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A perspective on multinational enterprisesand climate change: Learning from‘‘an inconvenient truth’’?

Ans Kolk and Jonatan Pinkse

University of Amsterdam Business School,The Netherlands

Correspondence: Ans Kolk, University of

Amsterdam Business School, Roetersstraat

11, 1018 WB Amsterdam, The Netherlands.

Tel: þ31 20 525 4289;

Fax: þ31 20 525 5281;

E-mail: [email protected]

Received: 7 July 2006

Revised: 4 May 2007

Accepted: 5 September 2007

Online publication date: 28 August 2008

Abstract

This paper explores whether and how an important environmental issue such

as climate change can not only give multinational enterprises the opportunityto develop ‘‘green’’ firm-specific advantages (FSAs), but also help reconfigurekey FSAs that are viewed as the main sources of firms’ profitability, growth, andsurvival. We examine the nature and geography of such FSA development, anddevelop two organizing frameworks, which are subsequently applied to climatechange, using information from Global 500 firms. Implications and futuredirections for international business research are indicated.

Journal of International Business Studies (2008) 39, 1359–1378.

doi:10.1057/jibs.2008.61

Keywords: firm-specific advantages; capabilities and capability development; location-bound knowledge bundles; climate change; sustainability

INTRODUCTIONSustainability related to multinational enterprises (MNEs) hasreceived increasing attention in the past decade (Lundan, 2004;Rugman & Verbeke, 2001a). In the academic international businessliterature, a major contribution to a better understanding hasoriginated from Rugman and Verbeke, in a series of publications inthe late 1990s (see especially Rugman & Verbeke, 1998, 2000,2001a). Their attempts to link sustainability to general themes,such as internalization, location-bound and non-location-boundfirm-specific advantages (FSAs), competitiveness, public policy andMNE strategy, have been particularly valuable. Considering thiswork, of which the last publication was written around 2000, there

are some obvious areas of further research building on Rugman andVerbeke, all the more because in recent years concern about MNEs’impact on sustainability issues with a global scope, such as climatechange, the hole in the ozone layer and biodiversity loss, hasbecome more pressing than ever before.

Yet the extent to which MNEs are also taking the responsibility tobecome agents of global change that tackle sustainability issues isstill highly debated (Christmann, 2004; Christmann & Taylor,2001). It is without doubt that MNEs have a huge potential forinnovation, which might lead to the development of sustainableproducts and services (Hall & Vredenburg, 2003). But do MNEs alsotake the effort to invest in sustainable technologies, and if so how

Journal of International Business Studies (2008) 39, 1359–1378& 2008 Academy of International Business All rights reserved 0047-2506

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far are they willing to go, if this also means movingaway from technologies they are familiar with? This‘‘frontier’’ of international business research seemsvery worthwhile pursuing, because it links thesustainability implications of corporate activity

and the policy and societal responses engenderedby the actual strategic responses of MNEs, particu-larly the competitive (dis)advantages that may becreated (or not) at different locations. It thus shedslight on how a global sustainability issue affectsconfigurations of country-specific and firm-specificadvantages, and may incite MNE activities thathelp shape the (sustainable) future of societiesworldwide.

The decision of an MNE to invest in tackling aglobal sustainability issue can be assessed withRugman and Verbeke’s (1998) resource-based frame-

work on environmental management, whichexplains the instances when it is likely that MNEswill commit resources to improving environmentalperformance. They argued that resource commit-ments to activities such as pollution preventionand waste reduction have a strategic use only if they lead to the creation of ‘‘green’’ FSAs. Whetherthis is the case depends on the leveraging potential of resource commitments and the flexibility regardingtheir reversibility. Leveraging potential indicateswhether committing resources to environmentalmanagement leads to the creation or improvementof FSAs that simultaneously advance environmen-tal and industrial performance. Rugman and Verbeke(1998) argue that environmental investmentshave this potential if they enable MNEs to improveperformance in existing markets, enter newmarkets, or boost technological capabilities valu-able for the long run. Flexibility, on the other hand,makes it easier for firms to decide upon resourcecommitments, as mistakes can be corrected. Pre-ferably, firms end up in a green success scenariowhere resource commitments for environmentalimprovement have a high leverage potential andare flexible. In many cases, however, environmen-

tal investments cannot easily be reversed, and firmsrun the risk of ending up in a green mistakescenario, in which inflexibility is accompanied bya weak leveraging potential. As a result of thislooming danger, firms may be hesitant to engage inthis kind of investment. If uncertainties exist in theenvironmental arena, for example with regard toregulatory instruments, consumer responses andindustry standards, firms are likely to postponedecisions until new environmental options areeconomically superior as well.

Apart from adding insights from the resource-based view by highlighting the instances in whichenvironmental regulation can lead to the develop-ment of green FSAs, Rugman and Verbeke (1998)have shown the value of adding country-specific

advantages (CSAs). MNEs are confronted not onlyby the issue of whether or not to develop greenFSAs, but also by the fact that environmentalregulations differ between the countries in whichthey operate. Rugman and Verbeke argued thatchanges in environmental regulations could funda-mentally alter CSAs for specific countries. Thestrategic complexity for MNEs is that they have tocombine FSAs and CSAs, which usually meansadapting FSAs, to attain optimal FSA–CSA config-urations (cf. Rugman & Verbeke, 1992, 2003).

Notwithstanding the contribution of Rugman

and Verbeke’s (1998) framework to gain insightinto the decision of MNEs whether or not to investin improving environmental performance, andhow this differs across countries, it does not tellhow MNEs maintain existing FSAs or create newones for managing a global sustainability issue overtime. Assessing the impact of such a global issue onMNE strategy is quite challenging, because it is farmore complex than responding to specific localenvironmental regulation, for example in the caseof air pollution or chemical substances laws. Therole that a global sustainability issue plays in MNEstrategy is not merely a matter of dealing withlocal regulation, but is usually part of a broaderconglomerate of factors involving not only govern-mental but also societal and market forces, andat different levels, national, regional and/orinternational. Because of this whole variety of geographically dispersed forces that influence thedevelopment of a global sustainability issue, meet-ing all stakeholder demands essentially forms amoving target for MNEs. What is expected fromMNEs constantly changes, because public opinion,regulation, competition and scientific evidence onglobal sustainability issues usually follow a rather

fitful course.This means that a one-time decision to commit

resources does not suffice. Instead MNEs have toconstantly adjust their FSAs for deploying theseresources, or even create new FSAs to maintain fitwith changes in the global sustainability issue. Inother words, because MNEs face a moving targetthey require dynamic capabilities (Teece, Pisano, &Shuen, 1997), and keep modifying and transferringFSAs to stay responsive to issue-relevant CSAs acrossthe globe as well as higher-order learning to keep

A perspective on multinational enterprises and climate change Ans Kolk and Jonatan Pinkse

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abreast of future developments that may affectkey FSAs (Winter, 2003; Zollo & Winter, 2002).Taking a dynamic capabilities perspective can thushelp to uncover whether and how particular globalsustainability issues incite MNEs to build green

FSAs or reconfigure their key FSAs that are viewed asthe main sources of profitability, growth andsurvival. It provides insight into the strategicchanges that MNEs implement to tackle issues of global sustainability, and how these differ betweenthe geographic locations in which an MNE is active.

To examine whether and how particular globalsustainability issues induce MNEs to build green orchange key FSAs, this paper focuses on the issue of climate change. Over the past decade this globalissue has evolved as the most pressing environ-mental problem of our time. Particularly as a result

of temperature increases, it already affects physicaland biological systems by changing ecosystems andcausing extinction of species, and will increasinglyhave a social impact and adversely affect humanhealth (IPCC, 2007). What is more, as a result of theeconomic costs and risks of extreme weather(Romilly, 2007), climate change could have a severeimpact on economic growth and development aswell, if no action is taken to reduce emissions(Stern, 2007). Consequently, climate change affectsMNEs active in a wide variety of sectors andcountries. It is also not a ‘‘purely’’ environmentalissue because it is closely linked to concerns aboutenergy security owing to dependence on fossil fuelsand oil in particular, and to energy efficiency andmanagement more generally. Over the years, thestrategic impact of climate change has beensurrounded by great uncertainty (Brewer, 2005)(e.g., uncertainty about type, magnitude, andtiming of the physical impact; about the besttechnological options to address the issue; andabout the materialization of public policies). It hasbeen a long time since the first deliberations onregulation of greenhouse gas emissions started,around 15 years ago, until sufficient ratification

and thus entry into force of the Kyoto Protocol, inearly 2005. The adoption of the Kyoto Protocol in1997, however, already set some things in motion,such as an emissions trading scheme in the EU (theEU-ETS, which started on 1 January 2005), but forfirms the overall policy context has been ambig-uous, with a range of national and internationalinitiatives, some binding, others voluntary, andwith a multitude of actors involved.

