1. The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1525-383X.htm
Rationale for
An internalization theory MNE regional
rationale for MNE regional strategy
strategy
135
Alain Verbeke
Haskayne School of Business, University of Calgary, Calgary, Canada and
Solvay Business School, University of Brussels (VUB), Brussels, Belgium, and
Liena Kano
Department of Management and International Business,
Haskayne School of Business, University of Calgary, Calgary, Canada
Abstract
Purpose – This paper seeks to demonstrate that internalization theory, as a “complete” theory of the
firm, is particularly well equipped to analyze multinational enterprise (MNE) regional strategies,
thanks to its joint transaction cost economics and resource-based foundations.
Design/methodology/approach – This paper builds on recent work by Wolf, Egelhoff, and
Dunemann to show that internalization theory’s predictions on MNE regional strategy are superior to
those suggested by several other conceptual frameworks. For each of the 11 hypotheses formulated by
Wolf and his co-authors, an alternative is proposed here that is consistent with internalization theory
predictions.
Findings – MNE regional strategy is an important empirical phenomenon. Internalization theory, as
a powerful conceptual framework with general applicability, simplicity and accuracy, allows in-depth
analysis of MNE regional strategies.
Research limitations/implications – Internalization theory scholars need to find new ways of
operationalizing MNE firm-specific advantages (FSAs), as well as MNE resource recombination
trajectories, to predict accurately when and how MNEs will pursue regional versus global strategies.
Practical implications – MNE senior management should rethink international expansion
strategies and realize that most large MNEs actually pursue regional, not global strategies.
Social implications – Even the world’s largest MNEs have great difficulty engaging in novel resource
recombination across the globe, and their alleged market power should therefore not be overestimated.
Originality/value – International business scholars should embrace internalization theory as the
general theory of the MNE, rather than looking for insight from theories not intended – nor properly
equipped – to study strategies of the world’s most complex entrepreneurial organizations.
Keywords Multinational enterprise, Regional strategy, Global strategy, Internalization theory,
Transaction costs, Resource based view, Firm specific advantages, Location advantages, Distance,
Resource recombination, Multinational companies, Corporate strategy
Paper type Conceptual paper
Introduction
Wolf et al. (2012), in a provocative piece published in The Multinational Business
Review (MBR), have argued that the phenomenon of multinational enterprise (MNE)
regionalization, defined as the concentration of foreign sales in the home region as Multinational Business Review
Vol. 20 No. 2, 2012
opposed to a more balanced distribution across the globe, cannot be explained fully pp. 135-152
through transaction cost economics reasoning. In their view, a broader and more q Emerald Group Publishing Limited
1525-383X
multi-faceted explanation is required of the regionalization phenomenon. The authors DOI 10.1108/15253831211238212

2. MBR utilize seven complementary theories from economics, psychology and sociology to
20,2 develop a set of propositions explaining the MNEs’ home-region orientation.
We agree with Wolf et al. (2012) that the study of MNE internationalization patterns,
and regional strategy/structure choices in particular, requires more than a mere focus on
conventional transaction cost economics parameters (Verbeke, 2003). However, Wolf
´
et al.’s (2012) perspective represents an incomplete expose on the regionalization
136 phenomenon as advanced by Rugman (2005) and Rugman and Verbeke (2004, 2005).
First, Rugman and Verbeke’s theory of regionalization is not based on conventional,
Williamsonian transaction cost economics (TCE) (Coase, 1937; Williamson, 1975, 1981a,
b, 1996), but rather on the theory’s “international version”, called transaction cost
internalization (TCI) or internalization theory, which was developed largely
independently of the Williamsonian version. First formulated in the classic work of
Buckley and Casson (1976), contemporary internalization theory goes beyond
concentrating on transaction cost economizing to recognize a variety of strategic and
managerial issues involved in internationalization, and to focus on managing the
innovation process in its entirety. This broad focus, as compared to Williamsonian TCE
and early internalization thinking, is achieved by infusing a “dynamic capabilities”-like
perspective into TCE thinking, with an emphasis on generating, exploiting and
rejuvenating firm-specific advantages (FSAs) and matching these with country-specific
advantages (CSAs) of host countries. Contemporary internalization theory explains the
choice of MNE boundaries, as well as the firm’s internal governance and its interactions
with external environmental forces (Rugman et al., 2011; Verbeke, 2009).
Second, Wolf et al.’s (2012) description of the TCE foundational assumptions is not
entirely accurate. Contrary to the authors’ claim (see Table I in Wolf et al., 2012), TCE
explicitly rejects the conventional notion of “homo economicus” in favor of the bounded
rationality behavioral assumption (Simon, 1959; see Williamson, 1996). The concept of
bounded rationality is central to internalization theory and to the explanation of the
regionalization phenomenon, as bounded rationality of MNE managers is largely
responsible for difficulties in transferring, deploying and recombining FSAs across
regional borders. Further, also contrary to what the authors imply, TCE acknowledges the
level of uncertainty as a principal characteristic of transactions (Williamson, 1996), as does
internalization theory. Consequently, internalization theory does not view international
expansion decisions as choices among well-specified, discrete alternatives even if much
empirical work has been based on this assumption (Benito et al., 2009). Nor does
internalization theory assume hyper-rational, MNE-centric decision processes (Hennart,
2009). As a general theory of the MNE, internalization theory is actually able to explain
MNE behavior while encompassing the spatial, behavioral and social considerations
explored by Wolf et al. (2012) through complementary theories (see Table I). In the
following section, we explore how the authors’ propositions can be reinterpreted through
an internalization theory lens, and, where necessary, restated. We conclude by discussing
internalization theory’s capacity to explain the phenomenon of regionalization, and by
assessing the value of Wolf et al.’s contribution to the current explanation.
