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An evolutionary approach to understanding international business activity: The co-evolution of MNEs and the institutional environment

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Abstract

This paper examines the co-evolution of MNE activities and institutions external and internal to the firm. We develop a theoretical framework for this analysis that draws on the more recent writings of Douglass North on institutions as a response to complex forms of uncertainty associated with the rise in global economic interconnectedness, and of Richard Nelson on the co-evolution of technology and institutions. We link historical changes in the character of MNE activities to changes in the institutional environment, and highlight the scope for firm-level creativity and institutional entrepreneurship that may lead to co-evolution with the environment. We argue that the main drivers for institutional entrepreneurship are now found in the increasing autonomy of MNE subsidiaries. Thus MNE agency derives from more decentralized forms of experimentation in international corporate networks, which competence-creating nodes of new initiatives can co-evolve with local institutions. Unlike most other streams of related literature, our approach connects patterns of institutional change in wider business systems with more micro processes of variety generation and experimentation within and across individual firms. This form of co-evolutionary analysis is increasingly important to understanding the interrelationships between MNE activities and public policy.

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Notes

  1. Although we might note that there is almost no evidence of explicit cross-fertilization between the two.

  2. These correspond broadly to the three pillars introduced by Scott (2001), except that the informal institutions cover both the normative and the cultural-cognitive domains.

  3. By the physical environment we mean the realm of the resources and markets exploited by profit-maximizing firms, where little attention is being paid to non-market actors and institutional differences. By contrast, the human environment is concerned more with the mindsets and motivation of the actors involved in resource allocation, where non-market actors and institutional differences figure prominently.

  4. This is partly because organizations in North's (1990) analysis include not only firms but also political parties, educational organizations, and social and cultural organizations.

  5. Another stream of the IB literature that has emphasized the need for MNEs to adopt more flexible (and experimental) strategies is that involving real options. This literature has been particularly concerned with the effects of irreversibility on investment, and how a piecemeal approach might allow the firm to realize additional option value from its investments (Buckley & Casson, 1998; Kogut & Kulatilaka, 1994). See also Hamel (2006) on management innovation and corporate resilience.

  6. Recognizing of course that some best practices may be very difficult to imitate or transfer owing to causal ambiguity or social complexity, even within the firm, let alone by other firms (Kogut & Parkinson, 1998; Martin & Salomon, 2003; Szulanski, 1996).

  7. In passing, we might note that the view of structural inertia in the literature on population ecology, such as Hannan and Freeman (1984), is not the same as the meaning of inertia in our sense here, or that in Freeman and Perez (1988). We are concerned here with impediments to institutional change in the environment largely beyond specific industries and the competitive interactions that may play out within industries. Yet these are impediments that may be overcome with varying degrees of success or failure across different firms and different countries. In contrast, Hannan and Freeman (1984) think of structural inertia as implying an inability of firms to adapt to their environments, so that the selection in or out of specific firms is largely unaffected by their strategic decisions or actions. In other words, in this alternative context of the evolution of populations of firms in an industry, firms need not co-evolve with their environment. However, the ideas of Freeman and Perez and of North on cross-country differences in institutional inertia, and hence in the ability of firms to adapt to or take advantage of changes in physical technology, can rightly be traced back to the much earlier contribution of Veblen (1899).

  8. Historically, this was the case for example with US manufacturing investment in Europe in the 1920s and 1930s (Wilkins, 1974).

  9. The work of Oliver (1991, 1997) is extremely instructive in outlining the range of different strategic responses of firms, albeit in a non-IB context.

  10. Civil society groups have also found inventive ways to introduce new institutions, for example, by using the Alien Tort Claims Act to make MNEs accountable for human rights violations (Muchlinski, 2001).

  11. Although the OLI factors are fundamentally interdependent, it is particularly in this kind of dynamic context that their interconnections are likely to be most evident.

  12. However, not all such voids can be filled in by MNEs, and there is often no compelling reason for the inefficient parts of an institutional system to be replaced.

  13. The distinction between linkage effects and spillovers, and the different channels for their dissemination, are discussed in Dunning and Lundan (2008b). See also Spencer (2008).

  14. It is also reasonable to assume that initial imitation occurs for somewhat different reasons than later imitation, since initial imitation carries a high signaling value, whereas subsequent imitation may exhibit bandwagon effects.

  15. The British Empire, which spanned the globe, provides a historical counter-example. In this case the comprehensive transfer of institutions, including systems of education, made it easier for firms to engage in cross-border activities within the Empire. This resulted in a pattern of sustained high levels of trade and investment within the Commonwealth (Lundan & Jones, 2001).

  16. See for example the work by Jones on the evolution of trading companies, and on the historical prevalence of the group or network structures of MNEs (Jones, 2000; Jones & Khanna, 2006).

  17. Ozawa (2005) has examined how US MNEs have contributed to the institutional transformation ongoing in Japan. In his words, “foreign multinationals which are now eagerly welcomed in Japan to revitalize its corporate business sector are serving as renovators that can remodel Japan's inner set of institutions more closely in accordance with the norms of the outer set”.

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Acknowledgements

The origins of this paper lie in a conversation between John Cantwell and John Dunning in April 2007, in which we agreed to collaborate on a paper on an evolutionary theory of international business activity in a longer-term historical perspective. In October that same year Sarianna Lundan joined the conversation, and we decided that we needed to focus as our central theme on the co-evolution of MNE activity and the institutional environment. The three of us worked closely together on the paper, despite the diagnosis of John Dunning's illness in January 2008. John continued to be involved in all our discussions of the paper through to the sad event of his death in January 2009, which was during the second round stage of revision and resubmission. Thereafter, the two remaining authors completed the final version of this paper, and we take full responsibility for the form in which it finally appears. We are grateful for the helpful comments that we have received from the reviewers and participants at the AIB conference in San Diego, to the three anonymous referees of the journal, and to the editors of JIBS.

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Authors and Affiliations

  1. Department of Management & Global Business, Rutgers Business School, Rutgers University, Newark, USA

    John Cantwell

  2. Department of Economics, University of Reading, Reading, UK

    John H Dunning

  3. Department of Organization and Strategy, School of Business and Economics, Maastricht University, Maastricht, The Netherlands

    Sarianna M Lundan

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  1. John Cantwell
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  2. John H Dunning
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  3. Sarianna M Lundan
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Correspondence to Sarianna M Lundan.

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Accepted by Geoffrey Jones, Consulting Editor, 21 September 2009. This paper has been with the authors for three revisions.

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Cantwell, J., Dunning, J. & Lundan, S. An evolutionary approach to understanding international business activity: The co-evolution of MNEs and the institutional environment. J Int Bus Stud 41, 567–586 (2010). https://doi.org/10.1057/jibs.2009.95

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