an exploratory study of internationalization strategies of malaysian and taiwanese firms

8/16/2019 An Exploratory Study of Internationalization Strategies of Malaysian and Taiwanese Firms

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An exploratory studyof internationalization strategies

of Malaysian and Taiwanese firmsA.B. Sim

School of Management and Marketing, University of Wollongong,Wollongong, Australia, and

J. Rajendran PandianWillamson School of Business, Youngstown State University,

Youngstown, Ohio, USA

Abstract

Purpose – There is limited empirical research on the internationalization processes, strategies andoperations of Asian multinational enterprises (MNEs) from countries at different levels of development. This paper examines and analyzes the internationalization strategies and characteristicsof Asian MNEs within the investment development path (IDP) perspective.

Design/methodology/approach – Primary data are drawn from matched case studies of emergingMNEs from Taiwan (a newly industrializing country) and Malaysia (a fast developing country) in thetextile and electronics industries.

Findings – The internationalization strategies of our Taiwanese and Malaysian case firms werefounded on cost-based competencies and other location-based advantages, brought together by anextensive web of ethnic networks. Differences between our Taiwanese and Malaysian case firms werefound and discussed. In general, the Taiwanese firms were more internationalized (at stage 3 of IDP)than the Malaysian firms (stage 2). They had more developed and elaborate production networks andgreater own design manufacturing/own brand manufacturing participation than the Malaysian firms.

Research limitations/implications – The research did not capture the operational strategies atthe level of the subsidiary or JV. The findings were exploratory and formed the basis for researchpropositions presented. As indicated there existed a wide empirical research gap on Asian as well asTaiwanese and Malaysian MNEs. These need to be filled to provide further evidence and answersto the issues raised in the paper. Other potential areas of research could include longitudinal studies of Asian MNEs to examine whether they will resemble Western MNEs as they evolve, the impact of ethnic networks on the performance of Asian MNEs of both Chinese and non-Chinese origins, and therole of the state in internationalization strategies.

Originality/value – Few studies have been done on emerging market multinationals and theirinternationalisation strategies.

Keywords International business, International investments, Corporate strategy, Malaysia, Taiwan

Paper type Research paper

IntroductionResearch on multinational enterprises (MNEs) had traditionally focussed on westernfirms. The rise of non-Japanese Asian multinational firms was a more recentphenomenon and had attracted limited empirical research attention (Pananond andZeithaml, 1998; Luo, 1999). The early 1980s saw the emergence of foreign directinvestments (FDI) from the developing countries. A number of studies investigatedFDI of these Third World multinational enterprises (TWMNEs), particularly

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contrasting their characteristics with the traditional MNEs from the western developedcountries (Lall, 1983; Wells, 1983; Kumar and McLeod, 1981; Khan, 1986; Monkiewicz,1986; Aggarwal and Agmon, 1990; Tolentino, 1993). The phenomenal growth of East Asia (World Bank, 1993) in the late 1980s and early 1990s resulted in increased

intra-regional direct investments (Dobson and Chia, 1997). This had been depicted as a“wild flying geese pattern” with direct investment processes and activities transferringfrom one level of economies to another, starting from Japan, followed by the NICs(Korea, Taiwan, Hong Kong and Singapore). This pattern carried through to therapidly growing economies such as Indonesia, Malaysia and Thailand (Toh and Low,1994; Guisinger, 1991). Firms from these Asian capital exporting countries wereinternationalizing and multinationalizing their business activities and had emerged orwere emerging as Asian MNEs. Research interest was beginning to focus on theseAsian enterprises and their direct investment activities (Yeung, 1994, 1997; Ulgadoet al., 1994; Pangarkar, 1998; Li, 2003).

The literature on Asian MNEs had been growing, but knowledge of the nature,organization and operations of Asian MNEs remained limited. For example, data onwhether Asian MNEs were really different from the western MNEs was scanty?Were differences in characteristics of MNEs from different Asian countries arosefrom differences in the levels of development in these countries (such as newlyindustrializing country (NICs) and LDCs) as predicted by the investment developmentpath (IDP) thesis (Dunning, 1993)? Ulgado et al.’s (1994) contention was that AsianTWMNEs resembled Japanese MNEs more than they resembled US MNEs. However,whether some of these TWMNEs were found to imitate certain aspects of developedcountry MNEs was not conclusive. Hoesel (1999) and Dunning et al. (1998) contendedthat the MNEs from the Asian NICs constituted the second wave of FDI that wasdifferent from the first wave of the TWMNEs. However, knowledge of these differenceshad been fragmentary. As comparative empirical research on MNEs originating from

different Asian countries was limited (Luo, 1998; Sim and Ali, 1998), further researchcomparing MNEs from different Asian countries, particularly at different levels of development, will be instructive.

The aim of this paper is to contribute to this research area by presentingcomparative empirical research and examining the internationalization characteristicsand strategies of emerging Asian MNEs from two countries at different levels of development. The countries are Malaysia, representing a rapidly developing country,and Taiwan, a NIC. Data from this exploratory study will be used to developpropositions or hypotheses for testing in subsequent research to enhance knowledge inthis area. Empirical data of four matched case studies are presented and used toanalyze and compare their internationalization characteristics and strategies, andto examine their position in relation to the IDP from a firm-level or micro perspective.

Our empirical findings will be discussed in relation to prior research findings on MNEsfrom developed countries. The next section covers the theoretical foundations of MNEsand their relevance to Asian MNEs, followed by research methodology and findings.Implications for further research are discussed.