Increasing societal and regulatory attention tothe issue has led MNEs to consider how it affects

the markets in which they operate, and hasengendered a variety of responses, both marketand non-market (political) in nature (Kolk & Levy,2004; Kolk & Pinkse, 2005, 2007; Levy & Kolk,2002). MNEs clearly show awareness of growing

public concerns that have come to the fore in presscoverage, but also through popular books andmovies on this ‘‘inconvenient truth’’, as one of them was titled. However, because MNEs have beenfacing a complex international context of continu-ously changing climate policies, many tend to becautious in taking steps in one particular direction.They clearly doubt the flexibility of climate-induced investments, and fear making irreversiblegreen mistakes (cf. Rugman & Verbeke, 1998). Whatis more, tackling climate change effectively mightrequire firms to move away from existing technol-

ogies and build new, unrelated FSAs instead. Forthese reasons, the vast majority have only recentlystarted developing FSAs in response to climatechange. Nevertheless, quite a few early movers,particularly in those sectors most confronted by it,have anticipated the ambiguities surroundingclimate change by seizing the opportunity to gaina strategic advantage over their rivals (Hoffman,2005). It is also an issue from which MNEs canlearn how to anticipate future developments in acontext of uncertainty, and exercise leadership thatcombines societal and strategic concerns.

To explore in more detail how a global sustain-ability issue may affect an MNE’s FSAs, we examinethe existing literature, particularly concerning thenature and geographic location of FSA develop-ment, and develop two organizing frameworks,one for each aspect. These are subsequently appliedto climate change to indicate what will induceMNEs to develop so-called ‘‘climate-induced FSAs’’.For these sections on firms’ actual positions andactivities on climate change we have used illustra-tive information from various sources, includingthose that have come available through the secondcycle of the Carbon Disclosure Project (CDP),

published in May 2004. For the CDP, MNEsdisclosed wide-ranging information on initiativescurrently under way to reduce greenhouse gasemissions. We used the CDP to identify specificcases of MNEs that have become engaged in thedevelopment of climate-induced FSAs in whateverform. After that identification we subsequentlycollected additional archival information aboutthe cases from corporate sustainability reports,research reports from NGOs and carbon consultants,and one international financial newspaper – the


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Financial Times. As the aim of the study is to explorewhat the response of MNEs to climate changebrings in terms of ideas and further researchdirections regarding FSA development, this empi-rical information is presented to illustrate the

theoretical concepts.

THE NATURE OF CLIMATE-CHANGE-INDUCEDFSA DEVELOPMENT

Before we analyze FSA development induced byglobal climate change, we first give a conceptuali-zation of FSAs and how they compare withcapabilities (a concept more often used in strategy).Rugman and Verbeke (1992) have argued that FSAsconsist both of proprietary knowledge and of thecapability to coordinate and control the geographi-cally spread assets of an MNE. In due course they

have rephrased their view on FSAs as ‘‘knowledgebundles that can take the form of intangible assets,learning capabilities and even privileged relation-ships with outside actors’’ (Rugman & Verbeke,2003: 127). The FSA concept is thus stronglyaligned with that of a capability,1 which Amit andSchoemaker (1993: 35) defined as ‘‘a firm’s capacityto deploy resources, usually in combination, usingorganizational processes to effect a desired end’’.The added value of Rugman and Verbeke’s frame-work, however, is that it takes note of theconsequences of cross-border activities for compe-titive advantage by putting emphasis on onecapability in particular – that is, managing geogra-phically spread assets. MNEs do not only seek todevelop FSAs but will also optimize their FSA–CSAconfigurations by taking the specific conditions of home and host countries into account.

But how will climate change induce MNEs totransform existing FSAs or build new FSAs? Lookingat the activities that MNEs initiate in response toa sustainability issue gives insight into the extentto which they change FSAs (cf. Aragon-Correa &Sharma, 2003). Examples of FSA development areproduct differentiation based on improving envir-

onmental quality for which consumers are willingto pay a premium (Reinhardt, 1998) and in-housedevelopment of pollution prevention techno-logies to lower environmentally induced costs(Christmann, 2000). It must be noted, though, thatnot all environmental management activities leadto a change in an MNE’s FSAs. For example, manytechnologies to control pollution, which have beendeveloped in response to environmental regula-tion, have a negligible effect on competitiveness(Hart, 1995; Russo & Fouts, 1997). For most issues

the impact and type of FSA development depend onthe industry in which an MNE is active. Legislationto stop ozone depletion, for example, had astrategic impact on the chemical industry butlargely no effect on other industries, because the

chemical industry was the main source of theharmful emissions (Levy, 1997). Climate change,on the other hand, is likely to have a strategicimpact on the growth, survival and performance of firms across a much wider range of industries, andis more likely to affect activities that form the corebusiness of an MNE (Hall & Vredenburg, 2003).

The impact of climate change is multifaceted inthe sense that for MNEs it involves responding toregulatory action as well as to potential marketdevelopments and competitor responses (Kolk &Levy, 2004). One factor that determines the impact

of climate change is the technological change thatits emergence brings about (Hall & Vredenburg,2003), and the reaction of MNEs to this change(Helfat & Peteraf, 2003). Climate change maylead to technological change for some industries,but for others it will not, and when it does havean effect on technology it may either enhance ordestroy the existing capabilities of incumbent firms(Abernathy & Clark, 1985; Tushman & Anderson,1986). A competence-enhancing discontinuitycreates a major change in a firm’s technology,which nevertheless still builds on existing capabil-ities, whereas a competence-destroying discontinu-ity necessitates firms’ developing completely newcapabilities as the existing ones have becomeobsolete (Tushman & Anderson, 1986). Whether atechnological change is competence enhancing ordestroying thus depends on a firm’s existingcapabilities (Gatignon, Tushman, Smith, & Ander-son, 2002). Still, firms have a choice in how to reactto technological change (Helfat & Peteraf, 2003):they can, for example, decide to build on existingcapabilities, fundamentally change capabilitieswithin the firm, or acquire new capabilities fromoutside the firm (Gatignon et al., 2002; Lavie,

2006). If the existing FSAs of incumbents still havevalue even with a change in technology, they canexert considerable influence on the direction inwhich FSA transformation moves (Helfat & Peteraf,2003; Rothaermel & Hill, 2005; Tripsas, 1997) andthus also the extent to which climate change istaken on board.

Lavie (2006) developed a framework that is usefulfor examining the process by which firms adapttheir FSAs in response to technological changecaused by climate change. The framework presents


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three capability reconfiguration mechanisms –capability evolution, capability transformation andcapability substitution – that represent ways in whichincumbents modify existing capabilities whenconfronted by technological change. Capability

evolution is an incremental learning process, whichrelies on a firm’s dynamic capabilities (Lavie, 2006)to accommodate technological change in a compe-tence-enhancing way. Dynamic capabilities refer tothe competence of firms to renew the configurationof their FSAs to maintain a fit with a changingbusiness context (Teece et al., 1997), and can bethought of as value-creating processes within anMNE such as product development, strategic deci-sion-making or forging alliances (Eisenhardt &Martin, 2000). Basically, capability evolution doesnot replace routines, it only modifies and adjusts

them by using internal sources of knowledge. As aconsequence, path dependencies determine howexisting FSAs evolve over time. In other words,through experimentation FSAs change over time,but the way in which they alter depends on a firm’sparticular history and rigidity of existing FSAconfigurations (Lavie, 2006). For incumbents, cap-ability evolution may well be the preferred mode of change because it builds on existing FSAs accumu-lated over time, thus exploiting asset mass efficien-cies (Dierickx & Cool, 1989). However, followingthis route will not necessarily lead MNEs to becomeagents of global change that significantly improvethe condition of the planet because they keeplooking at markets of the past instead of the future(Hart, 1995).

