How and Why Norwegian MNCs Commit Resources Abroad: Beyond Choice of Entry Mode. (1)

ABSTRACT * This study provides a model of MNC's commitment of resources in foreign countries. The results suggest that the strategic motives are important to MNC's decisions. * The data is based on Norwegian MNC's activities in Sweden, Germany, the United Kingdom, Spain, Poland, Japan, and the United States. Key Results * This research reveals how and why firm-specific, location-specific, and transaction-specific variables need to be supplemented by strategic factors to fully understand MNC's resource commitments abroad. How and Why MNC's Commit Resources Abroad The international commitment of resources has crucial implications for the competitive advantage of a multinational corporation (MNC) (2). Most previous studies have focused on the specific mode (e.g., export versus licensing) rather than on the magnitude of the actual foreign market resource commitment that is being made. We attempt to extend the entry mode research by identifying factors that determine how and why globally oriented firms from a small nation (Norway) invest their resources abroad. We define a foreign market resource commitment as the amount of dedicated visible and invisible assets that a MNC deploys in a specific country. For example, transferring working capital to a subsidiary is a low commitment decision. A high degree of commitment implies that resources cannot be transferred without loss of economic value. Common examples are seen in such dedicated resources as locally adapted production facilities or specialized staff training. We choose to analyze ongoing foreign market resource commitments for four reasons. First, ongoing resource commitments provide a chance to extend the entry mode and FDI literature. Second, Forsgren's (1989) research on the behavior of Swedish MNCs reveals that only 3% of these firms' commitment of new financial resources went towards new market entries. Most of the resources went towards strengthening existing foreign subsidiaries. Birkinshaw's (1997) research reveals that subsidiary initiatives can affect resource allocation independently from formal headquarters approval. Third, we expect that the current resource commitments reflect a more efficient allocation than the one at the time of entry. This is so because of the accumulation of corporate experience in relation to a specific market and the competitive pressure toward efficiency. Fourth, Dunning (1979) and Kogut (1983) propose that an incremental and sequential approach be applied when studying a firm's allocation of resources through FDI. Firms who are able and capable of increasing over time their FDI abroad are poised to be less rigid and more flexible in their ability to allocate resources and to remove to some extent systemic risk from their operations. The sequential approach provides a basis for the strategic motives. Thus, this research can guide international managers to make better resource allocation decisions. Kim and Hwang (1992) discuss how the different ways of doing business in a foreign environment, such as exporting, licensing, joint venture, or FDI, can vary according to the level of control (e.g., Caves 1982, Davidson 1982, Calvet 1981, Root 1987) and resource commitment (e.g., Vernon 1979, Johanson/Valhne 1990). Research has identified factors that affect mode changes (Benito/ Pedersen/Petersen 1999, Boddewyn 1985). However, previous studies have failed to address the actual magnitude of international managers' resource commitments, and the strategic motivations of firms which link them to the decisions regarding the allocation of resources (e.g., Benito/Welch 1997). We suggest that addressing the research questions in the context of Norway have multiple advantages. First, Norwegian firms have a home base in a small and open economy and thus need to internationalize early on. This study can therefore provide an early indication of the internationalization process that firms from less internationalized countries eventually can expect to experience. …