Background perspectives on Asian MNEsExplanations and theories on the internationalization (or expansion across nationalboundaries) of firms were largely based on western MNEs. Vernon’s (1966, 1979)

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product life cycle model, the Uppsala model (Johanson and Weidersheim-Paul, 1975; Johanson and Vahlne, 1977) and the works of Dunning (1977, 1988, 1993, 1995) on hiseclectic paradigm and the IDP (Dunning, 1981, 1986) were based largely on westernmultinationals. Research works that examined Third World (including Asian)

multinationals included Dunning (1986), Tolentino (1993), Dunning and Narula (1996),Lall (1996) and Dunning et al. (1998). Review of all these studies clearly indicated thatfurther research examining MNEs from countries at different stages of developmentespecially from Asia would enhance one’s understanding of how these Asianmultinationals could be different from their Western counterparts (Lall, 1996).

The eclectic paradigm was probably the most widely used explanation of international production. Drawing on received theories, Dunning’s (1977, 1988, 1993,1995) eclectic paradigm stated that the extent and pattern of international productionwas determined by the configuration of three sets of advantages:

(1) ownership or firm-specific advantages, such as proprietary technology,products, expertise and skills;

(2) the internalization of these advantages across national boundaries to overcomemarket imperfections or failures, reduce transaction costs and maximizeeconomic returns (Buckley and Casson, 1976); and

(3) locational advantages of host and home countries.

These OLI variables explained why internationalization occurred but neglected thedynamic process of internationalization. The IDP (Dunning, 1981, 1986) providedthe eclectic paradigm with a dynamic dimension by relating the net outward investmentof a country to its stage of economic development. At low level of economic development(stage 1), there was little inward or outward investments. As the country developed(stage 2), inward investment became attractive, particularly in import substitutionprojects. Some outward investment might take place, for example, in neighbouring

countries at lower stages of development. Most developing countries (includingMalaysia) with some outward investments were at this stage. With further economicdevelopment (stage 3), net inward investment declined while outward investmentincreased (relative to inward investment). Outward investment tended to increase,targeting countries at lower IDP stages to overcome cost disadvantages in labourintensive industries and also to seek markets or strategic assets. The NICs (e.g. Taiwanand Korea) were said to be at this stage. At stage 4 of the IDP, net outward investmentbecame positive with production being multinationalized. Most developed countrieswere at this stage. In the final stage 5, a convergence of outward and inward investmentflows took place as the result of the shift from advantages based more on factorendownment to those based on internalizing international markets.

Research on Third World (including Asian) multinationals had given general supportto the IDP concept (Dunning, 1986; Tolentino, 1993; Dunning and Narula, 1996; Lall, 1996).Dunning and Narula (1996) acknowledged that the specific IDP pattern of a country mightvary depending on country factors, such as resource endownment, home market size,industrialization strategy, government policy and the organization of economic activities.Revisiting the TWMNEs, Dunning et al. (1998) found that the second wave of TWMNEs was different from the first wave described by research in the early 1980s(e.g. Lall, 1983; Wells, 1983; Kumar and McLeod, 1981). While the first wave firms werefrom developing countries, the second wave consisted mainly of East Asian NICs.

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The MNEs from these countries had improved and augmented ownership advantages(e.g. innovatory capabilities) and made more strategic seeking FDI (for technology andmarketing) in advanced industrial countries via higher equity and control modes (e.g. Mand A). These outward investment activities were fostered by economic liberalization,

greater export and international orientation and the supportive role of governments. Theauthors argued that the second wave was consistent with the IDP explanation (stage 3)and represented an intermediate stage between the first wave of TWMNEs andconventional (Western) MNEs. Differences in the pattern of the IDP between Taiwan andSouth Korea were also reported by the authors. While generally supporting the IDPconcept, Lall (1996) stated that it should be extended and modified to take into account thedifferent sub-patterns of countries. The IDP concept remained vague about the preciserelationships between the underlying advantages (factors) and the pattern of inward andoutward FDI or stage of IDP (Hoesel, 1999). The macro nature of most IDP studies wouldhave contributed to this knowledge gap. The precise nature of the ownership specificadvantages of the Asian MNEs from NICs remained unclear and how different were theyfrom MNEs from countries less developed than the NICs? More research is needed in thisarea. This research will examine at the micro or firm’s level the characteristics of MNEsfrom a fast developing country, Malaysia, and one NIC, Taiwan. The aim is to shed furtherlight on these Asian MNEs, particularly within the IDP perspective.

A similar concept to the IDP was one that related the internationalization of firms tothe distinct patterns of national development based on the level of economicdevelopment, resource, size of domestic market and development path pursued(Tolentino, 2000; Cantwell, 1997). An earlier model for explaining the dynamic natureof international trade and investment was the Product Life Cycle model (Vernon, 1966,1979). This model hypothesized that new products were introduced and produced indeveloped or high income countries. With product maturity and standardization, theproduction location moved to less developed countries to take advantage of lower

labour cost. This model had also been applied to TWMNEs (Wells, 1983, 1986) but hadlost its appeal as innovations were originating from countries other than the homecountry in the MNE network. Also, the model did not apply to FDI which wereresource-based, efficiency-seeking and strategic asset-seeking. However, the ProductLife Cycle was still useful in explaining MNEs from developing countries that investedin other less developed countries.

The dynamic process of internationalization of individual firms could be explainedby the Uppsala model (Johanson and Weidersheim-Paul, 1975; Johanson and Vahlne,1977). This model of gradual incremental steps to international business expansionwas based on a series of incremental decisions, whose successive steps of increasinglyhigher commitments were based on knowledge acquisition and learning about theforeign market. The steps of foreign activities started with export to a country via

independent representative/agent, followed by the establishment of sales subsidiaryand eventually production in the host country. The internationalization of the firmacross many foreign markets was related to psychic distance (in terms of differences inlanguage, education, business practices, culture and industrial development). Initialentry was to a foreign market that was closer in terms of psychic distance, followed bysubsequent entries in markets with greater psychic distances. In terms of entry mode,the incremental expansion of market commitment meant that the initial entry wastypically some form of low commitment mode (e.g. minority JV) and followed by


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progressively higher levels of commitment (e.g. majority JV and wholly ownedsubsidiary). Similarly, commitment in terms of the level of ownership in differentmarkets was correlated with their psychic distance. The Uppsala model had receivedgeneral support in empirical research (Welch and Loustarinen, 1988; Davidson, 1980,

1983; Erramilli et al., 1999) and its largely intuitive nature and evolutionary learningperspective made it attractive as an explanatory model.