The other two mechanisms are more promisingin this respect, as they take more note of futurecontingencies (Lavie, 2006). In the case of cap-ability transformation, existing FSAs are not com-pletely discarded either, but some of the routinesthat are part of the FSA are modified or newlyacquired as a firm opens up to external sources of knowledge. In a transformation process the recon-figuration takes place at the level of the FSA. The

FSA maintains its function, but does so in adifferent way because of the change in underlyingroutines. An FSA that is formed through trans-formation thus consists of past as well as newknowledge and skills (Lavie, 2006), and is at thesame time competence-enhancing and compe-tence-destroying (Gatignon et al., 2002). Capabilitytransformation is more forward-looking, andinvolves higher-order learning, as not only someof the routines that form the FSA change but alsothe dynamic capabilities that shape the FSA (Zollo

& Winter, 2002). For example, higher-order learn-ing takes place when MNEs improve understandingof a sustainability issue, which in turn leads to newR&D activities that make production processes lesspolluting (Sharma & Vredenburg, 1998). FSA trans-

formation holds promise for the role MNEs play indealing with climate change, because it leaves thefunction of key FSAs intact while simultaneouslyenabling them to find ways to help the planet. ForMNEs, FSA transformation seems to be a morerealistic option than capability substitution, thethird reconfiguration mechanism. Capability sub-stitution assumes competence-destroying techno-logical change that causes a firm’s whole portfolioof existing FSAs to become obsolete. This meansthat the configuration of existing FSAs does notalter, but the value of the FSAs disappears (Lavie,

2006). For substitution to take place a firm mustacquire a completely new portfolio of FSAs that takethe place of the existing one, as no changes aremade to the FSAs that lost their value. This basicallymeans that MNEs have to acquire all new FSAs fromoutside the firm (Lavie, 2006), as it will be difficult –if not impossible – to bring about competence-destroying change from within the firm (Gatignonet al., 2002). A major challenge for MNEs in decidingwhat course of action to follow is to assess a priori thekind of technological discontinuity that climatechange will trigger, as its actual impact will be knownonly in retrospect (Tushman & Anderson, 1986).

How far MNEs are willing to go in takingresponsibility for climate change, and to whatextent this contributes to competitive advantage,also depends on the potential spillover effects of technological change throughout the value chain(Hall & Vredenburg, 2003). Formulated morebroadly, it makes a considerable difference to MNEswhether the issue affects either their upstream(back-end) or downstream (customer-end) activ-ities, or has an impact on the complete value chainall at once (Rothaermel & Hill, 2005; Tripsas, 1997).Depending on the precise impact of climate

change, it may induce an MNE to develop FSAsrelated to upstream activities for production, R&D,and sourcing of raw materials, capital and labor(Rugman, 2005; Rugman & Verbeke, 2004). Forexample, one possibility is that climate changemay lead a firm to create an FSA from developinga climate-friendly technology through upstreamR&D activities, which is then commercialized byway of existing downstream FSAs in market-relatedactivities. However, it may also lead to a changein downstream activities for the customer end of


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the value chain, including sales, marketing, anddistribution (Rugman, 2005; Rugman & Verbeke,2004). By developing green FSAs in downstreamactivities, such as green marketing, an MNE couldnot only commercialize existing technologies that

have previously unexploited green attributes, butalso create an FSA out of a purchased technology. Inboth instances, the rise of climate change can havea positive impact on MNEs, because they canleverage some of their existing upstream or down-stream FSAs, which creates a buffer against compe-titors (Tripsas, 1997). A more challenging case,however, is when climate change disrupts FSAsthroughout the whole value chain. If MNEs are ableto adapt both upstream and downstream activitiessimultaneously, this will contribute more to asustainable competitive advantage, because such

investments will be more difficult to imitate(Verbeke, Bowen, & Sellers, 2006), and lead tohigher-order capabilities of combining technologi-cal (upstream) and non-technological (down-stream) FSAs (Rothaermel & Hill, 2005). However,it will also be riskier for MNEs to accommodate thechange, because they cannot leverage existing FSAsand thus open the door to new entrants. HenceMNEs may also have an incentive to attempt toobstruct such a change (Tripsas, 1997).

Figure 1 presents a framework that depicts thenature of climate-induced FSA development; itshould be noted, though, that this can be appliedmore broadly as well. The vertical axis refers to thethree FSA reconfiguration mechanisms: FSA sub-stitution, FSA transformation, and FSA evolution.This axis measures how radically MNEs change

their key FSAs in response to climate change. Thethree mechanisms form a continuum, where FSAsubstitution is the most drastic response to externalchange, followed by transformation and evolution.The horizontal axis corresponds to the value chain

orientation of FSA development. It shows whetheran MNE changes FSAs related to downstreamactivities aimed at customers or those related toupstream activities such as sourcing and produc-tion. The ensuing matrix sets out six cells in whichparticular initiatives of MNEs in response to climatechange can be positioned, and shows how MNEsadapt their FSAs.

APPLYING THE FRAMEWORK TO MNEs’CLIMATE ACTIVITIES

A closer look at MNEs’ climate activities first shows,

as might have been expected in view of theirclimate impact, that MNEs in the oil and gas,automotive and electric utility industries, in parti-cular, are developing climate-induced FSAs. Thecurrently prevailing technological FSAs of theseindustries are the main source of carbon emissions,because they rely on the combustion of fossilfuels. But as fossil fuels also form an importantpart of the production process of many othermanufacturing industries (e.g., chemicals, steel,and electronics), climate-induced FSA developmentis not restricted to MNEs that produce cars, oil and

gas, or electricity.To begin with the car industry, several events canbe discerned in this industry that point to devel-opments regarding a change in this industry’s keyFSAs. Major players in the car industry seem to

FSA value chain orientation

Downstream

FSA

Upstream

FSA

FSA

evolution 21

FSA

transformation 43

F S A r e c o n f i g u r a t i o n m e c h a n i s m

FSA

substitution 65

Figure 1 The nature of FSA development.


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agree on the idea that hydrogen-powered fuel cellswill replace the internal combustion engine incoming decades. The fuel cell vehicle is climatefriendly, because it will remove direct carbonemissions from cars.2 The launch of the fuel cell

vehicle would thus mean that car producers couldbe positioned in cell 4 – upstream FSA transforma-tion – of Figure 1. The technology is aimed atupstream FSAs as it involves changes in R&D andproduction from modifying the car engine. It is acase of FSA transformation because the FSA port-folio as a whole keeps its function (producing cars);only the underlying routines will change as a resultof the fuel cell technology. But why is it taking thecar industry so long to commercialize the fuel cellvehicle? One explanation is that, on top of the factthat it is difficult to develop the fuel cell vehicle

itself, it also requires a substitution at the customerend of the value chain. The car industry is relyingon chemical and energy industries to supply thehydrogen necessary to attract prospective cus-tomers. This necessitates a major breakthrough inthe production and distribution of hydrogen,which has not occurred yet because it could be acompetence-destroying change for suppliers of fossilfuels. As the car industry will not be able to supplythe hydrogen itself, it thus faces a major barrier inbringing the fuel cell vehicle to the market.

To overcome this barrier many car firms firstinvest in so-called transition technologies, whichare predominantly competence-enhancing. Thisserves several purposes: it allows them to satisfyshort-term demand for fuel-efficient and climate-friendly cars; it helps in establishing a green brandimage (Anderson & Gardiner, 2006); and it createsthe asset mass efficiencies (Dierickx & Cool, 1989)necessary to build the fuel cell vehicle.3 Forexample, Ford and BMW are developing thehydrogen-powered internal combustion engine,which Ford (2004) views as ‘‘a ‘bridging strategy’using existing, proven technologies to deliver theenvironmental benefits of fuel cells at a fraction of

the complexity and cost’’. More accepted, however,is hybrid technology, which is illustrated by thefollowing statement from DaimlerChrysler (2004):

For the future we view the fuel cell as the technology which

has in the long term the most significant potential of

reducing the CO2 emissions of our products. y Today we

focus on three steps to reduce CO2 emissions: the

continuous improvement of conventional combustion

engines, the hybrid technology as the bridge between the

conventional powertrain and the fuel cell as the most

efficient technology for reducing CO2.

Firms including Toyota, Honda, Nissan, Ford, andGeneral Motors are following a path similar toDaimlerChrysler by offering hybrid cars. However,whereas Toyota and Honda have gained experienceby developing the technology in house for almost a

decade, others, including Ford and Nissan, haveonly quite recently licensed the technology fromToyota (Mackintosh, 2004). As a consequence, Fordand Nissan are not likely to create an upstream FSAin developing hybrid cars because they miss out onthe asset mass efficiencies, but merely anticipate ashort-term increase in demand for fuel-efficientvehicles due to higher fuel prices. This is illustratedby the fact that Nissan has recently ended thelicense agreement and decided to build its ownhybrids instead, because the market for hybridshas surged beyond expectation (Yomiuri Shimbun,

2006).Toyota’s leadership in hybrids is an exemplarycase of a firm that has been combining techno-logical and non-technological capabilities. It wasthe first to develop the hybrid technology, but thetechnology became a success because Toyota madegood managerial decisions (Helfat & Peteraf, 2003)such as licensing the technology, which led othersto also offer hybrid cars, thereby creating marketacceptance (Spencer, 2003). Toyota has also suc-cessfully bet on future contingencies: that is, itanticipated increasing consumer awareness for fuelprices and the environment, which has spurred thedemand for fuel-efficient vehicles. Particularly inthe US, it has been easier for the Japanese car firmsto position themselves as suppliers of fuel-efficient,clean cars, because traditionally they have strongercredentials in the small-car segment (Simon,2006a). In other words, for the Japanese firms,offering fuel-efficient vehicles merely involves anevolution in downstream FSAs (cell 1): they applytheir dynamic capabilities to maintain a fit with achange in consumer preferences in favor of climate-friendly cars. For US firms, on the other hand, itmay entail a transformation in downstream FSAs

(cell 3): because they are strong in large cars, suchas sports utility vehicles, producing small fuel-efficient cars is somewhat competence-destroying.

