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IBR 1291 No. of Pages 9

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International Business Review

journal homepage: www.elsevier.com/locate/ibusrev

The limits of rm-level globalization: Revisiting the FSA/CSA matrix

Jenny Hillemanna,* , Michael Gestrinb
a
Vrije Universiteit Brussel, Brussels, Belgium
b
OECD Investment Division, Paris, France

A R T I C L E I N F O A B S T R A C T

Article history: Multinational enterprises (MNEs) engaging in foreign direct investment (FDI) need advantages allowing
Available online xxx them to offset the liability of foreignness in host countries. This liability of foreignness gives rise to
additional operational costs related to economic, institutional, and cultural differences between home
and host countries. MNEs therefore need to own or control rm-specic advantages (FSAs) that, along
Keywords: with country-specic advantages (CSAs) and internalization advantages, affect international business
Firm-specic advantages
transactions. In this paper, we revise Rugmans classic FSA/CSA matrix to better reect how rms bundle
Country-specic advantages
their assets with CSAs. We further contribute to the prior debate on the linkages between the global
Global factory
Foreign direct investment
factory paradigm and internalization theory by empirically evaluating the validity of a key proposition
Ownership associated with the global factory, namely that FDI becomes relatively less important as a building block
Control of the modern MNE. We do so using data on FDI and cross-border mergers and acquisitions, a major
component of FDI.
2016 Elsevier Ltd. All rights reserved.

1. Introduction In a literature review covering fty years of IB theory, Rugman,

Alan Rugman was one of the most inuential scholars in the
international business eld. In the early years of his academic
career, through intellectual exchanges with other inuential
research colleagues, especially Peter Buckley, Mark Casson, John
Dunning, Jean-Francois Hennart and David Teece (Narula &
Verbeke, 2015; Rugman, 1981), Rugman turned rapidly from an
international economics into an internalization theory scholar,
though always aligning his work with microeconomics principles
(Rugman, 1980a, 1981, 1986; Verbeke, 2015).
Whereas Buckley and Casson (1976) focused on the global
economy as the unit of analysis in their net coordination benets
approach to internalization theory, Rugman applied a managerial-
ly-oriented approach. He thereby created his own version of
internalization theory focusing on the rm-specic advantages
(FSAs) held by an individual rm and thus dening the rm as the
relevant unit of analysis. In addition to FSAs, Rugman considered
location, in the form of country-specic advantages (CSAs), as an
important determinant for MNE decision-making, ultimately
leading to his well-known FSA/CSA matrix (Narula & Verbeke,
2015).
* Corresponding author at: Department of Business, Vrije Universiteit Brussel,
Pleinlaan 2, 1050 Elsene, Brussels, Belgium.
E-mail addresses: jenny.hillemann@vub.ac.be (J. Hillemann),
Michael.Gestrin@oecd.org (M. Gestrin).
Verbeke and Nguyen (2011) have emphasized three different units
of analysis used in the IB literature. In the rst stage of modern IB
studies, mainstream scholars (see e.g., Vernon, 1966; Dunning,
1958; Rugman, 1980b) considered country factors as the unit of
analysis. Here, the interactions between a multinational enterprise
(MNE) and the country-specic advantages of its home country led
to international expansion in the host country.
In the second stage of modern IB studies, Hymer (1960)
introduced a more MNE-centric approach focusing on FSAs as the
unit of analysis since FSAs were assumed to be required to
overcome the liability of foreignness when internationalizing to a
foreign market (Hymer, 1960; Zaheer, 1995). However, Hymer
(1960) overestimated the potential for successful FSA exploitation,
due to structural market imperfections (Dunning & Rugman, 1985)
such as government regulations and entry barriers amongst others.
As a result, only few MNEs appear able to operate as truly global
rms with revenues and assets equally distributed across the
broad triad of North America, Europe and Asia (Rugman, 2005;
Rugman & Verbeke, 2004, 2008a, 2008b, 2008c).
In the third stage of modern IB studies, the focus has shifted to
the international subsidiaries of MNEs as the unit of analysis. Here,
Birkinshaw (1996, 1997, 2000), building upon Rugman and
colleagues earlier work (Rugman & Bennett, 1982; Rugman,
1983) was among the rst to analyze resource recombinations of
home and host country CSAs as well as FSAs that could ultimately
result in new FSA development benetting the entire MNE
network and increasing the overall competitive advantage of the

