Home Country Underdevelopment and Internationalization: Innovation-Based and Escape-Based Internationalization

Abstract

We use the rise of emerging-market multinationals as a vehicle to explore how a firm’s country of origin influences its internationalization. We argue that the home-country’s institutional and economic underdevelopment can influence the internationalization of firms in two ways. First, emerging-market firms may leverage innovations made at home to cope with underdeveloped institutions or economic backwardness to gain a competitive advantage abroad, especially in other emerging markets; we call this innovation-based internationalization. Second, they may expand into countries that are more developed or have better institutions in order to escape weaknesses on these fronts at home; we call this escape-based internationalization. Comparative disadvantages influence the internationalization of the firm differently from comparative advantage as it forces the firm to actively upgrade its firm-specific advantage and internationalize.

Keywords: merging markets, institutions, economic development, multinationals, international business

JEL Classification: F23