10th Venice Summer Institute GLOBALISATION, TRADE, FDIAND THE MULTINATIONAL FIRM to be held on 18 19 July 2011 on the island of San Servolo in the Bay of Venice, Italy Fifty Years of International Business Theoryand Beyond Alan M. Rugman, Alain Verbekeand Quyen T.K. Nguyen Venice Summer Institute 18 - 23 July 2011 CESifo, the International Platform of the Ifo Institute of Economic Research and the Center for Economic Studies of Ludwig-Maximilians University 1 FIFTY YEARS OF INTERNATIONAL BUSINESS THEORYAND BEYOND Alan M. Rugman (Corresponding author) Professor of International Business Henley Business School, School of Management University of Reading Henley on Thames, Oxon, RG9 3AU, England E-mail: a.rugman@henley.reading.ac.uk Alain Verbeke Professor of Strategy and Global ManagementMcCaig Chair in Management Haskayne School of Business University of Calgary Quyen T.K. Nguyen Henley Business School, School of Management University of Reading Acknowledgements:wearepleasedtoacknowledgehelpfulcommentsfromtworeferees, andfromProfessorsPeterBuckley,MarkCasson,Michael-JoergOesterle,andJoachim Wolf. We also received helpful comments fromparticipants at seminars at the University of Leeds, York University and the University of Reading. Version: March 31, 2011 Accepted for publication in Management International Review , volume 51, 2011 2 ABSTRACT As the field of international business has matured, there have been shifts in the core unit ofanalysis.First,therewasanalysisatcountrylevel,usingnationalstatisticsontrade andforeigndirectinvestment(FDI).Next,thefocusshiftedtothemultinational enterprise (MNE) and the parents firm specific advantages (FSAs).Eventually the MNE was analysed as a network and the subsidiary became a unit of analysis.We untangle the last fiftyyears of international business theory using a classification by thesethreeunitsofanalysis.Thisisthecountry-specificadvantage(CSA)andfirm-specific advantage (FSA) matrix. Will this integrative framework continue to be useful in the future? We demonstrate that this is likely as the CSA/FSA matrix permits integration of potentially useful alternative units of analysis, including the broad region of the triad. Looking forward, we develop a new framework, visualized in two matrices, to show how distancereallymattersandhowFSAsfunctionininternationalbusiness.Keytothisare theconceptsofcompoundeddistanceandresourcerecombinationbarriersfacingMNEs when operating across national borders. Keywords:multinationalenterprises(MNEs);firmspecificadvantages(FSAs);country specificadvantages(CSAs);compoundeddistance;subsidiary;network;regions;resource recombination barriers; theory 3 INTRODUCTION In this paper, we examine the literature on international business (IB) over the last fifty years. Wedothisinthefirstthreesections.Inthesecondhalfofthepaper,wedevelopnew frameworks to analyze unresolved issues in the theoretical and empirical literature of IB that will require research in the future. As the field of IB has matured, there have been shifts in the core unit of analysis. In the pre-Hymer(1960)era,internationaleconomistsdominatedthefieldandfocusedonnational competitiveness at the country level, using national statistics on trade and foreign investment.Duringthe1970s,thefocusshiftedtoforeigndirectinvestmentbythemultinational enterprise (MNE) and the transfer across borders of its firm specific advantages (FSAs), both stand-alonecompetences(suchaspatentedR&Dknowledgeandbrandnames)andhigher-ordercapabilities.Asofthe1980s,moreattentionwasdevotedtotheMNEasa differentiatednetworkwiththeMNEsubsidiaryastheunitofanalysis.Inaddition,inside theMNE,substantialacademicworkwasperformedfocusingonentrepreneurialgrowthin specificcultural,economicandinstitutionalcontexts.Finally,anumberofstudiesfocused more on clusters and networks of independent companies.TheIBliteratureduringthepast50yearshasusedvariousunitsofanalysis.Mainstream neoclassicalinternationaleconomicsbuildsuponthestrongassumptionthatdifferencesin factor endowments across borders will lead to international transactions, whether transfers of capitalorgoods.Inotherwords,itisassumedthatthereisnotreallyanorganizational challengetobeaddressedincreatinganefficientsystemofinternationalexchange.Vernon (1966) and Dunning (1958) extend this work, but recognize the importance of firms in their pioneeringIBstudies,whichrepresentthefirststageofmodernIBanalysis.Vernons product life cycle framework, published in 1966, basically argue that the United States has a 4 technology-related, country specific advantage (CSA) embedded inUS owned multinational enterprises(MNEs).TheseUSparentfirmscreateminiaturereplicas(branchplants)in Canada and Western Europe such that technology would be transferred from the parent firm to these foreign subsidiaries. This leads to an indirect transfer of technology to host countries and to other benefits of foreign ownership. In the UK context, Dunning (1958) observes that theUKsubsidiariesofUSMNEsupgradethemacroeconomicinfrastructureasthey manufacture technologically intensive products and services; they upgrade UK jobs; they pay taxes;theyincreaseproductivityandotherwiseimprovetheCSAsoftheUnitedKingdom.Rugman (1980b) confirms this outcome in a Canadian context, with Canadian subsidiaries of US MNEs providing net economic benefits to Canada. Clearly,theunderlyingunitofanalysisintheworkbyVernon(1966),Dunning(1958)and Rugman (1980b) is the country factors, even though their analyses really focus on how these country factors interact with MNE activity as a conduit for their absorption at the micro-level in the home country, and subsequent diffusion/exploitation internationally.Hymer (1960), as the intellectual father of the second stage in modern IB studies, pioneered a fundamental change in theunit of analysis adopted inIB studies: he positions the MNE and its FSAs at the core of his analytical approach. Hymers great insight is his recognition of the MNEspossessionofFSAs,requiredtooffsettheliabilityofforeignness(LOF)when operatingabroad(Hymer,1960;Zaheer,1995).Unfortunately,Hymer(1960)exaggerates thepotentialofMNEstoexploittheirFSAsasmonopolistsbyexertingeffortstoclose marketsandexercisingexcessivemarketpower.Structuralmarketimperfectionsasaresult ofgovernmentregulationandMNEscreatingentrybarriers,ultimatelyattheexpenseof consumerwelfare,mayexistbutarenowlesscommon(DunningandRugman,1985).The realitytodayisthatfewMNEs,evenamongtheworldslargestones,actuallybenefitfrom 5 uncontestableanduncontestedmonopolies.Theabsenceofsuchmarketpoweris demonstratedbytherelativelyuncommonoccurrenceoftrulyglobalfirms,withabalanced distribution of their sales and assets across the triad of North America, Europe and Asia: few firmsappearabletoemulatetheirhomeregionsuccessinthehostregionsofthetriad (Rugman, 2005; Rugman and Verbeke, 2004, 2008a,b,c). Theliabilityofforeignness,meaningtheimpactofvariousformsofdistance(cultural, economic,institutionalandgeographic),explainswhyMNEshavedifficultiesoperatingin foreignmarkets,especiallywhenfacingrivalsnothinderedbysuchdistance.TheUppsala modelofinternationalexpansionproposedbyJohansonandVahlne(1977)essentially providesthemirrorimageofHymersanalysis.TheUppsalamodelsuggeststhatthereare stages of internationalisation, whereby the potential benefits of exploiting FSAs abroad need to be weighted against the risks of operating in unknown foreign environments and the costs oflearningtodobusinessthere.Consequently,accordingtotheoriginal1977model,firms initiallyexpandinnearbygeographiccountriesthatmayhavesimilarCSAs.Asthefirm learns to overcome the LOF it then expands into more distant country markets, at which stage the unfamiliar cultural, economic, and political environment will be offset against the firms ability of recombining its FSAs with host country CSAs. RecentworkbyHennart(2009b)rethinksthenatureofsuchrecombinationsofFSAsand hostcountryCSAs,anddemonstratesthatinmanycasestheboundarybetweenCSAsand FSAsbecomessomewhatblurred.Indeed,ifsomeoftheCSAsleadingtointernational expansionareactuallynotfreelyaccessible,butaccessiscontrolledbyhostcountryactors (e.g.,closeddistributionnetworkspreventingsalestocustomersorlocalmonopolieson natural resources ownership and exploitation preventing purchasing these resources), then the 6 challengefortheMNEistodeveloprelationships,i.e.,atypeoflocationbound(LB)FSA with powerful local actors to open up access to the desired CSAs. We define LB FSAs later.TheUppsalamodelrepresentsoneintellectualapproachtoexplainMNEentrymode selection. Here the firm can choose to exploit its FSAs abroad, either through exporting, FDI withwhollyownedsubsidiaries,licensing,orinternationaljointventures.Inthisliterature, thecountryremainsasaco-unitofanalysis,alongwiththeMNE.However,thenatureof thisresearchplacesmoreemphasisonMNEstrategicmanagementprocessissuesandthe roles of managers in the parent firm. In the third stage of contemporary work in IB, the unit of analysis has become the subsidiary oftheMNEandthesubsidiarymanager.Theclearestexpressionofthisapproachcanbe found in Birkinshaw (1996, 1997, 2000).Refining work by Rugman and Bennett (1982), and Rugman(1983b)onworldproductmandatesinaCanadiancontext,Birkinshaw(1996)has developedtheconceptofsubsidiaryinitiatives,wherebythefocusisreallyoninnovative recombinationsofbothhomeandhostcountryCSAs,andtheFSAsheld(orbeingnewly developed)bytheMNEsunitsinthesecountries.Heobservesthatsuchinnovative recombinationscanultimatelygeneratenewtypesofFSAsacrosstheMNEnetworkand strengthen the MNEs overall competitive advantage. Insummary,overthelastfiftyyears,theliteratureofIBhasdevelopedfromasomewhat basic focus on CSAs and FSAs that are clearly separate and distinguishable from each other (Rugman, 1981) towards a more nuanced understanding of the linkages between them and the mannerinwhichMNEmanagersinthehomeandhosteconomieswillinteracttodevelop novelrecombinationsofhomeandhostCSAsandtheFSAsheldbyvariousMNEunits, dispersed across borders.Overall, the unit of analysis has shifted from the country-level, to