New frontiers in international strategy...across international markets (Kogut and Zander, 1993). The internationalization process has also received attention (Johanson and Vahlne,

PERSPECTIVE

New frontiers in international strategy

Joan Enric Ricart1, Michael JEnright2, Pankaj Ghemawat3,Stuart L Hart4 and TarunKhanna3

1IESE Business School, University of Navarra,Barcelona, Spain; 2School of Business, University

of Hong Kong, Hong Kong; 3Harvard Business

School, Harvard University, Boston, USA;4Johnson School of Management, CornellUniversity, Ithaca, USA

Correspondence: JE Ricart, IESE BusinessSchool, University of Navarra, Avda.Pearson, 21, Barcelona 08034, SpainTel: þ93 253 42 00Fax: þ93 253 43 43E-mail: [email protected]

Received: 17 November 2003Revised: 10 February 2004Accepted: 12 February 2004Online publication date: 22 April 2004

AbstractThis paper studies a new frontier in the understanding of International Strategy

(IS). To explore it, we propose the analogy of the ecology of firms and places asa way to emphasize that the real problem is the colocation of different places

with different types of firms. Locations are in fact the distinctive content of

International Business Strategy. We deal with this problem with four different

perspectives. First, differences across countries must be addressed withintegrative frameworks able to represent the multidimensionality of ‘semiglo-

balization’, or intermediate states between total localization and total

integration. Second, differences in the development of intermediary marketsin a particular place influence firm positioning and industry structure in that

place, but their impact also crosses different places, and it is endogenous to the

ecology of places and firms in a systemic, integrative way that makessimplifications extremely risky in the design of competitive strategy in an

international context. Third, places, firms, and strategies form a complex

ecology that can be studied with a framework focused in understanding thegeography–strategy link that incorporates different levels of analysis, new

economic actors, and a set of primitives. Finally, firms around the ecology of

places face the challenge of developing strategies and business models to serve

the majority of humanity today excluded from world trade. It is afundamentally different way to think about the ecology of places and firms.

Overall, we present an intriguing New Frontier, with the capacity to impact

both research and practice in the field of international strategy, based inunderstanding the interplay among firms and places.

Journal of International Business Studies (2004) 35, 175–200.

doi:10.1057/palgrave.jibs.8400080

Keywords: international strategy; globalization; emerging markets; markets andinstitutions

IntroductionInternational business research has focused on a number of issuesdirectly linked to firm strategy. In the 1970s and 1980s, many ofthe issues of interest in the strategy field, such as industryenvironments, market share–performance linkages, positioningand generic strategies, market and customer selection, oligopolisticstrategies, and diversification, had their counterparts in theinternational business literature. In many cases, internationalbusiness researchers addressed much the same questions as strategyresearchers, with the added complexity either of studying manage-ment across multiple country operations or of performingcomparative studies. In other cases, such as diversification,international business researchers focused on geographic diversifi-cation, while strategy researchers focused on industry diversifica-tion. Transaction cost theories of the firm were developed more or

Journal of International Business Studies (2004) 35, 175–200& 2004 Palgrave Macmillan Ltd. All rights reserved 0047-2506 $25.00

www.jibs.net

less at the same time as transaction cost theories ofthe multinational firm. The same is true of knowl-edge-based views of the firm in the strategy fieldand knowledge-based views of the multinationalfirm in the international business literature.

In recent years, however, the field of interna-tional business appears to have focused more onthe management and organization of multina-tional companies and less on the underlyingstrategies of the firms involved. Even thoughseveral recurrent themes in IB research, includingthe underlying rationale for the existence of multi-national companies, the process of internationali-zation and foreign market entry, and theorganization and management of multinationalfirms, have direct links to firms’ internationalstrategy, international business research seemsincreasingly to have focused on how multinationalsdo what they do, rather than what they do, or whythey do it in the first place. The IB literature hasaccepted the strong belief that the logical responseto globalization is the multinational corporation.International strategy was to be global strategy, astrategy developed from an MNC headquarters’point of view. The world was globalizing; compa-nies needed to respond to globalization by arbitra-ging local advantages and exploiting tremendouseconomies of scale. Defining strategy, and espe-cially organization, for this new beast, the globalMNC was to be the key focus of the strategic agendaof international strategy.

IB research streamsSeveral recurrent themes can be seen in the IBliterature, including the rationales for multina-tional firms, the process of internationalization,entry modes for international expansion, locationdecisions, and the management of internationalsubsidiaries. The rationales for the emergence andexistence of the multinational firm in the IBliterature include the product life cycles (Vernon,1966), oligopolistic interaction (Hymer, 1976),transaction costs for intangible assets (Buckleyand Casson, 1976; Hennart, 1982; Caves, 1996),and the ability to obtain and deploy knowledgeacross international markets (Kogut and Zander,1993). The internationalization process has alsoreceived attention (Johanson and Vahlne, 1977,1990), as has the impact of the degree of inter-nationalization on firm performance (Carpanoet al., 1994; Contractor et al., 2003; Ruigrok andWagner, 2003). A large literature on foreign entrymodes has contrasted the performance of firms

that entered new markets through acquisition,greenfield investments, joint ventures, strategicalliances, licensing, or other entry modes (Hennart,1982; Root, 1987; Buckley and Casson, 1996, 1998among others). A substantial portion of the inter-national business literature focuses on the organi-zation and management of multinational firms.Issues addressed include the control and coordina-tion of national subsidiaries, the level of integrationacross national subsidiaries, and the balancebetween global headquarters control and autono-my of national subsidiaries (Doz and Prahalad,1984; Gates and Egelhoff, 1986; Martinez andJarillo, 1989, 1991; Paterson and Brock, 2002).

The relative importance of the different streamsof IB research in recent years can be discerned fromWerner (2002), which classifies international man-agement research in top journals from 1996 to2000. Of the 271 articles classified, 128 are fromJIBS, with SMJ, AMJ and JoM far behind. As shownin Table 1, 144 of the papers focus on internatio-nalization, 104 focus on multinational enterprises,and 23 focus on regulatory changes and interna-tional risk management in the global businessenvironment. All the articles classified in the tableshare a focus on some aspect of internationalmanagement. Comparative management studiesthat focus on cross-cultural differences, and studieswhose focus is on non-US countries, were notincluded in the classification.

The international business literature with a focuson strategy shows particular patterns as well. Table 2summarizes the results of a search of the Journal of

Table 1 Classification of IB research papersa

Internationalization 144

Pure internationalization 34

Entry mode decisions 33

International joint ventures 25

Foreign direct investment 37

International exchange 15

Multinational enterprises 104

Pure topics 16

Knowledge transfer 16

Strategic alliances and networks 18

Subsidiary–HQ relations 18

Subsidiary and multinational team management 20

Expatriate management 16

Global business environment 23

Total 271

aSource: Adapted from Werner (2002).

New frontiers in international strategy Joan Enric Ricart et al

176

Journal of International Business Studies

International Business Studies archives from 1970 toJuly 2003. The search yielded 84 papers with theword ‘strategy’ in the abstract. Of these, 27%focused either on overall international strategyissues such as configuring and coordinating inter-national operations, linking the theory of themultinational to strategy, customer or marketselection (11 papers), or on core strategy issuessuch as pricing strategies, generic strategies, marketshare–performance, and oligopolistic strategies (12papers). The rest focused on multinational activ-ities, on international aspects of functional strate-gies or on macroeconomics–political influences (seeTable 2). The remaining papers formed a diverse setthat included industry studies (four papers), linksbetween strategy and mindsets or beliefs (fourpapers), and even publishing strategies for interna-tional business researchers (one paper) (JIBSArchive, 2003).

Whereas the IB research agenda is quite complex,the strategic framework is relatively simple. Theworld was seen as the equilibrium between the twostreams of globalization and localization. Techno-logical change was bringing convergence in tastes,customs, and products. However, implementationrequired some degree of localization to respond tolocal needs and cultures, as well as to benefit fromlocal advantages, be they strong currency, low rawmaterial costs, low labor cost, or even fiscaladvantages.

In recent years, however, many forces havecombined to change the face of internationalbusiness. Several of these forces are loosely groupedunder the rubric of ‘globalization’. These includethe expansion of global finance and financialmarkets, the spread of knowledge facilitated byimproved communication, the widespread avail-ability and use of technology, the active expansionof multinational firms, the decoupling and decen-tralization of economic activities within andbetween firms, the blurring of nationality of multi-nationals, reductions in barriers to trade andinvestment, the increased importance and powerof supranational organizations such as the Eur-opean Union, and the emergence of regions andregional identities that transcend borders. Added tothis list today would be the rise of electroniccommunities over the Internet, and the fact thatnations accounting for nearly one-half of theworld’s population (including China, India, SouthAfrica, the former Eastern bloc, and the formerlyimport substitution driven economies of LatinAmerica) have either entered or have dramaticallychanged their relationship to the world economy(Enright, 1998, 2000a). In many ways globalizationhas proceeded to well beyond what Levitt (1983)conceived of in his famous article on it.

On the other hand, the very importance of theforces described above has engendered counter-vailing dynamics as well as rethinking of IBstrategy. The backlash against globalization hastaken on many forms, such as the anti-globaliza-tion movement, and has forced multinational firmsto confront new political as well as economicrealities. At the same time, these same forces haveresulted in a renewed focus on issues concerninginternational business and the multinational firm.Globalization has opened new potential markets asit has encouraged the rise of new competitors.Increased competition, the emergence of newlocations in the international economy, and theability of firms to decompose their activities evermore thinly has drawn renewed attention to thenature of locational advantages and disadvantages.As a result, firms are taking a new look at theirinternational strategies.

To face the realities of the 21st century, a differentparadigm is needed for relating IB and internationalstrategy: a view of the world that goes beyond thetension between globalization and localizationcontrolled by MNCs. Not surprisingly, one of theareas that Werner (2002) identifies for futureresearch in IB is MNC strategies. The IB literature

Table 2 Classification of IB strategy research papers: JIBS

1970–2003

Overall international strategy issues 11

Core strategy 12

Multinational enterprises 18

Organizational structure 5

Location decisions 4

Entry modes 4

Alliances and joint ventures 5

International aspects of functional strategies 22

Human resource management 9

Technology management 4

Sourcing 3

Marketing 2

Control and accounting 2

Manufacturing 1

Information management 1

Macroeconomics and political issues 11

Miscellaneous 10

Total 84


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provides extensive knowledge about MNCs, but notmuch is understood about strategy formulation orhow MNCs should define their strategy in acomplex and rapidly evolving globalized environ-ment.

