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EMNEs and knowledge-seeking FDI.


* Knowledge is the preeminent pre·em·i·nent or pre-em·i·nent  
Superior to or notable above all others; outstanding. See Synonyms at dominant, noted.

[Middle English, from Latin prae
 resource of firms that wish to become and/or remain globally competitive. This is especially true for emerging market multinationals, whose ability to overcome their inherent disadvantages as latecomers relies heavily on their ability to seek knowledge outside of their home borders through foreign direct investment.

* Our conceptual framework For the concept in aesthetics and art criticism, see .

A conceptual framework is used in research to outline possible courses of action or to present a preferred approach to a system analysis project.
 explores drivers of knowledge-seeking foreign direct investment, the types of functional knowledge sought, and the impact on location choice and entry mode decisions.

* It is argued that EMNE knowledge-seeking outward FDI FDI

See: Foreign direct investment
 is not based on the traditional asset-exploitation model of FDI, but rather tends to be focused on asset-augmentation through the exploitation of EMNE unique circumstances.

* Specifically, this work posits that an EMNE's strategic orientation predicts its propensity to engage in knowledge-seeking FDI and that the type of knowledge sought predicts location choice and entry mode.

Keywords: Emerging market multinationals * Knowledge-seeking FDI * Latecomers * Location choice * Entry mode


What role does knowledge play in the decision of Emerging Market Multinationals to invest abroad? It has been argued that knowledge has become the preeminent resource of the firm, and that the key organizational capability involves the integration of multiple knowledge bases (Grant 1996). Unstable market conditions caused by innovation, increasing intensity of competition, and diversity of competition have resulted in organizational capabilities, rather than served markets, becoming the primary basis upon which firms establish their long-term strategies. This is especially true for Emerging Market Multinationals (EMNEs) that have to compete from a relatively disadvantaged starting point Noun 1. starting point - earliest limiting point
terminus a quo

commencement, get-go, offset, outset, showtime, starting time, beginning, start, kickoff, first - the time at which something is supposed to begin; "they got an early start"; "she knew from the
 in an increasingly complex, fast-paced, and connected world.

While the vast majority of MNEs are based in developed countries, EMNEs are becoming increasingly relevant as global players (Gupta et al. 2008). Emerging markets are generally defined as low income, high growth economies that are using market liberalization lib·er·al·ize  
v. lib·er·al·ized, lib·er·al·iz·ing, lib·er·al·iz·es
To make liberal or more liberal: "Our standards of private conduct have been greatly liberalized . . .
 as their main means of growth (such as Brazil, Russia, India, and China) (UNCTAD UNCTAD United Nations Conference on Trade & Development  2006). Globalization globalization

Process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world. Factors that have contributed to globalization include increasingly sophisticated communications and transportation
 has encouraged accelerated internationalization The support for monetary values, time and date for countries around the world. It also embraces the use of native characters and symbols in the different alphabets. See localization, i18n, Unicode and IDN.

internationalization - internationalisation
 by EMNEs due to institutional reform within the home country, increased competition, and increased opportunity (Peng et al. 2008). Finns from emerging markets have options on how to internationalize in·ter·na·tion·al·ize  
tr.v. in·ter·na·tion·al·ized, in·ter·na·tion·al·iz·ing, in·ter·na·tion·al·iz·es
1. To make international.

2. To put under international control.
, such as exporting, licensing, alliances, joint ventures, mergers and acquisitions, or setting up a wholly owned subsidiary Wholly Owned Subsidiary

A subsidiary whose parent company owns 100% of its common stock.

In other words, the parent company owns the company outright and there are no minority owners.
. The last four are classified as foreign direct investment (FDI), which is becoming an increasingly common form of internationalization undertaken by emerging economy firms. In 2007, FDI from emerging economies accounted for more than 17% of the overall global outward FDI flow (UNCTAD 2008). While EMNEs currently represent a relatively small percentage of outward FDI, they have been and are expected to continue growing rapidly in the coining years, in both absolute and relative terms (UNCTAD 2006).

While international business scholars have developed frameworks to understand how and why firms engage in FDI (Dunning Dunning

The process of communicating with customers to ensure the collection of accounts receivable.

Dunning can start with gentle reminders and then progress to nearly threatening letters as accounts become more past due.
 1988; Johanson and Vahlne 1977), thus becoming MNEs, EMNEs offer a unique context in which to validate, refine, and extend this area of the literature (Wright et al. 2005). In particular, it seems that the unique characteristics of emerging markets (e.g., lower level of development, institutional voids) may cause EMNEs to have different motivations, competitive strategies, and risk tolerances during internationalization as compared to traditional MNEs.

EMNEs have been forced to rely on non-traditional advantages during internationalization. In particular they exploit home country-specific advantages (e.g., preferential pref·er·en·tial  
1. Of, relating to, or giving advantage or preference: preferential treatment.

 access to low-cost labor, capital, or government policy) rather than firm- specific advantages (i.e., internalized assets that offer a competitive advantage over established competitors) when engaging in FDI. For example, Lenovo's purchase of IBM's PC line of business, Shanghai Motor's purchase of Rover of UK, and TLC's purchase of Thomson TV were all based on the Chinese firm's country-specific advantages, not firm- specific advantages (Rugman 2009). Furthermore, these investments "reveal a search for the technology, management, and strategy skills missing in Chinese firms" (Rugman 2009, p. 53). Thus EMNEs are using unique home country-specific advantages (e.g., preferential access to low-cost labor, capital, or government policy), which differ from those available to traditional MNEs, in order to seek and build knowledge-based firm- specific advantages through FDI. While these firms initially exploit home country- specific advantages, these advantages are often temporary and as such only serve as a basis from which to develop capabilities (Lessard and Lucea 2009).

While it has been previously suggested that EMNEs will engage in FDI for asset- augmentation AUGMENTATION, old English law. The name of a court erected by Henry VIII., which was invested with the power of determining suits and controversies relating to monasteries and abbey lands.  purposes (as latecomers) in order to improve firm capabilities and become more competitive at home and abroad (Li 2010; Luo and Rui 2009; Luo and Tung 2007; Mathews 2002, 2006), asset seeking has yet to be classified in functional knowledge-seeking terms. Furthermore, the effect of the pursuit of knowledge has on motivating EMNE FDI location and entry mode decisions has also yet to be examined.