theparentMNE,andnowincreasinglytothesubsidiarylevel,oftenwithafocusofthe 7 subsidiarysroleintheinternalMNEnetwork.Below,weexpandontheimplicationsof adopting alternative units of analysis in IB research. FROM COUNTRY LEVEL TO FIRM LEVEL ANALYSISSeveraltheoreticalapproacheshavebeenusedtoexplaintheMNEsstrategicinvestment motives,foreignentrymode,ownership,structuredecisionsandperformance.Thissection providesareflectivereviewandsynthesisoftheliteratureatfirmlevelandtheinteractions between country and firm level.Hymer (1960) explains why a firm engages in international operationsbybringingthefocusfromthecountryleveltothefirmlevel.Hymermoves towards an analysis of the MNE based upon industrial organization theories by showing that the MNE is an institution for international production rather than international exchange. He distinguishesbetweenFDIandportfolioinvestmentintermsofthepresenceoffirm-level controlintheformerandtheabsencethereofinthelatter.Hymerrejectscountrylevel portfolioinvestmenttheorywithitssimplifying(andempiricallyincorrect)assumptionsof the movements of capital as an explanation for FDI, Dunning and Rugman (1985). ForHymer,twoconditionshavetobefulfilledtoexplaintheexistenceofFDI:(i)foreign firmsmustpossessacountervailingadvantageoverlocalfirmstomakesuchinvestment viable,and(ii)themarketforsellingthisadvantagemustbeimperfect.Hymerarguesthat forfirmstoownandcontrolvalue-addingactivities,theymustpossesssomekindof monopolisticadvantagessufficienttooutweightheliabilityofforeignness(LOF),arising from lack of knowledge about local customs, differences in local tastes, and unfamiliar legal systems,whencompetingwithindigenousfirmsinhostcountryproduction.TheMNEs proprietaryFSAstypicallyincludeelementssuchasproductdifferentiationability,superior marketinganddistributionskills,trademarksorbrandnames,accesstorawmaterials, economiesofscale,accesstocapital,intangibleassetssuchasproprietarytechnology, 8 patents,managementskills,theabilitytoachieveverticalandhorizontalintegration,etc. Hymerfocusesonimperfectionsinfinaloutputmarkets,asexpressedinmonopolistic advantagesheldbyindividualMNEsandentrybarriersleadingtoreductionsinconsumer welfare. Hymers pioneering views have been recognized as an influential contribution to the theoryoftheMNEandFDI.Hewasthefirsttocontrastsuchfirm-levelFDIwiththe prevailing orthodoxy by economists who explain FDI as a country level financial (portfolio) investmentdecisiondeterminedbyinterestratedifferentialsacrossnationalborders.Hymer recognizesthatFDIisafirm-levelstrategydecisionratherthanacapital-marketfinancial decision (Dunning and Rugman, 1985).Hence, FDI will occur mainly in imperfect markets.Though also focusing on the firm as the unit of analysis, internalization theory has its origins intheworkofvariousscholarsassociatedwiththeReadingSchool:BuckleyandCasson (1976, 2009), Rugman (1981), and Hennart (1982). Here, the MNEs existence is not caused bymonopolisticadvantagesleadingtoentrybarriersandconsumerexploitation,butbyits efficiencyproperties,i.e.,itscapacitytoreducetransactioncostswhenreplacingan inefficientornon-feasiblearmslengthtransactioninthemarketbyaninternaltransaction, insidethefirm,especiallyinthecontextoftransferringintermediate(mostlyknowledge-based)outputsacrossborders(Rugman,1980a,b;Rugman,LecrawandBooth,1985; Grubaugh,1987).TheMNEsactivitiestypicallyenhanceratherthanreduceconsumer welfare because efficiently coordinated transactions substitute for inefficient ones.Internalizationtheoryeconomists(BuckleyandCasson,1976;Rugman,1981)explainwhy firmsbecomeinvolvedininternationalproduction.Here,theemphasisswitchesfromthe conventionalactofFDIatthecountrylevel,totheleveloftheinstitutionmakingthe investment, i.e. the MNE. The essential argument of internalization theory is that firms aim at maximizingprofitbyinternalizingtheirintermediatemarkets(typicallythemarketsfor 9 intangibleassetssuchastechnology,productionknowhow,brands,etc.,)acrossnational bordersinthefaceofvariousmarketimperfections(suchasthepublicgoodsexternality associatedwithpricinganintermediateproductlikeknowledge,thelackoffuturemarkets, information asymmetries between buyers and sellers, government intervention in the form of trade barriers or the ineffective application of the national patent system). InternalizationtheoryextendstotheMNEthecentralideasofCoasiantransactioncost economicstheory(Coase,1937),developedinadomesticcontext.Rugman(1980b,1981) indicatesthatwhileHymer(1960),Kindleberger(1969)andCaves(1971,1982)make market imperfections in final output markets the centre of their theory, none of these authors specifically identify internalization of intermediate product markets as the core of a theory to explainFDIandtheexistenceofMNEs,incontrasttoBuckleyandCasson(1976)and Casson(1979).BuckleyandCasson(1976)showthatwhenmarketsforintermediate productsareimperfect,thereisanincentivetobypassthembycreatinginternalmarkets. Here,interdependentactivitiesarebroughtundercommonownershipandcontrol.The internalization of markets across national boundaries de facto generates an MNE. Rugman(1981)arguesthatinternalizationtheoryisageneraltheoryoftheMNE.He demonstratesthatinternalizationencompasseswithinitselfthereasonsforinternational(as well as) domestic production.He emphasizes the role of MNEs in overcoming imperfections invariousexternalmarkets,aswellasthepolicyimplicationsthereof(Hennart,2009a). Rugmanappliesthetheoryofinternalizationtothepublicdebateonforeignownershipin CanadaandhesharplycriticizestheinappropriateregulationofMNEs(Rugman,1980b, 1981).Rugmanarguesthattheefficienciesresultingfrominternalizationarenot acknowledgedtotheirfullextent,andinsteadregulatorymeasuresimposedbygovernment 10 resultfromtheunfoundedassumption,inlinewithHymersview,thatMNEsnormally command monopolistic positions that they will systematically use to exploit the consumer.Eden(2005)suggeststhatRugmansmostimportantcontributiontointernalizationtheory revolvesaroundtwoelements:first,hisroleinbuildingthetheoryofinternalizationasa general theory of the MNE and second, his bridging of the gap between internalization theory with strategic management thinking, by developing the concepts of location bound (LB) and non-locationbound(NLB)firmspecificadvantages(FSAs)(RugmanandVerbeke,1992, 2001, 2003), Rugman(1981)emphasizesthateachMNEcommandsanidiosyncraticsetofFSAs,which give it a competitive advantage relative to other firms. These FSAs arise when the MNE has developedspecialknowhoworacapabilitythatisunavailabletoothersandcannotbe duplicated by them, except in the long run at high costs. This thinking anticipates the modern resource based view (RBV) of the firm (Prahalad and Hamel, 1990; Barney, 1991) developed a full decade later.In many cases, such FSAs arise from upstream research and development (R&D)expendituresthatleadtonewproductsorproductionprocesses.Inothercases, innovation occurs at the more downstream level, and can lead to differentiated product lines, therebygeneratinganFSAinmarketingordistribution.ThecriticalcapabilityoftheMNE can also be some unique element of its management structure or core routines that confer an FSA (Rugman, 1983a, 1985; Rugman and McIlveen, 1985).However,Rugman(1980b,1981)notesthatpossessingFSAsisanecessarybutnota sufficient condition for FDI to take place.One MNE objective may be to establish property rightsoveritsFSAssothatthesewouldnotbedissipatedtootherfirms.Totheextentthat nationalinstitutionalregimes,suchaspatentprotectionsystems,areconsideredinsufficient topreventunwanteddissipation,theninternalmarketsreplaceexternalones.TheMNE 11 transfers, deploys and exploits its FSAs through the use of foreign subsidiaries that monitor, meterandregulatetheuseofFSAsabroad.TheinternalmarketoftheMNEpermitsitto maximizeitsworldwideearningswithoutincurringtherisksofFSAdissipationbyexternal actorssuchaslicensingagents,franchisees,etc.(Rugman,1981).Thegreatstrengthofthe MNEisthatitreplacesexogenouscoordinationsystemsprevailinginexternalmarkets (usuallywithpricingattheircore)bycoordinationthroughabalancedmixofhierarchical control, socialization and internal prices. In short, Rugman (1981) shows that MNEs develop inresponsetoimperfectionsinthegoodsandfactormarkets.TheCSAsofanationthat provide a basic level of comparative advantage are augmented by FSAs, internal to the MNE, and conferring competitive advantage.Hennart (1982) developed a slightly different version of internalization theory as compared to Buckley and Casson (1976) and Rugman (1981). He shows that for international expansion to takeplace,settingupfacilitiesabroadmustbemoreefficientthanexportingtoforeign markets (which entails domestic internalization) and a firm must find it desirable to own the foreignfacilities.ThisisthecaseiftheMNEcanorganizeinter-dependenciesbetween economic actors located in different countries more efficiently than markets. Three conditions mustbesatisfied:first,interdependentactorsmustbelocatedindifferentcountries (otherwise,onlydomesticeconomicactivitywouldoccur);second,theMNEmustbethe mostefficientgovernancesystemtoorganizetheseinterdependencies(otherwise,only domestic actors located in different countries would be involved in international transactions, and not an MNE);third, the costs incurredby MNEs to organize these interdependencies in the market (as in the case of licensing) must be higher than those of organizing them within MNEs (see Hennart, 2009a).12 Managinginterdependenciesrefersto(a)accessing,(b)recombining,and(c)orchestrating theproductiveusageofvarioussetsofresourcesthataredispersedgeographically.Such resources may involve knowhow, raw materials and components, marketing and distribution services,financialcapital,etc.FDItakesplacewhenfirmsinternalizemarketsforthese resources.Forexample,anMNEthatwantstoexploitabroaditsfirm-specificknowledge will choose to transfer this knowledge internally rather than license it to foreign producers if themarketforthisknowledgeissubjecttohightransactioncosts(Hennart,1982),butthe final decision on entry mode choice