Back to basics: Behavioral theory and internationalization

PERSPECTIVE

Back to basics: Behavioral theory

and internationalization

Irina Surdu1,Henrich R. Greve2 andGabriel R. G. Benito3

1Warwick Business School, The University of

Warwick, Coventry CV4 7AL, UK; 2INSEAD, 1 Ayer

Rajah Avenue, Singapore 138676, Singapore; 3BINorwegian Business School, Nydalsveien 37,

0484 Oslo, Norway

Correspondence:GRG Benito, BI Norwegian Business School,Nydalsveien 37, 0484 Oslo, Norwaye-mail: [email protected]

AbstractInternational business (IB) scholars’ over-reliance on a select few theories leaves

our understanding of firm internationalization incomplete. The behavioraltheory of the firm (BTF) can offer new insights and can be used to model a

broad range of firm actions. We focus on the three basic BTF components:

problemistic search, learning by doing, and vicarious learning. Thesecomponents help us understand why firm behaviors are more dynamic and

heterogeneous than other theories allow. BTF, with its emphasis on how firms

assess performance according to aspiration levels, selectively learn and updateroutines, and selectively incorporate the learning of others, is better suited to

examine the diversity and change increasingly observed in internationalization

decisions. We explain why scholars should move beyond ‘‘dynamizing’’ static

theories and show BTF’s applicability to behaviors involving change such asmulti-mode market entries and market re-entries. BTF also helps examine the

decision to internationalize in the first place, nascent firm internationalization,

location choices, international market adaptation, and headquarter–subsidiaryrelationships. We encourage IB scholars to use theories that can handle the

complexity increasingly associated with modern firm growth, and propose BTF

as a promising starting point.

Journal of International Business Studies (2021) 52, 1047–1068.https://doi.org/10.1057/s41267-020-00388-w

Keywords: behavioral theory; dynamic MNE behavior; problemistic search; learning bydoing; vicarious learning; internationalization theory

The online version of this article is available Open Access

INTRODUCTIONFor the past five decades, the scholarly focus in the field ofinternational business has been on how multinational enterprises(MNE) generate rent by effectively utilizing their resources andcapabilities in attractive international markets. Recent comprehen-sive reviews and commentaries point out the progress made in IBresearch, but also claim that there are limitations against contin-uing this progress (Buckley, Doh, & Benischke, 2017; Delios, 2017;Rugman, Verbeke, & Nguyen, 2011). First, because internationalbusiness is always changing, IB theories should put dynamicscentrally in their epistemology. This requires going beyond‘‘dynamizing’’ essentially static theories to focus more on how

Received: 22 May 2020Revised: 2 October 2020Accepted: 22 October 2020Online publication date: 3 December 2020

Journal of International Business Studies (2021) 52, 1047–1068ª 2020 The Author(s) All rights reserved 0047-2506/21

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specifically firm behaviors change over time. Sec-ond, because it involves different contexts andfirms, international business is also heterogeneous,which calls for theorizing that is both suitablygeneral and sufficiently flexible to accommodatediversity in firm decision-making. The dynamismand diversity observed in firm behavior (Puig,Madhok, & Shen, 2020; Santangelo & Meyer,2017) suggests that internationalization decisionsare more complex than current models wouldpredict, partly reflecting different decision-makerexperiences, goals and expectations. Also, decisionsmade in an international context require somelevel of flexibility as firms inevitably face varyinglevels of uncertainty and may regularly need toadjust their behavior in different markets (Aharoni,Tihanyi, & Connelly, 2011). A narrow and staticview of internationalization is, thus, inappropriate.