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Please cite this article in press as: J. Hillemann, M. Gestrin, The limits of rm-level globalization: Revisiting the FSA/CSA matrix, International
Business Review (2016), http://dx.doi.org/10.1016/j.ibusrev.2016.01.018
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IBR 1291 No. of Pages 9
2 J. Hillemann, M. Gestrin / International Business Review xxx (2015) xxxxxx
MNE (Rugman, Verbeke & Nguyen, 2011). To assure the optimal
coordination across the MNE network, effective managerial
planning is needed across the headquarters and foreign subsidiar-
ies. Buckley and colleagues (Buckley, 2009a, 2009b, 2010, 2011,
2012; Buckley & Ghauri, 2004; Buckley & Strange, 2015) describe
such a system with internationally dispersed activities as a global
factory.
In this paper, we incorporate all three units of analysis and
examine interactions between country-, rm- and subsidiary-level
determinants explaining the choice to engage in FDI and ultimately
the international architecture of the modern MNE. In doing so, we
build upon Alan Rugmans intellectual legacy and contribute to the
IB literature in two ways:
 First, we revisit Rugmans (1981,2006) classic FSA/CSA matrix,
adapting it to better reect how rms bundle their assets with
host country CSAs. By emphasizing the efciency of markets for
FSAs and CSAs (as opposed to the autonomous qualities of these)
this adapted FSA/CSA matrix can provide a more intuitive
explanation of the mix of modalities used by MNEs to organize
themselves internationally, depending on the efciency of
markets for FSAs and CSAs. The adapted matrix provides a
conceptual bridge linking the global factory paradigm and
internalization theory (see e.g., Buckley, 2009a, 2009b, 2010,
2011, 2012; Buckley & Strange, 2015; Hillemann & Verbeke,
2014).
 Second, the internalization dynamics that underpin the global
factory paradigm and hence the ne-slicing of economic
activities (Buckley, 2011, 2012; Buckley & Ghauri, 2004) dictate
that MNEs should progressively reduce their ownership of
physical assets as markets for FSAs and CSAs become more
efcient (Hillemann & Verbeke, 2014: 35). To our knowledge, this
theoretical proposition has not been empirically tested in the
international business literature before. Using data on FDI and
cross-border mergers and acquisitions (M&A) we nd evidence
in support of this proposition at both the country and rm level.
In the following section, we revisit the FSA/CSA matrix and
discuss linkages with the asset bundling approach and the global
factory paradigm. We introduce an efciency-based FSA/CSA
matrix, which provides a conceptual bridge linking the global
factory paradigm and internalization theory. We then present our
empirical analysis of cross-border ownership trends, discuss our
ndings and nally provide some conclusions.
Firm-specific advantages (FSAs)
Strong
Country-specific
advantages (CSAs)
Weak
Fig. 1. The classic FSACSA framework.
Source: Based on Chapter 8 in Rugman (1981, 2006).
Please cite this article in press as: J. Hillemann, M. Gestrin, The limits of rm-level globalization: Revisiting the FSA/CSA matrix, International
Business Review (2016), http://dx.doi.org/10.1016/j.ibusrev.2016.01.018
2. Theory: the FSA/CSA matrix revisited
2.1. The classic FSA/CSA matrix
Most IB scholars (see e.g., Hymer, 1960; Zaheer, 1995) would
agree that MNEs entering foreign markets need to offset the
liability of foreignness, which leads to additional operational costs
related to economic, institutional and cultural differences between
home and host countries. To do so, MNEs deploy their FSAs which,
along with CSAs and internalization advantages, determine the
form and competitiveness of the international operations of an
MNE and hence compensate for the disadvantages vis--vis
relevant rivals in the host country (Dunning, 1988; Rugman &
Verbeke, 1992: 762).
FSAs are unique resources and resource combinations ranging
from competences in innovation to transactional advantages. The
latter refer to the MNEs capabilities of economizing on transac-
tion costs as a result of the multinational coordination and control
of assets (Buckley & Casson, 1976; Dunning & Rugman, 1985;
Rugman & Verbeke, 1992: 762). In addition to FSAs, internalization
theory (Hennart, 2009; Rugman, Verbeke & Nguyen, 2011)
assumes MNEs leverage their home-country advantages, or CSAs.
Examples include natural resources, the local product demand, and
favourable political and administrative rules (Dunning & Lundan,
2008; Hennart, 2009; Rugman & Collinson, 2008; Rugman &
Verbeke, 1990; Verbeke, 2013).
The conceptual basis of the FSA/CSA matrix was developed in
Rugman (1981, 1988), and Rugman, Lecraw and Booth (1985).
These documents suggested the differentiation between FSAs as
managerial decision factors, and CSAs as environmental factors.
More specically, FSAs were considered to refer to a rms
competitive strength, e.g., resulting from advantages in upstream
(R&D) and/or downstream (marketing/customization) capabilities.
In contrast, CSAs were considered to refer to exogenous country-
level factors (e.g., economics and culture) that ultimately inuence
international business (Collinson & Rugman, 2011).
The classic FSA/CSA matrix (Fig. 1) can variously be used to
explain, predict, or prescribe the optimal organization of an MNEs
international operations.
In cell 1, country factors alone determine the MNEs interna-
tionalization. Examples include expansion decisions that are
driven by natural resources and low cost labour production. In
this cell, the main sources of the MNEs competitive advantages are
resource-based with ownership of intangible assets being of less
importance given the MNEs focus on commodity-type products
Weak Strong
1 3
2 4