does not only depend on the MNEs FSAs.It also very muchdependsonthecomplementaryresourcesneededbytheMNEfromforeignactorsto maketheexploitationofitsownFSAsfeasibleandpotentiallyprofitable(whichexplains why IB is always concerned with managing interdependencies), Hennart (2009b) Theeclecticparadigm,developedandsubsequentlyextendedintofiveversionsbyDunning (1977, 1988, 1998), integrates several theory streams on cross border activities at the country andfirmlevelstoexplainFDI(seeEdenandDai,2010forareviewoffiveversionsofthe eclecticparadigm).DunningproposesthatthreetypesofadvantagesinfluenceFDI:(i) ownership (O) advantages, (ii) location (L) advantages and (iii) internalization (I) advantages.Ownership advantages can be divided into asset advantages (Oa)andtransactional variables (Ot).Oaincludevarioustangibleandintangibleassetssuchaspatentedtechnology,brand names,etc.,whereasOtreferstostrengthsincoordinatingandtakingadvantageof operating a network of geographically dispersed affiliates. Location(L)advantagesreflectforeigncountrieshavingsomecountry-specificadvantages (CSAs) vis--vis other countries, in terms of natural resources, factors of production, demand conditions, etc. Location advantages also include elements of the cultural, legal, political and broadinstitutionalenvironmentinwhichthefirmoperates,andthatmakesomecountries 13 more attractive than other ones.In addition, Dunning (1977) identifies the market structure at thecountrylevelandgovernmentpoliciesasbeingpotentiallocationadvantages.Healso argues that the determinants of FDI may differ from one industry to another.Internalization(I)advantagesrefertobenefitsofcreating,transferring,deploying, recombiningandexploitingFSAsinternallyinsteadofviacontractualarrangementswith outsideparties.Here,thecommongovernanceofgeographicallydispersedvalue-added activities within a single firm is comparatively more efficient andeffective thangovernance by independent market actors or even by an equity joint venture where more than one firm is theresidualclaimant.Firmsdecidetooperateinforeigncountriesbyconsideringthe particular set of ownership and location advantages they face.The entry modes are selected on the basis of internalization advantages (or the lack thereof).Inadditiontoitscontributionasasynthesizingframework,theOLIparadigmallows identifyingthekeylocationadvantagesoffourtypesofinternationalproduction:natural resourceseeking,marketseeking,efficiencyseeking,andstrategicassetseeking(Dunning, 1998).IncontrasttotheHymerKindlebergerCavesapproach,Dunningdevotessome attention to managerial issues related to the FDIprocess, especially in terms of the complex trade-offs to be made when weighing alternative modes of operating in foreign countries and assessingthebenefitsthereoffortheMNEitselfanditsvariousstakeholdersin geographically dispersed jurisdictions. Dunningseclecticparadigm,however,strugglestointegratecountryandfirmlevel interactions.Fromthefirmsviewpoint,the(O)and(I)arenotindependentparametersin managerialdecisionmakingbutneedtobeconsideredjointly,with(I)beingthedominant consideration. The existence of the MNE itself, resulting from FDI, implies that(O) needed tobeinternalizedintermsoftheprocessesof(O)creation,transfer,deployment, 14 recombinationandprofitableexploitation(Rugman,1985;2010;Casson,1987).Inthis context,Itaki(1991)hasvoicedthestrongestcriticismoftheeclecticparadigm,andhas claimed that an (O) advantage could actually be derived from an (I) advantage, in which case itwouldberedundanttoconsiderthesetwovariablesasseparatedeterminants.Itakihas further pointed out the inseparability of the (O) advantage from the (L) advantage. He argues thatthe(O)advantageineconomictermsisunavoidablyinfluencedby-andinseparable from - location factors. Hence, (L) and (O) are simultaneously determined. Despite the above shortcomings,whichreflectarelativelackoftheoreticalparsimony,Dunningseclectic paradigm undoubtedly represents the most comprehensive framework to explain foreign entry mode choices and the economic efficiency implications thereof.Inparallelwiththedevelopmentofinternalizationtheory,agroupofScandinavian researchers,includingscholarsfromUppsalaUniversity,Sweden(JohansonandVahlne, 1977) and the Helsinki School of Economics, Finland (Luostarinnen, 1979) have attempted to explaintheprocessbywhichfirmsfromsmall,domesticmarketssuchastheScandinavian countries, internationalize their activities.DrawingupontheclassicworksofCyertandMarch(1963),andAharoni(1966),the Scandinavianmodelproposesthatinternationalizationisacumulative,path-dependent process whereby a firms international expansion pattern is a function of its past international experienceandknowledgebase(JohansonandWiedersheim,1975;JohansonandVahlne, 1977,1990).Internationalizationtheoryarguesthatafirmwithlittleornointernational experience,typicallyentersaforeignmarketbyexporting.Itprogressestoestablishasales subsidiaryandeventuallytoinvestinproductionfacilities.Thedrivingforceofthis internationalization process is experiential market knowledge (Johanson and Vahlne, 1990). 15 JohansonandVahlne(1977)alsointroducedtheconceptofpsychicdistance.Psychic distancereferstothedegreetowhichafirmisuncertainofthecharacteristicsofaforeign market(JohansonandWiedersheim,1975).Followingthepsychicdistanceconcept,firms undertakeinternationalexpansioninanincrementalmanner.Here,theinternationalization model postulates that firms will first enter the foreign markets with which they are relatively familiar(i.e.geographically,culturallyandinstitutionallyproximate),andthen,capitalizing on the knowledgeacquired from exporting to- or investing in- those markets, successively progresstopsychicallyandculturallymoredistantenvironments(Johansonand Wiedersheim,1975;JohnsonandVahlne,1977).Severalempiricalstudieshaveindeed shown that the MNEs level of foreign experience directly influences its selection of a market entry mode, see for example, Loree and Guisingers (1995) and Li (1994). However,internationalizationtheorycanbebetteralignedwiththeargumentsof internalization theory.Rugman (1980a),andFina and Rugman (1996) have pointed out that an MNE engages in foreign production in order to avoid dissipation of the rents derived from itsFSAsthatwerecreatedatconsiderableeffortandcosts.Therefore,internalizationtheory suggests that a firm consider explicitly the relative costs of servicing foreign markets by first, exporting to foreign markets with the FSAs embodied in final products,second, engaging in FDIorthird,licensingaforeignproducer.Thislastoptionbecomesattractiveespecially whenthetechnologylicensedisnotanylongerthetechnologyonwhichthefirmssurvival and future growth depends.The mode of entrychanges over time as the relative costs and benefits associated with each of these strategies change. The above stages in serving foreign markets are almost the reverse of the internationalization stages, or the Aharoni (1966) approach, which use (1) licensing as thefirststep,(2)exporting,(3)establishmentoflocalwarehouseanddirectlocalsales,(4) 16 localassemblyandpackaging,(5)formationofjointventure,(6)foreigndirectinvestment (thatis,fullscalelocalproductionandmarketingbyawhollyownedsubsidiary). Furthermore, Rugman (2005) also questions internationalization theory in that it lacks serious conceptualgroundingandgeneralizability,especiallyintermofwhatexactlyconstitutes geographicproximityorexperientallearning,andthemechanismsthroughwhichthese concepts influence FDI decisions and geographic sales dispersion.Similarly, Ruigrok and Wagner (2003) also question internationalization theory in their study ofGermanmanufacturingcompanies.Theyarguethataccordingtotheprincipleofinitial foreignlocationbasedonthepsychicdistancepremise,Germanfirmsarelikelytotarget SwitzerlandandAustria(Germanspeakingcountries).However,bothcountriesarevery small markets and theyhave never beenable to attract substantial German FDI.Instead, the typical German firm expands early into other European, North American and Asian countries. Thesenationsarecharacterizedbyhigherpsychicdistance.Thus,Germanfirmsappearto have pursued high distance expansion strategies from the outset, driven by the nature of the locationadvantagesoftheselarger(highdistance)marketsandpossiblybythe complementary resources offered by local actors in those environments.Theoverallproblemwiththeinternationalizationtheoryapproachisthatitlargelyneglects two critical elements. First, the nature of the MNE FSAs, which determines to a large extent the potential net benefits of internalization vis--vis alternative modes of operating in foreign markets (e.g., the importance of tacit versus fully codified knowledge). Second, the presence orabsenceofnaturalandgovernment-imposedmarketimperfections(e.g.,anineffective patentprotectionsystem),whichmaymaketheuseofexternalmarketsanon-starter.For example,exportingusuallytakesplaceintheabsenceofgovernment-imposedmarket imperfections,i.e.,whentherearenobarrierstofreetrade,whereasFDIpreciselyoccurs 17 whensuchbarriersexist.Inturn,licensingtakesplacewhenforeignmarketsarefully segmented,thefirmnolongerhasmuchtolosebysharingitsFSAs,andcrediblelicensees can be found with the requisite resources that complement the MNEs FSAs.FROM FIRM LEVEL TO SUBSIDIARY LEVEL ANALYSISBirkinshawandPedersen(2009)havesummarizedtheresearchapplyingFDItheoryand theoriesoftheMNEtothesubsidiarylevelandtheinteractionsbetweenMNEheadoffice and its subsidiaries. Today, we recognize that while the relevant unit of analysis for mostIB theoryisstilltheMNEasawhole,becausemostkeystrategicdecisionsaretakenatthat level, there is often a problem in translating and applying firm-level theory to the subsidiary unit.ThesubsidiarybecomesthekeybuildingblockoftheMNE,whichisviewedasa differentiatednetworkratherthanamonolithichierarchy.Inotherwords,noseriousMNE networkanalysiscanbeconductedwithoutunderstandingeachsubsidiarysidiosyncratic resource base, strategy, assigned role inside the MNE, and linkages with other subsidiaries. In thiscontext,Birkinshaw(1997,1998)hasshiftedfocustothesubsidiarymanagerandthe