic control over strategic sectors, technological
spillover effects, and so on. This occurs even where such public good may, in re-
ality, be nonexistent or where shelter leads to a substantial reduction in con-
sumer welfare. Rugman and Verbeke (1991b, 1991c) have demonstrated that
such shelter strategies can actually subvert policies aimed at achieving a level
playing field and fair trade, even in the United States and the European Union,
let alone in developing countries. In a similar way, recent international eco-
nomic literature on strategic trade policy represents a relatively small set of
mathematical cases under suboptimal conditions with questionable relevance
to reality; it is not the basis for a successful long-run trade policy, as argued by
Krugman (1993) and Rugman (1996a).
This distinction between an efficiency-based strategy and a shelter-based
strategy is fundamental to strategic management, because each strategy builds
on a different intellectual premise as to what constitutes the source of success.
In the case of an efficiency-based strategy, consumer sovereignty ultimately de-
termines whether the firm will be successful (except in the case of natural mo-
nopolies, few of which exist in an international context). Strong economic per-
formance reflects the successful creation of value for consumers. In contrast,
shelter-based strategies reflect behavior that reduces value for consumers.
It is important to distinguish between these two types of strategies, because
different “weapons” are used and different “rules” are followed in each case.
More specifically, firms in small open economies that are pursuing a conven-
tional efficiency-based strategy, but that are faced with shelter-seeking triad ri-
vals, may suffer in the short term, compared with a situation in which all com-
petitors are engaged in efficiency-based behavior. In the short term, triad
shelter-based behavior will reduce the possibilities for rivals from small open
economies that are not engaged in such behavior to exploit their FSAs or de-
velop new ones. There is a strategic asymmetry in the short term that a national
responsiveness policy by small open economies can minimize. In the long term,
shelter obviously works against the triad firms that build their economic per-
formance on it. Thus it is always advisable for firms in small open economies to
follow efficiency-based strategies, in both the short and the long term; however,
these strategies should be paired with government policies designed to reduce
or eliminate trade protections.
Rugman and Verbeke (1993b) have outlined several reasons shelter-based
strategies may fail in the long term, leading to corporate inefficiencies and po-
litical dependence. For these reasons, and because of the size asymmetry be-
tween small open economies and the triad, it is not useful for firms in small
open economies to use shelter as a strategic alternative. Porter’s protected-mar-
ket strategy (1986) is both inefficient and irrelevant for managers in small open
economies. Unfortunately, firms from developing countries must compete
with triad firms. Managers of firms in developing small open economies must
recognize that triad asymmetries exist. Until this is widely understood, much
triad-based, and especially U.S.-based, strategic management thinking will be
inappropriate for small open economies. The firm and public policy implica-
tions of the asymmetry in power and size of large triad markets versus small de-
veloping country markets is explored further in the next section.
MARKET-ACCESS ISSUES FOR FIRMS IN SMALL

OPEN ECONOMIES
The brutal reality of global business today is that enterprises in small open
economies are in a very weak bargaining position vis-à-vis MNEs from the
triad. Five major types of enterprises in small open economies must be consid-
ered:
A: Domestic firms selling all of their output at home

B: Local firms who export a major part of their output
C: Local subsidiaries of an MNE, where the MNE exercises head-office control
D: Local subsidiaries of an MNE, where the MNE operates in a decentralized
way, giving local autonomy to the subsidiaries
E: Local firms that become MNEs
In general, only the last two of these five types of enterprises offer much hope
for sustainable development in sovereign small open economies. Yet these are
the very types of enterprise structures that are in short supply in developing
countries. We know of no example of a type D network-type subsidiary in any
developing country, at least in terms of the organizational structure of the 500
largest MNEs in the world, over 85 percent of which are triad based. These
MNEs tend to develop type D networks across the triad, but not in developing
countries.
A similar problem exists for type E enterprises. Other than a few state-owned
businesses, especially in the petroleum and mineral-resource sectors, only a
score of large MNEs come from developing countries. In 2001, only 11 of the
Fortune 500 MNEs (which account for over 80 percent of the world’s stock of
FDI) were from China, and few others came from other developing countries
(see table 3.1). These Chinese firms generate well over 90 percent of their sales
in Asia (Rugman and Verbeke 2004). One MNE from each of India, Malaysia,
Venezuela, and Singapore was on the list. Again, these are all regionally based.
Of the more established newly industrialized countries, Mexico had 2, Taiwan
2, Brazil 4, and the Republic of Korea 12. Overall, 20 of the world’s 500 largest
firms were from less-developed economies (mostly China with 11) and another
15 from the East Asian Tigers (mostly Korea with 12).
Table 3.1 confirms that the focus of international business is in the core triad
of the United States, the European Union, and Japan. This has been the situa-
tion for the last twenty years. These three blocs are the home bases of 85 percent
of the world’s 500 largest MNEs, and these MNEs conduct the majority of
their business within their home regions of the triad (Rugman and Verbeke
2004). In other words, most developing countries are not yet significant players
Table 3.1 The world’s 500 largest firms

Country 1981 1991 1996 2001
United States 242 157 162 197

European Union 141 134 155 143
Japan 62 119 126 88
Canada 9 6 16
Republic of Korea 13 13 12
China 3 11
Switzerland 10 14 11
Australia 9 5 6
Brazil 1 5 4
Others 55 48 11 12
Total 500 500 500 500
Triad total 445 410 443 428
Source: Adapted and compiled from various annual publications of the Fortune 500 by Fortune maga-
zine.
in FDI, although to the extent that they have become more active, it is primar-
ily within the regions in which they operate.
Tables 3.2 and 3.3 list the twenty-five largest MNEs overall, and the largest
MNEs from developing countries, ranked by international assets. What is
striking about these data is that despite having significant assets outside their
home countries, the largest MNEs overall and those from developing countries
are not very international on a relative basis. That is, their ranking in the
Transnationality Index (calculated as the average of the following three ratios:
foreign assets to total assets, foreign sales to total sales, and foreign employment
to total employment) and the Internationalization Index (calculated as the
number of foreign affiliates divided by the number of all affiliates) is surpris-
ingly low. This further confirms that the largest MNEs are highly concentrated
in a few regions and countries, and many are still not particularly international.
Enterprises in developing small open economies are usually type A, B, or C.
Type B firms are the classic resource-based, or cheap-labor, exporting firms. In
all sectors they face declining terms of trade and ever-limited market access to
the triad. Again, future prospects are not good unless niche areas can be found.
Despite efforts at trade liberalization through the General Agreement on Tariffs
and Trade (GATT)–WTO process, and preferential treatment for developing
countries in such agreements, it is clear that most economic activity is con-
ducted through FDI rather than through trade. Multilateral rules for “deep in-
tegration” via FDI have not been developed, and the “shallow integration”
achieved by tariff cuts under the GATT-WTO has not helped developing
countries bridge the efficiency and managerial gap between them and the triad
leaders. Type C firms are often resource-based or labor-intensive subsidiaries of
MNEs. Little transfer of technology takes place, and the upgrading of skills and
managerial practices is minimal. Branch plants are not associated with R&D
and rely on the parent’s managerial and marketing know-how. Finally, type A
firms are often small or medium-sized enterprises, and their growth is limited
by the relatively small domestic market and its slow growth rate.
Against this gloomy background for business enterprises in small open
economies, what prospects are there for development? We do not believe that
there is any significant evidence that conventional proposals to tinker at the
margins with technology transfers will work. Instead, enterprises in small open
economies need to choose between two corporate strategies:
1. Become niche suppliers and develop global marketing skills

2. Become network partners of MNEs and develop managerial skills
Table 3.2 The world’s top 25 nonfinancial MNEs ranked by foreign assets, 2004
Ranking by
Assets ($ millions) Sales ($ millions) No. of employees No. of affiliates
Foreign TNIa
assets TNIa IIb Company Foreign Total Foreign Total Foreign Total (%) Foreign Total IIb
1 68 55 General Electric 448,901 750,507 56,896 152,866 142,000 307,000 47.8 787 1,157 68.02
2 4 93 Vodaphone Group Plc 247,850 258,626 53,307 62,494 45,981 57,378 87.1 70 198 35.35
3 67 65 Ford Motor 179,856 305,341 71,444 171,652 102,749 225,626 48.7 130 216 60.19
4 90 71 General Motors 173,690 479,603 59,137 193,517 114,612 324,000 34.0 166 290 57.24
5 10 44 British Petroleum Company Plc 154,513 193,213 232,388 285,059 85,500 102,900 81.5 445 611 72.83
6 38 37 Exxon Mobil 134,923 195,256 202,870 291,252 52,968 105,200 63.0 237 314 75.48
7 25 88 Royal Dutch/Shell Group 129,939 192,811 170,286 265,190 96,000 114,000 71.9 328 814 40.29
8 62 91 Toyota Motor Corp. 122,967 233,721 102,995 171,467 94,666 265,753 49.4 129 341 37.83
9 20 48 Total 98,719 114,636 123,265 152,353 62,227 111,401 74.3 410 576 71.18
10 66 47 France Telecom 85,669 131,204 24,252 58,554 81,651 206,524 48.7 162 227 71.37
11 49 60 Volkswagen 84,042 172,949 80,037 110,463 165,152 342,502 56.4 147 228 64.47
12 16 22 Sanofi-Aventis 82,612 104,548 15,418 18,678 68,776 96,439 77.6 207 253 81.82
13 61 54 Deutsche Telekom AG 79,654 146,834 47,118 71,868 73,808 244,645 50.0 266 390 68.21
14 60 62 RWE Group 78,728 127,179 23,636 52,320 42,370 97,777 50.1 345 552 62.50
15 19 59 Suez 74,051 85,788 38,838 50,585 100,485 160,712 75.2 546 846 64.54
16 81 79 E.ON 72,726 155,364 21,996 60,970 32,819 72,484 42.7 303 596 50.84
17 13 6 Hutchison Whampoa 67,638 84,162 17,039 23,037 150,687 180,000 79.3 94 103 91.26
18 39 49 Siemens AG 65,830 108,312 59,224 93,333 266,000 430,000 62.0 605 852 71.01
19 3 4 Nestlé SA 65,396 76,965 68,586 69,778 240,406 247,000 93.5 460 487 94.46
20 92 28 Electricité de France 65,365 200,093 17,886 55,775 50,543 156,152 32.4 240 299 80.27
21 29 87 Honda Motor Co. Ltd 65,036 89,483 61,621 79,951 76,763 137,827 68.5 76 188 40.43
22 52 73 Vivendi Universal 57,589 94,439 11,613 26,607 23,377 37,906 55.4 245 435 56.32
23 48 83 Chevron Texaco 57,186 93,208 80,034 150,865 31,000 56,000 56.6 121 250 48.40
24 34 23 BMW AG 55,726 91,826 40,198 55,050 70,846 105,972 66.9 124 153 81.05
25 93 80 Daimler Chrysler 54,869 248,850 68,928 176,391 101,450 384,723 29.2 324 641 50.55
Source: UNCTAD 2006.
a
The Transnationality Index (TNI) is calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total
employment. Ranking is based on 100 MNEs.
b
The Internationalization Index (II) is calculated as the number of foreign affiliates divided by the number of all affiliates (only majority-owned affiliates are counted). Ranking is
based on 100 MNEs.
Table 3.3 The 25 nonfinancial MNEs from developing countries ranked by foreign assets, 2004
(millions of U.S. dollars and number of employees)
Ranking by
Assets ($ millions) Sales ($ millions) No. of employees No. of affiliates
Foreign TNIa
assets TNIa II1b Company Foreign Total Foreign Total Foreign Total (%) Foreign Total IIb
1 28 4 Hutchison Whampoa Limited 67,638 84,162 11,426 23,080 150,687 182,000 70.9 84 93 90.30
2 80 30 Petronas—Petroleum Nasional Bhd 22,647 62,915 10,567 36,065 4,016 33,944 25.7 167 234 71.40
3 32 24 Singtel Ltd. 18,641 21,626 5,396 7,722 8,676 19,155 67.1 23 30 76.70
4 54 14 Samsung Electronics Co., Ltd. 14,609 66,656 1,524 79,184 21,259 61,899 44.7 75 87 86.20
5 86 71 CITIC Group 14,452 84,744 1,746 6,413 15,915 93,323 20.4 14 59 23.70
6 30 27 Cemex S.A. 13,323 17,188 5,412 8,059 16,822 26,679 69.2 42 56 75.00
7 11 13 LG Electronics Inc. 10,420 28,903 36,082 41,782 41,923 32,000 84.5 32 37 86.50
8 62 66 China Ocean Shipping (Group) Co. 9,024 14,994 4,825 11,293 4,230 70,474 36.3 40 134 29.90
9 75 55 Petroleos De Venezuela 8,868 55,355 25,551 46,589 5,157 33,998 28.7 30 65 46.20
10 37 1 Jardine Matheson Holdings Ltd 7,141 10,555 5,830 8,988 57,895 110,000 61.7 83 88 94.30
11 66 23 Formosa Plastic Group 6,968 58,023 6,995 37,738 61,626 82,380 35.1 14 18 77.80
12 96 72 Petroleo Brasileiro S.A.—Petrobras 6,221 63,270 11,082 52,109 6,196 52,037 14.3 23 103 22.30
13 94 33 Hyundai Motor Company 5,899 56,387 15,245 51,300 4,954 53,218 16.5 13 20 65.00
14 33 12 Flextronics Internation Ltd. 5,862 11,130 8,181 16,085 89,858 92,000 67.1 100 114 87.70
15 45 82 Capitaland Limited 5,231 10,545 1,536 2,328 5,277 10,668 55.0 4 23 17.40
16 63 46 Sasol Limited 4,902 12,998 5,541 10,684 5,841 31,100 36.1 1 2 50.00
17 90 75 Telmex 4,734 22,710 1,415 12,444 15,616 76,386 17.6 6 28 21.40
18 55 47 America Movil 4,448 17,277 5,684 11,962 13,949 23,303 44.4 17 34 50.00
19 79 69 China State Construction Engineering Corp. 4,357 11,130 2,513 11,216 21,456 130,813 26.0 4 16 25.00
20 43 22 Hon Hai Precision Industries (Foxconn) 4,355 9,505 7,730 16,969 140,518 166,509 58.6 32 41 78.00
21 19 2 Shangri-La Asia Limited 4,209 5,208 571 726 14,013 18,100 79.0 29 31 93.50
22 77 89 New World Development Co., Ltd. 4,202 15,567 891 2,865 12,687 47,000 28.4 7 57 12.30
23 27 7 Sappi Limited 4,187 6,150 4,351 4,762 8,936 16,010 71.8 33 37 89.20
24 100 95 China National Petroleum Corp. 4,060 110,393 5,218 68,952 22,000 1167,129 4.4 4 242 1.70
25 60 87 Companhia Vale do Rio Doce 4,025 16,382 9,395 10,380 2,736 36,176 40.9 6 48 12.50
a
The Transnationality Index (TNI) is calculated as the average of the following three ratios: foreign assets to total assets, foreign sales to total sales, and foreign employment to total employment.
Ranking is based on 100 MNEs.
b
The Internationalization Index (II) is calculated as the number of foreign affiliates divided by the number of all affiliates (only majority-owned affiliates are counted). Ranking is based on 100
MNEs.
In option 1, an indigenous firm must find and exploit a niche of no particu-

lar interest to a potential rival MNE. Just as the MNEs have the threefold skills
of research, production, and marketing, so too must an enterprise in a small
open economy develop these three skills in the niche area. Marketing skills are
the most difficult to learn—especially global marketing skills. With option 2,
modern management skills are the critical factor. Managers in developing
countries will need MBA-type skills, plus deep practical experience with differ-
ent countries and cultures, to become entrepreneurial network partners in an
MNE’s decentralized federation.
BUSINESS STRATEGY AND ECONOMIC

DEVELOPMENT
Lall (1987) argues that technological capabilities can be classified into the fol-
lowing three categories:
• Investment capabilities: the planning, entrepreneurial, and financial-assess-

ment skills required to start up a project
• Production capabilities: the engineering and manufacturing skills to operate,
maintain, and upgrade the plant
• Linkage capabilities: the ability to develop networks and maintain supplier-
buyer relationships
The model of the East Asian Tigers has been to use cheap labor and low-
technology exports as a basis for shifting competitive advantage toward higher-
technology indigenous production. This has been furthered by selected govern-
ment-determined industrial policies, improving international competitiveness.
In this context, the successful development of Korea and Singapore was noted
by Porter (1990), although the contribution of government-led industrial poli-
cies is still controversial, especially after the Asian financial crisis of 1997–1998
undermined the East Asian Tigers.
Wignaraja (1998) finds that the acquisition of technological capabilities by
export-oriented firms in Sri Lanka over the 1977–1991 period is a mixed bag.
Although these firms do not develop new process-centered R&D, or interfirm
linkages, they do upgrade their production capabilities to best-practice levels,
which has helped increase and maintain the exports of Sri Lankan garment
firms. Wignaraja examines firms in three sectors: garments, electronics, and
light engineering. Across these sectors, the firms tend to acquire investment ca-
pabilities, “typically at the simpler end of the technological spectrum” Wig-

naraja (1998, 192).
Similarly, few production capabilities are transferred, as Sri Lankan firms
concentrate on process modification rather than new product development.
Finally, the firms “display little evidence of inter-firm linkages or linkages with
technology institutions and universities” Wignaraja (1998, 206). The failure of
Sri Lankan firms to develop new indigenous products has linked them to a
cheap-labor, export-led strategy, making them vulnerable to external changes,
such as the abolition of the WTO’s Multifiber Arrangement in 2004.
There would appear to be obvious parallels between the Sri Lankan focus on
cheap garment exports under the Multifiber Arrangement and the Caribbean
banana exporters’ reliance on the E.U. protocol, which has been found to vio-
late WTO procedures. The failure to diversify into other value-added produc-
tion and service activities in Sri Lanka and the Caribbean makes both regimes
dependent on resource-based exports within the quasi-protectionist WTO
regime and the European Union, respectively. As movement toward govern-
ment trade liberalization continues under the WTO and regional agreements,
these small open economies will become more vulnerable to world market
forces and will need to follow the models of Chile and Mexico, absorbing ma-
jor adjustment costs in order to restructure and reinvest in new, globally effi-
cient, businesses.
Barclay’s research (1998) is the first work using the modern theory of inter-
national business to assess empirically the contribution of FDI to the develop-
ing Caribbean economies of Trinidad, Barbados, and Jamaica. Examining a
full sample of FDI in these three economies, Barclay also conducted interviews
with managers of foreign-owned MNEs in this area. The findings are also rele-
vant to the smaller economies of the Pacific and Africa, and possibly to the de-
veloping economies of Eastern Europe. All of these economies are similarly
preoccupied with the benefits and costs of FDI, and most of them lack Barclay’s
understanding of modern theory.
Barclay includes all the MNEs involved in FDI in the Caribbean in her
study: 139 foreign MNEs (in Jamaica, Barbados, and Trinidad and Tobago), 25
of which operate in at least two of the three countries. She sent out question-
naires and also conducted interviews with a large number of managers and
other stakeholders. Barclay used these impressive and comprehensive data to
test the modern theories of FDI as they apply in the Caribbean. Of particular
interest are her findings on the robust nature of internalization theory (Rug-
man 1981) and the eclectic paradigm (Dunning 1980). She finds that a version
of the “double diamond” model (Rugman and D’Cruz 1993) is a very useful ex-
planation of FDI in these three Caribbean countries. Barclay’s work (1998) is
one of the most detailed and rigorous studies published in the field of interna-
tional business, and it sets new standards for research work on the economics of
developing nations.
The application of strategic management thinking to the economic develop-
ment experience of East Asia is well known. As demonstrated by analysts of
Asian business systems such as Amsden (1989), Whitley (1992), Gerlach (1992),
and Rugman and Boyd (1999), the “group” system has been the predominant
and successful mode. In Japan it is the keiretsu system; in Korea, the chaebol; in
China and the overseas Chinese economies of Singapore and Hong Kong, it is
a looser “family-clan” system of enterprise control.
From the viewpoint of internalization theory, all three systems can be ex-
plained by a transaction cost approach. If internal markets for capital, labor,
and intermediate products (such as knowledge) are less than perfect, then there
is an economic rationale for the firm (or “group” system in this institutional
context) to replace the market. The first writer to apply this Coase-Williamson-
type thinking to the group system in East Asian countries was Nathaniel Leff
(1976). The interesting variance from internalization thinking, which argues
that international market imperfections lead to the MNE (Rugman 1981), is
that the groups result from imperfection in internal domestic markets rather
than in international ones. The international aspect, in terms of management
strategy, comes into play as these groups (in small open economies such as Ko-
rea, China, or even Chile) seek access to triad markets. This takes us back to the
critical strategic issue of asymmetry in market access for small open economies,
relative to triad-based MNEs.
We now turn to an evaluation of the literature on the economic contribution
of MNEs to developing countries. This will help us make generalizations about
the appropriate role of strategic management thinking as it relates to public
policy, using the empirical evidence cited above in this section.
MNES AS ECONOMIC AGENTS

FOR DEVELOPMENT
A basic premise is that the theory of the MNE applies equally well to MNEs
based in developing countries as to those based in the triad. It has been demon-
strated elsewhere (Rugman 1981) that the MNE is explained by internalization
theory. Although this statement was made for large triad-based MNEs, it is just
as appropriate for the MNEs based in small open economies.
The MNE is a producer of goods or services; it employs local workers; it may
or may not use local capital; and it markets its output mainly in the host nation.
Yet all of these purely economic activities are the result of normal cost-con-
scious business decisions; they are not directly related to the economic goals or
political aspirations of the host nation. The MNE’s primary interest as a good
corporate citizen is keeping a good business partnership with stakeholders such
as local consumers, producers, and (in today’s regulated world) political figures,
as well as civil society and NGOs.
MNEs in small open economies have the same responsibilities to their share-
holders as do their counterparts in the United States, Europe, and Japan. The
MNE is obliged to operate in an efficient manner, that is, to maximize profits,
subject to relevant local cost conditions. It can use its internal market to exploit
an FSA abroad, and it cannot neglect the risks of alternative contractual arrange-
ments when it makes a foreign investment decision. If the host nation chooses
to impose excessive regulations on the MNE, the firm is forced to consider al-
ternative locations in order to minimize costs.
The social and political objectives of the host nation, as reflected in its con-
trols and regulations on the MNE, may sometimes force the MNE to an alter-
native site or cause it to cancel or postpone its foreign investment. To that ex-
tent, there is a potential conflict of interest between the nation-state and the
MNE. Yet the MNE is a regulation taker, not a regulation maker, and its de-
pendence on the whim of local political leaders will make it risk averse in its
choice of location. Thus, political risk and the perception of social, cultural, or
psychic distance are the major elements in the information cost set of the
MNE. We take up these issues in chapter 6.
It can be hypothesized that the key FSA of MNEs in small open economies
lies in resource management. The full array of management skills starts with
the choice of cost or niche strategy but also expands along the value chain to in-
clude production and global marketing skills. The traditional reliance on the
extraction of minerals or the harvesting of agricultural products is not enough
to generate an FSA. Rather, these are CSAs, or location factors, using Dun-
ning’s terminology (1980). This new FSA builds on the efficient utilization of
technology required for resource-based industries and links it to sales and mar-
keting skills. Thus the largest set of MNEs is in the resource sector or in a clus-
ter related to this sector. The core skill of the MNE lies in its ability to assemble
a package of FSAs in resource management and to use them for worldwide
sales, overcoming obstacles placed in the way of distributing these resources.

Such obstacles are usually created by government regulations, tariffs and non-
tariff barriers, effective tax-rate differentials, and other market imperfections.
Market access (and overall marketing and management skills) is critical to the
success of firms in developing countries.
Recent management research on the role of MNEs in developing markets
has examined the role of “groups” in Korea, Chile, India, Indonesia, and other
countries (Ghemawat and Khanna 1998). The theoretical basis for this work
goes back to the pathbreaking article by Nat Leff (1976) on the nature and or-
ganization of groups in East Asia. Testing this theory across Korea is work by
Khanna and Palepu (1997), which found that the Korean chaebols emerged be-
cause of the market imperfections that existed in the Republic of Korea in the
1960s, when it was a developing economy. These imperfections existed in the
markets for labor, capital, and intermediate goods (such as knowledge). Busi-
ness groups offer risk diversification benefits in response to such market imper-
fections.
This thinking is a straightforward application of internalization theory, as
proposed also in Rugman (1981). Khanna and Palepu (1997) also found that the
chaebol is an efficient organizational form and that it has been an engine for the
economic development of the Republic of Korea. Their findings are broadly
consistent with those of Amsden (1989) and Whitley (1992), who note that
large business groups dominate in the developing markets of Asia.
Business groups exist not only in Korea but also in Chile, Indonesia, and
South Africa. The role of business groups in Chile and India is discussed in
Khanna and Palepu’s work (1999a, 1999b). The role of business groups as agents
for risk diversification and intermediation did not decline over the 1987–1997
period in Chile, nor over the 1990 –1997 period in India. One interpretation is
that despite government movements toward both deregulation (in primary
markets) and trade liberalization, many market imperfections remain in these
economies, and thus there is a continuing need for intermediation by business
groups.
One basic part of their work is the finding that the institutional context mat-
ters. Economic development does not depend just on economics. The success-
ful business enterprises that emerge will be embedded within the social, politi-
cal, and cultural context of their countries and regions. This is the focus of the
next three chapters. The profits of MNEs in small open economies are in line
with those of MNEs from other nations such as the United States, Japan, and
many European countries (Rugman 1981). The distinctive feature of MNEs in
small open economies is that they are resource intensive, but their embodiment
of this CSA does not permit them to earn excessive profits.
In the process of operating as MNEs, firms provide indirect economic bene-
fits to their home countries. The economic impact of U.S. multinationals has
been studied by many authors. One of the earliest comprehensive studies is that
of Bergsten, Horst, and Moran (1978). Frank (1980) extended this work. A sim-
ilar study by Langdon (1980) examined the impact of Canadian MNEs on de-
veloping nations. One of the indirect economic benefits of MNEs is that they
substitute for free trade, which is otherwise denied by tariffs and related market
imperfections. In this manner, MNEs help the balance of payments. Similarly,
there are indirect effects on employment, tax revenues, industry structure,
competition, and so on. These effects can be measured only by a social benefit-
cost analysis; yet, as argued elsewhere (Rugman 1980), such an analysis itself
confuses equity with efficiency considerations.
Internalization theory predicts that the MNEs are transferring their newest
technologies overseas through affiliates (where the risk of dissipation is re-
duced) and using licensing or joint ventures only at a later stage in the life of the
technology, when it is becoming a more standard product. Internalization the-
ory also predicts that the newer technologies will go first to developed coun-
tries, since they may well be inappropriate or costly to adapt in developing
countries. Only at a later stage is it profitable for MNEs to transfer technology
to developing nations; yet such transfers do indeed take place and the MNEs’
internal markets achieve this worldwide transfer of technology without any
help from governments (Rugman 1981).
Traditional economic-based public policy toward MNEs sometimes con-
fuses efficiency and equity objectives. The governments of other advanced, and
most developing, nations also fall into this trap. All governments have a pro-
pensity to favor protective devices such as tariffs, quotas, exchange controls, ex-
port subsidies, and so on for some particular pressure group within their soci-
ety. In this world of government-imposed market imperfections, the MNE is
an organization with enough market power to bypass many of the regulations
imposed by governments. Its success in arbitraging the imperfections of na-
tional markets is remarkable. The emergence of MNEs in developing small
open economies is entirely predictable given the imperfect nature of today’s
world economy.
MNEs in developing small open economies are responsible for some allevia-
tion of the loss of world welfare that might otherwise be experienced by the
continuation and even extension of protective measures and restrictions by
most nations. The MNE is not a complete substitute for free trade, but it is an
organization with a remarkable degree of adaptability. The creation of internal
markets by MNEs, to some extent, makes up for the closed markets imposed by
restrictive government policies. These efficiency aspects of MNEs represent the
underlying focus for their strategic management.
ASYMMETRIC BUSINESS STRATEGIES
In this chapter, we identify an operational paradox in prior characterizations of

the concept of national responsiveness. The asymmetrical strategic framework
suggests that managers in small open economies can rarely achieve success in
the triad markets without being nationally responsive, whereas triad managers,
on average, can get by without national responsiveness when doing business in
small open economies. The reason, of course, is that triad managers can choose
a cost or differentiation strategy and beat the average competitor on a triad ba-
sis, virtually ignoring the marginal impact of the small open economy, which is
of relatively trivial economic size. A successful triad business rolls out the prod-
uct across various regions in sequence, and it treats a small open economy as a
minor end-of-production-line region. The WTO reinforces this strong single-
diamond, home-base, strategic vision.
None of this is as easy for small open economy managers doing business in
the triad. Not only do they still need to beat the average competitor on cost or
differentiation margins, but they also need to overcome discretionary entry
barriers to the triad markets. Such entry barriers can arise when discriminatory
measures are introduced by triad governments, often at the behest of triad-
based private sector rivals; examples are the petitions for the use of WTO trade-
law remedies against alleged subsidies of Caribbean bananas and related agri-
cultural products.
Firms in small open economies will find it becomes essential to develop a
strategy of national responsiveness. Indeed, a firm that lives by the Porter cost
or differentiation strategy alone will invite retaliation by its triad rivals, and if
triad firms lose home market share to a firm from a developing country, then
the application of punishing trade laws becomes almost inevitable (Rugman
and Anderson 1987).
A related issue is whether the competitiveness of companies in small open
economies is weakened or enhanced by relocating critical value chain activities
to the triad. Porter (1990) would argue that the core competitive advantage of
such a company must be drawn from the small open economy cluster of the
home-base diamond. Although it would be theoretically simpler if this could

occur, in practice we observe that virtually all resource-based manufacturing
and service companies in small open economies rely on access to the triad mar-
kets for the success of their businesses; for example, on average, the great ma-
jority of sales of resource-based and labor-intensive products occur in triad
markets. Given this dependence on the triad markets, the contingent location
of production and distribution in the triad, instead of in small open economies
alone, can never weaken the performance of firms in small open economies,
since the alternative is to lose access to the triad markets and go out of business.
This is why the neoclassical economics framework of social benefit-cost
analysis to evaluate FDI process is of limited value from the viewpoint of strate-
gic management. The correct counterfactual is not investment, jobs, R&D
spillover, profits, or other economic attributes in the triad as opposed to the
small open economy. Instead, it is a competitive business operating in a home
cluster, or across the oceans (in both cases with the majority of sales in the larger
triad markets), versus no business operating in the small open economy at all.
SUMMARY POINTS
In this chapter we explored five major themes: first, the strategies of indigenous
small and resource-based MNEs in developing economies that need triad mar-
ket access; second, the asymmetries in the strategies of firms in developing
economies compared with the strategies of managers of MNEs with a large
triad home base; third, the consequent modifications in strategies required by
managers in developing small open economies; fourth, the role of FDI and the
contributions of foreign-owned firms to developing economies, with particular
reference to firm strategies and flagship firm linkages and networks; and fifth,
the importance of potential business-government relationships, within the
complex managerial nature of flagship and business networks, business groups,
and clusters in developing economies, that may have positive impacts on the
status of the MNE in developing economies and the development process it-
self.
We examined the business strategies of MNEs and the relationship of
MNEs to economic development, with a special focus on firms in small open
economies, using the logic of the basic FSA-CSA matrix of figure 3.1. In the
next three chapters, we turn to the implications of figures 3.2 and 3.3, which
consider the “social triangle” in which governments and NGOs appear as key
actors affecting development, as well as MNEs. This chapter has provided the
foundation for such work on the complexities of the multiple interactions

among the three actors. It will allow us to consider why corporate social re-
sponsibility is a win-win strategy for all three actors: MNEs, NGOs, and gov-
ernment. In general, the business strategies of MNEs are determined in an
interdependent manner, along with the actions of governments and NGOs.
Subsequent chapters on MNEs (specifically chapters 7, 8, and 9) will reflect
these complexities.
Chapter 4 The Role of
International Institutions
THE INTERNATIONAL ECONOMIC

SYSTEM AND DEVELOPMENT
Since the founding of the modern international economic system at

the Bretton Woods conference in July 1944, the World Bank, the IMF,
and the GATT (since 1995, the WTO) have played a pivotal role in
advancing the process of development. The summary of agreements
from July 22, 1944, states, “The nations should consult and agree on
international monetary changes which affect each other. They should
outlaw practices which are agreed to be harmful to world prosperity,
and they should assist each other to overcome short-term exchange
difficulties” (U.N. Monetary and Financial Conference 1944, par. 3).
The International Bank for Reconstruction and Development (IBRD)
—part of the World Bank—was created to accelerate postwar recon-
struction, to aid political stability, and to foster peace. The IMF was
established to help stabilize economic relations among countries and
to provide support for countries experiencing balance-of-payments
problems or other economic pressures. Later, the GATT was devel-
oped as an agreement in lieu of an international trade organization
59
60 Role of International Institutions
(which was too politically problematic) to oversee the successive liberalization

of trading and investment relations among countries. Since this book is not
meant to be a history of the modern international economic system, we will fo-
cus on recent developments in these institutions related to the goal of facilitat-
ing economic development by leveraging private investment in the developing
world.
In the 1980s and 1990s, both the World Bank and the IMF came under pres-
sure to reform. During the 1980s, World Bank, and especially IMF, assistance
shifted from financing investment to promoting policy reform, since it was be-
lieved that low-income countries were held back more by weak policies than by
lack of investment. Yet some of this policy-oriented lending was viewed as too
rigid and prescriptive; indeed, some have argued that IMF conditionality exac-
erbated the Asian economic and other crises. At the end of 1999, the IMF and
the World Bank developed a new framework for their support of low-income
countries in Africa and elsewhere: the “poverty reduction strategy” approach.
This new approach was meant to focus more clearly on economic growth and
poverty reduction.
Increasingly, MNEs are involved both directly and indirectly in the activities
of multilateral institutions and agreements. MNEs are instrumental in influ-
encing and shaping the many trade and investment agreements that have come
into force over the last decades. MNEs are also involved in World Bank and
IMF financing, especially financing provided by the International Finance
Corporation (IFC), the private sector arm of the World Bank, and the analo-
gous divisions of the regional development banks. MNEs are also taking a
greater role in the emerging strategies to combat poverty as part of the process
to achieve the Millennium Development Goals.
In this chapter, we review the historic evolution of the multilateral economic
agreements and institutions established in the post–Bretton Woods environ-
ment (the GATT, the World Bank, the IMF) and assess their contribution to
development. We also review the role of regional institutions—the European
Bank for Reconstruction and Development (EBRD), the Inter-American De-
velopment Bank (IDB), and the Asian Development Bank (ADB)—and re-
gional agreements (for example, NAFTA) on development. We address the
prospects of the Doha Development Round of the WTO and the progress and
future impact of the Millennium Development Goals. Finally, we extend the
framework introduced and developed in chapters 2 and 3 and apply it to the
growing role of multinationals in the international trade and international de-
velopment agenda.
Role of International Institutions 61
THE GATT, THE WTO, AND DEVELOPMENT
International trade dates back hundreds of years. However, after World War II,
it became more organized and encompassed many more nations. The GATT
was created at Bretton Woods in 1944 to increase the living standards and con-
tribute to full employment through reciprocal and mutually advantageous
arrangements directed to the substantial reduction of tariffs and other barriers
to trade and to the elimination of discriminatory treatment in international
commerce (Irwin 1995). Since then, the nation-state members of the GATT
have participated in eight rounds of trade negotiations (excluding the Doha
Round) described below and summarized in table 4.1.
The first round was held in Geneva in 1947 and included twenty-three coun-
tries. The first round was significant since it resulted in the signing of a trade-
rules deal affecting $10 billion of trade or one-fifth of the world’s total (WTO
b). The biggest tariff cut was implemented by the United States—35 percent,
on average (Irwin 1995). The second and the third rounds were not as success-
ful in terms of decreasing tariffs; however, they did result in an expansion of
GATT membership to thirty-eight countries. The Geneva Round and the Dil-
lon Round continued the reduction in tariffs and the limited reduction in
nontariff barriers. The sixth round, or the Kennedy Round, was very important
Table 4.1 Completed rounds of negotiations under the GATT and the WTO
Year Place (name) Subjects covered Countries
1947 Geneva Tariffs 23

1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960 –1961 Geneva Tariffs 26
(Dillon Round)
1964 –1967 Geneva Tariffs and antidumping 62
(Kennedy Round) measures
1973 –1979 Geneva Tariffs, nontariff measures, 102
(Tokyo Round) “framework” agreements
1986 –1994 Geneva Tariffs, nontariff measures, 123
(Uruguay Round) services, intellectual property,
dispute settlements, textiles,
agriculture, creation of WTO
Source: WTO b.
for the GATT. It not only resulted in significant tariff reductions but also set up
the Tokyo Round which achieved broad tariff reductions. The Uruguay Round
was the longest and most comprehensive round. Its agenda included reducing
the tariffs on industrial products, reducing or eliminating nontariff barriers,
creating new rules for the trade of services, and negotiating new intellectual
property protection. However, one of the most significant results of the Uru-
guay Round was the creation, in 1995, of the WTO, which is the successor to
the GATT.
The WTO is located in Geneva and as of December 11, 2005, had 149 mem-
bers accounting for 97 percent of world trade (WTO g). It is the only world-
wide organization that deals with the rules of trade between nations, but it has
a relatively small secretariat to administer its work. The WTO’s main objective
is to ensure that trade flows as smoothly, predictably, and freely as possible and
in so doing, to improve the welfare of the participating countries. The most re-
cent negotiations were the Doha negotiations, which began in 2001 in Doha,
Qatar.
The WTO has six principal responsibilities: administering trade agree-
ments, settling trade disputes, acting as a forum for trade negotiations, review-
ing national trade policies, assisting developing countries with trade policy is-
sues, and cooperating with other international organizations (WTO e). In
terms of structure, the WTO consists of the ministerial conferences that meet
every two years, the General Council, and various specialist committees. The
WTO dramatically expanded the scope and authority of the GATT in terms of
resolving disputes among trading countries, incorporating trade in services
such as international telecommunications service, protecting intellectual prop-
erty rights, and erecting a system for ruling on antidumping, subsidy, competi-
tion policy, and investment issues (WTO d).
The WTO has, as part of broader antiglobalization pressures, come under
fire for a host of sins. Critics argue, inter alia, that it is antidemocratic, be-
holden to MNEs, still dominated by the industrialized countries—notably the
United States—and hostile to environmental, labor, and broader social inter-
ests. These accusations have proved to be largely overblown; however, the
WTO has recently developed a more aggressive outreach to civil society and
NGOs, and has made its deliberations much more transparent by, for example,
posting all the substantive exchanges related to dispute settlement procedures
on its Web site as they become available.
One of the most recent developments regarding the WTO is the advance-
ment of both Russia and Vietnam in their negotiations to join the organization.
Russia had been negotiating its entry for thirteen years, and entered the final
stage of the negotiations in late 2006. Some of the reasons for the delay were
disagreements with the United States related to access to the Russian markets
for farm goods, aircraft, and financial services. Additional concerns were raised
over Russian protection of intellectual property and control of the oil and gas
sector (Reuters 2006). Before joining the WTO, Russia agreed to undertake a
more aggressive program to fight piracy and counterfeiting. On November 11,
2006, the United States and Russia announced that they had reached agree-
ment on the remaining issues for resolution prior to Russia’s accession.
On October 26, 2006, trade negotiators approved Vietnam’s admission into
the WTO. The official approval was announced on November 7, 2006. As in
the case of Russia, there are conditions to Vietnam’s joining the WTO. For ex-
ample, Vietnam will have to allow foreign banks to incorporate wholly owned
subsidiaries, reduce import duties, and eliminate textile industry subsidies
(Bradsher 2006). After Vietnam and Russia join the union, the biggest coun-
tries that have not yet done so will be Iran and Ukraine.
THE WORLD BANK AND THE IMF
In June 1944, the IMF and the World Bank were established in Bretton Woods,
New Hampshire, as part of the postwar conferences. The two organizations
were established in an effort to create a new monetary and development system
after World War II. The objective of the IMF was to create stable exchange
rates, promote monetary cooperation between nations, and act as a last-resort
lender for countries that are entering a crisis.
The IMF quota system, in which each member country is required to make
a contribution (called a “quota”) depending on the size of the country relative
to the global economy, provides the basis for decision making and the alloca-
tion of funds. The higher the quota, the greater the amount of funds a country
can borrow from the IMF. Similarly, the larger the country is relative to the
global economy, the more voting power a country is allocated (Kapur 1998).
IMF funds are used to support countries facing financial crises. When a mem-
ber country experiences difficulties paying its quotas and needs to increase the
amount of its loans, the IMF imposes requirements that that country must
meet. Such requirements typically involve changes in the country’s economic
policy to prevent further increase in its deficit—programs broadly termed
“conditionality.” If members do not meet the requirements, they might be
asked to leave the fund (Kapur 1998). The IMF has been criticized for its
approach to economic crises and its own governance system. Specifically, the
quota arrangement, established some fifty years ago, has not kept up with
changes in the balance of global economic power. In 2006, the U.S. govern-
ment argued for changing the system so that China and other large emerging
markets would have larger quotas and those countries whose relative global
economic contributions are declining (for example, Europe, Japan) would have
smaller quotas.
The World Bank was established to help the less-developed countries im-
prove their welfare and move toward more-developed global economies. In
short, the bank’s goal is to reduce poverty worldwide. The World Bank offers
low interest loans, interest-free loans, and most importantly, grants for educa-
tion, health, fighting corruption, and other purposes (World Bank a). The
World Bank consists of the IBRD and the International Development Associa-
tion (IDA). The IBRD focuses primarily on middle-income countries, whereas
the IDA focuses on the poorest (but creditworthy) countries in the world. The
World Bank currently includes 184 members. Box 4.1 summarizes the principal
areas of activities of the World Bank.
More broadly, the World Bank Group, which has several affiliates, includes
the Multilateral Investment Guarantee Agency (which insures international in-
vestments), the International Centre for Settlement of Investment Disputes,
and the IFC. The IFC often serves as a catalyst for private sector involvement in
major projects, in that its participation commitment signals to private investors
that projects meet both financial and development goals (World Bank b). An
example of the important role of the IFC—and private investment—can be
seen in the Mozal Project (see box 4.2).
Recent analysis of the work of the World Bank and the IMF has often been
critical. A major issue is the lending process of both the IMF and World Bank.
Harrigan, Wang, and El-Said (2006) claim that the lending process in the Mid-
dle East and North Africa is based not on a country’s economic need but on
other factors such as donor interest. They argue that both the IMF and the
World Bank make their lending decisions to best satisfy their shareholders, es-
pecially the United States. Furthermore, the shareholders’ interest determines
both the countries that receive loans and the loan terms (Harrigan, Wang, and
El-Said 2006). Their research focused on five countries—Algeria, Jordan, Mo-
rocco, Tunisia, and Egypt. Of all five countries, only Jordan in the late 1980s
and Egypt in mid-1970s seemed to be in financial need. However, all of these
countries have received consistent funding. Harrigan, Wang, and El-Said (2006)
provide examples of the country actions, and the fund and the bank reactions
Box 4.1 World Bank areas of focus
Education. Since 1963, when the World Bank started giving money for
education, it has transferred about $36.5 billion for education. The
bank’s goal is to ensure that young children receive a quality education.
The World Bank is also working toward closing the gender gap in coun-
tries such as India. For example, the goals of the India Elementary Edu-
cation Project are to make the elementary school available to all chil-
dren in need between the ages of six and fourteen years old, to improve
the quality of education, and to close both the gender and the social gap
by 2010.
Health. The World Bank is very active in creating awareness about
HIV/AIDS and fighting the virus worldwide. The virus has affected
Africa the most, and the situation in Africa is currently the main con-
cern. To help fight the virus, the bank allocated more than $1.8 billion
in the past five years to create awareness, and for prevention and treat-
ment.
Corruption. The World Bank is the largest organization in the world
fighting corruption. The World Bank is very careful when funding proj-
ects and is financing projects that are free from corruption. About 350
companies and individuals have been banned from projects that are fi-
nanced by the bank.
Debt Relief. Twenty-eight countries currently receive debt relief, which
should account for $56 billion over time. The first global effort to re-
duce the debt of the poorest countries is the Heavily Indebted Poor
Countries (HIPC) Initiative, which has provided debt relief to coun-
tries such as Nicaragua, Bolivia, Mozambique, Honduras, and Somalia.
The initiative has, for example, helped Honduras deliver basic health-
care to 100,000 people and Cameroon fight the HIV virus by educating
people about prevention.
Other. In addition to the areas above, the World Bank encourages bio-
diversity projects to protect endangered species, helps create infrastruc-
ture and provide clean water in poor countries, and helps postwar coun-
tries emerge from the crisis.
Source: World Bank a.