In this perspective paper, we advance a view ofthe world as an ecology of locations and firms. Afine-grained categorization of firms must gobeyond local firms vs MNC firms. We conceive ofmany different types: local firms, regional firms,firms that operate in a few countries, centralizedfirms, networks of firms, etc., with diverse char-acteristics and diverse sources of competitiveadvantage. At the same time, firms operate inplaces whose ecology is even more diverse thanthe firms themselves. IB involves the colocation ofthe two ecologies of places and firms.

This can be a complex view to grasp. We do notpresume to have all the necessary information to doso yet, although we do have a number ofapproaches that are moving us in this direction,breaking the old paradigms and bringing us to newfrontiers in international strategy research.

The remainder of this paper reviews four keyconcepts that inform the analysis of IB as anecology of firms and locations. The polar viewbetween localization and globalization is notsufficient. The polarity leaves out the richness andcomplexity inherent in the ecology of places.Semiglobalization seeks to explain puzzling under-lying variations in location specificity, and there-fore has a role in adding a distinctive content forinternational business strategy.

According to Ghemawat (2001, 2003a, b), giventhe interest in location specificity, the fundamentalquestion in international business strategy is, orought to be, ‘Why do countries differ?’ He notesseveral distinct types of dimensions along thatcountries may differ: cultural (religion, race, socialnorms, language), administrative (political andeconomic relationships), and geographic and eco-nomic (wealth and income). To deal with thiscomplexity, he proposes that country differencesshould be studied with integrative frameworks thatinclude bilateral and multilateral as well as index-ical measures, paying particular attention to thedifferences that matter most in the particularindustry (or industries) under consideration, andoffering cross-country perspectives rather than justdeep but narrow perspectives on individual coun-tries.

Another key element in understanding differentplaces involves the configuration of local institu-

tions. Khanna (2002) argues that institutional voidsarise in locations where specialized intermediarieson that a firm customarily relies are absent. With-out the functional activity provided by theseintermediaries, key strategic decisions becomemore difficult to make, with direct consequencesfor industry analysis, positioning, and sustainabil-ity – the key fundamentals of competitive strategy.Firms acting in different places need to incorporatethe strategic consequences of institutional voids,thereby acknowledging inter-relations embeddedin the ecology of firms and places.

The third key concept involves the need tointegrate places into competitive strategy. In otherwords, it involves the use of the internationaldimension as a source of competitive advantage.This requires approaching international strategyfrom an integrative point of view, as proposed byEnright (2002a, b). He suggests that internationalbusiness be analyzed by integrating different levels,from supranational to macro, meso, micro, andfirm level. By analyzing all these levels, it should bepossible to reach a better understanding of firm-and location-based advantages, essentially colocat-ing firms and places.

The fourth and final key concept focuses on aparticular application of some of these ideas, usingplace as an ingredient for competitive advantage.MNCs have traditionally focused on serving the topof the pyramid in underdeveloped countries. Thecentral view was to market or apply products andcapabilities that had proved useful in developedcountries. However, adapting to an unfamiliarplace requires a new way of thinking (Hart andMilstein, 1999; Prahalad and Hart, 2002). Learningfrom the difficulties encountered in serving thebottom of the pyramid can be a way to developnew, untouched markets, and a potential opportu-nity for disruptive innovation (Hart and Christen-sen, 2002).

Taken together, these concepts aim to open newresearch frontiers in our understanding of interna-tional strategy. Any new frontier is full of uncer-tainties. However, we believe that we haveprogressed enough to be able to highlight newdirections for IB strategy scholars, managers, andcompanies.

Semiglobalization and strategyGhemawat (2003a) presents evidence indicatingthat most measures of cross-border market integra-tion have scaled new heights in the last fewdecades, but still fall far short of economic theory’s


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ideal of perfect integration. Ghemawat called thisstate of incomplete cross-border integration semi-globalization, and pointed out that this structuralcondition of intermediate levels of internationalintegration is what affords room for internationalbusiness strategy to have content that truly isdistinctive from ‘mainstream’ (single-country orlocation) business strategy. In contrast, the polarpossibility of zero cross-border integration wouldimply complete international segmentation of out-put and input markets, and strategy could presum-ably be set country by country, using the single-country tools and frameworks of ‘mainstream’business strategy.1 And at the other pole, withcomplete cross-border integration, the single-coun-try approach would, once again, suffice: the worldcould simply be treated as one big country ormelting pot. It is only with semiglobalization thatinternational strategy has the potential for contentdistinctive from the single-country case that is thebaseline for most strategic thinking.

To set the stage, it is useful to begin by parsing thefield of strategy into the domains depicted inTable 3 (also discussed in more detail in Ghemawat,2003a). Note the somewhat paradoxical characterof domain 1, mainstream business strategy: byassuming total specificity, it allots the least atten-tion to actual understanding of either business/usage specificity or location specificity. As a result,we have to look to domain 2, that of mainstreamcorporate strategy, for interesting analyses of varia-tions in the extent to that key firm activities,resources or knowledge, are business-specific asopposed to generic in the sense of being fungibleacross businesses. And we must look to domain 3,that of international business strategy, for analysesof variations in the extent to that activities,resources, knowledge etc., are location-specific asopposed to generic in the sense of being fungibleacross locations. Domain 4, featuring internationalcorporate strategy, combines considerations ofbusiness/usage specificity and location specificity.The point of Table 3, however, is not to celebrate

the synthesis in domain 4 but, instead, to make itclear that location specificity is essential to thepossibility of international strategy having distinc-tive content. The link back to semiglobalization isthat with zero integration of markets across loca-tions, location specificity would be at a maximum,and that at the other pole, with complete integra-tion, location specificity would be at a minimum.Semiglobalization underlies subtler variations inlocation specificity.

There are, of course, many ways in which onemight think about or study location specificity. Oneobvious approach parallels the fundamental ques-tion that has proved fruitful in mainstream busi-ness strategy – why do firms differ? – by asking whycountries or locations differ. In both cases, the focuson firm differences helps differentiate the contentof the strategy agenda from that of economics:from industrial organization economics in the caseof mainstream business strategy and from interna-tional economics in the case of internationalbusiness strategy. However, once again, the overlayof locational differences is what gives internationalbusiness strategy its distinctive content. Anotherway of making the same point is that the overlay oflocational and firm-level differences is the specificperspective that semiglobalization contributes tothe ‘ecology of places and firms’ highlighted in theintroduction to this paper.

Why, apart from the parallel with mainstreambusiness strategy, should the question of whycountries or locations differ be focused on asfundamental in international business strategy?First, it seems a sensible response to the dearth of‘big research questions’ in international businessthat was recently flagged by Buckley (2002, 370) inhis Presidential Address to the AIB:

International business has succeeded because it has focused

on, in sequence, a number of big questions, that arise from

empirical developments in the world economy. The agenda

is stalled because no such big question has currently been

identified. This calls into question the separate existence of

the subject area.

Table 3 Strategy domainsa

Focus Increasing attention to business specificity/non-specificity-

Single business Multiple businesses

Increasing attention to location-

specificity/non-specificity m

Multiple countries/locations 3. International business strategy 4. International corporate strategy

Single country/location 1. (Mainstream) business strategy 2. (Mainstream) corporate strategy

aSource: Ghemawat (2003a).


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While other ‘big questions’ can be thought of –such as discussion later in this section of whyindustries differ, and how that matters – the notionof variations in location specificity that underliesthe question proposed here should, for the con-ceptual reasons discussed above, be expected to beessential to the development of distinctive contentfor international strategy.

A second and related reason for focusing on thequestion of why countries or locations differ is thatit proves helpful in classifying many interestingstrands of recent research in international business.The next few sections suggest salient examples. Tosimplify, the next section focuses on cross-countrydifferences in terms of the presence or absence ofspecialized intermediaries, and the broader streamof work on international business of which it formspart highlights institutional differences acrosscountries (with specialized intermediaries concep-tualized in terms of varieties of institutional infra-structure). The following section, ‘The primitives,levels of analysis, and international business’, takesa somewhat different tack but can be seen as part ofa broader research stream on regional strategies,geographic clustering, and other topics that hashelped bring the geographic dimensions of thedifferences between countries/locations into shar-per focus. The subsequent section, ‘The base of thepyramid as a new frontier in international strategy’,focuses attention on the (very large) differences inper capita income across countries – or to be moreexact, on the very-low-income end of that con-tinuum, because that is relatively understudied.The fundamental question of why countries orlocations differ is one way of slotting these diverseresearch thrusts in international business into acommon frame – as different ways of answering thesame fundamental question. In addition, thisquestion can help international business link toother fields of study that are tackling complemen-tary issues, such as the cross-country corporategovernance literature (e.g., Rajan and Zingales,1998; Beck, 2001). However, the discussionof such linkages goes beyond the scope of thisshort essay.

The preceding discussion of why countries differalso suggests that the dimensionality of the rangeof differences across countries is large. Dimension-ality is increased further by recognizing that the listis far from comprehensive. Efforts to extend andelaborate the known dimensions of differenceacross countries occupy a good chunk of thecurrent international business research agenda,

which makes some sense. However, some attentionshould also be allotted to the issue of how to movebeyond essentially piecemeal consideration of alarge number of individual dimensions of differ-ence. Some insights into how to proceed can beinferred by focusing on implementations of thegravity model (primarily in international econom-ics), the most systematic and successful class ofattempts, so far, for integrating multiple dimen-sions of cross-border economic activity.

The gravity model in economics bears a roughresemblance to Newton’s law of universal gravita-tion, down to having originally been proposed inthe economic context by an astronomer, JamesStewart. The model posits that economic interac-tions between two locations are directly related tothe product of their economic mass and inverselyrelated to the geographic distance between them –as well as to measures of distance along otherdimensions. Fitted relationships of this sort explainone-half or even two-thirds of the variation inaggregate bilateral trade between country pairs.Gravity models have also been fitted with somesuccess to bilateral foreign direct investment (FDI)and even cross-border equity flows. As a result,fitted gravity models have been described assupplying ‘some of the clearest and most robustempirical findings in economics’ (Leamer andLevinsohn, 1995, 1384).

