Perspectives on Multinational Enterprises in Emerging Economies

Abstract

Multinational enterprises (MNEs) play a pivotal role in the development of many emerging economies. In consequence, they became the focus of scholarly research by economists and policy analysts. In contrast, international business scholars have been comparatively uninterested in analysing this role of MNEs. Yet they could make important contributions to these debates. First, studies taking the individual firms as starting point would enhance understanding of the interaction between MNEs and the local environment. Second, theories and research methodologies developed in international business research could provide new insights into the dynamics of MNEs in emerging economies. The objective of this paper is to motivate more international business scholars to engage in research on positive and negative spillovers from foreign direct investment (FDI) in emerging economy societies. To advance this research agenda, scholars need to analyse the specific activities and capabilities of the firms involved, and the impact of FDI on the broader social and environmental context. For management, this agenda raises the ethical question: To what extent ought businesses to care about their local stakeholders?Journal of International Business Studies (2004) 35, 259–276. doi:10.1057/palgrave.jibs.8400084

Full text

PERSPECTIVE
Perspectives on multinational enterprises in
emerging economies
Klaus E Meyer
Copenhagen Business School, Frederiksberg,
Denmark
Correspondence: KE Meyer, Centre for East
European Studies, Copenhagen Business
School, Howitzvej 60, 2000 Frederiksberg,
Denmark.
Tel: þ45 3815 3033;
Fax: þ45 3815 2500;
E-mail: km.cees@cbs.dk
Received: 7 May 2003
Revised: 3 March 2004
Accepted: 16 March 2004
Online publication date: 1 July 2004
Abstract
Multinational enterprises (MNEs) play a pivotal role in the development of
many emerging economies. In consequence, they became the focus of
scholarly research by economists and policy analysts. In contrast, international
business scholars have been comparatively uninterested in analysing this role of
MNEs. Yet they could make important contributions to these debates. First,
studies taking the individual firms as starting point would enhance under-
standing of the interaction between MNEs and the local environment. Second,
theories and research methodologies developed in international business
research could provide new insights into the dynamics of MNEs in emerging
economies. The objective of this paper is to motivate more international
business scholars to engage in research on positive and negative spillovers from
foreign direct investment (FDI) in emerging economy societies. To advance this
research agenda, scholars need to analyse the specific activities and capabilities
of the firms involved, and the impact of FDI on the broader social and
environmental context. For management, this agenda raises the ethical
question: To what extent ought businesses to care about their local
stakeholders?
Journal of International Business Studies (2004) 35, 259–276.
doi:10.1057/palgrave.jibs.8400084
Keywords: multinational enterprises; emerging economies; business in society
Introduction
Multinational enterprises (MNEs) play a pivotal role in linking rich
and poor economies, and in transmitting capital, knowledge, ideas
and value systems across borders. Their interaction with institu-
tions, organisations and individuals is generating positive and
negative spillovers for various groups of stakeholders in both home
and host countries. In consequence, they are focal points in the
popular debate on the merits and dangers of globalisation,
especially when it comes to developing and emerging economies.
A solid understanding of the role of MNEs in emerging economies
is vital both for policymakers and for MNEs themselves. Policymakers
are influencing the regulatory regime under which both MNEs and
local business partners operate. They are interested in understanding
how foreign direct investment (FDI) influences economic develop-
ment and national welfare. The expectation that FDI will benefit the
local economy has motivated many governments to offer attractive
incentive packages to entice investors. The rationale is that the social
benefits of inward FDI would exceed the private benefits of FDI, and
Journal of International Business Studies (2004) 35, 259 – 276
&
2004 Palgrave Macmillan Ltd. All rights reserved 0047-2506 $30.00
www.jibs.net

investors would take into account only the latter
when deciding over investment locations (Oman,
2000; Blomstro
¨m and Kokko, 2003). The policy
debate needs scientific evidence on how, and to
what extent, FDI influences the local environment.
Despite the policy relevance, the impact of MNEs
on host economies is not well understood. Wells
(1998: 102) observed:
Some FDI is good, almost certainly some is harmful. But
exactly what kind of investment falls in each category is
frightfully difficult to determine, even if the effects are
measured against only economic criteria.
Similarly, Caves (1996: 237) concludes his review
of the literature:
The relationship between a less developed country’s stock of
foreign investment and its subsequent economic growth is a
matter on which we totally lack trustworthy conclusions.
Rodrik (1999: 39) infers:
Today’s policy literature is filled with extravagant claims
about positive spillovers from FDI, y[yet] the hard
evidence is sobering.
Having reviewed the empirical literature aiming
to identify spillovers, I concur.
The impact of multinational firms on their
environment is, or should be, equally relevant to
managers. Positive spillovers help build a com-
pany’s reputation as an actor concerned for its
stakeholders. Negative spillovers risk triggering
adverse reactions from stakeholders such as local
politicians concerned about employment, and
consumer NGOs concerned about ethics. Recognis-
ing both complementary and conflicting interests
helps during negotiation processes to identify
strategies that benefit both MNEs and stakeholders
in host economies. In fact, there are cases where
MNEs have commissioned independent studies to
document their spillovers, as this might enhance
their bargaining position (Woodward et al., 1995).
This paper presents suggestions on how to
advance research on the impact of MNEs on
emerging economies. The interaction with MNEs
may benefit or harm local firms and individuals,
which creates what is known as positive and negative
spillovers. Spillovers arise from non-market transac-
tions when resources, notably knowledge, are
spread without a contractual relationship, so-called
externalities. MNEs are profit maximising, and thus
naturally are not interested in creating benefits for
others without being paid for it. Whether foreign
investors allow positive externalities depends on
their opportunity costs of sharing the knowledge,
and the transaction costs of establishing barriers to
knowledge flows. Moreover, spillovers may arise
from market transactions if a buyer values a
resource more highly than the price paid, known
in economics as the consumer surplus. On the other
hand, sellers gain a producer surplus when they
value a good at less then the price they charge. Thus
unless one side is able to apply perfect price
discrimination, both parties will be better off as a
result of the transaction.
These issues are particularly relevant for emerging
economies – that is, middle- or low-income econo-
mies with growth potential that makes them
attractive for foreign investors. These economies
typically have less sophisticated market supporting
institutions and fewer locational advantages based
on created assets, such as infrastructure and human
capital (Hoskisson et al., 2000; Narula and Dun-
ning, 2000). Therefore both policymakers and
managers are interested in knowing how MNEs
may contribute to the economic development of
these economies. To derive policy advice, they need
to understand the specific circumstances that
influence spillovers, including characteristics of
investment projects, local firms, and the institu-
tional framework. However, these circumstances
change with the evolution of the global economy,
and thus require a continuous reassessment.
Scholarly research has for many years analysed
FDI, aiming to contribute to a rational assessment
of the impact of MNEs on their host societies. Yet
business scholars have largely been sitting on the
sidelines while the scholarly debate has been
dominated by economists (e.g. Blomstro
¨m and
Kokko, 2003; Bhagwati, 2004), and political scien-
tists (e.g. Spar and Yoffie, 1999; Moran, 2002).
However, international business scholars would be
able to contribute a deeper understanding of the
inner logic of multinational firms.
International business is an interdisciplinary field
of study, drawing on several social science dis-
ciplines. Economics has been the most influential
in the past two decades, yet other disciplines have
also made their mark on the field, including
political science, history, psychology, sociology
and anthropology (Shenkar, 2004). This commu-
nity of scholars is specially experienced in studying
multinational enterprises and comparative man-
agement, incorporating contextual variables
derived from multiple disciplines, as well as area
studies. However, international business research
has been largely looking into the MNE, rather than
Multinational enterprises Klaus E Meyer
260
Journal of International Business Studies