Box 4.2 The Mozal project
The Mozal project was the first major foreign investment project in
Mozambique. In 1997, the International Finance Corporation approved
a total of $120 million in loans toward the first project, Mozal 1, which
was to build an estimated $1.36 billion greenfield aluminum smelter
near Maputo, with annual production capacity of 253,000 tons of pri-
mary aluminum ingots for export. Mozal 1 was completed six months
ahead of schedule and under budget. Aluminum production began in
June 2000, a time frame that is believed to be a world record for a
smelter of its size. The smelter is on a site measuring 1.4 million square
meters—equivalent to 340 football fields.
The project sponsors are BHP Billiton; the Industrial Development
Corporation (IDC), a self-financing South African development bank;
Mitsubishi Corp., a general trading company; and the government of
Mozambique. Subsequently, in 2001, IFC’s board approved an addi-
tional $25 million to be invested in Mozal 2, an expansion project to
double Mozal 1’s capacity to over half a million tons of aluminum ingots
per year. The expansion, scheduled to be completed in October 2003,
was also expected to be completed ahead of schedule and under budget.
Mozal contributed a great deal in putting Mozambique—still recover-
ing from a devastating civil war—on the foreign investment map, en-
couraging others to invest in a poor country. It also boosted the
economies of Mozambique’s major trading partners, South Africa,
Swaziland, and Australia. The project has had a very positive impact on
the Mozambique’s economy, both directly and indirectly. In 2001,
Mozal generated 55 percent of Mozambique’s exports and accounted for
approximately 8 percent of its gross domestic product. Other net direct
benefits to the government will accrue through a revenue tax.
The project has also generated significant local linkages. Mozal 1 cre-
ated full-time jobs for 745 people, of which 88 percent were Mozambi-
can. Mozal 2 created about 3,039 jobs on-site during construction, ap-
proximately 70 percent of which were filled by Mozambicans.
Mozal’s employees are paid approximately six times the legal mini-
mum wage, one of the highest wages in Mozambique. Workers have
also received substantial training and have developed into highly skilled
industrial workers. Mozal has contracted with a number of companies
Box 4.2 Continued
for a variety of services such as transportation, catering, cleaning, and

security. At least 400 non-Mozal staff are employed on-site to provide
these services. Mozal spends approximately $35 million annually with
these private local companies. Mozal has also initiated a Graduate De-
velopment Program aimed at exposing participants in the program to
heavy industry and process facilities that are of a world-class standard.
The work continues to channel resources to local small and medium
enterprises and the local community, Mozal developed two other signif-
icant programs, the Mozal Community Development Trust (MCDT)
and the SME Empowerment Linkage Program (SMEELP).
Sources: International Finance Corporation 2002 and Morrissette 2000.
to them. For example, when Jordan refused to take a position in the Gulf War
and support the United States and its Arab supporters, the flow of financial aid
rapidly decreased. Similarly, when Jordan started negotiating its initiative for
peace with Israel, the country received two grants to support its economy (Har-
rigan, Wang, and El-Said 2006). An important implication of the Harrigan re-
search is the potential for social dissatisfaction to transform into social and po-
litical crisis. Further, this historical focus on “donor interest” rather than need
suggests a policy of allocating more funds to “less needy” countries and fewer
resources to countries truly in need. Recently, the IMF and the World Bank
have shifted focus to the poorest countries among the developing economies.
As more private capital has flowed to the middle-income countries (table 4.2),
there is growing need for development finance for the poorest countries.
Critics claim that the lending practices of the IMF and the World Bank have
been unfair to the poor countries and have resulted in limited growth or even
no growth at all. Since one of the goals of both institutions is to encourage
growth, some researchers analyzed the growth of countries that received World
Bank or IMF loans. Butkiewicz and Yanikkaya (2005) argue that IMF lending
has a negative effect on country growth, whereas World Bank lending may
result in increased growth in some cases. The research conducted with one
hundred developing countries indicates that IMF lending did not stimulate
growth. However, World Bank credits were shown to increase country growth
by increasing public investment (Butkiewicz and Yanikkaya 2005). Similarly,
Table 4.2 Private capital flows to low- and middle-income countries
(millions of U.S. dollars)
Year Low-income countries Middle-income countries
1970 951 7,483

1971 1,391 5,198
1972 1,757 7,787
1973 2,054 9,817
1974 2,576 12,087
1975 4,229 21,993
1976 3,355 21,384
1977 3,454 28,134
1978 5,175 34,821
1979 4,954 41,708
1980 6,571 41,258
1981 7,644 61,992
1982 9,766 55,195
1983 8,225 32,741
1984 4,758 34,502
1985 4,363 23,493
1986 5,268 18,810
1987 6,495 21,039
1988 9,097 28,296
1989 8,922 27,124
1990 6,820 36,872
1991 8,337 47,465
1992 10,347 83,145
1993 11,223 147,904
1994 20,065 147,153
1995 20,049 156,294
1996 30,873 211,363
1997 25,464 252,396
1998 7,539 261,637
1999 3,008 213,785
2000 4,741 175,260
2001 6,473 167,698
2002 7,151 146,680
Source: World Bank 2004.
Note: Private capital flows, net total, consist of private debt and nondebt flows. Private debt
flows include commercial bank lending, bonds, and other private credits; private nondebt
flows are foreign direct investment and portfolio equity investment.
Dreher (2006) argues that in terms of creating growth, the IMF programs are a
failure. Khan (1999) published a set of technical economic papers dealing with
aspects of structural adjustment in Pakistan, arguing that IMF conditionality
and the misguided approach of the World Bank have been detrimental to Pak-
istan’s growth and development. Missing from this analysis is an acknowledge-
ment of the domestic political and institutional constraints imposed by the
Pakistani government, which has been plagued by corruption, inefficiency, and
conflict. We return to these issues in chapter 6.
REGIONAL AGREEMENTS, INSTITUTIONS,

AND DEVELOPMENT
In the previous section, we focused on global institutions and agreements. In

this section, we turn our attention to agreements and institutions on a regional
level, consistent with our earlier argument that trade and investment—as well
as economic development—are conducted primarily at the regional level. The
primary focus of this section is on recent developments in the European Union,
NAFTA, the Southern Cone Common Market (MERCOSUR), and other
Latin American trade agreements. We also explore several agreements in Asia
and Africa, such as the Asia-Pacific Economic Cooperation (APEC) forum and
the Association of Southeast Asian Nations (ASEAN). We also briefly describe
the role of the regional finance institutions and their role in development.
Europe and the European Union
The formation of the European Union is considered one of the foremost exam-
ples of regional integration. The European integration started in 1958 with the
establishment of the European Economic Community. It later became the Eu-
ropean Community (1980) and finally the European Union in 1992. The goal
of the European Union was to eliminate all trade barriers between the members
in a twelve-year period.
The European Union has undoubtedly increased trade between member
countries. The dynamic trade development has required the negotiation of new
agreements, such as those for computer research and space research ( Jain 2001).
Another effect has been some degree of trade diversion as a result of relative in-
creases in intra-E.U. trade. For the period 1981–2000, trade between the Euro-
pean Union and the NAFTA, ASEAN, and newly industrialized countries ac-
tually decreased (Tang 2003). However, some of the APEC subgroups have
remained steady in their trade with the European Union. For example, the
ASEAN countries have been steadily trading with the European Union,
whereas the NAFTA and newly industrialized countries have experienced a
fairly consistent decrease (Tang 2003).
Regional Trade and Investment Agreements
NAFTA, concluded in 1994, is a free trade agreement between the United

States, Canada, and Mexico. The primary purpose of this agreement was to in-
crease trade between the three countries and to provide stable economic growth
in the region. There were, however, clear political and strategic overtones to the
agreement, including reducing historic tensions between the United States and
Mexico, identifying important areas for cooperation in light of the challenges
presented to the bilateral relationship in the area of narcotics and immigration,
and signaling to the multilateral community that regional agreements pre-
sented viable alternatives in the event multilateral progress stalled. Although all
industrial tariffs and most nontariff barriers were removed by January 1, 2004,
agricultural tariffs experienced a slower phase out and will be lifted by January
1, 2008.
Trade and investment within the region grew, although NAFTA itself is only
part of the story. As Soloaga and Winters point out (2001), trade between the
three countries was already deep and intensive, making the incremental gains
from NAFTA less significant. NAFTA has resulted in increased exports by
Canada and Mexico to the United States; however, the United States has also
benefited from both increased access to the Canadian and Mexican markets,
the opportunity to rationalize production in North America, and the develop-
ment of investments in Mexico to take advantage of relatively cost-effective but
highly productive Mexican labor. In this way, the comparative advantage of
efficient Mexican labor has balanced out the advantages that Canada and
United States have in productivity and technology; Mexico and Canada gain
from having access to America’s vast markets. Most studies show that NAFTA
has had positive effects on the development of, and trade and investment be-
tween, members. From 1993 to 2005, annual trade flows between the NAFTA
nations grew 173 percent, from $297 billion to $810 billion, reflecting nearly
$2.2 billion of trilateral trade that occurs each day in the North American re-
gion.
Between 1993 and 2005, the United States achieved real GDP growth of 48
percent, U.S. industrial production rose by 49 percent—which is more than
the increase achieved between 1981 and 1993—U.S. business sector productiv-
ity rose by 36.2 percent, and the annual rate of productivity grew by 24.3 per-
cent. In addition, U.S. employment climbed from 112.2 million in December

1993 to 134.8 million in February 2006, representing an increase of 22.6 million
jobs (a 20.1 percent increase) (USTR 2006).
In terms of trade between the United States and other NAFTA members, to-
tal U.S. exports to Mexico and Canada reached $240 billion in 2004, an in-
crease of $104 billion between 1993 and 2004. However, total imports reached
$366 billion in 2004, an increase of $211.3 billion. Although the United States
has experienced trade deficits with its partners, Canada and Mexico have expe-
rienced large and growing trade surpluses with the United States since NAFTA
took effect. These trade surpluses were influenced by several factors: relatively
cheaper labor and less costly production in Mexico, the declining value of the
U.S. dollar, and the concomitant currency depreciation and resulting decline
in relative manufacturing wages in Canada and Mexico. Canada and Mexico
have become more attractive locations for plants to produce goods for export to
other countries within the region. A rapidly growing capital inflow resulted in
a higher amount of foreign direct investment (FDI) flow to both of these coun-
tries, especially Mexico. During this period (1993 –2005), Mexico’s real GDP
grew 40 percent, and Canada’s grew 49 percent.
Aside from NAFTA, several other free-trade agreements and unions have
been established among the countries in the regions of North, Central, and
South America, and the Caribbean.
The Andean Community, incorporating the Andean Common Market
(CAM) established in 1992, includes Peru, Colombia, Bolivia, and Ecuador.
Among the members of this community, Colombia and Peru both have sepa-
rate bilateral trade agreements with the United States. Two-way trade between
the two countries amounted to $14.3 billion in 2005, and U.S. exports to Peru
were more than $2 billion in 2005. The Andean Community also has bilateral
trade agreements with MERCOSUR and Caribbean Community and Com-
mon Market (CARICOM) members. There is also an agreement between Bo-
livia and Mexico, and in September 2006, Chile was approved as an associate
member of the Andean Community. The Central American Common Market
(CACM), which consists of Costa Rica, El Salvador, Guatemala, Honduras,
and Nicaragua, was established in 1991.
MERCOSUR, established in 1991, includes Argentina, Brazil, Uruguay,
Paraguay, and Venezuela, as well as associate members Bolivia, Chile, Colom-
bia, Ecuador, and Peru. Established in 1993, CARICOM includes Antigua and
Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guyana, Haiti,
Jamaica, Montserrat, Saint Kitts–Nevis, Saint Lucia, Saint Vincent and the
Grenadines, Suriname, and Trinidad and Tobago. CARICOM has separate bi-
lateral trade agreements with the Dominican Republic, Costa Rica, Colombia,
and Venezuela. In 2004, CARICOM countries imported $13 billion in goods
and services and exported $8.8 billion (CARICOM).
Other trade agreements in the region include those between Mexico and
Nicaragua; Mexico and the Northern Triangle (El Salvador, Guatemala, and
Honduras); Central America and Panama; Central America, the Dominican
Republic, and the United States (CAFTA-DR); Central America and Chile;
CARICOM and Costa Rica; and Canada and Costa Rica. There are bilateral
trade agreements between MERCOSUR and each member of the Andean
Community, Chile, and Mexico.
The United States has also implemented bilateral free trade agreements with
various countries and communities in the Western Hemisphere, including
agreements negotiated or in effect with Chile, Panama, Uruguay, Colombia,
and Peru. In August 2004, the United States signed the Central America–Do-
minican Republic–United States Free Trade Agreement (CAFTA-DR), which
will lead to the elimination of tariffs and trade barriers between its members:
Costa Rica, the Dominican Republic, the United States, Nicaragua, Honduras,
Guatemala, and El Salvador. Once this agreement is fully implemented, 80 per-
cent of U.S. exports of consumer and industrial products to member countries
will be tariff free (USTR). In early 2006, the United States signed a free trade
agreement with Colombia (U.S. Department of State 2006), although the
prospects for congressional approval were put in doubt with the Democratic
victories in the 2006 midterm elections.
The Free Trade Area of the Americas (FTAA) initiative has been under nego-
tiation for more than a decade. The FTAA would create a regional agreement
between countries with combined GDP of $13 trillion and a population of 800
million (USTR 2003). The FTAA process, however, has been fraught with dis-
agreements and setbacks, and it is unclear whether it will ever come to fruition.
In 1989, the APEC forum emerged. This loosely structured coalition began
with eighteen member countries, including developed countries such as the
United States, Australia, and Japan as well as less-developed countries such as
Hong Kong, Indonesia, and Malaysia. The goal of all members was to achieve
both political and economic integration. APEC defined its mission as bringing
“stability, security and prosperity for our peoples” (APEC b). Some of the
achievements of APEC are economic growth, foreign-investment growth, new
job opportunities, training, and decreased poverty. During the period 1989–
1999, foreign investment increased by 210 percent overall and by 475 percent in
the lower-income APEC countries. GDP per person in the low income mem-
ber countries increased 61 percent (APEC b). Trade, investment, and increases
in income have resulted in improved sanitary conditions, lower infant mortal-
ity, and increased life expectancy. Poverty in East Asian APEC counties de-
creased by a third during the period 1989 –1999. Economic growth and in-
creased investments have helped achieve 195 million job openings over the
period, of which 174 million were in the low-income countries (APEC a).
The ASEAN agreement was signed in an attempt to integrate the then-
undeveloped economies of Indonesia, Thailand, Malaysia, Singapore, and the
Philippines. The goal of the agreement was to make it easier for members to
trade with each other and to increase access to industries such as technology
and tourism. Although in the beginning the growth was slow, the association
has shown progress in the past few years ( Jain 2001). The ASEAN Free Trade
Area (AFTA) seeks to eliminate tariff and nontariff barriers by 2018.
Regional Development Institutions
The EBRD was established in 1991 and is headquartered in London. Since its
establishment, it has helped many former Communist countries in Europe and
Central Asia build market economies. The bank has sixty member countries
(EBRD).
In 2005 the EBRD invested in 151 projects totaling EUR 4.3 billion, an in-
crease from EUR 4.1 billion the year before (EBRD 2005). The EBRD projects
report shows that the majority of the funding is provided in support of the pri-
vate sector. By investing in local business, the bank promotes social and eco-
nomic development from within. In addition, with the growth of the private
sector, recipient countries will become more attractive for foreign investors—
as we have argued, a key catalyst for development—and ultimately will become
less dependent on the EBRD.
The IDB was established in 1959 to help Latin American and Caribbean
countries accelerate economic development. Currently, the IDB has forty-
seven members, including sixteen European countries and twenty-eight coun-
tries from the Western Hemisphere, as well as Israel, Japan, and Korea. The
IDB supports development primarily by providing funds for areas such as
tourism, small enterprises, transportation and communication, education, and
trade (IDB 2005b). The IDB has an affiliate organization, the Inter-American
Investment Corporation (IIC), which is the regional analogue of the IFC; that
is, its financing is directed at private-sector investments. In 2004 the IIC ap-
proved thirty-one loans totaling $164 million. By comparison, in 2004 the IDB
overall approved loans totaling $6 billion (IDB 2005b). The reason for IDB
support of the private sector is twofold. First, providing support to small and
medium-sized enterprises makes people more willing to start their own busi-
nesses and better able to support themselves and their families. Second, helping
private business promotes economic activity, which in turn helps grow the
economy and reduce poverty. Since 1978 the IDB has approved more than $1
billion for microenterprise development (IDB 2006a).
A recent trend supporting Latin American economies is migrant remit-
tances. According to a 2006 report by the IDB, the money sent from Latin
American migrants working in the United States to Latin America will reach
$45 billion in 2006. This represents a 50 percent increase since 2004, when the
amount was $30 billion (IDB 2006b). Therefore, remittances are becoming an
increasingly important source of income for people in developing countries.
Louis Alberto Moreno, the IDB president, has said that the increasing amount
of migrant remittances is “proof of migrants’ strong commitment to family and
community.” Since the trend is predicted to continue in the future, the IDB is
trying to encourage banks to offer better services for this particular market. For
example, one successful initiative has led to a drastic reduction in fees for a
$200 bank transfer to Latin America (IDB 2006b).
In addition to providing loans to a variety of areas, the IDB is very active in
helping to achieve the Millennium Development Goals; for example, the IDB
has provided $82 million of debt relief so that governments can use the funds
for social programs, loans for poverty reduction programs, and education
about the goals through conferences (IDB 2005a).
The African Development Bank was established in 1964 and comprises fifty-
three African and twenty-four non-African members. The bank’s goal is to pro-
mote economic and social development in Africa through loans and equity in-
vestments. Some of the main areas of concentration are fighting HIV/AIDS,
combating poverty, and improving people’s lives. The bank’s commitments to-
tal $53 billion (African Development Bank 2006).
The Asian Development Bank was established in 1966, and its focus is on
helping development in Asia and the Pacific countries. Like other development
institutions, the bank helps countries in need with loans, technical assistance,
grants, and equity investments. The bank is headquartered in Manila, Philip-
pines (Asian Development Bank).
THE DOHA DEVELOPMENT ROUND

OF THE WTO
Historically, the WTO has served as a bargaining forum among the triad
economies; the United States and the European Union have played the most
active role in its activities. Japan, China, and other Asian nations have been less
important in shaping the agenda of the WTO. Developing countries, many of
whom have been members of the WTO for decades, have not been important
leaders in shaping its policies, but they have undoubtedly benefited from free
trade and enhanced access to the richer triad markets. For most of the more-
than-fifty years of the GATT, the United States provided leadership in setting
an agenda of trade liberalization, first by reducing tariffs on goods and, in the
Uruguay Round, by starting to address nontariff barriers to trade and services
(Hoekman and Kostecki 1996). The major postwar supporters of the U.S. led
drive for world trade liberalization have been the United Kingdom and smaller
rich trading nations such as Canada, Australia, and New Zealand.
In November 2001, members of the WTO gathered for the Fourth Ministe-
rial Conference in Doha, Qatar. At this gathering, several issues regarding
world trade and development were discussed, including, for the first time, a
very explicit commitment to making trade liberalization benefit the process of
development. This agenda, in turn, constituted the principal focus of the Doha
Development Round of trade negotiations. The round included a specific fo-
cus on agricultural issues, notably, improving market access for agricultural
goods, reducing subsidies, and exporting agricultural goods. The round also
addressed issues of special and different treatment for developing countries,
market access for nonagricultural products through elimination of tariffs, lib-
eralization of trade in services, and the “Singapore issues,” which include trade,
investment, government procurement contracts, and conditions governing
competition.
Of particular importance is that the agenda prioritized the concerns of de-
veloping countries. These countries, which now account for about three-quar-
ters of WTO members, are carrying increasing weight in the organization. The
commitment to having developing countries play a more active role in the
round is also thought to create a more business-friendly legal framework and
improved market access for foreign investors, conditions that will also lead to
a better development strategy. At the initial summit in Doha, Qatar, WTO
members agreed to a review of progress in the talks in Cancún, Mexico, in
2003.
The goal of the Cancún meeting was to examine and review the progress of
negotiations, make necessary decisions, and take action to move the discus-
sions forward. However, the Cancún talks ended without an agreement, as del-
egates from many developing nations (the G20⫹ developing-country alliance,
led by Brazil and India) objected to the refusal of the European Union, in par-
ticular, to commit to lowering its agricultural subsidies. As a result of the G20⫹
talks, the WTO failed to achieve a new global trade agreement by the self-im-
posed deadline of January 2005; the date was unofficially pushed to the end of
2006 (WTO a).
In December 2005, at the Sixth Ministerial Conference in Hong Kong, the
progress made since 2003 was assessed, but although there were certain areas of
movement, there was much more to be done in terms of lowering trade barri-
ers in farm and manufacturing goods and services, with a focus on developing
countries (WTO a). However, in July 2006, the Doha development negotia-
tions were suspended because gaps between key members of the WTO re-
mained so wide that the members could not reach an agreement on particular
issues (WTO a)—namely, market access and domestic support of agricultural
goods—and because of disagreement on taking the negotiations to a further
stage. Since the negotiations have been stuck in one phase and an agreement
hasn’t been reached, the Doha Round of negotiations has been put on hold.
WTO director-general Pascal Lamy has committed to resume negotiations
only when the negotiating environment is right (WTO a).
THE MILLENNIUM DEVELOPMENT GOALS
In September 2000, at the U.N. Millennium Summit, world leaders agreed to

a set of time-bound and measurable goals and targets for combating poverty,
hunger, disease, illiteracy, environmental degradation, and discrimination
against women. Placed at the heart of the global agenda, they are now called the
Millennium Development Goals (United Nations 2006a). The summit’s Mil-
lennium Declaration also outlined a wide range of commitments in the areas of
human rights, good governance, and democracy. At the International Confer-
ence on Financing for Development in Monterrey, Mexico, in 2002, leaders
from both developed and developing countries started to match these commit-
ments with resources and action, signaling a global deal in which sustained po-
litical and economic reform by developing countries would be matched by di-
rect support from the developed world in the form of aid, trade, debt relief, and
investment.
Table 4.3 Millennium Development Goals and corresponding targets
Goals Target
Goal 1: Eradicate extreme poverty Halve, between 1990 and 2015, the proportion
and hunger of people whose income is less than $1 a day and
the proportion of people who suffer from
hunger.
Goal 2: Achieve universal primary Ensure that, by 2015, children everywhere, boys
education and girls alike, will be able to complete a full
course of primary schooling.
Goal 3: Promote gender equality Eliminate gender disparity in primary and sec-
and empower women ondary education, preferably by 2005, and in all
levels of education no later than 2015.
Goal 4: Reduce child mortality Reduce by two-thirds, between 1990 and 2015,
the under-five mortality rate.
Goal 5: Improve maternal health Reduce by three-quarters, between 1990 and 2015,
the maternal mortality rate.
Goal 6: Combat HIV/AIDS, Halt by 2015 and begin to reverse the spread of
malaria, and other diseases HIV/AIDS and the incidence of malaria and
other major diseases.
Goal 7: Ensure environmental Integrate the principles of sustainable development
sustainability into country policies and programs and reverse
the loss of environmental resources. Halve, by
2015, the proportion of people without sustain-
able access to safe drinking water and basic
sanitation. By 2020, achieve a significant im-
provement in the lives of at least 100 million
slum-dwellers.
Goal 8: Develop a global partnership Address the special needs of the least-developed
for development countries, landlocked countries, and small-island
developing states. Develop further an open, rule-
based, predictable, nondiscriminatory trading
and financial system.
Source: United Nations 2006b.
The Millennium Development Goals Report 2006 shows that for the most part,
some progress has been achieved. The progress related to poverty and hunger
has been satisfactory and is illustrated in figure 4.1, which shows the proportion
of people living on less than $1 per day for 1990 and 2002, and 2015 (projected).
Progress has been good in the developing regions overall, as the proportion of
people living on less than $1 a day decreased from 27.9 percent in 1990 to 19.4
Figure 4.1 Progress in the Millennium Development Goals: Proportion of People Living on
Less Than $1 a Day, 1990 and 2002 and 2015 Projection (%)
Adapted from United Nations 2006b, p. 4.
Note: Data for 2015 represent targets.
percent in 2002. Eastern Asia achieved especially rapid improvement by de-

creasing the percentage of people living on less than $1 per day from 33 percent
in 1990 to 14.4 percent in 2002. However, poverty is still very high in Sub-Sa-
haran Africa and Southern Asia, with 44 percent and 31.2 percent, respectively,
living on less than $1 a day in 2002 (United Nations 2006b). Achieving univer-
sal primary education is another goal on the agenda. Almost all regions have
shown improvement. The majority of regions have achieved a net enrollment
ratio in primary education of between 80 percent and 100 percent. Only Sub-
Saharan Africa is lagging behind with a net enrollment ratio in primary educa-
tion of 64 percent for 2003–2004 (United Nations 2006b).
Another goal is to reduce child mortality, with a target of reducing the un-
der-five mortality rate by two-thirds between 1990 and 2015. Although child
mortality has decreased in all regions, 10.5 million children under five years old
died in 2004. Sadly, the causes of this early mortality are preventable (United
Nations 2006b). Improving maternal health is also one of the goals of the mil-
lennium agenda. The goal is to reduce the maternal mortality rate by three-
quarters by 2015. One of the key elements in reducing maternal mortality is the
presence of specialized care at delivery. As with the other goals, some improve-
ment has been made in all regions. However, regions such as Southern Asia,
Sub-Saharan Africa, and developing regions continue to lag behind with low
percentages of skilled care at delivery. For example, in 2004, of all deliveries in
Southern Asia, only 36 percent were performed with skilled personnel present.
Similarly, in 2004, in Sub-Saharan Africa the percentage was 46 percent. In
contrast, the rate in Eastern Asia increased from 51 percent in 1990 to 79 per-
cent in 2004, and reached 88 percent in Latin America and the Caribbean in
2004 (United Nations 2006b).
There has been progress with the rest of the goals as well. The fight against
HIV/AIDS has focused mostly on prevention, and this strategy has proved suc-
cessful. However, the disease continues to spread, and the number of people
living with HIV increased from 36.2 million in 2003 to 38.6 million in 2005
(United Nations 2006b). The goals for environmental sustainability and devel-
oping partnerships to help development have proved to be as challenging as the
other goals. Deforestation continues to spread; around 13 million hectares of
trees are cut per year. Although energy use is becoming more environmentally
friendly, carbon dioxide emissions continue to grow globally. From 1996 to
2004, aid to developing countries increased, reaching $106 billion in 2004
(United Nations 2006b). The aid target set by the United Nations for its mem-
bers is 0.7 percent of gross national income. So far only five countries have met
the target, and eleven have promised to reach the target by 2015. Table 4.3
summarizes the Millennium Development Goals and targets. Although some
progress in the Millennium Development Goals has been achieved, the major-
ity of the goals have not yet been met.
In addition to government aid, other important aspects of meeting the Mil-
lennium Development Goals are improved domestic economic development
and domestic governance. To achieve economic growth and development, de-
veloping countries require more and better-quality aid, trade reforms, the elim-
ination of corruption within government, improved governance, and increased
FDI (World Bank c).
The Millennium Development Goals now guide much of the multilateral,
bilateral, and private development assistance around the world (United Na-
tions 2006a). These goals include a commitment to a “global partnership for
development” that emphasizes collaboration among the private sector, govern-
ments, and civil society to introduce new technologies and organizational ca-
pabilities in the developing world. This acknowledgement (and expectation) of

the importance of the potential positive contribution of MNEs to host-coun-
try development may reflect a new era in which MNEs, host governments, and
international institutions work collaboratively to address the social and eco-
nomic needs of developing regions in a manner that contributes to increased
global wealth and social and economic progress.
MULTINATIONAL ENTERPRISES
AND INTERNATIONAL AGREEMENTS
Here we incorporate our FSA-CSA model in the context of international eco-

nomic institutions and agreement. Figure 4.2 incorporates the concepts of
country-level participation in trade and investment agreements and relation-
ships, and firm-specific experience with such agreements into our FSA-CSA
matrix.
Countries that are part of global trade and investment organizations and
agreements such as the WTO, NAFTA, and others offer discernible CSAs of at
least two sorts. First, countries that have been accepted into these organizations
Figure 4.2 The FSA-CSA Matrix in the Context of International Economic Institutions
and Agreements
and agreements have met certain standards in terms of investment policies,

trading systems, intellectual property protection, and the like. Hence, they
have received a “seal of approval” from a global or regional trading body or sys-
tem. Second, the obligations and commitments governments make as part of
these organizations and agreements represent real and meaningful pledges to
lower tariffs and further liberalize investment and other regulations. Some of
the obligations are congruent and reflective of the same kinds of commitments
associated with having the strong and well-developed institutional governance
we discuss in chapter 6. Hence, countries that have agreed to undertake these
obligations provide CSAs from the perspective of international investors.
Specifically, China’s accession to the WTO in 2001 and Vietnam’s acceptance
into that global trade body in 2006 have each contributed to investment in
these countries by MNEs. The many bilateral and plurilateral trade and invest-
ment agreements struck by the United States and the European Union with
Latin American, Asian, and African countries during the early part of the
twenty-first century constitute similar endorsements. MNEs are more willing
to adopt and commit to long-term investment plans in an environment in
which there are assurances of stable and liberalizing trade and investment poli-
cies and reasonable protections of real and intellectual property rights.
Relations with the World Bank and the IMF are less clear in terms of CSAs.
On the one hand, receiving World Bank and IMF support constitutes a signal
not dissimilar to being a member of an international trade agreement: in the
case of the IMF, countries have agreed to take on a series of economic reforms
that typically include lowering government deficits and reducing inflation. On
the other hand, heavy dependence on IMF and World Bank financing may re-
flect weak CSAs as countries become overly reliant upon ongoing financial sup-
port from multilateral bodies and fail to achieve strong, independent economic
systems and structures.
As for FSAs, knowledge and experience in operating under global or regional
trading agreements may constitute a moderate FSA for MNEs. In surveying
three rationales for multinational strategy, Tallman contends (1992) that MNEs
use FDI when a structure providing more managerial control is required to bet-
ter extract rents from the country-specific resources in a host market. He sug-
gests (Tallman 1992, 462) that “the resource-based model provides for condi-
tions under which firms can accrue higher profits if they have a resource
advantage, but where close potential substitutes make cost efficiency vital to
sustainable advantage.” Indeed, the experiences a firm gains with FDI and re-
gional production becomes part of the MNE’s resource structure (FSA) as it
learns and experiments with various structures so as to better apply them in

other markets. In the automotive industry, for example, firms that have learned
to take advantage of the production sharing made possible by a North Ameri-
can regional automotive industry under NAFTA may be able to leverage that
experience in other regional trading arrangements.
SUMMARY POINTS
International institutions and agreements—and MNE participation in them

—have had a substantial impact on development. Trade liberalization and fi-
nancial assistance from multilateral development institutions have undoubt-
edly contributed positively to the development prospects of the developing and
emerging regions of the world. Increasingly, these activities are driven by re-
gional agreements and initiatives—such as NAFTA, the European Union,
ASEAN, and the regional development financial institutions that accompany
them. Yet there has been criticism of some of these agreements and institutions
from a range of vantage points.
The Doha Round of multilateral trade negotiations and the Millennium
Development Goals represent important acknowledgements by the multilat-
eral system of the importance of focusing on the needs of developing countries.
The Doha Round, by tackling agricultural protections in the developed world,
presents an opportunity for real progress in providing developing countries
greater access to vital export markets. The Millennium Development agenda,
by focusing on the real needs of the poorest countries and populations, also pre-
sents a vital initiative for helping alleviate poverty. MNEs, through their expe-
rience and knowledge of operations in integrated regions, are important part-
ners and contributors to the success of these agreements and institutions.
Chapter 5 The Contributions
and Impact of Civil Society
The emergence of civil society and NGOs has had an important im-
pact on how MNEs contribute to development. On the one hand,
criticisms of globalization and MNEs by many NGOs have created
friction and pressure on MNEs to be more responsive to the range of
stakeholders they encounter in their global activities. On the other
hand, many MNEs and NGOs are forging new partnerships in which
they jointly advance initiatives designed to promote sustainable devel-
opment.
In this chapter, we review the emergence of civil society and NGOs
as important actors in international development. We introduce a
classification of NGOs to help differentiate among their goals, pur-
poses, and organizational structures. We review the tensions and con-
flict between civil society and NGOs on the one hand and MNEs on
the other, and introduce a framework for understanding civil society–
MNE interactions in the context of international development. We
then assess and critique the role of NGOs in development, the factors
that have facilitated and constrained their success, and the potential
for closer federations of MNEs and governments to increase their
effectiveness.
83
84 Contributions and Impact of Civil Society
We discuss the need for a more objective understanding of the roles and
goals of MNEs by civil society and NGOs, and of civil society and NGOs by
MNEs, and the potential for this understanding to lead to more collaborative
efforts and better development outcomes. We focus especially on the interac-
tions among MNEs and NGOs in the multilateral trade and investment
agenda, including WTO negotiations. The WTO has been criticized by NGOs
and others in civil society as an institution that supports free trade and global-
ization as advanced by MNEs, without sufficient attention to development.
We have developed a framework to analyze the different perceptions of NGOs
and MNEs, which we use to classify different types of trade and investment
agreements.
CIVIL SOCIETY, NGOS, AND BUSINESS
NGOs have assumed a significant and influential role in modern societies. Ac-
cording to Lindenberg (1999), fiscal crises, ideological shifts, and privatization
have all led to a decline in the scope and capacity of the state. In response, a
growing global not-for-profit sector has emerged, which, in part, has begun to
fill the humanitarian vacuum left by the corporate sector and the nation-state.
The number of NGOs in the world has swelled in recent decades (Spar and La
Mure 2003). A number of global events have led to this increase. One impetus
in the recent resurgence in civil society is the political failure of centrally
planned economies such as those of the former Soviet Union and Central and
Eastern Europe. Globalization is another important force in NGO history.
Although many NGOs have criticized globalization and its impact (Stiglitz
2002), globalization has facilitated the growth and development of NGOs.
The modern era of NGO activism can be traced to 1984, when a range of
NGOs, including church and community groups, human rights organizations,
and other antiapartheid activists built strong networks and pressured U.S.
cities and states to divest their public pension funds of companies doing busi-
ness in South Africa. The 1986 Comprehensive Anti-Apartheid Act banned
new U.S. investment in South Africa, export sales to the police and military,
and new bank loans, except to support trade. The combination of domestic un-
rest, international governmental pressure, and capital flight posed a direct, sus-
tained, and ultimately successful challenge to the white minority rule, resulting
in the collapse of apartheid (Doh and Guay 2004).
NGOs have also pushed to have greater access to trade policy and other in-
ternational government agreements and processes, systems that have histori-
Contributions and Impact of Civil Society 85
cally been limited to governments acting as agents of their domestic con-

stituencies. NGOs have expressed a great deal of interest in the trade policy dis-
pute settlement mechanism under the GATT and its successor, the WTO. In
addition to engaging in bilateral interactions with specific companies, NGOs
have also been very active in collective efforts to develop, implement, and en-
force industry-wide standards, codes of conduct, and agreements.
Examples of intergovernmental organizations and agreements that have
been shaped and influenced by NGOs include the WTO, NAFTA, the U.N.
Global Compact, the International Labor Organization’s Declaration of Prin-
ciples concerning Multinational Enterprises and Social Policy, and the Or-
ganization for Economic Cooperation and Development (OECD) Guidelines
for Multinational Enterprises. Examples of international codes sponsored di-
rectly by not-for-profit NGOs include the Social Accountability International
SA8000 standard; Rugmark, which certifies rugs and carpets as meeting basic
standards for labor and human rights; and the Forest Stewardship Council,
which certifies lumber as consistent with sustainable practices (Doh and Guay
2004).
According to a 1995 World Bank report, the NGO sector, in both developed
and developing countries, experienced exponential growth from the mid-1970s
to the mid-1990s. In terms of international development, it is estimated that
over 15 percent of total overseas development aid is channeled through NGOs.
Indeed, a report published by the United Nations and the NGO Sustainability
notes that the global not-for-profit sector, with its more than $1 trillion turn-
over, could rank as the world’s eighth largest economy. In the 1970s, approxi-
mately 70 percent of resource flows from the United States to the developing
world were from official development assistance agencies and 30 percent were
from the private sector. In 2003, just 15 percent of $102.5 billion in resource
flows consisted of direct government assistance, with 85 percent coming from
nongovernmental resources: 45 percent from private capital flows, 15 percent
from NGO assistance, and 25 percent from personal remittances (USAID
2006). Teegen, Doh, and Vachani (2004) propose that the emergence of civil
society in general, and the activism of civic NGOs in particular, has broad im-
plications for the role, scope, and definition of corporations in the global econ-
omy and therefore for international management as a research field. Doh and
Teegen (2003) point out that the emergence of NGOs has, in some cases, sup-
planted the role of host governments in the historic business-government bar-
gaining relationship, and as a result, NGOs yield significant power over the
right of MNEs to operate in developing countries.
In addition, NGOs face criticism and pressure over the perception that they
are often less accountable for their actions than their government and business
counterparts. Specifically, the corporate-governance scandals in the United
States and around the world have resulted in increased attention to the role of
boards, interlocking board directorates, and the overlapping board member-
ship among corporations and not-for-profit NGOs. The American Enterprise
Institute (AEI), in cooperation with the Federalist Society for Law and Public
Policy Studies, has launched a program initiative called “NGO Watch,” whose
mission is to highlight “issues of transparency and accountability in the opera-
tions of non-governmental organizations (NGOs) and international organiza-
tion (IOs)” (AEI).
Civil society, also referred to as the “third sector” or the “not-for-profit” sec-
tor, is used to describe broadly all aspects of society that extend beyond the
realm of the public sector and the private sector (Teegen, Doh, and Vachani
2004). Although the term NGO is relatively recent, associations among “like-
minded individuals” have been part of ancient and modern history. When
Alexis de Tocqueville first visited the United States, he was struck by the fact
that “Americans were forever forming associations” (Tocqueville 1835). Unlike
state-based membership inherent in citizenship, association in civil society is
voluntary and is characterized by individuals coalescing around common ideas,
needs, or causes to promote collective gain. It can be said that once these indi-
viduals come together in an organized or semi-organized fashion, they are tak-
ing collective action (Olson 1971).
When individuals or groups within civil society work together to advance a
broad set of common interests and these interests become a significant force in
shaping the direction of society, the outcomes of this process are often called so-
cial movements (Teegen, Doh, and Vachani 2004). Social movements can be
thought of as broad societal initiatives organized around a particular issue,
trend, or priority (Teegen, Doh, and Vachani 2004). Modern examples include
the environmental movement and the women’s, or feminist, movement. When
civil-society groups come together to form more organized relationships, the
entities that emerge are often referred to as NGOs. NGO is a broad term and is
used somewhat loosely to refer to all organizations that are neither an official
part of government (at any level) nor private for-profit enterprises. Within the
category, however, there are many different types, characteristics, and purposes
of NGOs.
DEFINITIONS AND CLASSIFICATIONS OF NGOS
Vakil (1997, 2057) suggests that the “lack of consensus on how to define and
classify nongovernmental organizations has inhibited progress on both the the-
oretical and empirical fronts in the effort to better understand and facilitate the
functioning of the NGO sector.” Indeed, the acronym NGO is not very helpful
in describing the organizations it defines, in that it tells us what the organiza-
tions are not rather than what they are. Hence, classification is important in
terms of demarcating NGOs and specifying different types and purposes of
NGOs.
Teegen, Doh, and Vachani (2004) argue that an initial distinction should be
made between “club” and “social purpose” NGOs. NGOs arising from social
movements can be described as social purpose NGOs. The stakeholders in
social purpose NGOs are individuals who contribute time or resources to the
organization; NGO staff, management, and board members who direct and
monitor the organization’s activities; and individuals, private foundations, gov-
ernments, and multilateral institutions that provide funding (Teegen, Doh,
and Vachani 2004). Social purpose NGOs are accountable primarily to the
clients they serve. Social purpose NGOs include, for example, environmental,
human rights, poverty-relief, and health NGOs. Club NGOs are membership
associations designed primarily to provide a benefit to their members, generally
as a result of pooling interests. Examples of club NGOs are unions, business
associations, and church groups. In most of the contemporary literature on
NGOs, the focus is on social purpose NGOs (Teegen, Doh, and Vachani
2004).
The term nongovernmental organization dates from 1950, when the United
Nations coined the expression (Vakil 1997, 2068). Presumably the United Na-
tions, which dealt primarily with governments and wanted to consult private
not-for-profit organizations that were independent of governments, found it
convenient to refer to them simply as nongovernmental organizations to dis-
tinguish them from governments. Today the United Nations (2003, par. 1) de-
scribes an NGO as “any non-profit, voluntary citizens’ group which is orga-
nized on a local, national or international level. Task-oriented and driven by
people with a common interest, NGOs perform a variety of services and hu-
manitarian functions, bring citizens’ concerns to Governments, monitor poli-
cies and encourage political participation at the community level. They provide
analysis and expertise, serve as early warning mechanisms and help monitor
and implement international agreements. Some are organized around specific
issues, such as human rights, the environment or health.” Another, more tech-
nical definition is offered by Hudson and Bielefeld (1997, 32): “NGOs are or-
ganizations that provide useful (in some specified legal sense) goods or services,
thereby serving a specified public purpose . . . (2) are not allowed to distribute
profits to persons in their individual capacities; (3) are voluntary in the sense
that they are created, maintained, and terminated based on voluntary decision
and initiative by members or a board; and (4) exhibit value rationality, often
based on strong ideological components.”
Teegen, Doh, and Vachani (2004, 466) provide a more succinct definition,
referring to social purpose NGOs as “private, not-for-profit organizations that
aim to serve particular societal interests by focusing advocacy and/or opera-
tional efforts on social, political and economic goals, including equity, educa-
tion, health, environmental protection and human rights.” Teegen, Doh, and
Vachani (2004) further differentiate among various functions of NGOs. Advo-
cacy NGOs work on behalf of others who lack the voice or access to promote
their interests. They engage in lobbying, serve as representatives and advisory
experts to decision makers, conduct research, hold conferences, stage citizen
tribunals, monitor and expose actions (and inactions) of others, disseminate
information to key constituencies, set or define agendas, develop and promote
codes of conduct, and organize boycotts or investor actions. In these ways,
NGOs give voice to stakeholders who might not otherwise have access to in-
fluence channels and provide access to institutions to promote social gain or
mitigate negative spillovers from other economic activity. Operational (also re-
ferred to as programmatic or service-oriented) NGOs provide critical goods
and services to clients with unmet needs. NGOs have long stepped in to serve
as critical “safety nets” where politically challenged, indebted, or corrupt states
are unable or unwilling to provide for unmet needs, and where global problems
defy traditional nation-state responsibilities. Examples of such operational ac-
tivities include relief efforts provided by the Red Cross and Red Crescent, nat-
ural resources monitoring by the World Wide Fund for Nature, and the provi-
sion of medical care by Doctors without Borders.
Although some NGOs focus primarily on advocacy or operational service
delivery, many others pursue both sets of activities simultaneously, or evolve
from one to the other. For example, Oxfam, the global development and
poverty relief organization, advocates for changes in public policy that would
provide greater support for its efforts, while also contributing directly to health,
education, and food security in the developing countries in which it operates.
In the international development literature, Brown and Moore (2001) dis-
tinguish three types of international NGOs (INGOs): welfare and services de-
livery INGOs, capacity building INGOs, and policy influence INGOs. The
first category corresponds roughly to Teegen, Doh, and Vachani’s (2004) oper-
ational NGOs, and policy influence INGOs are most closely related to advo-
cacy NGOs. Capacity building INGOs might be considered a special (and
somewhat narrow) category and one that may often overlap with the two
above. Brown and Moore (2001) conceptualize capacity building INGOs as
large global organizations that use their expertise and financial resources to
build the capability of smaller local NGOs. Most large INGOs (Oxfam, WWF)
engage in some capacity building activities along with their advocacy and op-
erational initiatives.
Other researchers and practitioners, especially those involved in the study or
work of international development and relief organizations, distinguish be-
tween “northern” NGOs and “southern” NGOs and the interactions between
the two (Ashman 2001; Lindenberg and Dobel 1999). These researchers con-
ceptualize northern NGOs, in part, as providing funding and other resources
to southern NGOs, and document increasing collaboration and joint projects
between NGOs of the North and South.
CIVIL SOCIETY AND THE MULTILATERAL TRADE