At least in the context of trade, it is possible tooffer some gravity-based assessments of the extentto that, on average, differences across countriesmatter for cross-border economic activity (seeTable 4 for a recent analysis by Ghemawat andMallick, 2003). The precise magnitudes of theestimated coefficients in Table 4 are interesting,but even more important are four emergentinsights about how to think – and not think –about the differences across countries:

1. Integrative frameworks: The estimates in Table 4are large enough and distributed broadly enough tocall into question, at least from the strategicperspective, the research strategy of trying toestablish that one category of differences (e.g.,institutional, that currently seems to be in anascendant phase: cf. Acemoglu et al., 2002) gen-erally trumps all the rest. Similar considerationsalso hint at the potential usefulness of a generalframework for thinking about why countries differas a supplement to specialized models of individualdimensions of difference. Table 5 presents theCAGE framework (see, Ghemawat, 2001, fordetails), which is implicit in the groupings in


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Table 4. The acronym is meant to evoke thecultural, administrative/political/institutional, geo-graphic, and economic dimensions of differencesacross countries. Others might further unbundlesome of the CAGE categories2 or modify or evenrecast them. However, it is not necessary to passjudgment on competing frameworks for thinkingabout why countries differ to make the point that

some such framework for organizing thinking islikely to prove helpful.

2. Inadequacies of indexicality: Many of the inte-grative frameworks that have been proposed forpurposes of understanding the differences acrosscountries (or locations) presume that countries canbe assessed one by one or unilaterally against acommon yardstick – possibly calibrated on the basis

Table 4 Estimated effects: a gravity model of bilateral tradea,b

Dimensions of distance/proximity Determinant Change in trade

Cultural Common language +42%

Administrative Common regional trading bloc +47%

Colony/colonizer +188%

Common currency +114%

Differences in corruption �11%

Geographic Physical distance: 1% increase �1.1%

Physical size: 1% increase �0.2%

Landlockedness �48%

Common land border +125%

Economic Economic size: GDP (1% increase) +0.8%

Income level: GDP per capita (1% increase) +0.7%

aEstimates are all significant at the 1% level but are, in many cases, smaller than those reported in previous studies, apparently because of correction forcensoring.bSource: Ghemawat and Mallick (2003).

Table 5 The CAGE Framework: Country-Level Analysisa

Cultural Differences Administrative Differences Geographic Differences Economic Differences

Bilateral Measures K Different languages K Lack of colonial ties K Physical distance K Differences in

consumer incomesK Different ethnicities/lack of

connective ethnic or social

networks

K Lack of shared

regional trading

bloc

K Lack of land border

K Differences in

availability of:

K Different religions K Lack of common

currency

K Differences in climates

(and disease

environment) Natural resources

K Differences in national

work systems K Different legal system

Financial resources

K Different values, norms

and dispositions

K Political hostility

Human resources

Intermediate inputs

Infrastructure

Information or

knowledge

Unilateral Measures K Traditionalism K Nonmarket/closed

economy (home bias

versus foreign bias)

K Landlockedness K Economic size

K Insularity

K Nonmembership in

international

organizations

K Geographic size K Low per capita income

K Spiritualism

K Weak legal

institutions/corruption

K Geographic

remoteness

K Low level of

monetization

K Inscrutability

K Lack of government

checks

and balances

K Limited infrastructure,

other specialized

factors

K Societal conflict

K Political/expropriation

risk

aSource: Ghemawat (2001).


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of the actual population distribution – to yieldmeaningful rankings or contrasts. Note that indexi-cality in this sense encompasses not only cardinalindexes such as the World Economic Forum’sGlobal Competitiveness Indexes (formerly one,now two) or Transparency International’s Corrup-tion Perceptions Index but also ordinal rankingschemes such as Porter’s ‘diamond’ framework fordiagnosing the (relative) international competitive-ness of different countries as home bases in specificindustries.3 However, the simplicity of indexicalityis purchased at a price: the summarization of anentire structure in terms of a simple index numberor contrast is, inevitably, Procrustean.4 For exam-ple, the physical distance between country pairscannot be represented in terms of country-by-country index numbers. More broadly, indexicalityis inattentive to the bilateral character of many ofthe dimensions of difference in Tables 4 and 5,which suggests that countries be envisioned asexisting in (and even occupying) multidimensionalspace in relation to each other instead of as an arrayalong a common yardstick. In other words, coun-tries should be represented as nodes in a networkrather than as a heap of structurally equivalentobjects.

The tendency to neglect this point about bilateral(or more broadly, relational) measures is particu-larly unfortunate because such measures often turnout, at least in gravity models of internationaltrade, to exert effects that are as large as if not muchlarger than unilateral measures. Having made thatdistinction, it is useful to add that unilateralinfluences – that is, influences specific to individualcountries rather than to country pairs – are by nomeans incompatible with careful consideration ofthe bilateral influences to which gravity models,almost by definition, draw our attention. A formallink is supplied by a unilateral measure of isolation(or integration), which captures unilateral country-specific attributes that generally decrease (orincrease) a country’s involvement in cross-bordereconomic activities and that can be treated as acommon component of that country’s distancesfrom other countries. For example, really isolatedcountries (characterized by unique, ingrown cul-tures, closed administrative policies, physical remo-teness, etc.) can be thought of as being relativelydistant from everywhere else.

3. Industry context: Conventional wisdom suggeststhat industry context has a profound impact onhow much a specific type of difference acrosslocations matters in a particular context. For

example, cross-border flows of cement are moresensitive to the effects of geographic distance thancross-border flows of satellite TV programming, butless subject to cultural (as in linguistic) differencesor administrative restraints due to political sensi-tivity. Such variation in industry attributes orcontext has an enormous influence on the contentof effective international strategies in the twosettings. The cement industry, unlikely though thismay seem, has seen a surge in global concentrationin the last 15 years that dwarfs the changesobserved in what are commonly considered to bemore ‘global’ product categories for example,automobiles) – a surge driven by a handful ofinternational firms pursuing essentially standar-dized strategies around the world (Ghemawat andThomas, 2003). In satellite television, in contrast,attempts by would-be globalizers to (re)broadcastthe same content in additional countries have, inmany contexts, run up against both culturalpreferences for local language programming andadministrative restraints, and there are both empiri-cal and theoretical reasons to think that the balancehas tilted (further) over time towards local asopposed to standardized programming in manycountries owing to market growth and otherdynamics (Ghemawat, 2004).

More generally, disaggregated gravity modelingconfirms that such industry-level variations in theeffects of given differences are important enoughthat they must be attended to (e.g., Head andMayer 2000, 2002; Ghemawat and Mallick, 2003).Attention to industry contextuality helps paredown some of the complexity induced by multi-dimensional (point 1) and relational as well asunilateral (point 2) measures of differences amonglocations. And it suggests that the ways in thatindustries differ from each other, and how whichmatters, constitute another fruitfully fundamental‘big question’ in international business strategy,just as they do in mainstream business strategy. Inthe terms used in the introduction to this paper,although the ecology of firms and locations is oftendiscussed in a general way, applications oftenrequire that it be looked at from the perspectiveof specific industries because that is the level atwhich generalized business landscapes assumedefinite form. For an illustrative attempt to relatethe salience of different categories of differencesacross countries identified by the CAGE frameworkto industry characteristics, see Table 6.

4. Implications for international strategy: In ponder-ing the implications for firm strategy of focusing on


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Table 6 The CAGE Framework: Industry-Level Analysisa

Cultural Sensitivity Administrative Sensitivity Geographic Sensitivityb Economic Sensitivity

Industry

Characteristics

K High linguistic content

(TV programming)

K High government involvement K Low value to weight/bulk

(cement)

K High intensity of labor,

other factors prone to

abs. cost or efficiency

diff. (garments)

K Local tradition/identity

(ego expressive prod.)

procurement/funding (mass

transportation products) K Hazards/diff. in transport

K Potential intl. scale/

scope/experience

effects

K Significant diff. in preferences

(hor. diff.)

regulation (healthcare) K Perishability (fruit)

K Different cycles

(cement)

idiodyncr tastes

(fish sausage, boxer shorts)

state ownership (telecoms) K Importance of connectivity

(fin. serv.)

K Diff. in willingness to

pay/profitability

design difference (autos)

K Strategic industry status

K Intence local supervision

requirements (restaurants)

K Income related

difference in demand

(automobiles)

diff. in standards

(electrical appliances)

size (autos)

K Other local perform. req. for

value activities (many services)

K Need for variety/

agility/responsiveness

(home appliances)

diff. in sizes/packages

(processed foods)

votes/organization (agriculture,

textiles)

K Difference in

suppliers/channels/

business systems

(insurance)

diff. in target segments

(boom boxes, US vs Japan)

anointed patrimony effects

(natural resources)

K Entrenched tastes

national security concerns

(telecommunications)

K Home bias (‘local’ preferences)

K Mass consumption/staple products

(food, fuel/energy)

K +Strong country of origin effects

(vertical differentiation)

K National patrimony effects

(natural resources)

K Asset specificity and the scope for

holdup (infrastructure)

K Specific profit restraint on foreign

competitors/opportunities

aSource: Ghemawat (2001).bMany of these conditions tend to favor FDI relative to trade.

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the differences across countries or locations, it isuseful to start, once again, with a parallel drawnfrom mainstream business strategy. The question ofwhy firms differ is a good starting point in themainstream context, but it is far from being a goodstopping point: how those differences matter is anessential follow-up question to the extent thatthere is any interest in devising implications forfirm international strategy. Mainstream businessstrategy has made some progress in this regard inrecent decades because, although it takes thedifferences across firms seriously, it has generallymanaged to refrain from overemphasizing them toan extent that might push the clock back to the olddays of business policy, in that firms were essen-tially seen as unique, and analytical attention tocompetitive interactions and pressures was quitelimited. By analogy, international business strategyshould take the differences across countries ser-iously, but probably not to the point of focusing onlocal variation to the exclusion of all else. In otherwords, firms that cross borders would benefit fromresearch that goes beyond ‘Never underestimate theimportance of local knowledge’ even if one believesthat many firms could still benefit from taking localvariation or knowledge more seriously than theydo. Or, to use the terminology originally intro-duced by Pike (1954), we need ‘etic’ knowledge –the cross-country perspective of a detached obser-ver – as well as ‘emic’ knowledge – the deep butnarrow single-country perspective of a nativeparticipant.5 Ghemawat (2003a) elaborates onsome specific proposals for making progresstowards the etic objective, including appropriatelybroad identification of variables that embodylocation specificity, and explicit recognition ofarbitrage strategies that capitalize on the remainingdifferences across countries as well as strategies ofadaptation or aggregation that try to cope withsuch differences while seeking to exploit simila-rities as economies of scale or scope. The arbitragestrategy, studied earlier by Kogut (1985a, b) amonga few others, is reconceptualized in terms of abroader range of differences across countries andelaborated on in Ghemawat (2003b), who alsodiscusses how it differs from adaptation/aggrega-tion as a strategic approach.