While most car firms focus on the technologicalattributes of car engines, thus changing attributesof their product, General Motors, Ford, Volkswa-gen, Volvo, and DaimlerChrysler also have a fuelstrategy. These firms, for example, are contributingto the development of biofuels, by which they aimto create an upstream-oriented FSA. This strategydoes not have a large impact on upstream FSAs in


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R&D and production, because the use of biofuelsrequires only modest changes to the engine of a car.Its upstream impact may be considerable, though,as car producers try to push new kinds of fuelsuppliers for the users of their cars – a shift towards

suppliers that produce ethanol and biodieselinstead of petroleum-based fuels, such as the largestUS ethanol producer, Archer Daniels Midland(Harvey, Cameron, & Beattie, 2006). Even thoughit is not expected that these car firms will turninto large-scale biofuels producers themselves, inadapting their cars they will cooperate morewith these biofuels suppliers. A fuel strategycan thus be positioned in cell 2: upstream FSAevolution.

Developments in the oil and gas industry moreclearly illustrate the trend of firms that will

eventually have to go for a competence-destroyingFSA substitution of their upstream and downstreamactivities (cells 5 and 6) through a fundamentalchange in their portfolio of key FSAs throughoutthe whole value chain. However, the direction inwhich this substitution will take place, and thetechnologies that will prevail in the comingdecades, is still unclear. While firms such as BP,ChevronTexaco, ENI, Royal Dutch/Shell, Suncor,and Total are investing in renewable energy sourcesfor the long term, others, including BHP Billiton,ENI, and Royal Dutch/Shell, are also emphasizingthe development of hydrogen, which is an energycarrier not an energy source. All these develop-ments require a sharper reconfiguration of theexisting FSA portfolio than in the car industry.Not only will the underlying technology of themain product – energy – change, but so too willother downstream processes, such as distributionand sales. For example, a renewable energy sourcesuch as solar energy scarcely builds on existingupstream FSAs in R&D and production. Techno-logically, the production of solar panels is muchcloser to the semiconductor industry, which hasexperience with processing silicon, the main

raw material for solar panels (Pernick & Wilder,2007). Similarly, although oil firms are investingin wind power, it is a capital goods producer suchas General Electric that has an FSA in producingwind turbines. Moreover, both renewable energytechnologies may lead to a system of decentralizedenergy distribution, and thus threaten centralizedenergy distribution, currently a key FSA of theoil industry. It is thus not surprising that most of the oil firms are investing in these renewabletechnologies only marginally. Only BP and Royal

Dutch/Shell have been relatively active throughsome investments in renewable energy, particularlysolar power. BP has recently tried to give thisbusiness segment an extra impetus by launchingits BP Alternative Energy campaign, thus attempt-

ing to create a downstream FSA in renewableenergy.

Nevertheless, current developments in the oil andgas industry do share some similarities with the carindustry: oil and gas firms also invest in compe-tence-enhancing transition technologies, thuschoosing an evolutionary path at first. A statementby Royal Dutch/Shell (2004) illustrates the role of transition technologies in the oil industry:

Given that natural gas has the lowest carbon emissions per

unit of energy produced (e.g., electricity) of all the fossil

fuels, it offers the world an important bridge to a lower

carbon economy as alternative energy technologies aredeveloped and allowed to reach economic maturity.

In the choice for transition technologies many oiland gas firms take their initial FSA configurations asthe starting point for the development of climate-induced FSAs, thus showing the importance of pathdependencies (cf. Helfat, 1997). MNEs that alreadyhave a strong position in the production of naturalgas, such as the BG Group, BP, ENI, ExxonMobil,Halliburton, Norsk Hydro, and Royal Dutch/Shell,conceive the changing context due to the emer-gence of climate change as an opportunity to

strengthen this segment of their firms. ExxonMobil(2004) exemplifies this:

As a leading supplier of clean burning natural gas,

ExxonMobil is well positioned to contribute to efforts to

address greenhouse gas emissions through fuel switching.

For firms that more heavily rely on the productionof coal, climate change is a driver to develop othertransition technologies. BHP Billiton and Rio Tinto,which have strong positions in the production of coal, are both investing in clean coal technologyand technologies to offset emissions by geologicalsequestration (the capture and storage of emissions

in underground reservoirs). Oil firms such as Statoiland BP have also started to invest in carbon captureand storage, but are doing this cooperatively tospread the risk, thus creating a shared capabilityinstead of an FSA. It thus seems that, although thelong-term strategies of oil and gas firms wouldmean a competence-destroying substitution of thecomplete FSA portfolio throughout the whole valuechain (cell 5), current developments more stronglyindicate a competence-enhancing FSA evolution indownstream activities, merely marketing existing


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activities in gas and renewables more proactively(cell 1).

Whereas current activities in automotives and oiland gas hint at long-run developments wherebyMNEs will eventually change (some of) their key

FSAs, in other sectors, such as electric utilities,chemicals, electronics, and metals and manufactur-ing, efforts are focused more on developing greenFSAs for the near future. Consequently, firms relymore on existing FSA configurations. They changesome routines, and their FSA base slowly evolvesin a climate-friendly direction. Electric utilities,for example, are drawing on their key FSAs in thegeneration, trade and sales of electricity to developgreen FSAs. Most utilities are not involved in thedevelopment of renewable energy sources them-selves, but instead purchase these from technology

suppliers such as General Electric (cf. Marcus &Geffen, 1998). However, quite a few, includingAmerican Electric Power, CLP Holdings, Endesa,Exelon, Iberdrola, and Scottish & Southern Energy,are expanding generation capacity that is based onrenewable energy sources. Such a reconfiguration of energy sources for electricity production can becompetence-enhancing, because utilities use theirexisting downstream FSAs to market energy to endusers. Iberdrola (2004), for instance, notes that ithas a program for ‘‘the promotion of electricityproduced from renewable energy sources in theinternal electricity market, making electricity usersaware of the benefits of renewable energies’’.

Another recent example of an MNE shiftingattention to the green attributes of its technologydevelopment is General Electric, with the launchof its Ecomagination campaign. General Electricwas already engaged in the development of windturbines and clean coal technology, but decided togroup clean technologies together under one brand(thus creating a green FSA in marketing) andincrease investment in these technologies (Harvey,2005). Depending on the success of marketing itsgreen segment, a conglomerate such as General

Electric may eventually expand this strategyfurther. In other words, even though these firmsdo not change their key FSAs, they respond toclimate change by using their existing key FSAs todevelop green FSAs related to successful marketingof the sustainability attributes of their products.Nevertheless, such activities are not necessarilyrestricted to downstream sales activities, but mayalso involve a change in upstream production,sourcing, and R&D activities: it can thus put themin cells 1 and 2 simultaneously. Some firms also

focus predominantly on sourcing: British Telecomand Du Pont, for example, have decided to source asignificant part of their energy consumption fromrenewable resources. It is arguable whether thisleads to an FSA of their own, although some MNEs

can undoubtedly put substantial pressure on theirsuppliers. Du Pont (2004) believes it can have suchan impact, and motivates its decision as follows:

We will source 10% of our global energy use in the year 2010

from renewable resources. We are serious about the need for

renewable energy to be a part of our future. We are

providing a strong ‘‘market signal’’ that there will be at

least one major energy consumer ready to buy; and that we

will work with suppliers of renewable energy resources to

stimulate their availability at a cost competitive with best

available fossil-derived alternatives.

Current evidence on MNEs’ climate activities shows

that most efforts are still evolutionary, and focusparticularly on downstream activities, which meansthat MNEs market existing products differently,with a stronger focus on green attributes. None-theless, this sometimes also entails investments inupstream production and sourcing activities tomaintain a fit with green FSAs in sales and market-ing. Yet current developments in the car industrydo suggest some bolder steps leading to upstreamtransformation of FSAs, but with mixed success.Whereas hybrids are experiencing a breakthrough,fuel cells are still far from being commercialized. Anissue such as global climate change, which has onlyrecently started to attract business attention, clearlydoes not lead immediately to radical changes suchas a competence-destroying substitution of com-plete FSA portfolios of large MNEs. This is probablystill reserved only for small, niche players. Inmaking climate-induced investments, MNEs wantto maintain their flexibility to safeguard theirorganizations against the uncertainties that existregarding the future of international climate policy.Moreover, the risk of making an irreversible greenmistake is quite high, because it is still unclear formany industries which climate-friendly technology

will prevail in coming years.