A related view in terms of learning was that TWMNEs built up their advantagesthrough the accumulation of technology and skills. Lall (1983) viewed this in terms of the localization and adaptation of technology to suit local markets by TWMNEs.Tolentino (1993) emphasized the accumulation of technological competence in theexpansion of firms from developing countries. This view was consistent with theresource-based view of building competitive advantage in strategic management.Pananond and Zeithaml (1998) found that the accumulation of knowledge andcompetence (particularly its knowledge of developing markets and not so much itstechnology) by the CP Group in Thailand was the key to its internationalization.Differences between the CP Group and Western MNEs were observed by Pananondand Zeithaml in their research. Mathews (2002, 2006) postulated that emerging firmscould achieve accelerated internationalization via leverage of their contractual linkageswith other foreign firms to acquire resources and learning new capabilities.He indicated that this explanation complemented the OLI framework and could beused to explain the rise of such latecomer firms which he dubbed as “Dragonmultinationals”.

The above concepts and theories provided understanding and explanation of theinternationalization of MNEs from NICs and developing countries. However, bythemselves, they were by no means complete explanation of MNEs, particularly AsianMNEs. The TWMNEs and Asian MNEs did exhibit characteristics, motivations andinternationalization paths that varied from those of Western MNEs from developed

countries. These were not fully explained by extant theories of MNEs. Li (2003)contended that extant MNEs theories needed to be modified and enhanced to explainall MNEs, including Asian MNEs.

Extant theories on internationalization had overlooked the active role played bythe state and neglected the institutional or contextual perspective in theinternationalization of Asian firms (Yeung, 1999; Zutshi and Gibbons, 1998). In theAsian context, the state often played a direct and active role in the internationalization of its MNEs. For example, the Singapore government played a key and direct role in thepromotion of outward FDI, particularly from the early 1990s in its regionalizationprograms (Pang, 1995; Tan, 1995; ESCAP/UNCTD, 1997). The state assumed the role of entrepreneur by actively opening up overseas business opportunities and setting upinstitutional frameworks (e.g. growth triangles, industrial parks in foreign countries) for

Singaporean firms to tap. Government linked corporations were used to pushregionalization activities either on their own or in partnerships with other firms. InMalaysia, the government took a very active role in promoting the internationalizationof Malaysian firms. Investment promotion missions abroad were organized andoften lead by the Prime Minister. The government provided incentives including taxabatement in 1991 and subsequently full tax exemption in 1995 for income earnedoverseas and remitted back to Malaysia. An overseas investment guaranteeprograms was instituted. The government’s role could work the other way too.

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To mitigate the impact of the effects of the 1997 Asian financial crisis, the Malaysiangovernment even “instructed” firms to defer non-essential overseas investment.In Taiwan, government policy had been to target strategic industries (e.g. computerinformation industry) and to encourage development and internationalization of

Taiwanese industries. The Taiwan government did assist firms in theirinternationalization activities, but for political reasons imposed constraints onTaiwanese FDI to China. Restrictions on travel and direct investments (particularlyby stock market listed companies) to China led many Taiwanese firms (including oursample firms) to invest in China via third countries. The government even initiated a “gosouth” policy in 1993 to encourage Taiwanese firms to diversify their investments awayfrom China towards Southeast Asia. In the Asian context, the state had played a veryactive and direct role in promoting the internationalization of its national firms. Thisdiffered from the western context where the role of the state was benign and indirect.

There was a need to examine Asian MNEs within the context of its institutionalas well as socio-cultural embeddedness. While national cultural characteristics ordifferences were investigated and found to have influences on different aspects of internationalization in Western MNEs (Johanson and Vahlne, 1977; Kogut and Singh,1988; Shane, 1994; Barkema and Vermeulen, 1997), these cultural factors were essentialin explaining Asian internationalization. Asian (or more specifically Chinese)internationalization tended to be organized through social and ethnic networks.The “Spirit of Chinese Capitalism” (Redding, 1990) with its sets of values and beliefsunderpinned the way Chinese business and cross border operations were conducted(Yeung and Olds, 2000). Personal relationships and networks (Chen, 1995; Hamilton,1996; Luo, 2000) formed the basis of the internationalization of Chinese and Asianfirms. Hence, the internationalization of Asian MNEs needed to be seen in itscontextual embeddedness (both institutional and cultural). It was imperative tocombine these contextual perspectives with the economic perspective normally used

to explain the internationalization of Western MNEs. This research had endeavouredto examine these characteristics and their role in the internationalization of Malaysian,Singaporean and Taiwanese firms within the context of IDP and other explanations of MNEs and incorporate them into specific propositions for research.

Hence, more empirical studies on Asian MNEs will be required to provide furtherdata on the applicability of extant theories on the internationalization of MNEs fromAsian countries at different levels of development. Hoesel (1999, p. 35) stated that“What is seriously lacking at present, are new empirical findings that will enable us tomake theoretical statements and hypotheses more concrete”. Towards this end, thispaper provided further empirical data on two Asian countries at different developmentlevels, namely, Taiwan (a NIC) and Malaysia (a fast developing country). This paperhas made an empirical contribution with such comparative data. Based on these

exploratory findings, propositions and hypotheses will be developed for more rigorousresearch investigation.