We begin this paper by exploring the relevant literature guided by the questions: What drives EMNEs to seek knowledge abroad? How might the motivation to seek different types of knowledge affect location choice and entry mode? Through this we offer a conceptual framework which extends existing EMNE FDI rationale by linking a firm's strategic orientation to its propensity to engage in knowledge-seeking FDI, and also to its primary knowledge-seeking motivation. Then we show how that primary knowledge- seeking motivation influences FDI location and entry mode choices.

Knowledge and EMNE Competitiveness

What makes EMNEs different is that their comparative advantage is based on their latecomer status (e.g., as a low cost partner, not seen as a legitimate threat by established MNEs, lack of legacy costs, organizational flexibility) and the idiosyncratic id·i·o·syn·cra·sy  
n. pl. id·i·o·syn·cra·sies
1. A structural or behavioral characteristic peculiar to an individual or group.

2. A physiological or temperamental peculiarity.

 nature of their home country (e.g., preferential access to low-cost labor, capital, or government policy) rather than the firm-specific advantages on which traditional MNEs rely (Mathews 2002, 2006; Ramamurti 2009; Rugman 2009). Furthermore, EMNEs use these comparative advantages in order to seek the knowledge and capabilities to develop the firm-specific advantages that will help them become and remain globally competitive. In this section we first examine the asset-exploitation vs. asset-augmentation debate to understand how and why EMNEs may require a different explanation than the OLI OLI Open Learning Initiative (RSA)
OLI Operation Lifesaver, Inc.
OLI Open Learning Institute (Britain)
OLI Originating Line Information (qualifies Automatic Number Identification) 
 Paradigm (Dunning 1988). We then examine two recent EMNE specific explanations--the LLL LLL
left lower lobe (of the lung)
 (Mathews 2002, 2006) and the Springboard Perspective (Luo and Tung 2007)--to show how they should be extended to account for how the pursuit of knowledge influences the location and entry mode decisions of EMNEs.

Asset-exploitation vs. Asset-augmentation

Dunning's (1988) OLI (Ownership, Location, Internalization Internalization

A decision by a brokerage to fill an order with the firm's own inventory of stock.

When a brokerage receives an order they have numerous choices as to how it should be filled.
) Paradigm is perhaps the most widely known theory of the multinational firm. It explains that an MNE can overcome the inherent costs and disadvantages of competing with domestic rivals in a host country by using a source of advantage that maximally max·i·mal  
1. Of, relating to, or consisting of a maximum.

2. Being the greatest or highest possible.

n. Mathematics
An element in an ordered set that is followed by no other.
 exploits internalized asset transfers and access to global value chains. Much of the rationale for FDI is based off this paradigm. Insufficient home markets, global competitive pressures, and/or government policies spur decisions to internationalize from firms who, naturally, wish to protect or increase their profitability and/or capital value. These firms then choose to engage in FDI (as opposed to exporting or licensing) based on the belief that they can exploit existing firm-specific competitive advantages abroad (i.e., asset-exploitation). The biggest criticisms of the OLI paradigm are that it does not capture new firm formation and early developmental processes or the dynamic nature of gaining and sustaining competitive advantage (i.e., exactly the issues that encompass the EMNE phenomenon), but rather focuses on large and well established international firms in a static environment (Mathews 2002, 2006; Luo 2002). To combat these criticisms, Dunning (2000, 2006) and others have offered refinements to the OLI to account for changing realities, but even Dunning (2006) admits that the unique context of EMNEs may require a revised theory.

What is different about EMNEs is that often their primary motivation to engage in FDI is to develop firm-specific advantages by gaining access to knowledge, resources, and markets in the host country (i.e., asset-augmentation). However these two perspectives (asset-exploitation and asset-augmentation) do not have to be mutually exclusive Adj. 1. mutually exclusive - unable to be both true at the same time

incompatible - not compatible; "incompatible personalities"; "incompatible colors"
. It has been suggested that firms that engage in asset-augmentation would only do so on the belief that they could gain entry to a host country by exploiting an existing competitive advantage, either the competency to seek assets or a home country-specific advantage (i.e., market imperfections that give them preferential access to markets, capital, or production capacity) (Dunning 2006; Ramamurti 2009; Rugman 2009).

Recently two conceptual frameworks have been offered which explicitly address the specific motivations and processes of EMNE outward FDI. The LLL (Linkage, Leverage, Learning) framework was proposed by Mathews (2002, 2006) to extend the OLI paradigm to latecomer firms who are seeking strategic assets. It suggests that international expansion in pursuit of new capabilities (asset-augmentation) requires a different framework than expansion designed to exploit existing capabilities (asset- exploitation). In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently
, EMNEs are often latecomers to the industry in which they compete, forcing them into accelerated internationalization with the explicit goal of gaining access to assets, resources, or capabilities not found in their home market (Mathews 2002). Since latecomers are generally at a disadvantage vis-a-vis traditional MNEs, they must often complement the strategic initiatives of established firms to gain a foothold foot·hold  
1. A place providing support for the foot in climbing or standing.

2. A firm or secure position that provides a base for further advancement.


 in the market. The success of several early EMNEs in the high tech industry (such as Acer Acer

trees of the family Aceraceae.

Acer rubrum
ingestion of wilted or dries leaves of this tree causes acute hemolytic anemia characterized by red urine, jaundice, anemia and methemoglobinemia in horses.
, Samsung, and LG) is due to the fact that they were able to link to established companies by offering services that were not beneficial for them to keep internalized. Through these links, the firms were able to acquire knowledge and competitive assets by leveraging their complementary resources. Repeated iterations of this process allowed these firms to learn how to be globally competitive and adaptable a·dapt·a·ble  
Capable of adapting or of being adapted.


Similarly, Luo and Tung's (2007) Springboard Perspective suggests that EMNEs will systematically and recursively use international expansion as a ,springboard to acquire critical resources needed to compete more effectively against rivals, and to avoid institutional and market constraints at home. EMNE internationalization behavior is systematic in that steps are deliberately designed to facilitate firm growth and to ultimately establish a competitive position in the global marketplace. It is recursive See recursion.

recursive - recursion
 in that activities are recurrent (e.g., one foreign acquisition may improve an EMNE's disadvantage in managerial expertise, while a later acquisition might aim to improve logistics networks in the host country) and revolving (i.e., outward activities are strongly integrated with activities back home). Furthermore, EMNEs will try to overcome their latecomer disadvantage through aggressive, proactive, and risk-taking acquisitions.