There are two dominant theoretical perspectivesused in IB to study internationalization: the Upp-sala model (Johanson & Vahlne, 1977, 2009) andinternalization theory in its various iterations(Narula, Asmussen, Chi, & Kundu, 2019); seeBuckley and Casson (1976), Hennart (1982), Rug-man (1980), and Teece (1986). In their originalform, both the Uppsala model and internalizationtheory incorporated behavioral assumptions,which have, over time, faded from scholarly focus,making room for more simplistic explanationsconcerning firm behavior. In the original Uppsalamodel, the emphasis on uncertainty avoidance andlearning by doing follows behavioral principles, butthe subsequent applications of the model assumedthat a firm’s environment remains stable over time;implicit in this assumption is that, following a longperiod of learning-by-doing, firms will acquire asufficient amount of market knowledge in order toreduce uncertainty and make more informed,almost rational-like decisions (Foss & Weber,2016). The model makes a reference to dynamism(see Johanson & Vahlne, 1977, p. 30), but mostlydisregards the changing and varying nature ofmanagement incentives and expectations to movepast the initial export step, and their effect on thedecision-making process. The international invest-ment decision is rarely the result of progressivereasoning (Aharoni, 1966) with factors in theinternal and external environment of the firmeventually influencing investment choices. Becausethe Uppsala model has not provided sufficientemphasis and insight into aspects such as opportu-nity identification and development (Petersen,Pedersen, & Sharma, 2003), its empirical

applications have become highly deterministic overtime, limiting its predictive value. Added assump-tions of cumulative learning and environmentalstability have narrowed the scope of the model tocontexts and firms that fit such assumptions – thebehavioral theory of the firm is more basic, andhence more flexible.Internalization theory also mentions bounded

rationality, again following behavioral theoryassumptions that there are natural limits to pro-cessing information and making strategic decisions.Internalization theory proponents, however,address the problem of bounded rationality mainlythrough the ‘‘cost of information’’ logic (see Cas-son, 1999, 2000). This reasoning relies on anassumption of near-optimal reactions to missinginformation or limited information processingcapabilities, which narrows the scope of the theoryto contexts and firms with sufficient knowledge tomeet the assumption. Again, the behavioral theoryof the firm is more basic, and hence more flexible.This paper discusses how and why the behavioraltheory of the firm offers important insights intounderstanding modern MNE behaviors, which tra-ditional IB theories have only distantly drawn uponso far.Our discussion is not intended as a critique of

traditional IB theories. Instead, we propose that thebehavioral theory of the firm (Cyert & March,1963), as discussed here, is a complementary per-spective for analyzing firm behaviors that are oftenoverlooked, or narrowly explained, using extanttheory. We start by explaining how the behavioraltheory of the firm can provide new insights in thefield of IB and help exploration of increasinglycommon, but neglected internationalizationbehaviors. As such, we focus our discussion ontwo main questions: How does behavioral theory fitwith what we already know about internationaliza-tion decisions? How can behavioral theory answerquestions about firm internationalization that havenot been answered effectively using extant theory?To illustrate the utility of the behavioral theory

of the firm, consider the key decision of entering aforeign market. Entry mode research has focused onthe discrete choices that firms make on marketentry, and adequately explains, for example, entrythrough exporting, which is a common entrymode, or whether a firm chooses instead to estab-lish a foreign subsidiary in the country, therebyentering through an ownership-based mode (An-derson & Gatignon, 1986; Brouthers & Hennart,2007). Firms that practice multi-mode entry

Behavioral theory and internationalization Irina Surdu et al.

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strategies, however, remain a puzzle for extanttheories. Such strategies involve the simultaneoususe of more than one operation mode – i.e., theconcurrent use of market-based, cooperation-based,and/or ownership-based organization modes – inconducting a given activity in various locations(countries) or conducting several activities in oneor more locations (countries). Evidence suggeststhat the use of multiple, rather than distinctsingular modes, is, in fact, increasingly widespread(Benito, Petersen, & Welch, 2009, 2011; Clark,Pugh, & Mallory, 1997; Putzhammer, Fainshmidt,Puck, & Slangen, 2018).