Alternative interpretation of regionalization propositions
H1 (based on the theory of new regionalism)
New regionalism refers to the politically induced process that started in the early
1990s, characterized by trade liberalization of regions through reduction of

3. Rationale for
Complementary social science theory Corresponding internalization theory concepts (core or co-opted
(Wolf et al., 2012 concepts) MNE regional
New regionalism Institutional, geographic, and economic distance (proxies for
strategy
additional costs of doing business abroad)
Government-imposed market imperfections (trade barriers)
New economic geography Location advantages – CSAs 137
Geographic distance
Knowledge economy Markets for intermediate products (various types of
knowledge)
Complementary resources of external actors
Location advantages (LAs) – CSAs
Geographic distance
Psychic distance Compounded distance
Cultural distance
Bounded rationality
Bounded reliability
LB versus NLB FSAs
Escalating commitment Bounded rationality
Bounded reliability
Resource recombination trajectories
Administrative archetype (reflected in higher order FSAs,
namely routines)
Population ecology Resource recombination trajectories Table I.
Co-evolution of FSA-CSA bundles Complementary social
Administrative archetype science theories
Neo-institutional theory Co-evolution of FSA-CSA bundles embedded in transaction
Complementary resources cost internalization (TCI)
Institutional distance theory’s concepts
intra-regional trade barriers (Hettne et al., 1999). The authors argue, following the logic
of new regionalism, that MNEs are incentivized to concentrate the bulk of their
business activities within the boundaries of a regional integration agreement. They
propose the following (for purposes of consistency in the present paper, we will always
use the words multinational enterprise – MNE, instead of multinational corporation –
MNC):
H1. A multinational enterprise’s (MNE’s) degree of home-region orientation will
be positively related to the degree of economic liberalization which existed in
its home region at the time foreign investment decisions were made.
From the internalization theory perspective, macro-level liberalization policies by
themselves will not determine the scope of the MNE’s geographic expansion; rather,
this scope will be determined by the MNE’s ability to link its FSAs with CSAs of
locations within or outside of its host region. Regional integration agreements may
influence this ability: they promote intra-regional coherence and thereby reduce the
MNE’s need to develop new location-bound FSAs or adapt existing FSAs to
host-country CSAs if a host country is located within the home region (Rugman and
Verbeke, 2005), thus indeed providing an incentive for intra-regional rather than

4. MBR inter-regional investment. It should also be noted that most region-based liberalization
20,2 policies are reactions to a history of collaboration within the region and to geographic
proximity and/or cultural/economic/institutional similarities among countries in the
region; they can be interpreted as the removal of unnatural market imperfections
(Rugman, 1981; Buckley et al., 2003) to further the ease of FSA adaptation, which was
already partially enabled by comparatively low cultural, geographic, economic and/or
138 institutional distance (Ghemawat, 2001).
An MNE home-regional focus is thus merely facilitated by region-based
liberalization. In addition, this “incentive” for home-region firms will not necessarily
act as a deterrent for outsider firms whose international expansion is motivated by
strategic resource seeking, if these strategic resources cannot be obtained within their
own home region. Consider, for example, an emerging economy MNE expanding into a
developed economy (i.e. a host region), in order to access technological know-how
(Guillen and Garcia-Canal, 2009), or a developed economy MNE entering an emerging
economy (e.g. China – again, located in a host region) in search of cheap labor. The
point here is that region-based liberalization policies may indeed affect the regional
scope of MNE international activities, but will not determine such scope. The key
determinant of the MNE’s geographic scope is the firm’s ability to recombine FSAs
with CSAs in order to reach its strategic goals. H1 can therefore be restated as follows:
H1. Internalization theory version. While region-based liberalization provides
incentives for intra-regional FDI, each particular MNE’s international
expansion pattern will be determined mainly by micro-level parameters,
including the firm’s internationalization motives and the nature of its FSAs.
Therefore, no fixed, generalized relationship can be proposed between a
region’s level of economic liberalization and the home-region orientation of
this region’s MNEs.
Wolf et al.’s (2012) hypothesis is, in fact, disproved by Rugman and Verbeke’s (2004)
empirical data. Among the three regions of the Triad (defined as Europe, North
America and Asia-Pacific), Europe can be seen as the most integrated, as it is
characterized by far-reaching administrative and political harmonization in addition to
economic integration, whereas North America and Asia only benefit from the latter.