These EMNE specific perspectives suggest that EMNEs differ from traditional MNEs in one key respect: The accelerated pace of EMNE internationalization, in order to develop and/or acquire the capabilities necessary to compete on a global level. This aggressive strategic internationalization often targets mutually beneficial Adj. 1. mutually beneficial - mutually dependent
interdependent, mutualist

dependent - relying on or requiring a person or thing for support, supply, or what is needed; "dependent children"; "dependent on moisture"
 partnerships that provide access to new knowledge and skills. What is lacking from these two perspectives is an understanding of how an EMNE's strategic orientation predicts its propensity to engage in knowledge-seeking FDI, or how the type of knowledge sought will influence location choice and entry mode. As knowledge increasingly becomes the preeminent resource of the firm, it is our assertion that knowledge will become the overarching o·ver·arch·ing  
1. Forming an arch overhead or above: overarching branches.

2. Extending over or throughout: "I am not sure whether the missing ingredient . . .
 motivation of FDI for EMNEs. We next offer a two part conceptual framework that helps to explain the drivers, types, and effects of knowledge-seeking FDI by EMNEs.

EMNE Knowledge-seeking FDI

The idea that a firm might gain knowledge through its international operations Internal Operations (I.O., IO or I/O) is a fictional American Intelligence Agency in Wildstorm comics. It was originally called International Operations. I.O. first appeared in WildC.A.T.S. volume 1 #1 (August, 1992) and was created by Brandon Choi and Jim Lee.  is not new, but it has often been considered to be a pleasant side effect rather than as a key motivation of FDI. Johanson and Vahlne (1977) developed a model of the internationalization process suggesting that firms incrementally increase their international commitments via a gradual process of acquisition, integration, and subsequent utilization of knowledge related to operating abroad. More recently, it has been argued that firms may supplement their existing technical capabilities by expanding internationally and that such expansion would allow them to access new technology, skills, or knowledge (Bhagat et al. 2002; Cantwell and Janne 1999; Chung and Alcacer 2002; Kedia and Bhagat 1988; Kuemmerle 1999; Wesson 1993). Typically, strategic asset seeking is pursed in conjunction with other motives, such as market or efficiency seeking, but this may not always be the case. In fact, empirical evidence exists (Almeida 1996; Chang 1995; Chen and Chen 1998; Kogut and Chang 1991) for the idea that firms may be increasingly motivated mo·ti·vate  
tr.v. mo·ti·vat·ed, mo·ti·vat·ing, mo·ti·vates
To provide with an incentive; move to action; impel.

 to expand internationally with the primary intention of acquiring valuable knowledge that resides abroad, rather than to exploit existing competencies. This is especially true for EMNEs that are often latecomers to their prospective industries, and as such face a knowledge gap that must be closed in order to become and/or remain globally competitive (Luo and Tung 2007; Mathews 2006).

EMNE Knowledge-seeking FDI: A Strategic Orientation

All MNEs have a unique strategic orientation that lies on a continuum between explorative or exploitative which will directly affect its desire to seek knowledge. March (1991) suggested that exploration involves gaining new information about alternatives and thus improving future returns, while exploitation involves using the information currently available and thus improving present returns. From this viewpoint, both exploitation and exploration are equally essential for organizational survival and prosperity. Since both are necessary, it is important that each firm find the right balance (or spot on the continuum) for their given context. March's exploration and exploitation idea can be paralleled with the asset-augmentation vs. asset-exploitation debate. We suggest that the balance struck by an MNE is its strategic orientation, a construct which consists of the underlying interaction of three subcomponents: Aspiration aspiration /as·pi·ra·tion/ (as?pi-ra´shun)
1. the drawing of a foreign substance, such as the gastric contents, into the respiratory tract during inhalation.

 level, mindset mind·set or mind-set
1. A fixed mental attitude or disposition that predetermines a person's responses to and interpretations of situations.

2. An inclination or a habit.
, and industry context. This strategic orientation will directly affect the MNEs propensity to engage in knowledge-seeking FDI.

EMNE specific perspectives (i.e., LLL and Springboard Perspective) suggest that EMNEs compensate for their competitive disadvantages by engaging in accelerated internationalization in order to develop and/or acquire the capabilities necessary to compete on a global level (Li 2010; Luo and Rui 2009: Luo and Tung 2007; Mathews 2002, 2006). This differs from traditional MNEs who as predicted by the OLI internationalize based on the belief that they have an existing advantage to exploit in the host country (Dunning 1988). In other words, EMNEs as a group have less internal advantages to exploit than traditional MNEs, making them more likely to have an explorative rather than exploitative orientation. So while all MNEs have a strategic orientation, we posit that EMNEs, based on their greater relative need to acquire the capabilities to be globally competitive (i.e., more likely to asset-augment than asset-exploit), will on the whole be more likely than traditional MNEs to have an explorative strategic orientation and engage in knowledge-seeking FDI.

Proposition 1a. EMNEs are more likely to have an explorative orientation than traditional MNEs based on their greater relative need to acquire knowledge and capabilities.

Because EMNEs are more likely to knowledge-seek than traditional MNEs, we will only discuss the subcomponents of strategic orientation in the context of EMNEs in this paper, though we believe that the construct of strategic orientation and its underlying components have the potential to be a useful conceptual tool for predicting knowledge- seeking FDI among all MNEs. Furthermore, within the context of EMNEs we believe that this framework can be useful in understanding which EMNEs will have a greater propensity to engage in knowledge-seeking FDI. So while as a group EMNEs are more explorative than their counterparts, there is also a lot of variation within the group (Ramamurti 2009). This variance in strategic orientation can be explained by the different underlying aspiration levels, mindsets, and industry contexts of each EMNE. Differences in these subcomponents can be attributed to different home country contexts, goals and strategies, as well as the competitive context (Luo and Tung 2007; Peng et al. 2008).