The evidence concerning the use of multiplemodes, however, fits extant theory poorly. Forinstance, the Uppsala model is primarily used topredict a progression in modes given adequatelearning, evolving business relationships, and pos-itive performance. It predicts a transition fromsimple and modest modes (such as market transac-tions), to more demanding ones in terms of com-mitment and risk, until the firm has the resourcesand capabilities needed to reduce host marketuncertainty and set up a wholly owned subsidiary.The firm evolves from one step to another, shed-ding simpler ways of organizing and adopting moredemanding ones as it moves forward along in itsinternationalization path. As such, the idea ofmultiple modes goes against the Uppsala modellogic, inasmuch as using multiple modes is contraryto the prediction of a steady transition. Similarly,research based on internalization theory has typi-cally focused on singular mode choices – presum-ably what has been regarded as the main mode –but does not predict singular mode choices. It doesnot predict multiple mode choices either, due to itsfocus on the costs of performing value activities,which may vary across contexts, requiring differentways of organizing them efficiently (Benito, Peter-sen, & Welch, 2021). Although firms that conductseveral value activities, in one or several locations,may rationally employ multiple modes, the observ-ability of these costs is sufficiently poor thattraditional IB theories do not make easilytestable predictions.

Next, consider the post-internationalization firmbehavior as another example. Foreign market re-entry occurs when a firm returns to an interna-tional market it has previously exited, either as apartial exit such as a significant decrease in exportintensity, or total exit such as when the firm nolonger sells its products or services in the market(Benito & Welch, 1997; Welch & Welch, 2009).

Research on re-entry finds that it is a frequentoccurrence (see Aguzzoli, Lengler, Sousa, & Benito,2020; Surdu, Mellahi, & Glaister, 2019; Surdu,Mellahi, Glaister, & Nardella, 2018; Surdu &Narula, 2020). Again, evidence concerning exitand re-entry behaviors fits extant theory poorly.The Uppsala model of internationalization assumesthat firms learn by acquiring experience in amarket, which, over time, becomes a source ofincreased confidence and increased market com-mitment. It is a model of increasing commitmentexcept when failure to perform in that marketindicates a need to retreat. Re-entrants follow anon-monotonic growth model, whereby they entera market, exit, and may or may not increasecommitment upon re-entry. For re-entrants, theexperience accumulated in the market during theinitial entry may be difficult to interpret or not beperceived as relevant, particularly after a period oftime-out which may have led to organizationalforgetfulness as well as alterations in the externalenvironment of the firm. Overreliance on utilizinginternal capabilities such as past experience, maylead firms to employ the same strategies that havebeen unsuccessful in the market, upon re-entry(Surdu et al., 2019). Furthermore, post-internation-alization decisions such as exit and re-entry are alsoa poor fit to internalization theories. The hightransaction costs associated with returning to apreviously failed market, where the firm clearlydoes not have superior firm-specific resources tosuccessfully leverage for competitive advantage,makes re-entry improbable. Were the MNE to re-enter, it would not be expected to commit signif-icant resources to the previously exited market.Multi-mode strategies and foreign market re-

entry post exit are examples of commonplaceinternationalization behaviors that remain under-studied in part – we argue – because they demon-strate dynamic and complex firm internationaliza-tion behaviors that are a poor fit with thecommonly used IB theories. Theories that predictstatic regularity will be drawn to static and regularbehaviors. However, dynamic behaviors are notanomalies, nor can they be classed as outliers.Rather, they exemplify lacunae that call forthoughtful scholarly engagement. For ambitiousIB scholars, they are opportunities to exploretheories that can enrich our understanding ofinternationalization and improve our claim tomanagerial relevance. We propose the behavioraltheory of the firm as a theory that offers suitable ex-planations for dynamic firm behaviors such as


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multi-mode and re-entry strategies, and also forseveral other internationalization-related decisions,as we will demonstrate later in this paper. We alsohighlight that existing IB theories which draw onbehavioral theory foundations, can be strength-ened and deepened if the behavioral theory of thefirm was to be applied more rigorously.

In the remainder of this paper, we present keyelements of behavioral theory and propose appli-cations to various internationalization behaviors.We start with a discussion of the theory and itselements of problemistic search, learning by doing,and vicarious learning. Then, we consider how thebehavioral theory of the firm (as we propose it) maybe used to study selected internationalization deci-sions such as examining internationalization moti-vations, nascent multinationals, internationallocation choices, international market adaptation,and the headquarter–subsidiary relationship. Weend with a broader discussion of how behavioraltheory can, in our view, inspire IB research.

