Path dependence, MNCs and the internationalisation process: a relational approach

International Business Review 12 (2003) 719–737 www.elsevier.com/locate/ibusrev

Path dependence, MNCs and the internationalisation process: a relational approach Luis Araujo a,, Sergio Rezende b a

Department of Marketing, The Management School, University of Lancaster, Lancaster LA1 4YX, UK b Department of Management, Pontificia Universidade Cato´lica—Minas, Belo Horizonte, Minas Gerais, Brazil Received 18 December 2002; received in revised form 15 March 2003; accepted 15 September 2003

Abstract In the internationalisation literature the notion of path dependence has often been associated with gradualism in the evolution of a subsidiary in its host country. In this paper, we argue that path dependence cannot be exclusively associated with gradualism nor can the evolution of a particular subsidiary be explained solely by its embeddedness in its host environment. Instead, we propose that the internationalisation trajectory of units within a multinational corporation’s network comprises a trajectory in time and space involving multiple, overlapping networks. Gradualism and discontinuities in the evolution of the units of a multinational enterprise are the outcomes of relational mechanisms interacting across different temporal and geographical contexts. # 2003 Elsevier Ltd. All rights reserved. Keywords: Internationalisation processes; Path dependence; Multinationals

1. Introduction Over the last few years a number of studies have invoked the concept of path dependence to explain the trajectory of firms in international markets. Path dependence has been used to denote the presence of self-reinforcing mechanisms in the way firms accumulate experiential learning in their internationalisation processes. Eriksson, Majkga˚rd and Sharma (2000a) and Blomstermo, Eriksson and Sharma 

Corresponding author. Tel.: +44-1542-59-39-15; fax: +44-1524-59-39-28. E-mail address: [email protected] (L. Araujo).

0969-5931/$ - see front matter # 2003 Elsevier Ltd. All rights reserved. doi:10.1016/j.ibusrev.2003.09.004

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(2002) associate path dependence with dynamic internationalisation models, namely the Uppsala and network models of internationalisation of the firm (Johanson & Vahlne, 1977, 1990; Johanson & Mattsson, 1988). Similarly, Chang and Rosenzweig (2001) in their study of patterns of sequential foreign direct investment conclude that there is a tendency for firms to choose entry modes that have been used in the past. They suggest that multinational corporations (henceforth MNCs) can be regarded as adaptive and learning entities whose international expansion is a path dependent process. Vermeulen and Barkema (2002) provide a complementary perspective by suggesting that the speed of expansion of MNCs is constrained by their capacity to absorb and assimilate knowledge from their international operations. Other studies, in contrast, have emphasised the discontinuous and unpredictable nature of internationalisation processes. For example, Benito and Welch (1994, p. 12) remark that ‘‘. . .although greater experience and knowledge normally empower a company to expand its international activities, it may also act in seemingly perverse ways to constrain forward steps at some stages of the overall process’’. Zander’s (1997) historical study of Alfa Laval’s R&D function presents an example of a complex and intricate pattern of internationalisation, at odds with the notion of a gradualist trajectory. The purpose of this paper is to examine these apparently contradictory claims and show how path dependence can be employed to produce a realistic explanation of internationalisation processes, covering both incremental and discontinuous trajectories. We suggest that internationalisation processes be understood as embedded in multiple and overlapping processes, linking intra and interorganisational networks and occurring in different spatial and temporal contexts. In addition, we claim that path dependence provides a useful framework to help overcome the relative neglect of temporal (Blomstermo et al., 2002) and spatial (Yeung, 1998) issues in the internationalisation literature. Our intention is to bridge different strands of literature namely the process perspectives of internationalisation models, particularly the Uppsala model, with the more structuralist approaches prevailing in the literature on MNCs’ architectures and subsidiary development. Our interests cover both extensions of MNC networks from a traditional internationalisation angle (e.g. entering new markets, moving to higher commitment modes in a specific host country) as well as reconfigurations of the MNC network as a result of internationalisation processes (e.g. acquisition or losses of subsidiary mandates). Unlike early internationalisation process models, which concentrated on the early stages of export development, our focus is on experienced rather than neophyte internationals.1 Melin (1992) suggested that internationalisation processes are characterised by a high degree of complexity, variability and heterogeneity and 1

The literature on internationalisation appears to have developed along separate lines, one focusing on the internationalisation of the small firm and the other on the larger multinational corporation (Liesch, Welch, Welch, McGaughey & Petersen, 2002). For a review of the literature on the internationalisation of small and medium sized firms see Coviello and McAuley (1999).

