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Institutions and the OLI paradigm of the multinational enterprise

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Abstract

The prevailing ownership-based theories of the firm are increasingly being challenged by new forms of organising, as exemplified by the Asian network multinational enterprise (MNE). We believe that an institutional approach, that tries to bridge both the macro and micro levels of analysis, and that encompasses both formal and informal institutions, offers a promising way to advance our understanding of the different forms of the contemporary MNE. This paper introduces a theoretical framework that draws substantially on the work of Douglass North, and examines how an institutional dimension can be incorporated into the three components of the OLI paradigm.

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Notes

  1. Our conception is similar to that of Madhok (2002), who considers three kinds of factors, namely the governance structure, transaction and resource attributes, to explain the boundaries of firms.

  2. See e.g. Chen (2005), who analysed not just failures in the market for technology (the original licensing vs. FDI decision), but also those in the market for manufacturing (the OEM vs. FDI decision

  3. A notable exception is the attempt by Oliver (1997) to integrate the resource based and institutional views in explaining the sustainable competitive advantages of firms.

  4. This is in spite of the fact that the knowledge-based theory of the firm essentially rejects transaction costs or market failure as an explanation for the internalisation of technology transfer. See also Verbeke (2003).

  5. Some of the organising principles are also likely to be industry rather than firm specific, cf. the industry recipes described by Spender (1989).

  6. Adam Smith’s underlying theory of human nature is articulated in his Theory of Moral Sentiments (1790).

  7. Historical examples of inventions that led to non-ergodic change include the advent of marine insurance, and the evolving technologies of warfare. In both cases, subsequent changes to the physical and human environment were profound, but unforeseen at the time of each invention (North, 2005).

  8. See also Casson and Lundan (1999) for a critique of the top-down approach of comparative institutional studies. Instead of explaining how national level institutions constrain or enable economic activity, they suggest a bottom-up approach centred on explaining differences in rates of entrepreneurship.

  9. Nelson (2002) uses the metaphor of a makeshift road across a swamp. While the road restricts where one can travel on the swamp, focusing on this restriction is to miss the point of the possibilities created by the existence of a road.

  10. Noorderhaven and Harzing (2003) define the country-of-origin effect in MNEs as the tacit beliefs and implicit values of key decision makers.

  11. For example, a recent ideological shift that has directly affected the goods and services supplied by firms is the open source movement, which has emphasised the value of maintaining a “knowledge commons” to encourage innovation (von Hippel & von Krogh, 2003). This can be contrasted with the strategies of many large ICT and pharmaceutical firms, which have focused on extending the boundaries of private knowledge through extensions to IPR law (Weber, 2006).

  12. Both Zysman (2004) and Nelson (2005) provide arguments that highlight the importance (and difficulty) of conscious experimentation to achieving growth in an increasingly uncertain environment.

  13. Ozawa (2005) has also recently 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 revitalise 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’.

  14. See also Ostry (1998) on the emerging challengers to the Western ‘universal’ model of the firm.

  15. For example, Lenovo, following its acquisition of IBM’s PC business in 2005, is an example of an unusual mix of a Chinese cultural background, imported management principles and technology, strong rules-based values imposed by a visionary CEO, and the ambition to create entirely new ways of conducting business by absorbing the considerable institutional legacy of a major foreign MNE.

  16. Although our focus in this discussion is mainly on the national level, the co-evolution of firms and industry-level institutions is equally important, and may sometimes be more important than the national institutional structure in shaping (and being shaped by) the behaviour of MNEs. See e.g. Djelic and Quack (2003) for several European case studies on such patterns of evolution.

  17. The role of formal and informal institutions at the national level is examined further in Chapter 10 of Dunning and Lundan (2008).

  18. On occasions, e.g. political or economic revolutions, there may be rapid institutional realignment, even though the effects of such a realignment may take some time to work themselves through. The fall of communism and the aftermath of the Asian financial crisis might be considered examples.

  19. See e.g. Pauly and Reich (1997) and Amable (2000). A partial exception is the work of Yeung (2002) which focuses on the impact of domestic institutions on entrepreneurship and the internationalisation of firms from Hong Kong and Singapore.

  20. The influence of institutions on the product and geographical scope of the firm is explored further by Peng and Delios (2006). See also Lu (2006) for an interesting theoretical discussion suggesting that institutional relatedness can offer both an Oi and Oa/Ot advantage, in so far as it may affect the performance resulting from the appropriate diversification strategy.

  21. The volume by Dunning and Lundan (2008) summarises and evaluates the contribution of internalisation scholars such as Peter Buckley, Mark Casson, Alan Rugman, and Jean-Francois Hennart to our understanding of the emergence and growth of the MNE.

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  1. Department of Economics, University of Reading, PO Box 218, Reading, RG6 6AA, UK

    John H. Dunning

  2. Department of Organization and Strategy, University of Maastricht, PO Box 616, 6200, MD, Maastricht, The Netherlands

    Sarianna M. Lundan

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The authors would like to thank Mike Peng (Editor-in-Chief) for helpful comments on earlier versions of this paper.

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Dunning, J.H., Lundan, S.M. Institutions and the OLI paradigm of the multinational enterprise. Asia Pac J Manage 25, 573–593 (2008). https://doi.org/10.1007/s10490-007-9074-z

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