Therefore, if Wolf et al.’s prediction were true, European MNEs would be
underrepresented in the group of truly global and host-region oriented companies,
and would account for the majority of home-region oriented firms. The empirical data,
however, show that the opposite is true: European MNEs account for the lowest
percentage of home-region firms and the highest percentage of host-region ones, while
the nine truly global MNEs are evenly distributed among the three regions of the Triad
(Rugman, 2005).
A relevant point in this context is that internalization theory does implicitly
consider the phenomenon of new regionalism, but it does so in the context of MNE
strategic positioning and its ability to link its FSAs with host country CSAs. Thus,
internalization theory provides a deeper, more firm-centric, and therefore more
strategically and managerially relevant perspective than the theory of new
regionalism, while the latter considered in isolation yields an incorrect prediction
that contradicts the empirical evidence.

5. H2 (based on the theory of new economic geography) Rationale for
The theory of new economic geography stems from Marshall’s (1922) work on the MNE regional
physical concentration of business firms, and attempts to explain the occurrence of
economic agglomeration. According to the new economic geography, two opposing strategy
forces cause the spatial agglomeration of business. First is the force of agglomeration,
fed by market size effects, condensed labor market effects, and effects stemming from
increasing returns in production. Second is the force of dispersion, driven by the 139
immobility of resources and the costs of increased economic activity in a particular
location (Krugman, 1998). The authors adapt the theory of new economic geography,
particularly the agglomeration side of the argument, to the Triad region level, and
suggest the following:
H2. MNEs from regions with a greater level of relevant agglomeration will tend to
be more home-region oriented than MNEs from regions with a lower level of
relevant agglomeration.
We agree with the authors’ view that a Triad region is too broad a geographic context
within which to consider agglomeration, and that relevant clusters need to be investigated
within each Triad region. Industrial clusters, such as Silicon Valley or Boston’s Route 128,
would provide a better unit of analysis. From an internalization theory viewpoint, such
industrial clusters offer incumbent MNEs a variety of CSAs, or, in this case, location-
rather than country-specific advantages, such as easy access to a highly skilled
professional labor pool and state-of-the-art technical knowledge due to a superior
educational infrastructure (e.g. proximity to leading technical universities and business
schools), easy access to venture capital, and access to knowledge held by industry leaders.
If these location advantages (LAs) are relevant to MNEs from the home region and these
MNEs have comparatively easy access to them, a home-region orientation may result.
Potential availability of complementary resources of external actors (e.g. existing supplier
networks; partnership opportunities) may also encourage expansion inside a cluster.
However, whether or not the expansion in fact occurs (and is successful) will be
determined not by the MNE’s location near a particular innovation cluster, but by its
ability to gain access to the region’s LAs that may be held by local actors (Hennart, 2009),
and then to establish a match between its own FSAs and the region’s LAs.
The dispersion side of the argument also needs to be considered: for example, firms
that possess FSAs superior to those of competitors and are vulnerable to appropriation
by competitors or third parties may shy away from locating in agglomeration clusters
in order to avoid proprietary knowledge dissipation. Further, there is an industry effect
on the level of clustering: e.g. firms in industries where knowledge is highly
idiosyncratic (e.g. financial and professional service firms) may not have a great need
to learn from competitors (Nachum and Wymbs, 2007). It should also be noted that
relevant LAs are likely to attract investment not only from home region MNEs, but
also from MNEs outside of the region – consider, for example, inward FDI in Silicon
Valley by Japanese MNEs (Teece, 1992). The above leads to the following prediction:
H2. Internalization theory version. Strong agglomeration in a region will not by
itself attract investment from MNEs, whether from within or outside the
region. Whether or not a home-region MNE chooses the region’s
agglomeration cluster as an expansion target depends on the potential
synergies of melding the MNE’s FSAs with the LAs of the region.

6. MBR Extant empirical literature supports this internalization-theory-based proposition.
20,2 Nachum and Wymbs’s (2007) study on the location choices of financial and
professional services firms shows that LAs, including relevant agglomeration, do not
determine MNE location choices – rather, location choices are influenced by the
interaction between LAs and the MNE’s FSAs.
140 H3a and 3b (based on the theory of the knowledge economy)
The theory of the knowledge economy argues that contemporary firms rely on
intellectual capabilities to a greater extent than on physical inputs and natural
resources (Powell and Snellman, 2004), and therefore sourcing, processing and
exploiting knowledge are critical tasks for these firms (Dunning, 2000). The label
“knowledge economy” covers a wide variety of research streams (Powell and Snellman,
2004). It includes literature on knowledge networks, which argues that knowledge is
rarely possessed by a single firm and resides within networks of firms and institutions
in a particular environment (Dicken, 1999), and literature on knowledge spillovers,
which studies the effects of inter-firm, intra-industry knowledge spillovers on R&D
and innovation (Cohen and Levinthal, 1989). Wolf et al. (2012) combine knowledge
networks and knowledge spillover arguments to hypothesize a strong linkage between
low geographic distance and various types of effective knowledge transfer:
H3a. The more knowledge intensive an MNE is, the more it will pursue a
home-region orientation.