In summary, semiglobalization is both an empiri-cal characteristic of the level of cross-borderintegration of markets and an essential logic forconsidering the possibility of distinctive contentfor international business strategy. Semiglobaliza-tion underlies interesting variations in location

specificity and, in parallel with mainstream busi-ness strategy’s fundamental question of ‘why firmsdiffer,’ directs attention to ‘why countries orlocations differ’ as the fundamental overlay ques-tion in international business strategy. Attempts toanswer this question, particularly on the basis ofgravity models of international trade, suggest thatthe differences across countries must be addressedwith integrative frameworks that go beyond index-ical measures of difference to include bilateral andmultilateral ones, pay explicit attention to theindustry context (that suggests a third fundamentalquestion, ‘why do industries differ?’), and attemptto offer cross-country perspectives on firm strategy.The intent behind ranging so broadly in a shortsection has been to encourage additional discussionof and research into foundational issues in inter-national business strategy that seem sorely under-studied.

Institutional voidsIn a semiglobalized context, understanding loca-tion specificity is clearly fundamental. This sectiondevelops the importance of institutional voids –defined below as the paucity of the specializedintermediaries needed to consummate transactions– as central to understanding such location speci-ficity, and also to understanding the nature ofcross-border transactions. Finally, this sectionmakes the case that IB scholars cannot analyzethe sustainability of strategies commonly discussedin the IB field without endogenizing the role, andevolution, of specialized intermediaries.

What are institutional voids?Institutional voids occur when specialized inter-mediaries are absent. Intermediaries are economicentities that insert themselves between a potentialbuyer and a potential seller in an attempt to bringthem together by reducing potential transactioncosts (Coase, 1937; Williamson, 1985).

To appreciate the importance of this concept,consider a simple stylized market where there is norole for a specialized intermediary. Then consideradding on a variety of real-world features, each ofthat ensures the need for (a different kind of)intermediary.

Two individuals are engaged in a barter transac-tion involving the simplest possible items in anerstwhile primitive economy – a simple article ofclothing in exchange for some food. The uses of theitems in question are reasonably well specified: thatis, there is little ambiguity about the value of the


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items in question. Further, the exchange has theproperty of simultaneous satisfaction of the wantsof the two individuals. There is no role for a thirdparty to intermediate this transaction.

(1) First, consider what happens if the exchange issubject to a time lag. That is, A has the clothing,but B promises to give the food in exchangelater on. Now there is a potential need to ensurethat B does not renege ex post and that, if thishappens, there is some redress available to A.The redressing mechanism is an example of acontract guarantor that intermediates the trans-action. It gives A the confidence to transact andreduces costly bargaining.

(2) Second, imagine that the items beingexchanged are not simple, but require somethird-party expertise in evaluating quality. Forthe transaction to not break down due to theclassic ‘lemons problem’ (Akerlof, 1970), acertification mechanism is needed. This is anexample of an information-providing specia-lized intermediary.

(3) Third, consider that A wishes to transact butcannot find B. Then, it might need the servicesof a different kind of information intermediarythat matches potential buyers and sellers.

It is straightforward to see why, in the absence ofintermediaries of the sort mentioned above, com-merce will, quite simply, collapse. Thus under-standing what happens when there is a paucity ofspecialized intermediation is fundamental tounderstanding all manner of commerce.

Further note that, although the language usedabove is that of ‘goods,’ it applies with equal forceto all kinds of markets, including markets for talent,capital, ideas, and services. Thus talent is particu-larly hard to evaluate, requiring the existence oflabor market intermediaries such as search firmsand business schools. The patent system facilitates,at least partially, contracting on ideas. Virtually allprovision of capital is subject to the temporalproblem alluded to above, as it typically involvesan investor giving something in return for the(uncertain) promise of a future return.

In addition to being a simple lens through that awide variety of phenomena can be interpreted, theidea of institutional voids points to a variety of un-researched phenomena that are relevant to scholarsof international business. In what follows, we shallfirst consider topics conventionally studied by theJIBS community – for simplicity, divided betweenwithin-country and cross-country issues – and then

comment briefly on new research frontiers sug-gested by this lens. Note that ‘country’ is used as asummary expression for a geographic unit ofanalysis, but the reasoning applies equally to sub-national or supra-national units of analysis.

Within-country topicsScholars of international business have long beenconcerned about tailoring strategies to particularcontexts (Prahalad and Doz, 1987; Bartlett andGhoshal, 1989). By viewing contexts through thelens of specialized intermediary institutions, itbecomes clear that contexts will vary widely.Further, it is not difficult to imagine that the choiceof that activities (Porter, 1985) to perform, and thechoice of how to perform these, may be quitedifferent if the services provided by specializedintermediaries are missing. In searching for man-agerial talent, for instance, companies will have toperform extensive screening of outside pools oftalent, assuming they can locate and identify such atalent pool in the first instance. Raising externalcapital requires credibly convincing external capitalproviders that the funds being sought will be usedin the way that is intended. This would beincredibly difficult if there were no independentauditors to certify that this was indeed so, and ifthere were no recourse mechanisms, such as legaladjudication, available to investors in the face ofoften unavoidable after-the-fact disputes. Thus thelens of specialized intermediation points inexor-ably to the idea of IB strategy being contextdependent.

Context dependence affects both industry analy-sis and positioning (Porter, 1980, 1985). Porter’sfive-forces framework is about identifying thateconomic constituency – buyers of a product,suppliers, or the firms that make the product –has the greatest economic power and can thus walkaway with the maximal rents. However, the way inwhich this division of the pie occurs depends verymuch on (typically unstated) assumptions withregard to specialized intermediation (Khanna,2002). For example, for employee talent to bargainaway rents, it matters whether it has access tocollective representation (unions, for example). Italso matters whether capital market intermediariesare present that can facilitate talent leaving andstarting its own entrepreneurial venture. Thus thebargaining power of this particular (important)supplier depends crucially on these specializedintermediaries’ presence or absence.


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Khanna and Rivkin (2001b) have shown, in asample of 40þ countries over a decade, thatindustries do not appear to be structured similarly.They base this on their demonstration that the rankorder of performance (measured variously) ofindustries varies quite drastically from country tocountry. Further, it varies more when their (admit-tedly crude) proxies for specialized intermediariesindicate sizeable differences in context.

Similarly, positioning choices are drasticallyaffected by the extent of specialized intermediation(see Figure 1). This is easily seen in studies ofbusiness groups in emerging economies. Thesestudies show that diversified structures that arebelieved to be value-destroying in some countries(Lang and Stulz, 1993; Montgomery, 1994) arevalue-enhancing in others (Khanna and Palepu,2000a; Khanna and Rivkin, 2001a). This is becausethe internal markets available to diversified entitiesare relatively more useful when specialized inter-mediaries are absent and the functioning ofexternal markets is thus compromised.6

An extreme illustration of the dependence ofpositioning and sustainability on institutionalvoids is provided by the actions of firms cateringto the world’s most under-served populations in the‘base of the pyramid’ (see Section 5 below). Onereasonable characterization of such regions wouldfocus on the complete absence of specializedintermediation. The hard infrastructure – roads,electricity, communications technology – is miss-ing; so, equally insidiously, is the soft infrastructure– contract law, commercial codes, intermediaries –needed to locate possible transaction partners, andto credibly contract with. Distributing consumerproducts to the vast expanses of the inner reachesof the Amazon or the Mekong Delta, for example,

has to rely on innovative franchising-style agree-ments with distributors who might bicycle overlarge terrains or distribute small quantities ofproducts via waterways. It is not difficult to seethat such a distribution system, itself a result of thepaucity of (hard and soft) infrastructure, would bepositioned quite differently than a distributionsystem for comparable products in a developedcountry. Clearly, also, the sustainability of such aposition would depend on the persistence ofinstitutional voids, an issue that is intertwinedwith actions taken by the firm (see comments onendogeneity of institutional voids below).

This influence of institutional voids on firms’choices appears resilient from the little evidenceavailable so far. For example, a systematic empiricalinquiry of positioning by Chilean firms suggeststhat the active program of market development inthat country took the better part of a generation toatrophy business-group–affiliation advantages –derived from the presence of institutional voids;even so, a companion field-data-collected studydemonstrated continued ability by Chile’s largestbusiness groups to continue to buck this aggregatetrend and add value by compensating for institu-tional voids (Khanna and Palepu 1999, 2000b).7

Anecdotal evidence having to do with attempts toeliminate institutional voids is consistent with theflavor of these studies. Perhaps the most robust ofthese is the difficulty experienced by scores ofcountries, not only underdeveloped countries,around the world to generate markets for riskcapital to spur entrepreneurship.

Cross-country topicsThis subsection considers the much-studied (byJIBS community and others) phenomenon of

InformationProblems

ContractingProblems

InstitutionalVoids

FirmPosition

Sustainability of position tied topersistence or amelioration of voids

Positions of multiplefirms determineindustry structure

Domesticcompanies

Adopt organizational structures to mitigate

effects of voids

Foreigncompanies

Access overseasinstitutions assubstitutes fordomestic ones

Capitalize onadvantaged accessto home country

institutions

Figure 1 Firms positioning. Source: Khanna (2002).


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multinationals (and the associated phenomenon ofFDI). It also considers less-studied phenomena ofcross-border flows of various factor inputs.

Multinationals can add value in the face of cross-border institutional voids (Foley, 2002; Khanna andPalepu, 2002). The particular institutional void thusfilled might arise from the absence of executivesearch firms, financial analysts, a cross-borderdispute resolution mechanism, or a global logisticscapability. The multinational is in the business ofreducing information asymmetries and guarantee-ing contracts – in markets for products, talent,capital and ideas. Conceptually, in addition to theusual sources of information problems in anyeconomy, cross-border transactions are accompa-nied by certain specific sources of informationcosts. These might arise because of cultural andlanguage differences, for instance, or from differ-ences in accounting standards, other (imperfectlytransparent) business practices, or other differencesas elaborated in Section 2. Further, the absence of across-border fiat authority (of the sort of a well-functioning state within a country) complicates theresolution of cross-border disputes.

Consider, for example, intellectual propertyrights. An entrepreneur with a path-breakingmousetrap with worldwide applicability can patenther invention under the US system, securingproperty rights worldwide. Even if the patenteehad the resources to ensure that these propertyrights are respected worldwide, she would still haveto contract with independent providers of a rangeof complementary assets. Production facilities invarious countries to make the mousetrap andbranding and logistics and distribution agents todisseminate the product efficiently would beneeded to realize a return on the invention. Onthe other hand, if the multinational were thepatent holder, several of these functions could beinternalized.