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that knowledge on internationalisation as a process has focused narrowly on firms in the early stages of internationalisation. Mattsson (1998) argued that major firms in many industries have achieved significant degrees of internationalisation and that a third dimension of internationalisation (international integration across nations) is increasingly important to understand internationalisation processes. We suggest that the process of internationalisation of experienced internationals is driven by the articulation of relational mechanisms that produce trajectories paradoxically characterised by both gradualism and discontinuity. Our argument is that although the relational mechanisms that drive this process exhibit self-reinforcing properties, their embeddedness and concatenation in specific spatial and temporal contexts produces a rich variety of trajectories. The structure of this paper is as follows: in the first section we will look at recent contributions to the literature on path dependence and examine the ways in which these insights can shed further light on internationalisation processes. In the second section the literature on internationalisation as a process, in particular the Uppsala model, is reviewed and critiqued. In the third section, we look at the internationalisation processes of experienced internationals as the interaction of three relational mechanisms, involving both the intra and interorganisational networks in which MNC units are embedded. In the fourth section, we propose a framework for looking at internationalisation as paths in space and time. In the final section, we extract a number of conclusions and implications for further research stemming from our proposals.

2. The notion of path depencence In the social sciences the notion of path dependence has been developed by economists concerned with the evolution of technology and institutions (David, 1985; North, 1990; Arthur, 1994). The classic definition is: A path-dependent sequence of economic changes is one of which important influences upon the eventual outcome can be exerted by temporally remote events, including happenings dominated by chance elements rather than systematic forces. Stochastic processes like that do not converge automatically to a fixed-point distribution of outcomes, and are called non-ergodic (David, 1985, p. 332). This definition highlights two important points. First, path dependence is a property of events sequences in which a particular economic process is unable to shake free from the influence of its past states. Secondly, path dependent processes combine systematic with unique and unpredictable processes, merging necessity and chance in the same event sequence. Path dependence suggests that there is more to the world than serially independent patterns of events. Path dependence inquires how events follow particular sequences and forces us to dig deeper into the mechanisms that account for the

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logical association between events.2 In the context of this paper, the mechanisms we are interested in comprise the interactions between different types of actors (e.g. subsidiaries and actors in their host environment) and their impact on subsidiaries’ trajectories in their host markets as well as the international trajectory of the whole firm. The notion that events can have remote temporal causes does not amount to asserting that they are predetermined.3 Path dependence recognises historical contingency in that at any given juncture, events can follow a multiplicity of paths leading to different outcomes. It also recognises the role of strategic action in influencing the course of events and in shaping the creation of new paths (Garud & Karnøe, 2001). Finally, path dependence recognises that there are discernible structures acting as ‘‘carriers of history’’, that afford different sets of opportunities and constraints in shaping the direction and pace of change (North, 1990). Ha˚kansson and Lundgren (1997) conceptualise the different aspects of path dependence in terms of paths in space and paths in time. Paths in space refer to the structural and positional elements of path dependence, and focuses on how structures act as ‘‘carriers of history’’. Paths in time refer to the interlocking chains of causation that constitute historical processes and account for the individuality of paths. This conceptualisation of path dependence has two implications for the understanding of internationalisation processes. First, it highlights the importance of understanding the temporal and spatial character of internationalisation processes as well as the multiple causes of events. Neglecting these aspects often leads researchers to disembed one particular event from its context and study it using cross-sectional, atemporal methods.4 Secondly, events are not only influenced by systematic forces but also by contingencies. Contingencies play a part in explanation because systematic mechanisms are unable to completely account for how events unfold and internationalisation processes take place in open systems, subjected to a variety of conflicting influences (e.g. firm-based factors, host-country specific influences). Sequences that exhibit path dependent properties are also affected by other sequences with which they collide or intersect at particular junctures, occasionally 2 The notion of mechanism adopted here is that of Stinchcombe (1991, p. 367): ‘‘Mechanisms in a theory are defined [. . .] as bits of theory about entities at a different level (e.g. individuals) than the main theories being theorised about (e.g. groups), which serve to make the higher-level theory more supple, more accurate, or more general’’. Mechanism-based explanations involve some form of agent whose causal powers and liabilities are assumed to have generated a relationship between two observed events (Sayer, 2000). 3 North (1990, pp. 98–99) neatly summarises this point: ‘‘Path dependence is a way to narrow conceptually the choice set and link decision making through time. It is not a story of inevitability in which the past neatly predicts the future’’. 4 Abbott (2001) discusses this notion at length. This is an important issue in internationalisation processes. For example, foreign market entry decisions are generally compressed to one distinct event with multiple causes operating together and simultaneously, rather than part of an internationalisation process (Mattsson, 1998).

