MNE linkages in international business: A framework for analysis

International Business Review 18 (2009) 555–566

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MNE linkages in international business: A framework for analysis Axe`le Giroud a,*, Joanna Scott-Kennel b a b

Manchester Business School, United Kingdom Victoria University of Wellington, New Zealand

A R T I C L E I N F O

A B S T R A C T

Article history: Received 25 May 2007 Received in revised form 2 July 2009 Accepted 8 July 2009

Empirical research demonstrates backward, forward and collaborative linkages between foreign subsidiaries and firms in host economies can have a major impact on the success of the development of these firms’ capabilities and resources. However, there is insufficient conceptualisation of this phenomenon in the international business literature, which has either presented a list of determinants of the occurrence of inter-firm linkages without identifying underlying constructs, focused on aggregate impacts of specific types of linkages or explored individual firm case histories. Such approaches inhibit our understanding of linkages at the firm-level generally and how they impact both local and foreign participants, in particular. Drawing on insights from other disciplines, a framework for analysis and future research is developed in this paper. This framework identifies three underlying constructs that determine the efficacy of linkages. It is argued that potential for firm capability and resource development via foreign–local interaction depends on the scope, quantity and quality of linkages formed. This approach reinforces the notion that particular dimensions of linkages, such as type, depth or duration, cannot be considered in isolation. Further, the paper argues that the relative emphasis on linkage scope, quantity and quality will involve trade-offs between them and maintaining equilibrium between global and local considerations. Crown Copyright ß 2009 Published by Elsevier Ltd. All rights reserved.

Keywords: Alliances Inter-firm relationships Linkages Multinational enterprises Networks Supply chain

1. Introduction MNEs create linkages when they are directly involved in relationships with other firms in the host economy (via transactions or alliance-based relationships within or across industries) and consequently influence the output, capability development and productivity of partner firms (Forsgren, Holm, & Johanson, 2005). Linkages, therefore, embody inter-firm transactions, interactions and on-going relationships (UNCTAD, 2006). Their importance, and thus interest from researchers, has grown as global firms increasingly pursue opportunities for specialisation through knowledge development and outsourcing, and as countries reconfigure their institutions and policies to encourage linkages between MNEs and local business partners (Battat, Frank, & Shen, 1996; UNCTAD, 2001, 2006). Recognition that the intensity of linkages determines the extent of knowledge and technology spillovers to local firms (Driffield, Munday, & Roberts, 2002) has prompted calls by researchers to better assess the developmental potential of linkages (Turok, 1993). In 1980, Lall described inter-firm relationships a ‘murky area’ in the industrial economics literature (Lall, 1980: p. 203). Twenty-five years later, a statement by Meyer that ‘future research ought to prioritise the study of . . . individual interactions of a multinational firm and a local agent or firm’ (Meyer, 2004: p. 264), suggests this ‘murky’ impasse remains unresolved by international business (IB) researchers. Because the body of literature on MNE linkages is relatively

* Corresponding author. E-mail address: [email protected] (A. Giroud). 0969-5931/$ – see front matter . Crown Copyright ß 2009 Published by Elsevier Ltd. All rights reserved. doi:10.1016/j.ibusrev.2009.07.004