possibilityofhavingsubsidiaryinitiativesinstrumentaltoFSAdevelopment.Theshiftin focus from the parent firm to the subsidiary as a unit of analysis has several origins. First, a stream of research in Canada examined the extent to which Canadian subsidiaries of foreignMNEscanactautonomouslywithworldproductmandates(WPM).Thisispartlya hostcountrylevelinteractionwithsubsidiarylevelmanagement,butvettedbytheMNEs head office in the home country. In particular, the Canadian government wanted to see more R&DintheCanadiansubsidiariesofUSMNEs,RugmanandBennett(1982),Poynterand Rugman (1982), Rugman (1983b), Rugman and Douglas (1986), DCruz (1986). In a public policycontext,Rugman(1980b,1981)criticizesthelackofeffectivenessandefficiency 18 associated with policy efforts to boost R&D spending in Canadian subsidiaries.He finds that the Canadian subsidiaries ofUS MNEs indeed do onlyhalf of the R&Dper unit of salesas compared to their parent firms. However, the R&D expenditures of a set of Canadian owned companies of similar sizeis also well under halfthose of US parent MNEs.In other words, therelativelackofR&DfoundinCanadiansubsidiariesofforeignMNEsislargelydueto countryfactorsratherthanfirmfactors.CanadahaspoorCSAsasalocationforR&D,and Canadian owned firms as well as US subsidiaries in Canada both lack FSAs related to R&D outputs.Rugmansconclusionsontheinefficiencyofattemptstoboostartificialnational R&Dexpenditures(whichalwaysreflectacost,butnotnecessarilyanybenefittothefirms and country involved) have subsequently been validated by Moore (1996), Birkinshaw (1997) and others. Second,researchonthestrategyandstructureoftheMNEmovedfromafocusuponthe centralized, hierarchical multidivisional form typology of the 1960s and 1970s (Stopford and Wells,1972;Williamson,1981;Egelhoff,1982)towardsanunderstandingofthelinkages betweentheparentfirmanditssubsidiaries.Thiswasaparentfirminteractionwith subsidiarymanagers.Inparticular,thepopularizationofthePrahaladandDoz(1981,1987) integration-responsivenessframeworkbyBartlettandGhoshal(1989)establishedthe intellectualfoundationforadifferentiatedinternalnetworkperspectiveastherelevant organizationalstructure.ThisworkbuildsontheconceptualinsightsofPrahaladandDoz (1981, 1987) who show that subsidiaries can developLB FSAs, albeit sometimes associated with negative outcomesfor the MNE,and therefore requiring re-centralization, see Verbeke (2009)andalsoMudambiandNavarra(2004)forananalysisofdysfunctionalities.Much subsequent work on MNE networks was performed in Scandinavia. Perhaps the best-known networkframeworkisHedlunds(1986).HearguesthattheM-form,parentdrivenMNE 19 would be replaced by the N-form, or network based, MNE. The Scandinavian and Canadian interestinthesubsidiaryisausefulcounterpointtotheearlierUS-ledfocusoncentralized and hierarchical MNEs from large economies. ThemostinfluentialexponentoftheviewthatsubsidiarymanagerscandevelopFSAs throughsubsidiaryinitiativesisBirkinshaw(1996,1997,seealsoBirkinshawandHood, 1998,2001;Birkinshaw,HoodandJonsson,1998;Moore2001;MooreandBirkinshaw, 1998).Birkinshawdemonstratesthatthesubsidiary-andinsomecaseseventhesubsidiary manager as driver/facilitator of subsidiary initiatives - may represent a useful unit of analysis whentryingtounderstandinnovationprocessesinsidetheMNE.Manystrategicdecisions criticaltoinnovationmaybetakenatthesubsidiarylevelandcanleadtonewFSA generation. Inthiscontext,RugmanandVerbeke(2009a)havesuggestedthatCSAsofhostcountries maybeusedinaleveragedway.MNEsmakedualuseofCSAsfromthehomeandhost countries,andsubsidiariesthroughouttheMNEnetworkmaybecriticalinresource recombinationefforts,aviewconsistentwiththedoublediamondframeworkofRugman andVerbeke(1993).IfMNEoperationsinvariouscountriescanbeinstrumentaltonew knowledge generation, this opens the door for two-way flows of FDI, sophisticated forms of parent-subsidiary relationships and complex network functioning inside MNEs (Rugman and Verbeke, 2001; Rugman and DCruz, 2000). Rugman and Verbeke (1992, 2001, 2003) have argued that FSAs can be created anywhere in the MNE network, both in the parent company at home and in the foreign subsidiaries. FSAs canbelocation-bound(LB)ornon-locationbound(NLB).TheLBFSAsreflectstrengths deployable and exploitable in a limited geographic area, such as a single country or a limited 20 set of countries or region, but cannot be profitably exploited outside of this area, whether as anintermediateoutput(e.g.managerialskills,R&Dknowledge)orembodiedinfinal products.LBFSAsmayincludeanexcellentlocalreputation,awell-positionedretail network, privileged relationships with domestic economic actors, etc. In contrast, NLB FSAs representcompanystrengthsthatcaneasilybetransferredacrosslocationsatlowcost, deployed and profitably exploited, with only limited need for resource recombination.Such NLBFSAstypicallyincludetheupstreampatentedtechnologicalknowledge,andthe downstreambrandnames.Theactualtransferacrossborderscanagainoccurintheformof intermediate products or embodied in final outputs. RugmanandVerbeke(2001)haveshownthatsubsidiaryinitiativesmayleadtothe developmentofLBFSAs(aresource-basedexpressionofhostcountrynational responsiveness)butthesecanbetransformedintonon-locationbound(NLB)FSAs,namely when being augmented with best practice attributes inside the MNE network (e.g, as a result of productivity increases and added differentiation).Indeed, in synthesizing the literature on subsidiaryinitiatives,RugmanandVerbeke(2001)findtengenerictypesofcapability developmentprocessesinsideMNEs,ofwhichBirkinshawhadidentifiedthosewhereby subsidiary initiatives are critical.This framework incorporates the thinking ofBirkinshaw and Pedersen (2009) who align the resourcebasedview(RBV)ofthefirmwiththeresourcesandcapabilitiesdevelopedand heldinanMNE(Wernerfelt,1984;Rumelt,1984,1997;Barney,1991;Mahoneyand Pandian, 1992; Peteraf, 1993; Teece, Pisano and Shuen, 1997; Rugman and Verbeke, 2002).Some FSAs are likely to be held at MNE parent firm level while others are held at subsidiary level.21 Birkinshawand Pedersen (2009)argue that if the subsidiary isa valid unit of analysis in its own right, it should be possible to unbundle resources and capabilities between the subsidiary andtheMNE.Consideringbasicresourcesfirst,mosttangibleresources(plant,equipment andpeople)areheldprimarilyatthesubsidiarylevel,whilemostintangibleresources (financial,organizational,andreputational)areheldatthefirmlevel.Capabilitiesaremuch hardertounbundlebetweenfirmandsubsidiarylevelsofanalysis.Someareclearlyheldat thefirmlevelandsharedacrosssubsidiaries,suchasaparticularorganizationalculture.Others are more likely to be specific to a particular subsidiary, such as a particularly effective wayofhandlinglocallabourrelationsorprivilegedrelationshipswithgovernmentagencies tosecurecommercialcontracts.Mostcapabilities,however,sitsomewherebetweenthetwo levels.ThecriteriausedtoevaluateresourcesintheRBVintermsoftheircontributionto competitive advantage (valuable, rare, non-imitable, non-substitutable) are not necessarily the mostrelevantatthesubsidiarylevel.Thus,BirkinshawandPedersen(2009)suggestthat ratherthansimplyanalyzingsubsidiarylevelresourcesintermsoftheirpotentialfor competitive advantage, it is necessary to consider recombining them with other resources, or leveraging them on a worldwide basis. This process couldgenerate NLBFSAs, in the spirit of Rugman and Verbeke (1992). Essentially,Birkinshawarguesthatsubsidiarymanagerscandevelopbothhostcountry,LB FSAsbutalsoNLBFSAs,throughsubsidiaryinitiatives.Subsidiaryinitiativesthatleadto NLBknowledgereflectthesubsidiaryanditsmanagersmovingbeyondtheirassigned charter,andgainingworldproductmandatesorcriticalrolesininternationalvalueadded chainsinsidetheMNEsinternalnetwork,ordevelopingsubsidiaryspecificadvantages (SSAs) (Rugman and Verbeke, 2001).22 Related work examining the role and function of subsidiary managers has been undertaken by HolmandPedersen(2000),Andersson,ForsgrenandHolm(2002,2007),Forsgren,Holm, andJohanson,(1995),FossandPedersen(2002),HolmandPedersen(2000),Malnight (1996) among others. The above analysis suggests that research in the IB field has evolved over the last fifty years. Theunitofanalysishasshiftedfromthecountryleveltothefirmlevelandfinallytothe subsidiary level. MNE subsidiary strategy has received significant attention, especially in the context of the MNE as a differentiated network.Now we move on to explore the evolution of IBtheoriesfromanequilibriumorientedtheoreticalfocustoamoredynamicoriented conceptualization.WeshowthatthebasicconceptualfoundationsofIBtheoryremainas logical developments of internalization theory and its offshoots.THE CLASSIC FRAMEWORK FOR IB THEORY The three basic units of analysis can be analyzed in the classic CSA/FSA matrix of Figure 1, derivedfromRugman(1981).Heretheimpactofcountryfactorsisdepictedonthevertical axis, ranging from weak to strong CSA impact on IB transactions (see Rugman and Verbeke, 2009aforacomprehensiveoverviewonlocation,competitivenessandtheMNEs). Conversely,onthehorizontalaxis,wedepicttheimportanceofthefirmfactors,i.e.,the FSAs, ranging again from a weak to a strong impact. Figure 1 here In cell 1 of Figure 1, only CSAs matter to explain the scope and direction of IB activities. In cell 1, mainstream international economics explains how comparative advantage will lead the homecountrytoexportgoodsandserviceswhichbuilduponitsrelativelyabundantfactor 23 inputsoflabour,capitalandnaturalresources.Forexample,Canadawillexportnewsprint, SaudiArabiawillexportoil,andChinawillattractmanufacturingassemblythroughits abundant cheap labour. Cell 1 also captures cultural stereotypes, as popularized by Hofstede (1983)andtheGLOBE(2006)studiesbyHouseandothers(2004),wherebycultural characteristicsandculturaldistancevis--visothernationsareviewedasinstrumentalor detrimentaltoacountryssuccessinIB.Inaddition,cell1includessituationswhereby politicalandadministrativerulesgreatlyaffectIBtransactions.Forexample,host