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leading to new sequences unrelated to the original ones (Mahoney, 2000). Ha˚kansson and Lundgren (1997) refer to these junctures as the crossings of paths and argue that it is at these crossings that path-creating opportunities are the highest. In short, sequences are not autonomous chains of events but are susceptible to the influence of other, overlapping chains of events with their own distinct spatial and temporal logics. Before we move on, it is appropriate to define some of the terms we will use in the remainder of this paper. By internationalisation, we mean the extension of a firm’s operations to foreign territories, involving both inward as well as outward connections (Welch & Luostarinen, 1988). Prior to going abroad the experiential knowledge of the firm is embedded in the routines and structures developed to address its domestic market. Internationalisation is a process of learning, involving an incremental acquisition of knowledge, the pace of which is governed by the ability of the firm to absorb and assimilate new knowledge about internationalisation processes, as well as business and institutional knowledge about specific foreign markets (Eriksson, Johanson, Majkga˚rd & Sharma, 1997). This definition suggests that the nation-state remains an important boundary between different regulatory, political and socio-cultural environments (Dicken & Malmberg, 2001). Furthermore, this definition implies that internationalisation can refer both to the extension of the geographic scope of the firm’s operations as well as changes in a firm’s operations in a given host country. We regard the MNC as a territorially and functionally differentiated interorganisational network characterised by a complex structure in terms of resources and loci of decision and influence (Forsgren, 1989; Ghoshal & Bartlett, 1990; Nohria & Ghoshal, 1997). In the next section we will review the connection between the literature on internationalisation processes and subsidiary paths. 3. Internationalisation processes and subsidiary paths Amongst the different processual approaches to the internationalisation of the firm, the Uppsala model deserves a special mention (Andersen, 1993, 1997; Petersen & Pedersen, 1997).5 The Uppsala model suggests that the firm internationalises its activities by a process of gradual resource commitment to a particular host country (Johanson & Vahlne, 1977, 1990). Two types of mechanisms acting in a self-reinforcing way, govern this process of gradual commitment. State aspects characterised by market knowledge and market commitment interact with what Johanson and Vahlne (1977) call change aspects, namely commitment decisions and current activities in the host country. 5

The formulation of the Uppsala model coincided with a period in which considerable effort was devoted to identify the stages firms went through in early exporting and how the initial steps along the internationalization route provided the foundation for subsequent moves. Amongst these studies it is worth mentioning in chronological order, Johanson and Wiedersheim-Paul (1975); Bilkey and Tesar (1977); Luostarinen (1979); Welch and Wiedersheim-Paul (1980) and Reid (1981). For early reviews of this literature see Bilkey (1978); Thomas and Araujo (1985) and Welch and Luostarinen (1988).

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The change aspects result from accumulated knowledge and past commitments, and also determine the level of knowledge and commitment to be made in the future. The future acquisition of knowledge is shaped by ongoing operations which, in turn, are shaped by past knowledge development (Eriksson, Majkga˚rd & Sharma, 2000a). Knowledge and commitment constitute self-reinforcing mechanisms. Once a foreign market entry mode is chosen, these mechanisms drive the firm to move gradually along a particular path as the scale of operations increases. Initial commitments accumulate over time, leading the firm to reap increasing rewards from sticking to a particular path. During this process, the firm eventually changes to a higher commitment mode of operation in response to a richer knowledge of the local environment and a lower perceived risk, which contributes to further knowledge development and resource commitment. In short, the Uppsala model implicitly associates a gradual trajectory with the self-reinforcing mechanisms connected with the acquisition of experiential knowledge about specific foreign markets (Eriksson et al., 2000a, p. 309; Blomstermo, et al., 2002, p. 267). The importance of the gradual development of experiential learning has also been highlighted in the literature on foreign direct investment starting with the pioneering work of Aharoni (1966). Kogut (1983) proposed a sequential approach to foreign direct investment, as MNCs learned how to explore the flexibility of their network of subsidiaries. Kogut and Zander (1993) introduced an evolutionary theory of the MNC, based on the notion that the geographically dispersed firm will develop efficient ways of transferring tacit and experiential knowledge across borders. Chang (1995) and Chang and Rosenzweig (1998a, b, 2001) conclude that there is a tendency for firms to replicate entry modes they have used successfully in the past, and for entry to occur first in lines of business where firms are strongest. Much has been written about whether internationalisation processes follow incremental paths, namely the establishment chain that has been intimately associated with models that assume self-reinforcing developmental processes.6 As Johanson and Vahlne (1990); Hadjikhani (1997) and Petersen and Pedersen (1997) contend, too often researchers have treated conclusions drawn from empirical data as equivalent to the assessment of the theoretical underpinnings of the model. This unfortunate tendency to conflate the theoretical and operational manifestations of the model has led to a string of studies describing a plethora of internationalisation trajectories other than the establishment chain, but shedding little light on what mechanisms have contributed to produce the observed outcomes.7 6 The establishment chain corresponds to the gradual increase in resource commitment to a particular foreign market, going from low commitment modes of operation (e.g. exporting) to high commitment (e.g. manufacturing subsidiary). For an early critique of the establishment chain see Reid (1983). 7 Johanson and Vahlne (1990, p. 14) comment in relation to this topic: ‘‘...the critique should be directed at the very partial nature of the model, which is the consequence of a very conscious effort by the model builders to catch one single, and so far unnoticed, mechanism with strong explanatory power regarding a wide spectrum of manifestations of the internationalisation of the firm’’.