AND INVESTMENT AGENDA
Some civil society advocates and NGOs have argued that globalization implies
a new form of economic imperialism, grounded in the increased commonality
(homogenization) of products, manufacturing processes, consumption, and
regulation. These actors maintain that the global economic system is controlled
by a limited number of wealthy countries and large MNEs. (For an articulation
of this viewpoint, see Gray 1998 and Giddens 1998). Rugman, however, has ar-
gued (2000, 2001) that although the actual economic impact of the United
States, the European Union, and Japan in multilateral negotiations and organi-
zations is undoubtedly enormous, other countries are increasingly able to exert
their own influence, especially in comparison with the role they have played in
regional agreements. With NAFTA, the U.S. agenda dominated that of Can-
ada and Mexico. In the European Union, the old coalition between Germany
and France is still dominant across the Brussels-based administrative structure.
In Asia, Japan is still the country with the most MNEs. In the WTO, by con-
trast, developing countries have gained increasing power and influence, as re-
flected in the widely publicized failure of the Seattle ministerial meetings in
2001, the launch of the Doha Development Round negotiations in 2003, and
the emergence of the G20⫹ group of developing countries that have wielded
significant influence over the direction of negotiations (see chapter 4). In addi-
tion, the WTO has undertaken some major steps to encourage greater access to
its proceedings and to solicit input from NGOs and civil society in this process.
Some civil society activists were especially troubled by the proposed Multi-
lateral Agreement on Investment (MAI). The MAI was to provide national
treatment for MNEs in their investment around the world, but was defeated in
1998, partly because of these antiglobal stakeholders, but primarily because of a
reduced U.S. commitment (at that time) to furthering global trade and invest-
ment liberalization, and the strenuous objections of France and Canada to
some of the proposed provisions. The WTO is portrayed by some critics of
globalization as the driver of global free trade and investment. As discussed in
chapter 4, the WTO secretariat represents a small, relatively understaffed sup-
port mechanism for member governments who make the policies that are cod-
ified in the multilateral trade and investment agreements. The WTO itself
wields relatively little political power; however, it is emblematic of many of the
criticisms of globalization articulated by NGOs, civil society, and developing-
country governments.
The triad-based trade disputes illustrate that the WTO faces substantial
problems. There are two underlying reasons for these problems. First, the
WTO is a technical body, lacking in political power and even political under-
standing. It has been successful for more than fifty years in dealing with the
technical issues of a series of tariff cuts, but it is not equipped to deal with the
new agenda of international trade and investment liberalization. Tariff cuts
have allowed “shallow” integration across many manufacturing sectors (but not
in agriculture and textiles). Today’s agenda, with major implications for MNEs
engaged in FDI, is one of “deep” integration. Here, the issue is how to make do-
mestic markets internationally contestable. This involves negotiating the role
of government in society, a virtually impossible task to achieve for the WTO
secretariat, with its small staff of professionals in Geneva. The WTO as a gov-
ernment-to-government negotiating body is not designed to deal with non-
trade and investment issues such as environmental regulations, labor standards,
and human rights. These issues now come onto its agenda only as indirect,
technical matters in trade disputes. These “big issues” are better handled by
governments themselves in different international forums, for example, human
rights at the United Nations, labor standards at the International Labor Orga-
nization, and environmental regulations at a new world environmental agency.
These issues are well beyond the capacity of the WTO to address, let alone re-
solve. Nonetheless, many NGOs have called for closer integration of social and
environmental concerns within the global economic agreements and organiza-
tions described in chapter 4 (the World Bank, the IMF, the WTO) (Esty 1994).
GLOBALIZATION AND DEVELOPMENT:

COLLABORATION OR CONFLICT?
Increasingly, NGOs are engaging in both collaborative and combative relation-

ships with MNEs in the areas of development. Lindenberg and Dobel (1999,
12) summarize the dilemma for NGOs of closer ties to MNEs: “The NGOs
face a continuing agenda of how to maintain their mission integrity and auton-
omy even as they seek these funds. At the same time they need to protect their
own legitimacy in the eyes of funders and recipients and not be used by states or
corporations for their own purposes.” In response, many NGOs are no longer
willing to adopt an either-or approach to their interactions with companies.
Rather, they have assumed an increasingly sophisticated and multifaceted rela-
tionship with business firms. In moving into this more complex role, they must
ask, “When does it make sense to cooperate with the corporate sector and when
might it be necessary to provide contravening pressure?” (Lindenberg and Do-
bel 1999, 12). Figure 5.1 presents a summary of these challenges.
By the same token, companies are now evaluating more strategically their
decisions to collaborate with NGOs. Drawing on resource dependency theory
and theories of social networks and social capital, Doh (2006) reports the re-
sults of a survey of Fortune 500 managers on their perceptions of NGOs and
the factors that contribute to decisions to collaborate, as well as their satisfac-
tion with collaboration. He finds that corporate-NGO interactions are com-
mon, dynamic, and sophisticated; that managers have significant discretion in
their approach to NGOs; and that managerial perceptions toward NGOs ap-
pear to be shaped by their own experiences and those of their companies. The
analysis suggests a close linkage between the demographic, experiential, and
network relationships associated with individual managers and their inclina-
tion to engage with NGOs. Age, experience, education, and prior affiliation
with NGOs are all associated (positively) with managerial responses regarding
the frequency and intensity of their interactions with NGOs and their assess-
ment of the efficacy of those experiences. In addition, perceptions of NGOs
as trustworthy and reciprocal partners also positively affect the reported fre-
quency by managers regarding their interactions with NGOs and the positive
Figure 5.1 Changing Private, Public, NGO Roles and Dilemmas for Expanding
NGO Sector
Adapted from Lindenberg and Dobel 1999, p. 13, fig. 2.
feelings they have about them. Perhaps more importantly, the perceptions and
experiences of managers are correlated with the actions of their firms; the more
experience individuals have in interacting with NGOs, the more likely they
were to report high levels of interactions by their firms.
In their review of the evolution of development NGOs, Brown and Kale-
gaonkar (2002) observe that resource scarcity is one of the chief challenges fac-
ing NGOs and that collaboration with the business community is one solution
to the problem in an era of declining resources for the state. Although many
NGOs have challenged business practices that exploit marginalized groups,
NGOs have increasingly mobilized resources from business to implement pro-
grams valued by both NGO and business. Brown and Kalegaonkar (2002)
point to commercial bank support for NGO educational innovations in Brazil
as one example. They also observe that strategic alliances that advance core
goals of both parties, such as the initiatives of Philippine Business for Social
Progress, contribute to political stability for the business community and sus-
tainable development for grassroots groups.
Lindenberg and Dobel (1999, 8) echo Brown and Kalegaonkar’s (2002) in-
terpretation of the response of the NGO sector to the challenges of globaliza-
tion. In particular, they report that NGOs have emerged to fill voids created by
the decline in national-government commitment to development support and
by outmoded international institutions. And yet “ironically, without a state to
actually provide services or security, NGOs face the task of how to rebuild com-
munities and provide service often without the effective public power needed
to sustain them” (Lindenberg and Dobel 1999, 11). They argue that “new tech-
nology, declining public resources, and unmet needs of refugees and poverty
populations have resulted in the growth of NGOs around the world” and that
this “creates major dilemmas in how to cooperate with state and corporate sec-
tors in gaining resources.” Lindenberg and Dobel (1999, 12) suggest that much
of the new corporate wealth is “resolutely antistatist and more inclined to work
with the NGO sector. New partnerships between corporations and NGOs are
being developed in various communities around the world.”
In addition to the obvious funding benefits, NGOs may also experience rep-
utation and legitimacy gains. Some NGOs are perceived as fringe, peripheral,
inflexible, or ineffective, and affiliation with a corporation in good public
standing may mitigate some of these perceptions. Just as likely, NGOs may
suffer reputation costs and accusations that they have modified or softened
their positions in exchange for corporate donations. This perception—that an
NGO has been co-opted by its corporate partner—has emerged as a genuine
concern for many NGOs seeking to maintain independence and autonomy
while engaging corporations for both resources and expertise.
Lindenberg’s research (1999, 605) has suggested that “NGOs and private sec-
tor organizations have had difficulty developing strong and sustainable part-
nerships.” Building on Austin’s continuum (2000), Lindenberg (1999) asserts
that because of distrust between potential partners, few NGO-business rela-
tionships have progressed to the most advanced, integrated stage. However, it is
likely that by the end of the next decade, more of these close partnerships will
be evident.
NGOs also have reason to be concerned about the net benefits that may ac-
crue to them from relationships with corporations. Indeed, according to one
study, costs appear to outweigh the benefits. Ashman (2001) examined ten cases
of collaboration between businesses and civil-society organizations (NGOs)
engaged in development in Brazil, India, and South Africa. Her findings sug-
gest “a sobering view of the benefits that civil society organizations and their
constituencies can expect from collaboration” (Ashman 2001, 1,097). Ashman
finds that development impacts are more likely in sectors related to business in-
terests, such as education and employment generation. She also finds that ca-
pacity-building objectives are more likely to be realized than are those of citizen
empowerment. Finally, NGOs tend to absorb the bulk of the costs of collabo-
ration whereas businesses often dominate decision making.
Starbucks’s relationship with NGOs has been the subject of a number of case
studies and research efforts. Lindenberg (1999), for example, documents Star-
bucks’s long-standing relationship with CARE. Beginning in 1991, one of
CARE’s managers in the Northwest region approached a Starbucks staff mem-
ber regarding CARE programs and development seminars. Starbucks had al-
ready carved out a strong social responsibility position, and given that Star-
bucks sourced coffee from regions where CARE was active, some kind of
relationship seemed logical and appropriate (Lindenberg 1999). Thus, the rela-
tionship began as a philanthropic one in which CARE received $2 from each
sale of coffee samplers. Subsequently, reports Lindenberg, the relationship be-
came more transactional, with Starbucks donating resources directly to CARE
projects. By the late 1990s, “the relationship moved from the transactional to
more integrative stage in which CARE staff members were offered opportuni-
ties for training and sabbaticals in Starbucks corporate units, such as human re-
sources and marketing. Starbucks staff members participated more frequently”
(Lindenberg 1999, 605). Ultimately, Starbucks began to consult CARE on is-
sues related to codes of conduct and standards regarding its overseas business
practices, including Starbucks’s decision to move into the sale of “fair trade”
coffee. By 2001, Starbucks had contributed more than $1.8 million to CARE
(Argenti 2004).
On the NGO side, Oxfam’s relationship with corporations has been the sub-
ject of a number of analyses. Oxfam’s approach to these relationships could
generally be characterized as one of “engagement” as opposed to close partner-
ships. Lindenberg (1999) reports that Oxfam Great Britain has pursued an
evolving, comprehensive strategy that is complex and dynamic and involves
multiple corporate relationships. “Oxfam’s corporate engagement strategy in-
cludes three dimensions: funding and cooperation, policy dialogue with joint
standard setting and monitoring, and pressure tactics. Oxfam GB’s president
defines funding and cooperative relationships as ones in which Oxfam and its
corporate partners have similar long-term values and goals about the develop-
ment process, not unlike the decade-long relationship between CARE and
Starbucks. Oxfam has such relationships with Northern Foods and the Coop-
erative Bank, two U.K. corporations. When Oxfam engages in policy dialogue,
the second dimension of its strategy, neither Oxfam nor the corporations in-
volved are under any illusions that their values or basic objectives are highly
compatible. Rather, their commitment is to engage in civil discussion about is-
sues of common concern” (Lindenberg 1999, 605).
Nonetheless, Oxfam has recently worked more closely with corporations in
areas that include its “Making Trade Fair” campaign and related initiatives re-
garding “fair trade”–certified coffee. According to an article published in 1999
and coauthored by Oxfam America’s president, “The most innovative interna-
tional NGOs of the future will have moved from the hands-on operational
style of the 1960s to a highly complex and diverse set of institutional partner-
ships, joint ventures, and networking relationships” (Offenheiser, Holcombe,
and Hopkins 1999, 137).
Some researchers have examined corporate-NGO collaboration in different
regions of the world, tracking the evolution of these relationships in one region
and comparing it with that in another. Austin and others (2004) examine
similarities and differences between collaborations in Latin America and the
United States. They note that in Latin America, corporate philanthropy toward
NGOs is not as developed as in the United States or Europe. The government
and churches play a larger role in social services. “Businesses were seen as hav-
ing to do with business, full stop. In fact, in many countries the business sector
has been looked on with suspicion and concern about self-interest and ex-
ploitation rather than as sources of beneficence and caring about the well-being
of the larger community” (Austin et al. 2004, 6).
MNES, NGOS, AND DEVELOPMENT:

TWO ILLUSTRATIVE CASES
There have been a number of interesting cases of MNE-NGO interactions re-

lated to development. Here we detail two of them.
Unilever and Oxfam in Indonesia
Unilever Indonesia (UI) has had a significant impact on the development

process in Indonesia. UI pays considerable taxes to the government, employs
many workers, and has shared best-practice standards with the local economy.
On the other hand, participation in UI’s value chain does not guarantee im-
provements in the lives of people living in poverty, and debate rages over what
constitutes reasonable performance standards. Oxfam Great Britain, NOVIB
(Oxfam Netherlands), Unilever, and UI collaborated on a research project ex-
ploring the link between international business and poverty reduction. In par-
ticular, the report details both the positive and negative effects that UI has had
on poverty in Indonesia.
UI, which was founded in 1933, had $984 million in sales in 2003. The ma-
jority (84 percent) of sales were derived from household and personal care
products, such as soap powder, household cleaning products, soaps, and sham-
poos. The remaining sales were generated from foods such as tea, margarine,
and ice cream. UI ranks as the thirteenth-largest company in Indonesia by
sales, and the fourth-largest in the fast-moving consumer goods (FMCG) sec-
tor.
According to Unilever’s estimates, at least 95 percent of Indonesians use one
or more of UI’s products annually, and 90 percent of poor people in Indonesia
buy UI’s products every year (Clay 2005). Approximately half of Indonesia’s
population is in this poverty-stricken segment, making less than $2 per day.
Marketing to people in poverty presents a number of challenges. Oxfam and
UI agree that items sold should represent good value for the money or serve
poverty-related social or environmental goals. More research needs to be done
to determine if UI is indeed meeting these goals.
Unilever, as a large MNE, has a huge impact on employment and employ-
ment conditions in countries such as Indonesia. UI is important because of its
size and also because of its investment in production and distribution. UI’s
main workforce consists of approximately 5,000 people, of whom 60 percent
are direct employees and 40 percent are contract workers. Indirectly, the full-
time equivalent of about 300,000 people earn their livelihoods in UI’s value
chain (Clay 2005). In general, UI treats its employees very well. UI is in the top
quartile of all Indonesian companies with respect to pay and benefits (Clay
2005). In 2003, the UI entry-level salary was 123 percent of the minimum wage.
UI also maintains high health and safety standards, good retirement and ma-
ternity benefits, and good workplace facilities, and emphasizes training. Train-
ing can provide employees with enhanced skills and confidence, which im-
proves lives. The study found that employees working less formally for UI
benefited less from the company. Contract employment can result in gaps be-
tween company policy and practice (Clay 2005).
UI spent $254 million on supplies in 2003, and its top ten suppliers are all In-
donesian (Clay 2005). UI’s extensive investment in local suppliers supports lo-
cal jobs, profits, assets, and tax revenues. The quality of local manufacturing is
also improved, as UI passes along its quality-management systems and techno-
logical assistance. However, UI does have to deal with potentially negative
effects of supply companies that use contract workers, which makes ensuring
UI’s standards challenging. In addition, UI creates potentially unreasonable
price pressure. Since UI purchases large quantities of supplies, it is able to ne-
gotiate lower prices. This price pressure is sometimes pushed to the raw mate-
rial producers who have limited negotiating power.
Oxfam believes that the private sector can spur development and be “pro-
poor.” FDI can bring wealth creation, employment, and technology transfer.
Barbara Stocking, the director of Oxfam Great Britain, believes that “compa-
nies, when they act responsibly, can play a vital role in contributing to sustain-
able development and poverty reduction” (Clay 2005). The collaborative re-
search initiative between Oxfam and Unilever set out to explore the tangible
effects of Unilever’s programs on those living in poverty. As a result of the study
and rigorous dialogue, Oxfam believes they have raised Unilever’s awareness of
their impact and opportunities.
Unilever agreed to work with Oxfam on the report because the company rec-
ognized that its business heavily engages with poor people—producers and
consumers—around the world. Also, Unilever considered the Millennium and
Johannesburg declarations, which make poverty eradication the focal point for
global strategies for sustainable development. Unilever wanted to understand
the impact of its business operations on poor people in order to know how to
support the declarations. Unilever admits that its opinions do not always coin-
cide with those of Oxfam, and some of its managers were uncomfortable under
scrutiny, but the managers are open to dialogue.
UI, though part of a larger MNE, is rooted in the local economy and creates
major changes in the region. UI has significant forward linkages (that is, distri-
bution networks) and backward linkages (that is, suppliers) in the local In-
donesian economy. Additionally, the majority of UI’s revenues remain in In-
donesia, through its local sourcing, wages, margins, and dividends to local
shareholders (15 percent of total dividends) (Clay 2005). After initial invest-
ment from the parent company, further investment has not come from outside
Indonesia at all in recent years, which indicates a strong, profitable local busi-
ness. UI points out that it consciously kept products affordable during the fi-
nancial crisis of 1997–1998. In fact, UI expanded its local operations through
joint ventures and acquisitions. UI believes that its stability during this time of
crisis helped the turbulent economy.
From 1999 to 2003, 25 percent ($182 million) of UI’s total pretax profits were
retained and reinvested in local business activities, particularly manufacturing
and distribution. This investment represents a commitment to UI’s long-term
future as well as help for Indonesia’s long-term development. Unilever also pays
about $130 million annually to the Indonesian government in taxes. This con-
siderable amount, depending on the policies of the Indonesian government,
can clearly contribute to the development of the local economy.
Additionally, the value created by poorer people working at the extremes of
the value chain is much lower than the value captured by those who interact di-
rectly with UI (Clay 2005). UI also has a large, complex distribution chain that
adds much value. Nonetheless, participation in UI’s value chain does not auto-
matically guarantee improvements in the lives of poor people.
As the case of UI illustrates, MNEs can have a positive impact on develop-
ment in major developing regions, such as Asia. Unilever’s direct payments to
the government in the form of taxes, stability during the financial crisis, em-
ployee benefits, and deep commitment to the local economy generate positive
macroeconomic effects. UI’s value chain has a huge effect on employment,
both in terms of numbers and employment practices. UI also initiates positive
effects on both the supply and distribution ends of its business. Still, Oxfam
raises concerns that UI is forcing local competitors out of business, or creating
a need for its product among the poor rather than meeting their needs. MNEs
such as UI, though spurring growth, still may fall short in some development
areas.
Microfinance in Latin America
The concept of extending small loans to low-income individuals is not new;

however, the explosion of microfinance institutions (MFIs) over the past several
decades constitutes a significant shift in the international development com-
munity (Berger 2000). Thousands of microfinance initiatives have emerged
throughout the developing world as a way to combat poverty, promote com-
munity-based development, and make a profit. The movement received world-
wide recognition when Muhammad Yunis, considered the founder of micro-
finance, was awarded the Nobel Peace Prize in 2006.
One of the major reasons that microfinance has been so successful in the de-
veloping world is that financial markets are either nonexistent or tend to be
weak and exclusionary (see chapter 6). Researchers have suggested that as little
as 1 to 2 percent of the population in developing countries has access to formal
credit (Carr and Tong 2002). Despite the explosion of microfinance providers,
economists estimate that less than 5 percent of microenterprises in Latin Amer-

ica, for example, have access to institutional sources of credit (Berger 2000).
Traditional banks see opportunities for profits in the vast and underserved
microfinance market (Christen and Rosenberg 2000). Pioneering microfi-
nance NGOs demonstrated both the enormous demand for such services and
the ability to achieve high returns. Commercial banks have far more resources
to devote toward innovation in product and service offerings, utilization of ad-
vanced technology, and the development and implementation of sophisticated
marketing strategies. Large banks are also able to access large pools of capital at
relatively low rates and finance new and potentially risky business ventures. For
example, credit cards are fast becoming the next wave in microfinance because
of their ability to reduce transaction costs, ease the management of informa-
tion, and increase customer access (Berger 2000). However, only large banks
have the technology, staff, and capital to offer such amenities. Another area
where commercial banks excel is in marketing. As competition intensifies, as
growth rates slow, and as client attrition and the demand for new services in-
crease, effective marketing campaigns become crucial in order for MFIs to ex-
pand, or just maintain, their client bases (Tran 2000).
Larger commercial institutions have more experience with marketing and
more money to invest in it, which helps them position themselves and develop
competitive and differential advantages. Commercial banks also have the fi-
nancial resources to develop new financial products. For example, Banco Soli-
dario has developed a program that grants immediate loans to individuals who
use gold jewelry as collateral (Christen and Rosenberg 2000). This type of
product innovation allows clients’ needs to be met more exactly, and it allows
microfinance providers to capture more of the potential market.
A recent expansion in Citibank’s cooperation with ACCION, a leading mi-
crofinance provider in the Americas, demonstrates the growing involvement by
international lenders in microfinance. In its early collaboration, Citibank was
primarily a donor to ACCION programs. After considering entering the mi-
crofinance market directly, Citibank chose instead to broaden its partnership
with ACCION and its member NGOs. Citibank concluded that recipient
businesses could become Citibank customers for larger loans, business check-
ing, and other services. However, Citibank realized that ACCION’s reputation
and that of its partner organizations created more trust among local indigenous
populations. For this reason, Citibank decided to continue supporting AC-
CION rather than start its own microcredit program. As a result, Citibank ex-
pects to gain customers, as those who graduate from microloans look to banks
to expand their small businesses. In another partnership, the Foundation for

International Community Assistance (FINCA) and Visa initiated a partner-
ship to bring greater efficiency and security to microfinance clients. The initia-
tive builds on a two-year partnership between FINCA and Visa to improve the
delivery of financial services to entrepreneurial women in developing countries.
The partnership plans to explore how Visa solutions will provide FINCA and
its clients with both cost- and time-saving processes, allowing FINCA to ex-
pand its outreach to more of the world’s poor. In addition, MasterCard is part-
nering with la Asociación para el Desarrollo de las Microempresas (the Associ-
ation for the Development of Microfinance, or ADEMI) in the Dominican
Republic to offer a MasterCard to members of ADEMI (Berger 2000). Card-
holders can receive cash advances, check balances, and make payments through
sixty ATMs and forty-five offices of Banco Popular. MasterCard and other
credit-card companies are looking toward the microcredit market because their
traditional middle- and upper-middle-class markets have become saturated.
MNE participation may be improving the overall microfinance market. A
World Bank study of foreign and domestic small-business lending in Ar-
gentina, Columbia, Peru, and Chile found that large foreign banks actually
lend significantly more, as a percentage of their portfolios, to small businesses
than do their domestic counterparts (Clarke et al. 2002). Another fast-develop-
ing trend in the microfinance sector is the increasing supply of consumer fi-
nancial services for low-income individuals. Finance companies, in an effort to
expand their consumer base, are beginning to use consumer durable goods as
collateral. In other words, these for-profit entities are implementing the chat-
tel-mortgage-lending technology that NGOs developed.
In sum, the exploitation of MNE financial institutions’ advantages in size,
scale, managerial capability, and technological expertise, combined with the lo-
cal knowledge, insight, experience, and innovation of local NGO MFIs, creates
a powerful collaboration with commensurate opportunities for generating
profits and assisting development by providing credit to underserved popula-
tions.
MULTINATIONALS AND CIVIL SOCIETY:

MANAGING EXTERNAL STAKEHOLDERS
How should MNE managers respond to the presence of external stakeholders

such as civil society organizations and NGOs in the area of investment and de-
velopment? Our review of the literature and cases suggests the following:
1. The activities of external stakeholders should be discussed at the board and

top-management level, and an overall strategy should be developed to deal
with them. Here, it is important to make a distinction between NGOs open
to cooperation and those engaged purely in advocacy. Initiatives should be
developed to work with the former.
2. Sustainable development and ethical stakeholder perspectives should be em-
bedded within the organization. More importance should be attached to so-
cial values, and they should influence the inner workings of the organization.
3. The firm should articulate the concept of stakeholder capitalism, rather than
shareholder capitalism, and the contribution of the organization to the re-
sulting wealth creation. In other words, all senior managers in the firm
should engage with NGOs; then the debate will be more evenhanded.
The firms that will do best in near future will likely be those that take leader-
ship positions with respect to stakeholder management, adopt the concept of
“values-driven” rather than profit-driven capitalism, and respect their most im-
portant resource, namely their employees. These are likely to be the most effec-
tive tools that can be deployed at the microeconomic level, including in the
realm of development.
The above prescriptions are represented in figure 5.2 on MNE responses to
civil society concerns. On the vertical axis a distinction is made between two
types of MNE stakeholder strategies. On the top, a strategy that differentiates
the various stakeholder groups, distinguishing between those with which a
dialogue is possible and those with which it is not (differentiated response) is
pursued, and on the bottom, a strategy that dictates a uniform response to all
outside stakeholders is pursued. The horizontal axis on the MNE corporate phi-
losophy distinguishes between a broad stakeholder perspective, whereby goals
other than shareholder-wealth maximization are considered relevant, on the
right, and a narrower shareholder profit-maximizing perspective on the left.
Many MNEs are now positioned in quadrant 3: they pursue a stakeholder
management model, perhaps driven by sustainable development environmen-
tal considerations. Here MNEs try to identify those salient stakeholders that
can contribute to a win-win situation for the firm and society at large.
SUMMARY POINTS
NGOs constitute an increasingly important set of actors on the international

political-economic landscape. Although at times the interests of MNEs and
Figure 5.2 Multinational Enterprise Strategies and Civil Society
NGOs would appear to be divergent, those interests are increasingly inter-

twined. MNEs and NGOs can work collaboratively to engage in innovative
and alternative approaches to the development challenge. Donor agencies and
other development policymakers are beginning to embrace the joint role of pri-
vate corporations and NGOs in supporting development. Civil society organi-
zations such as NGOs can provide important services that complement MNE
resources. Indeed, MNEs and civil society have an increasingly collaborative re-
lationships that can generate positive economic returns to the firms and social
benefits to the regions or communities in which they operate (Teegen, Doh,
and Vachani 2004).
NGOs and civil society may be considered CSAs within a given country.
The presence of civil society can provide a check on corrupt or inefficient gov-
ernments, or make up for the absence of health, education, and other services
that governments either do not provide or offer at insufficient levels. Civil soci-
ety organizations can also constitute a disadvantage from the perspective of
MNEs if these organizations unnecessarily constrain or limit MNE strategies.
When NGOs act collaboratively toward MNEs, and MNEs deploy their FSAs
in a manner that provides important social contributions, then MNE–civil so-
ciety relationships can maximize the integration of CSAs and FSAs so that they
have a positive impact on development.
Chapter 6 Institutional
Governance and Development
The importance of institutions and governance to growth and devel-

opment is widely accepted. North (1986, 1993b) argues that institu-
tional stability, fairness, and predictability are critical for economic
growth. Such institutional environments are demonstrated by a well-
specified legal system, a clearly defined and impartial third ( judicial)
branch of government to enforce property rights, and a set of attitudes
toward contracting and trading that encourage people to engage in
transactions at low costs.
Conversely, the absence of institutional structures that facilitate in-
teractions, such as rule of law, a good quality bureaucracy, and low
levels of corruption in government, results in significantly higher
transaction costs. Institutional deficiencies stemming from inconsis-
tent enforcement of rules, ineffective legal frameworks (La Porta et al.
1997, 1998), and corruption in governments (Doh et al. 2003) have
been sources of instability that impede growth and innovation. Over-
all, weak legal and regulatory institutions (North 1986, 1993b) that fail
to provide for basic public goods, property rights, and other protec-
103
104 Institutional Governance and Development
tions (Levy and Spiller 1996) result in poor economic performance and insta-
bility (Henisz and Williamson 1999; Henisz and Zelner 2005).
In this chapter, we review the growing literature on the importance of gov-
ernance and institutional advancement as a precondition for successful devel-
opment, and the damaging effects of institutional deficiencies on development.
We focus on the case of corruption as an example of how poorly functioning in-
stitutions can impede growth and development, and review strategies for com-
bating corruption that include the participation and contribution of MNEs.
We also survey the historic MNE–host government bargaining model and cri-
tique that model in light of (1) a greater understanding of the benefits of MNE
investment for host developing countries and (2) the growth of international
institutions and agreements under which host countries voluntarily agree to
improve their institutional development and governance. We introduce a re-
vised bargaining model that captures these developments and actors, including
the emergence of civil society and NGOs as important actors in the business-
government interface that better informs the development process.
THE IMPORTANCE OF INSTITUTIONS AND

GOVERNANCE TO DEVELOPMENT
Drawing from North’s new institutional economics (1990, 1993a, 1993b, 1994),
researchers have focused on hazards associated with the makeup and distribu-
tion of political systems (Henisz 2000a, 2004) and have called attention to the
risks associated with institutional voids—environments characterized by the
absence of formal, functional institutional mechanisms (Khanna and Palepu
1997, 1999a, 1999b, 2000a, 2000b; Khanna, Palepu, and Sinha 2005). Another
approach to measuring institutional quality focuses on “governance infrastruc-
ture” aspects of host-country environments and reflects the complex and inter-
related dimensions of the institutional apparatus for overseeing private sector
development and property protection (Kaufmann and Kraay 2002; Kaufmann,
Kraay, and Zoido-Lobaton 1999).
An additional theoretical stream, drawn from economic literature, further
complements the Northian assessment of the relationship of institutional qual-
ity to private sector growth and prosperity. The anticipated benefits of well-de-
veloped financial markets in host countries rest on the capital market–disci-
pline thesis. Capital markets are said to monitor managerial behavior through
the threats of takeover and bankruptcy and mitigate the agency problem with
politicians who pursue self-serving goals such as excess employment (Boycko,
Institutional Governance and Development 105
Shleifer, and Vishny 1996), by establishing boundaries between politicians and

managers and raising the costs to politicians of exploiting their power over
firms (Sappington and Stiglitz 1987). Overall, capital markets can alter the
mode of control of enterprises in emerging economies from a politically consti-
tuted hierarchy to the price system of economic markets, where managerial de-
cisions are informed by the contingencies of the competitive market. However,
the intensity of capital market pressures depends on the size and sophistication
of the nation’s financial system, as reflected in the level of stock-market devel-
opment and shareholder legal protection (La Porta et al. 1997). To the extent
that countries differ considerably in their levels of capital market development,
and therefore in their managerial-monitoring benefits (Holstrom and Tirole
1993), there may be significant differences in firm-level prosperity and growth.
Hence, better developed financial markets in host countries provide mecha-
nisms through which investments are protected and “insulated” from sur-
rounding risks such as asset expropriation and other host country risks. Local
and foreign investors perceive relatively developed financial markets and insti-
tutions and their capacity to enforce capital markets disciplines as insurance
against the risks of asset expropriation and contract repudiation.
Some researchers (Newman 2000; Newman and Nollen 1998) argue that in-
stitutional upheaval promotes organizational transformation to a point and
that beyond that level, such uncertainty can be counterproductive, suggesting
that regions experiencing unstable institutions will not facilitate growth and
innovation. Although this institutional perspective has been used to examine
some managerial phenomena, Hoskisson and others (2000, 253) note that most
studies that draw on institutional theory to understand aspects of emerging-
economy phenomena have focused primarily on state-owned enterprises, and
suggest that “the institutional environment (including cultural, political, and
other factors) has effects on other enterprises (private firms, international joint
ventures, collectives) in emerging economies.”
Researchers examining the absence of formal, functional institutional mech-
anisms, a condition that often results in a lack of property rights, a lack of ade-
quate incentives to reward entrepreneurship, a lack of effective governance, and
the like, argue that under these circumstances, firms are forced to create inter-
nal markets for capital, labor, and products because the institutional environ-
ment fails to provide the political and institutional infrastructure (Khanna and
Palepu 1997, 2000a, 2000b; Khanna, Palepu, and Sinha 2005).
According to Hausmann and Rodrik (2003), a central market failure in rela-
tion to innovation is an information externality: production costs of modern,
nontraditional activities are unknown and can be discovered only by making

sunk investments. This is particularly important to the present discussion since
countries grow rich by increasing the range of products that they produce, not
by concentrating on what they already do well. Thus, productive diversifica-
tion requires entrepreneurs who are willing to invest in activities that are new to
the local economy. However, in the absence of property rights, such invest-
ments may be easily appropriated by competitors, robbing the entrepreneur of
the benefits of those sunk costs. Of course, ensuring property rights involves
more than just passing legislation. Indeed, Rodrick (2000) argues that only
when such laws are consistently and fairly applied can entrepreneurship thrive.
Unfortunately, as Xin and Pearce (1996) observe, the rule of law in emerging
economies tends to be particularly unreliable, thereby limiting the enforce-
ment of what little legislation does exist, and creating an environment that
is “particularly burdensome for newer, smaller private businesses” (Xin and
Pearce 1996, 1642).
Often coupled with the lack of legal protection afforded to firms in emerging
economies is a high degree of bureaucracy and government regulation (Ben-
zing, Chu, and Bove 2004; Chang and MacMillan 1991), of legal complexity
(Benzing, Chu, and Callanan 2005), of taxation (Danis and Shipilov 2002),
and of corruption and bribery (Kiggundu 2002; Xin and Pearce 1996). Over-
coming such barriers likely requires a certain degree of financial and human
capital. Indeed, Merrifield (1991) argues that would-be entrepreneurs in emerg-
ing economies such as Peru often lack the ability to pay for the legal permits to
start a new firm.
Because of the scarcity of these valuable resources, several scholars find that
firms in emerging economies often seek to ally themselves with government
officials in order to increase the perception that they (the firms) are legitimate
entities, protect themselves from arbitrary extortion, and the like (Aldrich and
Auster 1986; Peng 2003; Xin and Pearce 1996). Interestingly, however, Peng
(2001) finds that this tendency is significantly less pronounced for older firms.
Peng observes that as firms begin to age, they actually seek to distance them-
selves from these parties, as the resources government officials contribute to the
firms are either no longer necessary given the firms’ larger size or no longer
worth the resulting loss in autonomy that they entail. It seems, then, that be-
cause new and small firms are comparatively resource poor (Aldrich 1999), they
are often forced to resort to unorthodox and often unproductive means in en-
vironments characterized by weak institutions. This would suggest that older,
more established MNEs may have a more positive impact on the reduction and
curtailment of corruption than newer and smaller firms.
Where success in new- and small-firm development has occurred in emerg-
ing economies, formal institutions established specifically to support entrepre-
neurial firms can often be found. For example, governments in many emerging
economies throughout Southeast Asia, Latin America, Africa, and other devel-
oping markets have created development financial institutions (DFIs), which
are publicly funded private organizations designed to invest in new and small
firms in core industries (George and Prabhu 2003). Additionally, private ven-
ture capital (VC) markets, historically rare in emerging economies, have begun
to emerge as well in Central and Eastern Europe (Karsai, Wright, and Fila-
totchev 1997). In such cases, empirical evidence from these emerging econo-
mies shows that the presence of formal institutions dedicated to providing fi-
nancial resources to new and small firms results in higher firm formation rates
(George and Prabhu 2003) and growth rates (Karsai, Wright, and Filatotchev
1997).
Ironically, even in markets in which formal financial institutions do exist,
new and small firms often find themselves disadvantaged relative to their larger,
older counterparts, in that new and small firms often lack the human capital (in
the form of effective governance) to convince potential financiers that they can
effectively manage their operations and in turn make good on the terms of in-
vested capital. Interestingly, Karsai, Wright, and Filatotchev (1997) find that by
providing both monetary and managerial resources, VC firms in Hungary pro-
vide new and small firms the means and strategic leadership necessary to sur-
vive, to grow, and to compete. Thus, the presence of high quality institutions
may provide new and small firms the ability to gain access to the financial re-
sources more readily available to large incumbent firms.
Institutions provide the rules of the game that structure human interaction
in societies and the formal and informal rules that bound organizational activ-
ities. In so doing, they reduce both transaction and information costs by miti-
gating uncertainty and establishing a stable structure that facilitates interac-
tions (North 1990, 1993b). In the context of emerging economies, institutional
deficiencies or “voids” (Khanna and Palepu 1997) stemming from inconsistent
enforcement of rules (Wells 1998), ineffective legal frameworks, and corruption
in governments (Doh et al. 2003) have been sources of risk detrimental to these
investments. Hence, the “constraints that structure human interaction” (North
1993a, 344) can be shaped by rule of law, low levels of corruption in govern-
ment, and capital market development; the absence of these attributes con-
tributes to higher levels of institutional risk.
Khanna and Palepu (2000a) and Khanna, Palepu, and Sinha (2005) have
termed the absence of institutions such as financial markets “institutional
voids” and have argued that these voids constitute severe liabilities for doing
business in developing countries. Institutional voids arise in locations where
specialized intermediaries on which a firm customarily relies—legal, financial,
human resource—are absent. Such absences may result from poorly function-
ing institutional infrastructure and governance systems. One response of firms
to these institutional deficits is to internalize functions by developing business
groups or conglomerates that provide internal capital and labor markets and
protect property rights by not exposing the firms to partners. An alternative is
for MNEs or NGOs to support the development of emergent institutions in
the nongovernmental sector that fill gaps generated by these institutional
deficits.
There are several approaches to measuring the quality and reliability of insti-
tutional governance. The World Bank tracked aggregate governance research
indicators for 213 countries for the period 1996–2005, for six dimensions of
governance: voice and accountability; political stability and absence of vio-
lence; government effectiveness; regulatory quality; rule of law; and control of
corruption. The methodological approach and validity of these measures are
discussed in Kaufmann, Kraay, and Mastruzzi (2006). Table 6.1 reports these
indicators for a selection of developed and developing countries for 2005. The
nexus between the quality of institutional governance and growth and develop-
ment is readily apparent, as is the close correlation between and among several
of these indicators.
INSTITUTIONS, DEVELOPMENT, AND

CORRUPTION
Government corruption is an important aspect of the institutional system that

has impeded the development process in countries in many regions of the
world. Rodriguez and others (2006) note that most research on corruption has
focused on government corruption and issues related directly to market liberal-
ization They note that researchers have unambiguously established that cor-
ruption impedes economic growth (Mauro 1995) and FDI (Wei 1997; Habib
and Zurawicki 2002). Doh and others (2003), Rodriguez, Uhlenbruck, and
Eden (2004), and Uhlenbruck and others (2006) provide useful reviews of the
Table 6.1 Governance indicators for selected countries, 2005 (percentile rank)
Voice & Political Government Regulatory Rule Control of