Research methodolgyA case study approach was utilized for this exploratory study. This approach was usedto collect comprehensive and holistic data (Yin, 1994; Eisenhardt, 1989) about firmswhich had internationalized their operations over time. This will provide data for moreextensive subsequent research and testing of propositions developed from this


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exploratory study. The focus here was on MNEs from Taiwan and Malaysia, countriesat different level of development in line with the stages of the IDP. The data wasprimarily drawn from field interviews with the CEOs or top executives responsible forthe international operations of the firm at the home country in Taiwan and Malaysia.

As our focus was on the internationalization and strategies of the parent firms,overseas subsidiaries were not interviewed. All interviews were taped, transcribed,coded, checked and analyzed. In addition to interviews, annual reports, prospectus,presentation to security analysts and bankers, news releases and other publicationswere requested and collected from the firms visited. Data from other published sources,including published materials in business and professional periodicals, journals andinternet web sites, were used to supplement the primary material. This use of datafrom various sources will also allow us to cross check and verify data and to ensurevalidity. Case notes were prepared, tabulated and analyzed for each case firm. Theevidence was examined case by case for replicative effects. Across-case analysis todetect similarities and differences were undertaken using various tabular displays(along the lines indicated by Miles and Huberman, 1994) of data by case firms, bycountry, by industry along such dimensions under study such as internationalizationspread, timing, motives, entry strategies, networks, etc. These results were alsocompared with findings from published literature on Western and Asian MNEs.Summary tables of the case firms were presented in the Appendix for discussion here.

This study focussed on the internationalization of firms from Taiwan and Malaysiain the textile and electronics industries. These two industries were among the mostinternationalized sectors in the two countries and would have substantial number of firms that had overseas operations to allow us to study their internationalization.The use of the two industries would also allow for comparative analysis by industrialsectors, which share some similarities (e.g. use of OEM strategy) and differences(e.g. different technological levels). Two electronics firms and two textile firms from

Malaysia and Taiwan were used for this exploratory study. These firms requestedanonymity and confidentiality as a condition of participation and were accordinglydisguised in the paper. The reluctance of firms to participate in the research wasencountered by the researchers and is a common problem of research in Asiancountries.

Case study findings and discussionThe findings on internationalization characteristics and strategies of our case studiesare presented and discussed henceforth. The discussion will seek out any differences ininternationalization strategies of the two countries at different levels of developmentusing the IDP perspective. These findings are also discussed in relation to priorresearch findings on other Asian MNEs as well as Western MNEs and research

propositions suggested.

Size and extent of internationalizationOur case firms varied in size from small (US$26m in sales) to large (US$900m).See Appendix for summary of all case studies. As expected, from the IDP, theTaiwanese sample firms were larger than the Malaysian firms in both the electronicsand textile sectors. Compared to Western MNEs from developed countries, our casefirms were much smaller in size. They were representative of MNEs in general from

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Taiwan and Malaysia reported in the literature. In Asia, small- and medium-sized firmsplayed a key role in internationalization. The prevalence of small- and medium-sizedfirms investing in China and Southeast Asia was a characteristic feature of Taiwan(Chen et al., 1995), and Malaysia’s (Rogayah, 1999) FDI. For example, during 1986-1991,

about 90 per cent of Taiwanese projects in Southeast Asia were estimated to beundertaken by small and medium enterprise’s (SME’s) (Chen, 1998).

The IDP suggested that multinationalization would be greater at higher stages of the IDP. Our case firms had fewer overseas locations in terms of international spread(as indicated in the Appendix tables) than western MNEs. The case firms tended toconcentrate in the Asian region. The Taiwanese textile firm had eight locations (inAsian countries and Canada), while the Malaysian firm had one (Sri Lanka). Inelectronics, the Taiwanese firm had operations in Thailand, China, UK and Mexico,while the Malaysian firm invested in China and Australia. Hence, the Taiwanese firmswere more internationalized than the Malaysian firms, which seemed consistent withthe IDP thesis. Our case firms while concentrating in the Asian region had begun tomove to the developed countries. This was particularly so for our Taiwanese case firmswith investments in the USA and Europe for strategic asset seeking motives. This wasalso observed by Hoesel (1999) for second wave NIC investors. However, this was trueof our Malaysian firm as well. It was interesting to note the early foray into Australiaby our Malaysian electronics firm for strategic technology acquisition. But this wassubsequently divested after two years of trial, probably indicating the lack of international experience for a firm at stage 2 of the IDP.

The size of our case firms, as well as that of Asian MNEs in general, had aconstraining effect on the geographical spread of their internationalization. Withlimited resources, such firms tended to extend their current products and technologiesto nearby countries with similar economic and cultural environments. In addition,these countries provided locational advantages for our sample firms. The choice of

proximate country in the initial stages of internationalization was consistent with theinternationalization processes of the Uppsala School (Johanson and Vahlne, 1977).This was also similar to patterns of internationalization by SMEs in western developedcountries as well (Bilkey and Tesar, 1977; Cavusgil, 1980; Holmlund and Kock, 1998;Riedel, 1998). Among the small Taiwanese MNEs in general, the spread was usuallybi-national rather than multinational (Chen, 1998).

Our case study firms were generally late movers, or late comers, ininternationalization. In the textile sector, the Taiwanese textile firm started early inforeign production in the mid 1960s, but only stepped up overseas activities during thelate 1980s in other Asian countries followed by Canada in 1995. The Malaysian textilefirm went overseas only in 1993. In electronics, the setting up of overseasmanufacturing by our Taiwanese firm came only in 1991, followed by three

investments in 1995, 1997 and 1998. The Malaysian electronics firm went to China in1995 followed by an Australian acquisition in the same year.

