Emerging Market Firms' Internationalization: How Do Firms' Inward Activities Affect Their Outward Activities?
| DOI | http://doi.org/10.1002/smj.2679 |
| Author | Geng Cui,Xiwei Yi,Haiyang Li |
| Published date | 01 December 2017 |
| Date | 01 December 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 2704–2725 (2017)
Published online EarlyView 28 July 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2679
Received 2 May 2014;Final revision received4 April 2017
Emerging Market Firms’ Internationalization: How Do
Firms’ Inward Activities Affect Their Outward
Activities?
Haiyang Li,1,*Xiwei Yi,2and Geng Cui3
1Jesse H. Jones Graduate School of Business, Rice University, Houston, Texas
2Guanghua School of Management, Peking University, Beijing, China
3Department of Marketing & International Business, Lingnan University,
Hong Kong
Research summary: In this study we examine how an emergingmarket rm’s inward international
activities (“inward activities”) are related to its outward international activities (“outward
activities”) by focusing on the role of the rm’s gain from its inward activities. On the one hand,
drawing upon the organizational learning perspective, we proposethat a rm’s gain from inward
activities may facilitate its outward activities through improving its resource fungibility. On the
other hand, we draw upon the prospect theory to proposethat a rm’s gain from inward activities
may hinder its outward activities by discouraging the rm’s top managers from taking risks that
are inherent in outward activities. With detailed data from a sample of manufacturing rms in
China, we nd empirical support for both lines of arguments.
Managerial summary: Are emerging market rms with higher inwardgain more likely to engage
in outward internationalization activities? Weargue that it depends upon how a rm uses its gain
from inward activities. If the rm can improve its resource fungibility (particularly organizational
resource fungibility) from its inward gain, it is more likely to engage in outward activities. If
the rm cannot improve its resource fungiblity, the answer is no. Our ndings suggest that for
emerging market rms, internationalization is not just a path toward new markets; instead, it
reects how these rms exploit and explore what they have learned from their interactions with
foreign rms at home in foreign markets. Therefore, managers must think more strategically on
developing (organizational) resource fungibility from their inward activities. Copyright © 2017
John Wiley & Sons, Ltd.
After years of being investment destinations for
traditional multinational companies (MNCs) in
developed markets, emerging market countries in
the past decade have become increasingly active
in outbound foreign direct investment (FDI).
Is the internationalization of emerging market
rms different from that of MNCs in developed
Keywords: inward activities; outward activities; resource
fungibility; emerging market; internationalization
*Correspondence to: Haiyang Li, Jesse H. Jones Graduate School
of Business, Rice University, 6100 Main Street, Houston, TX
77005-1892. E-mail: haiyang@rice.edu
Copyright © 2017 John Wiley & Sons, Ltd.
markets? While these two groups of rms share
many aspects in their internationalization processes
(Dunning, Kim, & Park, 2008), one key difference
is well accepted. That is, since emerging market
rms’ internationalization is relatively recent, they
have beneted tremendously from the presence of
inward FDI in their home markets (Buckley, Clegg,
& Wang, 2002; Gu & Lu, 2011; Luo & Tung, 2007;
Y. Zhang, Li, Li, & Zhou, 2010). More specically,
inward international activities (hereafter “inward
activities”) such as distributing foreign products
or forming a joint venture with a foreign rm pro-
vide opportunities for domestic rms in emerging
Emerging Market Firms’ Internationalization 2705
markets to acquire important resources and capabil-
ities from foreign rms (Steensma, Tihanyi, Lyles,
& Dhanaraj, 2005; Y. Zhang et al., 2010), which
can help them adapt to international business envi-
ronments and facilitate their outward international
activities (hereafter “outward activities”).