Even if only strategic asset seeking expansion is pursued, the above proposition may
hold solely in cases whereby the home region of the knowledge-intensive MNE
considered has relevant knowledge clusters, so that valuable knowledge recombination
can occur inside the region. If not, the MNE may undertake an expansion into host
regions where desired knowledge is located, as illustrated by Japanese FDI in Silicon
Valley, as discussed in the previous section. From an internalization theory
perspective, this expansion serves the purpose of accessing relevant LAs, either within
or outside the home region. In addition, in case of market seeking expansion, a higher
knowledge intensity could foster more globalization rather than regionalization,
depending on the non-location boundedness of the knowledge at hand.
In any case, access to proximate knowledge clusters does not guarantee innovative
performance. The development of new economic theories, such as the new economic
geography and the theory of the knowledge economy, has led to a tendency to
overemphasize the importance of the region at the expense of the firm-level factors
(Dicken and Malmberg, 2001; Maskell, 2001). Empirical evidence in the strategic
management literature suggests that FSAs remain ultimately more important for an
MNE’s ability to produce innovations than the regional environment (Beugelsdijk,
2007). Related to this point, different firms will benefit from LAs offered by knowledge
clusters to a different extent. Firms possessing the most advanced technologies may
have incentives to locate away from clusters in order to protect their core capabilities
from dissemination to weaker competitors (Nachum and Wymbs, 2007). Microsoft’s
location in Seattle rather in Silicon Valley is a case in point. Taking the above elements
into account, we can restate H3a as follows:
H3a. Internalization theory version. Higher knowledge intensity of an MNE will not
result in a stronger home-region orientation.

7. Wolf et al. (2012) further suggest that different activities within the MNE are associated Rationale for
with different requirements for knowledge transfer, with the knowledge generated in MNE regional
the upstream parts of the value chain (such as R&D) being more valuable than
knowledge generated in the downstream parts (such as sales and marketing). strategy
Combined with the previous reasoning on intra-regional knowledge transfer, this led to
the following proposition (where upstream value chain activities are considered more
knowledge-interdependent than downstream value chain activities): 141
H3b. The more knowledge-interdependent [i.e. upstream] activities of an MNE will
pursue more of a home-region orientation than the less
knowledge-interdependent [downstream] activities.
Internalization theory suggests that the extent of home-region orientation can be
different for different value chain activities, namely downstream vs. upstream activities,
but offers a reverse prediction: globalization, when it does occur, happens predominantly
in the upstream end of the value chain, with the downstream activities maintaining a
stronger home region focus. This proposition is empirically supported by the data in
Rugman and Verbeke’s (2004) flagship study, which shows that many large MNEs do
have a strong geographic dispersion of their R&D, sourcing and production, but are not
capable of achieving a global distribution of sales. The reason is that FSAs required in
upstream activities to achieve global sourcing of R&D outputs, raw materials,
intermediate inputs, labor and capital, and production are very different from the FSAs
required in downstream activities to achieve global distribution of sales. Adaptation of
downstream activities requires a higher level of local responsiveness, as the knowledge
bundles that have to be accessed and deployed at the downstream end in a host region
are likely quite different from the knowledge combinations effective in the home region
(which does not necessarily hold for more upstream activities). Upstream activities, on
the other hand, provide the greatest potential for scale economies, whereby a
concentration of these activities often can be achieved in home regions (Verbeke, 2009).
Further, MNEs differ in their ability to adapt upstream and downstream activities
separately, i.e. in their decoupling flexibility (Rugman and Verbeke, 2008a). Strong
decoupling flexibility means that upstream and downstream activities can be easily
adapted separately; most brand-named goods fall into this category. Weak decoupling
flexibility means that upstream and downstream activities have to be performed
simultaneously/cannot be separated, as is the case in many professional
knowledge-intensive services, such as engineering services or management
consulting. This distinction is partially responsible for a comparatively higher
home-region orientation of knowledge-based services vs. manufacturing MNEs, as
demonstrated in Rugman and Verbeke’s (2008a) empirical study, which shows that
services MNEs’ decoupling flexibility is usually considerably weaker than that of
manufacturing MNEs. Building upon the above, H3b can be restated as follows:
H3b. Internalization theory version. Assuming strong decoupling flexibility,
i.e. being able to separate upstream and downstream adaptation, MNE
downstream value chain activities will tend toward home-region orientation
more than upstream activities.
Perhaps part of the problem with Wolf et al.’s (2012) proposition is that they view
upstream activities as more knowledge-interdependent than downstream activities. In

8. MBR reality, downstream activities require an expert recombination of complex bundles of
20,2 knowledge related, inter alia, to foreign cultures, customer preferences and institutions.
Propositions 4a, 4b and 4c (based on psychic distance theory)
Psychic distance, when applied in the international business context, reflects MNE
managers’ perceptions of differences in business-relevant characteristics between
142 home and host countries (Brewer, 2007). Psychic distance is influenced by a variety of
cultural, political, economic, as well as personal factors (e.g. language, religion,
education, etc.). As psychic distance is believed to vary systematically with the
geographic distance between countries, the authors propose the following:
H4a. The greater managers’ perception of the psychic distance between the home
region and other regions, the more the respective MNE will be home-region
oriented.