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and its late stage in the product life cycle (see also Rugman & Li,
2007).
In cell 2, both rm and country factors are weak and thus
internationalization results from awed decision-making rather
than rational strategic motivations. Failed international expansion
strategies of MNEs can often be explained as a combination of
weak FSAs and CSAs. Wal-Marts (United States) ill-fated expansion
into Germany beginning in 1997 is one of many well-documented
examples (Verbeke, 2013). When internationalizing, rms need to
build upon their reservoir of non-location-bound FSA bundles and
combine these with location advantages in the host country.
However, in this example, Walmart did not succeed in developing
and subsequently deploying sufcient non-location-bound FSAs.
At the same time, the German retail market was subject to erce
competition, strict regulations and a distinctive union and co-
determination system (Verbeke, 2013: 150) ultimately weakening
the location advantages in Germany and thus hindering the
replication of Walmarts business model.
In cell 3 the combination of strong CSAs and FSAs can give rise to
new FSAs. The expansion of Shiseido to France provides an
excellent example. As Japans market leader in make up and skin
care products, Shiseido had developed strong bundles of FSAs that
were efciently exploited during its early stages of internationali-
zation. However, Shiseido lacked knowledge about the perfume
business to compete internationally in this market. In the 1980s, it
therefore decided to enter the French market and to absorb French
perfume development techniques. By establishing joint ventures
and wholly owned subsidiaries as well as acquiring French beauty
salons, the Japanese rm was granted access to local fragrance
knowledge. As a result of Shiseidos recombination capabilities, it
was able to bundle its non-location-bound FSAs with the coveted
location advantages in France ultimately leading to the successful
launch of Shiseidos international fragrance product line (for more
details, see Verbeke, 2013).
In cell 4, the existence of MNEs can be explained from a pure
resource-based view since these rms only rely on their own
strengths. Country factors do not contribute to the internationali-
zation and international success of these rms. These types of
rms are characterized as owners of valuable tacit knowledge in
e.g., marketing, brands and services, which is specic to the rm
(Collinson & Rugman, 2011). In reality, this case is almost non-
existent, since rms do not arise out of a vacuum.
MNEs firm-specific advantages (FSAs)
Inefficient
markets
Efficient
markets
Resources
available in the
host country
Inefficient
markets
Fig. 2. The revised FSA/CSA framework.
Source: Based on Grgaard and Verbeke (2012) and Hennart (2009).
Please cite this article in press as: J. Hillemann, M. Gestrin, The limits of rm-level globalization: Revisiting the FSA/CSA matrix, International
Business Review (2016), http://dx.doi.org/10.1016/j.ibusrev.2016.01.018
3
2.2. The revised FSA/CSA matrix
Recent developments in IB research suggest some modica-
tions to the classic FSA/CSA matrix. In line with Meyer, Estrin,
Bhaumik and Peng (2009), the FSA/CSA matrix advocates the
combination of both environmental context related parameters (as
a subset of CSAs) and the resource-based view (taking into
consideration the type and strength of FSAs). The matrix also
reects on the latest internationalization theory thinking empha-
sizing the focus on the liability of outsidership rather than the
liability of foreignness (Johanson & Vahlne, 2009). Outsidership
refers to the access to complementary assets in the host
environment or rather the lack of such access, mainly because
of relational shortcomings (Rugman et al., 2011: 768).
Past research has often oversimplied the nature of CSAs,
focusing mainly on generic CSAs such as low labour costs (e.g., in
discussions of international expansions to China), and has given no
serious consideration to the MNEs access to complementary assets
in the host country. For example, entry mode scholars have mostly
adopted MNE-centric approaches (Chen, 2010; Hennart, 2009) and
implicitly assumed complementary assets to be freely accessible in
host markets (Hennart, 2009). However, such MNE-centric
approach assumes MNEs to be the sole decision-makers and
overlooks the importance of third parties as owners of CSAs
embedded in local assets (Verbeke & Hillemann, 2013). In other
words, the classic FSA/CSA matrix ignores the transactional
characteristics of CSAs and assesses the rationale for internation-
alization from an MNE-centric perspective. The matrix thereby
ignores the critical role of complementary assets. However, when
entering a foreign market, MNEs require complementary assets for
the development of requisite location-bound FSAs and effective
asset bundling, i.e., linking extant non-location-bound FSAs with
complementary assets in order to fully exploit the host environ-
ment CSAs. As a result, the MNEs accessibility to such CSAs
ultimately co-determines the initial market entry and subsequent
operations (Hennart, 2009; Verbeke & Hillemann, 2013).
In order to address the above complexities, we suggest two
modications to the classic FSA/CSA matrix. First, we propose the
extension of the term CSAs so as to explicitly include comple-
mentary assets. We therefore introduce the more general term
resources available in the host country as a description on the
vertical axis. In contrast, CSAs of the home country are assumed to
be embodied in an MNEs non-location-bound FSAs to be
transferred to the host country (Verbeke, 2013). Therefore, home
Efficient
markets
1 3
2 4
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25 000