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Welch and Luostarinen (1988) and Clark, Pugh and Mallory (1997) argue that it is more appropriate to analyse the process of internationalisation at the firm level before concluding whether or not changes in commitment to specific host countries can be deemed to be discontinuous rather than evolutionary. What may be regarded as discontinuous at the individual market level may fit well with a gradualist trajectory at the firm level. Bjo¨rkman and Forsgren (2000) question the relationship between experiential knowledge and internationalisation, suggesting that incrementalist trajectories are not necessarily the norm. Forsgren (2002) casts doubt on the path dependent character of internationalisation processes by contending that the relationship between learning and internationalisation processes is more multifaceted than envisaged by the Uppsala model. Forsgren argues that firms learn about foreign markets in ways other than through direct experience, namely through mimetic behaviour, acquisitions of other firms with the requisite knowledge as well as proactive search of opportunities removed from current operations. This is not to say that experiential learning is not an important factor in internationalisation processes (Eriksson, Johanson, Majkga˚rd & Sharma, 1997, 2000b). But there is no reason to assume that experiential knowledge will necessarily grow in stepwise fashion, leading to a gradual commitment of resources.8 If this assumption does not hold, there will be no linear relationship between experiential knowledge and commitment. Furthermore, Forsgren (2002) suggests that the risk of making large commitment steps is reduced once the firm has acquired a working knowledge of a market. In this case, the relationship between experiential knowledge and incremental behaviour is expected to be negative rather than positive. Another important aspect addressed by Forsgren (2002) is where the locus of learning lies in a decentralised and geographically dispersed firm. In the Uppsala model the assumption is that the subsidiary is the locus of learning and control, accumulating experiential knowledge and deciding on the next commitment phase. Forsgren suggests that in a loosely coupled organisation such as a MNC, there may be more than one locus of learning and control. Moreover, high turnover of personnel may deprive subsidiaries of continuity in their evolution, again casting doubts on the predominance of gradualist trajectories. Johanson and Vahlne (1990) acknowledge that additional market commitments may not be made in small steps in cases where firms are large enough or benefit from surplus resources, when markets are stable or homogeneous enough for firms to learn in ways other than through experience and in cases where internationalisation experience can be reused across similar markets.9 The common thread to these arguments is that if we assume that MNCs learn from a variety of mechanisms other than direct experience and if we regard the MNC as a complex network integrating and transferring knowledge across loca8

On the notion of pace of resource commitment see Pedersen and Petersen (1998). Melin (1992, p. 104) puts it succinctly: ‘‘The model tells us little about the internationalisation process taking place in experienced companies which have learned through decades of international activities’’. 9

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tions, then the notion of a gradualist trajectory at the country level is open to question (Lord & Ranft, 2000; Forsgren, 2002). Furthermore, explaining the evolution of a subsidiary by focusing solely on the development of its network of external relationships within its host country ignores other influences that are not geographically contained within the subsidiary’s host country. In the remainder of this paper we will argue that if we regard internationalisation as the outcome of multidimensional, overlapping processes with their own spatial and temporal logics, we can expect to see both gradualism and discontinuities in the internationalisation processes of MNCs.