Observing that Asian countries are likely more psychically distant from European and
North American countries than the latter are from each other, they further predict that:
H4b. When other factors are controlled for, Asian MNEs will tend to be more
home-region oriented than European and North American MNEs.
The concept of psychic distance is somewhat similar to the four distance dimensions
between the home and host country – cultural, administrative (or institutional),
geographic (or spatial) and economic (Ghemawat, 2001) – that is central to
internalization theory. From the internalization theory perspective, distance is a critical
concept that affects the transferability, deployability, recombination and exploitation
of FSAs across borders. If any dimension of distance increases, so do the costs of doing
business abroad, as well as the challenges of effectively deploying FSAs in a host
environment. Distance creates new bounded rationality challenges for managers who
must understand drastically different subsidiary environments, as well as bounded
reliability problems (Verbeke and Greidanus, 2009) to the extent that it becomes
difficult for the head office to achieve proper monitoring and goal alignment with the
subsidiary.
To add to the complexity of the notion of distance, the various distance dimensions
are not independent of each other, but rather intertwined and interdependent. For
example, regional economic integration fosters institutional coordination, which in
turn may contribute to decreasing cultural distance through improved mobility of
labor and managerial best practices. It is then the compounded distance, defined as the
need to manage various distance dimensions simultaneously, that has the most
substantial effect on the firm’s ability to deploy successfully and efficiently its FSAs
abroad (Rugman et al., 2011). The concept of compounded distance is essentially
equivalent to psychic distance.
The assumption that greater compounded distance between regions might lead to a
greater home-region orientation may seem plausible at first sight. However, a general
statement about a positive relationship between inter-regional distance and MNE
home-region orientation would appear somewhat simplistic. First, macro-level distance
may be different in different parts of the value chains, e.g. upstream vs. downstream,
as discussed in the previous section. Consider North American Levi Strauss: its sales
are strongly home-region oriented, yet the entire bundle of upstream activities is

9. located in Asia and Latin America (Rugman et al., 2011). Second, the foreign entry Rationale for
motive may also moderate the influence of distance on the MNE’s decision to make an MNE regional
investment abroad. A strategic resource seeking MNE may find a high-distance market
particularly instrumental to learning opportunities potentially unavailable in strategy
low-distance locations (Verbeke, 2009). Similarly, a natural resource seeking MNE
may expand into a distant country/region due to unavailability of sought resources in
the home region, or in more proximate regions, as shown in Benito and Gripsrud’s 143
(1992) analysis of FDI by Norwegian MNEs. The internalization perspective suggests,
again, that the level of the MNE’s geographic scope will be determined by the extent to
which the MNE is able to deploy and recombine its FSAs to cope with compounded
distance between the home and host countries while reaching its strategic goals.
Similarly, the influence of the home region itself on the propensity toward a
home-region orientation, as hypothesized in H4b, is a macro-level observation that
ignores firm-specificity (Verbeke, 2009). In reality, firm-level distance could be smaller
than macro-level distance due to, for example, senior management’s extensive business
experience in the host region or a presence of relevant business and/or government
connections.
Rugman and Verbeke’s (2004) empirical results confirm the above reasoning.
Contrary to Wolf et al.’s prediction, Asian MNEs do not tend to be the most
home-region oriented – while they are more home-region oriented than their European
counterparts, they are significantly less home-region oriented than North American
companies (Rugman, 2005). Granted that “all other factors” were not necessarily
controlled for, but this nevertheless points at limitations of macro-level distance
analysis. We therefore propose the following:
H4a,b. Internalization theory version. There is no generalized relationship between
compound inter-regional distance and the degree of MNE’s home-region
orientation. Decisions on expansion into a high-distance host region are
moderated by:
† the MNE’s foreign entry motives;
† the specific activities in the value chain for which expansion is considered;
† the micro-level distance between the firm and the host region; and
† the MNE’s command of requisite recombination capabilities necessary to
overcome distance.
Exploring psychic distance theory further, the authors combine it with the Uppsala
model, which focuses on the internationalization process. The Uppsala model proposes
that international expansion is a function of the MNE’s past international experience
and knowledge base (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne,
1977, 1990; Luostarinen, 1979), and postulates that firms undertake international
expansion in an incremental and path-dependent manner. The following proposition
results:
H4c. The greater the international experience of an MNE, the more global will be
its orientation and the less it will exhibit a home-region orientation.
Here, the logical flow from theoretical assumptions to the proposition is not entirely
clear. First, host region expansion targets are not necessarily distant on all dimensions
(e.g. Spain and Mexico are located in different regions of the Triad but share a common

10. MBR language and cultural heritage). Second, it is not clear how international experience is
20,2 defined (e.g. the number of countries where the MNE has a presence, the extant
diversity of subsidiaries, the number of employees in different countries, etc.). The level
of international experience alone would not necessarily lead to a greater ease in
entering a distant region, as the MNE ultimately needs to address incremental, or
added, distance (Hutzschenreuter et al., 2011). Even a higher level of diversification of
144 the MNE’s current locations does not necessarily imply a greater incentive for – and
ease of further expansion into – distant countries, as the ease of further expansion
(meaning, really, ease of FSA adaptation and recombination) depends on a particular
expansion target, as well as the presence of recombination capabilities and relevant
experience within the MNE’s current international portfolio. Further, empirical
evidence suggests that extant cultural diversity of the MNE’s subsidiary network will
actually reduce the rate of subsequent internationalization, because heterogeneity
among subsidiaries increases complexity and ties up managerial resources that could
otherwise be dedicated to further international expansion (Hutzschenreuter et al., 2011).
