I follow this third approach and propose that the analysis of DMNCs can contribute to the extension and modification of existing theories by clarifying their assumptions and boundaries. I also propose that the contribution is limited to the areas in which the country of origin has a large influence on the behavior of the firm.
Conditions of developing countries and DMNCs' differing behavior
Developing countries have particular conditions that affect the internationalization of their firms. Different sources (e.g., World Bank, United Nations Development Program, United Nations Conference on Trade and Development, International Monetary Fund) use different criteria when classifying countries, which results in the same countries being classified as advanced by one source and as developing by another. Since countries can be ranked by relative level of development, the separation between advanced and developing countries is an artifact (Cuervo-Cazurra and Genc, 2011) that does not take into account the large differences within each group (Ramamurti, 2009). Despite this, I use this broad classification to facilitate the discussion.
Table 1 summarizes the stereotypical conditions of developing countries and how these affect the observed behavior of DMNCs at home and abroad (for reviews of the role of the environment on a firm's internationalization, see Cuervo-Cazurra, 2011a, and Meyer, Mudambi, and Narula, 2011). I group a country's conditions into four types (Ghemawat, 2001)—social, politico-regulatory, geographic, and economic—and analyze those conditions that can be ranked in terms of development. For conditions that cannot be ranked in terms of development (e.g., cultural attitudes, legal families), AMNCs and DMNCs cannot be compared (see Cuervo-Cazurra and Genc, 2011, for a discussion).
Stereotypical conditions of developing countries and their impact on the behavior of DMNCs at home and abroad
First, developing countries tend to be characterized by lower levels of social development, especially in terms of income and, in many cases, in health and education (notwithstanding pockets of excellence in some countries). The lower level of income induces firms to generate innovations that are appropriate for low-income consumers (Prahalad, 2004). These innovations help DMNCs not only enter other developing countries in which customers have similar needs, but also sell to customers in advanced economies, benefitting from reverse innovation processes (Govindarajan and Ramamurti, 2011).
Second, in the politico-regulatory arena, developing countries tend to have poorly developed institutions and less stable political systems and regulations (Djankov et al., 2002), which have been termed institutional voids (Khanna and Palepu, 1997, 2010). These induce firms to develop the ability to manage high transaction costs and political influences, which makes them more resilient to instability in the environment (Khanna and Palepu, 2010) and induces their diversification, leading to the emergence of business groups (Cuervo-Cazurra, 2006a; Khanna and Yafeh, 2007; Yiu et al., 2007). This ability to deal with challenging home countries enables DMNCs to enter and dominate other countries with problematic governance conditions (Cuervo-Cazurra and Genc, 2008) and high corruption (Cuervo-Cazurra, 2006b). Alternatively, DMNCs may escape the poor governance at home by entering countries with better governance (Witt and Lewin, 2007), bonding themselves to the more stringent governance (Coffee, 2002).
Third, geographically, developing countries tend to have less developed infrastructure because of the government's inability to provide it. This results in companies having to invest in the development of the missing infrastructure (Fisman and Khanna, 2004) and in the creation of innovations that function within the underdeveloped infrastructure (Prahalad and Mashelkar, 2010). These abilities enable firms to internationalize using process-based advantages that rely less on supporting infrastructure and generate resilient innovations.
Fourth, in terms of economic characteristics, developing countries tend to have less sophisticated innovation systems, underdeveloped capital markets, and fewer and less developed suppliers. This results in firms having fewer patents (Furman, Porter, and Stern, 2002), less sophisticated financial structures (Booth et al., 2001), and internalizing more suppliers of inputs (Toulan, 2002) at home. It also induces DMNCs to expand abroad to obtain sophisticated technology, acquiring firms from advanced economies (Madhok and Keyhani, 2012). Moreover, the process of pro-market reforms that many developing countries have undertaken has changed the conditions of operation and induced firms to improve, for example by integrating into global value chains (Kumaraswamy et al., 2012), and becoming more international (Cuervo-Cazurra and Dau, 2009a), helping them improve performance (Cuervo-Cazurra and Dau, 2009b).
Extending theories and models by analyzing DMNCs
I now review some of the insights the analysis of DMNCs can provide to some of the leading explanations of the MNC (for recent reviews of theories of the MNC, see Cuervo-Cazurra (2011b), Dunning (2009), Hennart (2009), Westney and Zaheer (2009)). Existing models and theories have been developed by observing and analyzing the behavior of AMNCs. In many cases, they have taken for granted certain conditions of the advanced country and the global environment at the time when they studied AMNCs. The analysis of DMNCs can help identify these assumptions and extend the predictions of the theories; the interaction between theory and observed reality can lead to a more powerful explanatory engine (Buckley and Lessard, 2005).3
Table 2 summarizes the arguments and assumptions of some of the leading explanations of the MNC and how these arguments can be modified by the analysis of DMNCs. I go beyond merely identifying how the behavior of DMNCs differs from that of AMNCs, as I did in Table 1 and the previous discussion, and analyze how this differing behavior extends theory. To do so, I review the core arguments of each theory or model, discuss how DMNCs may not follow the stated predictions, and explain how this differing behavior reveals unstated assumptions and boundaries that can be used to extend the theory or model.