‘looking out’ from MNEs to the societies in which
they are operating. Moreover, in the words of
Buckley and Casson (2003: 3):
Although political debates continue to rage over globalisa-
tion, academic research has become increasingly divorced
from the political, social and economic issues involved.
Most international business scholars, it appears, would
rather influence the boardroom than the office of the
president or prime minister. It certainly pays better, and
appeals to people with narrow ethical horizons.
It may be a paradox: Buckley and Casson’s
seminal work The Future of the Multinational Enter-
prise (1976) was intended as a contribution to
political debates at the time (Buckley and Casson,
2003), yet it has mainly stimulated research on how
to run businesses better – in terms of profits, not as
socially responsible citizens. Buckley and Casson
(1976) rejected the excessive concerns about MNEs’
monopoly power by providing a new, theoretically
grounded understanding of how MNEs operate,
and why they exist. However, few scholars pursued
this aspect of their work further. Rather, Buckley
and Casson (1976) has become the foundations of
many studies of the MNE itself, and recent discus-
sions outline research agendas that push further in
that direction (Ghemawat, 2003; Rugman and
Verbeke, 2003; Yeung, 2003). But are these better-
run MNEs also becoming better citizens?
As an interdisciplinary field, international busi-
ness is well positioned to advance a broader
research agenda. The role of FDI in developing
countries has been an occasional topic in the
Journal of International Business Studies (de la Torre,
1981; Wells, 1998), and in recent years several
studies have analysed FDI spillovers (Hejazi and
Safarian, 1999; Liu et al., 2000; Feinberg and
Majumdar, 2001; Buckley et al., 2002; Chung et al.,
2003). However, these closely follow the tradition
of similar studies in economics, and make little use
of the interdisciplinary nature of the field to
develop new theoretical insights, let alone agenda-
setting insights for policy or management.
Thus although international business scholars are
arguably the prime experts on MNEs, they have
contributed relatively little to explaining and
evaluating ‘the role of MNEs in society’. Few studies
on the impact of FDI consider more recent devel-
opments in strategic management research, such as
the resource-based view, organisational learning
theories, and institutional perspectives. This paper
presents a research agenda with the aim of enga-
ging international business scholars in the broader
scholarly debates on the role of business in society,
and in emerging economies in particular. This
research agenda on MNEs in emerging economies
is broad. One of the challenges is to tie the partial
views discussed in different literatures together to
allow comprehensive assessments.
The next section reviews the literature on spil-
lovers from MNEs to local firms in the same or
related industries. On that basis, I then go on to
outline a research agenda that focuses on the
different agents involved, following the broadly
the organisational framework of Figure 1. Interna-
tional business may in particular contribute a better
understanding of the multinational and local firms
Parent MNE
= country of origin
= industry
= organizational
centralization
= size & experience
FDI Project
= subsidiary role
= mode of entry
= centralization
= knowledge management
= …
Local Firms
= intra-industry spillovers
= inter-industry spillovers
= absorptive capacity
= entrepreneurship
= clusters
…
Knowledge
Linkage effects
Competition
Macroeconomy
= balance of payment
= capital stock
= employment
...
Social Issues
= ’ethical’ business
practices
= labour standards
= wages
...
Institutions
= policy framework
= FDI laws
= competition laws
= educational system
...
Natural
environment
= pollution havens
= global standards
...
Figure 1 An organisational framework for FDI impact in emerging economies.
Multinational enterprises Klaus E Meyer
261
Journal of International Business Studies

involved in the process. Moreover, the impact on
the non-economic aspects of societies ought to
receive greater attention, including the natural
environment, social issues and institutional devel-
opment. In the subsequent section I discuss the
ethical dimensions of conducting business and
emerging economies, before concluding in the final
section.
Industry-level perspectives: a review of the
literature
A major focus of the literature has been on the
interaction of MNEs and local firms via knowledge
diffusion, forward and backward linkages, and
competition. This review section focuses on key
issues pertaining to the impact on local businesses
in the same industry or in related industries; for
more comprehensive reviews see Altenburg (2000),
Blomstro
¨m and Kokko (2002) and Fan (2002).
Intra-industry spillovers
A large body of empirical literature has analysed the
way FDI influences local firms in the same industry.
The main theoretical foundations of these studies
are knowledge spillovers on the basis of demonstra-
tion effects and the movement of labour. Demon-
stration effects work through the direct contact
between local agents and an MNE operating at
different levels of technology. After observing a
product innovation or a novel form of organisation
adapted to local conditions, local entrepreneurs
may recognise their feasibility, and thus strive to
imitate them. Prior to such an encounter, local
entrepreneurs have limited information about the
costs and benefits of new methods, and may thus
perceive the risk of investment as too high.
However, FDI introduces an ‘existing proof’ of
viable paths of development. As local businesses
come into contact with existing users, information
about technological innovations and new manage-
ment techniques is diffused, the uncertainty is
reduced, and imitation levels increase (Blomstro
¨m
and Kokko, 2002).
A second channel of spillovers is the movement
of employees. MNEs build local human capital
through training of local employees, yet these
highly skilled individuals may move to locally
owned firms or start their own entrepreneurial
businesses. Within MNEs, even rank and file staff
acquire skills, attitudes and ideas on the job
through exposure to modern organisation forms
and international quality standards. If these
employees then move to local firms, they can take
some of this tacit knowledge with them, thus
enhancing productivity throughout the economy.
The benefits of demonstration effects and labour
mobility are often assumed to have quasi-public
good characteristics, as firms can observe the
outcome of organisational innovations by success-
ful companies. On this basis, a popular proposition
in the economics literature has been the technology
gap hypothesis originally proposed by Gerschenk-
ron (1962). It stipulates that spillovers are increas-
ing with the difference in technology levels
between domestic and foreign firms in the industry.
Empirical tests face the obstacle that spillovers are
difficult to quantify or measure directly. Many studies
thus proxy spillovers by the observed improvements
in productivity among the firms that came in contact
with FDI – so-called productivity spillovers.
Caves (1974) analysed cross-sectional data in his
pioneering work, and similar data have been used
in many subsequent studies. However, this metho-
dology does not capture the often long lags
between FDI entry and its impact on local firms.
Moreover, the cross-sectional association between
FDI and industry productivity may be a result of
MNEs entering industries with higher productivity,
rather than of productivity being raised by FDI.
Theoretical perspectives such as the OLI paradigm
(Dunning, 1993) suggest that MNEs operate in
technology-intensive industries, such that reverse
causality is highly plausible.
With the emergence of panel data techniques and
the corresponding software, most recent studies
have analysed panel data, which leads to system-
atically different results. Go
¨rg and Strobl (2001)
show that studies using cross-sectional data obtain
systematically more positive estimates of the spil-
lover coefficients than do panel data studies. In
consequence, the latter should be used to assess the
overall message arising from this research.
The results for panel data research in developing
countries show negative effects in two major
studies: Aitken and Harrison (1999) on Venezuela
1976–89, and Kathuria (2000) on India 1975–89.
Other studies such as Haddad and Harrison
(1993) on Morocco 1985–89 and Kugler (2001) on
Columbia 1974–98 find insignificant effects. For
transition economies, the evidence is less clear. Liu
(2002) in China and Sinani and Meyer (2004)
in Estonia find positive effects, whereas other
studies find negative effects in Bulgaria, Romania
(Konings, 2001) and the Czech Republic (Djankov
and Hoekman, 2000). Hence the overall evidence
does not support the proposition of positive intra-
Multinational enterprises Klaus E Meyer
262
Journal of International Business Studies