With the above considerations in mind, we suggest the following:
H4c. For internalization theory. There is no generalized relationship between the
MNE’s level of international experience and its home-region orientation.
H5 (based on escalating-commitment theory)
Escalating-commitment theory draws on behavioral aspects of managerial
decision-making to describe situations whereby managers hold on to – and continue
to reinvest in – certain actions (i.e. “escalate” their commitment to these actions) even if
these actions have failed to achieve strategic goals in the past and are unlikely to do so
in the future (Brockner, 1992). The authors blend escalating-commitment theory with
two IB concepts: administrative heritage and the multinationality-performance
relationship. Administrative heritage describes the firms’ key routines and tacit
knowledge that often develop at the time of inception and are influenced by the vision
of the founder and the firm’s set of external circumstances. The literature distinguishes
among four archetypes of administrative heritage: centralized exporter, international
projector, international coordinator and multi-centered MNE (Verbeke, 2009). The
literature on the multinationality-performance relationship suggests that a systematic,
fixed relationship exists between the MNE’s degree of multinationality and its
performance. In this context, Wolf et al. (2012) cite evidence that home-region oriented
MNEs typically perform worse than global, bi-regional or host-region oriented MNEs.
The blending of the implications of the above research streams results in the following:
H5. MNEs’ development from a home-region orientation towards a global
orientation is a slow (longsome) process. The effect of the amount of a MNE’s
international experience on its home-region orientation is low.
It should be noted that this directly contradicts H4c.
Internalization theory rejects the notion that a fixed, systematic relationship should
exist between the MNE’s geographic scope and its performance (Hennart, 2007;
Verbeke and Brugman, 2009; Verbeke et al., 2009) and consequently between its degree
of regionalization and performance, as domestic and international success will be
determined by the firm’s ability to develop, transfer, deploy and exploit its FSAs rather
than by its geographic scope per se. As such, contrary to Wolf et al.’s reasoning,

11. performance factors are unlikely to drive the MNE’s commitment towards a specific Rationale for
geographic scope, whether this entails maintaining home-region orientation or moving MNE regional
toward globalization.
This notwithstanding, internalization theory adopts a Penrosean (Penrose, 1959) strategy
view of MNE international expansion being a path-dependent process, with the
path-dependency being driven by the availability of resources and the need for new
FSA development and current FSA adaptation possibilities. Further, an MNE’s extant 145
international experience does not necessarily influence its home-region orientation, as
discussed in the previous section. Internalization theory thus yields the following
prediction, very similar to Wolf et al.’s (2012), but following a different logic:
H5. Internalization theory version. MNE’s development from a home-region
orientation towards a global orientation depends upon its resource
recombination trajectory. There is no systematic effect of the level of an
MNE’s international experience on its home-region orientation.
H6 (based on population ecology)
Developed in Hannan and Freeman’s (1977) classic article, population ecology theory
emphasizes the influence of selection pressures from the external environment on a
firm’s survival. The argument is that profit maximizers are selected, while the ability
itself to maximize profits depends on the organization’s ability to adapt to the
environment. This explains persistence of organizational forms over time. Wolf et al.
develop a population ecology argument for regionalization, proposing the following:
H6. If, in the population of MNEs, the degree of home-region orientation decreases
over time, this will rather be the consequence of a selection process than an
assimilation process.
Internalization scholars agree that regionalization is an open-ended phenomenon over
time, in the sense that there is nothing deterministic about the international expansion
trajectory followed by individual MNEs (Rugman and Verbeke, 2004). The reality of a
multinational firm, however, is such that globalization by selection appears to be a
simplification, since a combination of environmental factors and firm-specific factors
influence firm-level action. In fact, globalization may never occur, as regionalization
may be chosen as the preferred strategic alternative, based on cost-benefit calculus
(Rugman and Verbeke, 2004). Alternatively, globalization may occur suddenly as a
result of a strategic acquisition. Internalization theory focuses on the interaction
between firm-level strategies and the environment, whereas population ecology
emphasizes selection pressures by the external environment, thereby neglecting
firm-specific factors.
When globalization does occur, it will likely be driven by a combination of changes
occurring at the level of the population of relevant firms, and adaptation at the firm
level. Koza and Lewin (1998) argue that new organizational forms resulting from MNE
internationalization are an outcome of the co-evolution of the competitive and
institutional environments, and firm intentionality. Rugman and Verbeke (2004) apply
this thinking to the regionalization phenomenon and argue that MNE regional
strategies are embedded in – and co-evolve with – the broader competitive,
organizational and institutional contexts at the regional level. This suggests the
following proposition:

12. MBR H6. Internalization theory version. An MNE’s development from a home-region
20,2 orientation towards a global orientation results from firm-level strategy and
environmental factors; therefore, globalization may never occur, may occur
slowly or may occur suddenly. When globalization does occur, it is driven by
a combination of selection and adaptation processes.
