An important reason for a firm to expand overseas is the anticipated profit derived from a combination of its own resources with resources located in foreign countries. Firms that expand their operations to other countries typically possess some valuable resources such as technology, marketing expertise and management know-how, but can often benefit from complementary resources such as research talents, capacities for efficient manufacturing, and skills for local marketing and management in the host country.
A value-creating combination of the resources across countries normally requires adaptations of the resources from both sides. The fact that the resources are currently controlled by independent firms based in different countries separated by physical and psychic distances can present significant costs and risks. These include potential failures of negotiation under uncertainty about the true qualities of the respective resources, difficulties in enforcing contracts, and risks of intellectual property infringements.
In a recently published article in the Journal of International Business Studies, Tailan Chi, Richard C. Notebaert Distinguished Professor of International Business, with research colleagues from King’s College London and University of Reading, developed a comprehensive model on the choice of organizational forms that a firm can use in managing its international operations. Their model examines how the choice of the proper organizational form can mitigate these costs and risks and enhance the value created from across-country resource combinations.
The model analyzes three general organizational forms:
- Market. One firm obtains access to the other’s resources via contract, such as a technology licensing agreement. This form is most efficient when the relevant contract is highly enforceable in the host country.
- Internalization. One firm acquires the other’s resources by purchasing the whole or the part of the firm that owns the complementary resources. This form is most efficient if contract enforcement is problematic but the resources from one of the firms are relatively easy for the other firm to evaluate and manage alone.
- Quasi-internalization. The two firms exploit jointly their respective resources. The efficacy of this form hinges particularly on how each firm perceives its gain from collaboration with the other in the future and can be the most efficient choice if the first two choices both present major difficulties.
The authors argue that the choice among the three forms also depends on the “distances” between the two countries and the “transactional” capacities of the two firms.
Geographic, political, economic, and socio-cultural distances between the two countries tend to increase the requisite extent of resource adaptations and exacerbate the difficulties in coordinating the needed adaptations. As such distances widen, the efficacy of the market falls, making internalization or quasi-internalization more desirable. The potential gains from resource combinations can become unrealizable if the distances are too vast.
But the choice between internalization and quasi-internalization depends on whether one or both of the firms have developed strong capacities for undertaking and managing international acquisitions, or for building and managing business relationships internationally. In this case, prior learning by the two firms can shift balance in the choice.
The full study, “Quasi-internalization, recombination advantages, and global value chains: Clarifying the role of ownership and control,” Christian Asmussen, Tailan Chi, and Rajneesh Narula, was published in Journal of International Business Studies, Volume 53, Issue 4, July 2022.
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