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Introduction

Governments from emerging countries such as China have utilised inward multinational enterprise (MNE) investment activity as a key tool for promoting domestic technological capability. An important means has been to encourage partnerships and joint innovative activity with foreign MNEs as a way to upgrade firm-specific assets (FSAs) of domestic firms.

In principle, such upgrading of the FSAs of either firm should prove to be mutually beneficial. The domestic partner (whether in cooperation with the government or not) is able to provide access to location-bound assets such as privileged access to quasi-public assets, suppliers and domestic markets. In exchange, MNEs provide access to their stock of technological assets, as well as their experience in managing and organising R&D activity. Emerging market MNEs hope to acquire a portfolio of assets which permits them to be competitive in global markets in these industries, while the advanced country MNE seeks to acquire local knowledge and expertise and become an insider in the host market.

However, in practice, such partnerships – even where both firms have the relevant absorptive capacity – do not always have such straightforward outcomes, and learning tends to be uneven. Exactly why there is an imbalance in this exchange process is not especially well understood, beyond differences in absorptive capacity. This paper examines this process in some detail, combining perspectives from innovation management and international business studies, and illustrates that the challenges of such mutually beneficial upgrading of technological capacity and knowledge are associated with the complex and little-understood challenges of efficient recombination of complementary resources.

Essentially, firms require a certain threshold of assets to successfully compete in any given milieu, and this threshold of FSAs consists of several different classes of complementary assets which must be “bundled” together, some of which are in fact not firm-specific, but associated with locations and to which a firm may have privileged access. Where a firm (of whatever nationality) is deficient in one type of FSA, it may nonetheless continue to remain competitive, overcoming this weakness by:

  • compensating with a stronger portfolio of assets in another category – say, if it has superior technological skills that give it a cost advantage that is greater than the disadvantage of having poor brand recognition;

  • seeking to utilise the complementary assets...

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