Firm-specific advantages: a comprehensive review with a focus on emerging markets

The advantages derived from multinational enterprises’ (MNEs) possession of specific assets and capabilities has for decades, been the subject of intense scrutiny by international business (IB) scholars, and it continues to be so. Beginning with the seminal works of Dunning (1958), Vernon (1966), and Hymer (1960/1976), the IB field has seen rapid growth in studies examining firm-specific advantages (FSAs; Aharoni, 1993; Birkinshaw, Hood, & Jonsson, 1998; Buckley & Casson, 1976; Dunning, 1988; Dunning, 2000; Erramilli, Agarwal, & Kim, 1997; Hedlund, 1980; Kogut, 1985; Lecraw, 1984; Rugman, 1977, 1980a, b; Rugman & Verbeke, 1988). FSAs come mostly from intangible assets and capabilities, which bring a superior competitive position to the possessing firm (Rugman, Verbeke, & Nguyen, 2011). FSAs include privileged access to information, raw materials, distribution channels, superiority in [digital] technology, and brands, superior corporate governance, and organizational culture. A key tenet of IB theory is that to become an MNE and survive overseas against indigenous competitors; firms must possess significant FSAs over their competitors that can help them offset disadvantages when competing abroad (Dunning, 1988; Hymer, 1960/1976; Wells, 1983).

Although the concept of FSAs has remained a cornerstone of MNE theorizing for many decades, it was not until the late 1960s and early 1970s that scholars started paying attention to FSAs of MNEs from emerging markets (EM MNEs; Lall, 1983a, b; Wells, 1977, 1981, 1983, 2009). Although earlier work suggested that EM MNEs possessed distinct FSAs, comparable to the unique FSAs of their developed country counterparts, some scholars’ argued that the FSAs of EM MNEs were different in nature (Wells, 1977, 1983). The main argument was that different resource characteristics, endowments, and cultures of emerging economies accounted for these differences (Lall, 1983a; Wells, 1983). For example, one identified FSA of EM MNEs was the flexibility that came from being small and possessing technology that was less cutting-edge than their developed country competitors were, but nevertheless better suited for a developing country context (Lall, 1983a; Wells, 1983).

In the last few years, the growth of foreign direct investments (FDI) by EM MNEs has rejuvenated questions about the specific advantages of such enterprises (Ramamurti, 2012), leading some scholars to call for a “re-assessment of established theories of the MNE” (Meyer & Thaijongrak, 2013; Wells, 1983). As growth has picked up in emerging markets and slowed down in advanced economies, the internationalization of EM MNEs not only spurs new challenges for established MNEs, but also promises to change the landscape of world business (Lall, Chen, Katz, Kosacoff, & Villela, 1983; Lecraw, 1977; Luo & Zhang, 2016). According to Ramamurti (2012), we should be open to the possibility that EM MNEs have different ownership advantages than developed country multinational enterprises (DC MNEs), reflecting the distinctive institutional conditions of their home market.

Yet, to the best of our knowledge, surprisingly, no studies to date have systematically reviewed the literature concerning FSAs of EM MNEs. As a result, our understanding of EM MNEs’ unique ownership or firm-specific advantages and disadvantages, as well as their peculiar strategic behavior, remains inadequate (Luo & Tung, 2018). This literature claims that EM MNEs get their FSAs from their home countries; however, little clarity exists about which specific home country factors lead to these FSAs . In addition, scholars are split on the leading causes of EM MNEs expansion, whether they expand abroad because of their unique advantages and the intention to exploit their FSAs (Brainard, 1993; Markusen & Venables, 1998), or whether EM MNEs expand abroad to acquire such advantages (Aharoni, 1993; Birkinshaw, Hood, & Jonsson, 1998; Buckley & Casson, 1976; Dunning, 1988, 2000; Erramilli, Agarwal, & Kim, 1997; Hedlund, 1980; Kogut, 1985; Lecraw, 1984; Rugman, 1977, 1980a, 1980b; Rugman & Verbeke, 1988). Scholars who support the “no FSA” view argue that EM MNEs purposely expand abroad to obtain FSAs that they lack and which are not available in their home countries (Luo & Tung, 2007). Others argue that EM MNEs indeed do possess certain advantages, albeit a different kind than those possessed by DC MNEs (Ramamurti, 2012). As this body of literature develops, it is essential to take inventory of what has been identified as the nature of the FSAs of EM MNEs, to derive maximum value from existing research, and to push current research efforts into a new stage of development. In this paper, we aim to fill this critical void, answering these questions: What are the sources and benefits of FSAs as identified by IB research in emerging markets so far? What can these findings tell us about the distinctiveness of EM MNEs, in comparison with DC MNEs? Furthermore, where do we need more research?