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new and to-date has focused on developing economies (Moran, Graham, & Blomstro¨m, 2005; Santangelo, 2009), international business researchers lack a consistent theoretical foundation that would not only facilitate empirical research but also enhance comparability across studies. This paper’s first aim and contribution, therefore, is to clarify and integrate concepts developed to-date with regard to linkages with the view of moving forward with research on linkages in the international business field. Close examination of the work on FDI and host country development reveals emphasis on the subsidiaries themselves, the industries they operate in and national economies. Yet, there seems little by way of elucidation of the attributes of linkages that determine the extent of impact on local firms or agents (see the special issue in International Business Review, 1994). This gap can be attributed to the relatively recent emergence of the body of literature in IB on linkages at a firm-level. Work in this vein is useful but typically focused on manufacturing industries in developing economies where the technology gap between MNEs and local firms tends to be wide, and linkages with suppliers predominate. This scenario not only limits the scope of possible linkages that could be examined but also their developmental potential. Authors suggest that the developmental impacts of MNEs must be a more central concern in the mainstream of IB research (Ghauri & Buckley, 2006). While the literature on spillovers suggest a passive stance on the part of MNEs, IB scholars emphasize the deliberate attempt of MNEs at developing local capabilities (Ghauri & Yamin, 2009); and there is a need to not only consider the means through which MNEs benefit the host economy, but also combine the potential for learning gained from local business interactions in host countries (Yamin, 2005). For this reason, scholars need to adopt a model that emphasizes the benefits to be drawn from linkages creation for foreign subsidiaries as well as for local firms. This paper’s second aim and contribution is to balance the emphasis on these dual impacts on (host country) development and organisational learning by the foreign subsidiary. The final impetus for this paper was the authors’ search for a useable and comprehensive model of inter-firm linkages between foreign-owned multinational enterprises (MNEs) and locally based firms in host economies. Indeed, IB scholars have refined their definition of linkages to focus on inter-firm relationships (Hansen, Pedersen, & Petersen, 2009). Following this definition, we integrate concepts drawn from MNE theories and the existing linkages literature from multiple areas. Inter-disciplinary insights help to refine the definition of linkages and to unravel the complexity of linkage intensity, which lead us to develop a comprehensive foreign–local linkages analytical framework. The paper’s final contribution is thus developing three linkage constructs that can be employed in future empirical research. The starting point of the paper is to discuss the distinction between linkages and spillovers and refine the definition of inter-firm linkages (and specifically those formed between foreign and local firms) as a developmental mechanism. Then, a review of existing IB research in this area draws out contributions as well as limitations. Shifting the focus to other disciplines suggests there are a number of key insights on the impact of linkages on firm capabilities and resources for international business researchers worth considering for future research. The remainder of the paper integrates these ideas into a framework that can be used to analyse inter-firm linkage attributes at the firm-level. 2. MNE linkages 2.1. MNEs in host countries: spillovers vs. linkages FDI spillovers refer to externalities arising from the presence of MNEs (Blomstro¨m & Kokko, 1998: p. 5), and their existence provides a theoretical basis for FDI-assisted development of indigenous firms (Hoekman & Smarzynska Javorcik, 2006; Kugler, 2006). The assumption behind spillover creation lies in the belief that the MNE possesses superior firm-specific assets (Dunning & Lundan, 2008), which are transferrable at no cost due to the public good nature of technology (Girma, Go¨rg, & Piso, 2008). Externalities arise from both direct and indirect mechanisms (Scott-Kennel & Enderwick, 2005). Indirect spillovers result from demonstration effects, labour turnover and enhanced competition, and thereby affect the behaviour (Moran, 2001; Saggi, 2002) and performance of the domestic firms (Castellani & Zanfei, 2006: p. 142). Direct spillovers are created as a result of direct relationships between MNEs and local firms, notably through vertical linkages, training of local employees and technical assistance (Blomstro¨m, Kokko, & Zejan, 2000). Direct spillovers induce improvement in quality and efficiency of local firms, such as in the case of suppliers, by creating demands to attain economies of scale and providing access to advanced resources (Saliola & Zanfei, 2009: p. 371). Direct spillovers therefore occur through linkages MNEs establish with local actors, and although great attention has been devoted to spillover effects in host economies, the focus on linkages through which such effects may take place has been investigated mainly in the last decade, and primarily with reference to backward linkages (Santangelo, 2009: p. 194). Researchers who explicitly analyse the relationship between linkages and spillovers have highlighted the need to treat both concepts separately, particularly in empirical studies (Blomstro¨m et al., 2000; Javorcik, 2004); this is because most spillover studies are unable to disentangle direct and indirect effects at an aggregate level, and therefore capture both (Gu¨nther, 2005). Beyond spillovers, which imply a passive stance on the part of MNEs, IB scholars increasingly call for a reinvention of MNE strategies with a more deliberate attempt at developing local capabilities (Ghauri & Yamin, 2009: p. 105). Hence, the focus on linkages rather than spillovers, per se, is long overdue. A broad definition of linkages includes transactions between foreign subsidiaries and local businesses as well as nonbusiness entities like universities, training centres, research and technology institutes, export promotion agencies and other official or private institutions (Altenburg, 2000). Terminology differs considerably between studies, but linkages can be