4. Relational mechanisms and path dependence in internationalisation Our point of departure is that internationalised firms are themselves constituted by networks of relationships between geographically dispersed units embedded in their own network of relationships with external actors (Holm, Johanson & Thilenius, 1995; Dicken & Malmberg, 2001). We define the trajectory of a subsidiary in its host country by looking at the evolution of its mode of operation as well as its status and role within the MNC. A subsidiary is defined by Birkinshaw (1997, p. 207) as ‘‘. . .any operational unit controlled by the MNC and situated outside the home country’’. We follow Jarillo and Martinez’s (1991) suggestion to connect the literature on internationalisation and MNCs, by characterising international strategy in three dimensions: i) the degree of externalisation of activities; ii) the degree of localisation of activities in each country; and iii) the degree of integration of activities across different countries. The degree of externalisation of activities refers to the extent that the firm performs activities in-house or through third parties. The second dimension refers to the degree to which the firm locates value chain activities in a particular host country. A combination of the first and second dimension is usually employed to describe the mode of operation of a firm in a foreign market (e.g. sales subsidiary). Finally, the third dimension corresponds to the degree of integration across international activities, which is often translated as the extent of co-ordination amongst subsidiaries (Kogut, 1985a, b; Porter, 1986; Mattsson, 1998). As the MNC system becomes more integrated, some subsidiaries can be charged with co-ordinating parts of this system assuming mandates that transcend the boundaries of their host country. The evolution of a subsidiary can be regarded as occurring on two planes. The degree of externalisation of activities and the degree of localisation of activities correspond to changes in the pattern of activities of the subsidiary in the host country. The degree of integration of activities across countries denotes changes in the mandate of the subsidiary, namely in terms of the responsibilities the subsidiary undertakes in the MNC system, and changes in its territorial mandate (Forsgren, Holm & Johanson, 1992, 1995; Birkinshaw, 2000). It also captures the notion that the MNC’s general knowledge of operating internationally interacts with and influ-

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ences knowledge derived from specific local operations (Kim & Hwang, 1992; Clark et al., 1997). The Uppsala model suggests that knowledge and commitment are a consequence of the relationships primarily developed between a subsidiary and external actors located in the host country whilst relationships between headquarters (henceforth HQ) and the subsidiary as well as inter-subsidiary relationships are regarded as less important.10 Our relational perspective proposes that internationalisation processes result from three types of relationships: 1) relationships developed with external actors located inside or outside the host country—e.g. relationships with important customers or suppliers in one country can impact upon the firm’s international expansion, leading to connected processes of internationalisation (Martin, Swaminathan & Mitchell, 1998; Andersson, 2002); 2) the relationship of subsidiaries with HQ, and; 3) relationships with other subsidiaries located inside (e.g. different product divisions) or outside the host country (e.g. sister subsidiaries). The territorial scope of the internationalisation process is thus not restricted to the firm’s home country and the host countries in which subsidiaries are implanted. Actors internal or external to the MNC network and geographically embedded in third countries may affect the internationalisation process of the firm (Johanson & Mattsson, 1988; Blankenburg, 1995; Holm, Eriksson & Johanson, 1996). Similarly, as subsidiaries are progressively embedded in their host countries, they may extend their role and start affecting the development of other units in the MNC group, namely sister subsidiaries. Rather than simply pipelining HQ’s products and services into foreign markets, subsidiaries can assume a variety of roles in the MNC (Birkinshaw & Morrisson, 1995; Taggart, 1998; Birkinshaw, 2000). Furthermore, a subsidiary’s mandate may extend to territories other than the country in which the subsidiary was implanted. For example, the subsidiary may internationalise into third countries, a process known as internationalisation of the second degree (Forsgren, Holm & Johanson, 1992). The three dimensions identified earlier may also interact and overlap—e.g. as the firm progressively increases its degree of localisation of activities, it enhances the prospect of developing capabilities that may be of use to other parts of the MNC network. Recent research by Andersson and Forsgren (2000) and Andersson, Forsgren and Holm (2001, 2002) found that the value of a subsidiary to the MNC network in terms of performance and capability development is largely dependent on the subsidiary’s embeddedness in its local, external network. 10 Penrose’s (1956, pp. 225–6) description of the role of a subsidiary in a multinational firm represents an early example of this perspective: ‘‘Once established, however, a new subsidiary has a life of its own and its growth will continue in response to the development of its own internal resources and the opportunities presented in its new environment’’. Commenting on the absence of market interdependencies in the Uppsala model, Johanson and Vahlne (1990, p. 15) remark: ‘‘This is both a conceptual and explanatory problem. The conceptual problem is that it seems reasonable to consider a firm more internationalised if it views and handles different country markets as interdependent than if it views them as completely separate entities. The explanatory problem is that interdependencies between markets can be expected to have a strong impact on the internationalisation of the firm’’. [our emphasis]