governmentsmayrestrictandregulatebothimportsandexports,aswellasinwardand outwardFDI(Rugman,1980b;RugmanandVerbeke,2009b).Insuchcases,variedand complex interactions may occur between MNEs and host governments (Vernon, 1971, 1991; see Rugman and Verbeke, 2009b for a comprehensive overview) Incell4,theoppositesituationprevails:here,countryfactorsdonotmattermuch,and competitiveadvantageresultssolelyfromFSAsunaffectedbygeography,intermsof locationalimpactsontheirdevelopment,transferacrossborders,deployability, recombinationrequirementsandprofitableexploitation.Thissituationisconsistentwiththe viewespousedbymostmainstreamresourcebasedview(RBV)scholarsinstrategic management.These authors focus on FSAs only (referred to, inter alia, as core competences and capabilities), and do not recognize the importance of location and CSAs. Indeed, authors suchasWernerfelt(1984),Rumelt(1984,1997)andBarney(1991)developedtheRBVin isolation of country effects.Examples of strong FSAs in cell 4 include the allegedly location-independent brand equity of the firm, and the managerial resources and capabilities of the top management team to grow the firm (Penrose, 1959). In cell 3, both CSAs and FSAs matter. This is the unique stage forIB theory. Here, the firm beingstudiedisanMNE,operatingacrossmultiplecountries,andtryingtocoordinate 24 variousresourcedependenciesacrossborders.BothhomeandhostcountryCSAsmaybe important in terms of how the FSAs are managed.CSAs affect the processes of developing, transferringacrossborders,deploying,recombiningwithotherresourcesandprofitably exploitingFSAs,whicharealwaysinternalizedtosomeextent.SuchFSAscaninclude higherordergovernancecapabilitiesandcoreoperatingroutinesfollowingthefirms dominant logic.Cell3situationsalsoallowforcomplexintra-MNEnetworklinkages,sometimeswith sophisticated value chain relationships among the various subsidiaries involved, each holding specific sets of FSAs in particular value chain functions and benefiting from particular CSA bundles(Rugman,VerbekeandYuan,2011).Ineachofthesesituationsitisrecombining resources across borders that matters, see Rugman and Verbeke (2001) and Verbeke (2009).Importantly,thethreeunitsofanalysisintersectandoverlaphere.Themainfocuswhen studying resource recombination patterns may be the MNE, but useful analysis also requires anunderstandingofwhichCSAsinthehomeandhostcountriescanbeleveragedbythe firm, as well as sufficient appreciation for the geographical dispersion of MNE FSAs across the multiple units and subsidiaries in its internal network.ThisCSA/FSAmatrixisconsistentwithMeyer,Estrin,KumarandPeng(2009),whohave advocatedacombinationofinstitutionalanalysis(focusingonasubsetofCSAs)andRBV thinking (with the resource based view providing tools for studying the nature and strength of FSAs).Itisalsoconsistentwiththelatestversionofinternationalizationtheory(Johanson and Vahlne, 2009), which is now focused on understanding the liability of outsidership rather than the liability of foreignness. Outsidership is concerned with access to resources or rather the lack of such access, mainly because of relational shortcomings. Resources are needed to develop the requisite LB FSAs so as to link these with the MNEs extant NLB FSAs, and to 25 takefullbenefitoftheCSAsofthehostcountriesentered.Wenowturntoissuesinthe literaturelessresolvedthandiscussedsofar.Thesenewissuesarelikelytobethebasisfor future research. THE FUTURE OF DISTANCE IN INTRA-FIRM AND INTER-FIRM NETWORKS ThekeyscholarlyandmanagerialchallengeinIB,irrespectiveoftheunitofanalysis selected,istounderstandproperlyhowdistanceaffectsthetransferability,deployability, recombinationandprofitableexploitationacrossbordersof(quasi-)proprietaryknow-how, whetherintheformofstand-alonecompetencesorhigher-ordercapabilities.Themain weaknessofmanyscholarlyanalysesistheincorrectassessmentofwhatdistancereally meanswhenperformingIBtransactions.Thisleadstooverestimatesofthenon-location boundednessofextantFSAsandunderestimatesoftheneedformeldinginvestmentsin hostenvironments,soastocreatenew,LBFSAs,ofteninconcertwithothereconomic actors.TheoutcomeofsuchincorrectassessmentintheIBliteratureisstructurallyflawed theories of how MNEs really operate across borders.Basically, there are three types of FSAs: stand alone FSAs (such as patented knowledge or a brandname),routines(i.e.,thewaythingsaredoneinsidethefirm),andrecombination capabilities (i.e., the capacity to augment in a productive fashion the MNEs existing resource basewithnewlyaccessibleresources)(Verbeke,2009).Traditionalthinkingisthateachof these builds upon home country CSAs. Drawing upon home country CSAs typically leads to LBFSAs,tiedtothehomecountry.Aportionofthesestand-aloneFSAs,routinesand recombinationcapabilitiescanbecomeinternationallytransferrable,deployableand profitablyexploitable,i.e.thisportionbecomesnon-locationbound(NLB).FSAsinthe NLB category typically include R&D knowledge, system integration capabilities, managerial 26 capabilities,easyaccesstocapital,andsometimesbrandnames,totheextentthatforeign consumers confer value to these. However, upstream FSAs are usually much more NLB than downstream ones. NLB FSAs can be transferred internationally through the MNE intra-firm network.However, inmostcases,thesemustbecomplementedwithinvestmentsinnewLBFSAsinthehost countries where theyare to be exploited. The MNE may need to draw upon complementary resources held by external actors in the host country.It is only through these complementary resources, and the ensuing LB FSAs that the MNE is able to access host country CSAs (e.g., access to a large consumer market).If these resources can be freely purchased on the market, the MNE will develop the new LB FSAs on its own. In contrast, if these resources cannot be purchased,jointventuresandothertypesofalliancesmayresult,especiallyiftheMNE wishestokeepsomedirectcontroloveritsownNLBFSAstransferredabroad.Inthecase whentherearestrongimperfectionsinthemarketsforresourcesandnosatisfactoryjoint venturepartnerscanbefound,theonlyoptionisamergeroracquisition.HeretheMNEis forced to purchase not only the resources required for accessing the host country market, but alocalfirminitsentirety,includingpossiblesubstantialunwantedassetsandcapabilities. Obviously, if the MNE can simply augment its internationally transferrable NLB FSAs with self-createdLBFSAs,fullycontrolledbytheMNEthroughitsinternalnetwork,thenFSA dissipation risks can be avoided.However,hostcountrysubsidiariesmaydomuchmorethansimplyaugmenthome-based, NLBFSAswithrequisitelocalstrengths.Theymaydevelopsubsidiaryspecificadvantages (SSAs) as a result of their autonomous initiatives. Rugman and Verbeke (2001) define SSAs as idiosyncratic strengths developed by host country subsidiary managers building upon host country CSAs. However, SSAs may represent not just LB knowledge but new, NLB strengths 27 in the sense of having profit potential abroad. The challenge associated with SSAs is that the actualcapability(ormorespecificallythecapabilitycarrier,suchasthemanagementteam masteringtherelevantknowledge)cannotbesimplytransferredacrossborders.Inother words,theunderlyingknowledgeisembeddedinthesubsidiaryanditslinkageswithlocal actors.AsRugmanandVerbeke(2001)pointout,SSAsareoftenviewedwithgreat skepticismbythecorporateheadoffice,astheydonotconstitutenetworkknowledgeby definition.AnunresolvedquestioniswhetherSSAscansomehowbeupgraded(e.g., through codifying knowledge and sending expatriates to the subsidiary to learn about the new capability), so that they would become relevant to the entire MNE subsidiary network. Future research on geographic distance and SSAs might be usefully linked to recent empirical andtheoreticalworkanalyzingtheregionalnatureofMNEs(RugmanandVerbeke,2004; Rugman, 2005). Given that the empirical data show that the worlds largest 500 firms operate mainlywithintheirhomeregionofthetriad,itisapparentthatSSAs,aswellasmore conventional NLB FSAs, are difficult to exploit profitably outside of their home region. The problemmaynotresidesolelyintechnicaldifficultiesassociatedwithinternationalFSA transfer, but also in challenges of (a) effective deployment in a host environment, depending upontherecipientsabsorptivecapacity;(b)appropriaterecombinationoftheNLBFSAs withnewlycreatedornewlyaccessedLBFSAs;and(c)managerialeffectivenessin profitably exploiting the newly created FSA bundles.Thesechallengesbecomecompoundedasdistanceincreases,whethereconomic,cultural, institutional, or merely geographic. It becomes more difficult for senior MNE managers at the headofficetounderstandcriticalsuccessfactorsandtoactuponrelatedchallenges(a bounded rationality problem). It also becomes more difficult to engage in proper monitoring andcorrectionofhumanbehavior,especiallywheneffortsaredivertedfromengagement 28 towardsachievingcompanygoals;thisisaboundedreliabilityproblem(Verbekeand Greidanus,2009).RegionalboundariessuchasinNAFTAandtheEU,aswellthe boundaries separating Asia from the rest of the world, represent a useful first cut at separating lowerdistance,intra-regionalenvironmentsfromhigherdistance,inter-regionalones.In otherwords,thelocationboundednessofFSAsisoftenmainlyintra-regionalinnature:FSAscanberelativelyeasilytransferred,deployed,recombinedandprofitablyexploited throughout the home region compared to between regions. The comparatively easier resource recombination challenge, as compared to what prevails in host regions, is especially critical. Itremainssomewhatofapuzzleastowhyinter-regionaldistanceremainssoimportant, whereas the world economy otherwise appears to be moving towards greater integration with supportingpoliticalandinstitutionalstandardizationbeingdrivenbyimprovedinformation technology and information accessing capabilities. In our view it is the compounded distance, more specifically the need to manage various distance dimensions simultaneously, that really explainstheregionalnatureoftheworldeconomy.Thecompoundeddistanceis insufficientlycapturedineffortstosimplyaddorotherwiseaggregatevarioustypesof distance. Ghemawat (2001, 