The aspiration level of a given EMNE exists on a continuum, with global aspirations aspirations nplaspiraciones fpl (= ambition); ambición f

aspirations npl (= hopes, ambition) → aspirations fpl 
 at one end and regional aspirations at the other. The closer an EMNE's aspiration level is to the global end of the spectrum the more likely it is to desire to seek knowledge abroad. Furthermore, the aspiration level of the EMNE may make certain types of functional knowledge more important. If the EMNE only aspires to be a regional player, then it will focus on the technologies, product development, consumers, and operational needs suitable to that region. If, on the other hand, the EMNE aspires to be a global competitor, then it will focus on attaining the knowledge that will help it build globally competitive capabilities. Since this knowledge is most often not available in the home country of EMNEs, they will be forced to search in areas where this knowledge is more prevalent.

An EMNE's mindset exists on a continuum from almost completely externally focused to an almost completely internal focus. The more externally focused a firm's mindset, the more likely it will be to push the boundaries of its current operations and seek new capabilities and advantages. On the other hand, the more it focuses on being competitive with regard to its known products, processes, and locations, the more likely it will be to focus inward in·ward  
1. Located inside; inner.

2. Directed or moving toward the interior: an inward flow.

 and concentrate on exploiting known capabilities and advantages. The former mindset would increase the overall motivation to seek knowledge through FDI, while the latter may or may not preclude it. Either mindset would influence the type of functional knowledge sought, but this would be highly context specific. For example, an EMNE with a global mindset may already have a globally competitive product, but lack the technological and managerial expertise to deliver it to a global customer base.

The industry in which EMNEs operate can exist on a continuum from completely dynamic to completely static. The more dynamic the industry, the more likely the EMNE will be to seek knowledge abroad, and to seek those capabilities (e.g., technology and product development) that are often necessary in a changing environment. On the other hand, EMNEs in less dynamic industry contexts will be more likely to seek knowledge that will lead to capabilities (e.g., consumer knowledge and operational expertise) which will make it more efficient and better suited to serving its target customers.

The resulting configuration of the three subcomponents--aspiration level, mindset, and industry context--creates the EMNE's strategic orientation, which serves to either strengthen or weaken knowledge-seeking motivation (see Fig. 1). For example, an EMNE with global aspirations, in a relatively static industry, with an external mindset, may seek a very different type of knowledge than an EMNE with regional aspirations, in a relatively dynamic industry, with an internally focused mindset. EMNEs may have a variety of configurations depending on where they rate on each subcomponent sub·com·po·nent  
A portion of a component, especially an electronic component; a subassembly.
 continuum. However, overall, the more explorative an EMNE's orientation, the more likely it will be to engage in a search for knowledge abroad.


While we conceptualize con·cep·tu·al·ize  
v. con·cep·tu·al·ized, con·cep·tu·al·iz·ing, con·cep·tu·al·iz·es
To form a concept or concepts of, and especially to interpret in a conceptual way:
 strategic orientation as a summation summation n. the final argument of an attorney at the close of a trial in which he/she attempts to convince the judge and/or jury of the virtues of the client's case. (See: closing argument)  of the varying levels of the underlying components, there can be interaction between the subcomponents. Interaction would occur when the level of one or more subcomponents necessarily dictates the level of another subcomponent of strategic orientation. In other words, depending on the context, a certain subcomponent of strategic orientation could be required for an EMNE to be competitive and thus influence the level of another subcomponent. For example, an EMNE that has global aspirations and exists in a dynamic industry context may be forced to be externally focused in order to remain product competitive or, on the other hand, an EMNE with regional aspirations which exists in a static industry may be forced to be internally focused in order to stay cost competitive (i.e., focus on creating incremental advantages in known product areas). This phenomenon can be seen in the case of many EMNEs whose industry context or aspiration level dictates the level of the other subcomponents. For example, Wipro, an Indian information technology company, is known to have very global aspirations and competes in a relatively dynamic industry. While the company has traditionally focused on relatively basic technologies and services it has had to increasingly move up the value curve with an external mindset in order to become globally competitive. The company has continually expanded its product and service portfolio, as well as made strategic acquisitions in developed countries such as the US and those in Western Europe Western Europe

The countries of western Europe, especially those that are allied with the United States and Canada in the North Atlantic Treaty Organization (established 1949 and usually known as NATO).

Proposition 1b: The more explorative an EMNE's firm strategic orientation, the more likely it will be to engage in knowledge-seeking FDI.

EMNE Knowledge Types, Location Choice, and Entry Mode

Based on their higher propensity to seek knowledge through FDI (i.e., more explorative strategic orientation) we believe there is room to further contribute to the research stream via an examination of the knowledge-seeking motivations of EMNE FDI and their effect on location choice (developed or developing countries) and entry mode (alliance, joint venture, mergers and acquisitions, or through a wholly owned subsidiary). To this end we offer the second part of our conceptual framework as outlined in Fig. 2. Here we argue that the knowledge sought by EMNEs through FDI can be classified into four functional types--Technology, R&D, Consumer and Market Expertise, and Management and Operational Expertise, with the primary knowledge type sought directly impacting the location and entry mode decisions of the firm. in the next sections we first define the functional types of knowledge and then discuss its impact on FDI decisions.

Functional Types of Knowledge

Knowledge-seeking has often been defined as seeking access to superior technology in more technologically advanced locations (e.g., Berry 2006). We advocate a much broader interpretation of knowledge-seeking, one which accounts for the important role of different functional types of knowledge. While there are many types of knowledge, we have categorized cat·e·go·rize  
tr.v. cat·e·go·rized, cat·e·go·riz·ing, cat·e·go·riz·es
To put into a category or categories; classify.

 knowledge into four broad functional areas: Technology (Application), R&D (Product Development), Consumer and Market Expertise, and Management and Operational Expertise. The type of knowledge sought by firms has been shown in general to effect location choice (e.g., Kumar 1998; Makino et al. 2002) and entry mode (e.g., Martin and Salomon 2003), but has yet to be examined in the EMNE context or at the level of functional knowledge types. While it is possible, if not probable, that EMNEs will seek different types of functional knowledge simultaneously, we posit that the primary type of functional knowledge sought through FDI will have a direct effect on an EMNE's location choice and entry mode.


The first type of functional knowledge is technology, which we define as gaining access to established technologies and applications that are necessary to serve a given customer base. The technology's dominance and relevance in the given industry is unquestioned, compelling EMNEs to acquire and successfully adapt these technologies in order to become and/or remain competitive in the marketplace. For example, Lenovo's acquisition of IBM's PC division can be seen as an example of an EMNE being motivated to engage in FDI in order to seek established globally competitive technology.