Similarly, multinationals might serve to guaran-tee quality of goods and services that are movingcross-border, when alternative mechanisms toprovide information about, and police quality of,such goods and services are under-developed.Samsung’s brand name foreshadows its manufac-turing prowess, which translates into reliability ofits consumer electronics and other items com-monly available around the world.

A second challenge related to the management ofmultinationals has to do with the extent to thatmultinationals should localize their business modelto suit the particulars of country context. The JIBS

community has studied a variant of this problemextensively by studying the resolution of thecentralization/decentralization debate. That is,extensively locally sensitive business models areprobably more consistent with a decentralizedmanagement structure with emphasis on localautonomy. For our purposes, this issue is iso-morphic to the discussion of context dependenceof strategy from the within-country issues subsec-tion above.

Within the cross-border arena, the institutionalvoids lens directs us to consider questions that havebeen under-studied by the JIBS community. Belowwe discuss three categories of such questions, allnecessary to understand the ecology of firms andplaces:

(1) With whom do multinationals compete? Theconventional answer to this question is ‘witheach other’ or ‘with a local, that is, single-country firm’. However, they compete with allother ways in that there is cross-border move-ment of factor inputs or end products andservices. The extent to that multinationals aresubstitutes for alternative ends to the same goal– for example, consider a US investor entrustingfunds to a mutual fund that invests in LatinAmerica, vs investing in a US-based multina-tional that then maintains operations in LatinAmerica – depends on the configuration ofcross-border institutional voids. Similarly, the‘outside option’ of specialized talent employedby a multinational is to use cross-border specia-lized intermediaries (websites that provideinformation on worldwide opportunities, searchfirms that facilitate matching of talent withopportunity across borders, relocation agenciesthat accomplish the move) to ensure that hertalent is used by the highest bidder even if thelatter is in a remote geography.

(2) What effect do multinationals have on context?This is a question that has benefited from somediscussion in the JIBS community, and hasreceived increasing attention in the last fewyears (Aitken and Harrison, 1999). However, thescope for analysis is much wider than theproductivity–spillover–measurement guise inthat this problem is addressed.8 Consider theeffects of multinational presence on the pre-sence of local capital market intermediaries. Tothe extent that multinationals, typically listedon their home country exchanges, cause tradingto move offshore, the demand for services of


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local analysts is lowered. This affects theviability of the business model of the analyst,and, ultimately, affects the efficiency with thatthe local capital market might work. One canposit mechanisms with positive externalities aswell. A key issue relates to the economic engineunderlying specialized intermediation and howit operates, competitively or cooperatively, withmultinationals. Research on this issue will helpus understand the feedback loop from multi-nationals to context.

(3) Moving outside the realm of multinationals, butsquarely within the realm of cross-border issues,how should we understand cross-border flows oftalent and people and ideas beyond simplymeasuring their (lack of) incidence? Under-standing cross-border intermediaries will movethis research agenda forward. Given the forecastmagnification of cross-border movement ofindividuals due to demographic changes inthe developed and developing world in thecoming few decades, this is an issue ofparamount importance. Further, anotherissue related to cross-border factor mobilityinvolves the study of hot money that canalso be understood as resulting from apaucity of cross-border intermediaries. Theconnection here is that herd behavior, ofthe sort that results in money flowing inor out of a country with the speed that earnsit the epithet ‘hot’, occurs in the absence ofspecific information with regard to investmentopportunities.

Endogenous evolution of intermediariesMuch of the literature on transaction costs has theflavor of such costs being ‘given’. They are presentas a result of underlying characteristics of the‘technology’ (that governs exchange) in question.The institutional voids lens requires reconsidera-tion of this conventional focus. If transaction costsresult from the paucity of specialized intermedi-aries, and if these intermediaries can be viewed ashaving their own business models, it follows thatthe evolution of transaction costs can be under-stood better if we study the industrial organizationof specialized intermediation. Why do the ‘indus-tries’ of analysts, business schools, and executivesearch firms look the way they do? The endogenousemergence of specialized intermediaries, whosepresence or absence is the proximate determinantof ambient transaction costs, has received much

less attention than it deserves (see Spulber 1996 forsome attempts in this direction).

For example, think of an executive search firm asan economic entity that helps bring together(intermediates between) supply of talent (execu-tives) and demand for talent (firms). Notice that theintermediary is itself a firm, and has its ownindustry structure and its own considerations withregard to positioning and sustainability. Think, forexample, of how the executive search industry isstructured in the US (Khanna et al., 1999). There is apremium end occupied by the likes of RussellReynolds, Spencer Stuart and others, a more mass-market segment dominated by Korn/Ferry andHeidrick and Struggles, and an Internet-searchsegment with the likes of Monster.com. It turnsout to be virtually impossible to think about howthe possibility of efficient cross-border movementof talent will evolve without thinking through thebusiness decisions of these specialized intermedi-aries.

As another example, consider an economy domi-nated by business groups. These groups rely oninternal markets to promote new ventures, aphenomenon that is a response to the absence ofexternal markets. However, the very existence ofthe groups ensures that specialized intermediaries,not seeing a demand for their services, do not enter.Thus the situation perpetuates itself. A reasonableconjecture, awaiting empirical verification, is thatgroups might have static efficiency gains, butdynamic efficiency losses (Khanna, 2000).

However, the emergence of intermediaries ismore than just an economic issue. Consider FDIinto China and India. China is characterized todayby heavy investment by multinationals, India moreby vibrant, domestically owned private enterprise(Huang and Khanna, 2003). Intertwined with thisequilibrium outcome is the fact that the specializedintermediaries needed to disseminate risk capital towould-be entrepreneurs are far more developed inIndia than they are in China. In the latter, multi-nationals generally do not need domestic sources ofrisk capital as, in their role as cross-border inter-mediaries, they rely on cash flows from operationsaround the world. However, stepping away fromthe economics, consider why differences in suchequilibria might have arisen in the first instance.The government in China has gone out of its way tolay out the welcome mat for multinationals – thuspartially obviating its need to rely on domesticallyowned private enterprise – whereas India’s govern-ment has not done so. Understanding why this is so


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requires understanding the incentives and ideolo-gies of the Chinese state (at the center and in theprovinces) as well as the messy coalition politics ofmodern India (Huang and Khanna, 2003).

The primitives, levels of analysis, andinternational businessInternational business, by definition, is about theinteraction of firms and geographies. The analysisin this section mirrors Enright (2002a) in suggest-ing that international business research can benefitfrom work that focuses on the ‘primitives’ thatdrive firm- and geography-based success, intro-duces new economic and geographic actors to theanalysis, and organizes critical research questionsaccording to some relatively simple frameworks foranalysis.

The primitives: activities, resources, andknowledgeThe strategy literature makes the case that sourcesof advantage at the firm level are found inactivities, resources, and knowledge. The activity-based view of the firm posits that firm performanceis influenced by the way firms perform activities,the efficiency and effectiveness of those activities,and combinations or systems of activities (Porter,1985, 1996). The resource-based view posits thatfirm performance is heavily influenced by the rentsthat the firm can earn from its unique stock ofresources (Wernerfelt, 1984; Barney, 1986, 1991;Peteraf, 1993). The knowledge-based view positsthat firm performance is influenced by the abilityof the firm to create and exploit firm-specificknowledge (Spender, 1996; Nonaka and Takeuchi,1998). Although it should be obvious that theseviews of the firm are not mutually exclusive,researchers in the different schools tend to down-play the importance of the others, and rarely bringthe different features of the firm together into whatwe might call the ‘ARK’ view of strategy (Enright,2002a) in that activities, resources, and knowledgeare combined to create firm-based advantages (seeFigure 2).

Similarly, the economy of a nation or region canbe described as bundles of activities, resources, andknowledge bases. An activity-based view of geogra-phies posits that there are some economic activitiesthat might take place outside or partially outsideany individual firm, but tied to a particularlocation. A resource-based view of geographiesposits that there are resources that may be specificto particular locations rather than any individual

firm. A knowledge-based view of geographies positsthat there are knowledge bases that might beoutside the firm that are tied to particular geogra-phies. Just as they can provide competitive advan-tages to firms, activities, resources, and knowledgecan provide competitive advantages to locations aswell (Enright, 1998). One difference is that theactivities, resources, and knowledge that are inter-nal to a location and that might influence firmperformance can be rather broad, incorporatingnatural conditions, institutions, mixes of firms andindustries, and other features that influence loca-tion-based competitiveness. This suggests that afruitful line of research for international businessscholars is one that traces activities, resources, andknowledge, as well as their interaction, over theappropriate geographies. Of course, this leaves thequestion of what exactly are the appropriategeographies over that we should examine activities,resources, and knowledge that create value forbusiness (Enright, 1998; Enright, 2002a).

The three different views of the firm also haveanalogs in the international business literature. Anactivity-based view of the multinational firm viewsthe configuration and coordination of firm activ-ities across nations and regions as critical to themultinational (Porter, 1986; Yip, 1995). A resource-based view of the multinational firm posits that themultinational has resources that can best beleveraged through foreign investment (Vernon,1992; Dunning, 1993; Caves, 1996). A knowledge-based view of the multinational firm posits that themultinational firm has knowledge that it exploitsacross international markets (Buckley and Casson,1976; Johanson and Vahlne, 1977; Kogut andZander, 1993). Dunning (2000) and Doz et al.(2001) have begun to describe the emergence ofmultinational strategies that use their activities tolink important geographically based sources ofknowledge and resources together. However, thereis still little work that explicitly tests hypotheses

Activities Resources

Knowledge

Firm-Based Advantage Location-Based Advantage

Activities Resources

Knowledge

Figure 2 The ‘ARK’ model of firm-and location-based advan-

tage. Source: Enright (2002a).


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that link the three ‘primitives’ of strategy togetherexplicitly into an ‘ARK’ model of the multinationalfirm (Enright, 2002a).

Levels of analysisIn addition to the issue of what ‘primitives’ mightbe the subject of international business research,there also is the issue of the appropriate levels ofanalysis. Historically, the strategy literature hasemphasized the influence of industry- and firm-level features on performance. Schmalensee (1985)was the first of many researchers to decompose thevariation in performance of individual businessunits into business segment, industry, and corpo-rate-level effects. The literature generally concludesthat all three levels have significant influences,although with varying views of the relative magni-tudes of effects (Rumelt, 1991; Bowman and Helfat,2001; McGahan and Porter, 2002; Hawawini et al.,2003). Some studies in this vein use a four-digit SIClevel definition of ‘industry’, whereas others usethree- or two-digit definitions. The different defini-tions actually correspond to different economicentities. Whereas the four-digit level already tendsto be larger than a strategically distinct industry,the three- and two-digit levels represent entire setsof related industries. Thus evidence of an ‘industry’effect at the three- or two-digit levels is actuallyevidence of a ‘meso’-level effect on performancerather than a ‘micro’-level effect.