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The evolution of a subsidiary may also be affected by events unconnected to the context of its host country. For example, the merger of two MNCs at the corporate level may cause a wave of connected mergers at the subsidiary level that radically changes the way subsidiaries conduct operations in their host countries. The same argument applies to acquisitions of firms with their own multinational infrastructure leading to subsequent reorganisations of the combined subsidiary network. Finally, contingencies such as political events or changes in regulatory regimes can significantly affect the evolution of a subsidiary or a whole MNC network. In short, in our framework the subsidiary is embedded in distinct yet overlapping networks encompassing both internal and external actors (Mattsson, 1998).11 As the subsidiary is connected to different network contexts, it becomes susceptible to different types of changes across these contexts whose coupling varies over space and time. For example, the evolution of a subsidiary is likely to follow an incremental path if it is strongly influenced by the network context of its host country but events at the corporate level (e.g. cross-border mergers) could overlap with the trajectory in the host country and introduce important discontinuities in this evolution. A relational perspective draws attention to the fact that the focal subsidiary is embedded in multiple, overlapping contexts where different types of relationship are being created, developed, or broken (Johanson & Mattsson, 1988; Mattsson, 1998). Reversals, truncated or discontinuous paths may be the outcome of the subsidiary’s embeddedness in multiple network contexts and the way these contexts interact. The embeddedness of a subsidiary in multiple network contexts suggests looking at its evolution as path dependent process comprising paths in time and space (Ha˚kansson & Lundgren, 1997). We will develop this notion in the next section.

5. Internationalisation as paths in space and time Our proposal is to understand the internationalisation process as a path dependence sequence that can be analysed as paths in space and time (Ha˚kansson & Lundgren, 1997) driven by three types of relational mechanisms identified in the previous section. In our framework, paths in space refers to the way firms are intrinsically spatial and territorial entities in the sense that they are influenced by, and also affect, the characteristics of specific territories and places in which they operate (Dicken & Malmberg, 2001). The relationships between units of an internationalised firm are both complex and deeply embedded in the firm’s territoriality. On one hand, units embedded in specific territories have to develop a range of practices and identities that address the specificities of the places in which they are 11

Mattsson (1998, p. 245) defines overlap as ‘‘. . .a static, structural measure and implies interdependence between two or more networks. If both actor and relationship overlaps are high, two networks are very interdependent and might, by actors and analysts, be regarded as one network instead of two. Through strategic actions an overlap changes over time. This process is called overlapping’’.

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Fig. 1. Paths in space and time: Types of relationship that affect the evolution of a subsidiary.

implanted. On the other hand, these geographically dispersed units are both responsive to and affect the corporate network to which they belong. The MNC establishes a mandate for the subsidiary in its host country as well as a set of relationships to other parts of the network—e.g. the subsidiary manufactures a range of products locally, sources inputs from other subsidiaries and exports part of its output to other subsidiaries. A relational perspective suggests that the path of a subsidiary is affected by the relationships it articulates across different geographical contexts as well as the territorial scope of its operations. In Fig. 1, we depict a focal subsidiary as a node in an overlapping network of relationships with varying geographical scope. The evolution of a subsidiary located in a particular host country is thus potentially affected by a combination of relationships, involving internal as well as external actors, some embedded in the same geographical context and others operating in broader contexts.12 The first type of relationship concerns external actors. External actors comprise business and institutional actors, such as buyers, suppliers, competitors, regulatory and governmental agencies that can affect the trajectory of the focal subsidiary. 12

The double-edged arrows indicate that these relationships are mutually influencing rather than unidirectional—i.e. the different network contexts affect and are affected by the trajectory of the focal subsidiary. Moreover, the arrows depict the notion that the process of internationalisation is driven by the dynamics of the direct and indirect relationships in which the subsidiary is embedded.