The rest of the paper is organized as follows. In the next section, we discuss our method and review process before we present the results from the review of 88 empirical and conceptual studies on FSAs from 2011 to 2018 across top-ranked IB journals. This is followed by an analysis of the findings and a discussion of how these main sources of FSAs for EM MNEs relate to existing theories within IB research. We distinguish between ordinary sources of FSAs, as argued by Madhok and Keyhani (2012), and additional sources of FSAs specific to EM MNEs. We conclude by assessing the body of literature we reviewed, identifying knowledge gaps, and suggesting avenues for future research.

A literature review involves searching, reviewing, consolidating, and integrating the most prevalent issues examined in a discipline, to present research trends, synthesis, and direction, and to develop new theoretical constructs (Xie, Reddy, & Liang, 2017). In the domain of IB, and other social sciences disciplines, three main literature review techniques are employed by scholars: bibliometric reviews, meta-analysis, and systematic/integrative reviews (Xie, Reddy, & Liang, 2017). Bibliometric reviews entail analyzing extensively published research by using statistical tools to identify trends and citations of a particular theme, by year, country, author, journal, method, theory, and research problem. Meta-analysis is a quantitative review technique that identifies overall directions and effect sizes by combining findings across studies, comparing those findings to identify the substantial and methodological study characteristics that lead to variations in study findings, and generating and testing theoretical propositions using data-analytic techniques (Cooper & Hedges, 1994). Systematic reviews provide a critical discussion on a specific research problem by integrating extant literature, summarizing prior contributions, locating knowledge gaps, and proposing areas for future research. The methodology employed in this study follows the systematic literature review process described by Denyer and Neely (2004) since it allows us to employ a transparent and reproducible procedure, enabling us to gather the broadest view of FSAs in this domain.

A myriad of terms have been used to refer to both FSAs and emerging markets in the academic literature. In our review process, we relied on broad definitions of both terms to ensure that no important works were left behind due to bias in our selection criteria. In early literature, synonyms that reflect the concept of FSA are oligopolistic advantages, competitive advantage, firms’ capabilities, firm competencies, core competencies, and ownership advantages (see, for example, Lundan (2010)). Rugman and Verbeke (2003) define FSA as “knowledge bundles” that can take the form of intangible assets, learning capabilities, and even privileged relationships with outside actors. Most scholars agree that FSAs come from specific assets, particularly intangible assets, and capabilities that grant a firm a superior competitive position. In this paper, we use the term FSA to encompass all the advantages derived from MNEs’ possession of unique specific assets and/or capabilities that facilitate successful internationalization. In the analysis, we distinguish between “ordinary sources” of FSA, resources that have not historically been thought of as distinctive, and additional sources of FSA unique to EM MNEs because of their emerging market context.

The definition of emerging markets has varied over the past two decades (Luo & Zhang, 2016). It was first introduced in 1981 by the International Finance Corporation (IFC) as part of the promotion of the first mutual fund investments in developing countries (Khanna & Palepu, 2010). However, emerging markets existed before 1981. Prior to the introduction of the term, these countries had typically been called “third world,” “less developed countries,” or “developing countries”; this is how the early literature analyzed them and their multinational firms (see, for example, Lall (1983b)). Today, which countries fall under the category of emerging markets or developing countries is a hotly debated topic. The United Nations, for instance, does not have an official definition for “developing country,” despite labeling 159 nations as such.

Within IB research Hoskisson, Eden, Lau, and Wright (2000b) define emerging markets as characterized by trends toward “marketization” and privatization, and which are still heavily regulated. Burgess and Steenkamp (2006) define emerging markets as economies in which gross domestic product per capita, adjusted for purchasing power parity, is converted to U.S. dollars and smoothed for three-year currency fluctuations so that it is equal to or less than the highest-ranked country classified as “middle income” by the World Bank. Others define emerging markets against an initial definition of “developed” markets so that all remaining countries are classified as emerging (for example, see Buckley et al., 2007). In this study, we use the term “emerging markets” in its broader sense—including all studies in leading IB journals that focus on emerging markets, developing countries, third world countries, transition economies, newly industrialized countries, dysfunctional markets, and so forth. Following Luo and Tung (2018), we define EM MNEs as international companies that (a) originated from emerging markets, (b) are engaged in outward FDI, (c) have effective control of its international activities, and (d) focus its international expansion on value-adding activities. This definition is especially useful because it captures large MNEs from emerging markets as well as small and medium enterprises, such as born-global companies or international entrepreneurial firms (Luo & Zhang, 2016).