THE GEOGRAPHY OF CLIMATE CHANGE-INDUCED FSA DEVELOPMENT

The organizing framework on the nature of FSAdevelopment shown in Figure 1 looks at thisprocess at a corporate level. However, this doesnot mean that the development of FSAs to adapt toclimate change occurs only at MNE headquarters,or is implemented uniformly throughout the globalorganization. As stated in the introduction, the role


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that climate change plays in MNE strategy isdetermined by a broad conglomerate of factorsinvolving governmental as well as societal andmarket forces, working at different geographicallevels. There may well be particular geographical

factors that are conducive to a climate-inducedchange in FSAs, but this also means that the changebenefits the MNE at a specific location only. Inother words, MNEs not only have the option todevelop or change FSAs internally, but can alsooptimize their FSA–CSA configurations by takingthe specific conditions of home and host countriesinto account, so that CSAs form the starting pointfor FSA development (Rugman & Verbeke, 1992).Climate change thus adds new dimensions towhat regionalization or globalization in terms of production and/or sales might mean for an MNE

and its network, regarding possible spillovers of such concerns to other (core) activities and otherlocations, and how organizational responses arecoordinated and controlled (cf. Rugman & Verbeke,2004).

Climate change creates a geographically dispersedand moving target: while it may form a threat inone location, it can be an opportunity in another.Regardless of whether regional or local character-istics are seen as a potential advantage or disadvan-tage, liability or risk, geographical differences aresomething to be faced by MNEs, and those firmsthat excel in doing this are the ones most likely todevelop climate-induced FSAs. Hence learning fromclimate change does not merely mean that MNEsneed dynamic capabilities to cope with technolo-gical change; constantly rejuvenating FSAs by beingresponsive to a wide range of climate change-relevant CSAs is what gives them an edge overtheir competitors. For example, MNEs operatingoutside their home regions, upstream and/or down-stream, may have difficulty in accommodatinghost-country concerns and approaches on climatechange appropriately, often referred to as the‘‘liability of foreignness’’ (Zaheer, 1995). If the cost

of dealing with host-country concerns becomes sohigh that it forms a serious threat, an MNE maychoose to retire an FSA it once possessed in the hostmarket, or may transfer it to another market (Helfat& Peteraf, 2003). On the other hand, spillovereffects can also extend the impact of climatechange to firms active in countries withoutstringent environmental regulations (e.g., in coun-tries that refused to ratify the Kyoto Protocol)(Christmann & Taylor, 2001; Hoffman, 2005). Thiscreates an opportunity for MNEs, because they can

replicate, redeploy, or recombine green FSAs builtup in countries with strict regulations (Helfat &Peteraf, 2003). Using geographically spread assetsproactively in adapting to climate change is adynamic capability in itself, which complements

a change in FSAs in response to climate-inducedtechnological change.

But what kind of geographical factors formclimate-change-relevant CSAs? In general, CSAsare factors such as availability of natural resources,access to markets to sell products and services,factor costs (labor, capital and land), and knowl-edge-intensive assets such as skilled labor andpublic infrastructure (Dunning, 1998). These fac-tors form CSAs for all firms investing in a specificcountry (Makino, Isobe, & Chan, 2004), and there-fore attract MNEs driven by natural resource-

seeking, efficiency-seeking, market-seeking orstrategic asset-seeking behavior (Dunning, 1993).With the global intentions of the Kyoto Protocol itseemed at first that climate change policy wouldnot result in climate-related CSAs, because it wasintended to be quite homogeneous throughout theworld. However, in spite of this global agreement,national regulatory responses have varied consider-ably since 1997, with the EU-ETS and the USrejection of Kyoto as two extremes, leading afterall to a wide variety of climate-related CSAs. What ismore, many countries in the EU and states in theUS even have location-specific climate changeregulations such as subsidies to stimulate invest-ments in the development of renewable energytechnologies (IEA, 2004).

CSAs are not only a result of a country’s regula-tions; the broader institutional framework alsoplays a role (Makino et al., 2004). For example,the presence in the local context of a network of other firms or non-profit organizations that are inthe process of developing climate-friendly technol-ogies may be complementary to an MNE’s own FSAdevelopment. Also, consumer awareness of climatechange may form a CSA, because it makes them

responsive to green marketing campaigns. MNEsmay benefit from climate-related CSAs eitherbecause they already own facilities in this particularlocation or because they move to these locations inan effort to seek strategic assets to complementtheir existing FSAs (Dunning, 1998). For example,strict environmental regulations in the homecountry may act as a CSA and incite MNEs todevelop technologies by which they gain a compe-titive advantage over their rivals (Porter & van derLinde, 1995).4 However, host-country locations can


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also form a potential source of FSAs, as an MNE’ssubsidiaries may tap into external local knowledge(Almeida & Phene, 2004). The EU emissionstrading scheme, for example, has implicationsfor home-region firms in particular, but also

(potentially) for ‘‘outsiders’’, host-region MNEs forwhich the EU is important in terms of productionfacilities and/or sales (Pinkse, 2007), and/or whichcompete with EU firms on non-EU markets. Thelocus (or loci) of origin of FSA development thusdepends on the geographic spread of an MNE, as itis partly determined by the ‘‘local’’ institutionalcontext.

MNEs are thus confronted by a wide variety of climate-related CSAs (sometimes even state-specificadvantages), which may incite the development of climate-induced FSAs. However, the impact that

those climate-related CSAs have on the way MNEstransform existing or develop new FSAs depends toa large extent on the geographical origin of FSAdevelopment. If an MNE perceives climate changeas a global issue, decision-making power on thisissue will be at the level of its headquarters. In thiscase, an MNE believes that the consequences of climate change will have a significant impact onthe firm globally, which is therefore dealt withat the highest management level. Headquarters’support considerably increases the potential thatMNEs have for becoming global leaders in tacklingclimate change. However, since the worldwideinstitutionalization of climate change policies isstill quite fragmented, many MNEs may also dealwith the issue through their regional centers (e.g.,decisions to participate actively in the EU-ETS),or national subsidiaries (Husted & Allen, 2006;Rugman, 2005). It then becomes a matter of localresponsiveness to climate-related institutional pres-sures from regulators, NGOs, or the investmentcommunity (cf. Brewer, 2005). The more localizedthe decision is, however, the less likely it is thatclimate change will have a significant strategicimpact on the MNE as a whole, because it will be

quite difficult for a local subsidiary to convinceMNE headquarters that climate change requires aproactive response. Instead of a global leader, anMNE may then produce local heroes instead.

This is not to say that a local response is of no useat all, however: if through their subsidiaries MNEsare located in countries that have been frontrunners on climate change, then they have beenfacing climate-related pressures for a longer periodof time already. This may have enabled them tostart learning from the issue from an early stage.

Therefore, if a country initiates new regulations tocurb greenhouse gas emissions, this will probablybe a much greater shock to domestic firms thanto MNEs. Nonetheless, experience with climatechange in a specific location will create a cross-

border advantage only if the MNEs are able totransfer FSAs from other locations. Another ques-tion relating to the geography of climate-inducedFSA development is thus whether MNEs willdevelop different types of location-bound FSA thatfit with the CSAs of individual countries, or non-location-bound FSAs that can be transferred anddeployed globally. The peculiarities of MNEs ariseparticularly from the potential to leverage non-location-bound FSAs. Similar or identical proce-dures for every subsidiary facilitate the exchange of experiences, breed internal consistency, enable

benchmarking, and are clear to outsiders. SomeMNEs therefore strive to harmonize their environ-mental management system and standards at alllocations (Christmann, 2004). Yet the situation inspecific countries, for example, as a result of stakeholder or government pressure, may createlocation-bound FSAs as well (related to localresponsiveness) (Rugman & Verbeke, 2001b). Insome cases these can be used only in the country inquestion; in others they might help to increaseMNEs’ competitiveness elsewhere.

The transferability of an FSA typically depends onthe attributes of the knowledge bundles thatestablish it (Singh, 2007): the higher the tacitnessof the knowledge, the less transferable it becomes(Kogut & Zander, 1993). A higher level of tacit-ness may be due to the extent to which an FSA resultsfrom linkages with external parties (e.g., govern-mental bodies, universities, or NGOs). These lin-kages are in general much better in an MNE’s homecountry (or region), which explains findings thatmany MNEs are organized on a regional basis (cf.Ghemawat, 2003; Rugman & Verbeke, 2004). Host-country attributes also determine the transferabilityof an FSA to a foreign location (Cuervo-Cazurra,

Maloney, & Manrakhan, 2007). Transfer of FSAs torelatively ‘‘distant’’ countries (Ghemawat, 2001) interms of dissimilarity of environmental regulationsusually results in higher adaptation costs (in orderto realize location-specific ‘‘linking’’ investments)for alignment with the CSAs of these particularhost countries (King & Shaver, 2001; Rugman &Verbeke, 2005). Tsai and Child (1997), for example,noted that the transfer of environmental bestpractices is not always without problems. A globalapproach to environmental management usually


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relies on advanced technologies, but successfullyimplementing these in developing countries can bevery expensive, owing to a lack of adequateinfrastructure there.