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separated into three main groups: (1) supply chain (vertical) linkages with either suppliers (also referred to as backward or upstream linkages) or customers/agents (forward or downstream); (2) collaborative (relational or horizontal) linkages with other firms such as alliance partners (e.g. technology sharing agreements, management contracts and co-production agreements) or competitors (Chen & Chen, 1998; Gu¨nther, 2005; Murray, Kotabe, & Zhou, 2005; Saggi, 2002); and (3) institutional linkages with governments, research institutes, industry organisation and universities (Santangelo, 2009). Empirical studies that have focused on MNEs’ linkages concentrate mostly on inter-firm linkages and define linkages as inter-firm transactions that go beyond arm’s length, one-off transactions and involve longer term collaborations between the parties (Hansen et al., 2009: p. 122). It is this definition that we adopt in this paper, focusing on MNEs’ inter-firm linkages, which include both vertical and collaborative linkages. This definition of linkages raises the need to understand the dynamics of linkages and how these translate contextually into relationships, interactions, flows of capital, knowledge and people. The underlying assumption is that the foreign subsidiary is a nodal point in the linkage that exerts power and influence but can also gain from linkage creation as much as local partners. The primary purpose of linkage formation from the MNE’s point of view (beyond that of simple transactional exchange) is to overcome the deficiencies of pure-market relationships. Such deficiencies might arise due to operational (e.g. technical problems, reliability of supply, co-ordination of future capacities, access to distribution/marketing networks and expertise, the need to customize or adapt products or remain cost-competitive (Lall, 1980)); or strategic (e.g. joint resource development, access to proprietary knowledge, or association with key brands or firms (Chen & Chen, 1998; Fosfuri & Motta, 1999)) considerations. In fact, whenever the distinction between firm hierarchies and arm’s-length transactions via the market begins to blur there are opportunities for reciprocal access to resources and knowledge (Murray et al., 2005; Veugelers & Cassiman, 2004). This idea is best captured by Lall’s broader definition of linkages as ‘direct relationships established by arm’s-length firms in complementary activities which are external to ‘pure’ market transactions’ (1980: p. 204). Lall argues that where market failure (such as few sellers, imperfect information etc.) prevents ‘costless’ pure-market transactions, firms find it necessary to resort to ‘extra-market linkages’. That is, business relationships which extend beyond simple transactions to overcome the deficiencies of pure-market relationships. One of these deficiencies is the ability to maximize the value and transfer of knowledge using the market mechanism (Kogut & Zander, 2003). The distinction is important because it enables the researcher to extend the analysis beyond the externalities created through quantitative changes to demand and supply, to include qualitative influences on exchange and learning through foreign subsidiary–local firm interaction. In the following section, we explore in depth the concept of MNEs inter-firm linkages in host economies from the IB perspective. 2.2. The MNE as an inter-organisational network Ghoshal and Bartlett (1990) and Johanson and Vahlne (1990) were amongst the first IB scholars to explicitly conceptualise the MNE as an inter-organisational network by extending its scope not only across national, but also ownership, boundaries, thus enabling inter-firm relationships to be incorporated into our understanding of the MNE’s activities internationally. This line of research builds on the markets vs. hierarchies argument where MNEs will choose to internalise activities if they can do so more efficiently and/or more effectively than the market (Madhok & Phene, 2001; Tallman & Phene, 2007). The subsidiary is thus conceptualised as a ‘bridge’ between offshore units of the MNE (including headquarters) and local firms in the host country (Forsgren et al., 2005). Subsidiary ‘embeddedness’ is presented as mutually beneficial relationships between, on the one hand, its local external network partners, and on the other, headquarters and sister subsidiaries in a differentiated and international corporate network of operations (Rugman & Verbeke, 2001). Just as the ability of local firms to benefit from the MNE depends upon their absorptive capacity (Criscuolo & Narula, 2008; Easterby-Smith, Lyles, & Tsang, 2008; Zhara & George, 2002), the ability of the subsidiary to generate resources depends on locational determinants, corporate level considerations, subsidiary-specific advantages and its ability to learn from its local business partners (Eng, 2007). Despite these important insights, coverage of both specific linkage attributes (that is to say, the nature of the linkages across firms) and local firm perspective remains scant or poorly developed within this research. For example, Forsgren et al. (2005) proxy measures of internal and external embeddedness with ‘mutual adaptation in product and production development’. Although important, such proxies exclude other types of interaction from the analysis. Almost by default the emphasis of most research is the internal network of the MNE at the exclusion of the external business network (Boehe, 2007; Eng, 2007; Ghoshal & Bartlett, 1990), perhaps because the performance outcome potential is higher for the former (Li, 2005; Van Wijk, Jansen, & Lyles, 2008). However, both local firms and the MNE subsidiary benefit from inter-firm linkages. Understanding both rationale and mechanics of such relationships is important if research on linkages in IB is to develop. From an IB perspective the foreign subsidiary is the focal firm. During the course of its activities it acts as a bridge between the MNE proper and local firms. This distinction is important not only because local proximity enables the subsidiary to form direct exchange relationships with other firms in host economies, but also because international distance requires resources and capabilities transferred by the foreign parent in order to overcome the ‘liabilities of foreignness’ (Zaheer, 1995), that is, to offer significantly different advantages to those available locally. Thus, not only does the subsidiary become the focal node in the linkage between local and international contexts, but there is opportunity for the subsidiary (and in due course the MNE, see Ambos, Ambos, & Schlegelmilch, 2006) as well as local firms to benefit from these linkages. Despite clear potential for