THE BEHAVIORAL THEORY OF THE FIRMHow does the behavioral theory of the firm fit withwhat we already know about internationalizationdecisions? The behavioral theory of the firm viewsthe firm as a coalition of key stakeholders such asmanagers, shareholders, employees and customers,amongst others, each with their own goals andexpectations; importantly, these goals and expec-tations become adjusted over time in response torelevant changes in the firm’s environment (Cyertand March, 1963).1 Since firms have to considermany different goals, at different points in time,there is not a simple relationship between thesegoals and the subsequent decision-making pro-cesses designed to achieve those goals. Organiza-tions themselves vary based on the amount ofimportance (and thus, resources) allocated to speci-fic goals at a given point in time. The essentialpieces of the behavioral theory of the firm arecondensed into the famous Chapter 6 (in the firstedition) of Cyert and March (1963: 114–127).

Specifically, firms do not optimize, they satisfice,which means that on each performance goal,performance above the aspiration level is sufficient,but performance below the aspiration level initiatesproblemistic search. Problemistic search, in turn, ismyopic through its focus on the source of theproblem and the current activities of the firm, andit is persistent until performance is brought abovethe aspiration level or the aspiration level is

lowered. Because there are multiple goals andcoalitions monitoring each goal, the firm is in astate of quasi-resolution of conflict. It is also mademore rigid through uncertainty avoidance, throughemphasizing near-term goals and through seekingto negotiate a predictable environment. Finally,organizations and their participants learn. Organi-zations may repeat actions that have had priorsuccess, while participants may show a bias in favorof solutions that they are familiar with throughtraining, experience or observation.Although these are currently the most important

elements of the behavioral theory of the firm, theyare far from the only with potential use. The theoryhad extensive coverage of standard operating pro-cedures, which has become a research stream onorganizational routines and their effects on firms(Becker, 2008). It covered organizational politicsand the rise of dominant coalitions in manage-ment, which has a modern equivalent in researchon top-management team composition (Hambrick,Cho, & Chen, 1996; Hambrick & Mason, 1984).Finally, there is a rich research stream on howorganizations search for either proximate solutions(exploitation) or distant opportunities (explo-ration) (Lavie, Stettner, & Tushman, 2010), inspiredby a later seminal organizational learning paper(March, 1991). This theory has been followed by,and is consistent with, much later theory andevidence on how different forms of experience andsubsequent learning help firms build routines andchange their strategic behaviors (e.g., Kogut &Zander, 1992; Nelson & Winter, 1982).Figure 1 provides a behavioral model linking the

individual and organizational characteristics asso-ciated with MNE decisions to three inter-relatedtheoretical mechanisms: problemistic search, learn-ing by doing and vicarious learning. We explorethese theoretical mechanisms in detail below.

Problemistic SearchThe theory of problemistic search has developedinto a major research stream on the effects ofperformance feedback, started by papers showingthat performance relative to aspiration levels, infact, led to market entry and exit (Greve, 1998) aswell as other strategic decisions such as R&D andinnovation launches (Greve, 2003). This workexceeds 100 empirical papers and has beenreviewed multiple times (Gavetti, Greve, Levinthal,& Ocasio, 2012; Kotiloglu, Chen, & Lechler, 2019;Posen, Keil, Kim, & Meissner, 2018; Shinkle, 2012),with scholars in agreement about its potential and


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usefulness to examining strategic decisions, includ-ing IB decisions such as corporate internationaliza-tion (Jung & Bansal, 2009) and internationalmarket development (Su & Si, 2015).

The theory and empirical conclusions on prob-lemistic search are clear. First, as theorized by Cyertand March (1963), organizations compare theirperformance on each goal with aspiration levels,which, in turn, are determined through compar-isons with peers and with past performance. Thismeans that the performance level that is catego-rized as a failure, and hence triggers search, differsfrom firm to firm but is predictable from its pastperformance and the performance of similar firms(Bromiley & Harris, 2014; Greve, 1998). Second,organizations have multiple goals. The goals thattend to trigger the most diverse forms of search,and the strongest responses, are profitability andclosely related goals such as market share (Greve,2008; Shinkle, 2012). Third, problemistic searchusually uncovers modifications of current activitiesas solutions, and these modifications are guided bythe specific goal shortfalls (Baum & Dahlin, 2007;Gaba & Greve, 2019; Kuusela, Keil, & Maula, 2017).This research has moved into examining the goalconflicts in multi-unit organizations typical forMNEs (Gaba & Joseph, 2013).