20 000

USD billions
15 000

10 000

5 000

0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Fig. 3. Global FDI stocks.
Source: OECD FDI statistics database.

country CSAs are not explicitly mentioned in either of the two recombination and development of new (non-) location-bound
matrices. Second, the actual access to the resources available in the FSAs.
host country is determined by the efciency of markets within In terms of what cell 3 implies for how the rm should
which such resources are transacted (Hennart, 2009). To overcome internationalize, the literature generally points to non-equity
the FSA/CSA matrix weakness in assessing the accessibility of modes since efcient markets for both FSAs and CSAs signicantly
CSAs, we propose to replace the terms strong and weak with reduce the need for internalization via FDI. For example, Hennart
efcient markets and inefcient markets respectively building (2009) suggests the bundling of assets through contractual
upon Hennarts (2009) 2  2 matrix. The revised FSA/CSA matrix agreements.1
is shown in Fig. 2. Finally, in cell 4 the MNE is able to leverage its FSAs through
In cell 1, efcient external markets for resources available in the non-equity modes of control (e.g., licenses, contractual arrange-
host country motivate internationalization while inefcient ments) and does not need to engage in FDI since its FSAs are
markets for FSAs will (or at least should) motivate the use of available in efcient markets. In this case, third parties in the host
FDI to protect these FSAs. As in the classic matrix, cell 1 could be country (including local rms) set up enterprises and access
associated with expansion decisions that are driven by natural complementary assets held by the MNE through contractual
resources and low cost labour production. However, in this market agreements. Whereas in cell 1, internalization was used by MNEs to
some (or all) of the rms FSAs cannot be effectively traded so the address inefcient external markets for FSAs, in cell 4 it is used by
rm internalizes these. An example of this would be that of a third parties controlling resources for which inefcient external
market for a natural resource in a country open to foreign markets prevail in the host country.
participation whereby licensing of an FSA associated with
proprietary extraction technology would allow competitors to 3. Results and discussion
acquire this technology due to weak intellectual property
protections. 3.1. Implications of the global factory paradigm for FDI: an empirical
In cell 2, external markets for both FSAs and resources available assessment
in the host country are inefcient. However, in contrast to the
classic matrix that has suggested the absence of internationaliza- The revised FSA/CSA matrix, which is based upon internaliza-
tion for this cell, the revised matrix proposes that the MNE would tion theory, assumes the optimal bundling, and thus the optimum
engage in close strategic partnerships with local partners in the ownership and location strategies as a function of rm-specic and
host country. Establishing a long-term partnership and thus host country-specic assets for individual economic activities.
relying on a third party may be a complex form of internationali- These key decisions are coherent with the global factory (Buckley,
zation for MNEs. Strategic failure in an MNEs international 2009a, 2009b, 2010, 2011, 2012, Buckley & Ghauri, 2004; Buckley &
expansion may occur since strategic partnerships involve complex Strange, 2015) suggesting a shift away from the rm as the main
contractual agreements combined with FDI to overcome the actor engaged in international production. Production within
inefcient markets for both the MNEs FSAs and the complemen- global value chains (GVCs) is increasingly ne-sliced insofar as
tary assets in the host country. rms can dene their organizational architecture in terms of (a)
Following the logic of the classic FSA/CSA matrix, cell 3 the slices they will treat as their core-activities and will therefore
represents the most compelling case for MNE internationalization internalize; (b) those slices they will seek to inuence or control
with strong FSAs as well as strong CSAs. In the revised cell 3, both
FSAs as well as the host country resources can be transacted in
efcient markets. Thus, MNEs are able to efciently bundle their 1
Even with highly efcient markets for FSAs and CSAs, there will always be a case
non-location-bound FSAs with the complementary assets in the for equity-based internationalisation since rms risk losing their core-competences
host country, ultimately leading to the full exploitation of location (Prahalad and Hamel, 1990) if they are overly reliant on arms length arrangements.
Often, rms fail to recognize the importance of core strengths (Hillemann and
advantages in the host country and thus the successful resource Verbeke, 2014). Core strengths should remain within the rm despite the fact that
the relevant markets are efcient and would normally suggest the outsourcing of
particular activities.

