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From Absorptive Capacity in International Business to Strategic Flexibility of Multinational Corporations  

Carine Peeters

Both the absorptive capacity (AC) and international business (IB) literatures are interested in knowledge processes and learning in organizations. Although originating from different streams of research, AC and IB were thus meant to meet and reinforce each other. Fundamentally, the role of AC in IB is to condition the performance outcome of firms’ internationalization efforts. Firms benefit from their IB activities conditional on being able to absorb new knowledge and learn. In other words, multinational corporations (MNCs) need to have the necessary AC to overcome their liabilities of foreignness and outsidership. Short of AC, the costs and challenges of entering foreign markets and operating across countries are likely to outweigh potential performance gains. Moreover, AC plays a role in the technological upgrade and economic development of nations, as it helps firms in emerging economies to benefit from spillovers of foreign direct investments by MNCs from more economically advanced economies. And national governments can play an important role to facilitate this effect by developing appropriate economic and innovation policies that support knowledge creation and learning. Firms can also proactively develop AC. For instance, MNCs can nurture a broad knowledge base that can be leveraged in different contexts and opt for a decentralized structure with mechanisms that help subsidiaries access the knowledge base of the parent organization. They can also practice specific routines to identify and access relevant knowledge from their external environment, transfer that knowledge in their organization, and assimilate it in their own knowledge creation processes. Moreover, MNCs can adopt human resources management practices that help raise the capacity and motivation of their employees to acquire and exploit new knowledge. Ultimately, the most important contribution of AC in IB might be to help MNCs develop the strategic flexibility that enables them to thrive in dynamic environments. High-AC MNCs may indeed be in a better position than other firms to (a) build diverse options to prepare for uncertain evolutions in the market, (b) access flexible resources to allocate to new courses of actions, and (c) redeploy resources across options over time. Unpacking the exact mechanisms as well as boundary conditions for the role of AC in building strategic flexibility offers ample opportunities for future research on a highly relevant topic for MNCs.

Article

The Application of Real Option Approach in International Business Research  

Tailan Chi and Yan Huang

The real option theory (ROT), a theory on investment decision making under uncertainty, has been applied to analyzing a broad range of questions in international business (IB). In the face of uncertainty, any discretion that the managers of a multinational enterprise (MNE) have over the timing, scale, speed, and sequence of investing or using the firm’s resources, in the forms of physical or intellectual capital or managerial time and effort, can be a real option. Such options confer upon the managers the right, but not the obligation, to exploit the upside potential while limiting the downside risk. Uncertainty, irreversibility, and absence of immediate and complete preemption are three necessary conditions for a real option to create value. Uncertainty offers opportunities to gather more information in the future, and such information can help managers make better decisions or alter prior decisions for improvement. Irreversibility is defined as the proportion of the investment committed to a project that cannot be recouped if the project is abandoned. Preemption refers to the revocation of the decision-making discretion that nullifies the option. It is possible to distinguish seven types of real options that have been examined in IB studies: (a) option to defer, (b) option to abandon/exit, (c) option to exchange, (d) option to grow/scale up, (e) option to contract/scale down, (f) option to switch, and (g) compound options. These types of options are found to influence a firm’s international market-entry strategies (e.g., location, timing, scale, speed, and mode) and the configuration and organization of the firm’s geographically dispersed production network. ROT has also been integrated with other economic theories, such as transaction cost economics and resource-based view, to better understand these decisions. Although ROT assumes a strong form of rationality on the part of the decision maker, it is also possible to incorporate cognitive or cultural biases into the theory and give the theory’s analysis greater realism. ROT represents a theoretical approach that can be integrated with various economic and noneconomic theories. More work in such theoretical integration can potentially help researchers gain deeper or more complete understandings of IB questions. Extant studies in IB typically analyze only a single type of option in isolation. But the global production network of a MNE typically has a portfolio of different types of options embedded, and the different types of options inevitably interact. The study of interactions among two or more types of options under different sources of uncertainty is likely to yield new insights on the strategy and organization of the MNE.