Home- and host-country attributes as well as the

nature of the knowledge contained in an FSAtogether determine whether MNEs develop differ-ent types of location-bound FSAs that fit with theCSAs of individual countries, or one non-location-bound FSA that is globally (or regionally) transfer-able. Although, in the case of climate change, ahigh potential for transferability can be expected,because most climate-induced FSAs are relevant atmany different (or even all) locations whereMNEs have production and/or sales, internationalinstitutional differences may also lead to typicallocation-bound FSAs. Figure 2 shows a framework

that depicts the geography of climate-inducedFSA development by combining, on the verticalaxis, the location of the decision-making powerfor climate change and the origin of FSA develop-ment – corporate headquarters, regional center,or national subsidiary – with, on the horizontalaxis, the transferability of climate-induced FSAs.The framework shows the extent to which it can beexpected that an MNE will become a global leaderin tackling climate change. If, for example, an MNEinitiates investments in non-location-bound FSAsin climate change mitigation from corporate head-quarters (cell 2), there is more potential for a lastingimpact on the sustainability of the planet, com-pared with some local-bound initiatives in distantsubsidiaries (cell 5).

APPLYING THE FRAMEWORK TO MNEs’CLIMATE ACTIVITIES

Looking at MNE’s climate activities, it seems thatclimate-related FSAs have a variety of sources, bothgeographically and institutionally. MNEs develop

FSAs in response to climate-related CSAs, usually of their home country, but sometimes also of one of their host countries. It appears that country-specificclimate policies have an effect on MNEs, but notalways the desired effect of spurring innovation. Inthe US, for instance, many firms (particularlyelectric utilities) are participating in the Environ-mental Protection Agency’s Climate Leadersprogram. However, currently this merely seemsto affect initiatives to set voluntary emissionreduction targets rather than FSA development. Inthe EU, the regional emissions trading scheme is

intended to provide a stimulus for firms withenergy-intensive activities to become engaged inclimate-induced FSA development. Yet it turns outthat this scheme particularly influences electricutilities, which by and large do not seem to respondby developing new FSAs either, but instead pass onthe costs of their emission allowances to theircustomers (Hasselknippe & Røine, 2006; Morrison,2006). It thus seems that country-specific climatechange policies are not decisive for MNEs’ decisionto develop climate-induced FSAs.

However, what also becomes apparent is that,particularly for the purpose of developing climate-friendly technologies, many MNEs seem to prefer tocooperate with external parties. This is in line withwhat was noted earlier, namely that a country’s

Transferability of FSAs

Location-bound

FSA

Non-location-bound

FSA

Corporate

headquarters 21

Regional

centers 43

O r i g i n o f F S A d e v e l o p m e n t

National

subsidiaries 65

Figure 2 The geography of FSA development.


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climate change policy does not determine MNEbehavior in isolation; it also depends on thebroader institutional framework (Makino et al.,2004). As a consequence, the origin of an FSA doesnot always depends on the location of corporate

headquarters or subsidiaries; it also depends on thelocation of the external actor – for example, agovernment agency, university, or other firms –with which an MNE cooperates. For the carindustry, for example, one potential reason to optfor cooperation is the fact that pressure to developthese technologies comes from not only theincreased attention paid to climate change, butalso from the recent surge in oil prices (Mackintosh,2005a). To reduce the dependence on oil as theprimary fuel, car firms spend considerable funds onthe development of alternative fuel technologies.

Controlling costs is therefore clearly a motive forpartnering with other firms. Another potentialreason is the uncertainty about which technologywill prevail. MNEs may seek to acquire knowledgefrom external parties, or share knowledge withcompetitors to build support for their technologyin the early stages of FSA development (cf. Spencer,2003).

To develop new climate-induced FSAs, severalMNEs have ties with institutions such as univer-sities and research institutes: Suncor is funding aClean Energy Laboratory at the University of BritishColombia; ExxonMobil is investing in the GlobalClimate and Energy Project of Stanford University;and ChevronTexaco is co-funding the Massachu-setts Institute of Technology’s Joint Program onScience and Policy for Global Climate Change.These particular firms are focusing on ties withuniversities and research institutes in their homecountry. However, several others are also lookingacross borders, to affiliate with institutes in hostcountries. Australian-based Rio Tinto, for example,is participating in the research efforts of theUS-based Electric Power Research Institute, andBP (together with Ford) has a partnership with

Princeton University, called the Carbon MitigationInitiative. This initiative has the aim ‘‘to resolvefundamental scientific, environmental and techno-logical issues key to public acceptance of carbonmanagement strategies’’ (Ford, 2004). Technologyfor carbon capture and storage is one direction inwhich it is bearing fruit. It must be noted that,for many of these cooperative efforts, the exactgoal of linkages with universities and researchinstitutes is not always openly delineated. Whilesuch ties can be strategic asset-seeking behavior,

and lead to knowledge creation and transfer, theassociation with respectable institutes and thedemonstration of climate change activity cannotbe ruled out as (additional) motives for suchcooperation.

Cooperation with other firms often has a lessambiguous purpose: this more clearly aims at thedevelopment of new technologies. However,whether it also leads to climate-induced FSAs orshared capabilities instead, and at which loca-tion(s), depends on the type of partner that isbeing sought. Many car and oil manufacturers areworking together with firms that own a specifictechnology. This usually includes small, local nicheplayers as well as large global competitors. Forexample, to develop biofuels, both DaimlerChryslerand Volkswagen are cooperating with Choren

industries, a German firm that specializes ingasification technology for the production of energy from biomass. Likewise, Ford and Daimler-Chrysler have both entered partnerships with theCanadian niche player Ballard, which has devel-oped fuel cell technology, to further improve fuelcells for use in cars. Two Canadian oil firms, Suncorand Petro-Canada, are working with several localfirms to develop an infrastructure for fuel cellvehicles and wind energy, respectively. Becausethe MNEs engaged in these partnerships are notonly collaborators in these particular technologies,but also close competitors, it will be difficult todevelop an FSA, as it is inevitable that at least onecompetitor will own the same technology. Thereare more opportunities to create an FSA out of collaboration with firms from other industries,because the partners will use the ensuing technol-ogy quite differently in their downstream activities.Dow Chemical and General Motors, for example,are working together on the development of fuelcells, but for different purposes.

If climate-related CSAs stimulate upstream FSAdevelopment in R&D that translates into newtechnological capabilities, this would, on the face

of it, lead to a position in the right-hand column of Figure 2. It should be relatively easy to transfer atechnology to other geographical locations, regard-less of whether it originates from corporate head-quarters, a regional center, or a national subsidiary.A public-policy-driven CSA, such as a subsidy or taxbreak for the development of renewable energytechnologies, typically has a function only atthe start of the life cycle of an FSA, but once thetechnology becomes incorporated in a firm’sproducts it can be redeployed to other locations


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(Helfat & Peteraf, 2003), thus creating a non-location-bound FSA. Climate-friendly technologies,such as those related to hydrogen or fuel cells, areno longer of a tacit nature, or tied to externalparties such as local governments, and sourcing

and production of these technologies can take placeanywhere in the world (cf. Rugman & Verbeke,2004). However, if the CSA continues to be of valuefurther down the FSA life cycle, transferabilitybecomes more difficult. For example, for somespecific technologies related to renewable energy,the location of production depends on a country’snatural capital. Such geographic site specificity iscrucial for hydroelectric and wind power, whichrequire mountainous areas and sufficient windspeed, respectively (Russo, 2003). Such an FSAcannot simply be redeployed, but needs to be

recombined with a similar CSA in another geo-graphical location (Helfat & Peteraf, 2003).The same holds for the development of cars that

run on biofuels based on so-called flex-fuel tech-nology, which enables the use of ethanol (a biofuel)as well as gasoline. Car manufacturers includingFord, Fiat, Volkswagen, and General Motors havefirst introduced this technology in their Braziliansubsidiaries (Johnson, 2006). Since the oil crises inthe 1970s the Brazilian government has stimulatedlocal sugar producers to invest in ethanol to reducedependence on foreign oil, thereby creating a CSAin ethanol. Currently, an FSA in flex-fuel technol-ogy is still location-bound in foreign subsidiaries,because the natural resource necessary for thistechnology is readily available in this specificlocation. It could thus be positioned in cell 5 of Figure 2. However, after President Bush announcedintentions to lower the US’s dependence on foreignoil in his 2006 State of the Union address, interestin ethanol as a fuel has also increased in the US(Simon, 2006b), which may form a CSA for the USin coming years. Therefore, for car firms, flex-fueltechnology may well become an FSA that movesfrom cell 5 to cell 3, spanning the whole American

continent.Nevertheless, most technologies for climate-

induced FSAs are more likely to depend stronglyon CSAs when they have advanced further in theFSA life cycle, and have moved downstream andreached the sales stage. ChevronTexaco (2004), forexample, states that:

We invest in a variety of renewable and alternative energy

technologies and believe that those energy sources will be

important in the overall mix of energy for the global

economy in the future. But widespread application will

depend on many factors, including the rate of technological

development, market acceptance, and demonstration of

economic viability.