Please cite this article in press as: J. Hillemann, M. Gestrin, The limits of rm-level globalization: Revisiting the FSA/CSA matrix, International
Business Review (2016), http://dx.doi.org/10.1016/j.ibusrev.2016.01.018
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J. Hillemann, M. Gestrin / International Business Review xxx (2015) xxxxxx
12000
10000
8000
USD billions
6000
4000
2000
0 0%
Fig. 4. The importance of FDI relative to trade, OECD plus BRICS.
Source: OECD FDI statistics and WTO trade statistics databases.
through non-equity modes, and (c) those slices which can be
treated as commodities that can be simply purchased in external
(spot) markets. However, the revised FSA/CSA framework comple-
ments the global factory paradigm by providing a theoretical
explanation about which slices of global value chains rms should
be internalized. It thereby contributes in explaining and further
optimizing the two key analytical decisions relevant for each single
activity in the global factory network: control and location
(Buckley, 2009a, 2009b, 2010, 2011, 2012; Buckley & Ghauri,
2004; Buckley & Strange, 2015).
Most explanations for the emergence of the global factory relate
to improvements in markets for FSAs and CSAs. For example,
improved intellectual property rights and contract enforcement in
emerging economies make markets for FSAs more efcient. Better
ICT infrastructure and less red tape improves markets for resources
available in the host country. Within the context of the revised FSA/
CSA matrix, these improvements in the efciency of external
markets give rise to economic pressures upward and to the right,
towards cell 3, where the rm can most easily replace FDI with
non-equity forms of control. These global factory dynamics
thereby underpin the powerful proposition that MNEs should
reduce their ownership of physical assets (Hillemann & Verbeke,
2014).
In this section, we empirically examine whether or not rms are
actually reducing their ownership of physical assets with a
particular focus on their cross-border ownership of physical
assets. We do so from country- and rm-level perspectives.
3.2. Country-level cross-border investment trends
At a highly aggregated level, there is very little indication that
MNEs are reducing their cross-border ownership of physical assets.
Global FDI stocks have continued to grow strongly, with only a
slight pause in 2008, even in the wake of the global nancial crisis
that started that year (Fig. 3). However, this is not necessarily
inconsistent with the proposition that MNEs will reduce their
ownership of physical assets since a reduction of assets at the rm
level could be offset in the aggregate data by an increase in the
number of rms controlling foreign assets. As GVCs lead to ever
more ne-slicing, similar levels of FDI could become distributed
over a larger number of less vertically integrated MNEs, with lower
levels of cross-border ownership.
Another possibility is that cross-border ownership of assets,
while growing in absolute terms, is declining relative to trade. This
outcome would be consistent with the global factory paradigm and
the revised FSA/CSA matrix. MNEs would continue to engage in
Please cite this article in press as: J. Hillemann, M. Gestrin, The limits of rm-level globalization: Revisiting the FSA/CSA matrix, International
Business Review (2016), http://dx.doi.org/10.1016/j.ibusrev.2016.01.018
5
30%
25%
20%
OECD plus BRICS outward FDI
15%
OECD plus BRICS exports
10% Outward FDI lows/exports%
(right axis)
5%
cross-border investment but also rely more on contractual and
other non-equity relationships within GVCs, and as ne-slicing
advances using a mix of modalities that places greater emphasis on
non-equity relationships. Lavie (2006) argues that the competitive
advantage of interconnected MNEs depends upon the focal rms
ability to generate rents from resources without owning, but
quasi-internalizing them (see also Buckley, 2011). Also, Penrose
(1959) emphasized that rms should focus on the services that
resources might provide to generate value rather than on the
resources themselves. More recently, Hillemann and Verbeke
(2015) suggested a value capture system in which MNEs
determine the optimal contractual structure of activities as a
function of the entire MNE governance system. The latter implies
MNEs to internalize physical activities only if they cannot be
transacted in efcient markets. As a result of these ideas, FDI would
be expected to become relatively less important than trade in the
economic linkages between countries.
Fig. 4 presents the FDI outows and exports for the OECD and
the BRICS2 over time, as well as the value of FDI as a percentage of
the value of trade (right axis). In this comparison, we again nd
very little indication of a systemic decline in cross-border
ownership along the lines predicted by the global factory paradigm
or our revised FSA/CSA matrix. Although the ratio of FDI to trade is
currently low (at 10 per cent) compared with its historical average
(14 per cent), this would appear to be more consistent with the
cyclical relationship between FDI and trade, which has mirrored
closely the FDI boom and bust cycles, than a reection of a systemic
decline in the relative importance of FDI.
One possible reason that FDI stocks and ows have not shown
any signs of decline as predicted by the global factory paradigm is
that their composition has been changing to include a larger share
of investment that is not necessarily associated with the ownership
of physical assets. This is reected in the growing share of FDI going
into special purpose entities (SPEs), i.e., corporate entities that do
not engage in signicant production or employment but engage in
important nancial functions for the MNE. When a distinction is
made between SPEs and conventional operating afliates, a
completely new picture appears.
2
The OECD is comprised of Australia, Austria, Belgium, Canada, Chile, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland,
Ireland, Isral, Italy, Japan, Korea, Luxembourg, Mexico, Netherlands, New Zealand,
Norway, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Switzerland,
Turkey, United Kingdom, United States. The BRICS are Brazil, Russia, India, China,
and South Africa. These countries accounted for 84% of global outows and 76% of
global inows in 2013.
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6 J. Hillemann, M. Gestrin / International Business Review xxx (2015) xxxxxx

Table 1
FDI income payments by SPEs and operating afliates in Hungary, 2013.