Country accountability stability effectiveness quality of law corruption
Australia 95 74 95 96 95 95
Austria 90 82 92 94 97 97
Belgium 93 67 94 87 91 91
Chile 83 76 86 91 87 90
China 6 39 52 45 41 31
Colombia 37 4 53 54 32 53
Denmark 100 78 99 98 99 98
Egypt 18 21 43 34 55 43
Equatorial Guinea 5 52 5 8 7 0
Finland 100 98 99 99 98 100
Ghana 59 50 54 50 48 45
Haiti 10 4 5 12 2 1
Iraq 9 0 1 6 0 5
Malaysia 34 62 80 67 66 65
Nigeria 30 5 20 15 6 6
North Korea 0 41 0 0 10 3
Singapore 38 84 100 100 96 99
Somalia 2 0 0 0 0 0
United States 89 49 92 93 92 92
Source: Kaufman, Kraay, and Mastruzzi 2006.
research on corruption. Here we draw from their work and the work of others
on the direct and indirect impacts of corruption on growth and development.
The Costs of Corruption
Doh et al. (2003) argue that corruption has many costs to host countries, busi-
ness firms, and broader societal interests. They note that one perspective would
view corruption as a tax that increases costs and shifts risk from some stake-
holders to others (Shleifer and Vishny 1993). Although their focus is, in part, on
firm level effects, Doh et al. (2003) argue that many of the most damaging costs
of corruption affect firms indirectly, but through direct impacts on host coun-
tries. These effects include public sector failures—missing or weak institutions,
governments that fail to effectively use public resources, governments that
cause the private sector and the economy to fail to grow (Doh et al. 2003; Ro-
driguez et al. 2006). Doh et al. (2003) define the indirect costs of corruption
as those costs imposed on firms that cannot be specifically identified with an
interaction between the firm and the government or its officials. Indirect costs
are incurred because of corruption’s systemic effects, such as higher prices for
resources, lowered prospects for profitability, and macroeconomic instability.
These are the costs that most affect development; however, the deterrent im-
pact on firms also reinforces the impact on the host country and government,
creating a vicious downward spiral.
According to Doh et al. (2003), these indirect costs of corruption have been
well documented (Mauro 1995). Corruption has been shown to significantly
reduce the ratio of investment to GDP and GDP growth (Mauro 1995;
Brunetti and Weder 1998). More generally, the weakness of institutions like
courts and regulatory agencies, manifested in part by corruption, slow eco-
nomic growth (Brunetti and Weder 1998). Also, corruption markedly increases
poverty and retards development goals such as education, literacy, and life
expectancy.
Corruption results in reduced and skewed public expenditures because of
the reduction in tax revenue that results from the deterrence of business activ-
ity and recourse to the unofficial economy, and because of the selection of pri-
vately beneficial and publicly costly expenditure projects. Corruption weakens
public infrastructure, resulting in inadequate, expensive, and intermittently
supplied infrastructure services such as telephony, electricity, and transporta-
tion (Doh et. al. 2003). Weak infrastructure creates opportunities for small
bribes and may indirectly reduce public trust. Corruption leads to squandered
and misdirected entrepreneurial talent because entrepreneurs and other tal-
ented individuals are drawn to socially unproductive avenues of advance
afforded by corrupt environments. Corruption has been shown to correlate
with macroeconomic weakness and instability, resulting in reduced rates of
macroeconomic growth, weak commercial environments, and greater suscepti-
bility to financial crises such as occurred in Russia in the early 1990s, in South-
east Asia and Korea during 1997 and 1998, and in Latin America in the early
1980s and again in the mid- and late 1990s. In a related vein, corruption reduces
aggregate investment through reductions in public and private investment
flows, including lower rates of FDI for the formation of a robust commercial
environment. These factors combine to cause socioeconomic misery, including
increased poverty, income inequality, and slower income growth for the poor-
est in society, thereby increasing demands on already weak central governments
(Campos, Lien, and Pradhan 1999). Table 6.2 summarizes the direct costs of
corruption.
Doh et al. (2003) argue that other costs are borne directly by firms. Bribes
Table 6.2 Direct costs of government corruption
Type Explanation
Bribes Monetary and nonmonetary payments to those with

some degree of public power as a response to extor-
tion or in exchange for some misuse of public power.
Red tape/bureaucratic delay Nonmonetary and opportunity costs of dealing with
corrupt officials or of complying with the illegitimate
bureaucratic requirements of corrupt regimes.
Avoidance Efforts to avoid and limit the firm’s exposure to extor-
tionary behavior by corrupt officials, including hid-
ing output and opting out of the official economy.
Directly unproductive behavior Investments in channels of influence to gain advantage
in dividing the benefits of economic activity; includes
lobbying and more direct vote and influence ped-
dling.
Forgoing market supporting Costs imposed on the firm as a result of forgoing the use
institutions of courts for the enforcement of contracts, local fi-
nancial operations, and the like.
Engagement with organized Monetary and nonmonetary costs imposed on firms as a
crime result of willing or unwilling engagement with orga-
nized crime.
Source: Doh et al. 2003.
cost firms and other stakeholders through monetary and nonmonetary pay-
ments to those with some degree of public power, as a response to extortion or
in exchange for some misuse of public power. Red tape and bureaucratic delay
generate nonmonetary and opportunity costs of dealing with corrupt officials
or of complying with the illegitimate bureaucratic requirements of corrupt
regimes. Avoidance costs result when firms engage in expensive efforts to avoid
and limit their exposure to extortion by corrupt officials, including hiding out-
put and opting out of the official economy. Firms bear costs when they are not
able to use institutions such as courts for the enforcement of contracts. Costs
grow when firms are willing (or unwilling) to engage with organized crime by
paying for “protection” and other security services that would otherwise be un-
necessary. Finally, firms may engage in a range of costly and unproductive be-
havior, including investment in channels of influence, to gain advantage in di-
viding the benefits of economic activity—for example, lobbying and direct
vote and influence peddling. Table 6.3 summarizes the indirect costs of corrup-
tion.
Table 6.3 Indirect costs of government corruption
Type Explanation
Reduced investment Reduced public and private investment flows. Lower rates
of foreign direct investment for the formation of a
robust commercial environment.
Reduced and distorted Reduced taxes as a result of the deterrence of business
public expenditures activity and recourse to the unofficial economy.
Selection of privately beneficial and publicly costly
expenditure projects.
Macroeconomic weakness Reduced rates of macroeconomic growth, weak commer-
and instability cial environment, and greater susceptibility to financial
crises.
Weak infrastructure Inadequate, expensive, and intermittently supplied infra-
structure services such as telephony, electricity, and
transportation. Weak infrastructure foments opportu-
nities for small bribes and may indirectly reduce public
trust.
Squandered/misdirected Engagement of entrepreneurial and otherwise talented
entrepreneurial talent individuals in the socially unproductive avenues of
advance afforded by corrupt environments.
Socioeconomic failure Increased poverty, income inequality, and slower income
growth for the poorest in society. Increases demands on
already weak central governments.
Source: Doh et al. 2003.
Although corruption is difficult to measure, Transparency International, a

not-for-profit organization whose aim is to fight corruption, has developed a
comprehensive mechanism for evaluating the extent of corruption in countries
throughout the world. The organization calculates a Corruption Perception In-
dex (CPI), which varies from zero to ten, for each country. The higher the in-
dex, the less corrupt the country is. Tables 6.4 and 6.5 show the ten countries
with the highest and the lowest levels of corruption according to Transparency
International’s survey.
The direct and indirect costs of corruption make host countries less attrac-
tive for FDI: broad systemwide effects reinforce conditions that would make a
market less supportive of FDI, and firm-specific costs also serve to lower the at-
tractiveness of a market for FDI and distort the form and governance of the
FDI that does take place, leading to negative impacts for development. Re-
search on the impact of corruption on FDI confirms these effects.
Table 6.4 Corruption Perception Index (CPI): Least-corrupt countries
CPI
2005 rank Country 2005 2004 2004 rank
1 Iceland 9.7 9.5 3

2 Finland 9.6 9.7 1
3 New Zealand 9.6 9.6 2
4 Denmark 9.5 9.5 3
5 Singapore 9.4 9.3 5
6 Sweden 9.2 9.2 6
7 Switzerland 9.1 9.1 7
8 Norway 8.9 8.9 8
9 Australia 8.8 8.8 9
10 Austria 8.7 8.4 13
Sources: Transparency International 2005, 2004.
Note: The CPI is defined by Transparency International as “ the degree of corruption as seen by business
people and country analysts and ranges between 10 (highly clean) and 0 (highly corrupt).”
Table 6.5 Corruption Perception Index (CPI): Most-corrupt countries
CPI
2005 rank Country 2005 2004 2004 rank
158 Bangladesh 1.7 1.5 145

Chad 1.7 1.7 142
155 Haiti 1.8 1.5 145
Myanmar 1.8 1.7 142
Turkmenistan 1.8 2.0 133
152 Côte d’Ivoire 1.9 2.0 133
Equatorial Guinea 1.9 n.a. n.a.
Nigeria 1.9 1.6 144
151 Angola 2.0 2.0 133
144 Democratic Republic of the Congo 2.1 2.3 114
Kenya 2.1 2.1 129
Pakistan 2.1 2.1 129
Paraguay 2.1 1.9 140
Somalia 2.1 n.a. n.a.
Sudan 2.1 2.2 122
Tajikistan 2.1 2.0 133
Sources: Transparency International 2005, 2004.
Corruption, FDI, and MNEs
Mauro (1995) examined corruption in sixty-seven countries and found that it

reduced overall investment. Wei (2000) measured the impact of corruption on
bilateral FDI from twelve developed countries to forty-five destination coun-
tries and found that corruption had a negative impact on FDI; Smarzynska and
Wei’s study (2000) echoed these findings in Eastern Europe, showing that cor-
ruption had a negative impact on FDI in twenty-two Eastern European coun-
tries. Habib and Zurawicki (2002) analyzed bilateral FDI flows from seven de-
veloped countries to eighty-nine countries and found that both the level of
corruption in the host country and the absolute difference between the level of
corruption in the host country and that in the home country had a negative im-
pact on FDI. Their analysis suggests that foreign investors avoid corrupt mar-
kets and that both host and home country corruption levels contribute to this
effect.
A recent study examined how corruption might affect not just the level but
the composition of FDI in terms of country of origin (Cuervo-Cazurra 2006).
The study found that corruption results in relatively lower FDI from countries
that have signed the OECD Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions (discussed below), sug-
gesting that laws against bribery abroad may act as a deterrent to engaging in
corruption in foreign countries. Cuervo-Cazurra also finds that corruption re-
sults in higher levels of FDI from countries with high levels of corruption. The
combination of these two findings suggest that corruption creates a negative
dynamic in which companies from less-corrupt countries are increasingly in-
clined to avoid more-corrupt countries as locations for doing business, whereas
companies from corrupt countries are drawn to other countries with similar
levels of corruption.
Kwok and Tadesse (2006) note that the majority of research on the relation-
ship between MNEs and corruption focuses on how the institutional environ-
ment of host countries influences MNE behavior. In their study, these re-
searchers focused on how the presence of MNEs could shape the institutional
environment of corruption over time. They propose three avenues through
which the MNE may have an impact on its host institutions: the regulatory-
pressure effect, the demonstration effect, and the professionalization effect.
Drawing on institutional theory, Kwok and Tadesse (2006, 769) hypothesize
that “introduction of new modes of business practice in MNE subsidiaries can
challenge the legitimacy of existing patterns and stimulate debates on better

business practice in the host country. The mirror image of this influence is the
‘de-institutionalization’ of local firms’ existing organizational patterns.” They
find support for their expectation that the presence of MNEs in a host country
reduces the level of corruption over time, showing that MNEs can play a posi-
tive role in developing country efforts to curtail corruption.
Combating Corruption: Government and

International Organization Initiatives
Doh and others (2003) detail the range of strategies governments, international
organizations, and MNEs have pursued to respond to corruption. Here we
summarize some of these approaches and others.
Prompted by a series of scandals involving questionable or illegal payments
by U.S. firms to foreign government officials overseas, the United States
adopted the Foreign Corrupt Practices Act (FCPA) in 1977. The FCPA pro-
hibits American firms from giving anything of value—such as a payment, gift,
or bribe—to induce a foreign government to enter into a contract or relation-
ship or to bestow a business advantage. The act carries criminal penalties, in-
cluding imprisonment for up to five years and fines of up to $100,000 for indi-
viduals, and fines of up to $2 million for companies. In 1998 the United States
passed legislation expanding the scope of the FCPA to bring its provisions into
accord with the OECD’s convention on bribery (USIA 1998). Prior to the im-
plementation of the OECD convention, the United States was unique in hav-
ing this kind of law, and in countries where corruption was widespread, the act
made it difficult for U.S. companies to compete. Moreover, many executives
complained that the prohibited acts were standard operating procedure in
some countries, although with the implementation of OECD convention, this
attitude has evolved (Stackhouse 1993).
The Organization of American States (OAS) Inter-American Convention
against Corruption, which entered into force in March 1997, was the first mul-
tilateral anticorruption agreement negotiated in the world. The convention re-
quires parties to criminalize bribery of foreign officials and to assist one another
in the investigation and prosecution of such acts. The convention also explic-
itly disallows the use of “bank secrecy” as a basis for denying assistance. More
than twenty-five Western Hemisphere countries are signatories to the conven-
tion, including Argentina, Brazil, Chile, Mexico, and the United States.
The OECD Convention on Combating Bribery of Foreign Public Officials
in International Business Transactions was adopted in 1997, when negotiators

from thirty-three countries (twenty-eight of the twenty-nine member states of
the OECD, along with Argentina, Brazil, Bulgaria, Chile, and Slovakia) agreed
to its terms (USIA 1998). The OECD convention represents one of the most
significant milestones in efforts to reform and limit corruption in transactions.
Since 1996, the World Bank Anti-Corruption Knowledge Center has sup-
ported more than six hundred anticorruption programs and governance initia-
tives developed by its member countries. According to the bank, “corruption
undermines policies and programs that aim to reduce poverty, so attacking cor-
ruption is critical to the achievement of the bank’s overarching mission of
poverty reduction” (World Bank b). The World Bank’s anticorruption strategy
builds on five key elements: (1) increasing political accountability, (2) strength-
ening civil-society participation, (3) creating a competitive private sector, (4)
imposing institutional restraints on power, and (5) improving public-sector
management.
Combating Corruption: Industry

and Company Initiatives
Corporations face numerous challenges when considering whether to enter a

market characterized by corruption (Doh et. al. 2003). One option is to avoid
the market entirely and in so doing, eliminate the direct costs of corruption,
whether generated from its pervasive or arbitrary application. Often, there are
other reasons to avoid markets that are corrupt, such as weak profit potential,
unstable government, and slow market growth; however, these conditions may
themselves result, in part, from corruption. A number of companies have de-
veloped rigorous codes and principles that guide their policies on corruption
around the world, and other MNEs rely on guidelines provided by public in-
stitutions. Unilateral efforts, as well as those supported by multinational orga-
nizations such as the United Nations, the World Bank, or the IMF, should be
encouraged. Often, there is assistance available from multilateral bodies that
provide financial and technical support for the development of efficient gov-
ernment and “good governance.” Below are examples of individual firm activi-
ties as well as those involving public-private collaboration.
The International Chamber of Commerce (ICC) Commission on Anti-
Corruption (formerly, the Standing Committee on Extortion and Bribery)
promotes its “Rules of Conduct to Combat Extortion and Bribery” in interna-
tional business transactions. These rules specifically target “large-scale extor-
tion and bribery involving politicians and senior officials.” The seven basic
rules address extortion, bribery and kickbacks, agents, financial recording and
auditing, responsibilities of enterprises, political contributions, and company
codes (Doh et. al. 2003).
The Transparent Agent and Contracting Entities (TRACE) standard, which
is based on a review of the practices of thirty-four companies, applies to many
types of business intermediaries, including sales agents, consultants, suppliers,
distributors, resellers, subcontractors, franchisees, and joint-venture partners.
It is the first global business standard of its kind, and is being disseminated di-
rectly by TRACE and by investment houses and probusiness organizations like
the Center for International Private Enterprise, the not-for-profit arm of the
U.S. Chamber of Commerce. It has been well received because it sets out best
practices and gives companies the confidence that they are doing as much due
diligence as their corporate peers, which is an important part of a defense if an
intermediary does pay a bribe (TRACE 2002). Table 6.6. list the top thirty
countries that are least willing to pay bribes.
Building on the ICC rules, two legal experts have proposed a comprehensive
international corruption code that (1) emphasizes transparency, (2) provides
guidance concerning specific practices associated with paying bribes, (3) re-
flects relevance to organizational environments, (4) identifies with and sup-
ports an independent entity such as an NGO or an academic center, and
perhaps most importantly, (5) can be monitored and assessed by external, inde-
pendent entities (Hess and Dunfee 2000). This code and approach resolves the
“free rider” problem by requiring many competing firms to adhere to the same
standards. Further, it addresses challenges raised by both pervasive and arbi-
trary corruption.
In addition, many firms have developed their own strategies to respond to
corruption without acquiescing to it, as summarized in table 6.7. For example,
General Electric has a strong FCPA program and was one of the private sector
organizations that helped organize Transparency International.
Coca-Cola’s efforts against corruption have been aggressive. On its Web site,
Coca-Cola states unequivocally, “We are more than a beverage company. We
are a corporate citizen of the world” (Coca-Cola). The site further states that
“the Coca-Cola Company is listed in the FTSE4Good Index, which identifies
companies that meet globally recognized corporate responsibility standards”
(Coca-Cola). In fact, in August 2006, Coca-Cola HBC Bulgaria AD joined the
Bulgarian Global Compact Network and was recognized for its commitment
Table 6.6 Bribe Payers Index (BPI), 2006
Rank Country BPI
1 Switzerland 7.81
2 Sweden 7.62
3 Australia 7.59
4 Austria 7.50
5 Canada 7.46
6 UK 7.39
7 Germany 7.34
8 Netherlands 7.28
9 Belgium 7.22
United States 7.22
11 Japan 7.1
12 Singapore 6.78
13 Spain 6.63
14 UAE 6.62
15 France 6.5
16 Portugal 6.47
17 Mexico 6.45
18 Hong Kong 6.01
Israel 6.01
20 Italy 5.94
21 Republic of Korea 5.83
22 Saudi Arabia 5.75
23 Brazil 5.65
24 South Africa 5.61
25 Malaysia 5.59
26 Taiwan 5.41
27 Turkey 5.23
28 Russia 5.16
29 China 4.94
30 India 4.62
Source: Transparency International 2006.
Note: A higher index value means a country is less willing to pay bribes.
to “promoting the ten universal principles in the area of human rights protec-
tion, labor standards, environment and fight against corruption in its everyday
business” (Global Compact 2006).
Pfizer puts anticorruption high on its agenda. Hank McKinnell, Pfizer’s
chairman, said that “corruption is a major global health problem that can only
be fixed by a partnership of business, government and multilateral organiza-
Table 6.7 Examples of strategies companies use to combat corruption
Company Strategy
Honeywell • Created an ethics code of conduct to help their employees

make the right decision when faced with corruption and
bribery
• Provided training
• Decided not to bid on a project tender when asked to bribe
Motorola • Provided training to its employees
• Used case studies as part of the training to show potential real
situations and ways to deal with corruption
TDI Brooks International • Notified authorities and acted as a whistleblower in a project
that required bribe
• Went public to talk about corruption
General Electric • Promotes itself as having a strong Foreign Corrupt Practices
Act program so that clients feel safe doing business with GE
• Helped organize Transparency International, an NGO that
fights corruption
Coca-Cola • Tries to make each contact transparent and deal with trans-
parent suppliers in host countries, especially emerging
economies
• Emphasizes its image, supports education and sports in host
countries
• Has created a corporate culture in which no one wants to be-
come the reason Coca-Cola is leaving a country
Sources: Doh et al. 2003 and authors’ research.
tions” (Pfizer 2004). Pfizer has been a victim of corruption: the company do-
nated $650 million of medicine around the world in 2003, only to find that cor-
ruption prevented some of the medicine from reaching impoverished patients
in the developing world. To combat this problem, the company launched an
Internet site (http://www.pfizer.com/counterfeit) intended to inform the pub-
lic about this risk.
Goldman Sachs has also been a strong advocate of reducing international
corruption. Kevin Ford is executive director and counsel for Goldman Sachs
International (New Era, New Challenge 2000). Ford “had a distinguished
twenty-six year law enforcement career,” focused on “the investigation of orga-
nized crime and official corruption” (New Era, New Challenge 2000). Ford was
previously appointed by Mayor Rudolph Giuliani as deputy commissioner of
investigation for the City of New York and is also a member of the Interpol
Group of Experts on Corruption and is the chairman of the International Anti-

Corruption Conference Council.
Some companies use social contributions and public donations as alterna-
tives to both avoidance and compliance. For example, sometimes bribes are
presented as agent fees or fees for public services that might not otherwise be
available. Several examples are presented below. This strategy targets primarily
the direct costs of corruption. These approaches, however, are unlikely to pro-
tect firms from the arbitrary application of corruption because even if a legal
contribution is offered to an organization (versus individuals), there may be
other officials who demand further payments. Cargill, an international mar-
keter, processor, and distributor of agricultural, food, financial, and industrial
products, aggressively attempts to strengthen the communities in which it op-
erates by avoiding and speaking out against bribery and corruption as well as
supporting specific causes (Cargill 2003). After two Cargill offices were set on
fire in India following political opposition concerning the company’s entry into
the sunflower-seed market, the company responded by teaching Indian farmers
how to improve their crop yields (Cogman and Oppenheim 2002).
Motorola has permitted the payment of agent fees where they are a relatively
small part of the contract. In other situations, rather than pay a fee to ensure the
provision of local public services, Motorola donated equipment to the relevant
government agencies. This increased the likelihood that the equipment would
be used for the stated purpose. Hope Group donated textbooks to 17 million
students in China to facilitate business relationships and enhance its reputa-
tion. In China, such relationships are considered especially important in busi-
ness dealings, and this contribution also provided a substantial social benefit
(Ahlstrom and Bruton 2001).
THE BUSINESS-GOVERNMENT BARGAINING

MODEL: OLD AND NEW
Another way that MNEs interact with host government institutions that affects
development is bargaining over the terms of their investments. International-
business scholarship dealing with MNE interactions with political actors and
institutions can be divided into two related streams. Dahan, Doh, and Guay
(2006) summarize the various streams of this literature and some of the cri-
tiques and shortcomings of this literature.
The political-risk stream, as represented by the work of Robock (1971), Ko-
brin (1979), Simon (1984), and others, views the MNEs’ political environment
as mostly a given; firms must react by either complying with or exiting the host
country (Boddewyn 1988). The bargaining model, as proposed by Vernon
(1971) and further explicated by Kobrin (1987), proposes that MNEs typically
face more favorable terms early in the investment process but that their bar-
gaining power erodes as their investment commitment increases. The model
has provided a powerful perspective for understanding the dynamics of MNE–
host country relations, is prominent in the international business literature,
and has enjoyed many extensions. It offers a more dynamic view of the MNE as
a political player involved in bargaining with the host country (Fagre and Wells
1982; Vernon 1971). Nonetheless, although significant theoretical enhance-
ments have extended the scope of this approach over the past three decades
(Moran 1985), there is growing skepticism about the efficacy of the bargaining
model (Boddewyn 1988; Boddewyn and Brewer 1994).
Dahan, Doh, and Guay (2006) identify four principal shortcomings of these
models: (1) they are centered on the national level (that is, MNEs interact with
states, overlooking other types of public authorities and political levels); (2)
they consider primarily dyadic relationships (MNEs-states), but MNEs in-
creasingly develop relationships with a multiplicity of public and private actors;
(3) they deal with the MNE as the focal organization (with no consideration for
collective actions undertaken by MNEs within groupings such as clubs, associ-
ations, forums); and (4) they restrict their analysis to the political environment
of MNEs, that is, cover hard power in the forms of compulsory regulations,
formal public policies, and court rulings, thus missing “soft power” aspects
such as spreading ideas, shaping cognitive frames through discursive strategies
and symbolic actions, and participating in the promotion of certain social
norms and values.
Vernon (1971) proposes a specific application of these models of MNE–host
country relations in the obsolescing bargain model (OBM). He argues that the
changing dynamic of bargaining relations between MNEs and host govern-
ments is a function of goals, resources, and constraints on both parties (Vernon
1971). Under this scenario, the desire of the host government to attract invest-
ment results in the initial bargain favoring the MNE. However, the relative
bargaining power shifts to the host-country government as the MNE com-
mitment becomes more substantial and more difficult to reverse. Once this
bargaining power shifts, the host government imposes additional conditions
on the MNE, ranging from higher taxes to contract renegotiations to complete
the expropriation of MNE assets.
Kobrin’s (1987) early insight that FDI in manufacturing industries and ex-
port-oriented investment were less vulnerable to host-country intervention

demonstrated that these models are subject to important conditions and con-
straints. These conditions and constraints have come to suggest that the bar-
gaining model is outdated and in need of reconsideration. Indeed, the model
was largely repudiated in the late 1980s and 1990s (Stopford and Strange 1991),
reflecting, in part, evidence that outright expropriations in developing coun-
tries had declined precipitously through the period. Doh and Ramamurti
(2003, 342), however, observe that “creeping” expropriations were replacing
outright takings, noting that “beneath these generally favorable statistics lies a
troubling pattern: governments continue to engage in a pervasive practice of se-
lective and disruptive recontracting.”
Recent contributions have sought to extend or revise the political-risk and
bargaining models (Ramamurti 2001) rather than propose alternative concep-
tualizations. Teegen, Doh, and Vachani (2004) offer one of the more compre-
hensive critiques of the political bargaining model within the contexts of the
emergence of the civil society and NGO sectors; however, they do not propose
a fully developed alternative. Other useful extensions have included Rama-
murti’s (2001) contention that the emergence of multilateral organizations and
other state-to-state trade and investment agreements severely constrained host-
government intervention. Teegen, Doh, and Vachani (2005) added the rise of
NGOs to this mix, suggesting at least a trilateral, as opposed to bilateral, set of
relationships. These extensions, however, do not completely undermine the
relevance of the model, as most recently evidenced by the actions of developing-
country governments, especially those in Latin America (for example, Vene-
zuela, Bolivia, Ecuador, and Peru).
SUMMARY POINTS
The institutions created by a society to govern social, economic, and legal

transactions have a critical role to play in the growth and development of
economies. These institutions—or their absence—have a profound impact on
the amount and quality of FDI, an important aspect of development. Corrup-
tion is one of the most perverse manifestations of poor institutional systems
and has a particularly detrimental impact on the attractiveness of an economy
for FDI. Indeed, Doh and others (2003) show that even when MNEs choose to
invest in a country, despite its corrupt nature, those investments are less benefi-
cial to the local economy.
Another aspect of institutional governance is the nature of bargaining and
negotiation among MNEs, host countries, and other stakeholders over the
terms of investment. These interactions have evolved significantly over the past
decades such that host governments have somewhat less influence over the
terms of investment and instead compete for those investments, whereas other
institutions such as international organizations and NGOs are more involved
and engaged.
The institutional environment that MNEs face in developing countries may
be considered a CSA. The presence of quality institutions that provide legal
protections as well as clear and transparent rules and limit corruption, potential
threats to asset appropriation, and recontracting, contributes to making a de-
veloping country attractive to MNEs. When such institutions are absent or in-
ferior, MNEs can contribute FSAs that can help bolster these deficiencies, lead-
ing to improved CSAs, more investment, and sustained development progress.
Chapter 7 Multinational
Enterprises from Emerging
Economies
In this and the two succeeding chapters, we turn our attention to the
process of FDI and MNE activity in the emerging economies of Asia.
Here we use the term “emerging economies” (versus “developing
economies”) to emphasize those countries that have broken out of a
larger collection of developing economies and established impressive
economic growth and substantially improved incomes. Much has
been written about the Asian “economic miracle.” In these three chap-
ters, we explore the dynamics of MNE investment, host-country pol-
icy, and the development of indigenous regionally based MNEs as the
critical variables that have produced that miracle. An innovative fea-
ture of our analysis is a focus on outward FDI and inward FDI. Both
types of FDI affect economic development. Indeed, the complemen-
tarity between inward and outward FDI offers us many new and use-
ful insights into the modern nature of economic development. In this
chapter we look at the extent of outward FDI from the leading MNEs
in the emerging economies. We pay particular attention to the new
MNEs from China and Korea.
According to the U.N. Conference on Trade and Development
124
Multinationals from Emerging Economies 125
(UNCTAD), in 2005, global FDI outflows amounted to $779 billion. Devel-

oped countries remain the leading sources of such outflows; however, there
were significant increases in outward investment by developing economies, led
by Hong Kong (China) with $33 billion. Indeed, the role of developing and
transition economies as sources of FDI is increasing. Negligible or small until
the mid-1980s, outflows from these economies totaled $133 billion in 2005, ap-
proximately 17 percent of the world total (UNCTAD 2006).
The focus of this chapter is on identifying and analyzing the set of MNEs
registered and based in the world’s emerging markets. To do this we take as the
relevant population the world’s 500 largest firms, ranked by total revenues, as
compiled annually in the Fortune Global 500. This entire set of 500 firms (most
of which are MNEs) was analyzed by Rugman (2005). That study examined
data on the regional sales of MNEs from the “broad triad” markets of Europe,
North America, and the Asia-Pacific region, which is where nearly all of the 500
firms are based. Of the 500 firms in 2001, 428 were MNEs from the “core triad”
of the European Union, the United States, and Japan. In this chapter we discuss
the MNEs from emerging markets, which numbered 32 in 2001 (and 44 in
2004).
The chapter first identifies this set of 32 (or 44) MNEs from emerging mar-
kets. As most of these are from the Asia-Pacific region, the substantive theoret-
ical analysis of their performance focuses on a set of Chinese and Korean
MNEs. The 16 Chinese MNEs already on the 2004 list of the world’s 500
largest firms provide perhaps the most interesting challenge to theories of in-
ternational business, international economics, and FDI. In order to apply the
relevant theory, we have adapted the basic firm and country level matrix from
chapter 2 (Rugman 1981) to analyze the performance of China’s MNEs. Basic
theory suggests that MNEs succeed when they develop FSAs. In Korea’s case,
its large MNEs, mostly chaebols, have developed successful knowledge-based
FSAs. They are also using scale economies based on Korea’s CSAs in skilled la-
bor and government support. In the empirical work, we find that the Korean
chaebols operate on a home region basis, much like the world’s other large
MNEs.
THE REGIONAL PERFORMANCE

OF MULTINATIONAL ENTERPRISES
The performance of the world’s 500 largest MNEs has been examined by Rug-
man (2005). The world’s 500 largest firms, ranked by revenues, account for ap-
126 Multinationals from Emerging Economies
Table 7.1 Regional sales of the world’s largest firms, 2001
Number of Firms Average revenue ($ billions) Intraregional sales (%)
Total 380 29.2 (28.0) 74.6

North America 186 28.8 (28.5) 78.6
Europe 119 31.1 (29.0) 66.4
Asia 75 27.4 (25.8) 77.9
Third worlda 5 23.3 (21.8) 70.4

Source: Authors’ calculation based on data in Rugman 2005.
Note: Intraregional sales can be identified for only 380 of the world’s 500 largest MNEs. Figures in paren-
theses are for the entire set of the 500 largest firms in 2001.
a The third world countries include only Brazil, China, Malaysia, Mexico, the Republic of Korea, Rus-
sia, Singapore, and Venezuela.
proximately 90 percent of the world’s stock of FDI. They also account for more
than 50 percent of the world’s trade (Rugman 2000). Recent research has
shown that the vast majority of these large MNEs operate on an intraregional
basis. This information is summarized in table 7.1. The geographic basis for the
regions of the broad triad are developed and explained by Rugman (2005). Of
the world’s 500 largest firms in 2001, 380 provided data on the geographic dis-
tribution of their sales across the three regions of the broad triad. As shown in
table 7.1, the 75 MNEs from Asia generated an average of 77.9 percent of their
sales in their home region. This is somewhat above the average of 74.6 percent
for all 380 MNEs. The 75 Asian MNEs had average revenue of $27.4 billion,
which is only slightly less than the average for North American MNEs of $28.8
billion and for European MNEs of $31.1 billion. In summary, the regional per-
formance of Asian MNEs parallels that of their competitor MNEs from North
America and Europe.
Table 7.2 refines the data in table 7.1, examining a smaller set of 174 MNEs
that fully reported their sales in each of the three regions of the broad triad. The
results confirm the pattern of table 7.1. For example, the 45 Asian MNEs gen-
erated an average of 73.2 percent of their sales in their home region in 2001;
however, we can now see that they generated an average of 16 percent of their
sales in North America and an average of only 7.6 percent in Europe. Again,
this focus on home region sales is paralleled by MNEs from North America
(which generated an average of 77.7 percent of their sales in their home region
and an average of 12.5 percent in Europe, with an average of only 6.3 percent in
Asia). The 58 European MNEs generated an average of 69.1 percent of their
Table 7.2 Triad sales of the world’s largest firms, 2001
Regional sales (%)
Number of Average revenue North

MNEs ($ billions) America Europe Asia Unidentified
Total 174 30.4 (28.0) 42.6 30.2 24.1 4.0

North America 71 30.1 (28.5) 77.7 12.5 6.3 3.8
Europe 58 29.0 (29.0) 19.8 69.1 6.7 4.9
Asia 45 32.4 (25.8) 16.0 7.6 73.2 3.1
Note: Only 174 MNEs report their regional sales for each of the triad regions. Figures in parentheses are
for the entire set of the 500 largest MNEs in 2001. Percentages may not sum to 100 percent because of
rounding error.
sales in their home region, nearly 20 percent in North America, and only 6.7
percent in Asia.
The asymmetric pattern of classifications reported in tables 7.1 and 7.2 is
based on data for 2001 in Rugman’s study (2005). Some petty criticisms of that
book have suggested that these data present a snapshot and do not reveal a
trend toward regionalization. In fact, Rugman (2005) demonstrated that these
data were consistent over the time period for which firms reported their geo-
graphic distribution of sales, basically starting with fewer than 200 of the 500
largest MNEs in the late 1990s. Indeed, for 2002 the same pattern emerged as
for 2001.
Table 7.3 presents data for the world’s 500 largest firms in 2001, 2003, and
2004. In the most recent years more firms report the geographic distribution of
their sales. More specifically, table 7.3 is based on the data for 2004 instead of
2001 as in tables 7.1 and 7.2. The reason we take 2004 is that this is the year with
the most firms reporting data on geographical sales. Using the set of firms with
2004 data, we then find the regional sales of the firms for three years. Thus only
291 firms are present in this data set for 2001, based on the 2004 listing (as some
firms left the 2001 list by 2004).
Of the 291 firms analyzed in the 2001 data set in table 7.3, only 8 could be
classified as global. Another 33 were bi-regional (of which 6 were host region
oriented). The remaining 250 firms were home region based. These firms gen-
erated an average of 77 percent of their sales in their home regions. Of the 337
firms included in the 2003 data set, 8 were global, 41 were bi-regional (of which
8 were host region oriented), and 288 were home region oriented. These 288
Table 7.3 Regional sales of the world’s 500 largest firms
Home region Bi-regional Host region Global
Total No. of % intraregional No. of % intraregional No. of % intraregional No. of % intraregional

firms firms sales firms sales firms sales firms sales
2001 291 250 77 27 42 6 24 8 34

2003 337 288 77 33 43 8 29 8 33
2004 311 271 77 26 41 7 29 7 34
Sources: The data for 2001 and the methodology for this table are based on Rugman 2005. Data for 2003 and 2004 are from annual reports.
Note: Data for 350 firms are available for 2003, but data for only 337 firms are sufficient to determine their regional category. The number of firms that were excluded from the table
because of insufficient data are 21 for 2001, 13 for 2003, and 18 for 2004. Of the 350 firms for year 2003, 312 firms and 329 firms are listed in the Fortune Global 500 for 2002 and 2005,
respectively.
firms again generated an average of 77 percent of their sales in their home re-
gions. Finally, in 2004 there were 7 global firms and 33 bi-regionals (of which 7
were host region oriented). The vast majority (271) of the 311 firms were home
region oriented, with their home regions again accounting for an average of 77
percent of their sales. The conclusion to be drawn from tables 7.1–7.3 is that the
world’s 500 largest firms operate predominately on an intraregional basis, not a
global basis, and that this trend has been consistent over time.
MULTINATIONALS FROM EMERGING MARKETS
In this section data are reported on MNEs from emerging markets. Table 7.4
lists 32 such MNEs for 2001. Table 7.5 lists 44 MNEs from emerging markets
for 2004. In table 7.4 the 32 MNEs from emerging markets are mainly from the
Asia-Pacific region. Only 2 are from Europe, the Russian firms Gazpron and
Lukoil. Another 3 are from the Americas (Pemex and Carso Global Telecom
from Mexico, and an oil firm from Venezuela). In contrast, there are 12 firms
from Korea. Another 11 are from China, 2 from Taiwan, 1 from Singapore, and
1 from Malaysia.
Relatively few of the set of 32 MNEs from emerging economies in 2001 pro-
vided data on the geographic distribution of their sales. Using the 2001 data
and the methodology in Rugman’s study (2005), we make the following obser-
vations. First, 5 Korean firms provided data that show that all of them are
home region oriented. For example, POSCO generated 91.9 percent of its sales
in the Asia-Pacific region, and Hyundai Motor generated 81.6 percent of its
sales in the Asia-Pacific region and 18.1 percent in North America. The remain-
ing 3 Korean firms are close to being bi-regional, but should be classified as
home region based since more than 50 percent of their sales were in the Asia-
Pacific region: Samsung Electronics derived 60.6 percent of its sales in the Asia-
Pacific region, 20.8 percent in North America, and 18.3 percent in Europe; LG
Electronics derived 60.4 percent of its sales in the Asia-Pacific region, 23.6 per-
cent in North America, and 11.7 percent in Europe; and Hyundai (different
from Hyundai Motor) derived 56.3 percent of its sales in the Asia-Pacific re-
gion, 24.2 percent in North America, and 10.5 percent in Europe. Only 1 of the
32 multinationals from emerging markets is a global firm: Flextronics of Singa-
pore. It derived only 19.8 percent of its sales in its home region, but 44 percent
in North America and 36.2 percent in Europe. This firm is clearly an exception.
In contrast, all other multinationals from emerging economies reporting data
on regional sales are home region based. Some of the most extreme examples
Table 7.4 The world’s largest firms in emerging markets, 2001
% of sales by region
Company Industry Region Country Revenue ($ billions) North America Europe Asia-Pacific
State Power Electricity Asia-Pacific China 48.4 n.a. n.a. n.a.

PDVSA Gas Other Venezuela 46.3 n.a. n.a. n.a.
China National Petroleum Gas Asia-Pacific China 41.5 n.a. n.a. n.a.
Sinopec Gas Asia-Pacific China 40.4 n.a. n.a. ⬎90
Pemex (q) Gas North America Mexico 39.4 91.74 3.68 n.a.
Samsung Electronics Electronic Asia-Pacific Korea 36.0 20.84 18.30 60.63
Samsung Trading Asia-Pacific Korea 33.2 n.a. n.a. n.a.
SK Gas Asia-Pacific Korea 33.0 n.a. n.a. n.a.
Hyundai Motor Motor Asia-Pacific Korea 30.9 18.13 0.25 81.61
LG Electronics Electronics Asia-Pacific Korea 23.1 23.63 11.71 60.40
China Telecommunications Telecom Asia-Pacific China 22.3 n.a. n.a. 100.00
Hyundai Motor Asia-Pacific Korea 21.7 24.19 10.49 56.33
Gazprom Gas Europe Russia 20.1 n.a. n.a. n.a.
Ind. & Comm. Bank of China Banking Asia-Pacific China 19.8 n.a. n.a. n.a.
LG International Trading Asia-Pacific Korea 19.5 n.a. n.a. n.a.
Bank Of China Banking Asia-Pacific China 17.9 n.a. n.a. n.a.
Petronas Gas Asia-Pacific Malaysia 17.7 n.a. n.a. n.a.
Samsung Life Insurance Insurance Asia-Pacific Korea 17.5 n.a. n.a. n.a.
China Mobile Communications Telecom Asia-Pacific China 17.4 n.a. n.a. n.a.
SK Global Trading Asia-Pacific Korea 17.2 n.a. n.a. n.a.
Sinochem Chemicals Asia-Pacific China 16.2 n.a. n.a. n.a.
Korea Electric Power Electricity Asia-Pacific Korea 15.7 n.a. n.a. n.a.
Flextronics International Electronics Asia-Pacific Singapore 13.1 43.95 36.21 19.84
China Construction Bank Banking Asia-Pacific China 13.1 n.a. n.a. n.a.
COFCO Food, cereal Asia-Pacific China 13.0 n.a. n.a. n.a.
KT Telecom Asia-Pacific Korea 12.3 n.a. n.a. n.a.
Lukoil Gas Europe Russia 12.1 n.a. 35.51 n.a.
Carso Global Telecom Telecom North America Mexico 11.9 n.a. n.a. ⬎90
Cathay Life Insurance Asia-Pacific Taiwan 11.6 — — 100.00
Chinese Petroleum Gas Asia-Pacific Taiwan 10.8 n.a. n.a. n.a.
Agricultural Bank of China Banking Asia-Pacific China 10.7 n.a. n.a. n.a.
POSCO Steel Asia-Pacific Korea 10.2 2.94 — 91.90
Source: Authors’ calculation based on Rugman 2005 and annual reports for the companies.
Table 7.5 The world’s largest firms in emerging markets, 2004
% of sales by region
Company Industry Region Country Revenue ($ billions) Intraregional North America Europe Asia-Pacific
Sinopec Gas Asia-Pacific China 75.1 ⬎90 n.a. n.a. ⬎90

Samsung Electronics Electronics Asia-Pacific Korea 71.6 54.61 23.18 21.76 54.61
State Grid Electricity Asia-Pacific China 71.3 ⬎90 n.a. n.a. ⬎90
China National Petroleum Gas Asia-Pacific China 67.7 n.a. n.a. n.a. n.a.
Pemex Gas N. America Mexico 63.7 58.05 58.05 n.a. n.a.
Hyundai Motor Motor Asia-Pacific Korea 46.4 63.33 25.08 11.59 63.33
LG Electronics Electronics Asia-Pacific Korea 37.8 51.16 25.24 15.60 51.16
SK Gas Asia-Pacific Korea 37.7 n.a. n.a. n.a. n.a.
Petronas Gas Asia-Pacific Malaysia 36.1 ⬎90 n.a. n.a. ⬎90
OAO Gazprom Gas Europe Russia 35.1 100.00 0.00 100.00 0.00
Indian Oil Gas Asia-Pacific India 29.6 96.08 n.a. n.a. 96.08
Lukoil Gas Europe Russia 28.8 21.97 n.a. 21.97 n.a.
China Life Insurance Insurance Asia-Pacific China 25.0 n.a. n.a. n.a. n.a.
China Mobile Comm. Telecom Asia-Pacific China 24.0 n.a. n.a. n.a. n.a.
Ind. & Comm. Bank of China Banking Asia-Pacific China 23.4 n.a. n.a. n.a. n.a.
UES of Russia Electricity Europe Russia 22.6 99.47 n.a. 99.47 n.a.
Samsung Life Insurance Insurance Asia-Pacific Korea 22.3 n.a. n.a. n.a. n.a.
China Telecommunications Telecom Asia-Pacific China 21.6 100.00 0.00 0.00 100.00
POSCO Steel Asia-Pacific Korea 20.9 93.75 2.21 n.a. 93.75
Korea Electric Power Electricity Asia-Pacific Korea 20.9 n.a. n.a. n.a. n.a.
Sinochem Chemicals Asia-Pacific China 20.4 ⬎90 n.a. n.a. ⬎90
Shanghai Baosteel Group Steel Asia-Pacific China 19.5 ⬎90 n.a. n.a. ⬎90
China Construction Bank Banking Asia-Pacific China 19.0 n.a. n.a. n.a. n.a.
China Southern Power Grid Electricity Asia-Pacific China 18.9 100.00 n.a. n.a. 100.00
Sabic Chemicals other Saudi Arabia 18.3 ⬎90 n.a. n.a. n.a.
Bank Of China Banking Asia-Pacific China 18.0 98.41 n.a. n.a. 98.41
Hutchison Whampoa Telecom Asia-Pacific China 17.3 52.57 13.81 33.62 52.57
Hon Hai Precision Industry Electronic Asia-Pacific Taiwan 16.2 n.a. n.a. n.a. n.a.
PTT Gas Asia-Pacific Thailand 16.0 ⬎90 n.a. n.a. ⬎90
Flextronics International Electronic Asia-Pacific Singapore 15.9 45.31 13.83 40.86 45.31
Koc Holding Manufacturing Europe Turkey 15.6 n.a. n.a. n.a. n.a.
Hanwha Chemicals Asia-Pacific Korea 15.4 n.a. n.a. n.a. n.a.
Agricultural Bank of China Banking Asia-Pacific China 15.3 ⬎90 n.a. n.a. ⬎90
Chinese Petroleum Gas Asia-Pacific Taiwan 15.2 n.a. n.a. n.a. n.a.
KT Telecom Asia-Pacific Korea 14.9 n.a. n.a. n.a. n.a.
Reliance Industries Gas Asia-Pacific India 14.8 78.24 n.a. n.a. 78.24
CFE Electricity N. America Mexico 14.5 n.a. n.a. n.a. n.a.
Bharat Petroleum Gas Asia-Pacific India 14.4 100.00 0.00 0.00 100.00
COFCO Food, cereal Asia-Pacific China 14.2 ⬎90 n.a. n.a. ⬎90
Hindustan Petroleum Gas Asia-Pacific India 14.1 100.00 0.00 0.00 100.00
Samsung Trading Asia-Pacific Korea 13.9 93.00 3.04 3.97 93.00
SK Networks Telecom Asia-Pacific Korea 13.8 82.01 n.a. n.a. 82.01
China First Automotive Works Motor Asia-Pacific China 13.8 ⬎90 n.a. n.a. ⬎90
Oil & Natural Gas Gas Asia-Pacific India 13.8 91.33 n.a. n.a. 91.33
Source: Authors’ calculation based on annual reports for the companies.
come from China, although the data are sketchy. China Telecommunications
generated 100 percent of its sales at home. The Bank of China generated 98.4
percent of its sales in the Asia-Pacific region, and Sinopec derived 90 percent or
more in the Asia-Pacific region. A related firm, Cathay Life, from Taiwan de-
rived 100 percent of its sales in its home region. The pattern of dependence on
sales in the home region for Asian MNEs is also exhibited by Pemex of Mexico,
which generated 91.7 percent of its sales in North America.
Table 7.5 updates the analysis of MNEs from emerging markets for 2004, ex-
amining a total of 44 MNEs, with the addition of 3 from Russia, 1 from Turkey,
and 1 from Saudi Arabia. There were still 2 from Mexico. Otherwise, in 2004,
the MNEs from emerging markets were all from the Asia-Pacific region, in-
cluding India: 16 from China, 11 from Korea, 5 from India, 2 from Taiwan, 1
from Singapore, 1 from Malaysia, and 1 from Thailand. Data on the distribu-
tion of regional sales of these MNEs for 2004 has not yet been compiled, but it
is highly unlikely to be substantially different from that of 2001. Because of the
emergence of a large number of multinationals from China in recent years, the
remainder of the chapter focuses on this group.
The data on the regional sales of these 44 MNEs from emerging markets for
2004 in table 7.5 shows much the same pattern as for 2001 in table 7.4. In 2004,
25 firms provided some evidence that they were home region based. Only 5
firms were bi-regional (mostly the Korean firms, plus Flextronics). However, in
2004, Flextronics could no longer be classified as a global firm, as its sales to
North America fell to 13.8 percent of the total. Instead, it was classified like
Samsung Electronics, which is a bi-regional firm, with over 20 percent of its
sales in each broad-triad region but over 50 percent in its home region. Overall,
the data show that the firms from emerging markets were mainly home region
based in 2004.
Before exploring the data on China’s multinationals, the next section reviews
the relevant theory needed to analyze MNEs from such emerging markets.
THE THEORY OF MNES IN A CHINESE CONTEXT
One of the unresolved problems facing the MNE in a foreign country is that it
suffers from a liability of foreignness. From the viewpoint of the MNE’s man-
agers, foreign markets present risks: there are social, political, and economic
costs associated with entry to unfamiliar markets. The liability-of-foreignness
literature suggests that the MNE has to make an investment in learning about
foreign markets (Zaheer 1995, 2002). In general, this follows a process of inter-
nationalization; the MNE first goes to nearby countries, which is consistent

with the empirical finding that the great majority of international business is
conducted by MNEs in their home regions.
The new insight that comes from this literature is that we cannot analyze the
role of MNEs in a purely global sense. Instead, we must analyze the MNEs in a
regional sense. We need to analyze the impact of Asian MNEs, primarily Japa-
nese firms (66 of the 75 largest MNEs in Asia are Japanese), on the rest of Asia.
Second, we can analyze the role of Chinese MNEs themselves; we follow this
approach in the next section. We need to remember that of the 380 MNEs in
the Fortune Global 500 (for which data are available), 320 derive an average of
80 percent of their sales in their home regions (Rugman 2005). Their distribu-
tion of foreign assets is even more regionalized. We conclude that analysis of
Chinese (and later Korean) multinationals must focus on their regional sales in
Asia.
A case can be made that the recent economic development of China is al-
most entirely due to FDI. The opening of the Chinese economy to foreign
MNEs, first in the special economic zones in the 1980s, and then in most
coastal cities in the 1990s, introduced some market-based efficiency to a previ-
ously totally command economy. Although China is still dominated by state-
owned enterprises and collectives, by 2005 foreign-owned firms accounted for
one-third of production and half of exports (Thun 2005). The foreign MNEs
operate on a world-class basis of competition, and they have developed efficient
supply networks. Much of the privatized sector of small and medium-sized en-
terprises in China has become affiliated with the MNEs. Together the MNEs
and the small and medium-sized enterprises are now driving forward the eco-
nomic development of China. The inefficient and protected state-owned en-
terprises are beginning to reform and are starting to adopt more market-based
strategies in the face of this new type of MNE-led domestic competition.
Through this process, efficiency-based thinking is spreading from the coastal
cities throughout China. In this sense foreign MNEs are the agents of eco-
nomic development for China.
This trend raises the question, when will China generate its own MNEs?
The answer is, not for ten or twenty years. Although 11 Chinese firms are in the
Fortune Global 500, none of them is truly internationalized. Indeed, these
large Chinese firms are mainly state-owned enterprises, and they generate well
over 95 percent of their sales within China (although only partial data are avail-
able for 8 firms). They are still largely in the protected banking, natural re-
sources, and telecom sectors; they show few signs of developing any proprietary
FSAs that would allow them to compete internationally, even on an intra-

regional basis.
When the Chinese state-owned enterprises do go abroad, they are in search
of technology, but they are not doing well through acquisition. Lenovo bought
an obsolete IBM line of business; Baosteel bought up iron ore supplies in
Brazil; Shanghai Motors bought the technologically laggard Rover of the
United Kingdom; Haier bought Thomson TV and has found it difficult to up-
grade it. Overall, these Chinese acquisitions reveal a search for the technology,
management, and strategy skills missing in Chinese state-owned enterprises.
The objectives appear to be to secure natural resources and market access, but,
in fact, no useful technologies have been acquired. The Chinese MNEs still
lack the internal managerial capabilities to integrate foreign acquisitions and
develop anything resembling dynamic capabilities. They suffer from a lack of
management talent. This competitive disadvantage in management will take
about a decade to remedy before Chinese state-owned enterprises are competi-
tive with Western MNEs.
Related work by Nolan (2004) finds that Chinese firms have failed to de-
velop FSAs and are lagging well behind Western firms, especially in technology.
Nolan finds no evidence that Chinese firms can develop knowledge of the sys-
tems integration skills that characterize successful Western MNEs. The Chi-
nese firms are protected, resource-based, labor-intensive, low-technology, and
inefficient firms. The potentially efficient small and medium-sized enterprises
are now linking to foreign MNEs rather than to the inefficient and uncompet-
itive state-owned enterprises. Japanese and Korean MNEs have developed
FSAs, whereas Chinese firms have not. Basically there are no Chinese MNEs;
they are just Chinese home firms.
DATA ON ASIA’S AND CHINA’S