We relied on scholarly journals as the primary data source for this review. Scholarly journal articles are highly recognized in the management and social sciences, as compared to books and conference proceedings (Xie, Reddy, & Liang, 2017). This is partly due to the rigorous process articles must go through before they are accepted into top journals. Our data search spanned June 2017 to October 2018. In June 2017, we searched for “firm specific advantages” in ABI/INFORM, Web of Science, Google Scholar, EBSCO, ProQuest, Scopus, and article reference lists to identify relevant articles. This yielded many articles, but not necessarily those focused on emerging markets and not from the target journals. Using the publishing journal as a proxy for the quality of an article (Denk, Kaufmann, & Roesch, 2012; Fastoso & Whitelock, 2010), in February 2018, the search became more specific and constrained, including keywords in specific top IB journals only. We focused on the leading IB journals proposed by DuBois and Reeb (2000). In addition, we consulted the Chartered Association of Business Schools Academic Journal Guide (AJG, 2018) to verify the top journals within the area of international business studies. Top journals (with a ranking of three and up) comprised the following publications: Asia Pacific Journal of Management (APJM), Global Strategy Journal (GSJ), International Business Review (IBR), Journal of International Business Studies (JIBS), Journal of International Management (JIM), Journal of World Business (JWB), and Management International Review (MIR).

Similar to Doh and Lucea (2013); Newbert (2007), and Chabowski, Samiee, and Hult (2013), and to be inclusive, we retrieved relevant articles using a keyword search with combinations of the following terms or phrases: “firm-specific advantage,” “firm-specific advantages,” “firm specific advantages,” “firm specific advantage,” “firm-specific capabilities,” “firm specific capabilities,” “FSA,” “FSAs” oligopolistic advantages, oligopolistic advantage, oligopolistic-advantages, competitive advantage, competitive advantages, competitive-advantage, firm capabilities, firm-capabilities, firm capability, firm competencies, firm-competencies, core competencies, core-competencies, ownership advantage, ownership advantages, and ownership-advantages. We also used variants and spelling of these terms as keywords, searching journal by journal. To ensure that we traced as many articles as possible, both open search and advanced search options were used. We continued this strategy until the search was finalized in October 2018.

This revealed 368 full-text articles across the seven journals: 93 articles from IBR, 67 from JWB, 50 from GSJ, 61 from JIBS, 18 from APJM, 42 from MIR, and 37 from JIM. A thorough investigation of titles, abstracts, keywords, and introductory sections in each of the studies—with regard to their use of FSAs, oligopolistic advantages, competitive advantage, firm capabilities, firm competencies, core competencies, and ownership advantages and so on—led to the exclusion of 226 articles. These articles did not address “emerging markets,” “Third World,” “less developed countries,” or “developing countries,” the context investigated in this review. We then read through the remaining 142 articles in detail and differentiated articles that simply mention some FSAs from those that empirically tease out the role of specific FSAs in EM MNEs. This led to the elimination of an additional 54 articles. The sample thus comprised 88 articles from the seven IB journals. Figure 2 provides an overview of these articles and associated journals.

We used three criteria to select the articles: first, the article had to deal with “firm-specific advantages.” Second, the paper had to focus on “emerging markets” either as the context or as a key component of the paper. Third and final, the article had to be published between 2011 and 2018. Since FSAs are one of the most studied concepts within IB research, the first two criteria helped to focus the study and to be precise in its scope. The final criteria—the period from 2011 to 2018—was chosen for two reasons: first, since 2011, research interest on EM MNEs has increased tremendously, with an increase in special issues dedicated to emerging markets.¹ The quantity of studies published during this time makes our selected period suitable for a literature review focusing on emerging markets. The second reason is that one of the top IB journals selected for this study, Global Strategy Journal (GSJ), started publishing in May 2011 (Tallman & Pedersen, 2011). Considering there are only a few top-ranked journals within IB research (White, Guldiken, Hemphill, He, & Khoobdeh, 2016), we decided to include all issues of this journal. We surveyed all the selected articles to ensure that the country under study was, in fact, an “emerging market” as per the definition of this paper. From the initial 368 articles, only 24% were found to be appropriate for the current review.