Key theories of the MNC and their extension from the analysis of DMNCs
Contributions to the product life cycle model
The product life cycle model proposed by Vernon (1966) and extended in Wells (1972) and Vernon (1979) indicates that innovations are created first in advanced economies to solve the needs of sophisticated consumers there. These innovations are then exported to other advanced countries that have similar sophisticated consumers and are produced there to ensure proximity. As the innovation and production process becomes standardized and the price drops, the innovation is then sold in developing countries and produced there to take advantage of the lower cost of production. Eventually, the innovation stops being manufactured in advanced economies and is imported from developing countries.
DMNCs may select to sell their innovations in countries in which consumers have similar needs, i.e., other developing countries, or may choose countries in which consumers are more willing to pay for innovations, i.e., advanced economies. This helps separate two assumptions that are confounded in the original model: the similarity in customer needs between home and host countries that the innovation satisfies and the need for a high level of income to pay the premium that the innovator demands.
Moreover, after introducing the innovation and selling it abroad, DMNCs may continue producing at home when the products become standardized because DMNCs are already operating in low-cost countries (Mudambi, 2008). Thus, production stays in the same country in which the innovation was created rather than move abroad when the innovation is transferred to other countries. Production does not necessarily have to follow to the country in which the innovation is sold to ensure proximity.
Contributions to the incremental internationalization process model
The incremental internationalization model introduced by Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977) and refined by Johanson and Vahlne (1990, 2003) and Eriksson et al. (1997) outlines two predictions about the internationalization process. First, the model explains the selection among countries in which to enter, arguing that managers minimize risk by first selecting countries that are close in psychic distance (a measure of the differences between countries that limit the transfer of information) to the home country because managers can use their knowledge there more easily, and later selecting those that are further away. Second, the model explains the selection of the mode of operation in a country, arguing that managers select the mode of operation that limits the perceived risk and exposure as they learn about how to operate in the country. Thus, they choose first to export using agents, and then they establish sales subsidiaries and eventually production subsidiaries.
The analysis of DMNCs helps separate psychic distance from market attractiveness in the selection of countries; these two drivers are confounded in the original model, which has tended to focus too much on the risks and less on the benefits of internationalization (Nordstrom, 1991). DMNCs may have to choose between first: (1) expanding into another developing country that has low psychic distance because the institutions and consumer characteristics are similar to the ones prevailing at home, but has low market attractiveness because consumers have low levels of income; or (2) expanding into an advanced economy that has high market attractiveness because consumers have higher levels of income, but also high psychic distance because the conditions of the advanced and developing countries differ, thus following a nonsequential internationalization process (Cuervo-Cazurra, 2011c) with different selection patterns (Cuervo-Cazurra, 2007, 2008). In contrast, AMNCs may choose other advanced countries that are both close in psychic distance and have high market attractiveness.
The study of DMNCs provides additional insights on the role of risk aversion in the internationalization process; this modifies the idea that managers are risk averse. Managers of DMNCs are likely to be better at dealing with risk than managers of AMNCs because of the higher levels of uncertainty and crises prevalent in developing countries. This higher ability to manage risks can lead managers of DMNCs to bypass an incremental entry style and enter directly with high commitment modes, such as via the establishment or acquisition of production facilities. Additionally, this higher ability to deal with risk enables them to choose to start the firm's internationalization in countries that are more distant from the home country.
Contributions to the OLI framework of international production
The OLI framework proposed by Dunning (1977) and extended by Dunning (1988, 1995, 2000) explains the establishment of production facilities in another country (see Eden and Dai, 2010, for a review of the evolution of the framework). It indicates that a firm transfers its ownership advantages (O) to benefit from the location advantages (L) of another country and become an MNE if there are internalization advantages (I) in the transfer of advantages and coordination of operations within the company rather than using the market.
The analysis of DMNCs highlights the variation in advantages for the creation of production facilities abroad. This adds to the debate regarding the advantages of the MNC, with Buckley and Casson (1985) arguing that O advantages are not needed for an MNC to exist and Rugman (2010b) arguing that O can be grouped with I advantages as firm-specific advantages. Thus, DMNCs may become MNCs not only by using the traditional O advantages discussed in the literature of innovative products and well-known brands. Instead, they may become MNCs by using other advantages—such as efficient processes and business model innovations—that are rarely discussed. For example, the Mexican construction materials firm Cemex developed best-in-class integration and standardization processes that enabled it to become a global leader in its industry (Lessard and Lucea, 2009).