The theory of problemistic search is a differentlens on behaviors related to internationalization,and immediately suggests propositions related toour initial examples around multi-mode and re-entry behavior. Multi-mode entry strategies are

consistent with the behavioral theory of the firmbecause it does not rank entry modes by level ofcomplexity or commitment. Central statements inthe theory are that organizations learn from theirexperience and develop routines, which impliesthat firms will differ in their degree of multi-modeentry as a predictable result of their experience. Afirm that has used multiple modes of entry before,either in different locations or through evolution asspecified in the Uppsala model, will have routinesin place for each mode. If these past uses areperceived as successful, the MNE will draw freelyfrom them when entering a new market dependingon contextual differences such as availability ofresources or estimates of the best-fit entry mode.Indeed, the specific choice may be predictable iftaking into account that the learning from experi-ence also involves matching of current decisions topast decisions and outcomes (Cyert & March, 1963:125–127). Yet, the outputs of one decision made arenot necessarily the inputs of another. Decisionmakers are likely to compare market characteristicsand choose the mode used in the most similar pastentries, unless they were unsuccessful, in whichcase, one mode associated with multiple unsuccess-ful entries is less likely to be used. Given thepremise that search is problem-oriented, we alsoconsider that the rules of the search may be alteredover time. Hence, from a problemistic search lens,mode choices are not so easily predictable, as firmsdynamically adjust when they encounter problemsby, in this example, adding new inputs (knowledge,

Figure 1 Behavioral model of the characteristics, mechanisms and outcomes of MNE strategic decisions.


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information) into the subsequent mode choice,whilst old inputs are, in part, disregarded. The focusis oriented towards matching strategies to firmcontexts rather than calculating options orconsequences.

Similarly, when MNEs search for solutions to aproblem of low performance in a host market, oneform of myopic search is to adjust their interna-tional presence, in the form of retreats or furtherinvestments. Indeed, it has been shown that themanner in which low profitability combines withoverall resources predicts investment expansionversus investment reduction as a response (Kuuselaet al., 2017). Firms also learn from their experience,so a retreat from one market would normally resultin learning that the market is difficult, or that theMNE lacks the necessary resources and capabilitiesto succeed, and hence should not re-enter thatmarket. Importantly, the lessons drawn from sin-gular events such as a market retreat are unpre-dictable (March, Sproull, & Tamuz, 1991), and aredependent on how the MNE frames the causesassociated with underperformance and thus, theretreat. The top management team may frame theunderperformance as one caused by an incompe-tent country manager or attribute it to bad timingsuch as a slump in demand, so at a time in whichexpansion is seen as the correct solution, a re-entrymay appear to be a better choice than entering anew market. Indeed, a later search for a solution tolow corporate performance may suggest re-entryinto a familiar market as a myopic solution. This islikely considering the effect of dominant coalitionson decision-making, as a setback in one marketweakens a dominant coalition favoring interna-tionalization. The dominant coalition will stillfavor internationalization and may re-enter themarket after identification of a suitable scapegoat.Importantly, myopic search driven by MNE goalscan lead to strategic solutions being categorizeddifferently, so instead of deciding what do to with ahost market, the firm’s executives end up decidingwhere to expand. Insights from problemistic searchand dominant coalition theory would show that re-evaluations of search rules and different problemframing can produce distinctive strategic decisions.Further, there are difficulties in placing boundariesaround organizational coalitions – at differentpoints in time, different coalitions may be speci-fied. In contrast with past theorizing, we discussdecision alternatives in response to strategic prob-lems not necessarily strategic opportunities.