146 H7a and 7b (based on neo-institutional theory)
Institutional theory’s basic tenet is that a firm’s behavior is largely driven by
isomorphic pressures from the social and institutional environment, in which the firm
is embedded (DiMaggio and Powell, 1983; Haveman, 1993; Meyer and Rowan, 1997;
Tolbert and Zucker, 1983). While institutional theory pays little attention to
firm-specific drivers of behavior, neo-institutional theory ascribes a more active role to
the firm as an active carrier of change and innovation (Dacin et al., 2002; Leblebici et al.,
1991; Sherer and Lee, 2002). Applying neo-institutional theory to the regionalization
phenomenon, Wolf et al. argue that different industries are subject to different
institutional pressures, which leads to the following prediction:
H7a. MNEs from different industries vary in terms of their degree of home-region
orientation.
The authors further suggest that competitors and suppliers are highly relevant to the
MNE’s legitimization process, and therefore:
H7b. If the competitors and suppliers of an MNE are home-region oriented, this
firm will also have a relatively strong tendency towards the home region.
Internalization theory, with its focus on blending firm-specific and
environment-specific factors, supports institutional theory’s key assumption of
firms’ social and institutional embeddedness. As argued in the previous section, MNE
strategic choices, including regional strategy, are believed to evolve interdependently
with changes in prevailing industry practices, legitimate organizational forms,
government regulations, etc. (Rugman and Verbeke, 2004), and therefore MNEs from
different industries may indeed vary in their regional strategies. Further, MNEs from
different industries differ in their inter-regional expansion potential, which depends
largely on their ability to de-couple upstream and downstream activities (as discussed
under H3b), and on the extent of their supply-side autonomy of location choices
(Rugman and Verbeke, 2008a). As such, internalization theory supports H7a:
H7a. Internalization theory version. MNEs from different industries vary in terms
of their degree of home-region orientation.
Much empirical support can be found for this proposition in extant literature.
Rugman’s (2005) classic text on regionalization offers a break-down of regionalization
levels by industry; studies conducted by Oh and Rugman (2006) and Rugman and
Girod (2003) explore regionalization in specific industry contexts, and Rugman and
Verbeke (2008a) present empirical evidence of different levels of regionalization in
service industries versus manufacturing.
MNEs are likely to strive to maintain proximity to relevant supplier networks.
However, suppliers’ locations will not necessarily dictate MNE location choices.
Whether or not an MNE will be compelled to follow a supplier’s geographic strategy

13. depends on the transactional features of the buyer-supplier relationship. A large MNE Rationale for
with strong FSAs and significant purchasing power (Porter, 1980) may in fact be MNE regional
followed by a supplier, rather than being a follower itself. In terms of competitors,
MNEs may indeed attempt to gain access to relevant knowledge spillovers and strategy
therefore locate close to competitors; however, they may also choose to put some
distance between themselves and competitors in order to avoid dissipation of their own
competitively relevant knowledge. This, again, is particularly true for large MNEs with 147
strong FSAs that are vulnerable to appropriation by other firms due to their public
goods’ nature (Grøgaard and Verbeke, 2012). Whether or not the MNE follows its
competitors geographically depends on the extent to which the firm’s technological
knowledge is critical to its existence, and more generally on the nature of the firm’s
FSAs as discussed under H2. Location choices depend on the interaction of LAs (in this
case, availability of supplier networks and proximity of relevant competitive
knowledge) with the firm’s FSAs. Wolf et al.’s H7b thus appears at odds with
internalization theory:
H7b. Internalization theory version. There is no systematic relationship between the
MNE’s home-region orientation and that of its suppliers and competitors.
As discussed under H2, current empirical evidence supports this proposition.
Existing empirical support and potential empirical tests
As noted above, some of our new propositions formulated from the internalization theory
perspective have already been empirically tested in extant research. For example,
Rugman’s (2005) book contains an analysis of intra-regional sales by region that
supports the lack of a relationship between the region’s level of economic liberalization
and the degree of home-region orientation of firms headquartered in this region, as
hypothesized in H1. The same data support the lack of a higher degree of home-region
orientation of Asian MNEs suggested by H4b. A study by Nachum and Wymbs (2007)
demonstrates that MNE location choices are not determined solely by LAs, including the
presence of relevant agglomeration, but rather by an interaction of those LAs with the
firm’s FSAs; their results provide support for our H2 and H7b. H3b is supported by
Rugman and Verbeke’s (2004) data showing asymmetry between upstream and
downstream regionalization. Studies conducted by Oh and Rugman (2006), Rugman
(2005), Rugman and Girod (2003) and Rugman and Verbeke (2008a) present empirical
evidence of different levels of regionalization in different industries hypothesized in H7a.