The ‘meso’-level effects are very much in thespirit of recent work on regional clusters, defined asgroups of localized firms in the same and relatedindustries, including buyers, suppliers, and indus-tries related through shared resources or activities(Enright, 1998, 2003). Whereas interest in regionalclusters has mostly focused on their potential tosupport economic development, increasingly theyare becoming a focal point for firm strategy andinternational business. There is increasing evidencethat industry clusters influence investment deci-sions and firm performance (Audretsch, 2000;Dunning, 2000; Enright, 2000b). This is notsurprising, given the long-recognized influence ofsuppliers, buyers, and spillovers from related indus-tries on innovation and performance (von Hippel,1988; Schmalensee, 1989). All this suggests that the‘cluster’ also should be a valid level of analysis forinternational business researchers.

A large portion of existing international businessresearch focuses on the nation as a unit of analysis.In addition, recent efforts in the strategy literatureto decompose the variation in firm performance

have tried to isolate the impact of nationaldifferences as well as firm and industry differences(Hawawini et al., in press). However, distinc-tions among nations remain peripheral to muchof the strategy literature and strategy practice(Narayanan and Fahey, 2001), which is perhapsone reason why firms seem to be blindsided bydifferences in markets and business practices,public policies, macroeconomics, and institutionalenvironments.

The traditional geographic units addressed in theinternational business literature are national sub-sidiaries and markets, and global headquarters andmarkets (Paterson and Brock, 2002). Rugman(2000) and Rugman and Verbeke (2001), however,point out that most international trade and invest-ment flows are within large, supranational‘regions’, such as the Americas, Europe, and theAsia-Pacific, and show that many of the world’slargest manufacturing and service industries arecharacterized by (supranational) regional ratherthan global production or activity systems. Reasonsinclude the development of regional trade blocs,limits to global economies of scale, regionalaggregation and scale economies, communicationstechnologies that facilitate management on aregional basis, the need to serve customers operat-ing on a regional basis, regional differences incustomers and culture, and the ‘tyranny of timezones’ that facilitates management on a regionalbasis (Lehrer and Asakawa, 1999; Enright, in press).In addition, firm performance in a given nation isincreasingly influenced by multilateral organiza-tions, international financial flows, and the strate-gies of foreign multinational firms (Brewer andYoung, 2000; Chia, 2000; Enright, 2000a). Thisindicates that there is a supranational level ofanalysis that also can be critical to firm perfor-mance.

The literature suggests that firm effects, industryeffects, cluster effects, national effects, and supra-national effects all influence firm performance. Thetrouble is that, in much of the strategy literature,these additional levels of analysis are not integratedinto a single, organizing framework, but are used asadd-ons to traditional strategy analysis. As a result,strategy research and process tend to have blindspots that become obvious only in the aftermath offinancial or business crises.

An organizing frameworkA useful framework for organizing this way ofthinking is found in Figures 3 and 4 (Enright,


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2000a, 2002b). In this framework, performance atany level of analysis is a function of drivers at fivelevels: firm-level drivers, industry-level drivers,cluster-level drivers, national- or regional-leveldrivers, and global- or supranational-level drivers.Firm-level drivers include the strategies, activities,resources, knowledge, organization, management,and governance structures of firms. Micro- orindustry-level drivers include the nature of compe-tition and cooperation in the given industry,policies that are specific to the industry, and skillsand capabilities that are specific to an industry.Meso- or cluster-level drivers include inputs such asinfrastructure, materials, components, and capitalgoods; the linkages between suppliers and buyers;

the nature of local demand; spillovers from relatedindustries; and policies designed to enhance clusterdevelopment. Macro- or national-level driversinclude macroeconomic conditions, governmentpolicies at the national and regional levels, andaspects of society, including goals, interest groups,agendas, and social issues. Meta- or supranational-level drivers include international financial flows,the influence of foreign governments, the impact ofmultilateral agencies such as the World TradeOrganization, links with other economies outsidethe nation, the strategies of foreign multinationalfirms, and (supranational) regional linkages(Enright, 2002b).

The key to using this simple approach is torecognize that, in today’s economy, forces at eachlevel influence performance at every level. Firmperformance is clearly influenced by firm-leveldrivers, micro- or industry-level drivers, meso- orcluster-level drivers, macro- or national-level dri-vers, and meta- or supranational-level drivers.Macro or national economic performance is clearlyinfluenced by supranational or meta-level drivers,meso- or cluster-level drivers, micro- or industry-level drivers, and firm-level drivers, and so on. Theframework is best viewed as a set of questions thatensure that our analysis is complete, rather than asa recipe for firms or for national economies. It helpsus identify the interactive forces and strategies thatcoevolve with technology, tastes, and competition(as in Lewin et al., 1999).

Firms

Industries/Micro

Clusters/Meso

National/Macro

Supranational/Meta

Figure 3 Levels of analysis. Source: Enright (2000a, 2002b).

Meta or

Supranational

level drivers

Macro or n

ational

(regional) l

evel

drivers

Meso or cluster

level drivers

Mic

ro o

r in

dust

ryle

vel d

rive

rs

Firm leveldrivers

MacroeconomicsMacro Government PoliciesMacro Institutions Civil Society

Multilateral OrganizationsSupranational PoliciesSupranational InstitutionsTrade BlocsForeign Governments International Financial FlowsForeign MultinationalsRegional Groupings

Inputs and SuppliersDemand and CustomersShared Resources Shared ActivitiesComplementaritiesSubstitutesMeso PoliciesMeso Institutions

PositioningActivitiesResourcesKnowledge

Performance

Competitive ScopeCorporate StrategyOrganizationLeadership

Industry CharacteristicsCompetitionCooperationStrategic Groupings Role of Lead FirmsMicro PoliciesMicro Institutions

Figure 4 Drivers of business and economic performance. Source: Enright (2000a, b).


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Using the frameworkDetailed explication of the use of this framework isbeyond the scope of this paper. However, a briefexample will illustrate the spirit of its use forexamining firm strategies.

The emergence of Nokia, the Finnish telecommu-nications equipment company, is usually portrayedas a firm-based phenomenon, and firm-level drivershave been an extremely important part of the story.New leadership dramatically shifted Nokia’s strat-egy, narrowing its industry scope by divestingunderperforming units, revamping its positioningto that of a technology and design-driven company,overhauling its activity–resource–knowledge mix tomatch the strategy, and changing the financial andgovernance structures by opening up shareholdingsto international investors. At the industry level,competition on standards among a limited numberof lead firms has been supplemented by coopera-tion among some firms in standards debates, cross-licensing, alliances, and supply arrangements. Atthe cluster level, Finland exhibited early demand formobile services, including the world’s first GSMnetwork, which helped stimulate the developmentof suppliers and input providers around Nokia.These developments have fostered investments ineducation and training both by Nokia and byauthorities where it has located.

At the macro-level, Finnish policy that opened upcompetition in telecommunications paved the wayfor the development of Nokia’s first GSM customer.Nokia also was influenced by Finland’s decision toenter the EU, the macroeconomic shift in Finlandin the 1990s, and national efforts to create aknowledge economy. At the supranational or meta-level, Nokia benefited from access to the SovietUnion for its pre-GSM businesses, the Nordiccountries’ decision to settle on a single mobiletelecommunications standard, the subsequent Eur-opean decision to select the same (GSM) standard,the opening of telecommunications marketsaround the world (that provided customers), andthe wide penetration of GSM systems worldwide.Nokia clearly has been influenced by firm-leveldrivers, industry- or micro-level drivers, cluster ormeso-level drivers, national- or macro-level drivers,and supranational or meta-level drivers (Enright,2002b; Haikio, 2002).

A research agendaThe above discussion provides the outlines of aninternational business research agenda with severalbasic features. One is an explicit focus on levels of

analysis and a focus on new economic actors. Firmsand nations are not the only relevant levels ofanalysis; industries, clusters, subnational regionaleconomies, and supranational regional economiesalso have an important influence on firm perfor-mance. It also suggests that all competition is noteither national or global. There are lower andintermediate levels that are equally, and in somecases more, important.

A second feature is a focus on a given set ofprimitives. The present discussion suggests that afirm can be defined as the bundle of activities,resources, and knowledge that are internal to thefirm, with all three being essential to firm success.Similarly, the economy of a city, region, or nationcan be defined as the bundle of activities, resources,and knowledge that are internal to the location,with all three being essential to economic success.

The third feature is that a focus on firm-leveldrivers, industry-level drivers, cluster-level drivers,national-level drivers, and supranational driverscan provide an organizing framework for businessand economic performance at all of the relevantlevels. Analysis that does not encompass all theselevels of analysis is bound to be incomplete. This ishighlighted in other sections of this paper, whichshow that regional economies, national and localinstitutions, and national market characteristics arecrucial to international strategy. The present frame-work shows there are many other importantcombinations or interactions beyond those high-lighted specifically in this paper.

The payoff to the features of the present analysiswill come in research that focuses on the interac-tion of new actors and new geographic levels ofanalysis. The global headquarters–national subsidi-ary paradigm becomes much richer when oneincorporates subnational and supranational regio-nal strategies and organizations into the analysis.The firm location decision becomes much richerwhen we contemplate the placement of individualactivities in specific locations to take advantage ofspecific firm- and location-based resources andknowledge. Firm management and coordinationdecisions become much richer when the challengeis to coordinate learning and resource developmentacross geographically and culturally dispersed loca-tions in an integrated manner. Instead of providingspecific answers, the value of the new frameworkmight be in helping us organize the questions thatwe should ask in assessing the performance offirms, industries, clusters, and economies, in thecontext of the ecology of firm and places.


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Base of the pyramid as a new frontier ininternational strategyAs the introduction to this article suggests, theconceptualization underpinning most of the workon global strategy to date has been relativelystraightforward: to find the proper balance betweenglobal integration and local responsiveness (e.g.,Prahalad and Doz, 1987; Bartlett and Ghoshal,1989). Over the past two decades, we have learnedthat industries vary significantly with regard to thisbalance: global consumer products companies, forexample, cannot be managed in the same way asglobal automobile companies. We have also learnedthat, within global businesses, it is important toorganize key functions – R&D, operations, andmarketing – in different ways to take advantage ofthe optimal mix of global scale and local differencesin each. Furthermore, we have seen that certainindustries and businesses may well be evolvingtoward a ‘transnational’ model that combinesaspects of both global efficiency and local respon-siveness, and takes advantage of the ability ofMNCs to leverage learning across-country markets.