Total income payments by SPEs 5408 Total income payments by operating afliates 6522
Of which: Of which:
Dividends 2464 Dividends 3876
Reinvested earnings 3531 Reinvested earnings 1896
Net interest payments 586 Net interest payments 751

Source: OECD (2015). How multinational Enterprises channel investments through multiple countries (research note available at www.oecd.org/investment/statistics).

what extent FDI statistics provide an inated picture of MNE

Target investments in physical assets and thus overly pessimistic view on
Domestic Foreign the assumed emergence of the global factory (Buckley, 2011, 2012;
1 3
Buckley & Strange, 2015).
In sum, the extraordinary increase in the share of FDI going into
Domestic $1,792 $321 SPEs (for countries for which these data are available) provides a
60% 11% possible explanation as to why aggregate FDI ows are not showing
any sign of decline, in contrast to what the theory behind the
revised FSA/CSA matrix predicts. This increased share is also
Acquirer 2 4
evidence of a related prediction associated with the global factory
paradigm, namely that cross-border nancial ows related to
$700 $183 intangible assets will increase relative to ows related to tangible
Foreign
23% 6% assets (Buckley, 2009b, 2012).

3.3. Firm-level cross-border investment trends

Fig. 5. Four types of M&A in host countries (2014, USD billions).
Source: Dealogic M&A Analytics database, authors' calculations.
In 2014, SPEs accounted for 75% of all inward FDI into the EU.
Some of this investment will nd its way into operating afliates,
but an important share of this component of FDI is related to tax
management as well as transactions related to asset services
(service contracts, labour contracts, licensing etc.).
As an illustration, Table 1 presents details on FDI income of
Hungary by instrument so that the behaviour of SPEs can be
compared with the behaviour of non-SPEs (operating afliates).
The SPEs reinvest a much higher share of their earnings than
operating afliates. As a result, SPEs account for a large share of
reinvested earnings of foreign-owned afliates in Hungary. While
it is not possible to know exactly how reinvested earnings are used
within the MNE, it can be assumed that most reinvested earnings
in SPEs are not invested in physical assets and will have little
impact on the host economy since SPEs have little physical
presence in the host economy. Unfortunately, for most countries
separate statistics are not available for SPEs, so we do not know to
We can extend the analysis in the previous section using data on
cross-border M&As. These data allow us to look more directly at
cross-border investments in physical assets since they do not
contain the sort of hidden non-operational investment ows
present in conventional FDI data. Furthermore, since these data are
at the rm level, they allow us to observe rm-level dynamics in
relation to our overarching question: are MNEs reducing their
ownership of physical assets?
Four possible types of M&A deals can take place in a country
depending on the nationalities of the acquirer and the target:
 A foreign rm can buy a domestically-owned target: this type of
deal could be described as the classic cross-border M&A deal. It is
this sort of deal that can give rise to concerns over economic
sovereignty and national security.
 A domestically-owned rm can buy a domestically-owned
target: Most M&A deals t into this category; it is the only type
of deal that is not cross-border.
 A foreign rm can buy a foreign-owned target: this type of deal
can be described as MNE-to-MNE.

90

80

70

60
Value of MNE-to-MNE deals
over MNE-domesc deals
per cent

50

40
Value of cross-border
30 divestment over MNE-to-
domesc deals
20

10

0
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Fig. 6. Shares of MNE-to-MNE and cross-border divestment in total cross-border M&A.

Source: Dealogic M&A Analytics database, authors' calculations.