MULTINATIONALS
In table 7.6 we identify the home country of the 45 Asian MNEs providing data
on their sales in each region of the triad. This list is dominated by the 37 MNEs
from Japan, which in 2001 derived an average of 74.6 percent of their sales in
Asia, 14.8 percent in North America, and 7.3 percent in Europe. Although there
are 11 Chinese MNEs in the data set analyzed by Rugman (2005), none of them
reports geographic sales across each region of the triad. The only firm from
China reporting its geographic distribution of sales derived 100 percent of its
Table 7.6 Regional sales of Asian firms, 2001
Regional sales (%)

Average
No. of revenue North
MNEs ($ billions) America Europe Asia Unidentified
Total 45 (121) 32.4 (25.8) 16.0 7.6 73.2 3.1

Australia 4 (6) 13.9 (14.1) 21.9 7.2 68.8 2.1
Japan 37 (88) 35.9 (27.9) 14.8 7.3 74.6 3.3
Korea 2 (12) 26.3 (21.2) 21.2 5.4 69.0 4.5
Malaysia 0 (1) n.a. (17.7) n.a. n.a. n.a. n.a.
Singapore 1 (1) 13.1 (13.1) 46.3 30.9 22.4 0.4
Taiwan 1 (2) 11.6 (11.2) 0.0 0.0 100.0 0.0
China 0 (11) n.a. (25.0) n.a. n.a. n.a. n.a.
Note: Of the 121 Asian firms included in the list of the world’s 500 largest MNEs, only 45 report regional
sales data for the triad regions. Figures in parentheses are for the entire set of the 122 Asian MNEs in
sales in Asia. We would expect the other 11 MNEs from China to generate close
to 100 percent of their sales in Asia as well.
Table 7.7 lists the 11 Chinese firms in the top 500 for 2001, arranged by in-
dustry group. We also show the 16 Chinese firms for 2004.
Table 7.8 reports data on the regional sales of the 8 Chinese MNEs providing
some data on the geographic distribution of their sales. We can see that China
Telecom and China Southern Power generated 100 percent of their sales in Asia
(indeed, virtually all within China itself ). The Bank of China derived 98.4 per-
cent of its sales in Asia. The other 5 Chinese firms derived over 90 percent of
their sales in Asia. Overall these 8 large Chinese firms, most of which have the
potential of being classified as MNEs, generated an average of 93.1 percent of
their sales in Asia. We would not expect this number to fall below 90 percent
for many years. Indeed, it is likely to be at least ten to fifteen years before the 15
largest Chinese firms have intraregional sales close to the world average of
about 75 percent. Until then the Chinese MNEs will continue to experience
strong sales within China itself, with a gradual increase in foreign sales, but
mostly within the Asian region.
Table 7.7 Chinese MNEs in the top 500, 2001 and 2004 (billions of U.S. dollars)
Industry Company Revenue
2001 Banking (4) Industrial & Commercial Bank of China 19.8

Bank of China 17.9
China Construction Bank 13.1
Agricultural Bank of China 10.7
Utility (3) State Power 48.4
China Telecommunications 22.3
China Mobile Telecommunications 17.4
Natural-resource China National Petroleum 41.5
manufacturing (2) Sinopec 20.4
Other manufacturing (2) Sinochem 16.2
COFCO 13.0
Average (11) 21.9
2004 Banking and insurance (5) China Life Insurance 25.0

Industrial & Commercial Bank of China 23.4
China Construction Bank 19.0
Bank of China 18.0
Agricultural Bank of China 15.3
Utility (4) State Grid 71.3
China Mobile Telecommunications 24.0
China Telecommunications 21.6
China Southern Power Grid 18.9
Natural-resource Sinopec 75.1
manufacturing (3) China National Petroleum 67.7
Shanghai Baosteel Group 19.5
Other manufacturing (3) Sinochem 20.4
COFCO 14.2
China First Automotive Works 13.8
Other (1) Hutchison Whampoa 17.3
Average (16) 29.0
Sources: Rugman 2005 and annual reports.
COUNTRY-LEVEL DATA ON TRADE

AND FDI PERFORMANCE
Table 7.9 reports the ratios of trade and FDI stock to GDP across the three re-
gions of the broad triad. The Asian economies are more heavily involved in the
international economy through their trade performance than through their
FDI performance. Although Asia’s ratio of trade to GDP is very close to the
Table 7.8 Regional sales of eight Chinese firms, 2004
Regional sales (%)
Revenue North
Company ($ billions) America Europe Asia Unidentified
Sinopeca 75.1 n.a. n.a. ⬎90.0 ⬍10.0

China Telecommunicationsb 21.6 n.a. n.a. 100.0 0.0
Sinochemc 20.4 n.a. n.a. ⬎90.0 ⬍10.0
China Const. Bankd 19.0 n.a. n.a. ⬎90.0 ⬍10.0
China Southern Powere 18.9 n.a. n.a. 100.0 0.0
Bank of China f 18.0 n.a. n.a. ⬎98.4 ⬍1.6
Hutchison Whampoag 17.3 14.0 33.0 53.0 0.0
Agri. Bank of Chinah 15.3 n.a. n.a. ⬎90.0 ⬍10.0
Average 25.7 n.a. n.a. 88.9 5.2
Source: 2005 annual report for each company.
Note: Of the 16 Chinese MNEs included in the world’s 500 largest MNEs in 2004, only 8 report their re-
gional sales. If values are larger than 90%, 90% is used for calculation. If values are larger than 90%,
90% is used in the calculation of the average; similarly, if values are less than 10%, 10% is used.
aAccording to the notes in the company’s annual report, Sinopec has less than 10% of sales and invest-
ment in foreign areas, and accordingly, under International Financial Reporting Standards (IFRS), it
does not need to report its geographic sales.
bAll of the group’s operating activities are carried out in the People’s Republic of China.
c Exports make up 10% of Sinochem’s sales. We expect that regional sales would be larger than 10%.
d The company follows IFRS, but it does not specify geographic segment data. Accordingly, it is possi-
ble to presume that less than 10% of the company’s sales and assets are foreign.
e China Southern Power’s Web site shows that the company covers Guangdong, Guangxi, Guizhou,
Yunnan, and Hainan, which are also connected with the power grid in middle China, Hong Kong, and
Macao. It is possible to presume that the percentage of home region sales and assets is 100%.
f The percentage of sales from China, Hong Kong, and Macao is 98.41%, and that of assets is 94.5%.
g Annual report shows the value of geographic sales.
h The values are not explicitly noted in the annual report, but given the geographic data on the com-
pany’s deposits, borrowings, and the like, it is possible to conclude that domestic sales exceed 90%.
overall average ratio of 24 percent (on both an inward and outward basis), its
ratio of FDI stock to GDP is considerably below the average. With respect to
the ratio of inward FDI stock to GDP, Asia averages 11.65 percent, compared
with the overall average of 19.96 percent; and with respect to the ratio of out-
ward FDI stock to GDP, Asia averages 10.48 percent, compared with the over-
all average of 22.08 percent. Perhaps the most significant point in table 7.9 is
that the outward FDI stock of Asian countries is significantly below that of
North American and European countries. This particular statistic is unlikely to
Table 7.9 Inward and outward FDI stocks and trade as a percentage of
GDP, 2002
Inward Outward
Americas 15.83 13.34 15.57 16.34

North Americaa 14.65 12.68 15.96 16.16
South Americab 30.51 21.54 10.71 18.53
Asia-Pacific 13.02 24.46 11.13 22.49

Asia 11.65 24.66 10.48 22.44
Oceania 34.72 21.30 21.43 23.29

Europe 30.80 36.16 41.10 34.09
Total 19.96 24.05 22.08 24.04
Sources: FDI data are from UNCTAD 2004. Trade and GDP data are from World Bank
2005.
improve in the near future (the next three to five years) because it takes a long
time to increase the FDI stock.
Table 7.10 shows that the developed countries provide over 90 percent of the
world’s stock of outward FDI but that they receive considerably less of the in-
ward stock (74.82 percent). In contrast, the less-developed countries (which in-
clude China) receive nearly 25 percent of the world’s inward FDI stock but con-
tribute under 10 percent of the world’s outward stock. China is a microcosm of
the less-developed countries in this respect: China receives much more inward
FDI than it provides in outward FDI.
KOREA’S MULTINATIONALS
The Republic of Korea is home to a set of large firms, so called chaebols, which
can now be classified as MNEs. In the list of the world’s 500 largest companies,
ranked by sales for 2001, Rugman (2005) found that there were 12 Korean firms.
In 2004, there were 11 Korean firms in this list. These large MNEs are discussed
here as the basic set of firms that will determine the success of Korea in devel-
oping MNEs. The purpose of this part of the chapter is to analyze the FSAs and
Table 7.10 Stock and flows of inward and outward FDI, 2002
(billions of U.S. dollars)
Panel A. Inward FDI
Developed countries 7,213.5 74.82 565.8 80.76

Less-developed countries 2,288.7 23.74 129.9 18.54
Least-developed countries 138.9 1.44 4.9 0.70
Total 9,641.1 100.00 700.6 100.00
Developed countries 6,416.3 90.77 603.2 93.82

Less-developed countries 650.4 9.20 39.6 6.16
Least-developed countries 1.8 0.02 0.1 0.02
Total 7,068.5 100.00 642.9 100.00
Sources: Data from UNCTAD 2004, 2002.
egory to the “developed” category. There are 33 developed countries, 82 less-developed countries, and 31
least-developed countries.
CSAs of Korean chaebols in the context of the regional dimension of world

business. The literature now recognizes the importance of broad-triad regions
in determining the sales of MNEs. It shows that the largest MNEs have devel-
oped FSAs and CSAs in their home regions (see, among others, Rugman 2000;
Girod and Rugman 2003; Rugman and Verbeke 2004; Delios and Beamish
2005; and Oh and Rugman 2006). Korean firms have an incentive to become
MNEs, as the size of their home market is relatively small for achieving scale
economies. Like Western MNEs in large open economies, Korean chaebols
have developed home region oriented FSAs and CSAs, but their FSAs and
CSAs are different from those of Western MNEs. We show here that the chae-
bols have home region oriented advantages coming from business-government
relationships, knowledge-based capabilities, and group-affiliated benefits.
Considering the size of its economy, population, and land area, as well as the
amount of natural resources it possesses, Korea is a relatively small country, but
it has several very large firms. Therefore, Korean firms have a greater motiva-
tion to develop international capabilities to exploit host countries’ resources
and markets than firms of similar size in larger countries. Only Canada, China,
France, Germany, Japan, the Netherlands, the United Kingdom, and the United
States have more firms listed among the world’s 500 largest firms, and these
countries are all G8 countries except for China and the Netherlands. The
Netherlands is the only country that has more companies listed in the world’s
top 500, but it has a smaller GDP than Korea.
Korean firms’ FSAs and CSAs have changed rapidly in accord with Korea’s
rapid economic growth. In the past, the FSAs of Korean firms built on a set of
CSAs that included the benefits of group-affiliated behavior, cheap and skilled
labor, government subsidies for exporting, government protection from for-
eign firms in the domestic market, and collaboration between government and
firms. Today their FSAs are building on an updated set of CSAs that includes a
knowledge-oriented economy, highly educated workers, advanced infrastruc-
ture, and geographic proximity to cheap labor in Southeast Asian countries and
China.
Even though the Korean and foreign governments have sought to limit the
group-affiliated behavior of chaebols—for example, cross-subsidization—since
the economic crisis in Asia in the late 1990s, group-affiliated behavior of chaebols
once again has become a strong CSA in the home market. Lee and Miller (1996)
find that Korean firms using traditional technologies are able to succeed because
they obtain help in the form of government subsidies and protection, and fur-
ther claim that because of competition, government intervention is ineffective
in industries using emergent technologies. They conclude, therefore, that gov-
ernment protection is no longer a strong CSA for large Korean firms.
THE FSAs OF KOREAN FIRMS
What, then, is the current status of FSAs of Korean firms, and to what extent
have inward and outward FDI helped improve the FSAs of Korean companies?
Since improving technological capabilities is ultimately an endogenous and ac-
cumulative process that requires substantial endogenous efforts (Kim 1997; Lall
1987), relying solely on direct technology transfer from joint-venture partners is
not sufficient for the development of FSAs. Rather, firms need to internalize
the benefits of knowledge creation, partly shown by their R&D expenditures.
The R&D expenditures of 10 Korean firms accounted for 70 percent of the
total R&D expenditures of the 550 largest Korean firms, and that of 30 firms
accounted for 85 percent of the total in 2002. The 10 firms included Samsung
Electronics, LG Electronics, Hyundai Motor, POSCO, and KT, all MNEs
listed in the Fortune Global 500. Except for SK, which ranked twelfth in R&D
expenditure among Korean firms, all of Korea’s firms in the Fortune Global 500
are R&D-oriented manufacturing firms. The 3 largest Korean firms, Samsung
Electronics, LG Electronics, and Hyundai Motor, account for 52 percent of the
total R&D expenditure of the 550 largest Korean firms (see Science and Tech-
nology Policy Research Institute 2003).
Nelson and Pack (1999) find that the successful growth of Korea and Taiwan
is due to technology assimilation. They argue that individual firms had strong
incentives to improve their FSAs in efficiency to enable them to export rather
than engage in rent seeking in the domestic market. Korean firms had been us-
ing traditional or mature technologies that are established, well understood,
and less valuable to advanced counties since the 1960s, but the Korean chaebols
have adopted emergent or developing technologies because of their growing
R&D capacities. Those emergent or developing technologies are valuable FSAs
(Lee and Miller 1996). Advanced technologies are not easy to adopt, and firms
have to improve their R&D capabilities by increasing in-house capability.
Mathews and Cho (1999) report that the success of the semiconductor industry
in Korea can be explained by the technological learning of the latecomer firms.
The top-tier firms, like Samsung Electronics and LG Electronics, have to re-
duce the appropriability problem by securing their advanced R&D capability
against possible imitators. This is done by internalizing their FSAs (Rugman
1981, 2006).
A recent survey provides mixed evidence on the success of Korean MNEs.
Building on their FSAs, during the five-year period 2001–2005, Korean MNEs
invested in foreign countries to promote exports (38.2 percent of total outward
FDI), to use low-wage workers (11.0 percent of total outward FDI), to exploit
natural resources (9.6 percent of total outward FDI), and to circumvent trade
restrictions (3.4 percent of total outward FDI). But only 2.1 percent of total
outward FDI was for R&D purposes (see Korea EXIM Bank 2005). Only 5 per-
cent of the foreign establishments of Korea’s 3 largest MNEs are in R&D-ori-
ented facilities. Thus Korea’s MNEs develop FSAs based on home-country
R&D, not on asset-seeking FDI.
Guillén (2000) finds that firms and entrepreneurs create diversified business
groups when they can accumulate an inimitable capability to combine domes-
tic and foreign resources to enter industries quickly and cost effectively. Yet
chaebols find it hard to use groupwide benefits, particularly in well-developed
foreign markets. However, formal and informal benefits of a group-affiliated

structure, such as trust, knowledge sharing, and supply chain management,
will remain strong FSAs of chaebols. Hitt, Lee, and Yucel (2002) claim that rela-
tional networks represent important social capital in Korea. Chang and Choi
(1988) and Chang and Hong (2000) find that group-affiliated firms extensively
share technological skills and advertising. Indeed, Samsung Electronics has
strong network advantages coming from its affiliates such as Samsung SDI,
Samsung Corning, and Samsung Electro-Mechanics. It is interesting that the
Samsung group and the LG group recently restarted their group level recruiting
systems, which was suspended in the early 2000s.
OTHER ASIAN MNEs
The World Bank (1993) classified eight Asian countries into three groups: (1)
Japan; (2) the first-generation newly industrialized countries (Korea, Hong
Kong, Taiwan, and Singapore); and (3) the second-generation newly industrial-
izing countries (Malaysia, Indonesia, and Thailand). Even though these eight
Asian countries have experienced fast and export-oriented economic growth,
they have different types of MNEs based on different CSAs. Redding (2001)
analyzes the CSAs of firms in the smaller economies of Asia: an involved gov-
ernment, a centralized structure, human capital, and social capital.
Rugman and Collinson (2006) examine the FSAs and CSAs of Japanese
firms by using several case studies and conclude, among other things, that
Japanese MNEs build on the CSAs in their home region, where their upstream
FSAs are even more localized than their downstream FSAs. Debrah, McGov-
ern, and Budhwar (2000) show that Singapore’s CSAs lie in skilled labor, ad-
vanced technology, advanced physical infrastructure, and advanced commer-
cial infrastructure, whereas Indonesia and Malaysia have advantages in cheap
(unskilled) labor and natural resources. The three other first-generation coun-
tries (and Japan) have similar advantages to those of Singapore.
Brouthers, O’Donnell, and Hadjimarcou (2005) show that emerging-mar-
ket firms achieve a higher level of export performance when they mimic the
product strategies of Western MNEs in triad markets than when they enter
emerging markets or when they develop other product strategies in triad mar-
kets. We note, as supporting evidence, that Korean MNEs have acquired for-
eign technologies (but not really strong FSAs) through acquisitions; for exam-
ple, Samsung Electronics acquired Harris Microwave Semiconductor in 1993,
and LG Electronics purchased 57.7 percent of the stock of Zenith Electronics in

1995.
Japanese firms are linked to firms in the newly industrialized Asian coun-
tries, which serve as markets for final electrical and electronic products and
Japanese-made components. The first-generation newly industrialized coun-
tries developed their technological capabilities by relying on Japanese firms’
FSAs. Korean and Taiwanese electronics firms acquired technology mainly
through licensing and contracting arrangements with Japanese firms such as
Sony, Sanyo, and Matsushita in the period 1970 –1980 (Hobday 1995). Korea’s
MNEs have been building on their neighboring countries’ CSAs, such as cheap
labor in China, natural resources in Southeast Asia, and advanced technology
in Japan. We now apply this theoretical work on FSAs and CSAs to Korean
MNEs, using the data available on the nature and performance of Asian MNEs.
We conclude by examining the available data on Korean MNEs.
THE PERFORMANCE OF KOREAN FIRMS
In table 7.6 we identified the home countries of the 45 Asian MNEs that pro-
vided data on their sales in each region of the triad. Although there are 12 Ko-
rean MNEs in the data set analyzed by Rugman (2005), only 2 of them report
their geographic sales across each region of the triad. These 2 Korean firms de-
rived an average of 69 percent of their sales in Asia in 2001.
Table 7.11 shows the 12 Korean firms in the Fortune Global 500 for 2001,
arranged by industry group. We also show the 11 Korean firms for 2004. With
the exception of POSCO, Korea Electric Power, and KT, all other firms can be
categorized as chaebols. The presence of Korean chaebols is at least as stable as
the other 500 large companies: of Korea’s 12 largest firms in 2001, 2, that is, 17
percent, were no longer on the list in 2004, and of the world’s 500 largest firms,
94, that is, 19 percent, were removed from the list in 2004.
It is important to note that 4 Korean trading firms, Samsung, Hyundai, LG
International, and SK Global, were listed among the world’s 500 largest com-
panies and accounted for 34 percent of the revenue of Korea’s 12 largest firms in
2001. In 2004, only 2 trading companies, Samsung and SK Global (renamed
SK Networks), were listed among the world’s 500 largest companies and ac-
counted for only 9 percent of the revenue of Korea’s 11 largest firms. Over the
same time period, Korea’s international trade increased more than 60 percent,
from $292 billion to $478 billion.
Table 7.11 Korean firms in the world’s largest 500 (billions of U.S. dollars)
Industry Company Revenue
2001 Electronics (2) Samsung Electronics 36.0

LG Electronics 23.1
Trading (4) Samsung 33.2
Hyundai 21.7
LG International 19.5
SK Global 17.2
Energy (1) SK 33.0
Other manufacturing (2) Hyundai Motor 30.9
POSCO 10.2
Financial services (1) Samsung Life Insurance 17.5
Utilities (2) Korea Electric Power 15.7
KT 12.3
Total (12) 270.3
Average 22.5
2004 Electronics (2) Samsung Electronics 71.6
LG Electronics 37.8
Trading (2) Samsung 13.9
SK Networks (Global)a 13.8
Energy (1) SK 37.7
Other manufacturing (3) Hyundai Motor 46.4
POSCO 20.9
Hanwha 15.4
Financial services (1) Samsung Life Insurance 22.3
Utilities (2) Korea Electric Power 20.9
KT 14.9
Total (11) 315.6
Average 28.7
Sources: Rugman 2005 and company annual reports.
a SK Global changed its name to SK Networks in October 2003.
Table 7.12 shows the geographical distribution of sales for the 12 largest Ko-
rean MNEs, using data from their annual reports. Only 5 Korean firms re-
ported their regional sales in 2001. We can see that all 5 Korean firms are home-
region-oriented MNEs because they had more than 50 percent of sales in their
home region (the Asia-Pacific region). Overall these 5 large chaebols derived an
average of 70 percent of their sales in Asia. That result is very consistent with
the results in Rugman’s study (2005), which found that, on average, the world’s
500 largest companies derived 70 percent of their sales in their home regions.
Table 7.12 Regional sales of Korean MNEs, 2001
Regional sales (%)
Revenue North
Samsung Electronics 36.0 20.8 18.3 60.6 0.2

Samsung 33.2 n.a. n.a. n.a. n.a.
SK 33.0 n.a. n.a. n.a. n.a.
Hyundai Motor 30.9 18.1 0.3 81.6 0.0
LG Electronics 23.1 23.6 11.7 60.4 4.3
Hyundai 21.7 24.2 10.5 56.3 9.0
LG International 19.5 n.a. n.a. n.a. n.a.
Samsung Life Insurance 17.5 n.a. n.a. n.a. n.a.
SK Global 17.2 n.a. n.a. n.a. n.a.
Korea Electric Power 15.7 n.a. n.a. n.a. n.a.
KT 12.3 n.a. n.a. n.a. n.a.
POSCO 10.2 2.9 0.0 91.9 5.2
Average 22.5 17.9 8.2 70.2 3.7
Hyundai Motor and POSCO generated 82 percent and 92 percent of their

total sales in the Asian region, respectively. We presume that other Korean firms
in the trading, energy, financial services, and utility industries derived similar
percentages of sales in their home region because the data from the world’s 500
largest companies show those industries to be highly home region oriented.
However, Samsung Electronics can be categorized as a near-global MNE, be-
cause it generated more than 20 percent of its total sales in North America and
18.3 percent in Europe. Likewise, LG Electronics and Hyundai are nearly bi-re-
gionals because they generated more than 20 percent of total sales in Asia and
North America but only 10 percent in Europe.
More recent data also configure that the large chaebols are home-region-ori-
ented MNEs. As shown in table 7.13, which is based on 2004 data, Samsung
Electronics, Hyundai Motor, and LG Electronics diversified their sales geo-
graphically, but they still had more than 50 percent of sales in Asia. Samsung
and SK Networks reported their regional sales data for 2004, which show that
they are home region oriented MNEs like POSCO. The six firms generated an
average of 71 percent of sales in Asia.
We also track their geographic distribution of assets to analyze the chaebols’
Table 7.13 Regional sales of Korean MNEs, 2004
Regional sales (%)
Revenue North
Samsung Electronics 71.6 23.2 21.8 54.6 0.5

Hyundai Motor 46.4 25.1 11.6 63.3 0.0
LG Electronics 37.8 25.2 15.6 51.2 8.0
SK 37.7 n.a. n.a. n.a. n.a.
Samsung Life Insurance 22.3 n.a. n.a. n.a. n.a.
POSCO 20.9 2.2 n.a. 93.8 4.0
Korea Electric Power 20.9 n.a. n.a. n.a. n.a.
Hanwha 15.4 n.a. n.a. n.a. n.a.
KT 14.9 n.a. n.a. n.a. n.a.
Samsung 13.9 3.0 4.0 93.0 0.0
SK Networks (Global) 13.8 n.a. n.a. 82.0 18.0
Average 28.7 15.7 13.2 73.0 5.1
upstream FSAs in each region. All large Korean MNEs have more than 90 per-
cent of their assets in their home region of Asia. Rugman (2005) defines down-
stream FSAs, or customer end FSAs, as strengths deployed in activities with a
direct interface with customers; they are required to achieve successful market
penetration. In contrast, upstream FSAs are deployed in activities that lack this
direct interface but are critical to creating an efficient internal production sys-
tem. Rugman (2005) further suggests and presents a reconceptualization of
Bartlett and Ghoshal’s framework (1998) on “generic roles of national organiza-
tions” in the MNE. We apply this framework to our data in figure 7.1. The large
Korean MNEs’ strength of geographic scope for upstream FSAs lags behind
their downstream FSAs, as with other Western MNEs. Oh and Rugman (2006)
find that the world’s 100 largest cosmetics companies also have the same asym-
metry between upstream and downstream FSAs.
The existing literature on multinationality and performance sometimes uses
the number of foreign affiliates as a measure of geographic scope (see, among
others, Errunza and Senbet 1984; Kim and Lyn 1986; Morck and Yeung 1991;
Gomes and Ramaswamy 1999; and Zahra, Ireland, and Hitt 2000). Here we
also analyze the number of foreign establishments and the number of workers
in regional triad markets to check the robustness of our findings. These data are
reported for the three largest Korean MNEs in table 7.14.
Figure 7.1 The FSAs of Korean MNEs

Adapted from Rugman 2005, p. 198 and based on data from the firms’ annual reports. Data
for Samsung Electronics, Hyundai Motors, LG Electronics, and POSCO are for 2004.
Data of Hyundai are for 2001 (most recent available data). Geographic assets data for LG
Electronics and SK Networks are unavailable. Numbers for geographic scope are counted
when sales in the region exceed 20 percent of total sales.
The results show that the number of foreign establishments probably over-
states the importance of international strategy. The foreign establishments are
widespread throughout the world, but the employees work mainly in the home
region. Moreover, the number of establishments in Europe is higher than in
North America, whereas the number of employees in Europe is less than in
North America. The overall results from an analysis of the number of employ-
ees are consistent with our previous results from an analysis of regional sales.
We conclude that home region oriented strategy is very important from the
perspective of performance as well as the organization of MNEs.
SUMMARY POINTS
The main conclusion of this chapter is that MNEs from emerging markets are
not operating globally; instead they are home region based firms, like most of
the world’s other MNEs. Nor is there any evidence that there is a trend toward
globalization for either MNEs from emerging economies or MNEs in general.
With reference to MNEs from China, the following four major conclusions
can be drawn about the nature, extent, and future of outward FDI by Chinese
and Korean MNEs.
Table 7.14 Foreign operations of Korea’s “big three” MNEs
North Rest of
Company America Asia Europe world Total
Number of Samsung Electronics 14 33 26 21 94

establishments LG Electronics 11 41 30 13 95
Hyundai Motors 11 17 16 5 49
Total 36 91 72 39 238
Number of Samsung Electronics 14.89 35.11 27.66 22.34 100.00

establishments LG Electronics 11.58 43.16 31.58 13.68 100.00
(% of total) Hyundai Motors 22.45 34.69 32.65 10.20 100.00
Total 15.13 38.24 30.25 16.39 100.00
Number of Samsung Electronics 7,308 16,842 4,873 1,748 30,771

employees LG Electronics 5,910 46,247 4,863 4,852 61,872
Hyundai Motors 6,831 38,334 2,292 32 47,489
Total 20,049 101,423 12,028 6,632 140,132
Number of Samsung Electronics 23.75 54.73 15.84 5.68 100.00

employees LG Electronics 9.55 74.75 7.86 7.84 100.00
(% of total) Hyundai Motors 14.38 80.72 4.83 0.07 100.00
Total 14.31 72.38 8.58 4.73 100.00
Source: Korea Trade-Investment Promotion Agency.
Note: Establishments in the Republic of Korea are not included, but both Korean and non-Korean employees are in-
cluded. Samsung Electronics, LG Electronics, and Hyundai Motors do not report the number of employees in some
of their establishments (8, 13, and 4 establishments, respectively); most of those establishments (68 percent) are lo-
cated in China.
First, the theoretical literature indicates that MNEs expand abroad based on
a complex interaction between FSAs and CSAs. The successful MNEs from
North America, Europe, and Japan, in general (this is something of a simplifi-
cation), expand abroad to exploit FSAs that they have developed in their large
internal home markets. The activities of their foreign subsidiaries, to an over-
whelming degree, tend to replicate for local distribution the FSAs developed in
the home market. This explanation of MNEs was developed in Rugman’s work
(1981) and was still true as of the twenty-fifth anniversary republication of that
book (Rugman 2006). Only to a minor extent do MNEs go abroad to gain ac-
cess to knowledge and technology. A few Japanese MNEs engaged in asset-
seeking FDI in North America are the main exceptions to the rule that knowl-
edge and technology is usually developed in the home market. Similarly, only a
small set of Western MNEs go abroad to exploit natural resources—MNEs in
the energy, mining, and forestry sectors. They go abroad to exploit host coun-
try CSAs, but they retain proprietary control over managerial and marketing
FSAs, where the latter are identified with their home countries. The implica-
tion of this for China is that its MNEs are likely to develop by exploiting
China’s CSAs in cheap, unskilled, and skilled labor. It is highly unlikely that
Chinese MNEs will go abroad in any significant numbers over the next five to
ten years on the basis of FSAs. In general, China lacks firms with FSAs in
knowledge and systems integration, especially in comparison with Western
MNEs in the world’s top 500.
Second, as Chinese MNEs develop and go abroad, their primary geographic
focus will be within the Asia-Pacific region. Here their main competitors will
be other Asian MNEs based in Japan, Australia, South Korea, Singapore, and
other Asian Tigers. The empirical evidence on the performance of the world’s
500 largest MNEs, as summarized in Rugman’s study (2005), shows that the
great majority of these firms operate on an intraregional basis. Of the 380 firms
providing data on geographic sales, the largest set of 320 derived an average of
80 percent of their sales in their home regions. These firms had an even higher
proportion of their foreign assets in their home regions. There are extremely
few “global” firms, and only three dozen bi-regionals. The Chinese MNEs are
highly unlikely to become global or bi-regional firms in the next ten to twenty
years. However, this is not a problem, since there is no evidence showing that
global and bi-regional firms are more profitable than home-region MNEs.
Third, the major impact of the growth of Chinese outward FDI, and the de-
velopment of Chinese-based MNEs, will be to enhance the internal efficiency
of the Chinese economy. Only the best Chinese firms will succeed abroad.
Thus, a prerequisite for international success is domestic efficiency. As the Chi-
nese government has supported the establishment and improvement of domes-
tic markets, economic efficiency within China has improved. The key agent for
change in China has been the move toward unrestricted entry of FDI. Over the
past ten years, Western MNEs have greatly improved the efficiency of the Chi-
nese economy. They have established clusters and business networks with links
to new and regenerated Chinese businesses. Indeed, many small and medium-
sized Chinese firms are now affiliated with foreign multinationals in business
networks. In contrast, the old state-owned enterprises have been slower to en-
gage in the realities of market-driven efficiency. Consequently, many of these
state-owned enterprises are poor candidates for internationalization. As they go
abroad, their domestic monopoly protection, with its resulting inefficiency,
will serve them badly in competitive foreign markets. Only the newer and more
entrepreneurial firms in China will succeed internationally. The role of the

Chinese government is to facilitate continuous improvements in the domestic
market system. The government should continue to improve basic infrastruc-
ture, but a faster pace of liberalization in the service sector, especially financial
services, is required to develop a competitive Chinese business system. As
China’s economy improves, the most efficient firms will be able to expand
abroad. Initially they will build on China’s CSAs, but eventually they will start
to generate home-grown FSAs in knowledge and technology. Then Chinese
MNEs will be on an equal footing with foreign MNEs in the list of the world’s
500 largest firms.
Fourth, as Korean MNEs develop and go abroad, their primary geographic
focus will be within the Asia-Pacific region. Here their main competitors will
be other Asian MNEs based in Japan, Singapore, Thailand, China, and other
Asian Tigers. The large Korean MNEs perform as well as their Western com-
petitors in international markets, and they tend to be as intraregional as West-
ern MNEs. We also find that in general, Korea lacks MNEs with FSAs in up-
stream integration in foreign markets but that the Korean MNEs have FSAs in
downstream integration.
Chapter 8 Multinationals
and Development in Asia
In this chapter we continue our focus on FDI and MNE activities in

the emerging economies of Asia. This chapter follows the logic of the
previous chapter, in that outward FDI is shown to be a useful tool for
economic development. Here we turn to a broader analysis of MNEs
from all of Asia, in particular, adding the Japanese MNEs to the
MNEs from China and Korea discussed in the previous chapter. We
discuss certain MNEs in detail to understand their business strategies
and impact on development. We build on prior empirical work that
shows that the majority of the world’s 500 largest firms derive most of
their sales in their home regions (Rugman 2005; Rugman and Verbeke
2004).
Three sets of data are presented. The first set shows that 105 (91 per-
cent) of the 115 Asian firms reporting geographic sales data are home-
region oriented. Just 3 are truly global, with a significant proportion of
their sales in all three parts of the triad. In addition to sales data (which
indicate output, or market-related measures of internationalization),
we present data on the global distribution of the assets of these Asian
firms. Measured by assets, all but 3 (97 percent) of the 111 Asian firms
153
154 Multinationals and Development in Asia
in the world’s 500 largest for which asset data are available are home region ori-
ented. The third set of data shows that the vast majority of peer-reviewed aca-
demic publications have focused on the most global, and therefore the least
representative, of these firms. Much of what we understand of Asian firms in
terms of their distinctive characteristics (competitive strengths and weaknesses)
is drawn from a biased sample of the most “global” firms.
After presenting this data, we introduce an adapted “regional matrix” (Rug-
man 1981) as a framework for explaining the patterns of limited international-
ization shown by the data. We then provide case studies to supplement the data
and examine the most unusual bi-regional, host region oriented, and global
Asian firms. As other studies and prior research (Rugman and Collinson 2006)
have focused on the limited globalization of Japanese firms, we focus on non-
Japanese firms (BHP Billiton, Hon Hai Precision, Flextronics, and Hutchison
Whampoa) to see if there are common characteristics driving their unusual lev-
els of regionalization. Finally, considering the additional data we have com-
piled on case-study selection in peer-reviewed management and business jour-
nals, we comment on the implications of the biases in research on Asian firms.
ASIAN BUSINESS IS REGIONAL, NOT GLOBAL
Empirical data increasingly support a regional perspective, countering the

dominant view of globalization. Each region has 3 truly global firms, whereas
North America has 167 home region oriented firms, Europe has 86, and Asia
has 66. Despite the fact that these firms are large and multinational, the activi-
ties of, and influences on, these firms are strongly localized. Rather than in-
creasingly homogenized markets (Levitt 1983) and a ubiquitous need for global
strategies (Yip 2002), we have at most a situation of semi-globalization (Ghe-
mawat 2001, 2003). Regional issues arguably provide better explanations of
what influences these firms’ strategies and performance than do global issues.
Here we add to the empirical evidence concerning the world’s largest firms.
Table 8.1 lists 122 firms from Asia, 115 of which publish geographic sales data
and 111 of which publish geographic asset data.
We adopt the convention established by Rugman and Verbeke (2004).
Home region firms are defined as those that generate over 50 percent of their
sales in the home region; bi-regional firms generate less than 50 percent of their
sales in the home region and over 20 percent in another triad region; host re-
gion firms generate over 50 percent of their sales in another triad region, out-
Table 8.1 The Asian firms in the top 500, 2004
Distribution of sales Distribution of assets

Fortune Country Revenue Foreign to Intra- Foreign to Intra-
Company 500 rank Country rank ($ millions) total sales (%) regional (%) Type total assets (%) regional (%) Type
Toyota Motor 7 Japan 1 172,616.30 59 41 B 54 53 D

NTT 18 Japan 2 100,545.30 ⬍10 ⬎90 D ⬍10 ⬎90 D
Hitachi 23 Japan 3 83,993.90 35 80 D 23 92 D
Matsushita Electric Ind. 25 Japan 4 81,077.70 54 68 D 20 93 D
Honda Motor 27 Japan 5 80,486.60 80 30 S 69 36 S
Nissan Motor 29 Japan 6 79,799.60 66 35 B 48 60 D
Sinopec 31 China 1 75,076.70 ⬍10 ⬎90 D ⬍10 ⬎90 D
State Grid 40 China 2 71,290.20 ⬍10 ⬎90 D ⬍10 ⬎90 D
Sony 47 Japan 7 66,618.00 70 30 G 50 75 D
Nippon Life Insurance 56 Japan 8 60,520.80 ⬍10 ⬎90 D 12 88 D
Toshiba 72 Japan 9 54,303.50 39 76 D 19 93 D
Tokyo Electric Power 90 Japan 10 46,962.70 ⬍10 ⬎90 D ⬍10 ⬎90 D
Hyundai Motor 92 S. Korea 2 46,358.20 42 63 D 11 ⬎90 D
NEC 96 Japan 11 45,175.50 21 79 D 15 95 D
Dai-ichi Mutual Ins. 98 Japan 12 44,468.80 ⬍10 ⬎90 D ⬍10 ⬎90 D
Fujitsu 99 Japan 13 44,316.00 24 76 D 38 68 D
AEON 112 Japan 14 38,943.60 ⬍10 ⬎90 D 11 89 D
Meiji Yasuda Life Ins. 113 Japan 15 38,835.10 ⬍10 ⬎90 D 12 88 D
LG Electronics 115 S. Korea 3 37,757.50 77 51 D NA NA I
SK 117 S. Korea 4 37,691.60 53 70 D NA NA I
(continued )
Table 8.1 The Asian firms in the top 500, 2004 Continued