A lack of transferability of FSAs is thus not necessarilythe result of the tacitness of the knowledge on which

they are based, but is instead determined by theability of MNEs to create market acceptance for newtechnologies to realize global distribution of sales(Cuervo-Cazurra et al., 2007; Rugman & Verbeke,2004). In other words, although MNEs may havesome influence on market acceptance throughmarketing campaigns, it depends largely on CSAsrelated to consumer responsiveness to climate-friendly products and services, and on the availabilityof the necessary public infrastructure. For example,two main problems related to a successful launch of marketable fuel cell cars are the relatively high costs

compared with conventional cars and the lack of ahydrogen infrastructure (Griffiths, 2005). High costsare likely to impede transferability of these cars tolow-income countries, and the establishment of ahydrogen infrastructure is necessary in any countrywhere an MNE wants to sell fuel cell cars.5 Mack-intosh (2005b) has formulated this problem of setting up a hydrogen infrastructure as follows:

Drivers will not want hydrogen cars until there is a network

of filling stations. But no company will invest in filling

stations – and hydrogen production – until there is a critical

mass of cars.

To find a solution to this problem it appears thatMNEs will have to work with other private andpublic partners to create the necessary infrastruc-ture to bring the fuel cell car to markets worldwide.Activity in this direction can already be observed.Petro-Canada (2004) reports on a collaborativeframework for a hydrogen infrastructure, as it isengaged with Ballard Power Systems and MethanexCorporation in a project for a fuel distributionnetwork for hydrogen in Canada. Likewise, AirProducts and Chemicals (2004) states that it

is working with many public, private and governmentalorganizations to develop and promote the commercializa-

tion of hydrogen as a fuel in portable, stationary and

transportation fuel markets and is leading the development

of hydrogen infrastructure and fuel-handling technologies

to enable the commercialization of hydrogen fuel cells.

However, since political relations with the homegovernment are generally much better than withhost-country governments (Baron, 1995), down-stream FSAs for which sales rely on business–government cooperation are likely to stay bound tothe home country or home region (cell 1 or cell 3).


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In general, FSAs that rely on organizationalcapabilities to coordinate and control greenhousegas emissions are even more problematic to transferthan climate-friendly technologies: not only doessuch knowledge build on particular CSAs, it is

often also of a tacit nature, and organizationallyembedded. This is most clearly seen in emissionstrading. Currently, an FSA in emissions trading willbe difficult to transfer to other affiliates within anMNE, because of the international fragmentation of support for the Kyoto Protocol. A global frameworkfor emissions trading has not yet been established,but remains restricted to regional initiatives. TheEU-ETS is the most prominent example, and an FSAbased on trading in this scheme is constrained tothis region, as it has not yet been linked to otherschemes (cell 3). What is more, even though, when

new trading schemes are established, MNEs canbuild on their learning experience with the EU-ETS,this experience may be of limited value. It typicallyinvolves tacit, market-specific knowledge such asrules for allocating and trading allowances, whichtend to differ considerably, even within the EU(Boemare & Quirion, 2002), and it is by and largeorganizationally embedded. Successfully trading of emission allowances often depends on good com-munication between trading and productiondepartments – an organizational capability thatcannot be transferred easily. For these reasons, suchorganizational capabilities cannot be replicated,but need instead to be recombined to fit localconditions (Helfat & Peteraf, 2003). When recom-bining is perceived as too cumbersome, however,MNEs may restrict trading to the location of theirheadquarters or particular subsidiaries (cell 1 orcell 5).

To illustrate, Barclays (2004) has been participat-ing in the UK emissions trading scheme (a pre-decessor of the EU-ETS), but states that it cannotuse this experience for the EU-ETS, because parti-cipation there is restricted to energy-intensiveindustries. For similar reasons, Unilever (2004) does

not aim to develop a global strategy for emissionstrading, but considers it the responsibility of local(or regional) management. Nevertheless, it isnotable that some MNEs do seem to have theintention to create a non-location-bound FSA fromemissions trading. Several MNEs, including DowChemical, Norsk Hydro, Repsol and Royal Dutch/Shell, have established a separate business unit atheadquarters that is responsible for participation inemissions trading schemes for the MNE as a whole.These firms thus seem to have the intention to

create a non-location-bound FSA in emissionstrading (cell 2), and arguably do so because theysee possibilities for arbitrage to exploit inter-national differences in emissions trading schemes(cf. Ghemawat, 2003).

On the whole it appears that, with regard to thegeography of climate-induced FSA development,MNEs are not positioned in the right-hand columnof Figure 2, as stated above, but more often in theleft-hand column. There are still many institutionalbarriers for the transfer of technologies or organiza-tional capabilities (Cuervo-Cazurra et al., 2007),because CSAs play a crucial role in the whole FSAlife cycle. Most climate-induced FSAs are thereforelikely to stay location-bound, at least for the nearfuture. Only when proper institutional frameworks,such as a hydrogen infrastructure or an emissions

trading scheme, are set up on a global scale, willMNEs have the possibility to freely transfer theirclimate-induced FSAs. This seems to be a problemparticularly for transfer of such FSAs to lessdeveloped countries, where implementation of such institutions is not to be expected shortly.

Then, again, international transfer of climate-induced FSAs to developing countries may receivean impulse from another institutional arrangementof the Kyoto Protocol – or, that is, one of the KyotoMechanisms: the Clean Development Mechanism(CDM). CDM allows countries and firms to takeadvantage of reductions in emissions resultingfrom cross-border investments in developingcountries (Grubb, Vrolijk, & Brack, 1999). As ArquitNederberger and Saner (2005: 12) explain, CDM gives

opportunities to technology providers to expand their

market for state-of-the-art energy-efficient and climate-

friendly technologies to developing countries, which, with-

out CDM financing, may not be commercially viable in a

developing country context.

In other words, a country’s eligibility for CDMcreates a new CSA, to which MNEs can respond byreplicating their FSAs from headquarters to this

particular location (cell 2 of Figure 2). One exampleof a firm that has already started to make use of theCDM is the Spanish utility Endesa. Endesa (2006) isthe largest privately owned electric utility in LatinAmerica, and is using CDM to transfer some itstechnologies to this region. Another firm interestedin CDM is Nippon Steel (2005: 17):

Nippon Steel would like to utilize the Kyoto Mechanisms to

contribute to a reduction of CO2 on a global scale through

the transfer of its world’s top energy conservation and

environmental countermeasure technologies.


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CONCLUSION: A RESEARCH AGENDAThis paper has argued that a global sustainabilityissue such as climate change has the capacity toinduce MNEs to develop FSAs that not only leadto environmental improvements as such, but may

also affect firms’ profitability, growth and survival.We have presented two frameworks to analyze thenature and geography of such FSA development.Subsequently, they have been applied to the case of climate change, using illustrative material fromMNEs in several global industries. Climate changeis an issue that affects a wide range of firms aroundthe world, and which has implications beyond the‘‘pure’’ environmental dimensions, being linked toenergy security and efficiency, and the fate of theplanet more broadly. It has become a topic of societal, regulatory and corporate attention in

recent years, and has been brought to the fore asan ‘‘inconvenient truth’’ that requires a concertedpolicy approach. Regardless of one’s position in thisdebate, climate change provides a clear opportunityto consider how (green) FSAs (and FSA–CSA con-figurations) can develop and change, in a contextwhere there is considerable attention for this topic,not only by environmentalists and policymakers,but also by investors and major multinationals whohave become rather active. At the same time, thereis also considerable uncertainty and complexity, inview of the diversity of contexts and policyresponses, which means that FSAs developed inresponse to this ‘‘moving target’’ will need constantrejuvenation. The climate change issue can thusgive insight into dynamic capabilities, into howMNEs may be able to learn on various fronts, bothfrom the issue itself and from the way in which itis being dealt with in a range of countries andindustries. The two frameworks are meant to helpidentify and understand this, and to reflect onpossibilities and barriers, also in anticipating futuredevelopments and exercising leadership that reck-ons with strategic and societal concerns. Managersmay want to include this in their consideration of

the risks and rewards of investing in FSAs, andpolicymakers to better understand how CSAs can beshaped and firms be (in)directly induced to investin FSAs.