industry productivity spillovers, with the possible
exception of special circumstances such as the
transition from central planning to a market
economy.
The technology gap hypothesis does not find
convincing support either. Haddad and Harrison
(1993) find that FDI in Morocco has a greater
impact on reducing the productivity gap between
foreign and domestic firms in the case of a low
initial gap. Similar results were obtained by Kokko
(1994) for Mexico and Kokko et al. (1996) for
Uruguay. Hence the empirical evidence is insuffi-
cient to maintain the traditional (linear) technolo-
gical gap hypothesis widely assumed in economic
models.
Partly in response to the lack of support for the
technological gap proposition, recent theoretical
work emphasises the recipient’s own capabilities
and initiatives. A broad consensus suggests that
local firms need a certain level of indigenous
human capital to be able to benefit from knowledge
transfer by multinational enterprises (e.g. Lall
1996). This argument has been theoretically devel-
oped with reference to the concept of absorptive
capacity – that is, the firm’s ability to recognise
valuable new knowledge, integrate it into the firm,
and use it productively (Cohen and Levinthal,
1990; Zahra and George, 2002). Hence the extent
of knowledge transfer depends on the actions of
both firms, and is not quasi-automatic.
Recent empirical studies suggest that absorptive
capacity is crucial for local firms to benefit. For
example, Liu et al. (2000) find for the UK that
foreign presence in a sector positively affects the
labour productivity of domestic firms, but is
positively moderated by the local firms’ intangible
assets (a proxy for absorptive capacity). This result
extends to emerging economies; Kathuria (2000)
finds that spillovers in India depend to a large
extend on the investment by local firms in learning
and R&D.
The concepts of technology gap and absorptive
capacity have been connected in recent empirical
research that suggests that opportunities for knowl-
edge acquisition increase with the technology gap,
but recipients’ ability to use it declines. Potential
spillovers increase with the technology available in
the FDI firm, which increases with the technology
gap. However, realised spillovers decline as firms
fall too far behind to be able to absorb the
technology (Blomstro
¨m and Sjo
¨holm, 1999). Thus
technology spillovers may be related to the tech-
nology gap in an inverse-U-shaped function (Liu
et al., 2000). However, the concept of absorptive
capacity is not well understood, and intangible
assets or R&D expenditures are weak proxies. I thus
return to the concept of absorptive capacity when
discussing local firms.
In conclusion, two of the concepts widely used in
the theoretical literature do not gather convincing
empirical support. The evidence of intra-industry
knowledge spillovers is weak if appropriate panel
data methodology is used (Go
¨rg and Strobl, 2001).
1
Similarly the (linear) technology gap hypothesis
fails the empirical test. Thus this vast literature
leads to a puzzle: Why are there, except in two
studies, no positive spillovers to local firms? If some
firms gain, then others must be losing for the
average effect to be neutral or negative. What
negative productivity effects counterbalance the
positive spillovers?
In the short run, local firms may retain over-
capacity as they lose market share to foreign
competitors, which lowers their productivity (Ait-
ken and Harrison, 1999). Moreover, crowding-out
effects may harm local firms through various
channels (De Backer and Sleuwagen, 2003). Foreign
investment firms may attract capital and labour
that may otherwise be employed in local firms, thus
inhibiting their growth and productivity. Moreover,
if a local firms develops valuable technology or
brands, it may be acquired by a foreign investor and
thus no longer generate value for the domestic-
owned sector. Such negative effects are theoretically
feasible, yet it is unclear how important they are, or
with what time lags they occur. There are indica-
tions that crowding out occurs shortly after the
entry, but positive spillovers emerge with longer
time lags (Kosova, 2004).
Moreover, the literature suggests two partial
answers on why spillovers benefit only some firms,
and not the average firm. First, spillovers emerge if
local firms develop capabilities to decode, interpret
and apply knowledge, of if employees leave the
MNE to set up their own business. Second, these
spillovers would not necessarily benefit firms in the
same industry, whereas the hypothesised negative
spillovers would. Hence future research ought to
pursue two avenues: the implications of absorptive
capacity and human resource mobility, and possi-
ble negative spillovers.
Inter-industry spillovers
Spillovers through forward and backward linkages
are, in my view, based on more convincing
theoretical arguments, yet methodological pro-
Multinational enterprises Klaus E Meyer
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Journal of International Business Studies

blems make it difficult to demonstrate them
empirically. These vertical spillovers do not rely
on externalities but are part of the consumer and
producer surplus created by market transactions.
Foreign firms often purchase intermediate goods
from domestic suppliers, which can create spil-
lovers through several mechanisms (Lall, 1978;
Smarzynska, 2002): MNEs improve the productivity
of indigenous firms by providing technical assis-
tance and training of employees to increase the
quality of suppliers’ products, by helping in
management and organisation, and by assisting
them in purchasing of raw materials. They may set
higher requirements regarding product quality and
service aspects of the supply relationships, such as
just-in-time delivery, thus providing incentives to
improve product quality and production processes.
At the same time, FDI may increase demand for
intermediate goods, and thus allow local suppliers
to realise scale economies.
Forward linkages receive less attention in the
literature, yet downstream businesses can benefit
through similar, complementary channels. Local
firms acting as marketing outlets for foreign
investors may receive support in the form of
training in sales techniques and supply of sales
equipment, and by generating more economies of
scale. MNEs may moreover supply intermediate
goods and machinery of better quality, and with
more comprehensive after-sales services than pro-
vided by previous local suppliers. FDI in infrastruc-
ture and business services directly influences
productivity of its customers if services required
by businesses improve, or are newly introduced.
Supplier relationships are in particular associated
with international production networks (Chandler
et al., 1998; Rugman and d’Cruz, 2000). MNEs at
the core of a production network transplant net-
work structures when undertaking FDI, and thus
change the nature of market transactions in the
industry. Local businesses can link into such net-
works as subcontractors or as original equipment
manufacturers.
Empirical evidence of vertical spillovers is hard to
establish, as this requires data on industry-level
input–output relationships. Among recent studies,
Smarzynska (2002) finds in Lithuania higher pro-
ductivity in supplier industries to industries with
high foreign presence, while at the same time
finding no evidence of spillovers within the same
industry. She moreover shows that the productivity
effect is larger when the foreign investors are
domestic market oriented rather than export
oriented. In a similar study for Indonesia, Blalock
and Gertler (2003) find strong evidence of spil-
lovers from FDI in vertically related industries,
whereas FDI in the same industry has no significant
effect. Similar patterns of backward linkages emerge
in Kugler (2001) for Columbia, Aitken and Harrison
(1999) for Venezuela, and Schoors and van der Tool
(2002) for Hungary.
An innovative approach to study vertical linkages
has been applied by Belderbos et al. (2001). They
analyse local content ratios of Japanese overseas
manufacturing affiliates across 14 countries to
identify project- and country-specific determinants
of the extent of interaction with local suppliers.
They find that more linkages exist for older
affiliates, acquisitions and joint ventures, and in
less developed countries also FDI by less-R&D
intensive investors. Moreover, local content
requirements appear to have a positive effect
whereas FDI established to jump tariff barriers has
less local content.
Thus the literature on vertical spillovers is over-
whelmingly confirmatory, despite the methodolo-
gical obstacles, but our understanding on how they
occur at a micro level is limited. Future research
ought to prioritise the study of vertical relation-
ships by analysing how spillovers arise in individual
interactions of a multinational firm and a local
agent or firm. What characteristics of relationships
facilitate spillovers? For example, does integration
in international production networks or industrial
clusters help local firms?
These research questions require direct measures
of interactions between MNEs and local firms to
assert under which conditions local firms benefit
from vertical spillovers. Such research may apply
the approach of Chung et al. (2003), who focus on a
single industry and use information on which US
supplier is supplying which Japanese MNE in the
automotive industry. This approach can be
expected to yield interesting insights in emerging
economies as well.
Firm-level perspectives: a research agenda
International business scholars have comparative
advantages in investigating firm-level effects, while
recognising and controlling for known country-
level effects. Future research ought to provide a
better understanding of the actors involved, and of
their interactions. An interesting empirical ques-
tion would be how important firm characteristics
are, relative to country-level variables, in generat-
ing spillovers. In outlining key research issues,
Multinational enterprises Klaus E Meyer
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Journal of International Business Studies