The pursuit of innovative ability abroad has been the main focus of much of the current knowledge-seeking FDI research (e.g., Berry 2006). Along these lines we define our second type of knowledge--R&D--as that which is necessary to develop new products and refine existing offerings (i.e., innovation). The necessity of this type of knowledge is highly dependent upon industry context, but in many of the most dynamic global industries (e.g., electronics, software, or biotechnology), EMNEs must gain access to this knowledge abroad in order to become and/or remain competitive. For example, Haier, a Chinese appliance manufacturer, has invested in a R&D facility in southern California in order to access the know-how of local designers and gain the intellectual property protection afforded by the U.S. government.

The third type of knowledge is consumer and market expertise which we define as in-depth understanding of a particular market and its consumers. This type of knowledge allows a firm to operate in an idiosyncratic environment and to tailor its current and future products to a unique customer base. In some situations, gaining knowledge about consumers and operating in a type of market will be transferable to future FDI expansion. For example, Tata Motors Tata Motors Limited, formerly known as TELCO (TATA Engineering and Locomotive Company), is India's largest passenger automobile and commercial vehicle manufacturing company. It is also the world's 5th largest commercial vehicle manufacturer.  has used its existing low cost automobile brands to enter other developing countries and further tailor these products to the local markets.

The fourth type of knowledge is management and operational expertise which we define as the ability to improve existing processes within an organization. These processes could be the ability to manage an ever growing scope of operation, increase the scale of production, or operate in a drastically different environment. EMNEs may belong to industries in which products are mature (i.e., little need for innovation or advanced technology) and are seen by consumers as commodities. In these industries, EMNEs will be focused on gaining management and operational knowledge that will allow them to source, produce, and distribute their product more efficiently and at the lowest possible overall cost. For example, CEMEX CEMEX Cementos Mexicanos , a Mexican cement company, has acquired many established industry competitors with the goal of expanding its operational know how and harnessing these companies ability to operate in advanced markets (Lessard and Lucea 2009). Having defined these different functional knowledge types, we now examine their affect on FDI location and entry mode choices within the context of EMNEs.

Knowledge and Location Choice

The importance of FDI location decisions and location diversity has recently been featured in the literature (e.g., Cantwell 2009; Dunning 2008) as a relevant topic with significant implications for all MNEs, especially those from emerging markets. We delineate EMNE location choices by level of development, with developed countries characterized char·ac·ter·ize  
tr.v. character·ized, character·iz·ing, character·iz·es
1. To describe the qualities or peculiarities of: characterized the warden as ruthless.

 as high income, low growth countries that have mature economies (e.g., Western Europe, USA, and Japan) and developing countries characterized as low income, high growth countries that are using economic liberalization Economic liberalization is a broad term that usually refers to less government regulations and restrictions in the economy in exchange for greater participation of private entities; the doctrine is associated with neoliberalism.  as a main means of growth (e.g., China, India, Russia, and Brazil) (Cuervo-Cazurra and Genc 2008; Makino et al. 2002; UNCTAD 2006). We believe that the knowledge seeking motivation to enter each type of location will be different based on location specific advantages (Dunning 1998). Developed countries offer a relatively more advanced competitive environment, educated workforce, and institutional infrastructure which own, promote, and protect these knowledge types, while developing countries offer large potential consumer markets and a familiar operational environment for EMNEs. These different advantages will attract different EMNEs based on their knowledge-seeking motivation.

While existing research suggests that FDI location choice can be driven by the type of knowledge sought (Kumar 1998), a broader typology typology /ty·pol·o·gy/ (ti-pol´ah-je) the study of types; the science of classifying, as bacteria according to type.


the study of types; the science of classifying, as bacteria according to type.
 of knowledge and examination of its consequences for location choice is warranted. Furthermore, Makino et al. (2002) found support for the idea that a firm's FDI motivations had a significant impact on location choice (as moderated by firm specific capabilities).

Investing in Developed Countries

Based on the lower level of development of their home markets, EMNEs are more likely to seek the higher end functional knowledge types of technology, R&D, and management and operational expertise in more developed countries (Luo and Tung 2007; Mathews 2002, 2006). These developed countries have relatively more advanced MNEs, educated workforces, and institutional infrastructure which own, promote, and protect these knowledge types. To gain access to these technologies and protections EMNEs often must enter developed countries through FDI, even though it is difficult and risky (Luo and Tung 2007). On the other hand, traditional MNEs, which typically originate in Verb 1. originate in - come from
stem - grow out of, have roots in, originate in; "The increase in the national debt stems from the last war"
 developed countries, often have access to these types of knowledge in their home country, making them less likely to knowledge-seek through FDI than EMNEs.

As latecomers, or even newcomers to the industry, many EMNEs will not have access to basic technological applications internally, and often will not be able to find the technology in their country due to the fact that emerging market industries are laggards in terms of technology (Luo and Tung 2007; Makino et al. 2002). When EMNEs such as Lenovo have desired to compete globally in an industry with relatively established technology they have had to seek to acquire this knowledge internationally in developed countries where it is more prevalent.

R&D knowledge (i.e., the knowledge necessary for product development) is more often found in developed countries than developing countries, because the former generally have a more highly educated work force and stronger patent protection (Chung and Yeaple 2008). Intensive product development also often requires large capital investments in infrastructure, which may not generally be present in the EMNE's home country (Luo and Tung 2007). For example, Haier, a home appliance manufacturer based in China, has engaged in knowledge-seeking FDI to gain knowledge of product development (e.g., its R&D center in southern California) in developed countries, even attempting to acquire Maytag for top-end product development capability.

While an EMNE may have a labor cost advantage at home, it might find that to become or remain globally competitive it must gain access to world class operational processes, and, as the company grows, the management expertise to manage a larger global operation. This operational knowledge and management expertise might only be gained through experiential ex·pe·ri·en·tial  
Relating to or derived from experience.

 learning within developed countries that possess world class manufacturing and well educated managers. For example, Hindalco, an Indian industrial commodities company, acquired Canada's Novelis, a multinational manufacturer of rolled aluminum products, due in large part for its operational expertise in supplying top level companies such as Coca-Cola and the managerial expertise of operating in eleven countries including Canada, Germany, and the US.

Proposition 2: EMNEs are more likely to engage in FDI in developed rather than developing countries when their primary knowledge-seeking motivation is technology, R&D, or management and operational expertise.