Significant as this work has been, however, itleaves many stones unturned in our quest forunderstanding the dynamics of globalization andits implications for international strategy. As theprevious sections suggest, semiglobalization, insti-tutional voids, and the existence of multiple levelsof analysis offer important new lenses for framingresearch in international business. Each offers thepotential for a more nuanced understanding of the‘ecology of places and firms’ that is so important tothe international business research agenda of thefuture.

However, even this work, important as it is,examines only what is readily visible in interna-tional markets – the 1 billion or so people at the topof the economic pyramid – while virtually ignoringthe majority of the phenomenon that lurks below –the 4–5 billion people around the world living inpoverty who have been largely bypassed, or evendamaged, by globalization. This section, therefore,is an attempt to articulate the IB strategic logic foralso focusing on the ‘base of the pyramid’ as animportant new research frontier in internationalstrategy.

Why the base of the pyramid?With the fall of communism in the late 1980s,academic work on emerging market strategy (likeits cousin, global strategy) experienced rapidgrowth, as transition economies opened their

markets to foreign investment (e.g., Hoskissonet al., 2000). By the late 1990s, however, corporatemomentum in emerging markets had slowed con-siderably. The prospect for millions of new middle-class consumers in the developing world was vastlyoversold. The Asian and Latin American financialcrises put a damper on the rate of FDI. The events ofSeptember 11, 2002 then served to further hastenthe retreat. Established markets became increas-ingly saturated, leaving MNCs wondering wherefuture growth would come from (Prahalad andHart, 2002).

In addition, there has been a rising tide of anti-globalization sentiment around the world. Demon-strations from Seattle to Cancun have made itapparent that, if corporate expansion is seen tocome at the expense of the poor and the environ-ment, it will encounter vigorous resistance. Indeed,as MNCs sought to satisfy shareholders by enteringemerging markets, they increasingly heard con-cerns from many quarters about environmentaldegradation, labor exploitation, cultural hege-mony, and loss of local autonomy (Hart andChristensen, 2002). The recent scandals involvingmajor global corporations such as Enron andWorldCom have served only to fan the flames ofanti-corporate sentiment.

With the benefit of hindsight, we can now seemore clearly why many MNC global and emergingmarket strategies from the 1990s have been failures.The truth is, they were neither very global norparticularly emerging market oriented. Indeed, thevast majority of FDI over the past decade has beendirected at the established markets in the developedworld, particularly the US and Europe, not theemerging markets of the developing world (Sachs,1998). Developed countries have also been thecontext for most international business researchover the past decade (e.g., Tallman, 2001). In thedeveloping world, most FDI has targeted only thefew ‘large market’ countries such as China, India,and Brazil. And, even there, most MNC emergingmarket strategies have focused exclusively on theelite and emerging middle-class markets, ignoringthe vast majority of people considered too poor tobe viable customers (de Soto, 2000).

Many reasons have been offered to justify andexplain MNC preoccupation with the top of theeconomic pyramid in emerging economies: Hittet al. (2000), for example, suggest that suchcustomers are more similar to American, European,and Japanese consumers, that MNCs are accus-tomed to serving, and thus present less ‘psychic


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distance’ than do the impoverished inhabitants ofshantytowns and rural villages. Khanna and Palepu(1997, 2000a) point to the lack of importantinstitutions in the developing world, that makesconventional MNC operations all but impossible.Indeed, there is a healthy literature focusing onhow MNCs can address gaps in the businessenvironment in emerging economies through theuse of alliances, networks, and interpersonal tieswith local players (e.g., Beamish, 1987; Peng andLuo, 2000; Khanna and Rivkin, 2001a).

Unfortunately, MNC strategies aimed at tailoringexisting products to better fit the needs of the elitesand rising middle classes in the developing worldhave inadvertently resulted in a form of ‘corporateimperialism’ (Prahalad and Lieberthal, 1998). Theincremental design changes and cost reductionsassociated with this strategy have not succeeded inmaking products and services available to the massmarkets in the developing world (Arnold andQuelch, 1998). The net result is that four billionpeople at the bottom of the economic pyramid –fully two-thirds of humanity – have been largelyignored both by MNCs and by IB researchers. Theyhave been bypassed by globalization, their needsare being poorly met by local vendors, and they areincreasingly the victims of corruption and activeexploitation (Chambers, 1997).

With stagnation in the established markets of theworld economy and rising anti-globalization senti-ments, however, the opportunities for entering thebase of the pyramid are becoming increasinglyattractive to both managers and scholars. GDP percapita figures fail to capture the dynamism thatexists among the aspiring poor. Indeed, it isestimated that well over half of total economicactivity in the developing world takes place outsideof the formal economy, in the so-called ‘extra-legal’sector: this translates into more than $9 trillion inhidden (unregistered) assets among the world’spoor (de Soto, 2000).

In short, the emerging market opportunity maybe much larger than thought previously. However,the new untapped source of market promise is notthe wealthy few in the developing world, or eventhe rising middle-class consumers – it is the billionsof aspiring poor who are joining the marketeconomy for the first time (Prahalad and Hart,2002). However, capturing the opportunity at thebase of the economic pyramid will, in all like-lihood, require radical innovations in strategicthinking. Indeed, as Dawar and Chattopadhyay(2002) observe, it makes little sense for MNCs to

develop homogeneous country strategies in emer-ging markets (e.g., China strategy). Instead, itwould be far more appropriate to craft separatestrategies for the wealthy, rising middle class, andfor poor customers, across-country markets (Hartand Milstein, 1999). Thus the base of the pyramidis virtually uncharted territory and opens upan entirely new field of inquiry for the JIBScommunity.

Base of the pyramid: a new IB research priorityFor the past 5 years, a group of IB scholars9 hasbegun to pursue this research trajectory. Early work(e.g., Hart and Milstein, 1999; Christensen et al.,2001; Hart and Christensen, 2002; Prahalad andHammond, 2002; Prahalad and Hart, 2002) focusedon articulating the strategic logic for pursingbusiness strategies aimed at the four billion poorat the base of the pyramid. In 2000, the group ofcolleagues at the University of North Carolina’sKenan-Flagler Business School created the Base ofthe Pyramid (BOP) Learning Laboratory. The BOPLearning Lab is a consortium of companies, NGOs,and academics interested in identifying, evaluating,and quantifying the critical parameters and inter-dependences that govern these market segmentsand that translate into strategies for value crea-tion.10

In 2002, the UNC group won a 3-year researchgrant from the National Science Foundation toconduct a longitudinal study of BOP ventures beingpursued by the MNC members of the Learning Lab(Milstein and Hart, 2002). As part of this effort, over30 cases have already been produced detailing thestrategies and business models of ventures focusedon the BOP. These include local companies andnon-profits as well as MNC initiatives. Early find-ings from this work have now been summarizedand placed in the context of the literatures onglobal and emerging market strategy (e.g., Londonand Hart, 2003).

Some tentative conclusions, based largely uponinterviews, case-comparative analyses, and groundedtheory building, include the following:

(1) Incremental adaptation of existing technologiesand products is not effective in the BOP.Successful entry into the BOP appears to requirea new approach to product development basedupon deep listening and codevelopment withlocal partners.

(2) The BOP forces MNCs to rethink businessmodels fundamentally. Companies apparently


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need to transform their understanding of scale,from ‘bigger is better’ to a strategy of distributedsmall-scale operations married to world-scalecapabilities such R&D and learning transfer.

(3) The BOP also appears to demand a businessmodel premised upon capital efficiency andemployment intensity rather than the conven-tional MNC mentality of capital intensity andlabor efficiency.

(4) Given the small-scale and distributed nature ofBOP ventures, it appears to be important tobuild relationships with local governments,small entrepreneurs and non-profits rather thandepend upon familiar partners such as centralgovernments and large local companies.

(5) Building relationships directly and at the locallevel contributes to the social capital necessaryto overcome the lack of formal institutions suchas intellectual property rights and the rule oflaw.

(6) As the BOP possesses neither the institutionalinertia nor the incumbent density that exists atthe top of the pyramid, it appears to offer theideal conditions for incubating new, leapfrogtechnologies.

(7) The base of the pyramid appears to be especiallyappropriate for disruptive technologies thatdramatically reduce environmental footprintand increase social benefit (e.g., renewableenergy, distributed generation, micro-credit,wireless IT, biotechnology), given the largepopulations involved.

(8) Business models forged successfully at the baseof the pyramid have the potential to travelprofitably to higher income markets, offeringhuge growth potential. It appears to be easier toadd cost and features to a low-cost businessmodel than to remove cost and features from ahigh-cost business model.

The early work in this new domain confirms theinitial assumptions that the base of the pyramidcontains fundamentally new challenges for thefield of international strategy, and that we haveonly scratched the surface. Indeed, widening thestrategic bandwidth to include the base of thepyramid appears to have significant implicationsfor global and emerging market strategy, innova-tion theory, and theories of economic developmentand comparative advantage.

As we have seen, the BOP highlights significantlimitations in current thinking with regard toglobal and emerging market strategy. Indeed,

attempts to leverage existing MNC capabilities inglobal integration or local responsiveness appear tobe wholly inadequate when entering the BOPspace, suggesting the need for new capabilitydevelopment (London and Hart, 2003). Further, asthe BOP carries with it new and challengingconstraints (e.g., the need for dramatically lowercost structures, a smaller environmental footprint,difficult physical conditions, different culturaltraditions), it might not only help to expand ourthinking about global and emerging market strat-egy, but also enrich our understanding about thenature of lead markets in the innovation process.Rather than focusing exclusively on the mostsophisticated customers as the lead markets (e.g.,von Hippel, 1988), it might also be productive tofocus on the poorest and least sophisticatedcustomers as incubators of the innovation process.In fact, establishing positions in BOP markets mayturn out to be crucial to long-term competitivesurvival in the coming decades as top-of-the-pyramid markets become increasingly saturated(Hart and Christensen, 2002; Prahalad and Hart,2002).

With regard to economic development theory,the unique and disruptive character of BOP marketscould help to reframe the current thinking withregard to comparative advantage, where developingcountries must follow a predictable course ofcommodity production, labor cost, and assemblyplatform strategies before making the leap totechnology- and knowledge-based capabilities(Easterly, 2002). Indeed, the BOP could serve as anincubator for entirely new and globally competitiveenterprises and industries, with developing countrycompanies leading the way. This could provide anew lens for thinking about national economicdevelopment strategy (Christensen et al., 2001).