I loosely follow Figure 1 in outlining a research
agenda to analyse MNE strategies and operations,
the local firms receiving spillovers, and the broader
societal implications for the environment, labour
and institutional development. Given space limita-
tions, I leave out macroeconomic dimensions, such
as the impact on the balance of payments and
unemployment.
Focus on the multinational enterprise
A variety of different strategic objectives can
motivate FDI in emerging economies. Conse-
quently, subsidiaries play many different roles
within MNEs, and vary in their interactions with
the local environment and the spillovers they
create. However, the FDI impact literature has paid
scant attention to the diversity of business strate-
gies that influence the type and extent of spillovers.
Here, international business literature on, for
example, entry strategies (Anderson and Gatignon,
1986; Hennart and Park, 1993; Estrin and Meyer,
2004) and subsidiary roles (Galunic and Eisenhardt,
1996; Birkinshaw, 2000) provides a basis to analyse
the link between FDI strategies and their potential
impact.
Entry strategies
Foreign investors establish their operations using
different modes, which are commonly classified as
joint venture, acquisition and greenfield. The
impact on the host economy varies between FDI
with different modes, at least in the short term. Yet
the assessment of the variations of impact is often
based on theoretical considerations but only thin
empirical evidence, especially with respect to long-
term impact (UNCTAD, 2000). So far, these differ-
ences have rarely been analysed systematically,
apart from studies that include entry mode as
control variable (e.g. Belderbos et al., 2001).
In a joint venture, two partners share their
resources in return for access to the partner’s
resources. This can lead to mutual learning, and
thus extend linkages and knowledge transfers in
the local business community. Many observers thus
expect joint ventures to generate more spillovers.
Yet MNEs would be more concerned about
unwanted technology diffusion and thus would
be reluctant to share crucial knowledge.
Impact also varies between greenfield projects
and acquisitions. Greenfield projects are generally
regarded as having positive spillovers, but acquisi-
tions are seen with reservations. Greenfield projects
create new businesses, and thus have direct positive
effects on employment and domestic value added,
and increase competitive pressures on local compe-
titors, which may lead to their improving their
efficiency, or being forced to exit the market.
Acquisitions, on the other hand, are at the time of
entry fully operating enterprises. Following the
acquisition, the new owners may or may not
continue traditional business relationships, or
may reorganise the modes of interaction with
suppliers, which would have a significant impact
on related industries. However, based on inherited
operations, acquisitions are more likely than green-
field projects to engage in R&D (Belderbos, 2003).
Hence the variation of impact across entry modes is
theoretically ambiguous and requires systematic
empirical analysis. In particular, we have little
empirical evidence on the impact of acquisitions,
in part because rigorous analysis needs to establish
the Ceteris paribus case – that is, how the local firm
would have developed without FDI involvement
(Estrin and Meyer, 2004).
The implications of selling firms to foreign
investors are particularly pertinent in the context
of privatisation. Acquirers have to restructure and
integrate the acquired firm, as seen especially in
Eastern Europe in the 1990s (Uhlenbruck and de
Castro, 1998; Meyer, 2002). Proponents of privati-
sation by sale to foreign investors argue that foreign
investors are often well positioned to restructure
firms in crisis. In the short term, the takeover often
may require layoffs of employees, but if the
alternative would be even more drastic adjustment,
the foreign investor in fact may ‘save jobs’. A
foreign investor taking over a non-viable local firm
can add crucial resources, and thus ensure the
survival of the firm. Empirical evidence suggests
that foreign ownership has improved productivity
and profitability in Central and Eastern Europe in
the first years after privatisation (Djankov and
Murrel, 2002; Estrin, 2002). However, we lack
empirical evidence of the long-term implications
of different methods of privatisation in emerging
economies.
Subsidiary roles
FDI is undertaken to pursue a variety of objectives,
and MNE subsidiaries serve many roles within
global corporations. Consequently, they vary in
their interactions with the parent, with other
business units of the parent’s network, and with
local businesses. The impact in terms of knowledge
transfer, for example, varies with the subsidiary
Multinational enterprises Klaus E Meyer
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Journal of International Business Studies

