Is Competitive Advantage a Necessary Condition for the Emergence of the Multinational Enterprise?

• Author: Peter J. Buckley,Niron Hashai
• Published date: 01 February 2014
• Date: 01 February 2014
• DOI: http://doi.org/10.1111/j.2042-5805.2013.01069.x

IS COMPETITIVE ADVANTAGE A NECESSARY

CONDITION FOR THE EMERGENCE OF THE

MULTINATIONAL ENTERPRISE?

NIRON HASHAI1* and PETER J. BUCKLEY2

1School of Business Administration, The Hebrew University of Jerusalem,

Mt. Scopus, Jersusalem, Israel

2Centre for International Business, Leeds University Business School,

The University of Leeds, Leeds, United Kingdom

This article challenges the view that competitive advantage is a necessary condition for the

emergence of the multinational enterprise. It formally derives the conditions under which

multinational enterprises may emerge without possessing a competitive advantage vis-a-vis

their rivals. This counterintuitive argument is based on three insights: (1) the ability of a larger

number of disadvantaged home country entrepreneurs to enroll workers in the host country

more efficiently than a smaller number of advantaged host country entrepreneurs; (2) asym-

metric liability of foreignness for home and host country entrepreneurs; and (3) the ability of

location and internalization advantages to substitute for ownership advantage. Copyright ©

2014 Strategic Management Society.

INTRODUCTION

The view that the possession of a competitive advan-

tage is a necessary condition for the emergence of

the multinational enterprise (MNE) is a cornerstone

of the international business and international

strategy literatures. This dates back to Hymer’s

(1976) ‘liability of foreignness’ (LOF) concept and

to Dunning’s eclectic paradigm (Dunning, 1977). It

makes the claim that foreign entrants must possess

competitive advantages (denoted by Dunning as

‘ownership advantages’)—manifested by techno-

logical advantages, well recognized brands, or

superior organizational practices to coordinate and

control transactions efficiently (Dunning, 1988,

1993)—to compensate for the extra costs of doing

business abroad and to successfully compete with

indigenous firms and other MNEs. This view has

proved robust and, over time, has become an axiom

for international business and international strategy

scholars in many influential studies seeking to

explain the emergence of the MNE (e.g.,Kogut and

Zander, 1993; Martin and Salomon, 2003; Nachum

and Zaheer, 2005; Tallman, 1991; Rugman, 1981).

Yet, the recent rise of emerging country-based

MNEs challenges this view.Many emerging country-

based MNEs lack firm-specific competitive advan-

tages (Amsden and Chu, 2003; Goldstein, 2007;

Mathews, 2006; Ramamurti, 2009a, 2009b; Rugman,

2009), but are apparently still able to establish opera-

tions in developed countries. While some scholars

have tried to reconcile this contradiction to extant

wisdom by pointing to alternative competitiveadvan-

tages possessed by emerging country-based firms, the

debate on the existence or nonexistence of competi-

tive advantages for these types of firms, raises a more

fundamental question—is competitive advantage a

necessary condition for firms to become MNEs?

(i.e.,to own subsidiaries in two or more countries

(Buckley and Casson, 1976; Caves, 1996)).

Keywords: multinational enterprise; competitive advantage;

eclectic paradigm; ownership advantage; internationalization

*Correspondence to: Niron Hashai, School of Business Admin-

istration, The Hebrew University of Jerusalem, Mt. Scopus,

Jerusalem, 91905, Israel. E-mail: nironh@huji.ac.il

Global Strategy Journal

Global Strat. J., 4: 35–48 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1111/j.2042-5805.2013.01069.x

Copyright © 2014 Strategic Management Society