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mutual development of participant firms (Scott-Kennel, 2007), however, too few studies examine the actual attributes of linkages at the enterprise level. In order to understand the dynamics of all types and quantities of linkages formed by foreign subsidiaries, one must comprehend how these translate contextually via interactions, flows of capital, knowledge, technology, people and other resources into individual firm development of capabilities. However, such a comprehensive approach has rarely been adopted in any one study in the IB field. Studies in the IB field have, however, considered either the endogenous and exogenous determinants of such linkages (Dunning, 2006; Giroud & Mirza, 2006; Rodriguez-Clare, 1996; Smarzynska-Javorcik & Spatareanu, 2008); the ‘make or buy’ and ‘import or procure locally’ decisions (for a review see Dunning & Lundan, 2008); the types of linkages between foreign and local firms (Chen, Chen, & Ku, 2004; Scott-Kennel & Enderwick, 2004); or less frequently, inter-firm knowledge transfer and development (Aya, 2004; Giroud, 2007). Although linkage determinants are beyond the scope of this paper, the remainder of our review of the linkage literature examines the evidence of local sourcing and linkages, types of linkages and inter-firm transfer at both environmental (national/industry) and enterprise (MNE/subsidiary/local firm) levels. 2.3. Local sourcing and supply Much of the literature on MNEs’ linkages in host economies has focused, to-date, on the study of supply relationships, particularly in the manufacturing sector and in developing economies. These studies have enhanced our knowledge of buyer–supplier relations and the conditions leading to higher levels of local sourcing and supply (to name a few: Belderbos, Capannelli, & Fukao, 2001; Driffield & Noor, 1999; Giroud & Mirza, 2006; Go¨rg & Ruane, 1997; Halbach, 1989; Hirschman, 1958; Kiyota, Matsuura, Urata, & Wei, 2008; Turok, 1993). Local procurement is a measure of demand generated through MNE activity, and given that many studies focus on the developmental impact of MNEs, particularly in developing and transition economies, these studies concentrate on the fact that MNEs provide enhanced market opportunities for local firms. As such, they are particularly useful in understanding the context in which higher local linkages can occur. Saggi (2002) suggests that simply documenting the existence of linkages is insufficient to argue a net positive benefit from FDI, as (1) foreign firms must generate more linkages than local firms (as modelled by Rodriguez-Clare, 1996) and/or (2) these linkages must result in technology diffusion to local firms. Spencer (2008) argues that it is not only the increased demand, but also the knowledge conveyed from the MNE to local business partners, that acts as a catalyst for changes in the host economy in the long run. Studies of backward linkages, however, often lack depth of analysis on this knowledge exchange, and as such, provide insufficient evidence of the long-term potential for change. Studies to-date also only focus on foreign MNEs in host economies. Few compare the activities of foreign subsidiaries with that of local MNEs (see for instance Castellani & Zanfei, 2006; Smarzynska-Javorcik & Spatareanu, 2008), yet results point to varying degrees of local sourcing quantity and differences in the quality of exchange relationships. Thus, studies focusing on MNEs’ impact on supply and demand in host economies may enable researchers to understand changes in the competitive environment and the context through which linkages occur, yet they rarely enable them to uncover the depth and attributes of inter-firm relationships. More importantly, these studies focus on the potential for development of the host economy, ignoring the gains that MNEs themselves make through local linkages (Driffield & Love, 2003). 2.4. Variety of linkages Beyond supply relationships, a wide range of different types of linkages can be formed between foreign and local firms (Awuah, 1997; Aya, 2004; Hansen et al., 2009; Ivarsson & Alvstam, 2005; Lall, 1980; Lim & Fong, 1982). A large body of literature has focused on the vertical backward linkages created, with fewer studies looking at either forward or horizontal linkages. Yet, to fully grasp both how subsidiaries relate to local firms and how they gain from local linkages, an even broader perspective is necessary. Eng (2007) explicitly considers resource interdependencies in alliances in high-tech clusters and argues that ‘the value of the firm’s position in the network context is not about delineating clear boundaries but with whom it is connected’ (p. 48). The author subsequently confirms the importance of considering a number of different types of linkages. A small number of studies attempt to incorporate different types of linkages at the firm-level. In a study of linkages formed by Taiwanese MNEs abroad, Chen et al. (2004) include arm’s-length transactional as well as collaborative (nonequity) relationships (namely: supplier linkages, marketing linkages, R&D linkages, labour linkages, subcontracting linkages and financial linkages). Similarly, Scott-Kennel and Enderwick (2004) include both supply chain and alliance relationships in empirical research on IB linkages, although these relationships remain dyadic in nature. Hansen and Schaumburg-Mu¨ller (2006) found that 60% of Danish MNEs in five developing economies had fostered long-term partnerships with local firms upstream and downstream the value chain. The study also revealed that the major advantage of non-equity collaboration was related to cost efficiencies (in the case of suppliers, costs were related to ensuring quality and on-time deliveries). Given that these studies have found different linkages have different impacts on firm capability development, we strongly argue for the inclusion of a broad scope of linkages in future research. The analysis of linkages with different business partners is related to industrial breadth (Aya, 2004). Current research, however, tends to examine linkages either within, or between industries, but not both (Meyer, 2004). Yet a firm may form an alliance with a competitor in the same industry, or a supplier from a related industry. The reason we raise this issue is that the approach taken in previous research limits evaluation of all linkages formed by a subsidiary. It also prevents comparative

