24.03.2021

Turning Costs into Capabilities

LUNDAN, Sarianna M. | LI, J. T.

For multinational enterprises (MNEs), expanding internationally into untapped markets can be costly. Promisingly, however, such expansion also offers opportunities to gain competitive advantages. Such opportunities have been neglected in international business research to date—a gap that HKUST’s Professor Jiatao Li and a colleague set out to fill. Building on a landmark 2008 paper by Gregory Jackson and Richard Deeg, they focused not on the costs of international expansion but on the opportunities it affords for MNEs to build their capabilities.  

In a paper that ended up “shaping the subsequent discourse in international business,” say the authors, Jackson and Deeg stressed the importance of considering context when studying institutions. After all, institutional contexts are inherently complex and show huge diversity across cities, countries, and regions. They are also internally dynamic, as industries are affected by changes in technology, customer demands, and competitor activities, along with political regimes, regulatory structures, and social norms.

Unfortunately, however, note Professor Li and his co-researcher, “the dominant methodologies in business and management research tend to favor some kind of reductionist approach.” In such research, they explain, “the diversity in institutional environments is generally treated as a source of increased costs.” Yet high costs are not the only outcome of institutional diversity. Answering Jackson and Deeg’s call to consider context, the authors note that expanding internationally also “increases organizations’ effectiveness in learning and developing dynamic capabilities.”

Specifically, operating in multiple international markets may equip MNEs with “knowledge diversity, adaptive organizational processes, and more arbitrage opportunities.” As long as they possess the necessary resources, the authors posit, MNEs can even “learn how to generalize their experience from one institutional context to another.” This may help them to “deal with the costs of variety.”

A useful way for MNEs to generalize their experience, the researchers tell us, is by “engaging in experimentation in volatile environments.” Every time an MNE enters a new institutional environment, the need to adapt to this unfamiliar setting “may trigger failures of established practices and searching for new solutions.” This, the researchers tell us, is “likely to foster organizational learning and the accumulation of experiential knowledge,” which in turn enrich organizational processes and routines.

However, warn Professor Li and his co-researcher, “there are also limits to learning from institutional diversity.” The costs of international expansion may outweigh its benefits “if MNEs do not make deliberate efforts to absorb, assimilate, and reflect on their experience in diverse institutional environments.” For example, organizations that expand too quickly may “overstretch top managers’ absorptive capacity,” the researchers explain, preventing such managers from transforming their experience into innovative capabilities. Older MNEs may also find it more difficult to accumulate and transform knowledge.

“It is clear,” the researchers acknowledge, “that MNEs should exercise caution and maybe even restraint in dealing with diverse institutional environments.” However, focusing too much on the downside of international expansion may prevent MNEs from recognizing and seizing opportunities. Therefore, the authors’ innovative emphasis on capabilities rather than costs may “contribute to both improved policy design and managerial decision making.” This may be especially important, they suggest, when tackling “grand challenges” such as the Sustainable Development Goals, which require MNEs to operate across an enormous range of institutional contexts.

LI, J. T.

Lee Quo Wei Professor of Business, Chair Professor, Director of Center for Business Strategy and Innovation
Management