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These external actors are embedded in different network contexts of varying territorial scope. For example, governmental agencies operate usually at the regional or national level, buyers or suppliers may be local firms or branches of foreign-owned firms. The second type of relationship corresponds to HQ relationships. It is usually characterised by control through which the HQ holds key resources and is in charge of co-ordinating the development of the subsidiaries. This degree of control often correlates with the HQ’s knowledge of the subsidiary network context (Holm, Johanson & Thilenius, 1995). The last type of relationship comprises the relationship of the focal subsidiary with other parts of the MNC network. Powerful subsidiaries can heavily influence the development of other subsidiaries within the MNC network (Holm, Johanson & Thilenius, 1995). These units can be embedded in same territorial context as the focal subsidiary or in other contexts. The category ‘‘other subsidiaries’’ does not necessarily relate to equivalent subsidiaries implanted in third countries, since the MNC can establish more than one subsidiary in the same host country—e.g. mapping on to different divisions or business units in its domestic context (Chang and Rosenzweig, 1998a, 1998b). Moreover, MNCs may operate in the same country using multiple modes of operation (Valla, 1986; Clark et al., 1997; Petersen & Welch, 2002). In this event, there may be overlaps across the package of modes the firm uses in a particular country—i.e. the external networks of different units may be more or less interdependent. Fig. 1 depicts the set of relationships that affect the trajectory of a focal subsidiary and highlights the fact that these relationships have varying territorial scopes. For example, relationships with customers may be confined to the host country but may also spill over into other territories and require inter-subsidiary coordination. Relationships with HQ may be mediated by other subsidiaries or the focal subsidiary may itself assume the role of regional HQ for a group of sister subsidiaries (Yeung, Poon & Perry, 2001). In short, the trajectory of the focal subsidiary can be seen as a path in space, namely in terms of the range of relationships and associated territorial scope that influences that trajectory. If paths in space are associated with the structure and geographical configuration of the MNC, paths in time introduces the idea that the relationships outlined above are articulated in different temporal contexts and that changes in any of these relationships can reinforce an existing sequence or redirect it to new paths. The influence of the relationships outlined in Fig. 1 is neither homogenous over time nor is their influence exerted simultaneously. Internationalisation processes exhibit complex temporal structures with some events taking place over short periods of time and others lasting up to several years. Kutschker, Baurle and Schmid (1997) differentiate between international evolution, episodes and epochs to denote the scope, speed and duration of changes affecting internationalisation. Evolution refers to routine, small steps influencing small units, episodes affect larger parts of the corporation and introduce discontinuities in the internationalisation process, whereas epochs encompass longer periods of time, comprising both slow and rapid change and affect the whole corporation.

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We recognise that change processes have varying temporal layers and that these processes can collide to either reinforce or disrupt existing paths at different levels of a MNC. For example, episodes such as acquisitions of firms with their own multinational network can impact upon subsidiaries in countries where the two MNC networks overlap as well as affect the overall pattern of internationalisation of the new, combined MNC structure. Similarly, a subsidiary expanding its territorial mandate through a process of internationalisation of the second degree (Forsgren, Holm & Johanson, 1992), may impact upon the subsequent pattern of internationalisation of other subsidiaries as well as change the relationship between these subsidiaries and regional or corporate HQ. It is worth stressing that the same event can have a different impact at different stages of the evolution of the MNC. For example, an acquisition at an early stage of the evolution of the MNC can have a profound impact on the geographical and organisational architecture of the MNC. An acquisition for a MNC with an extended network of relationships may only have a marginal impact on the configuration of the MNC network. Finally, contingencies and strategic actions initiated at HQ or subsidiary level may also affect the operation of the relational mechanisms outlined here. In his historical review, Jones (1996, p. 310) argues that there is no single logic behind the growth of MNCs and that systematic factors accounting for this growth should not oversimplified or overstated. For example, contingencies such as changes in government regulations concerning voluntary export restraints in the 1970s and 1980s contributed to major investments in manufacturing facilities abroad and the consequent expansion of MNC networks. Lastly, management at the subsidiary and corporate levels can make sense of their international position, interests and identities and alter the direction of the paths they follow, or shape new paths altogether (Johanson & Vahlne, 1990). Andersson (2000), for example, has demonstrated the importance of different types of entrepreneurship in explaining internationalisation trajectories. Subsidiary managers can launch entrepreneurial initiatives, with or without HQ’s support, to change the mode of operation of a subsidiary and expand the territorial or product scope of its mandate (Birkinshaw, 2000). In summary, our relational framework suggests that internationalisation processes are affected by different types of relationships, internal and external to the MNC network, articulated in different temporal and spatial contexts. The paths in space and time framework advises against equating path dependence with incrementalist trajectories confined to specific territories, even if self-reinforcing processes continue to play an important role in explaining internationalisation processes. Our contribution extends and refines the network perspective on internationalisation processes advanced by Johanson and Mattsson (1988), Forsgren (1989), Johanson and Vahlne (1990) and Holm, Johanson and Thilenius (1995) amongst others. First, we have made some tentative steps towards articulating more clearly the spatial and temporal dimensions of internationalisation within a framework that regards the MNC as a network embedded in multiple, geographically differ-