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analysis of existing work. Thus, we argue that inter-firm exchange, cooperation and learning are equally possible via all types of linkages regardless of industry breadth. Thus, examination of linkages need not, and should not, be limited by an ‘artificial’ official industry delineation. Focusing on linkages within a single industry or of a certain genre represents neither an accurate nor a comprehensive view of linkages. In sum, despite the wider literature identifying a range of possible linkage types, the scope of individual studies tends to remain focused on either supply chain or collaborative linkages, and within or between industries. 2.5. Resource interdependencies If the enterprise-level impact of foreign–local linkages is to be fully understood, it is not only the quantity or scope of linkages that is important, but the quality of the relationships established between firms (Giroud, 2007; Santangelo, 2009; Scott-Kennel & Enderwick, 2004; Spencer, 2008). Fortunately, surveys that attempt to delve further into the quality of inter-firm relationships demonstrate that foreign subsidiaries and local firm(s) can, and do, engage in mutually beneficial interaction, voluntary exchange of assistance and resources as well as technology transfer and value creation (Giroud, 2003; Saggi, 2002). It is this beneficial interaction that creates the learning potential for business partners. We refer to such a process in this paper as quality of linkages. Drawing on earlier research (for a review see Dunning & Lundan, 2008: p. 574) there are numerous benefits firms can draw from quality linkages. For example, firm productivity improves as a result of gaining access to new, improved, or less costly intermediate inputs (Girma, Greenaway, & Wakelin, 2001; Javorcik, 2004). Indeed, many authors have argued for the inclusion of inter-firm resource transfer in the study of linkages and firm development (Giroud, 2003; Lall, 1980; Saggi, 2002). Resources transferred include those associated not only with information and technology, but also technical, financial, procurement, location-specific, managerial, marketing, organisational and pricing assistance. Such resources allow firms to benefit from joint development of products, specialisation, economies of scale, quality, prices and competitiveness (Duanmu & Fai, 2007; Giroud, 2007; Spencer, 2008). The fact that linkage quality is a complex phenomena may explain the lack of conceptual development by researchers in IB, although there are several worthy empirical contributions. For example, Chen et al. (2004) capture linkage intensity through multiple exchange relations involving local sourcing and supply, product design and innovation, subcontracting of the local workforce and financing. Gu¨nther (2005) includes individual and enterprise co-operation, and supplier/customer support where transfer of hard or soft technology takes place. Scott-Kennel (2007) includes sourcing and supply of specialised inputs, assistance to local firms, knowledge and technology transfer via a broad range of linkages. In the context of relationships between transnational and local firms in high-tech clusters, Eng (2007) finds high resource interdependencies and a variety of relationships. Other studies more readily demonstrate inter-firm learning or joint development of resources, skills and capabilities (Crone & Roper, 2001; Ivarsson, 2002; Murray et al., 2005). Together, foreign subsidiaries and local partners act as mediators in the diffusion of knowledge between firms within and across industries. Knowledge is embodied in products, processes and technologies bought, sold and jointly developed and firm capabilities develop as a result of on-going interaction (Driffield et al., 2002; Duanmu & Fai, 2007). Studies have found that knowledge transfer to local firms is higher when the resources and competences transferred from the parent MNE to the subsidiary are greater (Scott-Kennel, 2004), and the greater the technological capabilities of the subsidiary (Jindra, Giroud, & Scott-Kennel, 2009). Thus, as emphasized in the knowledge-based literature, the characteristics of the sender (in this case the foreign subsidiary) influence the knowledge transferred to local firms (as demonstrated by Giroud, 2003 in the case of buyer–supplier linkages). The likelihood of knowledge exchange is also higher when the key firm is more familiar with the host environment, one of the reasons put forward by Castellani and Zanfei (2006), who find that the extent of linkage and resource transfer is higher from domestic MNEs in the case of Italy, and by Scott-Kennel (2004) who finds formerly locally owned firms since acquired by foreign MNEs also more likely to engage in linkages. In sum, the IB research on inter-firm linkages has come a long way from relatively recent beginnings. Regrettably, inconsistencies in coverage, richer detail only provided by case study evidence, and measurement of and focus on either supply chain or collaborative linkages, subsidiaries or local firms, have resulted in a diverse and largely incomparable approach to the issue (Giroud & Scott-Kennel, 2006). In addition, this has meant that the IB discipline still lacks a common conceptual model in which to capture the key attributes of linkages from an enterprise developmental perspective, and in particular, the quality of linkages. Thus, the following section of the paper draws on literature beyond studies of foreign subsidiary–local firm linkages to explore this dimension further in light of our objective to present a comprehensive framework for future analysis. 3. Insights from other research In this section, we acknowledge and learn from various disciplines that provide insights into the study of inter-firm relationships. The broader network-based literature has focused on how inter-organisational relationships can channel information and resources that generate network resources for all participating firms (Ghauri, Hadjikhani, & Johanson, 2005; Gulati, 2007). Thus it provides further evidence of and insights into the multi-dimensionality of inter-firm relationships. In addition to complementing the ‘hierarchies vs. markets’ approach taken by many IB scholars, the network paradigm as used in the strategic management, supply chain, marketing and entrepreneurship literatures offers a number of useful insights to

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understanding key attributes of foreign–local linkages; namely, multiplicity of business relationships, resource sharing and learning, and relational and personal ties. 3.1. Multiplicity of business relationships The emphasis on numerous dyadic relationships and exchange between subsidiary and local supplier, customer or alliance partner in linkages research is contrasted by the approach of Porter (1998) who adopts the form of supporting infrastructure or clusters of firms, and suggests that the role of location in competitiveness remains paramount, much like IB scholars (see for instance Dunning, 1998 or Buckley & Ghauri, 2004). Similarly, ‘flagship’ multinational subsidiaries from Rugman and D’Cruz (2000) demonstrate a portfolio of business partners locally and across borders. Other researchers, such as Nohria and Garcia-Pont (1991) support the notion of multiplicity by adopting an industry perspective on the impact of strategic relationships. Hagedoorn and Duysters (2002) argue that in a dynamic environment, connections to a wider group of companies represent a higher learning potential for the focal firm. Economic geographers have also contributed much to our understanding of the importance of industry- and country-specific context in studies of multiple inter-firm linkages (Crone & Roper, 2001). For example, using unique firm-level data from Volvo Trucks Ivarsson and Alvstam (2005) focus on the significance of technology transfer from MNEs to their domestic suppliers. In line with the cluster researchers, this approach also enables a broader perspective incorporating both foreign MNEs and local firms (Ivarsson & Jonsson, 2003). These studies focus on the importance of context (industry, business environment and location) on the formation of multiple linkages and different types of linkages between subsidiaries (or focal firms) and local firms. The most salient lesson from these studies for development of a linkages framework arises from the wide scope of inter-firm relationships included. Predominantly, if one is to consider how a MNE benefits from its activities in different environmental contexts, IB researchers need to go beyond studies that focus on a single type of linkage, in a single industry or between a dyadic pair of firms. 3.2. Knowledge sharing and learning Strategic management researchers have developed a strong inter-firm knowledge sharing perspective. Although internationally oriented studies typically focus on cross-border engagement rather than between subsidiary and locally based firms, they do add to our understanding of attributes that are important to inter-firm development via linkages (Inkpen & Tsang, 2005). For example, the literature on alliances, joint ventures and strategic technology partnering (Hagedoorn, 2006; Hagedoorn & Hesen, 2007; Tallman, Jenkins, Henry, & Pinch, 2004) provides support for the importance of quality in inter-firm relationships, and in particular, the transfer of knowledge, inter-firm learning and joint development of resources (Fynes, Voss, & de Bu´rca, 2005; Holmqvist, 2003). A recent special issue of the Journal of Management Studies (2008) provides both review and a way forward for researchers with regard to knowledge transfer. Of particular relevance here are the mechanisms by which knowledge is transferred between firms via tacit and tangible channels including social activities, personnel, documents, blueprints, hardware etc.; and how the processes of knowledge transfer occur at different levels, namely; individual, firm and network, thus providing further support for a multi-level approach to linkages in this paper. Equally important, of course, is the joint development and subsequent transformation and integration of resources post-transfer. This is where inter-firm learning is fundamental to determining the success or failure of the linkage (Hamel, 1991). Inclusion of these dimensions also enables us to distinguish between the potential for development via linkages and actual development. Linkages do not, in all instances, act as a conducive means for firm development, and nor does transfer of resources necessarily imply development (Ambos et al., 2006). Much of this research takes its root in the resource-based view of the firm (RBV) that states that possession of distinctive resources is critical for the attainment of competitive advantage (Grant, 1996). Knowledge, in its broadest sense, therefore, is a core resource upon which evolving or dynamic capabilities are the result of existing capability, transfer, learning and development (Eisenhardt & Martin, 2000). As demonstrated by Duanmu and Fai (2007) on their study of backward linkages in China, inter-firm relationships progress through co-evolution, strengthening over time, with an increase in the potential for knowledge sharing. The intensity of the relationship becomes stronger, the longer the firms have known each other (Forsgren et al., 2005). For the purposes of this paper, such research illustrates the complex dynamics of inter-firm relationships and the potential for capability development for both the MNE (Yamin, 2005) and its business partners (Spencer, 2008). Clearly, in an age of ‘alliance capitalism’ firms have the potential to add to their existing resources by reaching beyond their own boundaries (Dunning, 1997). But there is no guarantee of any, or necessarily equal, benefits from linkages accruing to either partnering firm. This is demonstrated in research by Christopherson and Clark (2007), which attributes MNE power over resources in networks to diminished potential for innovation by small and medium-sized firms. 3.3. Relational and personal ties Perhaps the greatest weakness of linkage studies in IB lies in the lack of understanding of how inter-firm relationships evolve over time at a personal level, despite the importance of personal relationships in the exchange of tacit knowledge and evidence of relational capital or assets in both supply chain and alliance-based relationships as well as equity-based joint