The application of the frameworks to the climatechange issue showed that MNEs from differentindustries are developing different kinds of FSA.Moreover, the types of organizational process thatare set in motion involve the development of greenFSAs for some firms and the change of key FSAs forothers. Still we can conclude that, as it currently

stands, climate-induced FSA development may leadto a more radical, competence-destroying FSAreconfiguration for a few industries only; mostMNEs stay relatively close to their current activities.A strategic reorientation is most likely to occur in

the oil and gas and automotive industries, but willnot happen in the short run. A reason for this isthat MNEs in these industries do not agree on thetype of technology that will prevail in comingyears, and most firms thus invest first in compe-tence-enhancing transition technologies, therebystill relying on existing FSA configurations.

It can be observed that climate change as a sourceof competitive advantage is likely to occur inhigh-salience industries such as those mentionedabove – that is, those most confronted by theclimate issue. In addition, continuous reflection on

FSA development via internal investments(dynamic capabilities) also seems important forfirms specialized in goods or services that areinstrumental in the mitigation of climate changeimpacts, or in anticipating, influencing or respond-ing to public policy developments. For the remain-ing firms, climate change appears not to become amain source of profitability and growth, eventhough they may obtain legitimacy from actingvisibly and credibly in the field of climate change.For them, there is no compelling reason to developFSAs internally in managing climate change. Theirroute for addressing the issue is likely to go throughexternal markets: for example, purchasing greenerand productivity-enhancing technologies, adopt-ing externally developed tools and routines (suchas on mitigation, emissions trading, and measure-ment instruments), and ‘‘outsourcing’’ certainactivities to outsiders (who can, for example, takecare of lobbying and stakeholder management). Inthis situation, FSAs may arise from ‘‘internalizationarbitrage’’ (Rugman & Verbeke, 2004; cf. Ghema-wat, 2003) in the sense that MNEs obtain advantagefrom proximity and easy access to multiple externalmarkets that offer such best available practices.

With regard to the geography of climate-induceddevelopment, it can be noted that many MNEs stillfocus on their home regions, for example, whenlooking for private or public partners with which tointeract for the development of new technologies.Region-bound FSA development seems likely inthe case of emissions trading, because of thespecific location of emissions trading schemes(currently operational on a large scale only in theEU); transferability will also depend on (policy)developments and related opportunities for using


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these FSAs in other regions. With regard totechnological FSAs, a home-region focus mayhinder transferability in the later sales stages, butnot so much in the early production stages of theFSA development chain.

It should be noted, however, that marketresponses to global climate change have emergedonly recently, which means that our study of climate-induced FSA development could be onlyexploratory. Further research will be needed, alsousing other sources of information, when possible,to arrive at a more extensive set of data that allowsfor an examination of the determinants of suchFSA development, and the possible performanceimplications. The issue of climate change providesa fertile area in which existing internationalbusiness theories can be tested, and from which

new theoretical insights into the dynamics of the interaction between MNEs and their nationaland international environment can be induced.Climate change particularly illustrates the exactworkings of the interactions between FSAs andCSAs. What follows are more concrete researchareas for the relationship between climate changeand international business.

First, it will be interesting to assess whethertransferability pays off throughout the Triad (NorthAmerica, Europe, and Asia-Pacific) and, if so, underwhat conditions. For example, will (bi)regional or(semi)‘‘global’’, or highly internationalized and/ordiversified MNEs fare better in this respect? It couldbe argued that firms internationalize partly to avoidstringent domestic regulation, which means thathighly internationalized MNEs have the opportu-nity to do less about climate change in their hostcountries. MNEs located in regions of the Triadwithout stringent climate change regulations (e.g.,North America and Asia-Pacific) would thus havethe possibility to use their geographical spread toavoid making any changes to their existing FSAconfigurations. But geographical spread could alsomotivate MNEs to exploit climate-induced FSAs

overseas. In addition, more international firms arealso exposed to more diverse public pressures,suggesting that it might be more efficient to haveone single ‘‘leading edge’’ strategy towards climatechange based on non-location-bound FSAs thatencompasses different worldwide standards simul-taneously, rather then a range of country-specificresponses to each standard/regulation individually.

Second, a related question is what consequencesforeign direct investment (FDI) has for emissions indeveloping countries. Fossil-fuel-based energy use

in developing countries such as China and India ison the rise, given their rapid industrialization. Atthe same time, MNEs are often highly active inthese countries by means of FDI. Inward FDIin developing countries is generally believed to be

associated with better (more efficient) technologiesand production methods. This could lead to spil-lover effects to local firms, particularly because oneof the Kyoto mechanisms – the Clean DevelopmentMechanism – potentially accelerates knowledgetransfers to developing countries. It could thus behypothesized that more inward FDI would reduceemissions. However, factor conditions and regula-tion could also have induced MNEs to locate theirpolluting activities in developing countries in orderto exploit local circumstances rather than toimprove them. In this case, FDI would be associated

with higher emissions. It can thus be questionedwhether inward FDI by MNEs increases or reducesemissions.

Third, to what extent and under what circum-stances do climate change measures affectcorporate performance? Organizational activitiesinduced by climate change could present uniqueFSAs, thus leading to competitive advantages andhigher corporate performance, or less ambitiouslycould result in energy efficiencies that reduce costs.But, on the other hand, measures to deal withclimate change may in certain circumstances(depending on for example industry/location/firm-specific aspects) also impose additional costs,which may or may not be worthwhile investmentsthat lead to high returns in the longer run. Anadditional question that could be asked is what arethe sustainability implications of these firms’attempts to address this global problem. Will MNEsbe able to contribute in a significant way to thesolution for a changing climate?

The exploration of the climate change issueclearly raises a number of questions and severalinsights into MNE strategy and FSA–CSA configura-tions that may also be interesting for scholars

working on more ‘‘mainstream’’ topics in interna-tional business. Climate change is an exemplary,perhaps even unique, issue to investigate howMNEs respond to socially relevant issues of sustain-ability, because it involves fossil fuel productionand consumption. Many MNEs (particularly inenergy-intensive industries) recognize the strategicimpact and, accordingly, mention activities thatseem to hint at initiatives to develop green FSAs orchange key FSAs. The study of climate changethus forms a research ‘‘frontier’’ that also clearly


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illustrates the complexities and societal relevanceof international business in the current epoch.

ACKNOWLEDGEMENTSSupport from the Netherlands Organization for

Scientific Research (NWO) is gratefully acknowledged. We thank the reviewers and the Departmental Editor, Alain Verbeke, for their constructive comments onearlier versions of this paper.

NOTES1 We shall, therefore, in the remainder of the paper

use the terms ‘‘FSA’’ and ‘‘capability’’ interchangeably.2Nevertheless, it must be noted that there may still

be some emissions from the production of hydrogen,but this depends on the way it is produced.

3 Although fuel cell and hybrid technology are quitedifferent, investing in hybrid technology does give car firms the building blocks needed for developing thefuel cell vehicle (Anderson & Gardiner, 2006). Futurehybrids decouple the mechanical connection between

engine and wheels, which is also a requirement for thefuel cell vehicle (Ricardo Consulting Engineers, 2003).

4 Although it must be noted that this depends partlyon the size of the home country. MNEs from smalleconomies are less likely to be affected by home-country regulations than firms from large economiessuch as the US (Rugman & Verbeke, 1998).

5The high costs of setting up a hydrogen infra-structure are an exemplary case of the difficulties thatMNEs face in transferring FSAs, as it requires consider-able linking investments to align an FSA with particular host-country CSAs (cf. Rugman & Verbeke, 2005).

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ABOUT THE AUTHORSAns Kolk ([email protected]) is Full Professor of Sustainable Management of the University of Amsterdam Business School, The Netherlands. Herareas of research, teaching, and publications are incorporate social responsibility and sustainability,especially in relation to multinational enterprises’strategies and international policy. One of thetopics on which she has published extensively isbusiness and climate change.

Jonatan Pinkse ( [email protected]) is AssistantProfessor at the University of Amsterdam BusinessSchool, The Netherlands. His areas of research,teaching, and publications are in strategy andsustainable management. His PhD thesis, whichhas been awarded with the 2006 ONE Academy of Management Best Dissertation Award, addressedbusiness responses to climate change.

Accepted by Alain Verbeke, Departmental Editor, 5 September 2007. This paper has been with the authors for one revision.


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