Investing in Developing Countries

EMNEs are more likely to seek knowledge of consumers and markets in other developing countries because of their familiarity with the operational environment and market appropriate existing and new products. These capabilities offer EMNEs a competitive advantage over traditional MNEs, and a logical basis from which an increased understanding of specific market operations and consumer preferences may lead to a long-term advantage in these quickly growing consumer markets. Conversely con·verse 1  
intr.v. con·versed, con·vers·ing, con·vers·es
1. To engage in a spoken exchange of thoughts, ideas, or feelings; talk. See Synonyms at speak.

, when traditional MNEs enter developing countries they tend to exploit their firm specific capabilities (e.g., brands), and tend not to tailor their products as much to local consumer preferences (UNCTAD 2006). In other words, they are less likely to seek knowledge of consumer and markets in developing countries than EMNEs. Furthermore, when traditional MNEs are interested in learning about a unique consumer group, they often pursue more familiar, product appropriate, and profitable customer bases in other developed countries.

Other developing countries offer the most promising consumer markets because EMNEs are used to operating in similar difficult conditions within their home countries, where weak governance, poor infrastructure, and immature immature /im·ma·ture/ (im?ah-chldbomacr´) unripe or not fully developed.

Not fully grown or developed.


unripe or not fully developed.
 financial systems (i.e., institutional voids) may be quite normal (Khanna and Palepu 2006). They also are familiar with developing and selling products to consumers of similar economic levels, reducing the need to partner with established companies in the host country (Cuervo- Cazurra and Genc 2008). Moreover, many developing countries offer large potential marketplaces, in which EMNEs will be eager to become a first mover mover /mov·er/ (moo´ver) that which produces motion.

prime mover  a muscle that acts directly to bring about a desired movement.
 and may have a familiarity advantage over traditional MNEs. For example, Tata Motors 2009 introduction of the Nano, a small economical car targeted towards emerging market consumers with a price tag of $2500, is a prime example of an EMNE tailoring its new products to familiar consumer groups within its home market and looking to expand with the product into similar markets. As an EMNE gains experience in the foreign market, they learn even more about the unique preferences of local consumers, allowing them to tailor products further while establishing a first mover advantage that helps insulate in·su·late  
tr.v. in·su·lat·ed, in·su·lat·ing, in·su·lates
1. To cause to be in a detached or isolated position. See Synonyms at isolate.

 them from increasing competition.

Furthermore, some EMNEs operate in industries that do not require advanced product development capabilities or technology to become or remain globally competitive, but instead require the meeting of specific consumer and market expectations for the product. For example, in rural China consumers do not expect cutting edge cavity cavity /cav·i·ty/ (kav´i-te)
1. a hollow place or space, or a potential space, within the body or one of its organs.

2. in dentistry, the lesion produced by caries.
 reduction ingredients; simple fluoride fluoride, a salt of hydrofluoric acid; see hydrogen fluoride. See also fluoridation; fluorine.  will do as long as the toothpaste toothpaste,
n See dentifrice.
 is available, affordable, and salty salt·y  
adj. salt·i·er, salt·i·est
1. Of, containing, or seasoned with salt.

2. Suggestive of the sea or sailing life.

3. Witty; pungent; earthy: salty humor.
 instead of sweet. EMNEs in these mature and/or static industries may find at some point that their home markets are too small to meet their growth ambitions and will look for international markets for their products (Buckley et al. 2007). While it may be possible to sell the firm's products abroad through exporting, many EMNEs will find it necessary to engage in FDI in these countries to gain in-depth knowledge of consumer preferences and the idiosyncrasies of the local market place (Luo and Tung 2007). This knowledge allows the firm to overcome the liability of foreignness, establish legitimacy, and develop a relationship with local consumers (Liu 2007: Makino et al. 2002).

Proposition 3: EMNEs are more likely to engage in FDI in developing rather than in developed countries when their primary motivation is to gain knowledge of consumers and markets.

Knowledge and Entry Mode

Martin and Salomon (2003) proposed that the level of knowledge tacitness (requirement of experiential learning) and knowledge transfer capability dictates a MNE's entry mode choice in new international ventures. This suggests that if an EMNE is motivated to engage in FDI to attain knowledge, that motive might affect its entry mode into the host country. To this end we suggest that EMNEs employ one of two primary modes of FDI related entry: They may either enter via partnerships (linking to established host country players through alliances, joint ventures, or mergers and acquisitions) or independently (through wholly owned subsidiaries). The importance of EMNE partnering in acquiring knowledge has been highlighted by many researchers (e.g., Mathews 2002, 2006). Ahuja and Katila (2001) suggested that firms can grow their knowledge base by acquiring firms and their knowledge stocks. It has also been suggested that increasing development costs are a significant motivation for firms to engage in R&D alliances and share the initial fixed costs fixed costs, the costs that do not change to meet fluctuations in enrollment or in use of services (e.g., salaries, rent, business license fees, and depreciation).
 (Sampson 2004). It is not always necessary, however, for EMNEs to partner when entering a location through FDI, as there may be benefits to going independently, because some knowledge may be gained simply by operating in a host country (e.g., consumer expectations, host country specific operational knowledge).

Partnering Through FDI

EMNEs often strive to partner with established global competitors to attain firsthand knowledge of how to compete on a global stage (Li 2010; Luo and Tung 2007; Mathews 2002, 2006; Ramamurti 2009; Rugman 2009). These established competitors are often willing to partner with future and current EMNEs because they are focused on exploiting their core competencies in the short-run, making outsourcing (1) Contracting with outside consultants, software houses or service bureaus to perform systems analysis, programming and datacenter operations. Contrast with insourcing. See netsourcing, ASP, SSP and facilities management.  of certain lower level operations and processes advantageous. By servicing these low cost needs many future EMNEs become increasingly intertwined with established competitors absorbing technology and operational expertise through the process. By moving up the value chain and based on their importance to established competitors, these EMNEs are able to invest abroad to seek even more globally competitive capabilities. For example, Aviation Industries of China (AVIC AVIC Aviation Industry Corporation (China)
AVIC Area Veterinarian in Charge
AVIC Army Visual Information Center
AVIC Avi Codec
) was recently awarded a contract by Airbus to help produce parts for the A350. As part of the deal, Airbus agreed to setup a joint R&D facility with AVIC in China and allow AVIC access to its operational and managerial processes. This is a process that AVIC also went through with McDonnell Douglas McDonnell Douglas was a major American aerospace manufacturer and defense contractor, producing a number of famous commercial and military aircraft. It merged with Boeing in 1997 to form The Boeing Company.  in the 1980s before that company was acquired by Boeing. Through these partnerships AVIC has developed the necessary systematic know-how to now target competing in the regional jet market globally (Williamson and Zeng 2009). So while partnering to acquire knowledge may start in the home country, EMNEs are increasingly partnering through FDI to gain access to knowledge-based capabilities. This is particularly true with higher end functional knowledge types such as technology, R&D, and management and operational expertise.