role, but the link between subsidiary roles and
impact has yet to be analysed systematically.
Policymakers often favour export-oriented FDI
projects, which are expected to transfer knowledge
on operating production and to enhance the trade
balance by selling foreign markets. But some export
processing operations operate in exclaves with few
linkages to the local economy. Other FDI opera-
tions sell the global MNE’s products and services to
the local market, with or without local processing.
Such FDI would transfer mainly operational and
marketing knowledge, and benefit the local econ-
omy by providing higher-quality products. It also
impacts on local competition, whereas export-
oriented FDI normally does not. Thus both types
of FDI potentially transfer resources and capabilities
that may give rise to spillovers, but their nature
varies greatly. Empirical evidence on the relative
merits of either type of evidence is scarce, however.
A broader consensus exists on the potential
knowledge spillovers from higher value-added
activities, especially with local research and devel-
opment (R&D). As a relatively new trend, MNEs use
FDI to access R&D competences around the world,
either by locating near major centres of innovation,
or by acquiring firms with R&D capabilities (Kuem-
merle, 1999). Yet can emerging economies expect
to benefit from R&D spillovers? In India, Feinberg
and Majumdar (2001) find that affiliates of differ-
ent MNEs benefit from each other’s R&D activity,
but they find no spillovers to local firms, nor do
they observe reverse benefits of MNEs tapping the
R&D capabilities of local firms. Thus the question
remains: How can emerging economies attract and
benefit from subsidiaries that pursue higher value-
added activities?
One answer may be to develop subsidiaries over
time. Many affiliates upgrade their activities as they
mature, and more advanced inputs become avail-
able locally. This may be a process prepared in
headquarters, but subsidiaries can also themselves
take the initiative, for instance, to attain a global
mandate (Birkinshaw, 2000). However, what factors
drive the evolution of subsidiary roles in emerging
economies, and thus the nature of their interaction
with local businesses?
MNE operations
The impact of MNEs on their local environment
depends not only on what they do, but also on how
they do it. In addition to MNE strategies, researchers
thus ought to incorporate MNEs’ internal opera-
tions, including for instance the degree of centralisa-
tion of decision making (Bartlett and Ghoshal,
1989), the organisational cultures, and the human
resource management practices (Lane et al., 2004).
Yet how do MNEs’ internal processes affect their
impact on the local business environment?
One aspect of particular relevance for MNE
spillovers is intra-firm knowledge transfer. The
sharing of knowledge within the multinational
enterprise is a precondition for knowledge spil-
lovers. Despite a large and growing literature on
knowledge management in MNEs (Nonaka and
Takeuchi, 1995; Grant, 1996; Despres and Chauvel,
2000), few studies systematically analyse the trans-
fer of knowledge from MNEs to their affiliates in
emerging economies.
MNEs typically train local employees at all levels
of the organisation, providing formal training
courses in the subsidiary or elsewhere in the
network of the multinational enterprise, as well as
on-the-job training in close contact with expatri-
ates or trained local staff (Estrin and Meyer, 2004).
There is ample evidence that MNEs invest more
than local firms in training and staff development
(Chen, 1983; Gerschenberg, 1987). Yet internal
knowledge sharing varies, for instance with human
resource management practices and methods of
training (Husted and Michailova, 2002; Minbaeva
et al., 2003). How and to what extent does such
training create benefits that are not appropriated by
the investing firm? On the other hand, to what
extent does training serve to identify the most
qualified individuals for international careers with-
in the MNE outside their home country, thus
contributing to a brain drain? Future research may
incorporate proxies for the MNE’s organisational
structures and practices when analysing the impact
of FDI on local businesses.
Conclusions on the multinational enterprise
Explicit focus on the MNE should stimulate new
theoretical reasoning concerning FDI impact, and
provide a better understanding of which types of
FDI project create most spillovers. International
business research studying MNE impact on the
basis of firm-level datasets may want to focus on
investor- and project-specific variables, such as
entry modes and subsidiary roles and their evolu-
tion over time. Moreover, researchers should ana-
lyse the internal processes of knowledge sharing,
not only in terms of its organisational conse-
quences but also in view of the wider impact on
society.
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Focus on recipients
Local firms have long been treated as passive
recipients of spillovers, but benefits are not
obtained quasi-automatically (Blomstro
¨m and Kok-
ko, 2002; Fan, 2002). As noted in the discussion on
intra-industry spillovers, firms’ own strategies and
resource endowment are crucial for benefiting from
interaction with foreign investors. Yet what speci-
fically improves local firms’ ability to benefit from
interaction with MNEs? I see promising research
opportunities to explore the role of absorptive
capacity, entrepreneurship and industrial clusters.
Absorptive capacity
International business researchers have analysed
absorptive capacity in the contexts of knowledge
transfers within MNEs and within strategic alli-
ances (Lane and Lubatkin, 1998), including joint
ventures in emerging economies. For example,
Lyles and Salk (1996) and Lane et al. (2001) find
that local joint venture partners improve their
capacity to learn if organisational flexibility is
promoted, if collaboration and exchange of infor-
mation within the organisation are encouraged, if
employees are given greater latitude in altering
activity patterns, and if processes are adapted to
perceived changing needs and conditions.
Knowledge acquisition by local joint venture
partners is an important means by which a host
economy may gain; yet how do other local firms
benefit? The processes of learning from an MNE
partner willing to share knowledge are different
from learning from unrelated businesses (Martin
and Salomon, 2003).
To push the research on the conditions under
which spillovers emerge further, researchers ought
to explore the concept of absorptive capacity more
profoundly. In the management literature, absorp-
tive capacity is conceptualised as dynamic capabil-
ity, which is broader then its usage in the empirical
spillover literature. In a recent restatement, Zahra
and George (2002: 186) define absorptive capacity
as ‘a set of organisational routines and processes by
which firms acquire, assimilate, transform, and
exploit knowledge to produce a dynamic organisa-
tional capability’. It encompasses not only human
capital (Cohen and Levinthal, 1990) but also
structural characteristics of the organisation abil-
ities to value, assimilate and commercialise new
knowledge (Lane and Lubatkin, 1998). This in turn
has been associated with structural features of the
organisation, such as strategic and organisational
flexibility, which appear particularly important in
emerging economies owing to the high volatility of
the environment (Lane et al., 2001; Uhlenbruck
et al., 2003).
Yet what contributes to local firms developing
such capabilities in emerging economies? Buckley
et al. (2002) and Sinani and Meyer (2004) find that
received spillovers vary across firms in different
forms of ownership, which they attribute to
different absorptive capacity. The management
literature provides more precise theorising on how
firms enhance their absorptive capacity, including
human resource management practices (Minbaeva
et al., 2003), interactive top management teams
(Uhlenbruck et al., 2003), and managerial cognition
of opportunities for knowledge transfer and orga-
nisational change (Newman, 2000). These concepts
ought to be explored further in qualitative research,
and then be introduced to firm-level studies of
spillovers.
Entrepreneurship
Entrepreneurs are a major source of economic
growth in emerging economies. They are moreover
an important source of innovation, often develop-
ing new knowledge by combining knowledge
obtained from foreign partners with local knowl-
edge. In this process, experimentation helps in
developing innovations specific to the context, and
promotes the process of ‘economic development as
discovery’ (Hausmann and Rodrik, 2003). How do
MNEs influence local entrepreneurship in their
host economies?
Some observers are concerned that MNEs crowd
out local entrepreneurs, or at least inhibit the
emergence of locally controlled MNEs.
2
However,
FDI can also act as a stimulus to evolutionary
processes of resource creation by promoting inno-
vation and discovery (Kogut, 1996). Moreover,
entrepreneurial activity by individuals leaving a
foreign-owned affiliate to establish their own
business generates potentially large spillovers. Stu-
dies of successful local firms find that many
entrepreneurs or top managers had prior links to
MNEs. For example, Katz (1987) reports that many
managers of local firms in Latin America started
their career with MNE subsidiaries. Altenburg
(2000) reports that spin-off electronics companies
in Malaysia maintain close relations as suppliers
and subcontractors with the MNE, and Hill (1982)
makes similar observations on the Philippine
appliance and motorcycle industry. Hence the
movement of employees may not be large in terms
of the number of individuals involved, but those
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that leave may have a substantive impact if as
entrepreneurs they set up their own businesses.
Future research may draw on the literature on
entrepreneurship and spin-offs in emerging econo-
mies to investigate further the linkage between
MNEs and the growth of new firms. The evidence so
far is based mainly on case evidence. Yet how
widespread is the phenomenon, and under what
circumstances do individuals leave an MNE to set
up their own business and succeed in developing it?
Industrial clusters
Industrial clusters have attracted the imagination
of policymakers in emerging economies because
they provide opportunities for direct interaction
between firms, and thus for various forms of
spillover and for economies of specialisation. The
evolution of industrial clusters is often driven by
network organisations (Lall, 1996; Chandler et al.,
1998), or by singular large multinational firms
acting as flagship firms for an entire industry
(Rugman and d’Cruz, 2000). FDI by a lead firm
may draw other network members to the same
location, and thus create a larger impact than the
initial investment alone.
For small ambitious firms in emerging econo-
mies, access to such production networks is of
increasing importance, yet the long-term nature of
supplier relationships and the global reach of
incumbents raise entry barriers. Incumbents benefit
from their long-standing relationship, their reputa-
tion and their customer-specific know-how. Also,
large firms are better able to guarantee quality and
just-in-time delivery. Thus attaining access to an
international value chain is a major challenge for
small firms in emerging economies.
This key role of clusters for economic develop-
ment, and the potentially central role of MNEs in
clusters, raises many research questions. First, how
convincing is the empirical evidence for spillovers
to occur at subnational level? At the aggregate level,
it is not very strong. Aitken and Harrison (1999)
and Smarzynska (2002) test for the spillovers
pertaining to a ‘local’ region smaller than the host
economy, but they find no evidence to support this
claim in respectively Venezuela and Lithuania.
However, Zhang (2001) finds positive evidence of
spillovers at regional level within China, as does
Sjo
¨holm (1999) in Indonesia. More favourable
evidence comes from case research, showing how
FDI can facilitate cluster development. For
instance, Patibandla and Petersen (2002) argue that
the early investment by Texas Instruments in
Bangalore was instrumental in developing the
Indian software cluster. Similar case evidence shows
contributions of FDI during the inception phase of
industrial clusters, such as the textile industry in
Bangladesh and Mauritius (Rhee and Belot, 1990),
and the electronics industry in Penang, Malaysia
(Altenburg, 2000). Yet are these typical? Under
which conditions do they emerge? To assess the
questions beyond the case study approach, future
research needs better ways of delineating clusters to
capture intra-cluster spillover effects.
Second, how do MNEs contribute to cluster
evolution? The contribution of foreign investors
may lie both in transfer of knowledge to local
partners – possibly in exchange for other knowl-
edge – and in their role as intermediaries in the
international cross-fertilisation of knowledge clus-
ters. By establishing operations within a cluster,
MNEs can both contribute to and benefit from the
knowledge exchange within the cluster.
Longitudinal case studies have followed global
industry evolution over several years or even
decades to observe both winners and losers, tracing
the emergence of new clusters in a dynamic context
and recording not only entries but also exits
(McKendrick et al., 2001; Murtha et al., 2001).
Research on industrial clusters needs more such
longitudinal studies. This qualitative research may
then stimulate theoretical development applying,
for instance, theories of organisational learning,
knowledge creation and evolutionary economics,
as well as focused empirical tests.
Distribution of benefits
Market transactions normally create a producer and
a consumer surplus as the market price is below the
maximum price that the buyer would be willing to
pay, and above the minimum price at which the
seller is willing to sell. How this economic surplus is
divided depends on the relative bargaining power
of the two partners to the transaction. This
distribution may be very imbalanced in cases of
monopoly power, perfect price discrimination, or
asymmetric information at the time of contracting.
In relationships between a foreign investor and
local suppliers, bargaining power is likely to be
uneven. Suppliers that manufacture intermediate
goods with technological specialisation and/or
economies of scale have some degree of autonomy
and bargaining power. By contrast, local suppliers
providing products based on low labour costs face
less favourable terms, while suppliers serving dur-
ing peak demand periods need to be very flexible to
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Journal of International Business Studies

