The Effects of the Institutional Environment on the Internationalization of Chinese Firms - Part 8

Inspired by North (1990, 2005), Dunning and Lundan (2008) argued that institutions affect all three components of the paradigm, and they further examined how such impacts occur. In analyzing the institutional effect, Dunning and Lundan (2008) argued that it is necessary to separate it from other influences on the activities and strategies of MNCs. For example, regarding the ownership advantage, it is possible to identify formal and informal institutions at the level of the firm, and institution-based advantages (Oi) can be distinguished from asset-based(Oa) and transaction-based (Ot) based advantages. Dunning and Lundan (2008) concluded that the OLI paradigm can be viewed as a means of exploring and evaluating the impact of country- and firm-specific institutions on the value-adding activities of MNCs.

In their recent study, Peng, et al. (2008) proposed that the institution-based view together with the existing industry- and resource-base views form a strategic tripod. They suggested that the institution-based view added new understanding in four substantive research areas, that is, on antidumping as an entry barrier; on competition in and out of India; on the growth of firms in China; and on the corporate governance in emerging economies. They argued that the institutional perspective offered a complementary view when the industry- and resource-based theories could not provide a full explanation. As pointed out by Williamson (2000), recognizing the importance of the institution is a first step, while identifying the analytical logic is the second, followed by understanding the underlying mechanism. Peng, et al. (2008) acknowledged that they had embarked on a journey and they called for more IB research on how institutions matter.

In this chapter, we endeavor to address this “how” issue with a focus on the institutional impact on the internationalization of Chinese MNCs. China has undergone almost three decades of economic reforms and a rapidly growing private sector contributes more than one-third of economic output. However, the state control of the Chinese economy is still prevalent (Scott, 2002). According to Morck, Yeung and Zhao (2008), among the 30 Chinese MNCs with the largest amount of outward FDI in 2004 and 2005, almost all were giant, state-controlled companies. Lenovo, the world's fourth-largest PC maker, was listed on the Hong Kong Stock Exchange in 1994. Some 27% of Lenovo is owned by the state-run Chinese Academy of Science. Although more than two-thirds of Lenovo's top executives are non-Chinese and the company stresses that the Academy of Science has no board members and that it does not interfere with the company's operations, there is little doubt that Lenovo gets support from its close ties to government for its global ambitions (Financial Times, 2008).

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