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ventures (Chen et al., 2004; UNCTAD, 2001). The network literature incorporates both social and structural elements present in inter-firm interaction (Inkpen & Tsang, 2005; Kostova & Roth, 2003). Thus demonstrating that not only is enterprise-level interaction important, but also the individual-level or social dimension (e.g. people or persons). This level of analysis facilitates the capture of behavioural and social interaction aspects that influence inter-firm learning and subsequently the quality of linkages formed. It suggests that not only are subsidiary roles important, but so too the managers within those subsidiaries (see Bjo¨rkman, Barner-Rasmussen, & Li, 2004). Similarly, Li (2005) argues that trust and shared vision are so important in the transfer of knowledge that this may explain the predominance of intra- rather than inter-firm transfer that is suggested by the extant literature. In other words, inter-personal relations may be an equally important determinant of linkage outcomes as well as economic considerations. Inclusion of inter-personal interaction also avoids oversimplification of relationships (Todeva, 2006). The streams of literature discussed in this section lend insights to the study of linkage attributes from an IB perspective, and address individual, enterprise and environmental levels of analysis (Kostova & Roth, 2003). The following section incorporates these insights into a framework for analysis of foreign–local linkages. 4. Developing a foreign–local linkages framework 4.1. Conceptualisation of linkage attributes Linkage attributes refer to the characteristics of the complex set of inter-firm relationships that can be established by the MNE’s foreign subsidiary and local firms. Studies have focused on scope, quantity and quality attributes. The scope of linkage formation is the extent of different types of linkages; e.g. vertical (backward, forward) or horizontal (relational). Although there is a larger literature on backward linkages in empirical work (Crone & Roper, 2001; Iguchi, 2008; Ivarsson & Alvstam, 2005 to name a few), forward linkages are also created in host economies (Driffield et al., 2002; Miozzo & Grimshaw, 2008), as well as alliances and networks (Scott-Kennel, 2007). Recent studies have, therefore, endeavoured to widen the scope of linkages within their research framework. For instance, Santangelo (2009: p. 200) distinguishes between three synthetic indicators, namely backward and forward linkages, recruitment/training of local human capital and relationships with local institutions producing knowledge (the third is excluded from the inter-firm linkages definition adopted by this paper). Hansen et al. (2009: p. 126) combine linkages created by Danish MNEs’ affiliates with suppliers, distributors and other local business partners to capture local linkage partners both upstream and downstream in the value chain. The quantity of linkage formation relates to the amount or value of goods, services and labour sourced or sold in the host economy (for instance, linkages are assessed in this way by Belderbos et al., 2001; Driffield & Noor, 1999; Go¨rg & Ruane, 1997; Hirschman, 1958; Iguchi, 2008; Turok, 1993). The quality of linkages refers to the resource and knowledge transfer and development potential for foreign subsidiaries and local firms. Firms can benefit from substantial resources and knowledge transfer (see for instance studies conducted by Dries & Swinnen, 2004; Giroud, 2007; Ivarsson & Alvstam, 2005; Saliola & Zanfei, 2009; Scott-Kennel, 2007), or from training (Hansen et al., 2009) particularly as the relationship evolves and strengthens (Duanmu & Fai, 2007). This literature points, therefore, to a number of linkage attributes of importance to enterprise-level development when studying inter-firm linkages from an IB perspective. As mentioned above, these can be classified as quantity, scope and quality attributes, and can also be defined at three different levels of analysis, individual, enterprise and business environment (or industry). Table 1 provides a summary of these attributes, their dimensions (described below), possible measures to be employed in empirical research and units of contextual analysis. 4.1.1. Quantity of inter-firm linkages The quantity of linkages is simply the number of linkages formed by the foreign subsidiary or their value in pecuniary terms (Dunning & Lundan, 2008). As this paper has demonstrated, quantity in some form has been captured in most studies of local sourcing or value-added by foreign subsidiaries. While quantity is important as one measure, its ease of use relative to alternative measures has encouraged researchers to adopt an overly narrow definition of linkages by using it as the sole measure of linkage formation. We argue that it is also important to capture the quantity of relational linkages across single or multiple firms. This enables researchers to focus on the impact of a single MNE, multiple MNEs within a selected industry or all MNEs (both foreign and local) within a specific location. 4.1.2. Industrial and international scope of linkages Linkage scope captures different types of linkages taking place across or within industries, between different types of partners, but with the MNE at the centre of the analysis. The extant literature in IB is limited somewhat by a lack of clear division of the scope of linkage formation, but two key dimensions are apparent; type and breadth. Linkage type incorporates the supply chain or collaborative linkages or both. In light of the alliance and supply chain literatures if we adapt the ‘make or buy’ decision to the ‘make, buy or borrow’ decision we can also assess the extent to which value-chain activities are performed in-house or externally via local partners for a simple estimate of linkage type. Breadth can be both local and international. In the local sphere, we refer to industrial breath, where linkages may be confined to a single industry or span across industries, whereas international breadth refers to the extent to which the subsidiary is embedded in both local networks and corporate networks. It is possible, therefore, to include linkages which are either within the local business network and/or the international (corporate) network into the analytical framework. This