cope with high uncertainty (Altenburg, 2000). The
dominant role of flagship firms in industrial net-
works may create new dependences as other
participants, including non-business infrastructure
such as universities and public agencies, ‘have no
reciprocal influence over the flagship strategy’
(Rugman and d’Cruz, 2000: 84).
In extreme cases, the balance of benefits might
even be negative for local partners facing asym-
metric information and high sunk costs. If local
firms invest heavily in fixed equipment, but the
price is subsequently driven down to marginal costs
due to additional entry, local firms may not be able
to recover their initial investment and may thus be
worse off. This extreme scenario is unlikely, but
illustrates that foreign investors may under certain
circumstances be able to accrue all or most of the
value added created. Similar concerns arise for
individuals signing employment contracts with
foreign investors employing ‘sweatshop’ produc-
tion facilities, as discussed below.
In conclusion, the contribution of foreign inves-
tors to a host economy depends not only on their
local value creation, but also on who accrues the
economic gain, which in turn depends on bargain-
ing power. While a common assumption is that both
partners benefit (provided they entered the relation-
ship voluntarily), researchers ought to incorporate
the distribution of benefits when assessing the
contribution of FDI. Research on supplier relation-
ships thus ought to pay more attention to the role of
smaller businesses in international production net-
works. For instance, what types of relationship
generate the largest benefits for local partners, and
how can relationships be managed so as to generate
spillovers for local firms without harming the
interests of the MNE?
Conclusion on recipients
Research taking the local firms as starting point can
be expected to substantially advance our under-
standing of how MNEs affect their local environ-
ment. In my view, studies of absorptive capacity
and capability development processes in individual
firms as well as clusters would greatly help to
explain the impact of MNEs. However, these studies
should also pay attention to who accrues the
benefits of the new value created.
Focus on the environment
The literature on the social and environmental
impact of FDI has developed largely separate from
the literature on economic impact, as neither
business scholars nor mainstream economists
appear to take a particular interest. The impact of
MNEs on the social and natural environment of
host economies can be positive or negative (Das-
gupta et al., 2002). Some authors stress the transfer
of modern, environmentally friendly technology
and production processes by MNEs, which improve
the standards prevalent in the host economy – a
pollution halo effect. Other scholars are concerned
that MNEs choose to transfer outdated technology
to locations with less stringent environmental
regulation – a pollution haven effect. A major
research challenge is the assessment of the relative
importance of these opposing hypotheses.
MNEs have two motivations to transfer advanced
environmentally friendly technology to emerging
economies, even where this is not required by local
legal or ethical standards. First, MNEs employing
their global technology and procedures can realise
scale economies in engineering standards for
design, equipment purchases and maintenance;
integrate global production and logistics; and
reduce potential liability from regulatory changes
(Dowell et al., 2000). The second motivation arises
from the reputation of being seen to act ethically,
or, more precisely, the potential dangers of dama-
ging the global brand by a major scandal. Globali-
sation increases institutional and customer
pressures on firms to surpass local requirements in
emerging economies.
Thus some observers expect a pollution halo
effect as foreign investors introduce environmen-
tally friendly technology that then diffuses locally.
Eskeland and Harrison (2002) show that foreign
investors are more efficient in using energy, an
important aspect of environmental impact. Christ-
mann and Taylor (2001) find that firms’ interna-
tional linkages contribute to their adaptation of
industry self-regulation standards. However, other
studies, such as Hettige et al. (1996), point out that
local community pressure is more important than
ownership in explaining environmental perfor-
mance (Zarsky, 1999).
On the other hand, the pollution haven effect has
become a major concern among environmental
NGOs. It is feared that multinational firms evade
stringent environmental standards in their home
countries and locate to pollution havens, thus
triggering a ‘race to the bottom’ in environmental
standards. Empirical evidence suggests that escap-
ing environmental regulation is not a substantive
motivation for relocation of production, as com-
pliance costs are – for most firms – small relative to
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Journal of International Business Studies