Petronas 133 Malaysia 1 36,064.80 77 60 D 23 81 D

Nippon Oil 142 Japan 16 34,150.70 2 99 D 11 93 D
Ito-Yokado 145 Japan 17 33,631.90 36 64 D 18 83 D
Sumitomo Mitsui Fin. 147 Japan 18 33,318.20 9 94 D 9 93 D
Mitsui 148 Japan 19 32,805.90 41 59 D 42 73 D
Mitsubishi 149 Japan 20 32,735.00 15 87 D 40 74 D
Canon 154 Japan 21 32,071.50 75 27 G 50 58 D
Mitsubishi Electric 156 Japan 22 31,735.40 14 98 D 10 95 D
Nippon Steel 157 Japan 23 31,536.90 ⬍10 ⬎90 D ⬍10 ⬎90 D
Sumitomo Life Ins. 158 Japan 24 31,000.20 ⬍10 ⬎90 D 20 80 D
Mizuho Financial Grp. 184 Japan 25 28,278.70 14 89 D 15 87 D
Marubeni 185 Japan 26 28,273.70 32 74 D 32 77 D
KDDI 194 Japan 27 27,170.10 ⬍10 ⬎90 D ⬍10 ⬎90 D
Millea Holdings 197 Japan 28 26,978.70 ⬍10 ⬎90 D ⬍10 ⬎90 D
JFE Holdings 202 Japan 29 26,087.60 ⬍10 ⬎90 D ⬍10 ⬎90 D
Denso 203 Japan 30 26,052.70 44 65 D 46 71 D
Mazda Motor 211 Japan 31 25,081.40 60 40 G 19 83 D
Mitsubishi Tokyo Fin. 217 Japan 32 24,457.50 40 64 D 23 80 D
Kansai Electric Power 219 Japan 33 24,317.70 ⬍10 ⬎90 D ⬍10 ⬎90 D
Mitsubishi Heavy Ind. 221 Japan 34 24,106.00 12 90 D 7 94 D
Sharp 225 Japan 35 23,632.60 49 63 D 11 95 I
East Japan Railway 226 Japan 36 23,610.50 ⬍10 ⬎90 D ⬍10 ⬎90 D
Fuji Photo Film 227 Japan 37 23,516.40 48 52 D 28 76 D
Coles Myer 235 Australia 1 23,184.40 ⬍10 ⬎90 D ⬍10 ⬎90 D
Sanyo Electric 237 Japan 38 23,118.80 50 77 D 27 83 D
BHP Billiton 241 Australia 2 22,887.00 91 47 B 53 55 D
Bridgestone 250 Japan 39 22,350.00 65 35 B 50 62 D
Samsung Life Ins. 251 S. Korea 5 22,347.90 ⬍10 ⬎90 D 12 ⬎90 D
Suzuki Motor 255 Japan 40 22,010.90 52 69 D 47 68 D
China Telecom. 262 China 7 21,561.80 ⬍10 ⬎90 D ⬍10 ⬎90 D
UFJ Holdings 264 Japan 42 21,450.80 7 95 D 10 93 D
National Australia Bank 269 Australia 3 21,313.90 32 62 D 40 72 D
POSCO 276 S. Korea 6 20,929.10 30 ⬎90 D ⬍10 ⬎90 D
Korea Electric Power 277 S. Korea 7 20,914.20 ⬍10 ⬎90 D ⬍10 ⬎90 D
Sinochem 287 China 8 20,380.70 10 90 D ⬍10 ⬎90 D
Mitsubishi Chemical 288 Japan 44 20,372.30 15 94 D 14 94 D
Woolworths 289 Australia 4 20,334.50 ⬍10 ⬎90 D ⬍10 ⬎90 D
Chubu Electric Power 300 Japan 45 19,849.00 ⬍10 ⬎90 D ⬍10 ⬎90 D
Japan Airlines 301 Japan 46 19,817.80 ⬍10 ⬎90 D ⬍10 ⬎90 D
Mitsubishi Motors 304 Japan 47 19,750.40 38 69 D 51 82 D
Shanghai Baosteel Grp 309 China 9 19,543.30 11 89 D ⬍10 ⬎90 D
Sumitomo 313 Japan 48 19,068.10 42 65 D 22 81 D
China Construction Bk. 315 China 10 19,047.90 ⬍10 ⬎90 D ⬍10 ⬎90 D
China Southern Power 316 China 11 18,928.80 ⬍10 ⬎90 D ⬍10 ⬎90 D
Nippon Mining Hldings 318 Japan 49 18,817.00 ⬍10 ⬎90 D ⬍10 ⬎90 D
Mitsui Sumitomo Ins. 319 Japan 50 18,813.30 4 96 D ⬍10 ⬎90 D
Japan Tobacco 320 Japan 51 18,739.00 15 85 D 32 69 D
Itochu 327 Japan 52 18,527.90 21 92 D 12 86 D
(continued )
Table 8.1 The Asian firms in the top 500, 2004 Continued

Japan Post 337 Japan 53 18,006.40 ⬍10 ⬎90 D ⬍10 ⬎90 D

Bank Of China 339 China 12 17,960.40 25 ⬎90 D 22 ⬎90 D
Sompo Japan Ins 344 Japan 54 17,677.10 ⬍10 ⬎90 D ⬍10 ⬎90 D
Hutchison Whampoa 347 China 13 17,280.80 74 53 D 80 37 B
Daiei 353 Japan 55 17,020.50 ⬍10 ⬎90 D ⬍10 ⬎90 D
Aisin Seiki 354 Japan 56 17,018.90 24 79 D 20 84 D
Ricoh 356 Japan 57 16,879.70 49 51 D 29 73 D
Nippon Express 368 Japan 58 16,314.00 17 83 D 29 81 D
Hon Hai Precision Ind. 371 Taiwan 1 16,239.50 ⬎90 17 S NA NA I
Sumitomo Electric Ind. 372 Japan 59 16,192.00 23 84 D 17 91 D
PTT 373 Thailand 1 16,023.30 ⬍10 ⬎90 D ⬍10 ⬎90 D
Flextronics International 375 Singapore 1 15,908.20 ⬎90 48 B 90 47 G
Taisei 377 Japan 60 15,892.00 ⬍10 ⬎90 D ⬍10 ⬎90 D
Kajima 384 Japan 61 15,700.60 10 92 D 10 92 D
Mediceo Holdings 390 Japan 62 15,499.90 ⬍10 ⬎90 D ⬍10 ⬎90 D
Hanwha 393 S. Korea 8 15,406.30 NA ⬎90 D NA ⬎90 D
Cosmo Oil 396 Japan 63 15,296.50 2 98 D ⬍10 ⬎90 D
Agric. Bank of China 397 China 14 15,284.60 ⬍10 ⬎90 D ⬍10 ⬎90 D
Telstra 401 Australia 5 15,193.10 ⬍10 ⬎90 D 12 88 D
Chinese Petroleum 402 Taiwan 2 15,189.50 NA ⬎90 D ⬍10 ⬎90 D
Cmnwlth Bk of Austral. 406 Australia 6 15,083.90 19 ⬎90 D 17 ⬎90 D
Tohoku Electric Power 409 Japan 64 14,994.20 ⬍10 ⬎90 D ⬍10 ⬎90 D
Nippon Yusen 410 Japan 65 14,944.30 24 81 D ⬍10 ⬎90 D
KT 414 S. Korea 9 14,901.10 ⬍10 ⬎90 D ⬍10 ⬎90 D
AMP 422 Australia 7 14,600.80 ⬍10 ⬎90 D ⬍10 ⬎90 D
COFCO 434 China 15 14,189.40 ⬍10 ⬎90 D 19 ⬎90 D
Samsung 442 S. Korea 10 13,919.20 45 ⬎90 D NA ⬎90 D
Isuzu Motors 444 Japan 66 13,897.20 32 83 D 13 94 D
SK Networks 446 S. Korea 11 13,844.30 36 ⬎90 D ⬍10 ⬎90 D
China (FAW) Autom. 448 China 16 13,825.40 ⬍10 ⬎90 D 19 ⬎90 D
Shimizu 450 Japan 67 13,811.20 7 93 D ⬍10 ⬎90 D
Seiko Epson 453 Japan 68 13,768.60 51 76 D 28 87 D
Asahi Glass 456 Japan 69 13,647.80 51 68 D 56 69 D
Fuji Heavy Industries 461 Japan 70 13,459.20 43 57 D 22 78 D
Kobe Steel 462 Japan 71 13,433.80 25 ⬎90 D ⬍10 ⬎90 D
Komatsu 464 Japan 72 13,350.30 46 67 D 36 72 D
Dai Nippon Printing 467 Japan 73 13,258.60 ⬍10 ⬎90 D ⬍10 ⬎90 D
Toppan Printing 471 Japan 74 13,152.90 ⬍10 ⬎90 D ⬍10 ⬎90 D
Central Japan Railway 472 Japan 75 13,114.90 ⬍10 ⬎90 D ⬍10 v90 D
Kyushu Electric Power 473 Japan 76 13,107.80 ⬍10 ⬎90 D ⬍10 ⬎90 D
Obayashi 475 Japan 77 13,069.70 ⬍10 ⬎90 D ⬍10 ⬎90 D
Westpac Banking 477 Australia 8 12,943.30 18 ⬎90 D 19 ⬎90 D
Asahi Kasei 483 Japan 78 12,819.00 20 ⬎90 D ⬍10 ⬎90 D
Sekisui House 486 Japan 79 12,719.50 ⬍10 ⬎90 D ⬍10 ⬎90 D
Daiwa House Industry 487 Japan 80 12,709.40 ⬍10 ⬎90 D ⬍10 ⬎90 D
Australia & N.Z. Bankg 490 Australia 9 12,618.40 27 ⬎90 D 27 ⬎90 D
Yamaha Motor 496 Japan 81 12,471.50 60 58 D 45 68 D
Source: Data are from the most recent annual report available for each company (2004 in most cases).
Note: D ⫽ home-region oriented; S ⫽ host-region oriented; B ⫽ bi-regional; G ⫽ global; I ⫽ insufficient information.
Table 8.2 Asian firms in the top 500 by firm type, 2004
No. of firms % of No. of firms % of
measured total measured total
Firm type by sales cases The firms by assets cases The firms
Global (G) 3 3 Sony (Japan), Hutchison

Canon (Japan), 1 1 Whampoa
Mazda Motor (Japan) (China)
Bi-regional (B) 5 4 Toyota Motor (Japan), 1 1 Flextronics (Singapore)
Nissan Motor (Japan),
BHP Billiton (Australia),
Bridgestone (Japan),
Flextronics (Singapore)
Host region (S) 2 2 Honda Motor (Japan), 1 1 Honda Motor (Japan)
Hon Hai Precision Industries
(Taiwan)
Home region (D) 105 91 Others 108 94 Others
Total cases 115 100 111 97
Multinationals and Development in Asia 161
side their home region; and global firms generate less than 50 percent of their
sales in the home region and over 20 percent in each region of the triad.
As summarized in table 8.2, 105 (91 percent) of the 115 firms for which geo-
graphic sales data are available are home region oriented (these firms are indi-
cated in table 8.1 with a “D” in the column headed “Type”). There are 3 global
firms: Sony, Canon, and Mazda Motor, all from Japan; 5 bi-regionals: Toyota,
Nissan, and Bridgestone from Japan, BHP Billiton from Australia, and Flex-
tronics from Singapore; and 2 host region oriented firms: Honda from Japan
and Hon Hai Precision Industries from Taiwan. Overall, these 115 Asian firms
derived an average of 81.9 percent of their sales in their home regions. Going
beyond previous studies (Rugman 2005; Rugman and Verbeke 2004), however,
we can also report that on average, 87.1 percent of the assets of these firms were
located in their home regions.
In table 8.3 we show the firms listed in table 8.1 by country, with the average
revenues, intraregional sales, and assets for each country group. There are some
interesting comparisons to be made, both between country groups and be-
tween the current and past levels of (limited) internationalization illustrated by
these data.
Briefly, 12 large Chinese firms have the highest average percentages of in-
traregional sales and assets, which is to be expected when we look at the com-
position of the group. As shown in the last chapter, many of the large Chinese
firms build on China’s CSAs and tend to be (at least partly) government owned
and supported. They are in the energy, commodities, utilities, and telecommu-
nications sectors, where growth has been driven by the CSA of increased de-
mand in the domestic market. This contrasts with the profile of the Japanese,
South Korean, and Australian firms that developed knowledge-based FSAs and
Table 8.3 Asian firms in the top 500 by country
Average Average Average

No. of revenue intraregional intraregional
Country firms ($ billions) sales (%) assets (%)
Australia 9 17,573.26 86.00 87.22

China 12 27,030.83 90.58 90.17
Japan 79 29,735.77 80.63 86.00
Republic of Korea 10 24,406.94 84.90 95.00
Others 5 19,885.06 63.00 79.50
have experienced a longer period of growth, yet still remain oriented to the
Asian region. The content of many of the annual reports from which the data
was gathered suggests that there was an increased (or renewed?) focus on the
Asian region because of the steady growth rates experienced in mainland
China. Certainly the Japanese firms, which both dominate the list (79 firms)
and are (on average) the largest, were shifting their focus toward China in terms
of both inputs and outputs. This is confirmed by both FDI and trade data
(Rugman, Collinson, and Hodgetts 2006).
The main overriding message here is that very few of these firms can be
thought of as global; they all conduct most of their business in the Asian region.
This is the central empirical driver of this chapter: the vast majority of Asian
firms are regional, not global. Accordingly, economic development in Asia is
best viewed through regional, not global, lenses. Development in Asia is most
likely to parallel the economic success of MNEs from Europe and North Amer-
ica, which are largely regionally based.
THE REGIONAL MATRIX AND ASIAN FIRMS
We take the basic model of international business, which distinguishes between

country level and firm level effects (as introduced in chapter 2), and adapt it for
this analysis. In earlier work (in chapters 2 and 7 in particular) we developed a
matrix of CSAs and FSAs, based on the work of Rugman (1981) and Rugman
and Verbeke (1992a). Much of the analysis in the international-business field
can be synthesized within the simple framework of CSAs and FSAs. The FSAs
possessed by a firm are based ultimately on its internalization of an asset, such
as production, knowledge, managerial, or marketing capabilities. The firm ex-
ercises proprietary control over these FSAs, which are thus related to the firm’s
ability to coordinate the use of the advantage in production, marketing, brand
management, or the customization of services.
Beyond the firm, there are country factors. They can lead to CSAs, which
affect a firm’s strategy. For example, the CSAs can include political, cultural,
economic, or financial factors, which are parameters exogenous to the firm. In
Porter’s (1990) terminology, the CSAs form the basis of the global platform
from which the multinational firm derives a home-base “diamond” advantage
in global competition. Tariff and nontariff barriers to trade and other govern-
mental regulation also influence CSAs.
Here we advance on this two-by-two FSA-CSA matrix of chapter 2 to
demonstrate that it can be modified to create the regional matrix shown in fig-
Figure 8.1 Asian Firms in the Regional Matrix
ure 8.1. On the horizontal axis is shown the regional or global reach of the FSAs
of a firm. On the vertical axis is shown the regional or global scope of the loca-
tional advantages of a firm’s FSAs. The vertical axis becomes operational for
strategy, as for each firm there are data available on geographic scope. The re-
gional matrix differs from the FSA-CSA matrix in that both axes represent FSA
aspects of corporate strategy. For further discussion, see Rugman’s work (2005).
We have positioned our 115 Asian firms from the top 500 inside the regional
matrix. Almost all of these 115 firms are on the lower (regional) half of the verti-
cal axis. Only 3 are unambiguously “global” in their geographic scope. The 3 bi-
regional firms are also constrained in their geographic scope to the regional half
of the vertical axis. This new regional matrix leads us to the following key ana-
lytical classifications:
Quadrant 3: Global firms. Their FSAs have both global reach and global
scope, as these firms are in all three regions of the triad. We find 3 among our
115 Asian firms.
Quadrant 4: Bi-regional firms. Their FSAs have global reach but are not
global in their geographic scope, as the firms have a significant presence in only
two regions of the triad. Again, there are just 7 in our list of 115 Asian firms.
Host-region firms, such as News Corp and Honda, also appear here.
Quadrant 2: Home region firms. These firms have FSAs with a reach only in
their home region, and they also have home region locational FSAs. Of the 115
Asian firms, 105 fit into this category.
Quadrant 1: Firms with home region FSAs but a global scope in FSAs. There
are very few of these in practice, although many firms think that they are global
in scope. Data show, however, that they are actually home region based, in
quadrant 2. We call quadrant 1 the “myth” of global scope.
THE PROBLEMS OF EXISTING

“GLOBALIZATION” RESEARCH ON ASIA
The widespread view among the international business research community

that large firms are more global in their business activities than they actually are
has led to inaccurate views about the nature and extent of globalization and de-
velopment. With hindsight we can see that biased research, focusing on the
most “global” of firms rather than the most representative firms, has con-
tributed to this inaccuracy. Further, those who write about development have
tended to ignore the regional nature of the MNEs and the implications for de-
velopment, for example, that regional trade agreements matter more than the
WTO.
The following discussion extends an argument put forward by Lynn (2006)
and other authors in a recent special issue of the Journal of Asian Business and
Management. They point to the inappropriateness of many of the theoretical
approaches developed in the West for analyzing Asian business practices. How-
ever, they miss the related point that most of the published empirical research,
by focusing predominantly on the more international Asian firms, is also part
of the bias problem.
Similarly, a number of reflexive papers in a recent volume (23) of the Asia Pa-
cific Journal of Management discuss approaches to studying the distinctiveness
of Asian business and management, but miss the empirical sample bias we
show below. Our findings add weight to the main points of Meyer’s insightful
article (2006) calling for greater “self-confidence” in studies of Asian business
and management. Despite helpful guidance on appropriate methodological
approaches, including qualitative methodologies, Meyer’s article also neglects
the case study–selection bias that supports his overall argument about a U.S.-
centric approach to management studies.
Mathews (2006), in an otherwise very useful addition to the literature on
latecomer firms, makes a number of these mistakes in his discussion of “dragon
multinationals.” His data on the “Asia-Pacific MNEs in UNCTAD’s list of Top

50 MNEs from developing economies” (table 8.1, p.11) shows total overseas as-
sets of the selected firms but does not show a breakdown by geographic loca-
tion. Moreover, by adopting UNCTAD’s Transnationality Index, the analysis
misses the strong regional concentration of both sales and assets that our data
illustrate. Finally, because it presents case studies of the “more globalized” firms
in the list, including Ispat, Cemex, Acer, Li & Fung, and Lenovo, Mathews’s
study (2006) contains the sample bias we discuss above. However, Mathews’s
central argument focuses on the relative differences in the internationalization
process between latecomer and incumbent MNEs, justifying this case selec-
tion. What should be clear is that we cannot make generalizations regarding the
characteristics of the majority of Asian firms on the basis of analyses of this un-
usually international subgroup.
Perhaps a more serious issue in the debate is the extent to which a new the-
ory is required to explain Asian multinationals. Here we comment on the argu-
ments in Mathews’s study (2006), simply because he has the most recent argu-
ment in favor of a new theory. He calls this the LLL framework. The first L
stands for linkages, the second for leverage, and the third for learning. Basically,
Mathews argues that the received theory of the MNE, as in Dunning’s eclectic
paradigm, is unable to explain the emergence of latecomer MNEs. He also
refers to these Asian MNEs as “peripheral,” “challengers,” “third world,” “emerg-
ing economy,” and “dragon” multinationals. However, it is apparent that the
Asian multinationals still perform on an intraregional basis. Thus they are no
different from MNEs in North America and Europe.
The overarching regional dimension of all MNEs implies that the basic the-
ory will explain the development of Asian MNEs. For example, emerging-
economy MNEs from China are obviously explained by country factors. They
are driven by cheap labor, state support, and cheap money. The Korean-based
MNEs are building on more experience and a higher level of R&D, and thus
may be explained by FSAs as well as by Korea’s CSAs. Of course, most Asian
MNEs are from Japan, and these are fully explained by the FSA-CSA frame-
work, first developed by Rugman (1981).
Our conclusion is that the detailed comments by Narula (2006) on the
generic nature of the eclectic framework are basically correct. Furthermore, the
comments by Dunning (2006) are rather subtle, as they suggest that the argu-
ments of Mathews (2006) are complementary and need to be incorporated
within the eclectic paradigm. Dunning’s work on the investment-development
path is based on the eclectic framework, and it fully explains the development
of Asian multinationals, as explained by Narula (2006). Thus the arguments of

Mathews (2006) have failed to make the case for a new and distinctive theory to
explain Asian MNEs.
It is also argued by Mathews (2006) that many of the emerging economy
MNEs from Asia are “born global.” These are generally small and medium-
sized enterprises. Two points are in order. First, there is a well-known set of lit-
erature on emerging new ventures that would fully explain Asian firms. No sin-
gular theory for Asian “born globals” is required. Second, there is no empirical
evidence that Asian born-globals perform in a manner different from that of
North American or European firms. Furthermore, there is no published litera-
ture suggesting that born-globals, from anywhere in the world, actually per-
form other than within their home region. Indeed, all indications are that small
firms will be more localized than large MNEs. Our conclusion is that no sub-
stantial case has been made for the development of a separate theory to explain
Asian multinationals, large or small. Yet much of the literature on Asian firms is
biased toward an assumption that these firms are global rather than regional.
We pursue this conclusion by presenting data on the published literature in this
area in the next section.
ASIAN-FIRM CASE STUDIES
We now apply the framework of figure 8.1 to analyze some specific firms in each
of the major quadrants. This will help us classify the differences between re-
gional and global structures and strategies of the world’s largest Asian firms. It
will, indirectly, provide clues about the appropriate strategy required by MNEs
to be successful—that is, a regional, rather than a simplistic global, strategy. In
turn, this provides guidance for development, suggesting that the region mat-
ters for MNEs serving as indirect vehicles for development.
These cases show that the former set of firms above is relatively unique in
managing to develop FSAs applicable to other triad markets. Literature helps
provide the beginnings of an explanation of why most firms are home-region
based in their FSAs. First we develop an analytical framework to position these
case studies.
When we examine the unusual, more international, Asian firms, we find spe-
cific reasons they have internationalized to the degree they have. When we
measure them in terms of sales, as in table 8.1, or downstream FSAs, as in figure
8.2, there are 5 bi-regional firms (Toyota, Nissan, BHP Billiton, Bridgestone,
and Flextronics), 2 host region oriented firms (Honda and Hon Hai Precision
Industries), and 3 global firms (Sony, Canon, and Mazda). In terms of assets, or
upstream FSAs, there is just 1 bi-regional firm (Hutchison Whampoa), 1 host
region oriented firm (Honda), and 1 global firm (Flextronics).
Of course, there are industry sector effects that need to be considered in ex-
plaining the differences across this sample of firms. Steel and bulk chemicals,
simply because of transportation costs, are less-internationalized industries.
But this is another factor promoting regionalization rather than globalization.
In past studies we have focused on Japanese firms, which dominate lists of
the largest Asian firms (Rugman and Collinson 2006, 2004). In this chapter we
briefly examine how the other Asian firms in the above list (BHP Billiton, Hon
Hai Precision Industries, Hutchison Whampoa, and Flextronics) are different
from the more representative home region oriented Asian firms.
BHP Billiton
Many of the more international firms in our list have expanded geographically
via mergers and acquisitions. BHP Billiton is a case in point. Formed by the
merger in 2001 of BHP (Australia) and Billiton (United Kingdom), it now em-
ploys 37,000 people working in more than a hundred operations in approxi-
mately twenty-five countries. (BHP Billiton) Billiton was originally Dutch,
and for some time was part of Royal Dutch Shell before becoming a separate
listing on the London Stock Exchange. The firm is now a leading supplier of
core steelmaking raw materials and one of the top five producers of copper, en-
ergy coal, nickel metal, and uranium. The merger brought together two firms
with very different combinations of CSAs and FSAs. Billiton was an E.U.-
based raw-materials producer that expanded historically by establishing min-
ing activities in Dutch and British colonial territories. It leveraged other coun-
tries’ advantages and built sales channels in the growing European markets.
BHP’s growth was based on the CSAs of Australia, with the firm developing
mining and processing operations initially to serve the domestic and regional
markets.
The geographic distribution of sales and assets today reflects this history.
Less than 4 percent of BHP Billiton’s assets are in Europe, and over 50 percent
remain in the Asian region, predominantly in Australia. In terms of asset distri-
bution, it is a home region oriented firm. Just over 33 percent of the firm’s sales
are generated in Europe. With only 47 percent of its sales in its home region, it
became a bi-regional firm as a result of the merger.
Hon Hai Precision Industries (Foxconn)
Hon Hai Precision Industries is described as “probably the biggest company

you have never heard of ” (Hoovers). It is better known as “Foxconn,” and last
year surpassed Flextronics to become the world’s largest contract manufacturer
for computer parts, mainly connectors and cable assemblies. It was recently
awarded a significant portion of the production contracts for Apple’s iPhone.
The firm began manufacturing plastic products in the early 1970s, but grew
rapidly in the 1990s on the back of steep demand for cheap IT components
(Foxconn) and the move by firms such as Hewlett-Packard and Apple to reduce
costs and contract out their assembly operations (Dean 2003). Its market value
was over $17 billion in 2005 (up from less than $2 billion in 2002). Although
the firm does not publish the details of the geographic distribution of its assets,
we can be fairly sure that most of its assets are located in Asia. Although the
company has established some manufacturing operations in Europe (Scotland
and Ireland) and the United States (Los Angeles, Houston, and Kansas City),
its main production operations are in Taiwan and mainland China (in Guang-
dong and Jiangsu provinces). Hon Hai Precision Industries has effectively built
on its CSAs, notably cheap labor, and tapped into a growing global market for
IT hardware during a period of rapidly increasing sales and declining prices
(post 2000). Over 55 percent of its total sales are in North America, making it a
host-oriented firm in terms of downstream FSAs. It could be argued that the
success of the firm and its particular form of international expansion has been
driven more by the outsourcing strategies of Western electronics-hardware
brand owners than by the firms’ own FSA development (Ernst 2000).
Flextronics
Flextronics and similar firms such as Solectron, Sanmina-SCI, Celestica, and

Jabil make the Microsoft Xbox; Web TV set-top boxes for Philips and Sony;
portable phones for Ericsson, Alcatel-Lucent, and Motorola; and PCs for a
range of Western firms. Next to Hon Hai Precision Industries, Flextronics is
the largest of these contract manufacturers. With 48 percent of its sales in Asia,
35 percent in Europe, and 17 percent in the Americas, it is a bi-regional firm in
terms of its downstream FSAs. In terms of its asset distribution, Flextronics is
global: 47 percent in Asia, 28 percent in Europe, and 25 percent in the Ameri-
cas. It is the only firm with this distinction in our entire list of 111 firms (those
from the 122 Asian firms in the Fortune Global 500 for which asset data were
available). Its stages of growth since its beginnings in Singapore in 1990 give us
some insights into this unusual pattern of internationalization.
As in the case of Hon Hai Precision Industries, it could be argued that Flex-
tronics has evolved on the back of a major transformation in the structure of
global production networks, that of vertical specialization (Borrus, Ernst, and
Haggard 2000). Global brand owners and original equipment manufacturers
(OEMs) have increasingly outsourced manufacturing and related services to
global contract manufacturers like Flextronics. Unlike Hon Hai Precision In-
dustries, however, Flextronics has expanded rapidly by purchasing smaller elec-
tronics-industry contractors and factories from its customers. In 2000 it pur-
chased a Japanese factory from Casio and was contracted to manufacture for
the Japanese firm as it restructured to “externalize” its production activities. In
2001 it bought half of Xerox’s office equipment manufacturing operations for
$200 million and took on a five-year outsourcing contract to manufacture
Xerox products (Rugman, Collinson, and Hodgetts 2006; Flextronics). That
same year, it took over much of Ericsson’s manufacturing and supply chain ac-
tivities in Brazil, Malaysia, Sweden, and the United Kingdom. Ericsson de-
cided to focus on high-end R&D and design activities and to let other firms
manufacture telecommunications system components (UNCTAD 2003, 139).
Through this route Flextronics has acquired and developed six industrial
parks in low cost regions near each large core triad market. In Asia, it has two
industrial parks in China, and a network of regional manufacturing facilities
supply printers, cell phones, telephone switching boards, and PDAs. In the
Americas, it manufactures products at its two industrial parks (one in Mexico,
one in Brazil), and its network of manufacturing facilities produce automotive
parts, telecommunications infrastructure equipment, electronics for automo-
tives, printers, and disposable cameras.
The strategy of buying out the manufacturing operations of telecommuni-
cations and IT firms continues, most recently with the purchase of Nortel’s
manufacturing operations in Calgary, Canada, including the transfer of 650
employees. But Flextronics is also aiming to improve its innovative capabilities
in R&D and design, and move higher up the industry value chain. By doing so,
it will begin to challenge some of its own clients—the same firms that now out-
source their manufacturing operations to specialize in these higher end capa-
bilities (Engardio and Einhorn 2005).
Hutchison Whampoa
This Asian conglomerate began in the 1860s as a Hong Kong trading company.
It now encompasses container ports, property development, telecommunica-
tions, and retailing. It is still controlled by the influential businessman Li Ka-
shing. Retailing dominates in terms of revenue, followed by telecommunica-
tions, which has grown rapidly with the firm’s investment in the 3G platform in
Europe (Lim 2005).
Hutchison Whampoa’s international expansion increased noticeably in the
late 1980s, when it took over Canada’s Husky Oil, partnered with Procter &
Gamble in personal care and retailing, and entered the U.K. telecommunica-
tions business. In the 1990s it expanded rapidly in four distinct business areas:
(1) telecommunications and satellite TV, through partnerships with Cable &
Wireless and China International Trust and Investment Company (CITIC)
and by launching “Orange” in the United Kingdom in 1994 (which was bought
by Mannesmann AG for $14.6 billion in 1999); (2) ports and port infrastruc-
ture, by acquiring the Port of Felixstowe in Britain in 1991 and developing ter-
minal services around Asia; (3) energy and utilities; and (4) retailing and per-
sonal care products, through its A. S. Watson Group.
The firm has continued to expand in these same four areas throughout this
decade. In 2000 it won the largest 3G license “A” in the United Kingdom for
over $6 billion. The platform was expanded to European countries and then to
other parts of the world, primarily Asia. In Japan, the company’s expansion was
accomplished through partnerships with NEC and NTT in 2002. By 2005,
when a deal was struck with Skype, the group’s 3G global customer base had
reached over 10 million. As a key license holder in the telecommunications in-
dustry, Hutchison Whampoa is now seen as a “flagship firm” alongside Voda-
fone, coordinating a wide array of hardware and software suppliers and service
content providers (Whalley 2004).
The ports business had also grown rapidly on the back of huge expansion in
China and India, but the firm has also acquired interests in Turkey, Egypt, and
Poland. Husky Energy (formerly Husky Oil) now spans the globe from Canada
to Asia, with the company having completed large deals recently in the United
Kingdom and China. A. S. Watson Retail has also continued to grow. The year
2004 saw particularly strong developments in Eastern Europe, and by 2005
A. S. Watson was seen as the world’s largest health and beauty chain.
This pattern of diversified expansion, with a strong focus on U.K. and Euro-
pean ports, telecommunications, and utilities investments, explains the asset
and sales distribution for Hutchison Whampoa. Sixty-three percent of its assets
are outside Asia, with 44 percent in Europe, which makes it bi-regional in terms
of its asset distribution. Europe accounts for 34 percent of its sales, but because
Asia still accounts for over 50 percent of its sales, the company is classified as a
home region oriented firm with respect to sales.
TESTING THE PERCEPTIONS

OF “GLOBAL” MNEs
The previous case studies can provide us with idiosyncratic examples of rela-
tionships, patterns, or processes. Establishing the wider validity of context-spe-
cific phenomena lies at the heart of social science research in general. Moving
from descriptive to normative theory, to create general principles with explana-
tory power and both predictive and prescriptive validity, is not easy (Carlile and
Christensen 2005; Yin 1984). However, we now study all the large MNEs from
Asia.
Given that the objective data reported in this book shows that the Asian
MNEs perform regionally, why is there a public perception that MNEs are
global? We argue that this is partly explained by a bias in academic research
(and in more popular media) toward the few “special cases” of MNEs that are
global or bi-regional. In contrast, most large MNEs, operating largely in their
home regions, are ignored. We now test this bias as it applies to Asian MNEs,
especially the MNEs for the emerging economies of Asia, and in particular,
those from China and Korea.
Bibliometrics is the quantitative study of document-related processes. Ro-
bust research citations and evaluation methodologies have evolved from the
early work of Derek de Solla Price (1963), and the related disciplines of infor-
metrics and scientometrics are now used widely (Egghe and Rousseau 1990;
Narin 1976). We employed a simple keyword metric similar to co-word analy-
sis, based on a frequency analysis of the co-occurrence of keywords. This ap-
proach has not been used in this way in the field of business and management
studies.
The 75 largest Asian firms were subjected to a keyword search using the Busi-
ness Source Premier database. An article “hit” is counted when the search finds
an article that features the name of the firm and the keyword “business.” Only
peer-reviewed periodicals were included in the search. The search process re-
turned a total “hit count” for each firm. Table 8.4 lists the top 37 firms, ranked
in order of the frequency of hits across this entire range of journals, and shows
the aggregate data for all 75. There was an aggregate total of 518 hits across the
top 75 firms. Note that this does not equate to 518 individual articles, since sin-
gle articles that mention more than one firm are counted more than once (once
for each firm).
Business Source Premier is described by the database providers as “the
world’s largest full text business database.” It enables full text searches of nearly
3,800 scholarly business journals and full text retrieval for more than 1,100
peer-reviewed business publications. Over 6.5 million articles are viewable on
the online system, covering all subject areas related to business, with some jour-
nals dating as far back as 1922. EBSCOhost updates the system on a daily basis.
Checks were run by accessing listed articles to ensure that these featured the
firms highlighted by the search process. To validate the findings, we conducted
a second search of a sample of these firms, employing an identical approach but
using the Social Sciences Citation Index, a database that covers 1,725 journals
spanning 50 disciplines (Social Sciences Citation Index). This returned slightly
different hit counts, but the relative ranking of the firms and the proportion of
hits for each group of firms validated the results of the main search.
Finally, it should be noted that the database, although providing global cov-
erage of business and management journals, is dominated by English-language,
U.S.-based publications. This is, however, simply a reflection of the research
field and the proportion of U.S. academics and academic institutions in the
field.
Table 8.4 shows that the more “global” Asian firms dominate academic re-
search across all business and management disciplines in peer-reviewed jour-
nals. There is a strong correlation between the degree of globalization of a firm
and the attention paid to it in academic research: 13 percent of the 75 firms in
table 8.4 are global (G), bi-regional (B), or host region oriented (S) in terms of
sales (even fewer in terms of assets), yet these firms account for over 54 percent
of the total 518 hits and have an average hit count of 27.4 hits per firm, com-
pared with an average of 3.6 hits per firm for home region firms (D) and 6.9
across all 75 firms.
None of the top 5 firms in this list (table 8.4) are the usual home region ori-
ented type of Asian multinational, yet these 5 unrepresentative firms account
for over half of the total number of articles for the entire group of 75. There is
an overwhelming bias in management studies toward firms like Toyota, Sony,
Canon, and Honda because of their impact in the global economy (particularly
in the United States). Yet they do not provide us with examples of what really
differentiates Japanese or Asian firms from other firms. We know least about
the most “typical” group of Asian firms whose sales are predominantly in their
home region.
There are other sample-selection biases in table 8.4. It is notable that Japa-
nese firms dominate the list but also achieve a higher average hit count overall
(including the many home region oriented firms). The 66 Japanese firms in
the total list of 75 in table 8.4 average 7.4 hits per firm compared with 5 hits per
firm for the South Korean firms, 3 for the Australian firms, and 1 for the other
Asian firms listed. Of the Asian firms in our list, 88 percent are Japanese, but 95
percent of the total 518 article hits are for Japanese firms. No firm from any
other country received more than 5 hits, and the 17 Japanese firms that top the
list accounted for 86 percent of the total hits. Again, the top 5 firms in terms of
hit count illustrate this point. With an average of 52.6 hits per firm, Toyota Mo-
tor, Sony, Canon, Honda Motor, and Nissan Motor accounted for over half the
total hits. None of them are home region oriented; all are Japanese.
There are parallels between past research on Japanese firms and the newer re-
search on firms from emerging markets in Asia, including China. The current
research is driven largely by concern about the evolving global competitiveness
of large Asian firms, which is similar to the fear of Japanese economic superior-
ity among U.S. and European CEOs and policymakers in the 1970s and 1980s.
The perceived threat from Japan stemmed from the rapid relative growth in
GDP, exports, and outward FDI, which suggested that an alternative model of
market capitalism had given rise to specific competitive advantages that West-
ern firms could not access. High-profile articles and books on the Japanese
threat (Franko 1983; Wolf 1983; Ouchi 1981; Drucker 1981; Vogel 1979) fed this
fear, and research efforts tried to identify what was different about Japan and its
firms and how such differences might convey sustained competitive advan-
tages.
As a subset of the literature connecting multinationality and performance
(Hitt, Hoskisson, and Kim 1997; Rugman 1979, 1981; Buckley and Casson
1976) studies of Japanese firms have attempted to connect differences in the
CSAs of Japan itself, as the “locus of origin of geographic diversification” (Wan
and Hoskisson 2003), with attributes in Japanese firms that convey advantages
vis-à-vis their U.S. and European counterparts (Westney 2001, 1999; Nelson
1996; Aoki 1994; Fruin 1992; Whitley 1990). This research has tended, however,
to over-generalize on the basis of the export-led growth of a relatively small
number of industry sectors, the international success of a relatively small num-
ber of firms, and superior capabilities in a limited range of business processes.
As a result, the accepted wisdom (until the Japanese recession that began in the
Table 8.4 The 75 Asian firms ranked by frequency with which they feature in academic articles (top 37 shown)
Data for selected groups
Article 500 Cumulative Cumulative Average no. of Average revenues Average Asia-
hits rank Company Country hit total hit total (%) article hits ($ billions) Pacific (%)
91 10 Toyota Motor Japan

51 37 Sony Japan
45 190 Canon Japan
40 41 Honda Motor Japan
36 58 Nissan Motor Japan 263 51 52.6 62.8 37.4
26 12 Mitsubishi Japan
26 84 NIEC Japan
20 77 Toshiba Japan
20 251 Fuki Photo Film Japan 355 69 39.4 58.1 53.0
18 32 Hitachi Japan
16 45 Matsushita Elec. Ind. Japan
13 88 Fujitsu Japan
9 13 Mitsui Japan
9 381 Suzuki Motor Japan
8 23 Sumitomo Japan
8 141 Mitsubishi Electric Japan
8 285 Bridgestone Japan
5 133 Hyundai Motor S. Korea
5 219 Hyundai Motor S. Korea
5 379 Ricoh Japan
5 411 Telstra Australia
5 442 Woolworths Australia 469 91 8.8 37.5 74.2
4 296 Mazda Motor Japan

3 82 Mizuho Holdings Japan
3 171 Mitsubishi Motors Japan
3 252 Denso Japan
3 364 News Corp. Australia
2 229 Nippon Steel Japan
2 293 Sanyo Electric Japan
2 348 Dentsu Japan
2 368 Japan Telecom Japan
2 378 Taisei Japan
2 388 Flextronics Intl. Singapore
2 399 Japan Airlines Japan
2 404 Isuzu Motors Japan
2 445 Yasuda Fire & Mar. I. Japan
2 499 Asahi Glass Japan 505 97 2.4 17.1 71.6
For all 75 firms 518 100 6.9 19.7 83.2

Source: Data are from the most recent annual report available for each company (2004, in most cases).
early 1990s) was that these unique competitive advantages would lead to the
widespread dominance of Japanese firms over incumbent firms in their own
home markets.
With hindsight we can see that even the more rigorous comparative studies
of Japanese firms tended to focus only on a small subset of the most-interna-
tional firms in the relatively few industry sectors experiencing export-led
growth (Pearce and Papanastassiou 1996; Fransman 1995; Dunning and Cant-
well 1991). They also tended to focus on specific superior capabilities achieved
by these Japanese firms in a limited range of business processes.
Trade data show that the export success of Japanese firms was limited to a
small number of industry sectors (Fransman 1995), and these same sectors were
responsible for much of the outward FDI and foreign sales of Japanese firms
(Pearce and Papanastassiou 1996; Dunning and Cantwell 1991). The data pre-
sented further show that this success, expressed in terms of the proportion of
overseas sales of a wide range of Japanese (and other Asian) firms, has also been
rather limited. The size of these Japanese firms, as is the case for many U.S.
firms, reflects success in their large regional home market rather than their
global competitiveness.
What we now know is that relatively few Japanese firms have ever managed
to internationalize across the triad. The vast majority of Japanese firms are still
strongly dependent on the domestic market. This bias toward the more un-
usual, more international, Japanese firms has given rise to a number of related
problems, which we can learn from in guiding current research on Asian busi-
ness and management. Past studies promoted an exaggerated perception of the
competitive threat from Japan, suggesting that the advantages demonstrated by
the relatively small number of exporters in autos, consumer electronics, and en-
gineering were general Japanese advantages. A more objective approach would
have questioned the degree to which we could generalize from these unusual
examples. This bias was also linked to the expectation that the majority of
Japanese firms would eventually internationalize to the same degree as the lead
exporting firms in these key sectors. As our data show, they have not.
A follow-up study examined the article hits for the Chinese firms in our
larger list of 122 Asian firms that are among the world’s 500 largest: 4 hits for
Sinopec; 3 for the China Construction Bank and Shanghai Baosteel Group; 2
for China National Petroleum, China Life Insurance, Industrial and Commer-
cial Bank of China, Agricultural Bank of China, and China Telecommunica-
tions; 1 for State Grid, China Mobile Communications, and Sinochem; and no
hits for China Southern Power Grid, COFCO, or China First Automotive
Works. (Note that not all of these firms are listed in table 8.1, because data on
the international distribution of their sales and assets were not available.)
Hutchison Whampoa received 17 hits, however, and Chinese firms that are
not currently in the Fortune Global 500 but are well known for their interna-
tional activities and aspirations are also starting to attract more attention than
their size warrants: Haier (14 hits), Shanghai Automotive, or SAIC, (10 hits),
and Lenovo (9 hits).
SUMMARY POINTS
Figure 8.2, which is based on Rugman’s model (2005), summarizes our main
findings. The top Asian firms, which have an intraregional scope to their FSAs,
based on both sales and asset data, are distributed across the regional matrix.
We find that 108 out of the 111 firms with asset data on upstream FSAs are
home-region oriented and lie in cell 2. We also found that 105 of the 115 firms
with sales data are in cell 1. Only 3 of the 108 firms with asset data are not home-
region based. Only 10 are non-home-region based, based on sales data on
downstream FSAs. We placed the companies discussed in the case studies ear-
lier in this chapter in the appropriate cells of figure 8.2.
Figure 8.2 Upstream and Downstream FSAs in Asian Firms

The FSAs, whether downstream or upstream, possessed by a firm are ulti-

mately based on its internalization of a knowledge resource or capability. As a
result, a firm’s ability to leverage advantages away from its home region and
compete successfully in other markets is restricted by its ability to internalize
knowledge resources and capabilities. In the case of the Asian firms examined,
their major knowledge assets and capabilities have evolved in the specific re-
gional selection environment of Asia. It is highly unusual to find Asian firms
like Toyota, Flextronics, and Sony that have managed to de-couple from the
home region base of their FSAs or to adapt and customize to compete outside
their home region. Yet such unrepresentative “global” firms are the overwhelm-
ing focus of the traditional international business-strategy research into the al-
leged differentiating characteristics and superior competitive advantages of
Asian firms. In contrast, we find here that the vast majority of Asian firms have
evolved FSAs to succeed in the regional Asian home market. They are unlikely
to substantially expand their sales or foreign assets into other regions of the
triad in the foreseeable future. In turn, this means that the emerging-economy
MNEs from China and Korea will expand mainly within Asia. Any exceptional
firm (like Lenovo) is likely to be a special case, and not a model MNE to be im-
itated.
Chapter 9 Yang Multinationals
In this chapter, we discuss the potential of yang MNEs to contribute

to the positive transformation of the development patterns of coun-
tries. Yang is a Chinese philosophical expression indicating a positive
force, in contrast to the negative yin force. By yang MNEs, we mean
sunshine multinationals that bring happiness and joy through eco-
nomic development and prosperity. More specifically, we refer to out-
ward FDI by MNEs from China, the Republic of Korea, Singapore,
and Taiwan (the major Asian-based emerging economy MNEs). We
will discuss the role of yang MNEs as instruments for economic de-
velopment in Asia.
GOVERNMENT POLICY TOWARD