The longitudinal spread of our case firms was reflective of Asian MNEs fromdeveloping countries in general, with firms from the NICs ahead of the lesser developedAsian countries, indicating some support for the IDP. However, the competitive catch-upprocesses became very important for Asian MNEs and some might be able to leap frogstages in the internationalization process (Young et al., 1996). Oh et al. (1998) in theirstudy of globalization of a Korean firm, Daewoo Motor Company, indicated that Asian


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MNEs must simultaneously pursue both technological built up and internationalizationat the same time to compete effectively in the global market. Mathews (2002, 2006)postulated that late comer firms could be successful in globalization by learning andbuilding capabilities quickly and successfully. Taiwanese and Malaysian MNEs had

been late comers in globalization. While our case firms had gone international since the1960s, the big impetus for internationalization only occurred during the late 1980s andearly 1990s, though they seemed to have moved rapidly since then in an attempt toacquire overseas manufacturing capabilities and other strategic assets, particularly indeveloped countries. This might also enhance their competitiveness at the same time.However, this needed verification. Hence, the specific proposition for further research:

P1. Emerging Asian MNEs that are latecomers can accelerate their growth andprogress in the IDP by more rapid overseas expansion, particularly in moredeveloped countries to augment their strategic assets.

Motivation and strategic advantages for internationalizationThe motivations for the textiles firms in our study were basically the search overseasfor low cost bases and quotas for textile exports (see tables in Appendix). TheTaiwanese textile firms shifted operations to Southeast Asian countries initially, andthen to China. In addition, it invested in a joint-venture in Canada to producefeedstock (ethylene glycol) – a backward integrative motive to ensure raw materialssupply. It also moved downstream in departmental stores in Taiwan. This move togreater vertical control of its value chain and to capitalize on internalizationadvantages was indicative of the move along the IDP and was found in the secondwave Asian MNEs (Dunning et al., 1998). The Malaysian textile firm remained in itsoriginal posture as an OEM supplier, a reflection of its stage 2 in the IDP. Inelectronics, our Taiwanese firm extended their OEM-base strategy of seeking

low-cost manufacturing sites in Asia. They also invested in the USA and Europe forstrategic reasons and to position themselves for the NAFTA and European markets.These locations also served as windows for new technology acquisition in the USAand Europe. The Malaysian electronics firm went to China and Australia mainly formarket and R&D reasons. Technology acquisition was its motive in the Australianinvestment, but this move was very much ahead of its time in internationalizationand was disposed off two years later. Time and learning was probably required forsuch a move further along the IDP towards stage 3 for the Malaysian firm.

The internationalization of our Taiwanese and Malaysian case firms as well asthat of other Asian MNEs generally lay in their search for low-cost labour andmarket expansion. This differed from those of Western MNEs that were based onefficiency seeking motives of optimising their intangible assets and other

ownership advantages. In the textile and electronics industries under study here,it could be argued that the motivation for the internationalization of the Asianfi rm s r es em bl ed t ha t o f t he ir w es te rn c ou nt er pa rt s i n t he ir i ni ti alinternationalization process as the product life cycle (Vernon, 1966, 1979) andIDP (Dunning, 1993) theses would suggest. Both these theses pointed to thelocation based advantages (such as low cost and protectionist factors) asmotivators of the international expansion of production in the textile andelectronics industries. There were similarities in these location based motivators

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f or A si an M NE s an d We st ern M NE s d ur in g t he ir e ar ly s ta ge s o f internationalization as indicated by the IDP.

Asian MNEs had different ownership specific advantages (e.g. adaptive technology,better market knowledge) that allowed them to compete with western MNEs in the

developingeconomies. The ownership specific advantagesrequired for these Asian MNEsto compete in the developed countries would be different. Were our sample firmsdeveloping these capabilities? The competitive advantage of our case firms in the textileindustry was based on low cost input largely for OEM manufacture. For example, thecompetitive advantage of our Malaysian textile firm was based on a cost and exportorientation and a reputation for quality and reliability built over 30 years of operations inMalaysia. Its production in Malaysia and Sri Lanka were mainly for OEM export toEuropean and North Americamarkets. To reduce dependence on textiles, it haddiversifiedinto trading, retailing and property development. The Taiwanese textile firm, anintegrated textile company, focused its competitive advantage in terms of using low costproduction. It integrated backwards to ensure cheap and steady sources of raw materials,including several joint ventures to produce textile and related materials such as pureterephthalic acid, nylon fibre, polyesters and industrialgases andonein Canada to produceethylene glycol as feedstock for fibre. The firm had moved along the textile value chain tointernalize its ownership advantage as well as to acquire technological knowledge from itsforeign partners. This was different from the Malaysian textile firm which did not seek toaugment such competitive advantages. The Taiwanese company was also diversifyingoutside textile into telecommunications and semiconductors and was becoming aconglomerate multinational, which would erode its original sources of competitiveadvantage as the firm moved away from its core competencies in the textile sector.

The internationalization advantage of our electronics case firms in Taiwan wasinitially based on strategies of OEM manufacturing. Initially this firm capitalized ondomestic low cost and flexibility to supply components. When this source of

competitive advantage was eroded by rising domestic labour cost, it sought tomaintain its competitive advantage by shifting production to neighbouring low costcountries. Our Taiwanese case firm, a manufacturer of monitors andtelecommunication products, moved production of monitors to its venture inThailand in 1991 and China in 1995. Later its overseas expansion spread to Mexico andthe UK. The strategic positioning of the Mexican operation was to maximize itslocational advantages (cost and proximity to the USA). It was also done for strategicreasons, including keeping tap on and acquiring technology development in the USAand to cater to the NAFTA markets. The UK location provided both an entry into theEuropean market and a European base for its technology monitoring and globallogistics network. The investments in the developed countries were to seek andaccumulate new competitive capabilities and advantages. The company was

emphasising R&D in product development for own design manufacturing (ODM),developing its own brand identity and had recently achieved some very innovativeproducts in colour monitor and LCD displays which had been recognized by theindustry. Hence, the company was trying to extend its competitive ownershipadvantage beyond a low cost basis to one of greater differentiation based oninnovation, distribution and reputation. This was a reflection of moving upwards inthe IDP. On the other hand, our Malaysian electronics firm relied on its technicalexpertise to tailor electronics displays to host market requirements. The company was