H3a can be tested using Rugman and Verbeke’s (2004) data by assigning various
levels of knowledge intensity to companies based on three sources of economic
knowledge – industry R&D, skilled labor, and the size of the pool of basic science for a
specific industry (Audretsch and Feldman, 1996), and by regressing home-region
orientation on knowledge intensity. Similarly, H4c and H5 on the lack of a systematic
relationship between MNE international experience and its home-region orientation
could be statistically tested using data from Rugman and Verbeke’s (2004) study, with
the level of international experience operationalized as the number of countries where
the MNE has a presence (a more sophisticated test would involve a measure of the
MNE’s extant diversity; extant diversity could be operationalized as the sum of the
cultural distances between the countries of every pair of subsidiaries, consistent with
Hutzschenreuter et al., 2011).

14. MBR We should, however, not lose sight of methodological limitations of statistical tests,
20,2 and should keep in mind Yair Aharoni’s (1993) warning against relying solely on
databases and industry averages in explaining MNE performance and behavior.
According to Aharoni (1993), statistical tests do not capture the MNE’s uniqueness,
which could reside, for example, in the MNE’s absorptive capacity to digest different
cultures and to employ productively managers of many nationalities, or in its
148 managerial experience and entrepreneurial qualities. These higher-order FSAs are
often at the heart of achieving superior performance, yet are not easily measured in
quantitative terms. In our case, this is particularly true for H4, H5 and H6, which deal
with such complex and multidimensional constructs as foreign entry motivation,
micro-level distance, recombination capabilities, path dependence, experience and FSA
adaptation. These constructs are difficult to operationalize accurately, without losing
valuable rich data that are unique to each particular MNE. Here, in-depth case analyses
would likely be more helpful than quantitative methods in uncovering the linkages
among the MNE international expansion targets, its FSAs and its regionalization
strategies.
Conclusion
Wolf et al. (2012) have usefully suggested that a multifaceted, interdisciplinary
approach can enrich our understanding of MNE regional strategy and structure.
Indeed, in a field as complex and multidimensional as international strategic
management, interdisciplinary reflection can add much value by facilitating the
cross-pollination of ideas, broadening the scope of available methodologies, and
increasing the pool of knowledge and experience on an important subject matter. This
is precisely why internalization theory has been so influential as a general theory of the
MNE. Internalization theory implicitly but powerfully blends key ingredients from
paradigms used in strategic management, such as TCE, RBV and the dynamic
capabilities approach, and is tied to broader concepts from disciplines beyond strategic
management, such as psychology, cultural anthropology, geography, history, political
science and sociology. Even mainstream TCE, upon which the economic argument of
internalization theory is based, is not a “pure-play” economic theory, but rather a
comprehensive blend of economics, law and organization science (Williamson, 1996).
Wolf et al. (2012) appropriately recognize the need for a broad social focus when
explaining regionalization and offer much needed support for this phenomenon.
However, we need to evaluate the substantive value added beyond the extant
internalization theory explanation. They offer a list of hypotheses, but the question arises
whether these hypotheses really constitute theory (Sutton and Staw, 1996) – especially
when considering that some hypotheses contradict each other (e.g. H4a and H5), or offer
essentially the same prediction but from a different angle (e.g. H2 and H3a)
Ultimately, the authors have formulated a set of somewhat disconnected
propositions analyzing the regionalization phenomenon through seven separate
conceptual lenses. It could be argued that enriching extant theory would require the
various conceptual lenses adopted to be used in a complementary fashion.
Internalization theory already achieves this goal: it relies on multiple “neighboring”
concepts and in fact embeds, in its own logic, all of the theories described by Wolf et al.
(2012), as reflected in the core concepts of bounded rationality, bounded reliability,
compounded distance, FSAs, CSAs, LAs, recombination, complementary resources

15. and co-evolution (see Table I). Internalization theory’s broader and more nuanced view Rationale for
of the MNE likely explains contradictions that exist between the authors’ original MNE regional
hypotheses and the restated internalization theory hypotheses.
A good theory, as famously stated by Weick (1979), has general applicability, strategy
simplicity and accuracy. Internalization theory, particularly its contemporary version,
does have such general applicability in that it covers a wide variety of aspects of MNE
functioning, simplicity in that it builds upon a limited number of foundational 149
principles (Rugman and Verbeke, 2008b), and accuracy in that it yields managerially
relevant predictions that have been supported by empirical evidence. Wolf et al.’s
(2012) set of hypotheses, though intellectually interesting, adds an unnecessary layer of
complexity because no attention was devoted to parsimony. In contrast, internalization
theory does provide a comprehensive and parsimonious explanation of the
regionalization phenomenon.
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Rugman, A.M., Verbeke, A. and Yuan, W. (2011), “Re-conceptualizing Bartlett and Ghoshal’s
classification of national subsidiary roles in the multinational enterprise”, Journal of
Management Studies, Vol. 48 No. 2, pp. 253-77.
About the authors
Alain Verbeke is McCaig Chair in Management at Haskayne School of Business, University of
Calgary, and is also associated with the Solvay Business School, University of Brussels
(VUB), Belgium. Alain Verbeke is the corresponding author and can be contacted at:
averbeke@ucalgary.ca
Liena Kano is Research Associate at Haskayne School of Business, University of Calgary.
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