As EMNEs will logically find it difficult, if not impossible, to compete globally without the established technologies required to meet customer needs they will look to acquire technology expertise through FDI when established competitors are resistant to selling or licensing the technology for fear of reverse engineering or the technology requires experiential learning to get lull utilization out of the application (Mathews 2002, 2006). Due to this the EMNE will look to establish mutually beneficial relationships with firms in the host country that allow it to link to and leverage the partnership to gain knowledge. An example of this is Lenovo's acquisition of IBM's personal computer unit in 2004, when it acquired established technology and applications in a mutually beneficial relationship that allowed IBM (International Business Machines Corporation, Armonk, NY, The world's largest computer company. IBM's product lines include the S/390 mainframes (zSeries), AS/400 midrange business systems (iSeries), RS/6000 workstations and servers (pSeries), Intel-based servers (xSeries)  to refocus Verb 1. refocus - focus once again; The physicist refocused the light beam"
focus - cause to converge on or toward a central point; "Focus the light on this image"

 its business.

As latecomers to global competition many EMNEs have very little, if any, internal capability to engage in world class product development, and thus will look to link to established players through mutually beneficial partnerships (Mathews 2002, 2006). Many EMNEs start as original equipment manufacturers or specialty niche providers for established competitors, and overtime as they become more valuable to these companies they start to move up the value curve eventually looking to compete in product development. In order to compete they look to acquire this ability outside of their home country. For example, Suzlon Energy Suzlon Energy is the world's largest fully-integrated wind power company. In terms of market share, the company is the largest wind turbine manufacturer in Asia. With headquarters in Pune it has several manufacturing sites in India including Pondicherry, Daman, Bhuj and Gandhidham , an Indian wind-power company, has been actively investing in developed countries to gain access to R&D know how. In 2001 Suzlon set up an R&D unit in the Netherlands through its partnership with Sudwind (a German energy company) and a year later bought the company outright to create an R&D base in Germany. Through these investments Suzlon has developed the capabilities to compete globally even entering the US market with a rotor rotor: see generator; motor, electric.  blade manufacturing plant in 2007.

Since EMNEs are not used to operating on a global scale or in highly sophisticated markets, they will look outside of the firm for management and operational expertise. Since this type of knowledge may be complex and well internalized by established competitors, EMNEs will likely look to link to an established firm, in order to leverage the relationship to gain this capability. For example, EMNEs such as Cemex and Mittal Steel have been aggressive in the past few years acquiring managerial and operational know how as well as economies of scale in developed countries through mutually beneficial partnerships and acquisitions. Furthermore, in 1994 Sabo, a Brazilian automotive parts supplier, acquired Kako, a renowned German automotive parts producer, in order to acquire the necessary competences and knowledge to successfully move up to the higher performance standards of international manufacturing and technological development. This original acquisition gave Sabo access to Kako's managerial and operational expertise as well as a main base of R&D in Europe (Fleury and Fleury 2009). This acquisition paved pave  
tr.v. paved, pav·ing, paves
1. To cover with a pavement.

2. To cover uniformly, as if with pavement.

3. To be or compose the pavement of.
 the way for additional manufacturing operations Manufacturing operations concern the operation of a facility, as opposed to maintenance, supply and distribution, health, and safety, emergency response, human resources, security, information technology and other infrastructural support organizations.  in Eastern Europe Eastern Europe

The countries of eastern Europe, especially those that were allied with the USSR in the Warsaw Pact, which was established in 1955 and dissolved in 1991.
 and America during the past 10 years.

So when seeking these higher end functional knowledge types that are often embedded Inserted into. See embedded system.  in existing organizations, EMNEs will seek to partner with these firms to gain access to this knowledge base. Returning to the Suzlon Energy example, Suzlon originially partnered with Sudwind of Germany in 1995 to acquire the technology for producing 0.35 megawatt meg·a·watt  
n. Abbr. MW
One million watts.

 wind-turbine generators. Less than seven years later, it acquired Sudwind outright expanding its R&D operations in Europe. It later moved its global management headquarters to Amsterdam, hiring top American management talent from GE to lead the company globally. So we see that Suzlon, like many EMNEs, has at different times sought different types of knowledge abroad through FDI partnering.

Proposition 4: EMNEs are more likely to engage in FDI through partnerships rather than independently when their primary knowledge-seeking motivation is technology, R&D, or management and operational expertise.

Independent FDI

As discussed earlier it is not always necessary for EMNEs to partner when entering a location through FDI, as there may be benefits to going independently, because some knowledge may be gained simply by operating in a host country (e.g., consumer expectations, host country specific operational knowledge) or the EMNE has sufficient firm- specific capabilities to overcome their lack of knowledge of local consumer tastes and compete within the market (Johanson and Vahlne 1977; Liu 2007; Makino et al. 2002). Thus when a EMNEs primary knowledge-seeking motivation is consumer or market expertise, it suggests that the EMNE believes in its operational ability (or at least capacity for it) making it more likely to invest independently.