The study of DMNCs draws attention to the existence of disadvantages that the OLI framework's focus on advantages neglects. DMNCs are more likely to move abroad not only to exploit O advantages developed in the home country, but also to reduce O disadvantages; acquiring firms are likely to move abroad to improve O advantages at home. Moreover, DMNCs may invest abroad to escape L disadvantages at home in the form of poor institutions or asphyxiating regulation. They are also likely to enter advanced economies in the input market (rather than the product market) to obtain L advantages—such as advanced finance, technology, or management skills—without having to establish production subsidiaries abroad.
Contributions to the internalization theory of the MNC
The internalization theory of the MNC introduced by Buckley and Casson (1976) and refined by Hennart (1982), Teece (1986), and Anderson and Gatignon (1986) explains the selection of methods to enter a country as the result of the transaction costs of using markets or companies. The firm selects the best method of operation (exporting, licensing, alliances, greenfields, or acquisitions) to benefit from the existing technological advantage depending on the ease of contract creation, the specificity of assets, and the ease of protection against opportunism.
The analysis of DMNCs extends the traditional view that a decision to internalize a transaction depends on the conditions of the particular transaction to include the characteristics of the company and its ability to manage transaction costs. DMNCs learn to internalize transactions because they are used to dealing with higher transaction costs and poorer contractual protections in their home countries. They react differently to transaction cost abroad, internalizing transactions differently from AMNCs because they have a higher tolerance for the level of transaction costs they can manage and a lower trust in the ability of external mechanisms, such as the judicial system, to protect contracts.
Contributions to the integration/differentiation model of the MNC
The integration/differentiation model discussed by Prahalad and Doz (1987) and Bartlett and Ghoshal (1989) explains the tension in the firm between benefiting from economies of scale via the integration and standardization of activities across countries and benefiting from responsiveness to local conditions via the adaptation and differentiation of activities to the host country in which the MNC operates (for a review of subsidiary management, see Birkinshaw and Pedersen, 2009, and Westney and Zaheer, 2009). The result of these pressures is the creation of different strategies to manage the twin set of pressures from headquarters and from the host country. An extension of these ideas is the application of neoinstitutional theory to the MNC and its analysis of the tension between headquarters and the host country in pressuring the subsidiary to achieve legitimation (Kostova and Zaheer, 1999).
The analysis of DMNCs helps extend these arguments by highlighting a third source of pressures in the form of the influence of the home country; this complements the pressures from headquarters and the host country that are traditionally discussed in the literature. These traditional two sets of pressures result in the international, global, multidomestic, and transnational strategies of the multinational (Bartlett and Ghoshal, 1989). The influence of the home country on the DMNC results in other strategies, for example natural resource vertical integrator, local optimizer, low-cost partner, global consolidator, and global first mover (Ramamurti, 2009).
Contributions to the resource-based view
The resource-based view introduced by Penrose (1959) and refined by Dierickx and Cool (1989), Barney (1991), and Teece, Pisano, and Shuen (1997) argues that firms have firm-specific resources/capabilities that managers use to create products that solve the needs of customers in competition with the offers of competitors. The application of the theory to the study of the MNC highlights the existence of architectural and component capabilities and their creation and use across countries (Tallman and Fladmoe-Lindquist, 2002). An extension is the knowledge-based view discussed by Nonaka (1994) that indicates that firms compete on the basis of knowledge, because knowledge is the resource that determines the value of all other resources. A firm becomes an MNC because it is better than the market at transferring knowledge across borders (Kogut and Zander, 1993).
The study of DMNCs highlights the influence of the country of origin on the development of resources and knowledge, which has resulted in the extension of the resource-based view with the so-called institution-based view (Meyer et al., 2009; Peng, Wang, and Jiang, 2008) that highlights the importance of institutions in the firm's internationalization. DMNCs emerge in countries in which the advantage provided by the resources is more difficult to protect because of the underdevelopment of institutions such as the patent or judicial system (Khanna and Palepu, 2010). This forces DMNCs to focus on developing advantages that are not protected externally but rather internally via secrecy, causal ambiguity, and systemic relationships such as new business models, organizational capabilities, and process innovations. Some of these advantages may even be the ability to manage in the challenging and changing institutional environment of developing countries (Cuervo-Cazurra and Genc, 2008; del Sol and Kogan, 2007). Thus, as DMNCs expand abroad, they use these differing advantages. Moreover, when internationalizing, DMNCs are likely to prefer methods of entry that provide more control over the operations because they already have a higher tendency to protect their resources and knowledge and rely less on institutions for protection.