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90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Fig. 7. Share of IM&A directed at core lines of business.
Source: Dealogic M&A Analytics, authors calculations.
 A domestically-owned rm can buy a foreign-owned target:
these deals could be characterized as investment de-globaliza-
tion since assets that are internationally-owned revert to
domestic ownership.
Fig. 5 presents the distribution of these four types of deals at the
global level in 2014. By far the largest share of M&As is still purely
domestic, accounting for 60 per cent of the total in 2014 (quadrant
1), followed by M&As involving foreign acquirers of domestically-
owned targets, which accounted for 23% (quadrant 2). This type of
cross-border M&As adds new international business linkages
between the host country and international markets. Quadrant
4 includes deals between MNEs, which accounted for 6 per cent of
the total. The two bottom quadrants combined represent the most
commonly reported measure of cross-border M&As. Finally,
quadrant 3 shows de-globalizing cross-border M&As, which
accounted for 11 per cent of the global M&A activity in 2014.
With respect to the question whether MNEs are reducing their
ownership of physical assets, quadrants 3 and 4 are both relevant.
Asset sales by MNEs to domestic buyers represent an unambiguous
reduction in cross-border ownership of physical assets. Asset sales
between MNEs are a bit more complicated to interpret insofar as
one MNEs reduction is another MNEs increase. Nonetheless, the
behavior of this series over time is interesting insofar as it could
relate to rm-level ne-slicing, GVC dynamics as predicted by the
global factory paradigm (Buckley, 2012; Buckley & Ghauri, 2004;
Buckley & Strange, 2015).
According to the global factory logic, rms will increasingly
outsource non-core business activities and focus their ownership/
direct control of assets in core-business activities, where their FSAs
reside (Buckley, 2012; Buckley & Strange, 2015). In terms of rm-
level FDI patterns, this could be expected to generate MNE-to-MNE
FDI in which one rm sheds what it considers non-core assets to an
acquirer for whom the assets are core.
Fig. 6 represents longitudinal data on MNE-to-MNE M&As
(quadrant 4 in Fig. 5) and cross-border divestments (quadrant 3 in
Fig. 5) both as a share of MNE acquisitions of domestic assets
(quadrant 2 in Fig. 5). The reason for comparing quadrants 3 and 4
with quadrant 2 of Fig. 5 is to gauge the relative importance over
time of deals that add to the tangible assets owned by MNEs versus
those we would associate with ne-slicing (quadrant 4, MNE-to-
MNE) and those we would associate with the replacement of
ownership with licensing (quadrant 3, MNE-to-domestic).
In Fig. 6 we see the growing importance of cross-border
divestments relative to cross-border M&As directed at turning
domestic assets into internationally-owned assets. During the dot.
com boom leading up to 2001, cross-border divestment was a
relatively unimportant part of the story, representing about 14 per
Please cite this article in press as: J. Hillemann, M. Gestrin, The limits of rm-level globalization: Revisiting the FSA/CSA matrix, International
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7
cent of the value of quadrant 2 M&As, i.e., MNEs acquiring domestic
assets. By the next peak in the cycle, cross-border divestment had
increased to 24 per cent of the value of quadrant 2. And then, when
cross-border investment collapsed starting in 2008, cross-border
divestment reached a record high of 46% versus cross-border
M&As.3 The relative importance of MNE-to-MNE deals has grown
more modestly but the upward trend is nonetheless clear, reaching
a 20-year record of just under 40% of the value of quadrant 2 M&As
in 2011. In 2014, for every dollars worth of domestic assets
acquired by MNEs, there were 76 cents-worth of disposals and
deals between MNEs, the highest level reached in 20 years.
In order to gauge better the extent to which cross-border M&As
contribute to investment linkages between countries, cross-border
divestment can be netted out of cross-border M&As. Until the turn
of the century, cross-border divestment volumes were relatively
small such that the difference between net and gross cross-border
M&As was not very important. However, cross-border divestment
has grown over time, not only in absolute terms, but relative to
overall cross-border M&As. This has given rise to a substantial gap
between gross cross-border M&A deals and net cross-border M&A
deals
In 2014, net cross-border M&As represented USD300 billion,
and were almost almost 40% lower than the gross cross-border
M&As. More importantly, the two series moved in opposite
directions between 2013 and 2014. Whereas cross border M&As
grew by 9% when measured in gross terms, they shrank by 4% when
measured on a net basis.
The growing importance of cross-border divestment as shown
in Fig. 6 could reect the sort of dynamics concerning ownership
and control strategies of assets associated with the global factory
paradigm (Buckley, 2009b, 2012; Buckley & Strange, 2015). During
the earlier phases of investment globalization, the focus was on
acquiring assets and building international business centered
around an FDI-centric IB model. In more recent years, the focus has
shifted to what could be described as a churning phase, involving a
more active mix of both asset acquisition and asset disposal as a
natural part of the asset bundling and FSA/CSA recongurations
that MNEs are engaging in.
At the macro level, we can observe a general trend towards
more protection of knowledge and institutional development
resulting in higher-quality institutional environments, thus
allowing a more efcient management of host country-related
3
The sharp spike in this series in 2014 was due to an exceptionally large cross-
border divestment, NTT DoCoMos (Japan) sale of AT&T Wireless to Cingular
Wireless in the United States for around $48 billion while at the same time gross
cross-border M&A volumes had yet to fully recover from the bursting of the dot.com
bubble.
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8 J. Hillemann, M. Gestrin / International Business Review xxx (2015) xxxxxx