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562 Table 1 Linkage attributes. Linkage

Dimension

Possible measures

Quality

Depth

Intensity of inter-firm interactions for non-pecuniary benefits (e.g. social, learning or improvement opportunities) between subsidiary and local firm, at employee or team levels Extent of learning which occurs due to interactions between subsidiary and local firm at employee or team level Time since relationships between subsidiary and local firm first formed, including those at both employee and team level Extent of inter-firm tacit knowledge transfer Extent of inter-firm codified resource and technology transfer

Duration Transfer

Quantity

Number Value

Scope

Type

Breadth

Number of inter-firm relationships formed by the subsidiary and/or local firm Number of different firms with which linkages are formed by the subsidiary and/or local firm Value of local sourcing and/or supply associated with linkages formed by the subsidiary Value-added associated with linkages formed by the subsidiary Range of different types of linkages formed (supply chain, collaborative) Extent to which value-chain activities are performed by the local partners or the foreign subsidiary (in-house vs. outsourcing) Range of industries (or sectors) in which linkages formed (or extent of network constellation) Extent to which value-chain activities are performed in host country vs. internationally (or local business network vs. international corporate network)

enables researchers to assess the relative importance of local vs. corporate embeddedness and the value of the subsidiary as a ‘bridge’ for resource transfer from local to international corporate networks (and vice versa). 4.1.3. Linkage quality Linkage quality, as defined earlier in the paper, includes interactions for non-pecuniary benefits (at least in the short-term) and emphasizes the potential for learning and improvement. Transfer of resources, such as technology, products, skills and expertise, is a most important influence on linkage quality due to the potential for subsequent use and development of such resources within the MNE or the local firm. The extent of transfer of resources varies depending on specific projects and contract specifications. Resource transfer increases as partners learn to work together and trust each other more, and in the case of a foreign subsidiary with the level of involvement in the host economy. Thus, it is important to include duration (length of time) of the business relationship, or of interactions between people across firms. This adds an important longitudinal dimension to the analysis of linkages. Social interaction is considered a key determinant of the development of trust between firms, and the foundation for on-going relationships, inter-firm exchange and learning. Hence, the quality of linkages takes into consideration interactions between employees and teams of the MNE and of local firms. The depth of the linkage is the extent to which bi- or even multi-lateral relationships and on-going interaction and learning occurs, through people or systems of the MNE and of local firm(s). 4.2. Determinants of linkages Linkage determinants are influences or casual factors relating to the formation of linkages and the extent to which linkage attributes; quality, quantity and scope, are evident. Selected studies focus on different types of determinants (Belderbos et al., 2001; Giroud & Mirza, 2006), while others analyse the influence of determinants on the formation and impacts of linkages in specific contexts. The literature distinguishes between two broad categories of determinants. First, firm-level determinants encompass the strategies, networks and absorptive capacity of firms involved in linkages. Strategies include the global strategy of the firm, subsidiary role or capabilities (see Hansen et al., 2009; Iguchi, 2008; Jindra et al., 2009). Networks relate to the web of existing relationships established by the firm (Forsgren et al., 2005), while absorptive capacity demonstrates the ability of the firm to absorb and take the full benefit of the business interaction with its partners (for the foreign firms, as well as for local firms) (Criscuolo & Narula, 2008; Marcin, 2008). Second, the locational advantages of host economies influence the type of activities conducted by MNEs and the potential for linkage development. For instance, there can exist complementarities between ownership and location advantages (Lall & Narula, 2004), or variation in governance mechanisms (Ghauri & Cao, 2006; Parrilli & Sacchetti, 2008). While we acknowledge the importance of these determinants, the framework does not aim at providing an exhaustive list of all the factors that influence linkages, rather the purpose of this discussion is to distinguish between linkage attributes and determinants and build upon existing knowledge to provide a Comprehensive framework for analysis of linkages. 4.3. Linkages framework Fig. 1 integrates all three linkage attributes, associated dimensions and levels of analysis into a diagrammatic representation of the integrated foreign–local linkage framework. Part of the framework’s appeal is its flexibility in terms of levels of analysis. Different units of analysis enable assessment of the extent to which individual firms upgrade their capabilities (including employees’ skills and experiences), local and/or foreign firms upgrade their combined capabilities,