total costs of production, and legal changes in
developing countries have narrowed the regulatory
gap that may have existed in the 1970s (Jaffe et al.,
1995; Zarsky, 1999; Dasgupta et al., 2002). However,
possible relocation is occasionally used as an
argument by MNEs bargaining with governments.
Studies of actual pollution in overseas affiliates
have to operationalise environmental impact by
using a single indicator as dependent variable,
which is problematic for such a complex construct.
Case studies provide a more rounded picture of the
environmental impact of specific projects and their
evolution over time (Gentry, 1998). They point to
industry-specific problems, such as the dangers of
monocultural plantation for exported food pro-
ducts. However, there are too few such studies to
permit a more general conclusion.
More systematic research ought to explore the
impact on the natural environment. Empirically,
this research might employ survey studies that
capture multiple dimensions of impact, preferably
integrating economic and environmental impact.
Theoretical research ought to further investigate,
for instance, the motives for imposing high stan-
dards in foreign operations and on foreign suppli-
ers, notably the effectiveness of the reputation
effect and of industry self-regulation. Work spon-
sored by international organisations provides some
starting points for such research (Zarsky, 1999;
Hansen, 2002).
Focus on labour and other local stakeholders
The labour standards in MNE affiliates and sub-
contractors in emerging economies are a major
concern in globalisation debates. Some observers
fear that the strong bargaining power of multi-
national firms vis-a
`-vis their employees, and vis-a
`-
vis potential host countries, leads to a lowering of
standards and wages (Cerny, 1994; Palley, 2002).
Does the downward spiral of rivalry lower labour
standards in MNE operations in developing coun-
tries, triggering a ‘race to the bottom’ (Spar and
Yoffie, 1999)?
The theoretical arguments concerning impact on
social variables resemble those on environmental
impact. On the one hand, concern with global
standardisation and the firm’s reputation induces
many MNE affiliates to pay higher wages and to
employ high labour standards with respect to
working hours, sick leave, child labour, union-
ization etc. (Caves, 1996: 228; Moran, 2002). As
MNEs generally wish to retain their qualified staff,
they have incentives to keep them satisfied, unless
they are employing unskilled labour with few
outside job opportunities. On the other hand,
lower labour standards and lower wages present
opportunities to reduce production costs. This
incentive is generally larger than for environmental
issues, as labour costs often account for a larger
share of production costs. Host countries eager to
attract investment are said to compromise their
standards under pressure from MNEs, thus under-
mining democratic principles (Cerny, 1994; Scherer
and Smid, 2000).
3
The unease about the ‘race to the bottom’ is of
concern in certain industries, such as textiles,
footwear and assembly of electronics. Spar and
Yoffie (1999: 565) argue that necessary conditions
for a race to the bottom are, first, mobility of firms
and goods across borders – ie free trade – and,
second, that ‘regulation and factor costs are
heterogeneous – and the heterogeneity leaves gaps
that can be turned into the firm’s competitive
advantage’. Moreover, lowering of standards is
facilitated by the following factors:
(1) Products (or components at certain stages of
the value chain) are homogeneous, such that
price is a key competitive parameter.
(2) Regulatory differentials, such as labour law for
textiles and footwear, are important for the
cost structure of the industry.
(3) MNEs would not incur major transaction costs
or sunk costs when relocating a production
plant: that is, location is not ‘sticky’.
Such a race to the bottom would not necessarily
be in the business interest. Theoretically, if firms
were to cooperate and implement common stan-
dards, the race would stop. This would require a
cartel-like cooperation. However, like cartels, agree-
ments over standards are hard to enforce, especially
if firms are heterogeneous. But contrary to cartels,
policymakers may have incentives to support the
creation of standards cartels (Spar and Yoffie, 1999).
Industry self-regulation can achieve part of such
regulation by creating common standards and
certification (O’Rourke, 2003).
Yet this theoretical discussion requires more
empirical support: are industries with the afore-
mentioned characteristics actually engaging in
races to the bottom? Are standards cartels, with or
without government involvement, moderating
races to the bottom? How effective is industry
self-regulation? The issue of labour standards has
gained renewed prominence in the globalisation
debates (Bhagwati, 2004), and international busi-
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Journal of International Business Studies

ness research ought to offer both theoretical and
empirical evidence on the way globalisation of
supply chains (with or without FDI) affects employ-
ees at the bottom of the hierarchy.
Moreover, concern about labour conditions has
to go one step further. Poor working conditions,
including child labour, were common during the
early stages of industrialisation in Europe and
North America. Some authors thus argue that
sweatshops are a necessary step of economic
development. For example, Kristof and WuDunn
(2000) argue that Asian economies that permitted
sweatshops, such as Taiwan and South Korea, have
substantially improved their standards of living
over the past three decades, whereas citizens of
countries that resisted foreign exploitation, such as
India, continue to suffer widespread poverty.
This discussion, too, needs more solid empirical
foundations.
Focus on institutions
Institutions failing to ensure efficient functioning
of markets are widespread in emerging economies.
Formal institutions such as the legal code may be
less sophisticated, and – just as important – law
enforcement may be inefficient. Local firms may
thus rely on network-based coordination mechan-
isms to overcome various forms of market failure
(Peng, 2000). Yet how does this institutional
heterogeneity interact with FDI? Foreign investors
may influence the institutional development, but
at the same time they adjust to local institutions.
Moreover, institutions moderate interactions with
local firms and individuals.
The literature has analysed the issues largely
separately: strategy scholars analyse how FDI
strategies are adjusted to local contexts, and
institutions in particular (Peng, 2000; Henisz,
2000; Meyer, 2001), whereas development scholars
analyse the way FDI influences the local context.
However, FDI strategies and the local environment
in emerging economies are mutually interdepen-
dent. Informal institutions may be influenced by
the living example of businesses based on different
values and norms, and even formal institutions
may be influenced by governments changing
legislation in view of attracting FDI, possibly even
under direct negotiations or lobbying by MNEs. On
the other hand, the local environment, and in
particular the institutional framework, influences
MNEs’ entry and subsidiary strategies.
Moreover, institutions moderate many of the
relationships discussed above between foreign and
local firms. For instance:
(1) Labour market institutions moderate the
mobility of people between local and FDI
firms, and thus the diffusion of knowledge,
but also local firms’ loss of employees to
foreign competitors. Labour laws and their
enforcement regulate minimum wages and
working conditions.
(2) Capital market institutions moderate the ease
of local sourcing of capital, but also the
possible crowding out of local investment.
(3) Environmental regulation and enforcement
influence the potential negative effects on the
local environment.
(4) Competition and industry regulation influ-
ence foreign investors’ ability to extract
monopoly rents or otherwise benefit from
market power.
(5) Education systems enhance the availability of
skilled labour and the absorptive capacity.
(6) Special economic zones may attract more FDI,
but at the same time they limit the interaction
with indigenous industry and thus spillovers.
Corporate strategies, institutional change and the
development of local resources and capabilities are
thus mutually interdependent. This suggests two
directions for future research. First, institutions are
important moderating variables to be included in
many studies of FDI impact. Second, scholars should
build on recent research on the co-evolution of
corporate strategies and institutions (Lewin and
Kim, 2004) and apply this line of thought to emer-
ging economies (Meyer and Nguyen, 2004). This
should lead to clearer empirical evidence on the long-
run processes of institutional and corporate change.
Ethics of business in emerging economies
So far, I have discussed how international business
research may contribute to enhancing our under-
standing of how MNEs influence the local environ-
ment. However, this question can hardly be
separated from ethical questions concerning how
MNEs should treat their local environment and
their local stakeholders. Should they feel obliged to
create positive, or at least non-negative, spillovers
to the local economy? What standards of behaviour
would be appropriate in a world of hugely varying
cultures, incomes, and cost of living? These issues
have to be addressed by scholars working on the
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interface of ethics and business. Given space
limitations, I briefly raise some key issues.
Authors on business ethics can be broadly divided
into those taking a normative view and those
taking an instrumental view. The normative view
believes that MNEs have a moral responsibility to
their stakeholders, and thus reject the primacy of
shareholders over other stakeholders (Donaldson
and Dunfee, 1999; Scherer and Smid, 2000). Thus
moral standards are independent of profits. A
normative view is implicit, for example, in the
following UN declaration:
Recognising that even though states have the primary
responsibility to promote, secure the fulfilment of, respect,
ensure respect of, and protect human rights, transnational
corporations and other business enterprises, as organs of
society, are also responsible for promoting and securing the
human rights set forth in the Universal Declaration of
Human Rightsy’ (United Nations Social and Economic
Council, 2003: 1)
On some issues, such as child labour or slavery, a
broad international consensus supports certain
standards, known as hypernorms. Yet on other issues
such as CO
2
pollution or employees’ right to
annual leave, standards vary greatly between and
within countries. Certain ethical principles are
considered appropriate for some but not all cul-
tures, which creates a ‘moral free space’ (Donaldson
and Dunfee, 1999). For example, many business
practices considered ethical in the USA are not
necessarily so in Russia, and vice versa (Puffer and
McCarthy, 1995).
Those adopting a normative view need to discuss
how a consensus might be achieved to establish
global standards that recognise diversity of
cultures (Scherer and Smid, 2000; Hartman et al.,
2003). More practically, international business
research should analyse how MNEs manage the
variation of moral standards in their countries of
operation, and provide guidelines for managers
facing normative decisions. Yet this is a thorny
challenge:
It is testament to the philosophical and logistical complex-
ity of the sweatshop issue that even if a corporation’s
leadership decides it want to assume a progressive posture,
or at least sufficient progressive to protect the company
from an embarrassing publicity campaign, there is as yet no
consensus about what the company must do. (Varley et al.,
1998: 495)
The instrumental view is more common in Anglo-
Saxon countries. The somewhat simplified argu-
ment of its proponents is that firms should pursue
high labour or environmental standards if it is good
for profitability to do so. If markets are efficient,
and consumers are willing to pay higher prices for
goods produced with higher standards, then meet-
ing these standards will be good for profitability.
This perspective lends itself more naturally to
systematic analysis than normative views, as
research questions pertain primarily to the effi-
ciency of the proposed linkages between business
practices and profits.
First, raising standards may in fact raise produc-
tivity if environmental standards reduce wastage, or
labour standards increase work motivation. For
example, Frenkel and Scott (2002) compared two
similar subcontractors of Adidas in China and
found that the firm that took a collaborative
approach to introducing a new corporate code of
conduct achieved better performance in terms of,
for example, reject rates and employee turnover.
Second, higher standards may shield MNEs
against negative publicity. Traditionally, many
MNEs took the legalistic view that they could not
be held responsible for the labour practices of their
foreign suppliers. However, the new activism of
NGOs and attention of the media put spotlights on
incidences of practices considered unethical by
these stakeholders, such that
the advantages of lower cost labour or lower cost inputs
from more abusive suppliers must be weighted against the
crush of negative publicity, the costs of public relations, and
the possibility of consumer protests. (Spar, 1998)
Over the past decade many MNEs have reacted by
introducing corporate codes of conduct (Varley
et al., 1998; van Tulder and Kolk, 2001), and by
joining new non-governmental systems of labour
standards and monitoring (O’Rourke, 2003). Such
systems are expected to link ethical behaviour to
profitability: failure to comply to standards that a
firm has committed itself to may severely affect the
firm’s reputation, and thus its sales and its bottom
line (Spar, 1998).
This relatively new phenomenon raises many
research questions, however. As the non-govern-
mental systems are still relatively new, they are in
constant flux, and have not yet been comprehen-
sively evaluated. O’Rourke (2003) suggests that
they should be assessed for legitimacy in terms of
stakeholder involvement, rigour of the standards,
accountability of the monitoring process, and
complementarity with state regulation and corpo-
rate learning processes. Empirical research needs to
assess if and how NGO involvement and codes of
conduct influence businesses to raise standards: Is it
Multinational enterprises Klaus E Meyer
272
Journal of International Business Studies