resources for rms at the micro level (see vertical axis in the with the global factory paradigm, namely that cross-border
revised FSA/CSA matrix). Although the ease of doing business nancial ows related to intangible assets will increase relative
might still vary across subnational regions within countries (see to ows related to tangible assets. In the second part of our
China as an example, Doing Business, 2015), overall it has empirical analysis, we extended the country-level analysis using
improved in both advanced nd developing countries. This benets data on cross-border M&As. Containing no hidden, non-opera-
the efciency of external markets within which FSAs as well as tional investment ows, M&A data allowed us to examine the
local complementary assets are transacted. As a result, MNEs are change in ownership of both foreign and domestic assets and thus
less inclined to own physical assets (Buckley, 2009b, 2012). This whether or not rms have reduced their ownership of physical
trend corresponds with our ndings showing an increase of assets with a particular focus on the cross-border ownership of
domestic rms acquiring internationally owned assets (Fig. 6). The physical assets. The ndings on the rise in foreign assets reverting
rise in foreign assets reverting to domestic ownership as well as to domestic ownership as well as the rising share of MNE-to-MNE
the rising share of MNE-to-MNE deals provide further evidence for deals provide further evidence for the de-internationalization of
this trend fostering the de-internationalization of local assets and local assets and the MNE control rather than physical ownership of
the control rather than physical ownership of assets in line with assets, in line with modern FSA/CSA thinking.
modern FSA/CSA thinking.
Finally, we alluded above to the possibility that MNE-to-MNE
4.2. Limitations and future research
cross-border M&As might also be related to asset churning, as
rms seek to focus their cross-border ownership on core business
The contributions of this study are subject to some limitations
activities and use non-equity modes of control for non-core
pointing to potential paths for future research projects. First, the
business activities. The cross-border M&A data provide support for
classic as well as the revised FSA/CSA matrix do not provide full
this proposition (Fig. 7).4 During the rst half of the period covered,
explanation for entry and establishment mode choices and hence
the share of cross-border M&As by MNEs in their core lines of
the actual FDI decision (e.g., wholly owned subsidiary versus joint
business steadily increased from a low of just under 50 per cent in
venture, and greeneld investment versus acquisition). The
1995 to 80 per cent in 2003. Since then it has remained relatively
revised matrix assumes that rms do ne-slice their activities
steady, averaging just under 80 per cent. This heightened industrial
in the value chain into more narrow sets of activities as a function
focus of cross-border investment at the rm level during the
of external market efciency. It thus proposes that rms do not
second half of the 1990s and the early 2000s is consistent with the
only consider whether they possess weak or strong FSAs, but also
global factory paradigm and the growth in GVCs (Buckley, 2012).
assess the efciency of markets in which assets are transacted. At
the macro level, the assessment of CSAs is assumed to have
4. Conclusions
changed (with CSAs requiring bundling with rm-level resources),
which gives rise to the importance of the ease of transacting these
4.1. The extension of Rugmans FSA/CSA matrix
CSAs. As a result, rms are expected to move beyond traditional
FDI, and to engage in the development of more strategic roadmaps
This article has built upon Alan Rugmans intellectual legacy. In
that include the recombination of assets and nancial engineering,
revisiting Rugmans (1981, 2006) classic FSA/CSA Matrix and
i.e., the bundling of nancial and real assets. As a result of the
subsequently revising as well as testing it in the realm of modern
current shortcomings in the revised FSA/CSA matrix, future
internalization theory thinking, we have contributed to the IB
research should consider further extensions of the matrix, for
literature in two ways.
instance by including efciency assessments of three types of
First, we have extended extant knowledge on how to bridge the
markets, i.e., the market for rms, the market for assets, and the
global factory paradigm and internalization theory (see e.g.,
market for asset services (Hennart, 2009). This would allow
Buckley, 2009a, 2009b, 2010, 2011, 2012; Buckley & Strange,
scholars as well as senior managers to determine which markets
2015; Hillemann & Verbeke, 2014) and have provided clear
for specic assets are efcient in which country, thereby providing
predictions as to how MNEs organize themselves internationally.
more managerial guidance for optimal investment decisions.
More specically, we have suggested two modications of the
Second, our new FSA/CSA matrix, as well as the related empirical
classic FSA/CSA matrix by (1) extending the term CSAs so as to
analysis, only involve rm-level and country-level data. However,
explicitly include complementary assets; and (2) reecting on the
future research should create a linkage between the revised FSA/
efciency of markets in which FSAs and complementary assets are
CSA matrix and the non-location boundedness of FSAs in terms of
transacted.
regional and global reach. The efciency of specic markets differs
Second, we have provided empirical support for the Buckley-
greatly across regions and might therefore drive MNEs to pursue
hypothesis of a decrease in the relative importance of MNE
regional strategies. By integrating intra-regional as well as inter-
ownership of physical assets. However, the observed FDI stocks
regional aspects in the matrix and subsequent data analysis, this
and ows do not show signs of decline as predicted by the revised
research would thus contribute to the debate initiated by Rugman
FSA/CSA matrix. We therefore examined the composition of FDI as
and Verbeke (2003, 2004, 2005, 2007, 2008) on regionalization. In
a possible explanation for this nding since it includes an
doing so, it may shed new light on the determinants of the
increasingly large share of investment not necessarily associated
evolution of the MNEs international operations and provide
with the ownership of physical assets, but SPEs. These corporate
further evidence for the global factory paradigm.
entities focus on nancial engineering and do not lead to
signicant production or employment. Despite the fact that the
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