2007) has an introductory discussion of this, though still adopting alargelyadditiveapproach.Futureresearchshouldengageinfurthercarefulreflectionand testing of the compounded distance concept. The key insight here is that the various distance dimensions typically measured in IB studies arenotindependentofeachother.Forexample,regionaleconomicintegrationfosters institutionalcoordination,andmaycontributetoloweringactualculturaldistanceby increasing mobility of labour and managerial best practices. At the same time, improving the common transport infrastructure, adding transport connections (e.g., in air travel) in terms of frequencyandqualitymayreducetheimpactofgeographicaldistance.Inaddition,one 29 specificparameterrelatedtodistancedimensionhasbeenneglectedsystematicallyinlarge-scalestudiesanalyzingthegeographicscopeofinternationalexpansionpatterns.Thisisthe presence and the strength of the relationships between the MNE and relevant actors operating in the host environment.As noted earlier, Johanson and Vahlne (2009) have argued in their extensionofinternationalizationtheorythatbeinganoutsiderinforeignnetworksmay explaintheabsenceofcompetitivesuccess.Theliabilityofhostregionoutsidership, meaningsimplythatmostMNEshavefewifanypowerfulrelationshipswithactorsinhost regions,maygoalongwayinexplainingtheabsenceofinternationalsuccessinthesehost regions.Relationshipsmaywellbethekeymissingfactor(asaLBFSA)toovercome compounded distance and to allow access to coveted CSAs in host regions. Atthistime,itremainsunclearastotheextenttowhichforcesofglobalintegrationcan actuallyovercomethecurrentlytriadregionbarriersobservedbyRugman(2005). Researcherswillneedtocontinuetoexaminecarefullytheextenttowhichregion-bound FSAs,includingSSAsheldbyMNEsubsidiaries,canbetransformedfromtheirapparent currentregionalexploitabilityintoNLBFSAswithatrulyglobalreach,meaningthatthey caneasilybetransferred,deployed,andrecombinedwithotherresourcestotheextent necessary, and profitably exploited around the world.TheaboveanalysiscanberelatedtotheearlierFigure1.Themostinterestingaspectof Figure 1 lies in cell 3, whereby the MNE successfully accesses and leverages CSAs in home and host environments, and is able to put together bundles of LB and NLB FSAs to achieve successinavarietyofhostenvironments.Therequirementsofthisapproachgofarbeyond merelyadaptinghomegrownFSAstothehostcountryenvironment,asinthenational responsivenessstrategyofBartlettandGhoshal(1989).Forexample,inthecasewherea BirkinshawtypeSSAheldbyanMNEsubsidiaryincell3iscriticaltoMNEinternational 30 growthandprofitability,thechallengefortheMNEheadofficeistoprovidesufficient resources to the subsidiary to allow global deployment and exploitation (by allowing a world productmandateorprovidingthestatusofglobalcentreofexcellence).Alternatively, investmentsmustbemadetoturntheSSAintoastrengththatcanbetransferredinsidethe MNE network (e.g., through codifying knowledge, or by sending subsidiary experts to other unitstoprovidetraining,orbyallowingdirectinteractionandknowledgetransfersamong subsidiaries, etc.) and the subsequent, dispersed exploitation out of many units. Essentially this section has discussed potential combinations of home and host country CSAs andassociatedFSAs.Allofthisprovidessophisticatedsubstancetocell3ofFigure1.The future for research in IB needs to expand upon this type of deep analysis of cell 3 in Figure 1. Inparticular,effortsarestillintheirinfancytounderstandthenatureandextentof recombinationefforts,wherebyextantFSAbundlesaremeldedwithcomplementary resources in host environments, so as to access host country CSAs. Acriticalfeatureofinternalizationtheoryisitsfocusongovernance.Inotherwords, disciplinedexecutionoftheFSA-CSArecombinationprocessesdescribedaboverequires muchmorethansuggestedbytherathersimplisticcase-basedanalysisofBartlettand Ghoshal(1989)andtheirbroadintegrationresponsivenessframework.Thisframework provideslittleguidanceintermsofpropergovernancebeyondsomegeneralsuggestionson how to improve normative integration, i.e., socialization, Rugman, Verbeke and Yuan (2011).Similarly, limited case analysis on the so-called metanational by Doz, Santos and Williamson (2001), in terms of building globally deployable NLB FSAs based on the CSAs of peripheral host country environments, is not particularly useful. Doz and his co-authors place the future oftheMNEinthehandsofsmallsensingandmagnetunits,almosttheequivalentofUS 31 Army Delta Force units. These units are supposed to work outside of the realm of the MNEs operating divisions. Sensors are supposed to identifyand seek outgeographicallydispersed, unique, and hitherto fully ignored bodies of valuable knowledge. Magnets are then supposed to follow up the sensors activities, and to recombine the various unique pieces of knowledge identifiedbythesensorsintocommerciallyviableproducts.Inafinalstage,theMNEs operating divisions must then implement the new solutions put forward by the sensors and magnets.Theoperatingdivisionsroleissimplytoengageinscalingupandensuringthe commercialviabilityoftheproductspushedontotheMNEnetworkbythesensorsand magnets.VerbekeandKenworthy(2008)haveargued,however,thatthemetanationalformof governanceisunlikelytodisplacetheconventional,hierarchical,M-formorganizational structure,especiallyintermsofhownovelresourcerecombinationsareturnedintoactual non-locationboundFSAs.Theyhavefocusedontheneedtoviewresourcerecombination, i.e.,theinnovationprocess,initsentirety.ThismeansthatR&Dorothereffortsto develop/accessnewknowledgecannotbestructurallydivorcedfromproductionand marketing/sales. This is broadly consistent with the thinking of Buckley (2009) on the global factory.TherearegoodreasonswhymostlargeMNEsareorganizedindivisions(typically geographicandproductdivisions)andintonationalunitswithspecificmandatesintightly coordinated, international value chains: such governance is comparatively more efficient and effective than alternative forms of organization. The modern M-form allows economizing on boundedrationalityandboundedreliability,andimplementinginnovationprocessesintheir entirety,fromtechnologicalFSAdevelopmenttoaftersalesservicetocustomers,aview consistentwithWolfandEgelhoffs(2010)criticalanalysisofvariousformsofnetwork 32 organizations proposed byIBscholars who neglect the limitations of networks as compared to,forexample,modernmatrixstructures.Usinganinformationprocessingapproach,Wolf andEgelhoff(2011)convincinglyarguethatdecentralizednetworkorganizationssimplydo notworkascomparedtoM-formstructuressuchasmatrixorganizations,whentheMNE operatesinmultiplehighdistanceenvironments,needstofocusatleastpartlyonthe efficiencyofexistingoperations,andmustbalancetheexploitationofNLBFSAswith developing LB FSAs.Inotherwords,muchofthetraditionalinternationalmanagementstrategyliteraturestill makessimplisticassumptionsthatglobalstrategiesarefeasible,andcanbeimplemented without much attention devoted to governance. In fact, global strategies and truly global NLB FSAbundlesarelikelytobeextremelyrare,asdemonstrated,interalia,bytheregional natureofMNEsintermsoftheir(limited)salesandassetdispersion,andtheregional elementsintheirgovernancestructures(RugmanandVerbeke,2008a).Futureresearchwill likelybuilduponthetheoreticalandempiricalinsightsofRugmanandVerbeke(2004)and hopefully recognize regional strategy and structure as an efficient alternative to non-feasible globalapproaches,especiallyinthecontextofinternalgovernance.Globalgovernance sometimesdoesappearpossibleinthecontextofglobalalliancessuchasintheairline industry,whereindividualairlinesperformlargelyregionalroles,andselectparticular, narrowvaluechainactivitieswhereresourcescanbepooledandrecombinedtocreateNLB alliancespecificadvantages(ASAs),whichunfortunatelyarelosttoanairlinewhenit decides to leave the alliance.33 OTHER UNITS OF ANALYSIS AND THE ROLE OF DISTANCE IN IB Infocused,contemporaryIBstudies,nineotherunitsofanalysishavebeenadopted,in additiontothebigthreediscussedinearliersections.Thesesetsinclude:first,the entrepreneur;theMNEheadofficeandthetopmanagementteam;andthevaluechain; Second, the expatriate; the centre of excellence; and the model factory. Third, the outsourcing agreement; the joint venture/strategic alliance and the cluster. Thefirstthreeadditionalunitsofanalysisarereallysubsetsofthefirmasthemainunitof analysis,butwithafocuson,respectively,whoestablishedthefirm,whatgovernance mechanismleadsthefirmandhowthefirmsvalueaddedfunctionsaredispersedacross space.Thesecondsetofthreeadditionalunitsisconcernedmainlywithwhatoccursatthe subsidiary level, but with a focus on, respectively, who is sent by the head office to perform a numberoftasksinthesubsidiary,whatuniquerolethesubsidiarycanperforminsidethe MNEnetworkandhowitcanbeamodelforexceptionalvaluecreation.Thethirdset explicitlylooksatthecomplementaryresourcesprovidedbyexternalactorsthatcanbe productively recombined with extant FSAs. Here, the critical point to remember is that any serious IB analysis always considers the CSAs of home and host countries, as well as bundles of LB and NL FSAs. The challenge is always toexplain,predictorguidehowcompetitivesuccesscanbeachievedoutsideofthehome nation, or how such success is hampered by a variety of internal and external constraints. For example,thestrategicchallengesfacinganentrepreneurwithinternationalexpansion ambitionsaresimilartothosefacingalargeMNE,especiallyintermsofthebounded rationalityandboundedreliabilityconstraintstobeovercome,andthetransactioncosts related to these constraints (Casson, 1982).34 Theabovealsoholdsfortheanalysisofnetworks.Theproblemwithsomeofthestrategy and IB literature is an exaggerated focus on the benefits of networks, but a relative neglect of itscosts.NetworktheoryneedstobeappliedtoIBwithcaution.Whenthereareintra-firm alignments the network approach is fully consistent with analysis at the parent and subsidiary level,asdiscussedabove.However,inter-firmlinkages,whichincludejointventuresand strategicalliancesdonotrelateeasilytobasicIBtheory,especiallyinternalizationtheory. Here, the