MNES
Today public policy toward FDI needs to take into account the role
played by yang MNEs. It is now widely accepted that MNEs are the
key institutions driving globalization. As shown previously, the 500
largest MNEs account for about 90 percent of the world’s stock of
179
180 Yang Multinationals
FDI, and they also account for about 50 percent of the world’s trade in goods
and services, which has important public policy implications. Emerging econ-
omies today have two-way flows of FDI—a symmetrical pattern of cross-in-
vestments—which is typical of the mature economies in North America, Eu-
rope, and Japan. Therefore, public policy toward inward FDI (to attract MNEs
from North America, Europe, and Japan) will have an indirect impact on out-
ward FDI by emerging economy MNEs. We explore the data on both inward
and outward FDI, especially for Korea, analyze it in terms of the modern the-
ory of MNEs and international business, and describe the policy implications
for Korea. One aspect of particular importance is the strong intraregional di-
mension of MNE activity. The implications of this regional dimension to the
world’s MNEs will be discussed with reference to Korean outward-FDI and
inward-FDI policies.
MNEs, the key institutions driving globalization, interact with both their
home and host country governments. The complexities of such MNE–public
policy dynamics were first introduced by Rugman and Verbeke (1998b), and ex-
tended by Rugman, Verbeke, and Greidanus (2005). Three main shifts were
identified in MNE-government relationships: a shift toward complementary
goals, a shift toward national responsiveness and thus dispersed FSAs, and a
shift toward endogenous government policies. Here, this framework is applied
to MNE-government linkages in a Korean context, by exploring the data on
both the inward and the outward FDI of Korea, analyzing the data in terms of
the modern theory of MNEs and international business, and suggesting policy
implications for Korea.
Korea is at a good and relevant stage for the application of the new regional
trends identified by Rugman, Verbeke, and Greidanus (2005). The focus of Ko-
rea’s economic development policy shifted from a foreign loan-based develop-
ment strategy to an FDI-based strategy after the financial crisis in 1997. For ex-
ample, Korea attracted $60 billion of inward FDI from 1998 to 2002, which is
2.4 times the $24.6 billion it received from 1961 to 1997. Inward FDI has helped
Korea reform its national economic system for further economic development
and recover its status as one of the top four foreign exchange reserve nations in
the world.
Most of the world’s FDI is made by MNEs in the triad. The triad is a group
of three major trading and investment blocs in the international area: North
America, Europe, and the Asia-Pacific region (Rugman and Hodgetts 2003).
About 80 percent of the world’s total FDI is conducted in the triad, and the
world’s 500 largest MNEs account for about 90 percent of the world’s stock of
Yang Multinationals 181
FDI. Moreover, most of these firms generate the vast majority of their sales
within their home regions of the triad (Rugman 2005). Therefore, understand-
ing the importance of the triad and the strong intraregional dimension of
MNE activities is a prerequisite for our analysis on the inward and outward
FDI of Korea.
ASIA’S REGIONAL MNEs
MNEs are companies that are headquartered in one country but have upstream
or downstream operations in other countries (Rugman and Hodgetts 2003).
According to this definition of MNEs, all the companies in the Fortune Global
500 are classified as MNEs. In chapter 8, we demonstrated that most MNEs are
not global but regional.
Table 7.6 shows the regional sales of the largest Asia-Pacific MNEs. The 45
Asia-Pacific MNEs that provide full data on their geographic sales in each re-
gion of the triad generated an average of 73.2 percent of their sales in the Asia-
Pacific region and only 16.0 percent and 7.6 percent in North America and
Europe, respectively. Most of the 45 Asia-Pacific MNEs are dominated by
Japanese MNEs, which generated an average of 74.6 percent of their sales in the
Asia-Pacific region, 14.8 percent in North America, and 7.3 percent in Europe.
As shown in table 7.11, there were 12 Korean companies in 2001 and 11 in
2004 in the Fortune Global 500. Only 5 Korean MNEs provide data on their
geographic sales in the triad. All of them are home region oriented MNEs,
with an average of 70.2 percent of their sales coming from the Asia-Pacific re-
gion. POSCO, the largest steel company in Korea, had the highest percentage
of home region sales, with the Asia-Pacific region accounting for 91.9 percent of
its sales. Hyundai Motor was second, with 81.6 percent of its sales coming from
the Asia-Pacific region. Samsung Electronics, the highest ranked Korean com-
pany in the Fortune Global 500, also realized more than 60 percent of its sales
in its home region. LG Electronics and Hyundai show similar geographic sales
patterns.
THE FSA-CSA MATRIX FOR ASIAN MNEs
The theoretical basis for the regional nature of the world’s 500 largest MNEs
can be partly explained by the liability of foreignness that most MNEs face
when they go abroad (Zaheer 1995, 2002). Because of this disadvantage, foreign
MNEs entering new markets must go through a learning process, which en-
Figure 9.1 The FSA-CSA Matrix and Korean and Chinese MNEs
courages MNEs to enter nearby countries first, learning about international

business in an incremental fashion (Rugman 1981). This theoretical argument is
consistent with the regional nature of the world’s 500 largest MNEs discussed
in the previous section.
The expansion of MNEs abroad helps them realize their FSAs in foreign
countries. As defined earlier, in chapters 2 and 8, an FSA is a unique capability
proprietary to the firm built on innovations on product or process technology,
marketing, or distributions skills (Rugman 1981, 2005). The FSAs of each MNE
can be supported or reinforced by country-specific factors from its home coun-
try (Rugman 1981). These CSAs are based on the factor endowments of natural
resources, labor, and land, cultural factors, or government regulations of each
country where an MNE is operating (Rugman 1981, 2005). Therefore, MNEs
should make decisions about the optimal configuration of FSAs and CSAs that
leads to the best choice of strategies when they go abroad to expand on their
FSAs in foreign markets. This dynamic process can be explained diagrammati-
cally with the now familiar FSA-CSA matrix in figure 9.1.
Quadrant 1 depicts the situation in which MNEs go abroad based on strong
CSAs from their home countries but without unique and strong FSAs. The
MNEs in this quadrant are resource-based, mature, and globally oriented firms
producing a commodity type product at the later stage of the product life cycle.
Since CSAs (such as natural resources, labor, and land) are important for main-
taining a competitive advantage in the global market, MNEs usually adopt low
cost leadership strategies. Any resulting FSAs in economies of scale are strictly
based on CSAs and are not sustainable FSAs.
Quadrant 2 represents a situation in which MNEs do not have strong FSAs
or CSAs. Any MNEs in this quadrant are regarded as being inefficient, and will
likely exit. MNEs in quadrant 3 have both strong FSAs and strong CSAs. Since
the strong CSAs of low production costs from the home country can be com-
plemented by the strong FSAs of the MNEs in distribution channels, for ex-
ample, these MNEs can adopt both cost-leadership and differentiation strate-
gies in the global market. Quadrant 4 depicts the case in which MNEs go
abroad based on their strong FSAs, but the CSAs from their home countries are
not required for a competitive advantage in the global market. Therefore, the
MNEs in this quadrant are differentiated firms with strong FSAs, for example,
in brands or customization.
By including not only home countries but also host countries as the sources
of CSAs, we can expand the FSA-CSA framework for a better understanding of
MNEs’ activities. First, we can overcome the limitations of Porter’s (1990) view
that MNEs rely solely on a strong home-base diamond, which has been criti-
cized by scholars in international business (Rugman and Verbeke 2003b; Dun-
ning 1993a, 1996; Moon, Rugman, and Verbeke 1995, 1998). Weak CSAs from
home countries can be complemented or upgraded by strong CSAs from host
countries when MNEs go abroad for upstream activities in the host countries.
In the previous section we noted that 320 of the 380 of the world’s 500 largest
500 MNEs derive an average of over 80 percent of their total sales from their
home regions of the triad. Their distribution of assets is even more regionalized.
The evidence from the world cosmetics industry also confirms that the up-
stream activities of the MNEs are more home region based than their down-
stream activities (Oh and Rugman 2006).
Second, we can identify the different key location-specific advantages of host
countries for different types of FDI—natural-resource seeking, market seek-
ing, efficiency seeking, and strategic-asset seeking (Dunning 1998b). Therefore,
the FSA-CSA framework can be applied to the analysis of inward FDI in a host
country. We provide some examples in the next section, where we analyze the
data on inward FDI in Korea.
Third, we can pay attention to the dynamic process of upgrading FSAs and
CSAs through interactions between them. MNEs try to select locations where
they can maximize their profits, because the location choice by itself is one of
the most important strategic decisions by which they can not only improve
their competitive advantages but also upgrade the location advantages of the
places where they operate (Rugman and Verbeke 2003b). The location choice
of FDI would be the direct result from the interaction between a company’s
FSAs and the type of CSAs it faces (Rugman and Verbeke 1992a). Therefore, if
an MNE whose employees have strong managerial skills, for example, enters a
new region, it will upgrade the quality of labor in that host region. This will, in
turn, act as a catalyst for upgrading the FSAs of companies in the host region
through knowledge spillover and flexibility of labor movement. This dynamic
process of upgrading CSAs and FSAs will lead to outward FDI in the future by
the domestic firms in the host region, based on their upgraded FSAs by the ini-
tial inward FDI. Therefore, expanding the sources of CSAs from home coun-
tries to host countries gives us a good basis for the current trends toward the
symmetry of FDI, which is discussed in the next section.
In general, Chinese MNEs are in quadrant 1 of figure 9.1. They are successful
because of China’s CSAs, namely, cheap labor, cheap money, and state support.
The world’s manufacturing goes to China because of its cheap labor. China’s
MNEs go abroad in natural resources sectors, funded by state support and
cheap money from a financial system overflowing with foreign exchange re-
sources earned by China’s trade surplus.
In contrast, Korea’s MNEs are now more knowledge based and are in quad-
rant 3. They build on Korea’s R&D and educated work force. Similarly, MNEs
like Flextronics of Singapore are in quadrant 3. These emerging economy
MNEs from Korea and Singapore are like MNEs from North America and Eu-
rope, many of which are also in quadrant 3.
THE SYMMETRY OF INWARD

AND OUTWARD FDI
Inward FDI
Inward FDI is the inflow of the funds from foreign countries to a domestic
country, whereas outward FDI means the reverse. FDI is undertaken by MNEs
to establish footholds in foreign markets by setting up operations (greenfield
FDI) or acquiring other businesses (M&A). In both cases MNEs can exercise
direct control over their foreign affiliates (Rugman and Hodgetts 2003).
Table 9.1 presents the data on inward FDI notifications for Korea across all
Table 9.1 Inward FDI notifications (thousands of U.S. dollars)
Region 1990 –2004 1990 –1994 1995–1999 2000–2004
Asia-Pacific 26,694,566 1,636,209 9,928,805 15,129,552

Europe 31,081,837 2,027,686 13,321,073 15,733,078
North America 33,530,643 1,670,563 12,019,424 19,840,656
South America 4,723,280 78,166 967,231 3,677,883
Africa–Middle East 644,478 18,549 162,933 462,996
Others 173,976 22,743 105,878 45,355
Total 96,848,780 5,453,916 36,505,344 54,889,520
Source: Authors’ calculation based on the inward FDI statistics at the Ministry of Commerce, Industry, and Energy
in Korea (http://www.mocie.go.kr).
industries for the fifteen-year period 1990 –2004, from each region of the triad.
The total amount of inward FDI increased over this time period, especially af-
ter the mid-1990s. About 95 percent of the total investment of $96.8 billion was
made after 1995. The same table also shows that the largest source of inward
FDI in Korea was Europe until the late 1990s, but changed to North America at
the beginning of the twenty-first century. There is a similar pattern for inward
FDI in the manufacturing industries. However, we should note that since 1995,
the most important source of inward FDI in the manufacturing industries has
been Europe, accounting for 38.2 percent of the inward FDI over the fifteen
years. The Asia-Pacific region, Korea’s home region of the triad, has become
more important for inward FDI in manufacturing industries, accounting for
26.9 percent during the period 1995 –1999, and 31.7 percent during the period
2000–2004.
Table 9.2 presents the data on inward FDI notifications in Korea made by
the 2001 Fortune Global 500 companies for the same time period, again across
the entire set of industries. Of these 500 firms, 195 MNEs invested a total of
$19.6 billion in Korea during the period 1990 –2004, which constitutes 20.2
percent of the total amount of inward FDI in Korea. The largest portion of in-
ward FDI by the Fortune Global 500 was made by MNEs from Europe, with
about 60.5 percent from 1990 to 2004. We should note that the contribution of
European firms decreased from 67.4 percent in the period 1995–1999 to 55.5
percent in the period 2000 –2004, across all industries, and from 71.9 percent
to 52.8 percent in the manufacturing industries. At the same time, the contri-
bution from MNEs in the Asia-Pacific region increased from 7.8 percent to 18.4
Table 9.2 Inward FDI notifications by top 500 companies (thousands of U.S. dollars)
Region 1990 –2004 1990 –1994 1995–1999 2000–2004
Asia-Pacific 2,542,850 (12.98) 95,833 (8.42) 695,447 (7.81) 1,751,570 (18.35)

Europe 11,848,024 (60.46) 548,036 (48.14) 6,002,934 (67.38) 5,297,054 (55.48)
North America 5,187,252 (26.47) 494,408 (43.43) 2,207,152 (24.77) 2,485,692 (26.03)
South America 18,044 (0.09) 240 (0.02) 4,183 (0.05) 13,621 (0.14)
Total 19,596,170 1,138,517 8,909,716 9,547,937
Source: Authors’ calculation based on the inward FDI statistics at the Investment Notification Statistics Center in Korea
(http://mgr.kisc.org/insc/).
Note: Percentages are in parentheses. Percentages may not sum to 100 percent because of rounding error.
percent, across all industries, and from 13.5 percent to 25.1 percent in the man-
ufacturing industries.
These recent trends of inward FDI in Korea can be explained in several ways
based on the modern theory of MNEs discussed in the previous sections. First,
MNEs from Europe have brought their advanced FSAs to Korea through in-
ward FDI in manufacturing industries. Renault, Philips, BASF, Alstom, and
Nokia are good examples of firms that have a proprietary knowledge capability
built on innovations in product or process technology and management skills.
MNEs from North America are important for the inward FDI in Korean ser-
vice industries. Costco, Citigroup, and FedEx have aimed to realize in Korea
their FSAs built on their unique capabilities in marketing or distributions
skills.
Second, each of these MNEs investing in Korea can be positioned in the
FSA-CSA matrix according to the CSAs that MNEs want to upgrade or com-
plement by investing in Korea. For example, General Electric (GE), number 9
in the Fortune Global 500 in 2001 and one of the home region oriented com-
panies, can be positioned in quadrant 1. GE sought natural resources (for ex-
ample, low cost but high quality labor) in Korea during the 1970s and 1980s,
pursuing a low cost leadership strategy in household electric appliances, med-
ical devices, and lighting (Invest Korea 2004). Since these items are commod-
ity-type products at the late stage of the life cycle, GE’s FSAs were not as im-
portant compared with Korea’s strong CSAs in low cost labor and efficient
production processes. Recently, GE has moved to quadrant 3 because of its
strong R&D activities in Korea. It has developed ultrasonic diagnostic devices
at the R&D facilities in Songnam, Korea, that have been supplied to the global
market through GE’s global distribution networks (Invest Korea 2004). Nokia,
the world’s largest manufacturer of mobile devices, number 147 in the Fortune
Global 500, and one of the nine global firms, can be positioned in quadrant 3.
With strong FSAs in R&D and brand awareness, Nokia has been seeking
strategic assets (IT infrastructure and technological capabilities of parts suppli-
ers) in Korea. Korea’s strong CSAs are complemented by Nokia’s FSAs (Invest
Korea 2004). Nokia’s recent contract with Samyoung Technology, one of the
high-quality mobile phone parts suppliers in Korea, supports this positioning
in the matrix. Tesco, a home region based MNE ranked 114th in the Fortune
Global 500, can be positioned in quadrant 4. In the retail industries, MNEs go
abroad solely based on their strong FSAs, but the CSAs of the host countries are
not essential for their success in the global market. Using its existing FSAs in
brands and distribution channels, Tesco has developed location-bound FSAs in
Korea (quality control, customization, and differentiated stores with entertain-
ment, culture, and high quality service) to realize the benefits of national re-
sponsiveness (Invest Korea 2005).
Last, the data on inward FDI in Korea by each region of the triad confirms
the importance of the home region orientation for MNEs’ activities. It shows
the deepening process of regionalism of inward FDI in Korea, especially in
manufacturing industries and by the world’s 500 largest companies. This result
is consistent with recent findings that most MNEs are not global but regional.
Outward FDI
Table 9.3 presents the data on outward FDI notifications from Korea across all
industries for the fifteen-year period 1990 –2004 for each region of the triad.
Tables 9.1 and 9.3 reveal that the amount of outward FDI increased during this
time period, especially after the mid-1990s. For example, 84.1 percent of the to-
tal outward FDI of $73.8 billion was made after 1995, as was 84.2 percent of the
outward FDI of $40.5 billion in the manufacturing industries. We should note
that the majority of the total outward FDI was made in the Asia-Pacific region,
Korea’s home region of the triad. This tendency has accelerated in recent years,
with the Asia-Pacific region accounting for 48.7 percent of Korea’s outward
FDI from 1995 to 1999, and 53.2 percent from 2000 to 2004. The data on out-
ward FDI in the manufacturing industries confirms the deepening process
of regionalism for MNE activities. During the period 1995–2004, the Asia-
Pacific region accounted for 61.1% of Korea’s outward FDI in manufacturing,
with Asia’s share increasing from 54.2 percent during the period 1995–1999 to
65.6 percent during the period 2000–2004.
Table 9.3 Outward FDI notifications (thousands of U.S. dollars)
Region 1990 –2004 1990–1994 1995–1999 2000–2004
Asia-Pacific 38,397,482 (52.00) 6,657,046 (56.76) 14,272,398 (48.72) 17,468,038 (53.23)

Europe 11,086,469 (15.01) 1,260,980 (10.75) 4,739,944 (16.18) 5,085,545 (15.50)
North America 17,500,842 (23.70) 2,797,826 (23.85) 7,519,573 (25.67) 7,183,443 (21.89)
South America 4,899,290 (6.63) 398,096 (3.39) 1,862,403 (6.36) 2,638,791 (8.04)
Africa—Middle East 1,956,438 (2.65) 615,236 (5.25) 900,735 (3.07) 440,467 (1.34)
Total 73,840,521 11,729,184 29,295,053 32,816,284
Source: Authors’ calculation based on the outward FDI statistics from the Export-Import Bank of Korea (http://www.koreaexim.go.kr).
Table 9.4 summarizes the data on outward FDI notifications by large Korean
firms (large firms are defined here as having more than 300 employees or more
than 30 billion won, or roughly $30 million, in revenue).Outward FDI by the
large firms decreased in recent years, despite the increase in the total amount of
outward FDI over the same time period. For example, 82.6 percent of the total
outward FDI of $52.1 billion was made after mid-1990s, but outward FDI de-
creased from $23.4 billion for 1995 –1999 to $19.7 billion for 2000 –2004. The
data on outward FDI in the manufacturing industries confirms this tendency.
Although 83.9 percent of the outward FDI of $26.9 billion in the manufactur-
ing industries was made after 1994, outward FDI decreased from $12.5 billion
for 1995–1999 to $10.0 billion for 2000 –2004. Of the triad regions, the Asia-
Pacific region receives the most outward FDI from large Korean firms. During
the fifteen-year period, Korea’s home region received 46.2 percent and 49.7 per-
cent of Korea’s outward FDI across all industries and in the manufacturing in-
dustries, respectively. The data demonstrate that the deepening process of re-
gionalism of MNEs’ activities is still under way.
These recent trends in outward FDI from Korea can be discussed in terms of
the modern theory of MNEs as follows. First, the outward FDI of Korea is ex-
panding, and Korean MNEs are realizing their FSAs mainly in the Asia-Pacific
region, Korea’s home region of the triad. The evidence of home-region orienta-
tion with respect to outward FDI from Korea is stronger in the manufacturing
industries. The upstream activities of the Korean MNEs are being conducted
in other lower-cost Asian countries; Samsung Electronics, for example, has
“offshored” some of its manufacturing operations to China for cheap assembly
of its electronic parts. This trend of regionalism of Korean MNEs’ activities has
also been deepening in recent years, which is consistent with recent empirical
evidence that most MNEs are regional, operating primarily in their home re-
gions.
Second, although the total amount of outward FDI by Korean MNEs in-
creased over the 1990–2004 period, the outward FDI by the large firms has de-
creased in recent years. This implies that the recent outward FDI from Korea
has been driven by small and medium-sized enterprises. The underlying rea-
sons for this increasing trend of outward FDI by small and medium-sized en-
terprises are multifold, but one potential explanation can be found from the
upgraded FSAs of small and medium-sized enterprises in Korea. We should
note that Korea has been very active in attracting inward FDI from foreign
MNEs with sophisticated FSAs, for example, from Europe in the manufactur-
ing industries and from North America in the service industries, as discussed in
Table 9.4 Outward FDI notifications by large firms (thousands of U.S. dollars)
Region 1990 –2004 1990–1994 1995–1999 2000–2004
Asia-Pacific 24,068,916 (46.19) 4,571,640 (50.49) 10,566,985 (45.18) 8,930,291 (45.40)

Europe 10,371,825 (19.90) 1,173,800 (12.96) 4,471,247 (19.12) 4,726,778 (24.03)
North America 13,148,873 (25.23) 2,471,496 (27.30) 6,030,919 (25.78) 4,646,458 (23.62)
South America 2,678,620 (5.14) 234,544 (2.59) 1,467,668 (6.27) 976,408 (4.96)
Africa–Middle East 1,845,836 (3.54) 602,831 (6.66) 854,094 (3.65) 388,911 (1.98)
Total 52,114,070 9,054,311 23,390,913 19,668,846
Source: Authors’ calculation based on the outward FDI statistics from the Export-Import Bank of Korea (http://www.koreaexim.go.kr).
the previous section. The foreign MNEs operate with worldwide competition,
and they have developed efficient value-chain networks. Serving as parts sup-
pliers (or as potential suppliers), many of the small and medium-sized enter-
prises in Korea have had more interactions with foreign MNEs than ever be-
fore, and have been able to capture spillovers of tacit knowledge from the
MNEs by locating their operations in close proximity to the MNEs. Therefore,
through the dynamic process of upgrading the CSAs of Korea and the FSAs of
the local small and medium-sized enterprises, outward FDI by Korean small
and medium-sized enterprises is made possible based on these upgraded FSAs.
Lastly, the data on outward FDI from Korea and the dynamic process of up-
grading CSAs and FSAs by the initial inward FDI from foreign countries sug-
gest that Korea has become both a recipient and an exporter of substantial
amounts of FDI. This implies that Korea is moving toward the “deep integra-
tion” of FDI symmetry, which is discussed in more detail in the next section.
MNE-GOVERNMENT LINKAGES
Rugman, Verbeke, and Greidanus (2005) consider three recent shifts in MNE-
government relationships: (1) the goal consistency between MNEs and govern-
ments at a macro level; (2) the dispersion of FSAs and the symmetry of inward
and outward FDI at an institutional level; and (3) the endogeneity of govern-
ment policy at a firm-strategy level. These shifts will be used as a framework for
evaluating the MNE-government linkages in Korea and suggesting policy im-
plications for attracting inward FDI in Korea.
Complementary MNE-government goals
Rugman, Verbeke, and Greidanus (2005) attribute the initial conflict between
the goals of MNEs and the goals of host-country governments to differences in
their ultimate objectives. Foreign MNEs pursue efficiencies at a micro level by
minimizing (transaction) costs and maximizing profits, whereas governments
want to attain efficiencies at a macro level by achieving distributional objec-
tives. However, as the host governments begin to understand the importance of
FSAs (which MNEs bring with them into the host country), they will generally
implement policy measures for the liberalization of inward FDI. This process is
reinforced when the host governments realize the impossibility of direct ac-
quisition of the FSAs from the MNEs, who internalize them as intermediate
goods. Therefore, the increasing number of measures for liberalizing inward
Table 9.5 Trend of liberalization of inward FDI in Korea
Jan. 1997 Jan. 1998 Jan. 1999 Mar. 2000 Mar. 2002
Total number of industries 1,148 1,058

(A)
Number of Not opened 30 21 7 4 2

industries (B)
regulated Partially
for inward opened 24 29 16 24 27
FDI (C)
Rate of liberalization
on inward FDI (%)a 97.4 98.2 99.4 99.6 99.8
Source: Korea Ministry of Commerce, Industry, and Energy 2003.
a Rate of liberalization of inward FDI (%) ⫽ (A⫺B) / A ⫻ 100.
FDI reflects the complementarity between the efficiency goal of MNEs and the
equity goal of governments (Dunning 1993b).
There has been a strong shift in Korea’s policy regarding inward FDI toward
recognition of the complementary goals between foreign MNEs and the gov-
ernment. Korea has adopted a series of policy measures to liberalize inward
FDI. For example, inward FDI was used only for promoting export-driven or
import-substitute industries in the 1960s, but almost all sectors in manufactur-
ing and service industries were liberalized before the end of the 1990s. The reg-
ulation on foreign ownership structure (foreign ownership was not permitted
to exceed 50 percent) was eliminated during the 1990s, and inward FDI was
permitted upon notification to, not permission from, the Korean government
in the mid-1990s. Additional strong incentives for inward FDI began to be pro-
vided after 1998, including preferential tax treatment and provision of loca-
tional advantages for greenfield FDI. Table 9.5 confirms the trend toward com-
plementary MNE-government goals in Korea. The rate of liberalization of
inward FDI is defined as the number of industries opened for inward FDI di-
vided by the total number of industries in Korea. The data show that Korea had
achieved a 99.8 percent rate of liberalization of inward FDI as of 2002. This is
good evidence of the goal consistency between the foreign MNEs operating in
Korea and the Korean government.
High FSA Dispersion and FDI Symmetry
Rugman, Verbeke, and Greidanus (2005) also consider the recent trends in the
low FSA dispersion of MNEs (where non-location-bound FSAs of the MNEs
are created exclusively in their home countries) to the high FSA dispersion of
MNEs (where the development of location-bound FSAs in their host countries
becomes indispensable). With strategic-asset-seeking FDI, the objective for the
MNE is to develop its FSAs abroad and to realize the benefits of national re-
sponsiveness in the host countries. The high FSA dispersion of MNEs will be
encouraged by the national treatment of the host-country government, which,
in turn, leads to symmetry between inward and outward FDI. A country is said
to have achieved symmetry of FDI if it becomes both the origin and recipient
of substantial amounts of inward and outward FDI. Therefore, public policy
measures toward MNEs will be highly dependent on whether the country has
a symmetry or asymmetry of FDI. The concept of FDI symmetry is an im-
portant departure from the traditional literature on FDI discussed by Caves
(1996).
The trend from low FSA dispersion to high FSA dispersion of MNEs can be
observed from cases in which inward FDI in Korea failed because of the lack of
national responsiveness. The best examples are Wal-Mart and Carrefour, which
decided to withdraw from Korea in 2006. Wal-Mart was the world’s largest
company, with $219.8 billion of sales in 2001. Carrefour was ranked thirty-fifth,
with $62.2 billion of sales in 2001, by the Fortune Global 500, but it is the
largest retail company in Europe. Both Wal-Mart and Carrefour are home re-
gion based MNEs: 94.1 percent and 81.3 percent of their sales, respectively,
were intraregional in 2001. Both have accumulated high FSAs in marketing
and distribution channels attributable to an economies of scale strategy based
on cost reduction; these FSAs have been developed exclusively in their home re-
gions (Rugman 2005). However, they could not succeed in the Korean market,
because they did not develop location-bound FSAs in the host country. They
ignored different relationships with suppliers (long-term relationships) and
different shopping styles and tastes of consumers (preference for easy access to
stores and high-quality goods and services, dislike for frozen foods) in Korea.
These examples demonstrate the importance of the development of “national
responsiveness” FSAs for inward FDI in Korea.
Table 9.6 shows the trend toward symmetry of inward and outward FDI in
Korea. Korea has been increasingly involved in substantial volumes of both in-
ward and outward FDI since 1995. This has lead to a “deep integration” with
Table 9.6 FDI stocks as a percentage of GDP
Region/economy 1990 1995 2000 2001 2002
World
Inward 9.3 10.3 19.6 21.2 22.3
Outward 8.6 10.0 19.3 20.4 21.6
Developed economies
Inward 8.2 8.9 16.5 17.9 18.7
Outward 9.6 11.3 21.4 23.0 24.4
Developing economies
Inward 14.8 16.6 31.1 33.4 36.0
Outward 3.9 5.8 12.9 12.8 13.5
Asia and the Pacific
Inward 17.9 19.1 32.1 32.7 33.3
Outward 2.6 5.8 15.8 15.3 15.4
Korea, Republic of
Inward 2.1 1.9 8.0 9.5 9.2
Outward 0.9 1.6 11.0 9.6 9.1
Japan
Inward 0.3 0.6 1.1 1.2 1.5
Outward 6.6 4.5 5.8 7.2 8.3
China
Inward 7.0 19.6 32.3 33.2 36.2
Outward 0.7 2.3 2.4 2.7 2.9
FDI symmetry (inward FDI was $43.7 billion and outward FDI was $43.5 bil-
lion in 2002). The degree of symmetry in Korea is higher than that in the Asia-
Pacific region and China, but much lower than that in developed economies.
We find a similar pattern when we look at FDI stocks as a percentage of GDP.
Table 9.6 shows that Korea has achieved a symmetry of FDI since 1995 (inward
FDI was 9.2 percent of GDP and outward FDI was 9.1 percent of GDP in
2002).
The most important aspect of this for public policy is that it is the national
treatment of the host-country government that encourages the high FSA dis-
persion of MNEs. This high FSA dispersion, in turn, leads to outward FDI by
the domestic firms of the host country, based on their upgraded FSAs, which
they obtained through the initial inward FDI from foreign countries. Although
governments might support their MNEs to become first movers in a global
market with strong subsidies or other preferential treatment, it has been shown
that such policies have not been successful enough, because governments have
limited ability to guide domestic MNEs in that direction (Rugman and Ver-
beke 1990). Public policy measures toward attracting inward FDI from foreign
countries will have a direct and indirect impact on the outward FDI of domes-
tic MNEs.
MNEs and Government Policy
Rugman, Verbeke, and Greidanus (2005) also discuss the endogeneity of gov-
ernment policy at a firm strategy level as the final shift in the MNE-govern-
ment relationships. MNEs intentionally attempt to influence the process of
public policy formation by the government of the host country so that the pol-
icy for inward FDI makes it easier for them to capture the benefits of national
responsiveness. Therefore, negotiations between foreign MNEs and the Ko-
rean government become an important issue in the process of attracting inward
FDI to Korea.
It is too early to evaluate the trend toward the endogeneity of government
policy at a firm-strategy level in Korea, but the next two examples will give
some insights. The first case is the negotiation between LG.Philips LCD and
the Korean government in 2004, during the process of implementing the gov-
ernment’s plan to transform the Paju area into the world’s largest cluster for the
production of flat-panel display. LG.Philips LCD is a joint venture between
Royal Philips and LG Group that was created in 1999, and which became the
leading manufacturer of thin-film-transistor liquid crystal displays (TFT-
LCDs) (Invest Korea 2005). It began construction of its main factory in the
Paju area in 2003 with total investments of $20 billion, and as a result of its ne-
gotiations with the government—at both the local and national level—the
Korean government agreed to build industrial complexes for parts suppliers,
roads leading to the factory, and a waste-water disposal plant for the factory for
free.
The second case is the newly introduced incentive for attracting inward FDI
in Korea in 2005—cash grants. According to the guidelines for awarding the
cash grants, MNEs that are more than 30 percent foreign owned and that are
investing at least $10 million in the high-tech industry are eligible for cash
grants (Invest Korea 2006). At least 5 percent of the inward FDI can be covered
by the cash grants through negotiations between an MNE and the Korean gov-
ernment. The grants should be used for the purchase or rent of land for the fac-
tory, the construction of the factory and common facilities, the purchase of
production equipment or R&D facilities, and training programs for employ-
ees. The number of applications by MNEs for these cash grants has not been re-
ported yet, but the adoption of this incentive system will make MNEs invest-
ing in Korea start to think of national government policies as being critical to
the success of their business strategies in host countries. A recent study shows in
a game-theoretical setting that the effect of subsidies for cluster formation is
highly dependent on the type of clusters characterized by the type of goods pro-
duced: in a symmetrical cluster where imperfect substitutes are produced, the
subsidies do not give any incentive to cluster formation in host countries (Lee
2006).
SUMMARY POINTS
After analyzing the data on inward and outward FDI for Korea for the fifteen-
year period 1990 –2004, we have applied Rugman, Verbeke, and Greidanus’s
framework (2005) on the MNE-government linkages toward FDI to investi-
gate three recent shifts in MNE-government relationships in Korea. Our study
shows that the complementarity of goals between the MNEs and the Korean
government has increased since the 1990s, as evidenced by the proactive liber-
alization measures with respect to inward FDI by the Korean government. The
increased complementarity of the goals has fostered substantial amounts of in-
ward FDI flow into Korea based on the national treatment of foreign MNEs.
The development of location-bound FSAs in Korea by the MNEs became in-
dispensable for their survival in the Korean market (high FSA dispersion of
MNEs), as evidenced by the withdrawals of Wal-Mart and Carrefour from Ko-
rea. This led to an increase of outward FDI by Korean MNEs based on their
upgraded FSAs, making Korea a country with FDI symmetry. Location-bound
FSAs provide the MNEs investing in Korea with a strong incentive to endoge-
nize the process of policy formation by the Korean government at a firm-strat-
egy level, as evidenced by the LG.Philips LCD case and the newly adopted
cash-grants system. We should note that these three shifts in MNE-govern-
ment relationships in Korea are interrelated and reinforce each other in a virtu-
ous circle.
The policy implications for Korea are multifold. First, the crux of FDI is the
realization of FSAs. Inward and outward FDI is closely interrelated through the
dynamic process of MNEs upgrading CSAs (and FSAs) in host countries. Ko-
rea’s public policy toward inward FDI has both a direct and an indirect impact
on outward FDI by Korean MNEs, as discussed in the previous section. Policy
measures that attract foreign MNEs with high quality FSAs provide a shortcut
for upgrading the FSAs of Korean MNEs, making them go abroad as outward
FDI to realize their enhanced FSAs in foreign countries. This process is espe-
cially effective when an MNE investing in Korea acts as a leading “flagship”
firm that plays an important role as a strategic leader of the partners in an asym-
metrical business network model (Rugman and D’Cruz 2000).
Second, because of the positive interactions between inward and outward of
FDI, the increase of outward FDI is not an outflow of national wealth any-
more. Rather, outward FDI allows MNEs to realize upgraded FSAs of domes-
tic MNEs in foreign markets, which leads to the creation of national wealth
abroad. This gives us a good rationale for making the achievement of FDI sym-
metry another policy goal in Korea. Korea has two-way flows of FDI today—a
symmetrical pattern of cross-investments—which is typical of the mature
economies in North America and Europe. However, as we saw in table 9.6, Ko-
rea is still much behind developed economies in terms of FDI stocks as a per-
centage of GDP. Encouraging inward and outward FDI, and in particular, in-
creasing both inward and outward FDI as a percentage of GDP, should be a
public policy goal.
Third, the importance of home region orientation for MNEs’ activities
should be fully understood. Most MNEs are not global but regional, operating
primarily in their home regions. The data show that Korea has imported high-
quality FSAs of foreign MNEs from Europe in the manufacturing industries
and from North America in the service industries, and it has exported its up-
graded FSAs to the Asia-Pacific region (Korea’s home region of the triad) in past
years. However, the data also show that the process of regionalism of both in-
ward and outward FDI of Korea in the Asia-Pacific region has been deepening
and accelerating in recent years. This evidence should help policymakers
choose strategic regions when they design policy measures for attracting inward
FDI in, and encouraging outward FDI from, Korea.
Last, policymakers should be careful about the effect of cash grants when
they negotiate with MNEs, especially if they want to create a cluster in Korea
by attracting inward FDI. As briefly touched on in the previous section, the
effect of subsidies for cluster formation is highly dependent on the type of clus-
ters.
CONCLUSIONS
In this chapter—and throughout the book—we have highlighted the promise

and potential for MNEs to make sustained positive contributions to the devel-
opment process. More importantly, we have specified a set of conditions that

we believe help realize these impacts. Here we offer a few concluding comments
based on the empirical analysis of these last three chapters.
Our review of the basic conditions that lead MNEs and FDI to have positive
impacts on development suggests that host countries should recognize and em-
brace the FSAs that MNEs can deploy when investing abroad. Indeed, rather
than view MNEs as potential threats, hosts should identify where their CSAs
offer MNEs the most attractive environment for investment, and leverage these
CSAs to maximize the potential positive impact of MNEs. It is this interaction
between the host country and multinational assets that is the catalyst for
growth and development.
We also contend that the architecture of the global economic system—the
WTO, the World Bank, the IMF, and similar organizations—has limited, but
generally positive, impacts on development. When MNEs and countries work
with these institutions, and craft agreements that liberalize trade and invest-
ment, that provide developing countries with access to developed-country
markets, and that foster important institutional reform within developing
countries, the development process is greatly accelerated. In fact, developing
countries would be well served by improving their governance, anticorruption,
financial, and other regulatory systems to limit graft and economic distortions
and provide a predictable and reliable institutional infrastructure for invest-
ment. The role of NGOs in fostering development can be positive if those
NGOs recognize the potential to collaborate and leverage MNE investment in
ways that advance development. Some NGOs that are focused exclusively on
criticism and antagonistic expressions are unlikely to elicit supportive MNE in-
vestment that is critical for development.
In this final section, we have illustrated sequentially how indigenous firms
from emerging economies have become critical institutions for taking develop-
ing countries to the next stage of truly emerging economies. The cases of China
and Korea—and for that matter Singapore and in the future, other developing
economies—clearly demonstrate how the interaction of FDI and local CSAs
can create conditions for the development of emerging-market MNEs, which
are becoming global players.
The role of FDI within Asia underscores another important theme of this
book—that trade, investment, and development is largely a regional, not a
global, phenomenon. Accordingly, the regional patterns of FDI—inward and
outward—are essential to understanding the process of development. Global
solutions to development, though worthy, may not be appropriately scaled to
the reality of the regional dynamics that are driving trade, investment, and eco-
nomic progress.
Certain MNEs—the yang MNEs—can have especially beneficial impacts
on development, as these MNEs are at the axis of the interactions of inward and
outward FDI and of domestic and foreign MNEs. Yang MNEs are the hub of a
series of spokes connecting developing and developed economies and provid-
ing productive connections between developing countries.
Chapter 10 Conclusions
In this book we have demonstrated that MNEs unambiguously con-

tribute to the economic development of nations, although the distri-
bution of those benefits may vary. MNEs bring foreign direct invest-
ment, transfer technology, increase national income, provide more
skilled jobs, pay taxes, and otherwise contribute to the overall macro-
economic growth of host economies. In an interesting and novel twist
to this, we also find that MNEs from emerging economies build on
the improved macroeconomic infrastructure created by foreign MNEs.
These new indigenous emerging economy MNEs grow and help im-
prove the prosperity of their countries. We found evidence of these
yang MNEs in Korea, Singapore, Taiwan, and China. Although we
have not specifically investigated the growth of MNEs from India,
Latin America, Russia, and other emerging economies, we expect that
the virtues of yang multinationals will also apply in these other emerg-
ing economies. Thus, our analyses provide two key contributions.
First, MNEs from the advanced triad economies of Europe, North
America, and the Asia-Pacific region serve to foster the development
and growth of poor economies. Second, as a result of this improved
200
Conclusions 201
macroeconomic infrastructure, the emerging economies generate their own

MNEs, thus further enhancing their growth and prosperity.
These conclusions can be observed by a retroactive study of figure 2.1, which
combined the country level and firm level factors relevant to MNEs. This
framework was used throughout the book, especially in chapter 3, where man-
agement strategies were adapted to this efficiency-based framework. It was then
applied in chapters 7, 8, and 9 to examine the activities and performance of
MNEs in the Asia-Pacific region. For example, figure 9.1 applies the thinking in
this framework to an analysis of the general nature of Chinese and Korean
MNEs. On the basis of our analysis of the Chinese and Korean MNEs in the
world’s 500 largest firms, we came to some interesting conclusions.
Of primary importance is that the success of Chinese MNEs is almost en-
tirely due to favorable country factors. Chinese MNEs are successful because
they build on abundant cheap labor, which can lead to economic efficiency in
terms of cost competitiveness and low prices across a variety of manufacturing
and routines based service sectors. Such firms develop FSAs that are strongly
dependent on the nature of China’s CSAs. Thus Chinese MNEs may develop
economies of scale (a type of FSA)—but as a result of cheap labor (a CSA)
rather than any inherent proprietary FSAs. This means that the competitive-
ness of Chinese manufacturing relies on country factors, not firm factors. Chi-
nese MNEs are also successful because of access to relatively cheap money. To
help process the large balance-of-trade surplus with Western economies such as
the United States, the Chinese banking system (with government guidance and
support) has provided cheap financing to Chinese businesses. This has led to
outward FDI in the form of acquisitions of foreign firms, especially in the nat-
ural-resource sectors. In the last few years, Chinese MNEs have been active in
FDI in the energy sector and in the acquisition of mining companies in African
countries. Again, this is a quadrant 1 strategy in figures 2.1 and 9.1.
In contrast, we have demonstrated (in chapters 8 and 9) that Korean MNEs
are located in quadrant 3 of figures 2.1 and 9.1. Firms such as Samsung Elec-
tronics have developed knowledge-based FSAs, building on the improved
macroeconomic infrastructure of Korea. Indeed, Samsung Electronics now
outsources much of its basic manufacturing and assembling to plants in China.
In other words, Korean MNEs are now performing in the same manner as lead-
ing Western MNEs in the sense that they rely on strong firm-driven factors that
build on a set of country-specific attributes.
Yet we did not find any evidence to support the existence of emerging
economies in quadrant 4 of figures 2.1 and 9.1. In other words, there are few (if
202 Conclusions
any) purely knowledge-based emerging-economy MNEs. Instead, the emerg-

ing-economy MNEs we observed combine country and firm advantages in
quadrant 3. As yet, there are no emerging-economy MNEs with pure brand-
name marketing FSAs, or pure technology-based FSAs, where these are inde-
pendent of their home-country infrastructure. Furthermore, we find no evi-
dence that there is asset-seeking FDI. Instead, the emerging economy MNEs
that make acquisitions do so by building on strong home country advantages,
such as cheap money in China. A case in point is the Lenovo acquisition of the
IBM computer-assembly division. With this acquisition, Lenovo has acquired
the existing routines in computer assembly, but not the intangible brand-name
and knowledge and service advantages of IBM. Thus, the Lenovo acquisition is
not asset-seeking in the host economy but is driven by country factors in the
home economy.
The emergence of IT and services offshoring and outsourcing, however, may
begin to change this dynamic. Offshoring is an important economic and social
phenomenon that has generated considerable attention in practitioner outlets,
in the popular press, and in political circles; however, its impact on the devel-
opment process is not yet clear. Hence, we have not focused on offshoring or
international services investment as an explicit dimension of the interactions
between multinationals and development. It is clear that worldwide trade in
services is growing at a rapid rate, and services account for increasing shares of
domestic and global output. Initially driven primarily by cost, offshoring ap-
pears to be evolving into a more complex phenomenon with broad implica-
tions for economic and management theory and practice. Of relevance to the
focus of our analysis, the emergence of IT and business process outsourcing
MNEs in India—such as Infosys, Wipro, Tata Consultancy, and others—may
point to the emergence of a more knowledge-based services sector in develop-
ing countries. Yet to date, these firms—like the Chinese MNEs—are depen-
dent primarily on CSAs. However, some appear to be on the verge of develop-
ing genuine FSAs related to business process outsourcing. Despite these signs,
it is still too soon to determine the scope and impact of this trend on MNEs and
development.
We recognize that some readers may have an intellectual problem with our
focus on the efficiency aspects of MNEs. Many scholars and practitioners in the
field of economic development subscribe to what we might best call a distribu-
tional framework rather than our efficiency framework. We have been upfront
about our approach (as noted both in the preface and in chapters 1 and 2). We
believe that the business-school focus on analysis of MNEs from the efficiency
Conclusions 203
viewpoint has been badly neglected by development economists and policy-

makers. Thus we included figure 2.2, which developed a stakeholder viewpoint
in the social triangle. We have also attempted to incorporate explicitly the na-
ture of the stakeholder viewpoint. In particular, in chapters 4, 5, and 6 we ex-
plored the nature, extent, and performance of international institutions and
the role of the NGOs and civil society on economic development. With regard
to international trade agreements, institutions, and NGOs, we have suggested
that MNEs alone may not be sufficient in ensuring that the development
process takes hold and that its benefits are fully realized. International trade and
investment agreements facilitate and encourage multinational investment, of-
ten in conjunction with important financing from multilateral development
agencies. Hence, we see the role of these agreements as potentially important
signaling mechanisms, in that they provide validation of market reforms and
policy changes—which can be considered CSAs—to the international invest-
ment community. These agreements also encourage government policy re-
forms that generate a hospitable investment climate and lock in those reforms
so that subsequent government regimes are not tempted to reverse them. In-
creasingly, these agreements also touch on the distributive side of the develop-
ment process by, for example, incorporating labor and environmental commit-
ments and obligations.
Domestic institutional development is another important facilitating pro-
cess that works to ensure the security and integrity of an investment climate
and thus increases the likelihood of positive development effects. Such an envi-
ronment unarguably works to promote MNE investment and increase the po-
tential distributive impact of that investment. In contrast, corrupt regimes are
more likely to divert economic resources for their own ends. Indeed, demo-
cratic, well-functioning institutional regimes in which the rule of law is upheld
not only provide a supportive environment for foreign investment, entrepre-
neurship, and innovation, but they also promote a responsive government and
vigorous civil-society sector that is able to advocate for investment in physical
infrastructure, human capital, and social programs. Hence, the institutional
environment (a CSA) is an important complement to basic economic condi-
tions that are necessary for MNE investment and the development it generates.
Our discussion of the role of NGOs is perhaps not directly related to the
main frameworks of our analysis, but we do attempt to analyze both NGOs
and MNEs in a neutral manner. Hence, in this discussion, we detailed the
emerging role of NGOs and the changing nature of business-NGO relation-
ships. We also illustrated how NGOs—working with MNEs—can help facili-
204 Conclusions
tate some aspects of the fair distribution of economic gains, within the context
of the efficiency orientation of MNEs and the equity focus of host govern-
ments. In this sense, MNEs and NGOs occupy a complementary space in de-
veloping countries. The MNEs provide investment and critical resources and
capabilities. The NGOs advocate for a distribution of government and other
resources to address poverty, environmental protection, and the like.
Nonetheless, the viewpoints of MNEs and NGOs are often in conflict be-
cause they use different frameworks. The MNEs need to perform efficiently,
and they are held to account by the stock markets and their shareholders. In
contrast, NGOs, although sometimes aware of the efficiency constraints fac-
ing MNEs, have a broader distributional viewpoint. The focus of NGOs on
poverty is ultimately a relativist viewpoint. We have shown that MNEs im-
prove the macroeconomic conditions for growth. Thus, they indirectly reduce
poverty. However, in this book we did not explore indicators of poverty; instead
we deconstructed the activities of MNEs from both the wealthy and the emerg-
ing economies of the world. In so doing, we believe that this book makes a dis-
tinctive contribution in which the role of MNEs, in fostering economic devel-
opment, can be understood as a complement to the traditional analysis in the
field of economic development.
As we proposed at the beginning of the book, the topic of MNEs and devel-
opment is complex, dynamic, and critical to the health and welfare of the
global economy. In this volume, we have sought to bring a specific perspective
to this topic, one that is based on solid evidence and reasoned analysis, and
views MNEs and FDI as important elements in the development equation. We
hope this approach has shed new light on long-standing questions and opened
up new horizons for future research and inquiry.
Glossary
ADB—Asian Development Bank. http://www.adb.org/.