Some specific research questions with regard tothe implications of the BOP for MNC strategyinclude the following:

(1) Can MNCs effectively serve the bottom of thepyramid? Can they overcome lack of familiaritywith these contexts and their liability offoreignness? Can they design business modelsthat compensate for the lack of institutions suchas IP protection and the rule of law and avoidthe corrosive effects of corruption?

(2) Can MNCs design profitable strategies andbusiness models to serve the BOP? What arethe implications for structure/governance, alli-ances and partnerships, technology and product


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development, supply chain and distribution,and knowledge transfer?

(3) Can MNCs grow and make money whilesimultaneously catalyzing sustainable develop-ment? Can corporations serve as agents ofpoverty alleviation, environmental restoration,and world betterment while simultaneouslydeveloping entirely new and profitable markets?

Looking forwardAs we enter the 21st century, the institutions ofglobal capitalism find themselves increasinglyunder siege. Following the fall of communism inthe late 1980s, a decade of economic globalization,privatization, and free trade has produced mixedresults at best. While developed countries havegrown richer, the vast majority of nations andpeople in the world have not benefited from theapparent triumph of global capitalism. Further-more, the underlying natural systems supportinghuman economies – forests, fisheries, soils, ecosys-tems, and climate – have all experienced continu-ing decline. A rising tide of ‘anti-globalization’ hasemerged that combines concerns about environ-mental degradation, inequity, human rights, andloss of local autonomy. And terrorism – theultimate form of anti-globalization – is on the rise,driven by poverty, hopelessness, and desperation.

In many ways, global capitalism – and IB research– find themselves at a crossroads. Continuing tofocus exclusively on the 800 million consumers atthe top of the pyramid appears to lead only tooblivion: it can produce neither the market growthnor the societal legitimacy required for the eco-nomic globalization process to continue to thrive.Through a new focus on the base of the economicpyramid, however, global capitalism has the oppor-tunity to bring the benefits of the market system tothe entire human community of 6.2 billion in away that respects both cultural diversity and theenvironment. Indeed, the BOP offers firms theopportunity to design entirely new strategies thataddress simultaneously the growing opposition toglobalization and the limitations associated withthe global environment.

From an academic perspective, we know verylittle about how to formulate and implementsuccessful international strategies focused on thebase of the pyramid. Indeed, the BOP offers a hostof new and important research questions andcontexts that have the potential to add greatly toour understanding of the ecology of firms and

places so important to the field of internationalstrategy. It is time that we, as a community ofscholars, got on with the research needed to movethis agenda forward.

ConclusionsThis paper has presented several perspectives toopen a new frontier in the understanding ofinternational strategy. To explore it, we haveproposed the analogy of the ecology of firms andplaces as a way to emphasize that the real problemis the colocation of different places with differenttypes of firm. Locations are in fact the distinctivecontent of international business strategy. Thefundamental overarching question, therefore, is‘why do countries or location differ?’

Answering this question is fundamental. How-ever, differences across countries must be addressedwith integrative frameworks that go beyond uni-lateral measures of difference, pay implicit atten-tion to industry content, and draw out implicationsfor firm strategy, so as to shed light on thisfundamental issue in international business strat-egy. The proposed concept of ‘semiglobalization’and the CAGE model are important steps in thisdirection.

However, understanding places is very complex.Differences in the development of intermediarymarkets in a particular place influence firm posi-tioning and industry structure in that place.Furthermore, the impact of institutional voidscrosses different places as alternative firm organiza-tions compete to take advantage of these differ-ences. The evolution of these intermediary marketsis then endogenous to the ecology of places andfirms in a systemic, integrative way that makessimplifications extremely risky in the design ofcompetitive strategy in an international context. Infact, it is impossible to discuss the efficient cross-border movement of talent, people, or ideas with-out thinking through the business decisions ofthese specialized intermediaries.

Places, firms, and strategies form a complexecology. Multilateral measures of difference, inter-related with intermediary markets, make the ‘real’geography of places extremely difficult to under-stand and use in competitive strategy. The proposedframework to understand the geography–strategylink incorporates different levels of analysis, neweconomic actors, and a set of primitives (activities,resources, and knowledge), and focuses on the keydrivers of economic performance at all relevantlevels.


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Finally, firms around the ecology of places, andwe as scholars in IB, face the great challenge ofbringing prosperity everywhere and not just to asmall privileged group. It is the challenge ofdeveloping strategies and business models to servethe majority of humanity that is currently excludedfrom world trade. It is the challenge of doing so in aprofitable way but also in a way that is socially andenvironmentally feasible given limited worldresources. It is a fundamentally different way ofthinking about the ecology of places and firms:changing firms to impact on places in a greattransformation for the future.

Moving forward with this research agenda repre-sents major challenges and research opportunities.Neither does this agenda represent the only frontierthat IB scholars need to explore. However, webelieve that it is a most intriguing one, with thecapacity to impact on both research and manage-ment practice. In this perspective paper, we haveadvanced a view of the world as an ecology oflocations and firms as a way of exploring theessential differentiating element in internationalstrategy.

AcknowledgementsThis paper is based on a panel at the First AnnualConference on Emerging Research Frontiers in Inter-national Business Studies, organized by the Journal ofInternational Business Studies (JIBS), to discuss severalnew lines of research in international strategy. Eachpanelist took particular responsibility to write hiscorresponding section. Excluding the introductionand conclusions, the order of authorship is P Ghema-wat, T Khanna, M Enright, and S Hart. We wish toacknowledge the insightful guidance of A Lewin in thedevelopments of this paper. The support of the‘Anselmo Rubiralta’ Center for Globalization andStrategy is highly appreciated.

Notes1Admittedly, at this polar extreme there would still

be room for interesting cross-country comparativeresearch aimed at correcting for the US-centricapproach that continues to pervade most ‘main-stream’ strategic thinking. However, such researchshould properly be classified as a contribution tosingle-country strategy: that is, domains 1 or 2 of thematrix in Table 3, rather than domains 3 or 4.

2If pressed to unbundle the CAGE frameworkfurther, it would probably involve splitting the admin-istrative category into institutional precommitments,government policies and interest group politics/poli-

tical preferences that have the power to influencepolicies over time. It would also be necessary toelaborate further on variations in the usage specificityof the relevant economic factors, inputs, infrastructure,etc.

3Porter’s diamond framework does afford moredegrees of freedom than, for example, the GlobalCompetitiveness Index because of its industry specifi-city, the attractions of which are discussed below.However, the point about indexicality continues toapply to the diamond framework, given its focus oncompetitiveness without systematic attention to thevariations in distance, along various dimensions,between countries.

4For a somewhat more extended discussionof indexicality in a broader social science context,see Abbott (2001), especially pp 11–12 andChapter 6.

5According to Pike: ‘The etic view is cross-cultural inthat its units are derived by comparing many systemsand by abstracting from them units that are synthe-sized into a single scheme that is then analyticallyapplied as a single system. The emic view is mono-cultural with its units derived from the internalfunctional relations of only one individual or cultureat a time.’

6Whereas one can posit conceptual links betweeninstitutional voids and sustainability, we know of noformal work that establishes whether positions aresustained for differentially long periods based onambient institutional voids.

7The field study also reached similar conclusionsabout Indian business groups during the several yearsfollowing deregulation of cross-border activity (1991–1997).

8Outside the realm of economic reasoning thatinforms this section, the issue of effects of multi-nationals is one that continues to receive muchattention. For example, do multinationals compromisenational sovereignty? Do multinationals crowd outlocal culture? and so on

9Including CK Prahalad (University of Michigan), CChristensen (Harvard Business School), MA Rodrıguez(IESE Business School), S Sharma (Wilfrid LaurierUniversity), A Hammond (World Resources Institute),I Gomez and N Guttierez (Tec Monterrey), and JJohnson, T London, M Milstein, E Simanis, and L Jones(University of North Carolina).

10The BOP Learning Lab’s contributing membersinclude DuPont, HP, J&J, P&G, SC Johnson, Ford,Dow, Coke, and Tetrapak. Non-profit organizationssuch as the Grameen Foundation and the WorldResources Institute are also actively involved.


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About the authorsJoan Enric Ricart is Associate Dean for researchand the doctoral program and chairman of thegeneral management department at IESE BusinessSchool, University of Navarra. He holds Doctoral

Degrees in Industrial Engineering (UniversidadPolitecnica de Catalunya, 1982), Managerial Eco-nomics (Northwestern University, 1984), and Eco-nomics (Universidad Autonoma de Barcelona,1985). He is President of the European Academyof Management and Associate Editor in Chief forJIBS.

Michael Enright is the Sun Hung Kai Professor ofBusiness Administration; head of the Economics,International Business, and Strategy Group; anddirector of the Asia-Pacific Competitiveness Pro-gram at the University of Hong Kong. He receivedhis A.B., MBA, and Ph.D. from Harvard Universityand taught at the Harvard Business School beforemoving to Hong Kong.

Pankaj Ghemawat is the Jaime and Josefina ChuaTiampo Professor of Business Administration atHarvard University’s Graduate School of BusinessAdministration and Head of the Strategy Unit. Heholds an A.B. in Applied Mathemetics and a Ph.D.in Business Economics from Harvard University,where he has taught since 1983. In 1991, he wasappointed the youngest full professor in theBusiness School’s history.

Stuart Hart is the S.C. Johnson Professor ofSustainable Global Enterprise at Cornell Univer-sity’s Johnson School of Management. He is alsoProfessor of Management and Founding Director ofthe Center for Sustainable Enterprise at the Uni-versity of North Carolina’s Kenan-Flagler BusinessSchool. He has received numerous honors andawards for his work in the area of sustainableenterprise, including the 1997 McKinsey Award forBest Article in the Harvard Business Review and the2001 Moskowitz Prize for outstanding research inthe field of socially responsible investing.

Tarun Khanna is Professor and Novartis Fellow atthe Harvard Business School, where he has been amember of the Strategy group since 1993. Bachelorof Science in Engineering (Electrical Engineeringand Computer Science) degree, summa cum laude,Phi Beta Kappa, from Princeton University, andPh.D. in Business Economics from Harvard Uni-versity. He is course head for the required Strategycourse in the MBA program and teaches in execu-tive education programs worldwide. He is a Depart-mental Editor for JIBS.

Accepted by Arie Lewin, Editor in Chief, 12 February 2004. This paper has been with the author for two revisions.


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New frontiers in international strategy...across international markets (Kogut and Zander, 1993). The internationalization process has also received attention (Johanson and Vahlne,

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