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conscious of its need for R&D and acquired an Australian firm for its technology andused its China’s venture to tap technology developed and tailored to the Chinesemarket. It claimed that its adaptive technology could match the best in the world(evident from its ability to win large projects in Southeast Asia through international

competition), and yet doing so at competitive prices. It had diversified into relatedvalue adding businesses such as system integration of telecommunication equipmentand audio-visual multi-media. Hence, the Malaysian electronics firm was much lesssophisticated than the Taiwanese firm in its competencies and relied on its skills toadapt existing technology to local market conditions. It probably needed to acquirefurther capabilities from developed countries to progress further in its IDP.

All our sample firms shared several basic competitive advantages and traits,though there were some variations, particularly by country. The majority of firmsrelied on advantages based on cost, responsiveness, and knowledge of the local market.Similar findings on other Asian MNEs had been reported by Luo (1999, 1998), Yeung(1994, 1997), Li (1994, 1998) and Chen (1998). Differences in their ownership advantageswere detected among the sample firms from the two countries in both industry sectors.In the textile sector, while all firms relied on cost-based advantages, the Taiwanesefirm was more internationalized and had moved towards greater vertical control of itsvalue chain activities, particularly in an advanced country where technology intensiveprocesses were required for large-scale input manufacture. While the Taiwanese firmhad advanced technologically, the Malaysian textile firm was largely confined to itscost-based OEM manufacture. Similarly in the electronics sector, the Taiwanese firmhad upgraded to ODM, own brands and developing logistics networks (thetransaction-type ownership advantages of Dunning, 1993) even in the developedcountries. There was some preliminary indication that such FDI in developed countriescould have a positive effect on the firm’s value (Aybar and Thirunavunukkarsu, 2005).Our Malaysian electronics firm was occupied with adaptation of technology for Asian

markets, including cooperating with Chinese academics and scientists for technologyapplications and adaptations. Its acquisition in Australia for technology purposes wasan attempt to move beyond its current situation, but was not successful and hencediscontinued. The characteristics of our Malaysian firms were generally consistentwith the first wave (stage 2) of the IDP, while the Taiwanese firms reflective of thesecond wave (stage 3). To become more competitive globally, our more forward lookingTaiwanese case firms in stage 3 had moved to the developed countries to seektechnology, strategic assets and markets, but their advantages were still different fromthose of more advanced western MNEs which were largely based on intangible assets(e.g. technological capabilities, organizational skills). Nevertheless, they wereaugmenting their competitive advantages and moving towards resembling more likeWestern MNEs. However, it also indicated that the move to advanced countries was to

seek and acquire additional ownership advantages, rather than to exploit existingownership advantages as the basis of internationalization as postulated in OLIexplanation. The above will need further substantiation and has led to the followingproposition for further research:

P2. Emerging Asian MNEs internationalize into developed countries to acquirenew strategic assets and capabilities rather than internationalize relying ontheir current strategic assets and capabilities. Such Asian MNEs will be morecompetitive than those that have not internationalized in this manner.

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Networks and alliancesWhile the IDP thesis did not specifically cover ethnic networks, the role of suchnetworks was critical in the growth of Asian MNEs. The internationalization of oursample firms was strongly aided by their ethnic networks in the Asian region. All our

case study firms reported using their ethnic and other networks in their foreignoperations (see tables in Appendix). A good case example was our Taiwanese textilefirm. It went to Singapore based on ethnic connection in 1963 and had since developedan extensive ethnic network in Asia (Hong Kong, Philippines, Thailand, Malaysia,Indonesia and China) where it had operations. In addition, it subsequently went intofour joint ventures with Western MNEs in its upstream integrative ventures to protectits sources of supply. The Malaysian textile firm was linked to a large network of suppliers and related businesses in Asian countries which it had closely associatedwith over a long period of time.

Similarly in the electronics firms in our sample, all had ethnic networks in SoutheastAsia and China that they utilized for their overseas operations (see Appendix tables).For example, our Taiwanese firm set up a venture in Thailand as the result of association with a related Taiwanese partner in another venture (shoe manufacturing)that had operations there. Ethnic connection facilitated its operations in China. OurMalaysian electronics firm had ethnic partners in research and development in Chinaand an extensive network of Japanese and other suppliers. In the electronics firms inour sample, the use of strategic alliances (which involved both business and ethnicpartners) was also prevalent. Our Taiwanese case firm had elaborate sub-contractingnetworks and put in resources to build extensive global logistics networks and JIThubs to ensure efficient and smooth supply and distribution. It was apparent that ourelectronics firm, as well as other Taiwanese firms, had realized the need to buildefficient global logistics and supply networks to complement the competitiveadvantage their ethnic links and low cost production. Hence, a part of the network was

not necessarily ethnic-based, but based on industry relationships. The presence of anelaborate global network of suppliers and sub-contractors as part of the industryglobal OEM framework facilitated this. Our Taiwanese firm built up elaborate logisticsnetworks in Europe. The Malaysian electronics firm in our sample made greaterutilization of strategic alliances, licensing and partnerships with companies intechnologically advanced countries.