AFTA—ASEAN Free Trade Area. http://www.us-asean.org/afta.asp.
Andean Community (Communidad Andina, or CAN)—Formerly, the Andean
Group. A trade organization consisting of Bolivia, Chile, Colombia, Ecuador,
and Peru. http://www.comunidadandina.org/.
ASEAN—Association of Southeast Asian Nations. Includes Brunei Darussalam,
Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore,
Thailand, and Vietnam. http://www.aseansec.org.
CACM—Central American Common Market, also known in Spanish as Mer-
cado Común Centroamericano (MCCA). In existence from 1960 to 1969, then
reinstated in 1991. Includes Costa Rica, El Salvador, Guatemala, Honduras,
and Nicaragua.
CAFTA-DR—Central America—Dominican Republic Free Trade Agreement
(also known as DR-CAFTA).
CAN—See “Andean Community.”
CARICOM—Caribbean Community Common Market. Its members are An-
tigua and Barbuda, the Bahamas, Barbados, Belize, Dominica, Grenada, Guy-
ana, Haiti, Jamaica, Montserrat, Saint Kitts—Nevis, Saint Lucia, Saint Vin-
cent and the Grenadines, Suriname, and Trinidad and Tobago. http://www
.caricom.org/.
205
206 Glossary
CIS—Commonwealth of Independent States. An economic union created in 1991 after the

fall of the Soviet Union and composed today of Armenia, Azerbaijan, Belarus, Georgia,
Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Ukraine, and Uzbekistan; Turk-
menistan was a member only until 1995.
CSA—Country-specific advantage.
CSR—Corporate social responsibility.
EBRD—European Bank for Reconstruction and Development. http://www.ebrd.com/.
E.U.—European Union. Formerly the European Economic Community and the European
Community. http://europa.eu/.
FSA—Firm-specific advantage.
FTA—Free-trade agreement, such as NAFTA, CAFTA, and AFTA.
FTAA—Free Trade Area of the Americas. http://www.ftaa-alca.org/.
GATT—General Agreement on Tariffs and Trade. Designed to provide an international fo-
rum that encouraged free trade between member states by regulating and reducing tariffs
on traded goods and by providing a common mechanism for resolving trade disputes.
GATT is one-third of the Bretton Woods system that was created after World War II to
ensure a stable trade and economic world environment. The International Monetary
Fund (IMF) and the World Bank are the other two bodies of the Bretton Woods system.
Often referred to as an international organization, the GATT had a “de facto” role as an
international organization before the creation of the World Trade Organization (WTO).
See also “WTO.”
IBRD—International Bank for Reconstruction and Development. Lending arm of the
World Bank Group. http://go.worldbank.org/SDUHVGE5S0.
IDA—International Development Association. Provides long-term low- or no-interest
loans and grants to the poorest countries. http://www.worldbank.org/ida.
IDB—Inter-American Development Bank. http://www.iadb.org/.
IFC—International Finance Corporation. http://www.ifc.org/.
IMF—International Monetary Fund. http://www.imf.org/.
International Centre for the Settlement of Investment Disputes—http://www.worldbank
.org/icsid/.
International Labor Organization Declaration of Principles concerning Multinational En-
terprises and Social Policy (also called MULTI)—http://www.ilo.org/public/english/
employment/multi/index.htm.
LLL framework—Linkages, leverage, and learning framework.
M&A—Mergers and acquisitions.
MENA—Middle East and North Africa regional section of the World Bank. http://www
.worldbank.org/mena.
MERCOSUR—Southern Common Market. http://www.mercosur.int/msweb/principal/
contenido.asp.
Glossary 207
Millennium Development Goals—Eight goals developed by the United Nations to improve

world living standards. http://www.un.org/millenniumgoals/.
MNE—Multinational enterprise.
Mozal Project—http://www.mozal.com/.
Multilateral Investment Guarantee Agency—Insures international investments. http://
www.miga.org/.
NAFTA—North American Free Trade Agreement. http://www.fas.usda.gov/itp/Policy/
NAFTA/nafta.asp.
NGO—Nongovernmental organization.
NIC—Newly industrialized country.
OECD—Organization for Economic Cooperation and Development. http://www.oecd
.org.
OECD Guidelines for Multinational Enterprises—http://www.oecd.org/documentprint/
0,2744,en_2649_34889_2349370_1_1_1_1,00.html.
OEM—Original equipment manufacturer.
PDA—Personal digital assistant. A handheld computer.
R&D—Research & development.
transition economy—an economy changing from a planned to a free market and moving
from public to private ownership of resources by letting market forces set prices, lowering
trade barriers, and undertaking privatization. Examples include China, Croatia, Kazakh-
stan, Mongolia, and Vietnam.
Transnationality Index—Arithmetic average of the ratio of foreign to total assets, sales, and
employment.
triad economies—The huge markets of North America, Europe, and the Asia-Pacific re-
gion. The core triad consists of the United States, the European Union, and Japan; the
broad triad consists of North America, Europe, and Asia.
U.N. Global Compact—Nine principles on business responsibility. http://www.global
compact.org.pk/aboutgc.htm.
UNCTAD—United Nations Conference on Trade and Development. http://www.unctad
.org.
World Bank—Source of financial and technical assistance to developing countries. Made up
of two development institutions: the International Bank for Reconstruction and Devel-
opment (IBRD) and the International Development Association (IDA) http://www
.worldbank.org/.
WTO—World Trade Organization. Develops ground rules for international trade and
mediates trade disputes. The WTO was established on January 1, 1995, by the Final Act
of the Uruguay Round of negotiations under the GATT. http://www.wto.org/. See also
“GATT.”
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Index
absorptive capacity, 6, 20 Andean Community. See CAN.

ACCIÓN, 99 Anderson, Andrew, 56
ACER, 37, 165 Aoki, Masahiko, 173
ADB (Asian Development Bank), 7, 60, APEC (Asia Pacific Economic Coopera-
74, 205 tion), 69, 72–73, 210
ADEMI (Association for the Development Apple (Firm), 168
of Microfinance = Asociación para el De- Argenti, Paul A., 94
sarollo de las Microprensas), 100 Argentina, 115, 116; see also Latin America.
administrative heritage, 39 –40 ASEAN, 69 –70, 73
AEI (American Enterprise Institute), 86 Ashman, Darcy, 89, 93, 94
Africa, 2, 16, 60, 81, 107 Asia, 2, 23, 27, 60, 81, 89, 98, 124,126, 127,
Africa-Middle East region, 27 144, 147, 161, 171
AFTA-ANSEAN Free Trade Area, 205 Asia Pacific Journal of Management, 164
agricultural subsidies, 75, 76 Asia Pacific region, 27, 29, 30, 129, 134, 146,
Ahlstrom, David, 120 181, 185, 187, 197, 200; see also Asia,
Aitken, Brian J., 5, 19 China, Japan, Korea.
Alberto Moreno, Luis, 74 Asian financial crisis of 1997, 180
Aldrich, Howard, E., 106 Asian firms. See MNEs, Asian
Algeria, 64 asset risks, 105
aluminum production, 66 asymmetry, 43, 56, 127, 197
Amsden, Alice, 52, 54 Auster, Ellen R., 106
231
232 Index
Austin, James E., 93, 95 bribes, 111, 118, 120

Australia, 72, 75, 161, 167, 173, 175 Bridgestone, 161, 166
automotive industry, 82 broad triad (North America, Europe, Asia),
avoidance costs, 111 22, 26, 125. See also core triad, triad
economies.
Baden-Fuller, Charles, 39 Brouthers, Lance E., 144
Banco Popular, 100 Brown, L. David, 88, 92, 93
Banco Solidario, 99 Brunetti, Aymo, 110
Bank of China, 134, 137 Bruton, Gary D., 120
bank secrecy, 115 Buckley, Peter J., 173
banks and banking, 99. See also World Budhwar, Pawan S, 144
Bank. Bulgaria, 116, 117. See also Eastern Europe.
Baosteel (Shanghai Baosteel Group), 136 business associations, 87
Baran, Paul A., 4 business-government relations, 141
Barber, Benjamin R., 5 business groups, 107, 143
Barclay, Lou Ann, 36, 51 business-NGO relationships, 202
bargaining model, 122 business practices, Asian, 164
Barlett, Donald L., 148 Business Source Premier database, 171–2
Bartlett, Christopher A., 39, 40 Butkiewicz, James L., 67
Beamish, Paul W., 141
Benzing, Cynthia, 106 Cable & Wireless (Firm), 170
Berger, Gabriel, 95 CACM, 71, 205
Berger, Marguerite, 98, 99, 100 CAFTA-DR, 72, 205
Bergsten, C. Fred, 55 Callanan, Gerard, 106
BHP Billiton, 154, 161, 166, 167 CAM, 71
bibliometrics, 171 Campos, J. Edgardo, 110
Bielefield, Wolfgang, 88 CAN (Andean Community), 205
biodiversity, 65 Canada, 22, 35, 55, 70, 71, 75, 89, 142, 169;
bi-regional firms, 127, 128, 129, 134, 147, 154, see also NAFTA; North America.
163, 166, 168, 172, 177 Canon, 161, 172, 173
Birkinshaw, Julian, 40 Cantwell, John A., 176
Blomstrom, Magnus, 5, 19, 20 capital, 68
Boddewyn, Jean J., 121 capital markets, 104, 105
Bolivia, 122. See also Latin America. CARE, 71, 94, 95
Borrus, Michael, 169 Cargill, 120,
bottom of the pyramid, 20, 21 Caribbean, 7, 22, 36, 51, 56, 71–72, 73, 79
Bove, Roger E., 106 CARICOM, 71, 72
Boycko, Maxim, 104 Carlile, Paul R, 171
Boyd, Gavin, 52 Carr, James H., 98
Bradsher, Keith, 63 Carrefour (Firm), 193, 196
Brazil, 23, 35, 76, 92, 94, 115, 116, 136, 169 Carso Global Telecom, 129
Bretton Woods Conference (1944), 59, 61, case study selection bias, 164
63 Casio, 169
Brewer, Thomas L., 121 Casson, Mark, 173
Index 233
Cathay Life, 134 corruption, 65, 69, 79, 104, 107–120

Caves, Richard E., 4, 5, 19, 36, 193 cost analysis, 51
Cemex, 165 cost leadership, 38
Center for International Private Enterprise, counterfeiting, 63
117 country specific advantages. See CSAs.
Central Europe, 107. See also Europe; Euro- CPI (Corruption Perception Index), 112–
pean Union. 113
centrally planned economies, 84 CSAs (Country specific advantages) (e.g.
chaebols, 52, 54, 125, 141, 142, 143, 145, 146, labor, land, natural resources), 3, 8, 11, 12,
147 14, 17, 32, 53, 80– 81, 102, 142, 144, 162,
Chang, Sea Jin, 144 206
Chang, Weih, 106 CSR (Corporate social responsibility), 5, 17,
child mortality, 77, 78 21, 114, 206, 258
Chile, 51, 52, 54, 72, 115, 116 Cuervo-Cazurra, Alvaro, 114
China, 6, 8, 9, 20, 23, 33, 35, 44, 52, 64, 81, Cull, Robert, 100
120, 124, 125, 129, 134, 135 –140, 142, 149, Cummings, Larry L., 106
161, 168, 169, 171, 173, 179, 184, 198, 200 Czech Republic, 2; See also Central Europe;
China International Trust and Investment Eastern Europe; European Union.
Company (CITIC), 170
China Southern Power, 137 Dahan, Nicolas, 120, 121
China Telecommunications, 134, 137 Daniel, Shirley, 38
Cho, Dong-Sung, 143 Danis, Wade M., 106
Christen, Robert P., 99 D’Cruz, Joseph R., 21– 36, 37, 52, 197
Christensen, Clayton M., 171 Dean, Jason, 168
Chu, Hung Man, 106 De Backer, Koen, 4
Citibank, 99 Debrah, Yaw A., 144
civil society, 7, 8, 17, 79, 83, 86,90, 102 debt relief, 65
Clarke, George, 100 deforestation, 79
Clay, Jason, 96 –98 Delios, Andrew, 141
clean water, 65 dependency, 4
cluster, symmetrical, 196 de Tocqueville, Alexis. See Tocqueville,
Coca-Cola, 117 Alexis de.
Cogman, David, 120 developed countries, 23, 25
Collins, Jamie, 103, 107, 109, 110, 122 developing countries, 23; MNEs in, 34
Collinson, Simon C., 144, 162, 167, 169 developing economies, 2, 24, 25
competitiveness, 40, 183 development, 162, 197–198
complementarity, 192, 196 development assistance, 79
Comprehensive Anti-Apartheid Act (1984), development financial institutions. See
84 DFI.
contract manufacturers, 168 DFI (development financial institutions),
core triad, 32, 35, 125. See also broad triad, 107
triad economies. diamond framework, 35, 40, 183
corporate philanthropy, 95 differentiation strategy, 38, 56
corporate social responsibility. See CSR distributional framework, 202
234 Index
Dobel, J. Patrick, 89, 91– 93 energy sector, 170, 201

Doctors without Borders (Médecins sans Engardio, Pete, 169
frontières), 88 environmental regulations, 90
Doh, Jonathan P., 7, 17, 84–89, 91, 102, environmental sustainability, 77, 79
107–109, 120, 121, 122 Ernst, Dieter, 168, 169
Doha Development Round, 7, 35, 60, 62, Ericsson (Firm), 169
75–76, 82, 89 Errunza, Vihang R., 148
Dominican Republic, 100; see also Latin Esty, Daniel C., 91
America. Europe, 2, 126, 167, 168, 170, 173, 180, 181,
Dore, Ronald, 173 200; see also European Union; Eastern
double-diamond framework, 52 Europe; Central Europe.
downstream FSAs. See FSAs, downstream. European Union (EU), 15, 28, 29, 30, 69,
Doz, Yves L., 40 89, 95, 206
dragon multinationals, 164 –165 exchange rates, 63
Dreher, Axel, 69
Drucker, Peter F., 173 Fagre, Nathan, 121
Dunfee, Thomas W., 117 fair trade coffee, 94, 95
Dunning, John H., 5, 20, 36, 52, 53, 165, family-clan system, 52
176, 183, 191 FCPA (Foreign Corrupt Practices Act,
1977), 115
East Asia, 52, 54, 78, 79. See also Asia Pacific. FDI (Foreign direct investment), 1, 11, 23,
East Asian Tigers. See Tigers, East Asian. 114, 124, 180, 193; FDI notifications, 185–
Eastern Europe, 51, 107, 114, 170. See also 187, 190; greenfield FDI, 192; inward
Europe; European Union. FDI, 9, 18, 23, 24, 25, 26, 35, 141, 184,
EBRD (European Bank for Reconstruction 185 –187, 192, 195, 197; outward FDI,
and Development), 7, 60, 73, 206 23, 24, 25, 26, 29, 30, 141, 143, 187–191,
EbscoHost, 172 194, 197; 179, 194; FDI flows, 24, 25,
eclectic paradigm, 165 125, 141, 180; FDI stocks, 24, 25, 27, 28,
economic development promotion, 9, 17, 29, 30, 139; FDI symmetry, 184, 191,
19, 22, 54 193 –194
economies of scale, 34, 201 Federalist Society for Law and Public Policy
Ecuador, 122; see also Latin America. Studies, 86
Eden, Lorraine, 103, 107, 108, 109, 110, 122 Filatotchev, Igor, 107
education, 65, 77, 92; see also LLL frame- finance companies, 100
work FINCA (Foundation for International
efficiency-based strategy, 42, 202 Community Assistance), 100
Egghe, Leo, 171 firm specific advantages. See FSAs
Egypt, 64 Fischer, Rosa Maria, 95
Einhorn, Bruce, 169 five forces model for competitive advan-
El-Said, Hamed, 64, 66 tage, 37, 38
emerging economies, 124–125, 129; See also five partners framework, 37
developing economies. flagship firms, 21, 36, 57, 170, 197
employment, 98 Flextronics, 129, 134, 154, 161, 167, 168–169,
endogeneity, 191, 195 178
Index 235
FMCG (fast moving consumer goods) sec- Ghemawat, Pankaj, 54, 154
tor, 96 Ghoshal, Sumantra, 39, 40, 148
Ford, Kevin, 119 Giddens, Anthony, 89
Ford Motor Company, 38 Giuliani, Rudolph, 119
Foreign Corrupt Practices Act (1977). See Global Compact, 118
FCPA. global firms, 154, 161, 163, 168, 171, 172, 177,
foreign direct investment. See FDI. 178, 187
Forest Stewardship Council, 85 global partnership for development, 77, 79
Fortune Global 500, 43– 44, 125, 135, 143, globalization, 4, 84, 89, 91– 93
145, 168, 181, 184, 187, 193 Globerman, Steven, 5, 19
Foundation for International Community Goldman Sachs, 119
Association. See FINCA. Gomes, Lenn, 148
Foxconn. See Hon Hai Precision. Görg, Holger, 4, 19
France, 89, 142; see also Europe; European governance, institutional. See institutional
Union. governance.
Frank, Isaiah, 55 governance indicators, 109
Franko, Lawrence G., 173 government economic policy, 55, 191, 195
Fransman, Martin, 176 Gray, John, 89
free trade, 84 Greenaway, David, 4, 19
Friedman, Thomas L., 5 Greidanus, Nathan, 180, 191, 193, 195, 196
Fruin, W. Mark, 173 G20+ group of developing countries, 76, 90
FSAs (Firm specific advantages), 3, 4, 11, 12, Guay, Terrence R., 84, 85, 120, 121
14, 17, 41, 51, 80– 81, 142, 178, 184, 206; Guillén, Mauro F., 143
downstream FSAs, 144, 148, 149, 168, Gutierrez, Roberto, 95
177; knowledge based FSAs, 32; location
bound FSAs, 40, 187, 196; non-location Habib, Mohsin, 108, 114
bound FSAs, 40, 193; upstream FSAs, Haddad, Mona, 4
144, 148, 149, 177 Hadjimarcou, John, 144
FSA-CSA matrix, 6, 8, 12, 13, 14, 80, 162, Haggard, Stephen, 169
163, 181, 182, 183; quadrants, 13, 14, 17, Haier, 136, 177
182–184; regional matrix, 154 Hamel, Gary, 37
FTAA (Free Trade Area of the Americas), Harrigan, Jane, 64, 67
72, 206 Harrison, Ann E., 4, 5, 19
FTSE4Good Index, 117 Haskel, Jonathan, 19
Hausmann, Ricardo, 105
GATT, 45, 59, 60, 61, 85, 206 health, 65; see also HIV/AIDS, malaria,
GDP (Gross domestic product), 27, 139, 194 child mortality.
gender equality, 77 health, maternal, 77, 78, 79
General Electric, 117, 186–187 Henisz, Witold J., 104
General Motors, 38 Hess, David W., 117
George, Gerard, 107 heterogeneity, 20
Gerlach, Michael L., 52 Hewlett-Packard, 168
Germany, 89, 142; see also Europe, Euro- HIPC Initiative (Heavily Indebted Poor
pean Union, Central Europe. Countries Initiative), 65
236 Index
Hitt, Michael, 144, 173 IMF (International Monetary Fund), 67,

HIV-AIDS, 65, 74, 77, 79 198, 206
Hobday, Michael, 145 India, 20, 35, 54, 65, 76, 94, 120, 134, 200
Hodgetts, Richard M., 37, 162, 169, 180, 184 Indonesia, 6, 54, 72, 73, 97– 98, 144
Hoekman, Bernard, 75 Infosys, 202
Holcombe, Susan, 95 INGOs (International NGOs), 89
home base, single vs. multiple, 40 innovations, 184
home region based firms, 147, 149, 154, 161, institutional advancement, 104
164, 172, 173, 177 institutional environment, 203
Hon Hai Precision, 154, 161, 167, 168, 169 Institutional governance, 103, 104, 107–
Honda Motors, 161, 167, 172, 173 108
Hong, Jaebum, 144 institutions, 7, 103
Hong Kong, 72, 125, 144, 170; see also Asia internalization theory, 55, 143
Pacific; Asia. International Anti-Corruption Conference
Hope Group, 120 Council, 120
Hopkins, Nancy, 95 International business strategy research,
Horst, Thomas, 55 178
Hoskisson, Robert E., 105, 173 International Center for the Settlement of
host country, 18, 80 Investment Disputes, 206
Hudson, Bryant A., 88 International Chamber of Commerce
human rights, 90 (ICC) Commission on Anti-Corruption,
Hungary, 2; see also Eastern Europe; Cen- 116
tral Europe; Europe; European Union. international competitiveness, 40
hunger reduction, 77 International Conference on Financing for
Husky Oil, 170 Development (Monterrey, Mexico,
Hutchison Whampoa, 154, 167, 170 –171, 2002), 76
177 International development and relief orga-
Hymer, Stephen H., 5, 19, nizations, 89
Hyundai Motors, 37, 129, 143, 146, 181 International government agreements, 84
International Labour Organization (ILO),
IBD (Inter-American Development Bank), 85
7, 60, 73–74 International Monetary Fund (IMF), 7, 59,
IBM, 202 60; quota system, 63, 64
IBRD (International Bank for Reconstruc- international strategy, 149
tion and Development), 59 Interpol Group of Experts on Corruption,
IDA (International Development Associa- 119–120
tion), 64, 206 Invest Korea, 186, 187, 195
IDB (Inter-American Development Bank), investment, 50, 60, 73–74
73–74, 206 IOs (International organizations), 86
IFC (International Finance Corporation), Iran, 63
60, 64, 206 Irwin, Douglas A., 61
ILO’s Declaration of Principles concerning Ispat, 165
Multinational Enterprises and Social Pol- Israel, 73
icy, 85 IT (Information technology), 202
Index 237
Jain, Subhash C., 69, 73 Lamy, Pascal, 76

Japan, 9, 22, 52, 54, 72, 73, 89, 142, 144, 161, La Porta, Rafael, 103, 105
169, 172, 173, 174, 175, 176, 180 Latin America, 2, 73, 74, 79, 95, 107, 110,
Johannesburg Declaration, 97 122, 200; See also Bolivia, Chile,
joint ventures and acquisitions. See JV&A. Venezuela.
Jordan, 2, 64, 67 learning. See education.
Journal of Asian Business and Management, least developed economies, 25
164 Lee, Ho-Uk, 144
JV&A (joint ventures and acquisitions), 97 Lee, In Hyeock, 196
Lee, Jangwoo, 142, 143
Kalegaonkar, Archana, 92 Leff, Nathaniel H., 52, 54
Kapur, Devesh, 63 Lenovo, 136, 165, 177, 178, 202
Karnani, Aneel, 22 less developed economies, 25, 64
Karsai, Judit, 107 leverage, 165. See also LLL framework.
Kaufmann, Daniel, 104, 107 Levitt, Theodore, 154
keiretsu, 52 Levy, Brian D., 104
Keller, Wolfgang, 19 LG Electronics, 129, 143, 145, 147, 181
Kenney, Martin, 4 LG Group, 37, 144, 195
Kenya, 16 Li & Fung, 165
Khan, Shahrukh R., 69 liability of foreignness (LoF), 22, 34, 134
Khanna, Tarun, 54, 104, 105, 107, 108 Lien, Donald, 110
Kiggundu, Moses N., 106 Lim, Ghee Soon, 170
Kim, Hicheon, 173 Lindenberg, Marc, 84, 89, 91–93
Kim, Linsu, 142 Linkages, 3, 5, 19, 20, 50, 57, 97, 165
Kim, Wi Saeng, 148 Lipsey, Robert E., 19
Kobrin, Stephen J, 120, 121 LLL framework, 165, 206
Kogut, Bruce M., 40 Lopez-de-Silanes, Florencio, 103
Kokko, Ari, 19, 20 Lowe, Nichola J., 4
Koljatic, Mladen, 95 Lozano, Gerardo, 95
Korea, South, 2, 8, 9, 24, 35, 50, 52, 54, 73, Lukoil, 129
110, 124, 125, 129, 134, 140 –150, 171, 173, Lyn, Esmeralda O., 148
175, 179, 180, 181, 184–198, 200 Lynn, Leonard H., 164
Korea Electric Power, 145
Korea EXIM Bank, 143 M&A (Mergers and acquisitions), 184,
Kostecki, Michel, 75 206
Kraay, Aart, 104, 107 MacMillan, Ian C., 106
Krugman, Paul R., 42 MAI (Multilateral Agreement on Invest-
KT (Firm), 143, 145 ment), 90, 120
Kwok, Chuck C. Y., 114 malaria, 77
Malaysia, 72, 73, 129, 134, 144, 169
labor, 183, 184, 186 management skills, 50, 184
labor standards, 90 managerial behavior, 104
Lall, Sanjaya, 50, 142 Mansfield, Edwin, 5
La Mure, Lane T., 84 manufacturing industries, 121
238 Index
market imperfections, 55 Morocco, 64; see also Middle East and

market opportunities, 21, 43 North Africa region.
marketing, 50, 99 Morrisson, Allen J., 40
Mastercard, 100 Motorola, 120
Mastruzzi, Massimo, 108 Mozal Project, 64, 66 –67, 207
Mathews, John A., 143, 164, 165, 166 Mozambique, 66. See also Africa.
Mauro, Paolo, 108, 110, 114 Multifiber Agreement, 51
Mazda Motors, 161 Multilateral Agreement on Investment. See
McGovern, Ian, 144 MAI.
McKinnell, Hank, 118 Multilateral Investment Guarantee Agency
Médecins sans frontières. See Doctors with- (MIGA), 207
out Borders. Multilateral trade, 84
MERCOSUR, 69, 71, 206 Multinational enterprises. See MNEs.
Merrifield, D. B., 106 Multinationality, 165
Mexico, 24, 34, 51, 70–71, 72, 74, 89, 115,
129, 134, 169. See also Latin America; NAFTA (North American Free Trade
NAFTA. Agreement) (US, Canada, Mexico),
Meyer, Klaus E., 5, 164 vii, 7, 15, 28, 29, 35, 60, 69, 70, 82, 89,
MFIs (microfinance institutions), 100 207
microfinance, 98–100 Narin, Francis, 171
microfinance institutions. See MFIs. Narula, Rajneesh, 20, 165, 166
Middle East and North Africa region, 64 national responsiveness, 39, 40, 56
Millennium Development Goals, 7, 60, 74, Nelson, Richard R., 143, 173
76 –79, 82, 97, 207 Netherlands, 142
Miller, Stewart R., 22 New Era, New Challenge, 119
Mining firms, 201 New Zealand, 75
MNEs (Multinational enterprises) vii, 1, 2, Newman, Karen, 105
8, 12, 13, 16, 53, 54, 102, 124, 125, 150, 164, NGOs (Nongovernmental organizations),
200–201, 204, 207; and corruption, 114 – 4, 7, 8, 16, 53, 57, 58, 83– 89, 91, 92, 93,
115, 120; and social policy, 85; Asia Pa- 102, 198, 203 –204; advocacy NGOs, 88;
cific, 181; Asian, 154–164, 171, 172, 173, International NGOs see INGOs; opera-
174–175, 176, 177, 178, 181; born globals, tional NGOs, 87; social purpose NGOs,
166; Chinese, 151–152, 162, 176, 182, 184, 87, 88
201, 202; government relations, 180, 191, niche, 34, 37, 50
195, 196; host country relations, 121, 191; Nissan Motors, 161, 166, 173
India, 202; Japanese, 144 –145, 150, 162, Nokia, 187
173, 174, 176; Korean, 145–149, 152, 165, Nolan, Peter, 136
173, 182, 201; Yang MNEs, 9, 179, 199, Nollen, Stanley D., 105
200 nonbusiness infrastructure, 21
Moon, Hwy-Chang, 183 nongovernmental organizations. See
Moore, Mark H., 88 NGOs.
Moran, Theodore H., 55, 121 Nortel, 169
Morck, Randall, 148 North, Douglass C., 103, 107
Index 239
North America, 126, 129, 134, 147, 180, 181, Pereira, Sonia, 19, 100
200; See also Canada, Mexico, NAFTA, personal care products firms, 170
United States. Persson, Hakan, 5
North American Free Trade Agreement. See Peru, 122
NAFTA. Pfizer, 118, 119
not-for-profit sector, 86 Philippines, 73, 74, 93
piracy, 63
OAS InterAmerican Convention against Porter, Michael E., 5, 13, 15, 35, 36, 38, 40,
Corruption (1997), 115 50, 56, 162
obsolescing bargain model (OBM), 121 ports and port infrastructure firms, 170
O’Donnell, Edward, 144 POSCO, 129, 143, 145, 146, 181
OECD (Organization for Economic Coop- post-war reconstruction, 59
eration and Development), 28, 85, 114, poverty reduction strategy, 60, 64, 73, 74,
116, 207; Convention on Combatting 77, 97, 204
Bribery of Foreign Public Officials, 114, Prabhu, Ganesh, 107
115; Guidelines for Multinational Corpo- Pradhan, Sanjay, 110
rations, 85, 207 Prahalad, C. K., 20, 40
OEM (Original equipment manufacturer), Price, Derek de Solla, 171
169 private capital flows, 68
Offenheiser, Raymond, 95 Proctor & Gamble, 170
Offshoring, 189, 201 production, 50
Ogliastri, Enrique, 95 profit driven capitalism, 101
Oh, Chang Hoon, 141, 148, 183 profits, 54, 55
Olson, Mancur, 86 property rights, 106
operational NGOs, 88 protected markets, 38
Oppenheim, Jeremy M., 120 protection (organized crime), 111
Organization of American States. Inter-
American Convention against Corrup- R&D (Research and Development), 50, 56,
tion, See OAS InterAmerican Conven- 142, 143, 165, 169, 184, 186, 207, 213
tion against Corruption. Ramamurti, Ravi, 122
Organization for Economic Cooperation Ramaswamy, Kannan, 148
and Development. See OECD. Red Crescent, 88
Ouchi, William G., 173 Red Cross, 88
outsourcing, 202 red tape, 111
Oxfam, 88, 89, 94, 95– 97 Redding, Gordon, 144
regional MNEs, 22, 26. See also MNEs.
Pack, Howard, 143 regional sales, 128, 137, 139, 147, 148, 154, 183
Pakistan, 69 regional strategy, 198
Palepu, Krishna, 54, 104, 105, 107, 108 Reitsperger, Wolf D., 38
Palma, Gabriel, 2, 4 Republic of Korea. See Korea, South.
Papanastassiou, Marina, 176 research bias, 164, 173
Pearce, Robert D., 106 research methodologies, 164
Peng, Mike, 106 Reuters, 63
240 Index
risk diversification, 54 Sinopec, 134, 176

Robock, Stefan H., 120 Sjoholm, Fredrik, 19
Rodriguez, Peter, 103, 107, 108, 109, 110, 122 SK Networks, 143, 145, 147
Rodrik, Dani, 5, 105, 106 Slaughter, Matthew, 19
Romeo, Anthony, 5 Sleuwagen, Leo, 4
Rosenberg, Richard, 99 Slovakia, 116; see also Eastern Europe; Euro-
Roth, Kendall, 40 pean Union; Central Europe.
Rousseau, Ronald, 171 small and medium enterprises. See SMEs.
Rover (Firm), 136 Smarzynska, Beata K., 114
Royal Dutch Shell, 167 SMEs (Small and medium enterprises), 20,
Royal Philips, 195 67, 136
Rugman, Alan M., 4, 5, 13, 16, 21, 22, 26, 35, Social Accountability International, 85;
36, 37, 38, 39, 40, 41, 42, 43, 52, 55, 56, 89, SA8000 standard, 85
125, 126, 127, 135, 141, 143, 144,146, 148, social benefits, 57
149, 150, 154, 161, 165, 167, 169, 173, 180, social movements, 86, 87.
181, 182, 183, 184, 191, 193, 195, 196, 197 social triangle, 12, 15, 203
Russia, 62, 63, 110, 129, 134, 200 SOEs (Small open economies), 6, 34, 35, 38,
40, 41– 52, 54 – 55, 56, 57
Salinas de Gortari, Carlos, President of Soloaga, Isidro, 70
Mexico, 1988–1994, 34 Sony, 161, 172, 173, 178
Samsung Corning, 144 Soros, George, 5
Samsung Electro-Mechanics, 144 South Africa, 2, 54, 84, 94
Samsung Electronics, 129, 134, 143, 144, 147, Southeast Asia, 107, 110
181, 189, 201 Southern Asia, 78, 79
Samsung Group, 37, 144, 145 Spar, Debora L., 84
Samsung SDI, 144 Spiller, Pablo Tomas, 104
Sanchez, Susan, 100 spillovers, 3, 4, 5, 18, 19, 20, 184
Sappington, David E. M., 105 Sri Lanka, 50, 51
Saudi Arabia, 134 SSCI (Social Science Citation Index), 172
Schulz, Andrea, 5 Stackhouse, Dale E., 115
Science and Technology Research Institute stakeholders, 87, 101, 102
(Korea), 143 Starbucks, 94, 95
Senbet, Lemma W., 148 Staw, Barry M., 106
Shanghai Automotive, 136, 177 Stiglitz, Joseph E., 5, 85, 105
shelter-based strategies, 41–42, 43. See also Stopford, John, 39, 122
strategies. Strange, Susan, 122
Shipilov, Andrew V., 106 strategies, 3, 36. See also efficiency-based
Shleifer, Andrei, 103, 105, 109 strategy, shelter-based strategy.
Simon, Jeffrey D., 120 Strobl, Eric, 19
Singapore, 2, 50, 73, 75, 129, 134, 144, 161, sub-Saharan Africa, 78, 79
169, 179, 198, 200 sustainable economic practices, 85, 97,
Singer, Peter, 5 101
Sinha, Jayant, 104, 105, 108 Sweden, 169
Index 241
Tadesse, Solomon, 114 United Nations (U.N.), 76, 78, 79, 227
Taiwan, 134, 143, 144, 161, 168, 179, 200 United Nations Conference on Trade and
Tallman, Stephen, 38, 81 Development (UCTAD), 23, 24, 125, 165
Tang, Donny, 69 United Nations Global Compact, 85, 207
tariff and nontariff barriers, 13, 41, 54, 61, United Nations Monetary and Financial
62, 72, 75, 76, 162 Conference (1944), 59
Tata Consultancy, 202 United States, 16, 54, 70, 71, 72, 89, 95, 115,
technology transfer, 18, 19, 55 142, 168, 172, 173
Teece, David J., 4, 5 United States–Canada Free Trade Agree-
Teegen, Hildy, 7, 17, 85–89, 102, 122 ment, 15
telecommunications firms, 170 United States Information Agency (USIA),
Tesco, 187 115, 116
Thailand, 73, 134, 144 United States. Trade Representative, 71, 72
Thompson RV, 136 unproductive behavior, 111
Thun, Eric, 135 upstream FSAs. See FSAs, upstream.
Tigers, East Asian, 44, 50 utility firms, 170
TNI. See Transnationality Index.
Tocqueville, Alexis de, 86 Vachani, Sushil, 7, 85– 89, 102, 122
Tong, Zhong Y., 98 Vakil, Anna C., 87
Toyota Motors, 38, 161, 166, 172, 173, 178 values driven capitalism, 101
TRACE (Transparent Agent and Contract- Venezuela, 122
ing Entities), 117 Venture capital (VC) markets, 107
trade liberalization, 3, 60, 75 Verbeke, Alain, 5, 36, 38, 39, 40, 41, 42, 43,
trade negotiations, 61 141, 154, 161, 162, 180, 183, 184, 191, 196
Tran, Nhu-An, 99 Vietnam, 62, 63
transaction cost approach, 52 Visa (Firm), 100
Transnationality Index (TNI), 45, 207 Vishny, Robert W., 103, 105, 109
Transparency International, 112, 113, 118 Vogel, Ezra F., 173
triad based disputes, 90
triad economies, 180, 207; see also broad Wal-Mart, 193, 196
triad; core triad. Wan, William P., 173
triad markets, 56 – 57, 127 Wang, Chengang, 64, 66
Tunisia, 64 Wang, Jian-Ye, 20
Turkey, 24, 134 Watson, A.S. (Firm), 170
Weder, Beatrice, 110
Uhlenbruck, Klaus, 103, 107, 108, 109, 110 Wei, Shang-Jin, 108, 114
UI. See Unilever Indonesia. Wells, Louis T., Jr., 107, 121
Ukraine, 6, 63 Westney, D. Eleanor, 173
U.N. Millennium Summit 76; see also Mil- Whalley, Jason, 170
lennium Development Goals. Whitley, Richard D., 52, 54, 173
Unilever Indonesia (UI), 95 – 98 Wignaraja, Ganeshan, 50, 51
United Kingdom, 142, 169, 170. See also Eu- Williamson, Oliver E., 104
rope, European Union. Winters, L. Alan, 70
242 Index
Wipro, 202 Yang MNEs. See MNEs, Yang.

Wolf, Marvin J., 173 Yanikkaya, Halit, 67
World Bank, 2, 7, 59, 60, 63 – 65, 79, 81, 116, Yeaple, Stephen R., 19
144, 198; loans, 64 Yeung, Bernard, 148
World Bank Anti-Corruption Knowledge Yin, Robert K., 171
Center, 116 Yip, George, 154
World Investment Report, 23 Yucel, Emre, 144
World Trade Organization (WTO), 7, 51, Yunis, Mohammad (Nobel Prize laureate),
56, 59, 61– 65, 75, 76, 84, 90, 198 98
World Wide Fund for Nature (WWF), 88–
89 Zaheer, Srilata, 22, 134, 181
Wright, Mike, 107 Zahra, Shaker A., 148
WTO. See World Trade Organization. Zelner, Bennet A., 104
Zenith Electronics, 145
Xerox, 169 Zoido-Lobaton, Pablo, 104
Xin, Katherine R., 106 Zurawicki, Leon, 108, 114

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Multinationals and Development

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Yale University Press

New Haven & London

All rights reserved.

This book may not be reproduced, in whole or in part, including illustrations,

Library of Congress Cataloging-in-Publication Data

The topic of multinational enterprises (MNEs) and development is

The impact of multinational enterprises (MNEs) on host country

achieved their success through economic reform, including policies of trade

ural-resource products. Later, the indigenous MNEs develop knowledge-based

THE LITERATURE ON MULTINATIONALS

OUTLINE OF THE BOOK

Caribbean. We examine the basic strategies pursued by MNEs in such devel-

regional CSAs have combined to help develop increasingly successful indige-

In advancing our understanding of the role of MNEs in development, we oﬀer

In this chapter, we introduce our analytical framework for under-

OUTLINE OF THE ANALYTICAL APPROACH

As discussed in chapter 1, the issue of FDI in developing countries has

MODEL 1: THE FSA-CSA MATRIX

Figure 2.1 The FSA-CSA Matrix

It is useful to note two points. First, if the ﬁrm is a conglomerate, it should

MODEL 2: THE SOCIAL TRIANGLE

Figure 2.2 The Social Triangle

be no role for MNEs. In contrast, in a world of market imperfections, with

RECONCILING MODEL 1 WITH MODEL 2

Figure 2.3 Reconciling the Models

SPILLOVERS, TECHNOLOGY TRANSFER,

A broad body of literature argues that MNEs contribute to economic develop-

Empirical Analyses of Spillovers and Linkages

There is a long history of empirical analysis of FDI-related technological

Researchers have begun to focus on some additional variables in the MNE-

Spillovers and Linkages to the Bottom

A recent extension of the spillover linkages argument is captured in the work of

as well as consumers (Karnani 2007). A more promising area is the integration

REGIONAL MNES AND DEVELOPMENT

Hence, a book on multinationals and development is actually a book about

DATA ON FOREIGN DIRECT INVESTMENT,

Table 2.1 Top 15 developing and transition

Rank Economy FDI stock

1 Hong Kong, China 470

Panel A. Inward FDI

Inward stock Inward ﬂows

FDI stock % of total FDI ﬂow % of total

Developed countries 6,742,883 75.80 407,044 62.80

Panel B. Outward FDI

Outward stock Outward ﬂows

FDI stock % of total FDI ﬂow % of total

Developed countries 8,672,348 89.11 645,251 88.36

Panel A. Inward FDI

Inward stock Inward ﬂows

FDI stock % of total FDI ﬂow % of total

Developed countries 7,213,545 74.82 565,804 80.76

Panel B. Outward FDI

Outward stock Outward ﬂows

FDI stock % of total FDI ﬂow % of total

Developed countries 6,416,296 90.77 603,155 93.82

Region FDI stock Trade FDI stock Trade

Americas 31.81 22.24 28.27 27.25

Asia-Paciﬁc 16.08 25.07 12.42 23.06

Europe, Africa, and Middle East 52.11 52.69 59.31 49.69

Total 100.00 100.00 100.00 100.00

b Caribbean countries are included in South America.