The rise in outward FDI and the growing number of EM MNEs in recent years have triggered a theoretical discussion within the IB research community on the need to reassess our understanding of the theory of MNEs (Meyer & Thaijongrak, 2013). Does outward FDI from EM MNEs represent a new phenomenon that requires new theories, or can it be explained within the “classic” theoretical frameworks (Hennart, 2012)? Several scholars have argued that EM MNEs are fundamentally different from MNEs in developed countries (see, for example, Dunning, 2006; Ramamurti, 2012), implying that a need exists for new theories to explain their internationalization activities. This view persists. Among the articles reviewed, we note a general agreement that theories based on DC MNEs are not suited to explain the internationalization of EM MNEs due to the differences in strategic motivations, resources, and internationalization processes. While scholars agree that we need a better understanding of the traits, resources, and processes of EM MNEs, the literature is split on which theories are best suited to take account of the specificities of these firms.

As noted by Luo and Zhang (2016), it is essential that IB scholars develop a better understanding of how EM MNEs deploy and reconfigure their additional FSAs throughout the global value chain. This requires more empirical studies examining how EM MNEs develop FSAs from their home country characteristics. Although the drivers of EM MNEs to pursue FDI may vary depending on whether such firms target other emerging economies or developed economies (Liang et al., 2012; Makino et al., 2002), very little has been researched about the exact FSAs necessary for EE MNEs to invest in each of the two economies. This lacuna in the literature needs to be ameliorated.

To summarize, we still lack an overarching theory to explain the whole picture of how EM MNEs exploit their different FSAs in the internationalization process. This is further complicated by the fact that “emerging markets” is a broad category, one that includes very different countries and firms. At the same time, as this review has shown, the literature dealing with the FSAs of EM MNEs is strongly characterized by research on multinationals from BRIC countries, in particular from the two largest emerging markets, China (32%) and India (10%). Future researchers will thus have many opportunities to carry out studies in other emerging economies, particularly in those countries endowed with abundant natural resources. African countries are among this group—diverse nations, whose institutional environments vary tremendously. Market-supporting institutions in African countries are gradually changing; however, the direction of these changes is not equal in different countries, making them challenging for MNEs operating across the continent to navigate (George, Corbishley, Khayesi, Haas, & Tihanyi, 2016; Mol, Stadler, & Ariño, 2017).

FDI into Africa has increased tremendously, from USD 6 billion in 1996 to USD 59.3 billion in 2016 (UNCTAD, 2018), a compound annual growth rate of 11%. African countries, together with other emerging economies in the Middle East, now represent a substantial part of global FDI inflow (UNCTAD, 2018). This provides an opportunity for researchers to develop theories that explain the role of African governments in the internationalization process of such MNEs. For example, what FSAs do African firms possess? What is the nature of the institutional environment in which African firms create their strategies? Moreover, what can new knowledge about FSAs in African multinationals add to our understanding of the distinctiveness of emerging market multinational enterprises in general?

In this paper, we have reviewed the IB research status on FSAs in EM MNEs from seven top journals between 2011 and 2018, taking a qualitative survey approach. We illuminated the main source of FSAs for EM MNEs, as well as their nature, their traits, and the benefits they provide to these firms. The available research shows that although it might have seemed difficult for emerging economies to produce MNEs in the past, they clearly have, and these EM MNEs tend to possess a broader set of FSAs, which makes them robust and able to compete effectively with their Western counterparts. In addition to the more general FSAs, such as brand, technology, geographical diversification, and managerial expertise, EM MNEs enjoy additional valuable FSAs. These derive from their experience dealing with high protectionism, high corruption, and high bureaucracy in their home country and other emerging markets.

What is more, EM MNEs’ deep understanding of customer needs in emerging markets, allows them to develop functionally “good enough” products for a reasonable premium. When combined with a generally high level of government support from their home countries, MNEs can be flexible, which may serve as a key differentiator in the face of stiff competition from DC MNEs. However, while representing a hot topic in IB research, much remains to be learned about how emerging market multinationals use their specific (dis)advantages as a competitive edge in global business.