The key argument underlying this line of research
is that it is the resources and capabilities that a
rm acquires from its inward activities that facilitate
its outward activities. However, previous studies
have not made a distinction between what a rm
does in terms of inward activities and what it gains
from its inward activities (e.g., Buckley etal., 2002;
Karlsen, Silseth, Benito, & Welch, 2003; Luo &
Tung, 2007). Rather, it is assumed that to the extent
a rm engages in inward activities, it will gain
resources and capabilities from such activities. Note
that not all rms benet to the same extent from
their inward activities. Therefore, it is crucial to
separate a rm’s gain from inward activities from
the inward activities in which it participates. More
importantly, the relationship between a rm’s gain
from inward activities and its outward activities
may not be as straightforward as previously argued.
Indeed, Li, Li, and Shapiro (2012) have shown that
an emerging market rm’s gain from its inward
activities may decrease the rm’s propensity to
participate in outward activities because of the risky
nature of these activities.
In this study, we aim to address these issues
by revisiting the link between a rm’s inward and
outward activities and focusing on the role of the
rm’s gain from inward activities. A rm’s gain
from inward activities (hereafter “inward gain”)
refers to the benets (e.g., capital, technologies, and
knowledge) that the rm achieves from engaging
in inward activities. We propose that inward gain
has two possible effects on a rm’s participation in
outward activities. On the one hand, drawing upon
the organizational learning perspective (Helfat &
Peteraf, 2003; March, 1991), we argue that a rm’s
inward gain will improve its resource fungibility,
which will further increase the rm’s participation
in outward activities. Resource fungibility refers to
the extent to which a rm’s resources and capa-
bilities can be deployed in multiple geographical
and country settings (Oviatt & McDougall, 1994;
Sapienza, Autio, George, & Zahra, 2006). On the
other hand, drawing upon the prospect theory (Kah-
neman & Tversky, 1979), we argue that controlling
for the effect of resource fungibility,a rm’s inward
gain may induce its top managers to frame their
situation as a gain domain. As such, these top man-
agers may behave in a risk-averse manner and are
less likely to engage in risky activities such as out-
ward activities (Carpenter, Pollock, & Leary, 2003).
We tested these argumentswith detailed data col-
lected from 314 manufacturing rms in China’s
emerging market. We found that a rm’s inward
gain is positively related to the rm’soutward activ-
ities through improving the rm’s organizational
resource fungibility (but its technological resource
fungibility does not seem to matter in this rela-
tionship). Moreover, after controlling for this indi-
rect relationship, we found that a rm’s inward
gain has a negative direct relationship with its out-
ward activities. This direct negative relationship is
more salient for high-risk outward activities (e.g.,
overseas mergers and acquisitions and establish-
ing wholly owned overseas subsidiaries) than for
those with low risk (e.g., franchising). This negative
relationship is also stronger for rms with low-risk
propensity than for those with high-risk propensity.
Overall, our ndings suggest that there are three
possible paths through which a rm’s inward activ-
ities may be related to its outward activities: (a) a
rm’s inward activities have a direct positive rela-
tionship with its outward activities; (b) a rm’s
inward gain has an indirect positive relationship
with the rm’s outward activities through improv-
ing its organizational resource fungibility; and (c)
a rm’s inward gain has a direct negative relation-
ship with the rm’s participation in outward activi-
ties, particularly if those activities involvegreat risk
and/or if the rm has low-risk propensity. Our the-
oretical arguments and empirical ndings provide a
more complete picture of the inward– outward con-
nection of emerging market rms’ internationaliza-
tion and make important contributions to both the
strategy and the international business literature.
Theory and Hypotheses
Research Background
A rm’s internationalization comprises two impor-
tant processes: inward activities and outward
activities (Gu & Lu, 2011; Johanson & Vahlne,
1977; Korhonen, Luostarinen, & Welch, 1996;
Luo & Tung, 2007). Inward activities refer to the
activities that domestic rms engage in with foreign
rms in their home market, including technology
imports, product imports, product agency business,
original equipment manufacturing (OEM), inward
Copyright © 2017 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 2704–2725 (2017)
DOI: 10.1002/smj
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