is falling short because monitors can’t observe all
abuses, or is it overshooting as NGOs proclaim
higher standards then a social consensus would
approve? A crucial variable linking ethical beha-
viour to financial performance is consumers’ will-
ingness to pay for ethical features of products.
Auger et al. (2003) provide first evidence that
consumers are willing to pay for certain features,
but more such studies are required.
Ultimately, MNEs are concerned with how
their handling of ethical matters affects financial
performance. Whereas individual studies provide
opposing results, a recent meta-analysis suggests
that corporate virtue in the form of social respon-
sibility is likely to pay off (Orlitzky et al., 2003).
However, further research based on outcomes in
specific areas such as labour standards, rather
then announced policies and processes, may pro-
vide more specific insights to guide managerial
decisions.
In conclusion, the ethical aspects of business
have become a major issue in popular debates on
multinational enterprises. Higher standards are
expected to increase the positive effects of MNEs
on their host economies, although some argue that
too rapid a rise of standards may undermine
countries’ competitiveness and thus inhibit eco-
nomic growth. International business scholars, in
collaboration with political economists and busi-
ness ethicists, ought to raise the intellectual level of
these debates.
Conclusion
The role of MNEs in emerging economies is a key
aspect of contemporary disputes over the merits of
globalisation (Bhagwati, 2004). International busi-
ness scholars should contribute to the ongoing
debates in scholarly, policy and public forums. The
research agenda is broad, and I have argued that
international business scholars may in particular
contribute research that takes the individual multi-
national and local firms as starting point. They
have key insights into the inner logic of multi-
national firms that should enhance both policy and
management decisions crucial for the future of the
global economy, and facilitate mutually beneficial
outcomes. Future research should moreover look
beyond technology spillovers and analyse a wider
range of impact variables, including environmental
and social variables, and the potential impact of
non-governmental organisations and corporate
codes of ethics.
Although I share the view of most observers that,
in most cases, MNEs play a positive role in the
development of host economies, I would also like
to see careful analysis of the negative effects. A
better understanding of the specific conditions
under which these negative effects may emerge
should help both to create remedies and to counter
exaggerated claims by those fundamentally
opposed to globalisation.
A good understanding of the role of MNEs in
society is a precondition for discussing policy in
relation to MNEs. If impact is shown to be positive,
an argument can be made for policy intervention to
encourage FDI (Blomstro
¨m and Kokko, 2003). This
research thus establishes a foundation for policy-
oriented studies that could not be covered in this
paper, for instance on the effectiveness of policy in
influencing FDI (Oman, 2000), or on negotiations
between MNEs and local governments (De la Torre,
1981; Ramamurti, 2001).
Acknowledgements
I thank Arie Lewin for stimulating this research, and
Evis Sinani for her research assistance. Moreover, the
following colleagues have been providing helpful
comments: Saul Estrin, Heather Hazard, Camilla
Jensen, Mike Peng, participants of the JIBS conference
New Frontiers in International Business Research at
Duke University, and anonymous referees for Journal
of International Business Studies.
Notes
1
Even increased productivity in an industry does not
necessarily imply a positive spillover: inefficient pro-
ducers may be crowded out, which increases the
average productivity in the remaining domestic
industry even if no change has occurred in the
surviving firms (Smarzynska, 2002).
2
Thanks to an anonymous reviewer for pointing to
this and other potentially negative consequences of
MNE.
3
Many economists point out that, as long as the
contract is entered into voluntarily, both partners will
be better off. Notably, local wages reflect outside
earning opportunities, which are typically low in those
countries where so-called sweatshops are located.
However, this assumes ex ante full information and
the absence of switching costs. Both conditions are
unlikely to be fulfilled in labour markets, especially for
migrant workers in developing countries. Moreover,
bargaining power and even the ability to price
discriminate may allow locally important employers
to accrue most of the surplus created.
Multinational enterprises Klaus E Meyer
273
Journal of International Business Studies

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About the Author
Klaus Meyer is a professor in international business
strategy at the Center for East European Studies at
the Copenhagen Business School. His research
focuses on the strategies of multinational enter-
prises, especially entry strategies, in emerging
economies such as Eastern Europe and East Asia.
He has published two books and over 20 articles in
refereed Journals, including Journal of International
Business Studies, Journal of Management Studies,
International Business Review, Journal of Comparative
Economics and Comparative Economic Studies.
Accepted by Arie Lewin, Editor in Chief, 2004. This paper has been with the author for two revisions.
Multinational enterprises Klaus E Meyer
276
Journal of International Business Studies