The utilization and role of ethnic networks in our sample firms was not unlike thatof other Asian MNEs reported in the literature (Yeung, 1997; Kao, 1993; Luo, 2000).These ethnic networks were characteristic features of Chinese businesses and theirinternationalization in Asia (East Asia Analytical Unit, 1995; Hamilton, 1996;Weidenbaum and Hughes, 1996). Cooperative activities in such networks were basedon personal relationships (guanxi) which were usually ethnically linked. Their similar

cultural attitudes and heritage fostered the development of trust and cooperativebehaviour. These ethnic networks and ties provided knowledge and access to localmarkets, distribution systems, connections around local bureaucracy and businesssystems, as well as potential business partners and associates and even financing. InSoutheast Asia, overseas Chinese, who shared common dialects with Taiwanese andMalaysian Chinese investors (our case firms were Chinese owned and controlled),provided valuable links to form local networks for their businesses (Chen and Liu,1998; Sim and Pandian, 2002, 2003). Yeung (1998) also illustrated that economic


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synergy was embedded in the complex business networks among the transnationalenterprises from Malaysia and Singapore. Ethnic and cultural ties also resulted in thesurge of Taiwanese and Southeast Asian investments and operations in China,particularly in Fujian and Guangdong provinces (Lu and Zhu, 1995; Chia, 1996). Lin

(1996) indicated that the average size of Taiwanese investments in China was muchsmaller than that in Southeast Asia because the ethnic network effectively facilitatedeasier entry. The attributes of manufacturing network structure had been empiricallylinked to the degree of internationalization in the Taiwanese electronics and textileindustries (Fang and Hsiao, 1999). Chen (1999) found that manufacturing strategies of networks in the textile industry had enhanced the competitive determinants of flexibility, delivery and cost for the SMEs in Taiwan. The existence of such networkshad been linked to the competitive advantage and performance of Asian firms (Parkand Luo, 2001; Tsang, 1998; Lee et al., 2001). The networks allowed these firms toleverage their linkages and acquire technological and market knowledge to becomemore competitive (Hitt et al., 2002; Ordonez de Pablos, 2005). However, the explicit

connection between such networks and competitive advantage and performanceneeded further clarification and research. As the above empirical research had focussedon Chinese firms, will this connection hold for firms in countries like Korea and Japan?These countries were non-Chinese but had Confucian origins. Guanxi concepts inKorea (inmak) and Japan (kankei) had subtle differences compared to those of theChinese (Hitt et al., 2002). For example, family ties were most important in the Chinesecontext and least important in the Japanese context, while Korean relationshipsemphasized geographical ties. Trust was most important in forming Japanesenetworks but less so in Chinese or Korean networks (Hitt et al., 2002; Fukuyama, 1995).So will the impact of networks be the same for such contexts which are not Chinese buthad Confucian origins? This needs further investigation.

It could be argued that our sample firms and other Asian MNEs were no differentfrom Western MNEs that had made use of extensive global networks, particularly inthe textile and electronics industries. Organizational networks had been quiteextensively covered in the literature on organizational dynamics (Nohria and Eccles,1992; Pfeffer and Salancik, 1978; Oliver, 1990). Such relationships were similar to theconcept of social capital (Coleman, 1988; Fukuyama, 1995) which had gainedpopularity in the west. In a general sense, it had been defined as “the ability of people towork together for common purposes in groups and organizations” (Fukuyama, 1995,p. 10). Social capital consisted essentially of relationships and network structure thatcould provide value (Adler and Kwon, 2002). Hence, guanxi could be seen as a form of social capital and in that general sense not unique. Differences between guanxi and thewestern concept of social capital and relationship network had been explored and

discussed (Hitt et al., 2002; Lee et al., 2001; Ordonez de Pablos, 2005). However, debateas to whether guanxi was unique to the Chinese persisted (Ordonez de Pablos, 2005).Guanxi type relationship might be universal. What could vary from culture context toculture context could be the type of particularistic ties and the intensity of application(Tsui and Farh, 1997; Park and Luo, 2001). While social capital is a relatively recentconcept, guanxi relationships had been in use in Asian countries for a long time(Hitt et al., 2002; Wee and Lan, 1998). Hence, it would be instructive to study and clarifythe specific impact of network relationships in different cultural and country contexts.

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The global textile and electronics industries had well established patterns of networks of international OEM suppliers and contractors. Asian OEM suppliers,including our case firms, were usually part of this network (Ernst, 2000). Even in theinternationalization literature on Western SMEs, recent attention had also shifted to

using networks to examine and explain their internationalization (Chetty and Holm,2000; Holmlund and Kock, 1998; Tavakoli and McKiernan, 1999; Johanson andMattsson, 1988; Coviello and McAuley, 1999). Dunning (1988) had also indicated theneed to include the influence of alliance network in MNE explanations. But thesewestern networks were of a business type and not linked to the social context.Networks of Asian firms, including our sample case firms, were largely based on ethnicand cultural foundations, threading similar cultural values and attitudes in the pursuitof businesses. They were embedded in the social and cultural framework or context of these largely Chinese businesses. All our sample firms were Chinese owned andmanaged. Hence, the ethnic and social embeddedness of networks and relationships(guanxi) was a distinguishing feature of Chinese based Asian MNEs and not wellcovered by conventional explanations of MNEs. Our proposition was that such

contexts should be explicitly taken into account, particularly in the IDP perspective.Further, it could be asked whether Asian MNEs, which were not Chinese or Confucianbased, had and benefited from such ethnic networks. Would the same effects applyto Asian firms of Indian, Malay, Indonesian and other origins that were notChinese or Confucian? The applicability of ethnic networks relationships in theinternationalization of these firms should be investigated. Based on the abovediscussion of networks, the following propositions for further research can be stated as:

P3. The greater the extent and depth of ethic networks the greater the competitiveadvantage for Asian firms in their internationalization strategy.

P4. Ethnic networks are more critical to and lead to greater internationalization of Asian firms than non-Asian firms.

P5. Ethnic networks are more critical to and lead to greater internationalization of Chinese (or/and Confucian based) Asian firms than those that are not.