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563

Fig. 1. MNE linkage framework.

resources and skill sets, and industries, clusters or networks of firms as a whole can develop as a result of upgrading of individuals and firms. The framework can be applied to analysis at the level of the single linkage between the foreign subsidiary and locally based firm(s) and evaluate the enhanced capability of either firm. For instance, a long-term relationship with a local supplier involving substantial technology transfer and interaction will have development potential for the local supplier and/or the foreign subsidiary. Linkage quality (depth, transfer, duration) will be the construct most crucial to understand how both the MNE and the local firm can learn from resource sharing. The framework can also be applied to the analysis of multiple linkages, where not only quality, but also quantity and scope are expected to be important attributes. Here the focus of research could be either the impact on the foreign subsidiary as a result of all the different linkages it forms in the host economy, or the impact on a local supplier (or other) through a variety of linkages created with several foreign subsidiaries, or even the compound impact on development potential for an industry (region, country) of multiple subsidiaries and multiple local firms. Linkage creation depends on a number of factors, such as the level of resources available to the subsidiary, its size, existing networks or strategy. Similarly, local conditions impact upon the incentive and ability to create linkages. Such factors influence the trade-off between scope, quantity and quality of linkages. For instance, a large number of linkages does not necessarily result in the best outcome for either the subsidiary or the local firms. Instead, firms can benefit more from a small number of quality relationships. Thus, by adopting multiple levels of analysis the framework can help to achieve understanding of how, not only a single linkage offers potential for development, but also the development potential of all linkages created by a single firm, within an industry, region or host country. Ultimately, the quality, quantity and scope of linkages formed by the MNE enable us to capture linkage intensity. In turn, the development potential for local firms that engage in business relationships with the MNE results in enhanced spillovers in the host economy. As previous research has yet to integrate these variables, there are few that can provide a broader perspective on possible linkages, however, within this framework of analysis, future studies can develop specific hypotheses depending on the context of analysis. 5. Conclusions and applying the framework to future research This paper is in response to repeated calls for further research on foreign–local firm relationships, and in particular, their firm developmental potential (e.g. Meyer, 2004). Although the research to-date has shown much promise, it appears to have reached a critical juncture which can only be addressed through a consistent methodological approach and extension of the scope of the study of linkages. Few studies have adopted a comprehensive approach to capturing all relevant dimensions of

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inter-firm linkage intensity. This paper has contributed this pursuit by presenting a framework for future analysis of interfirm linkages. The framework extends previous work by developing three key attributes based on crucial dimensions, and by integrating each of these within the context of either individual or multiple relationships between firms. Business-to-business linkages are defined as supply chain and collaborative relationships which extend beyond simple transactions to overcome the deficiencies of pure-market relationships. A primary reason for their formation is to capture rents from resources such as knowledge. However, our review of existing research found a need for the inclusion of three main attributes in studies of foreign–local firm linkages: quantity, scope and quality. Overemphasis on local sourcing and backward linkages often fails to elucidate the firm-level mechanics underpinning successful exchange and subsequent organisational development. Hence, the paper supplemented the discussion with key insights from other research, focusing predominately on the MNE as an inter-organisational network, the multiplicity of business relationships, knowledge sharing and learning, and relational and personal ties. This highlighted the importance of context, whether at the individual (manager), enterprise or environment level. Our discussion then developed constructs, by considering both unit of analysis in different contexts in conjunction with individual linkage quality, as well as the scope and quality of multiple linkages. Linkage intensity (of either MNE, local firm or both) was the combined influence of all three constructs. There are several implications of these findings for future research particularly that which seeks to explore firm resource and capability development. First, consideration of a complete range of linkages formed is required to capture actual physical resource and knowledge transfer. Second, inclusion of both foreign subsidiary and local firm in dyadic relationships, as well as the complexities of multiple relationships is necessary to fully understand the influence of linkages on firm development. Third, good research will incorporate a longitudinal dimension capturing the changes to these variables over time, and the impacts of interaction and exchange at a specific point in time, and over the life of the linkage. Fourth, from a developmental perspective, capturing the intensity of inter-firm linkages – and therefore their potential for beneficial spillovers – should take priority in future research, rather than types of linkages or within/between industry concerns. Thus, the framework equips researchers with a useful guide for future research in four key ways. It can be applied to the study of upgrading and development in either MNE or local firm. It is able to integrate all attributes of linkages in order to provide a more accurate assessment of the way MNEs interact with local firms in host economies. For instance, until now, emphasis was given to backward linkages with suppliers, at the expense of forward and relational linkages thus underestimating the total direct effect of FDI via inter-firm relationships. It enables empirical studies to delve further into the processes of technology (knowledge) transfer and organisational learning that occur at the level of the firm and to refine research design relating to a wider scope and varying quality of linkages. Use of the extended framework also has implications for policy. If policymakers are able to ascertain which MNEs are most likely to actively participate in linkages with local firms and why, then policy can be better targeted at attracting such firms, and encouraging the formation of linkages with local suppliers, customers as well as other business partners. 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