network literature largely ignores the ownership issue, in the sense of required FSA protection against dissipation and the appropriate distribution of the cooperation benefits and costsamongthepartners,whoareallresidualclaimants(NarulaandHagedoorn,1999; Gulati, Nohria and Zaheer, 2006). In moregeneral terms, the main challenge associated with the myriad ofalternative units of analysis adopted in the IB literature is that the authors sometimes lose track of the continued relevance of distance and its various dimensions. One example is the study of so-called born globalswherebyauthorsoftensimplyassumethatcell3ofFigure1opportunitiesare availabletothemacrosstheworldwithoutunderstandingthechallengesofinternational expansion, especially outside of the home region. In many ways, a simplistic use of cell 3 in Figure1thinkingrepresentsabornglobalillusionforinternationalentrepreneurship, Rugman and Almodovar (2011).Studies on another unitof analysis, namely thevalue chain, are often also associatedwith a rathershallowunderstandingofthecompoundeddistanceconcept.Avaluechaindispersed across borders equates to a firm making strategic decisions to access particular home and host country CSAs by deploying idiosyncratic FSA bundles in each country and then coordinating these bundles.In this context, the often expressed view that MNEs pursue global sourcing and are engaged in a global race for talent, rather than pursuing more focused and selective 35 initiatives in these areas, such as regional sourcing or local sourcing, often leads to absurd conclusions,(Rugman,LiandOh,2009).Morespecifically,mostoftheliteratureon offshoringandoutsourcingislargelyacell1inFigure1phenomenon.Westernfirmshave offshoredmanufacturingtoChinaduetoChinasCSAincheaplabour.Similarly,IThas been offshored to India due to Indias relatively cheap, skilled and educated labour. The relevant insight is that offshoring is difficult. The distance to countries such as China and IndiamaybelargeforWesternMNEs,andthereforeoffshoringeffortsarenotdeployed globallybutareverytargeted,oftentowardslargecosmopolitancentres.Withinthese centres, widely available knowledge of business best practices, competent legal and financial counselling,andapoolofexperiencedmanagersmayalleviatetheboundedrationalityand boundedreliabilitychallengestobeovercome.Inmostcases,substantialmelding investmentsmustbeperformedfortheMNEtobesuccessfulinrecombiningtheMNEs extantNLBFSAswiththeFSAsoflocalresourceproviders.Here,theadditionaldistance challengeisthatoutsidesuppliersofoffshoringservicesmaywanttoworkupthesmiling curve,i.e,movetowardsbothmoreupstreamanddownstreamvaluechainactivitiesas comparedtotypicalcomponentsupplyorbasicICTservices,therebycreatingmorevalue added per unit delivered, Mudambi (2008). However, there is a danger for the MNE in that it mayultimatelyloseitscompetitiveedgeinsomeoftheseactivitiesvis--visoffshoring services providers, especially in higher distance, peripheral markets. Fortunately, much of the work on the global factory, which looks at the production side of the value chain is consistent with the complexities of cell 3 in Figure 1 thinking, see Buckley and Ghauri (2004), Buckley and Hashai (2005), Buckley (2009).In examining the changing locationandownershipstrategiesofMNEs,namely,thehubandspokeandtheglobal factory, Buckley and Ghauri (2004) show the increasingly sophisticated decision making of 36 managersinMNEstoslicemorefinelythevalueaddedactivitiesoffirms.Infinding optimumlocationsforeachcloselydefinedactivity,theyaredeepeningtheinternational divisionoflabour.Ownershipstrategiesarealsobecomingincreasinglycomplex,leading manyMNEstoapplyacontrolmatrix,wherebyoperatingstrategiesaredecidedupon locationbylocation,andcanrangefromwhollyownedsubsidiaryunitsviaFDItomarket relationshipssuchassubcontracting,withjointventuresasoptionsonsubsequentdecisions inadynamicpattern,LiandRugman(2008).However,fullyunderstandingcell3 complexities, probably means that here again the so-called global factory may be an illusion, and that the reality may be more one of regional factories. Figure 2 here Theimplicationoftheaboveisnotonlythatdistancestillmatters,butshouldneverbe underestimatedinIBstudies(especiallynotthecompoundeddistance),assuggestedby Figure 2. The vertical axis of Figure 2 lists the various possible units of analysis, whereby we includehere,forillustrativepurposesonly,fourunitsofanalysis,consistentwithcell3in Figure 1: the entrepreneur, the MNE, the MNE subsidiary with intra-firm networks, and inter-firmarrangements.ThehorizontalaxisdichotomizesthereachofMNEFSAs/capabilities into global NLB FSAs versus limited NLB FSAs.TherelevanceofFigure2isthatwecanpositionasubstantialnumberofcontemporaryIB conceptsonthelefthandside.Cell1representstheso-calledbornglobalfirmwithan ambitious entrepreneur at its core who has worldwide growth ambitions. Cell 2 represents the global MNE with sales and assets dispersed in a balanced fashion across the globe, of which thereareonlynineexamples,Rugman(2005),orthemetanationalwithitssensorsand magnets gathering knowledge from the farcorners of the planet.Cell 3 represents the MNE subsidiary with a globalmandate. Finally, cell 4 represents global outsourcing networks and 37 global alliances.Unfortunately, the real world cases that can actually be placed in cells 1 to 4 are few and far betweenduetothetyrannyofcompoundeddistance.Mostbornglobalsarereallyborn regionals in cell 5. Most large MNEs have a home region sales and asset concentration, and operatewithgeographicdivisionsincell6,RugmanandVerbeke(2004,2008a,b,c).Most MNEsubsidiariesperformaregionalmandateroleintheinternalMNEnetworkincell7.Finally,mostoutsourcingnetworksandalliances,eventhosedesignedbythelargestMNEs in the world, are again very selective in terms of geographic coverage, placing them in cell 8. Globaloutsourcing/offshoringincell4islargelyanon-starter,becauseofthetransaction costs associated with it. In short, in the future, much more research needs to be done on the right hand side of Figure 2; the IB field needs to move beyond the left field of Figure 2. We need to focus instead on the limits to globalization, resulting from two sets of parameters, as shown in Figure 3. Figure 3 here Theessenceofexplainingtheliteratureonglobalversusregionalstrategiescanbedivined withreferencetoFigure3.Asexplainedabove,muchoftheliteratureinIBignoresthe complexityofgeographicdistance.Therefore,weplacethecomplexityofthecultural, institutional, economic, and geographic components of compounded distance on the vertical axis. Essentially, each MNE needs to identify the relevant weighting of the components of the compoundeddistanceitfaces.ItthenneedstobuildonitsextantFSAsbasetofurther developnewFSAswhichwillovercometheresourcerecombinationbarriersitfaces. Therefore, on the horizontal axis of Figure 3, we place the resource recombination barriers to the growth of the MNE.38 Thepresenceofcompoundeddistancemeansthatitisnotsufficienttoaddtheisolated effectsofcultural,institutional,economicandgeographicdistancecomponents.Theremay be multiplicative effects arising from these distance dimensions, especially in interregional as opposedtointraregionalsettings.Inotherwords,ratherthanlookingatCSAsassourcesof netbenefitstotheMNE,assuggestedbyFigure1,thefocusshouldshiftinsteadtothe challenge of accessing these CSAs.The existence of resource recombination barriers demonstrates the difficulties of creating the rightmixofFSAsthatwouldguaranteecompetitivenessin,forexample,ahostregion market.Inotherwords,itisimportantnotsimplytoassumethepresenceofFSAsinthe MNE that would almost automatically confer competitive advantage, as suggested by Figure 1,butinsteadtorecognizethat,typically,NLBFSAsneedtobemeldedwithLBFSAs,a processthatmayencountersevereimplementationproblems,interalia,wheneachsegment ofthefirmsvaluechainrequiresidiosyncraticresourcerecombinationefforts,Rugman, VerbekeandYuan(2011).Asimilarapproachtofinding,andtesting,severaltypesofLB FSAs appears in Lo, Mahoney and Tan (2010). Incell1,thereisamixofhighcompoundeddistanceandlowresourcerecombination barriers:thisistheassumptionofacomplexworld,combinedwiththeMNEsabilityto create the right FSA mix without too much difficulty. This is the main assumption adopted in, forexamplethe transnationalandmetanationalillusions.Incell2,alowcompounded distance and low resource recombination barriers suggest a simple world where all is global (global firms, born globals, global mandates, etc.). Cell 3 in turn shows the regional solution, whereby firms face high compounded distance, and at the same times struggle with important resource recombination barriers when entering into host regions. Finally, cell 4 describes the often-observedpositionofsmallerfirmswithmainlyLBFSAsbecauseofhighresource 39 recombinationbarriers.Suchfirmshavegreatdifficultyovercomingevenlimited compounded distance (across the national borders of the home region).These firms operate mostly on a local level.In conclusion, Figure 3 helps us to build upon the tension between the literature on simplistic aspectsofglobalizationandglobalstrategies,ascomparedtotherealitiesofmorecomplex decisionmakingrequiredbyMNEsdealingwiththerealitiesofcompoundeddistanceand resourcerecombinationbarriers.Incell1ofFigure3,theworldiscomplex,intermsof compoundeddistancebuttheliteratureonmetanationalsandtransnationalssimplyassumes that firms can overcome this. In reality, there are complexities facing the firm in developing newFSAstoovercomeresourcerecombinationbarriers.Inthefuture,IBresearchneedsto engagewithcell3ratherthancontinuingtobeboggeddownincell1.Inasimilarmanner, much of the literature over the last fifty years has dealt with cell 2 of Figure 3. This has led to simplisticworkonglobalfirms,globalmandatesandbornglobalfirmswhichbasically assumethattheworldissimpleasbothcompoundeddistanceandresourcerecombination barriers are ignored. In reality, even if compounded distance is not a critical challenge, there remain firms that operate in cell 4, developing mainly LB FSAs, and