Additionally, the study of DMNCs helps better explain how companies develop capabilities at the same time as they internationalize in a coevolutionary manner (Cuervo-Cazurra, 2002; Luo and Rui, 2009). DMNCs internationalize at the same time as they obtain new resources and capabilities via the alliances or acquisition of firms to upgrade capabilities at home and catch up to AMNCs (Bonaglia, Goldstein, and Mathews, 2007; Kumaraswamy et al., 2012; Luo and Tung, 2007). Thus, the traditional model in which the MNC uses existing resources to expand abroad is modified. DMNCs expand abroad at the same time as they create resources.
Limits to the contributions to theory development
Although the analysis of DMNCs can contribute to extending theories by revealing some of the assumptions and implicit conditions of operations upon which the theories have been built, there are limits to this contribution. A good theory should be able to explain the behavior of firms in general and not just under particular conditions. When the conditions of the country diminish in importance for the behavior of the firm, the contribution gained by analyzing DMNCs as one special type of MNC diminishes. In this case, they can help create and extend theory, not because they are DMNCs but just because they are MNCs.
Thus, I propose that the contributions to theory found through the study of DMNCs are mostly generated when analyzing the early stages of the foreign expansion of DMNCs. The reason is that at the beginning of the international expansion of the firm, the country of origin has a large influence, either because it is the source of most of the advantages/disadvantages or because the attitudes and knowledge of managers at headquarters play the leading role in decision making and international expansion. Once the DMNC operates in a large number of countries and derives much of its inputs and sales from multiple countries, the country of origin plays a limited role in its behavior. As a result, differences in behavior between DMNCs and AMNCs, as well as the potential contribution to theory by analyzing DMNCs as a distinct phenomenon, diminish in later stages of internationalization.
Additionally, there are other differences in behavior between DMNCs and AMNCs that have been discussed in the literature but that are not driven by differences in the conditions of the country of origin. Instead, they are driven by differences in the conditions of the firms and environment of operation. Unfortunately, some authors mistakenly associate these alternative explanations with being typical of DMNCs.
I group these alternative explanations of the differences between DMNCs and AMNC that are not associated with the country of origin into three types (see Ramamurti, 2012, for a related and detailed discussion).
The first alternative explanation is the lower level of internationalization. Many DMNCs are in the early stages of internationalization (infant MNCs) and, thus, differ in behavior from the AMNCs traditionally studied, which tend to be in later stages of internationalization (mature MNCs). Hence, many DMNCs are smaller, operate in fewer countries, are more regional, or have less well-known brands—not because they are from developing countries, but because they have internationalized for a shorter period of time; AMNCs with a short history of foreign expansion will show similar traits.
The second alternative explanation is a facilitating global environment. Although some DMNCs became MNCs long ago, like the Argentinean shoe company Alpargatas that established operations in Uruguay in 1890 and in Brazil in 1907, most DMNCs are becoming MNCs at a time of lower institutional barriers to foreign direct investment and widespread advances in transportation and communication technologies in the late twentieth and early twenty-first centuries. In contrast, many of the AMNCs analyzed in the literature emerged when transferring products and information was more difficult, in the early and middle parts of the twentieth century. Thus, much of the rapid and widespread internationalization of DMNCs can be explained by the ease of foreign expansion at the time they move abroad rather than from their origin in developing countries; AMNCs that are becoming MNCs in recent times can also do so quickly and widely (Knight and Cavusgil, 1996).
The third alternative explanation is the higher prevalence of special types of owners. Some DMNCs are state-owned firms under the control of politicians and many are family owned and managed, while many of the AMNCs traditionally analyzed are widely held and run by professional managers. Thus, some DMNCs follow nonbusiness objectives as a result of the differences in the desires of their owners rather than because they come from developing countries; state-owned and family-controlled firms from advanced economies are also likely to follow nonbusiness objectives that affect their internationalization (Pedersen and Thomsen, 1997; Thomsen and Pedersen, 2000).
In sum, the ability to use DMNCs to extend theory depends on whether researchers focus on the specific differential conditions of the home country and how these affect the internationalization of the firm, or whether they merely analyze how DMNCs behave. What sets DMNCs apart as a different phenomenon is their country of origin. Studies of DMNCs that want to extend theory by using DMNCs as a laboratory need to be explicit about which conditions of the country of origin they study and explain how they impact firm behavior. The question that researchers need to ask when analyzing DMNCs is whether the same arguments, logic, and behavior can be found in AMNCs. If the answer is yes, the study is not about DMNCs but MNCs that happen to come from developing countries. Many studies on DMNCs merely rediscover that well-known relationships identified from studying AMNCs hold for DMNCs as well.