ConclusionThis paper made an empirical contribution with comparative data on theinternationalization strategies of Asian firms from two countries at different levelsof development. The internationalization strategies of our Taiwanese and Malaysiancase firms were founded on cost-based competencies and other location-basedadvantages, brought together by an extensive web of ethnic networks. Differencesbetween our Taiwanese and Malaysian case firms were found and discussed.In general, the Taiwanese firms were more internationalized (at stage 3 of IDP) than theMalaysian firms (stage 2). They had more developed and elaborate productionnetworks and greater ODM/OBM (own brand manufacturing) participation than theMalaysian firms. Increasingly, these Taiwanese firms were extending beyond theircurrent competitive advantages to those that capitalized on differentiation benefits,such as technology, innovative product features and value. Our case study firms inthe electronics sector were particularly active here. Our more progressive samplefirms were moving outside their Asian bases to North America and Europe.This was to position themselves strategically for new technologies and markets.


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The Malaysian case firms were less active in all these areas and indicated a lower levelof internationalization and competitiveness. Hence, they were more reflective of thefirst wave investors rather than the second wave of firms described by Dunning et al.(1998). As our case firms evolved and grew, particular attention needed to be paid to

learning and accumulating new knowledge and expertise, particularly from developedcountries. The need to develop and leverage new capabilities had become critical forAsian MNEs in an increasingly global market (Pananond and Zeithaml, 1998; Tsang,1999; Mathews, 2006).

The trend towards differentiation strategies based on technological and othercapabilities by our sample firms indicated a move towards the ownership (or firm)specific advantages specified by the IDP thesis. The findings here provided somesupport for the IDP and the IDP stages of Malaysia and Taiwan. Whether thefuture strategies of our sample firms (and that of other Asian MNEs) will result in themresembling Western MNEs remained to be seen and warrant further research anddiscourse focussing on the propositions set out in this paper. There were otherobservable differences between our sample Asian firms and Western MNEs. Inparticular, our findings indicated the key role government and ethnic network andrelationships played in their internationalization. These elements had been neglected inconventional MNE theories. Hence, our propositions for further research had beensuggested. Our findings here reinforced the basic proposition that the social andinstitutional framework was a distinguishing feature of our Chinese firms, andprobably other Asian MNEs, and needed to be verified by further empirical research.

This paper provided an exploratory and broad examination and discussion of theinternationalization characteristics and strategies of Taiwanese and Malaysian MNEs.It had drawn on specifically from a study of four case studies, matched by industry.The empirical base had been limited and the use of case studies method here had itsshortcomings (e.g. in terms of sample size, generalizations, etc). Our research did not

capture the operational strategies at the level of the subsidiary or JV. The findings wereexploratory and formed the basis for research propositions presented. As indicatedthere existed a wide empirical research gap on Asian as well as Taiwanese andMalaysian MNEs. These need to be filled to provide further evidence and answers tothe issues raised in the paper. Further, research on Asian MNEs from countries of different levels of economic development could fill some of these research gaps andprovide a more comprehensive test of the IDP and other MNE theories. Other potentialareas of research could include longitudinal studies of Asian MNEs to examinewhether they will resemble Western MNEs as they evolve, the impact of ethnicnetworks on the performance of Asian MNEs of both Chinese and non-Chinese origins,and the role of the state in internationalization strategies. Research into these andrelated areas would provide a better and more comprehensive understanding of Asian

MNEs, as well as MNEs in general.

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Appendix

Characteristics Electronics firm Textile firm

Product Industrial electronics products Textile, garments, and propertySize (1998 sales) US$26m US$90mOverseas production locationsand year established

China (1995)Australia (1995-closed 1997)

Sri Lanka (1993)

Entry strategy WOSAcquisition

WOS

Key motives Market expansionR&D

Low costQuota

Strategic advantages and traits Technical expertiseCompetitive pricingRelated diversification

Cost-basedDiversification to property, etcReputation and quality

Networks and alliances R&D partnersProduct principals

Member of regional grouping JVs and established customerslinks

Future plans Looking for partners in China;aim for 50 per cent overseas

businessRelated diversification

Another factory in Sri Lanka;overseas bases in Mexico and

middle east; high valuesegments; consolidate propertybusiness

Notes: mfg, manufacturing; WOS, wholly owned subsidiary; JV, joint venture

Table AI.Summary of Malaysiancase studies

Characteristics Electronics Firm Textile firm

Product MonitorsTelecommunication products

Integrated textile company

Size (1997/1998 sales) US$400m US$900m

Overseas production locationsand year established

Thailand (1991)China (1995)UK (1997)Mexico (1998)

S’pore (1963)P’pines (1986)Hong Kong (1986)Thailand (1987)Malaysia (1995)Canada (1995)Indonesia (1998)China (1998)

( continued )

Table AII.Summary of Taiwanesecase studies

IJOEM2,3

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Corresponding authorA.B. Sim can be contacted at: [email protected]

Characteristics Electronics Firm Textile firm

Entry strategy All WOS Mainly JVsWOS (China)

Key motives Low cost basesMarket expansionTax incentivesLocal content

Low cost basesSupply of materialsIntegration

Strategic advantages andtraits

Cost and OEM-based production,ODMR&D and logisticsEmphasis on market expansion

Cost-basedVertical integrationUnrelated diversificationEarly movers in overseas mfg(1963)

Networks and alliances Sub-contracting and outsourcing(ethnic network)Logistics network

JVs (ethnic network)Strategic alliancesLong-term contracting

Future plans Another factory in ChinaInvest in global service network

Increase FDI in ChinaExpand unrelated diversification

Notes: mfg, manufacturing; P’pines, philippines; S’pore, Singapore; WOS, wholly owned subsidiary; JV, joint venture Table AII.


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an exploratory study of internationalization strategies of malaysian and taiwanese firms

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