operating domestically. Thesefirmslackthemotivationtoexpandinternationally,forexample,becauseofan uncontesteddomesticmarket.Insummary,futureresearchinIBneedstodistinguishmuch more carefully between the four cells of Figure 3. In the concluding section, we suggest that such future research may well benefit from a focus upon the regional nature of IB. CONCLUSIONS REGIONAL VERSUS GLOBAL STRATEGIES We have shown that the three key units of analysis in IB theory over the past fifty years have been the country, the firm (MNE) and the subsidiary. The most promising area for further IB 40 theory development is in essence the study of the interactions among these three parameters, withthesubsidiaryasthekeybuildingblock.Inparticular,wehaveshownthatthe subsidiary hasemergedas a new unit of analysis due to the importance of network thinking from strategic management.Here, the SSA concept represents the culmination of fiftyyears of IB analysis. An SSA results from (a) recombining knowledge transferred from the network withnewlycreatedknowledge;(b)autonomouslyassumed(extended)subsidiaryroles;and (c)subsidiaryknowledgeembeddedinidiosyncratichostcountrylocations.Paradoxically, theSSAconceptisconceptuallyalmosttheoppositetoconventionalnetworkthinkingin mainstream strategy, with its exaggerated focus on knowledge sharing. Looking ahead, it is apparent that, irrespective of the unit of analysis chosen, the region as an expression of how distance matters in IB - has emerged as an important parameter. Here, theoreticalworkisinitsinfancyasthefocusofrecentresearchonthenatureandextentof regionalversusglobalactivitybyMNEshasbeenlargelyempirical.Thisresearchonly becamepossibleduetochangesinaccountingstandardsinthelate1990s,whichrequired firmstoidentifythebroadregionsofthetriadinwhichtheirsalesandassetstakeplace, Rugman (2000, 2005).There is confirmation of the lack of global firms and the importance of the region as a unit of analysis in Fisch and Oesterle (2003); Asmussen (2008); Collinson and Rugman (2008); Rugman and Oh (2008); Hejazi (2007); Kolk (2010); Sethi (2009); Yin and Choi (2005); Rugman and Verbeke (2008a,b,c); Grosse (2005). There needs to be more conceptually driven inquiry to solve the empirical puzzle that most of eventhelargestMNEsappearunabletomovebeyondtheirhomeregionandgoglobal.A transactioncosteconomics(TCE)basedanalysismaybeparticularlyusefulhere,Rugman and Verbeke (2005). Such analysis would recognize the barriers to recombining extant NLB FSAs held by the MNE, with LB FSAs to be provided by third parties (in the absence of well 41 functioningexternalmarketsfortheresourcesunderlyingtheseLBFSAs).Thisresource recombination process, in turn, may be a precondition to accessing the coveted CSAs in host markets,suchasalargecustomerbaseatthedownstreamendorahighlyskilledand productiveworkforceattheupstreamendofthevaluechain,butrequiresovercoming resource recombination barriers. Currentlythereappearstobealiabilityofinterregionalforeignnessfacingeventhelargest MNEs, though this concept has only been sketched by Rugman and Verbeke (2004, 2007).If the great majority of the worlds 500 largest firms grow their sales and assets mainly within theirhomeregion,thissuggeststhattheirbusinessmodelsandstrategiesarehomeregion based. There must be prohibitive resource recombination barriers associated with adapting or changingtheirbusinessmodelstoachievetrulyglobalsalesintheothertworegionsofthe triad.Thus,IBtheorymustredirectthinkingatthecountrylevelontheliabilityofinter-regionalforeignnesscausedbycompoundeddistanceandmovethistowardsafocusupon regional strategy.In other words, the country level of analysis may needto move towardsa regionallevelwhenassessingtheimpactsofdifferencesinculture,politicalregulation, economicandfinancialinstitutionsetc.Newresearchonthemultinationalityand performancerelationshipneedstoincorporatethisregionaldimension,RugmanandOh (2007, 2010), Lee (2010); Oh (2010); Wolf et al. (2008); Li and Li (2007), while avoiding the pitfalls of the past research on this topic (Verbeke and Brugman, 2009) In related work, Fisch and Oesterle (2003) point out that the term globalization has become overused,andhasapparentlyreplacedtheterminternationalization.Thereareboth conceptualresearchgapsconcerningthedifferencebetweenglobalizationand internationalization, and a lack of empirical knowledge about the actual level of globalization ofMNEs.InthespiritofRugman(2000),FischandOesterle(2003)presentanew 42 quantitative tool, which combines geographic spread and cultural diversity measures, so as to integratemultipledimensionsofinternationalizationintoaglobalizationindexinsteadofa simpleinternationalizationmeasure.FischandOesterle(2003)applythismeasuretoassess theglobalizationofthemostinternationalizedGermanMNEs,amongthetop100non-financial MNEs from developed economies. The results suggest that these MNEs are neither globalizednorshowastraightforwardpathtowardsglobalizationinthepastdecade.This outcomecontradictsthecommonassumptionofglobalMNEs.Thisnewconstructcanbe operationalizedtomeasurethedegreeofinternationalization(GlaumandOesterle,2007). Moreresearchlikethisneedstobeundertakenonthemetricsofinternationalization,not globalization. Intermsofinternationalhumanresourcedevelopmentandcross-culturalstudies,aregional focuswillrequirefundamentalrethinkingofthetraditionalcountryfocus.IfMNEsoperate regionally, then what is the use of Hofstede (1983), House et al. (2004), GLOBE (2006) and the Kogut and Singh (1980) metrics?These traditional empirical shortcuts for cross-cultural analysismayneedtoberevisedataregionallevel.Forexample,TungandVerbeke(2010) havesuggestedrecentlythatanalysisofexpatriatesandthetrainingofseniorexecutivesfor Chinese firms may be subject to an inverse resonance and that there may be a need to adopt aregionalfocus,e.g.anAsian-AsianperspectiveratherthanthetraditionalWestern-Asian perspective.Inmanyways,thetentheoreticalproblemsincross-culturalresearchidentified byShenkar(2001)remainunresolved,mainlybecauseresearchinthisareaispoorly embeddedinIBtheory.Inthiscontext,Wolf,DunemannandEgelhoff(2008)examinethe economic, psychological, and sociological reasons for home-region oriented MNEs (Rugman and Verbeke, 2004; Rugman, 2005).43 Intermsofpoliticalintegration,theexperimentoftheEUoffersmanyinsightsintothe benefitsofeconomicintegrationonaregionallevelwithcommoninstitutionsand regulations.ButdoesthisapplytoNAFTA,inwhichtheextentofsocialandpolitical integration is much less than in the EU? Or to Asia, where at best a NAFTA type set of loose integration is more likelyto arise than the tightlyregulatory structure ofthe EU?Why is it thatNorthAmericanandAsianMNEsarenearlyashomeregionbasedasEuropeanones, without the same degree of political and social integration? Afinalexampleoftheneedforbettertheoreticalanalysis,buildingupontheregional phenomenon,istheworkoninternationalentrepreneurshipandso-calledbornglobalfirms.Close scrutiny of the born global phenomenon, whereby companies internationalize near or at their founding (Knight and Cavusgil, 1996), suggests that these firms actually achieve their exportssaleslargelywithinthehomeregion.Forexample,Knight,MadsenandServais (2004)investigatethe292bornglobalfirmsinDenmarkandtheUnitedStates.Their findingsarethatDanishfirmsgenerateonaverageof71percentoftheirtotalsalesfrom abroad, mainly in Europe, compared to 47 percent for the American sample. This reflects the smallsizeoftheDanishdomesticmarketandDenmarksproximitytonumerous neighbouringcountriesinEurope,ofwhichGermanyaccountsfor50percentoftheirsales. The American firms generate 53 percent of their total sales in the United States. To be more accurate, these firms can be described as born regional, not born global, (Rugman, 2000; Fisch and Oesterle, 2003).There appears to be no robust empirical evidence of any born global firms other than a few ITfirmsfromIndiaandpossiblysomesmallfirmsfromIsrael,RugmanandAlmodvar, (2011).Instead,therearebornregionals(Lee,2010;Lopezetal.,2009).Further,whena smallfirmmakesopportunisticforeignsales,theseareusuallyintheformofexports,not 44 FDI.Yet,theclassicarticleoninternationalnewventure(bornglobals)byOviattand McDougall (1994) uses Dunnings OLI framework of MNEs to explain born global activity, insteadofmaintainingamoreappropriatefocusuponexportsandinternationalmarketing. Again, this area of research is still very weakly embedded in basic IB theory. Inconclusion,futuretheoreticalworkinIBmustcontinuetostudythelinkagesamongthe key units of analysis adopted in the previous fifty years, with a focus on the subsidiary as the key building block, taking into account the reality of regional strategy and structure for most MNEs.Weneedtoavoidbeingsidetrackedbyill-conceivedconceptssuchasthe metanational and empirically illiterate subfields of research such as the born global literature, whichignoresthecostsofdistance.Weshouldfocusinsteadonthelimitstoglobalization, resulting from severe frictions, i.e. resource recombination barriers, occurring when attempts are made to conduct business beyond the home region, wherecompounded distance may be high. It is only by linking brave new empirical work on emerging issues, such as the regional solution,withgoodbasictheory,i.e.sophisticated,comparativeinstitutionalanalysis,as providedbyinternalizationtheory,thatthefieldofinternationalbusinesswillcontinueto prosper in the future. 45 Figure 1: The CSA/ FSA Matrix. Firm-Specific Advantages (FSAs) Weak Strong Country-Specific Advantages (CSAs) Strong 13 Weak 24 Source: Adapted from Chapter 8 in Rugman,Inside the Multinationals, New York: Columbia University Press, 1981; 25th anniversary edition, Basingstoke, UK and New York: Palgrave Macmillan, 2006. 46 Figure 2: Distance and the Nature of International Business Studies Reach of Firm-Specific Advantages (FSAs) Global NLB FSAs Limited NLB FSAs ENTREPRENEUR 1 BORN GLOBAL 5 BORN REGIONAL Unit of analysis MNE 2 GLOBAL MNEMETANATIONAL 6REGIONAL MNE GEOGRAPHICDIVISIONS

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