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entiated and overlapping networks. Secondly, we have disentangled the contingent association of path dependence with incrementalism in internationalisation trajectories and attempted to show that gradualism and discontinuities can coexist in the same trajectory. The interaction of mechanisms across overlapping network contexts as well as contingencies can produce a wide variety of trajectories. Sources of discontinuity can be localised (e.g. regulatory changes in one country affecting the local subsidiary) as well as transmitted, transformed or absorbed through long chains of relationships within the MNC (e.g. reorganisation of product divisions).

6. Conclusions The main proposition advanced in this paper is that path dependence can be usefully deployed to capture the dynamics of internationalisation processes of experienced internationals. The conceptualising of the internationalisation trajectory of a subsidiary as paths in space and time following Ha˚kansson and Lundgren (1997), allows us to portray this trajectory in terms of a number of overlapping processes whose coupling may vary across geographical and temporal contexts. The embeddedness of the subsidiary in multiple network contexts, involving external actors, HQ and other subsidiaries, generates three types of relational mechanisms that together with contingencies, leads to a variety of trajectories where gradualism, discontinuity, reversals as well as leapfrogs, are equally possible. The implications of a relational approach to the study of internationalisation processes are threefold. First, there is a need to separate empirically observed trajectories from the mechanisms driving those trajectories (Johanson & Vahlne, 1990). Too often, evidence at the empirical level has been used as a straightforward counterproof to the inexistence or lack of operation of particular mechanisms. As we have argued, mechanisms operate in conjunction with other mechanisms, their coupling varies over time and space, and contingencies introduce an element of chance and serendipity in this process. Secondly, we suggest that models of internationalisation must be able to explain a wide variety of trajectories from establishment chains to shorter or truncated trajectories, as well as trajectories characterised by leapfrogging, retrenchment or withdrawals. The suggestion advanced here is that only a focus on the multiple network contexts within which subsidiaries exist can provide a viable platform for explaining such a variety of trajectories (Holm et al., 1995). Whilst some trajectories are well documented empirically, there has been little research on others, namely de-internationalisation processes (Benito & Welch, 1997). Finally, we propose that path dependence explanations should not be solely associated with self-reinforcing processes nor be restricted to generic statements such as ‘‘history matters’’ As we have argued, a broader view of path dependence should focus on mechanisms and contingencies, without neglecting path creating decisions. This implies looking at the evolution of modes of operation for a subsidiary in its host country, at the drivers and switching costs that enable and thwart those changes (Pedersen, Petersen & Benito, 2002), as well as changes in its

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degree of integration in the MNC network and impact of changes in one part of the MNC network on distant parts of the same network. Studying internationalisation trajectories calls for a more sophisticated understanding of how the MNCs function as an interorganisational network, and how changes in one part of the network are propagated to other parts of the network. The proposal of Kutschker et al. (1997) to divide internationalisation processes according to the scope and duration of changes provides a start in this direction. Easton and Lundgren’s (1992) flow through nodes model provides another alternative to look at how changes travel through complex webs of relationships. In summary, our suggestion for a relational approach to internationalisation calls for a conceptualisation of the MNC as a geographically dispersed network within networks of relationships with varying territorial extent. Some of these relationships are embedded in specific territories and nation-states; others may approach the global scale. Whereas the literature on MNCs as networks has tended to focus on structures and functions of subsidiary units, the literature on internationalisation processes has adopted a process orientation but has tended to focus on the early stages of going abroad. The proposal for further research stemming from our relational framework attempts to combine the processual focus of the internationalisation literature with the structuralist bias of the MNC literature. The notion of internationalisation as paths in time and space sketched in this paper, points towards the importance of looking at dynamic processes embedded in structures of relationships that overlap and interact in complex ways across space and over time.

Acknowledgements Sergio Rezende is grateful for the financial assistance of the Brazilian Government agency CAPES (grant number 1381/96–8) that supported a three-year doctoral research project on which this paper is based. We gratefully acknowledge the valuable comments and suggestions made by two anonymous referees and Geoff Easton. The usual disclaimers apply.

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