Furthermore, there are certain location types that EMNEs may be more confident in investing in independently. It could be because they are familiar with developing and selling products to consumers of similar economic levels, reducing the need to partner with established companies in the host country (Cuervo-Cazurra and Genc 2008). The institutional environment of developing countries often have similar voids, making EMNEs better prepared than traditional MNEs to operate in and serve customer needs (Khanna and Palepu 2006). Other developing countries also offer large potential marketplaces, in which EMNEs will be eager to become a first mover (Hoskisson et al. 2000; Wright et al. 2005). For example, Marcopolo, a Brazilian manufacturer of buses, has developed products suitable for unsophisticated markets. As such it has expanded production to six other developing countries from which it tailors products to 103 total countries, most of which could be considered developing. When entering these markets, Marcopolo has invested independently, as it feels it has the ability to compete, even while it seeks to learn more about these markets. Similarly when Mahindra & Mahindra, an Indian automotive and tractor manufacturer, decided to venture abroad with its rugged Scorpio sport utility vehicle it targeted other developing countries because they had similar road conditions and consumer preferences as India and decided to invest independently. For example, in 2004, Mahindra made a big push into South Africa South Africa, Afrikaans Suid-Afrika, officially Republic of South Africa, republic (2005 est. pop. 44,344,000), 471,442 sq mi (1,221,037 sq km), S Africa.  creating a subsidiary to undertake final assembly.

While EMNEs may be more confident in their ability to compete independently when entering other developing countries, they are still likely to engage in FDI independently when pursuing this knowledge type no matter the development level of the host country. This is again because when gaining knowledge of consumers and markets is the primary motivation, it suggests that the EMNE believes in their operational ability (or at least capacity for it). For example, when Haier entered the US market for refrigerators they entered independently by targeting a niche market--college dorm room refrigerators--that was unprofitable for the more established refrigerator producers. However, the true intent of Haier's operation in the US was to learn about the preferences of advanced consumers and how the US market worked, so that they could compete in higher end product ranges. Thus when EMNEs are motivated to seek knowledge of consumers and markets, they are more likely to enter independently than through partnerships.

Proposition 5. EMNEs are more likely to engage in FDI independently rather than through partnerships when their primary motivation is to gain knowledge of consumers and markets.

Discussion and Conclusion

This paper contributes to the existing literature by showing that knowledge increasingly plays a preeminent role in EMNE FDI decisions, and as such EMNEs tend to have a more explorative strategic orientation which is a major driver of knowledge- seeking FDI. Furthermore, the conceptual framework offered divides knowledge into functional types and outlines how each can be an EMNE's primary knowledge motivation which affects its entry mode and location choices.

We posit that EMNE knowledge-seeking outward FDI is not based on the traditional asset-exploitation model offered by Dunning's OLI, but rather tends to be focused on asset-augmentation through the exploitation of EMNEs unique position in the value chain and country-specific advantages. We build on existing EMNE specific theoretical argumentation, extending their asset-augmentation perspectives to account for the preeminent role of knowledge-seeking as a motivator of EMNE FDI. Furthermore, what is lacking from these theoretical arguments is an understanding of how an EMNE's strategic orientation predicts its propensity to engage in knowledge-seeking FDI, or how the type of knowledge sought will influence location choice and entry mode. Furthermore, by defining types of functional knowledge sought, we offer testable propositions that predict EMNE FDI decisions based on the type of knowledge sought.

EMNEs need to pursue knowledge to overcome their inherent disadvantages. To this end we have offered a framework that explores how firm strategic orientation both drives EMNEs to pursue knowledge through FDI and shapes the type of knowledge it seeks. In turn, we posit that the primary type of knowledge sought by the EMNE has a direct impact on location and entry mode decisions. In addition, this paper offers a basic typology of functional knowledge that will be of varying importance to firms in different contexts. While it has been suggested that EMNEs will engage in FDI for asset-augmentation purposes (as latecomers) in order to improve firm capabilities and become more competitive at home and abroad, however, this phenomena has not been examined from the perspective of knowledge-seeking and its implications. This is a necessary step because as knowledge increasingly becomes the preeminent resource of the firm, it is our assertion that knowledge will become the overarching motivation of FDI for EMNEs.

It is not our intention to state that knowledge-seeking FDI only happens in the context of EMNEs, rather we believe that EMNEs simply have a greater propensity to engage in knowledge-seeking FDI because of a lack of firm-specific advantages (capabilities) as compared to traditional MNEs. While EMNEs have country-specific advantages to exploit initially, these are often only temporary and as such are just an avenue in which to access the knowledge-based capabilities that will help create and sustain competitive advantage in the long-term. Prior knowledge-seeking FDI literature has focused mainly on R&D and has been applied in a narrow sector. We suggest that examining knowledge-seeking FDI within broader functional knowledge type and in the context of EMNEs will help contribute to the existing literature stream by explaining when and how different knowledge-seeking motivations will affect FDI location and entry mode decisions.

Though we argue that EMNEs are more likely to knowledge-seek than traditional MNEs, an important area of future research is to further develop the construct of strategic orientation and its underlying components to ensure that it accurately captures all important determinants of a MNEs orientation towards internationalization. Specifically, a more developed scale can be a useful tool for predicting knowledge-seeking FDI among all MNEs. Furthermore, the propositions in this piece should be empirically examined. While motivations, and specifically knowledge-seeking motivations, might be difficult to detect within FDI decisions, it is important that once we conceptually define this phenomenon, that we attempt to empirically validate them.

In conclusion, by examining the role that the pursuit of knowledge plays in motivating EMNE FDI location and entry mode decisions, we are answering and contributing in part to the recent calls (Hoskisson et al. 2000; Wright et al. 2005) to examine how EMNEs become and remain competitive at home and abroad. Though this framework is focused on the relative importance of knowledge and its impact on location choice and entry mode for EMNEs, advancements in understanding based on EMNEs may be applicable to all MNEs and in particular born globals, helping to explain and predict their FDI decisions in an increasingly knowledge based economy.


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DOI (Digital Object Identifier) A method of applying a persistent name to documents, publications and other resources on the Internet rather than using a URL, which can change over time.  10.1007/s11575-012-0132-5

Received: 23.03.2010 / Revised: 23.05.2011 / Accepted: 07.06.2011 / Published online: 16.03.2012 [c] Gabler-Verlag 2012

N. Gaffney, Ph.D. ([mail])

Department of Management, University of North Texas, Denton, USA

e-mail: nolan.gaffney@unt.cdu

Prof. B. Kedia

Wang Center for International Business Education and Research, University of

Memphis, Memphis, USA

J. Clampit, Ph.D.

Department of Management, University of Memphis The University of Memphis is a public research university located in Memphis, Tennessee, United States, and is a flagship public research university of the Tennessee Board of Regents system. , Memphis, USA
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Author:Kedia, Ben; Gaffney, Nolan; Clampit, Jack
Publication:Management International Review
Date:Mar 1, 2012
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