Learning by DoingOrganizations learn from their own experiencethrough direct learning by doing, interpretationof the organizational history, and selective record-ing and retrieval of experiences (Levitt & March,1988). This gives organizations stable sets of routi-nes both of the kind that are executed repeatedlyand of the kind that are executed in response tospecific situations (Feldman, 2000; Feldman &Pentland, 2003). There are multiple researchstreams documenting how such learning producesbehavioral patterns in organizations that can bepredicted and understood from their experiences.For instance, research on acquisitions has foundthat rate of acquisition, selection of acquisitiontarget, and integration of target are all subject tolearning from experience (Barkema & Schijven,2008; Haleblian, Kim, & Rajagopalan, 2006;Trichterborn, Zu Knyphausen-Aufseß, & Schweizer,2016). Research on alliance formation and perfor-mance has generated similar findings (Anand &Khanna, 2000; Barkema, Shenkar, Vermeulen, &Bell, 1997; Gulati, Lavie, & Singh, 2009), withscholars explaining that firms would benefit fromacquiring market and institutional knowledge inorder to enhance their firm-specific advantages andeffectively engage in international partnerships(Collinson & Narula, 2014; Narula, 2012, 2014).Research on the internationalization decision itselfrelies significantly on experience accumulated overtime as a source of learning (Casillas, Barbero, &Sapienza, 2015; Sapienza, Autio, George, & Zahra,2006), with fewer studies starting to recognize thatfirms learn from different types of experiences(Gong, Zhang, & Xia, 2019; Zeng, Shenkar, Lee, &Song, 2013). Studies focusing on experiences thatproduce learning and routines which are executedin response to specific situational characteristics,tend to be even more scarce (but see Arikan &Shenkar, 2013; Chang & Rosenzweig, 2001; Perkins,2014).Research on learning by doing has become

prominent, and repetition of strategic actions isso common that analysts control for it whenexamining different learning processes. Forinstance, research on the diffusion of new tech-nologies and strategic actions among firms rou-tinely controls for such repetition in firm strategies(Compagni, Mele, & Ravasi, 2015; Greve, 2009;Miller & Chen, 1994). Importantly, however, find-ings suggest that firm behavior goes beyond repe-tition, as there is clear evidence that repeated


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strategic actions are done with greater sophistica-tion as a result of the learning they enable (Dekker& van den Abbeele, 2010; Lavie, Kang, & Rosen-kopf, 2011; Zollo & Reuer, 2010).

The findings on the effects of learning fromexperience are closely related to a large researchstream on how organizations build up and exploitsets of routines either for continuous use or for usecontingent on specific events (Becker, 2008). A keyissue for understanding this literature is that learn-ing by doing, or learning from own experience, isno longer restricted to the conception of routines asactions that are repeatedly done by small groups ofpeople as part of the regular production (Nelson &Winter, 1982). Instead, routines can be seen asrecipes that are used flexibly to produce specificoutcomes, or more generally, as grammars ofactions that start with specific experience and canbe varied to take into account environmentaldemands and changes (Pentland & Rueter, 1994).This view of routines is more flexible than thetraditional one, but it still implies that organiza-tions vary in their ability to adapt depending onhow broad their experience is, and how well it hasbeen recorded into organizational memory (Feld-man & Pentland, 2003).

To the extent firms use multiple modes, they aremore likely to choose modes that are relativelysimilar to each other, as a way to utilize theknowledge and routines they already have andreduce the need for additional learning. For exam-ple, market-based operations and contractual oper-ations share the key characteristic of involvingseparate firms doing business with each other.While the regularity and time horizon typicallydiffer between the two modes of operation –markets transactions may be serendipitous, tran-sient, and flexible, whereas the nature of contractsis to establish and structure a lasting bond withinspecifically agreed parameters – both operationmodes entail keeping a clear interface betweenactors. Thus, operating both modes concurrentlyimposes few additional organizational strains onthe firm. Similarly, both a joint venture and awholly owned subsidiary imply setting up entitiesthat are integrated with the rest of the organiza-tion. Both modes require largely the same organi-zational routines to run effectively, so operatingthem alongside each other does not typicallyrequire significant adjustments, although manag-ing a joint venture may entail additional challengesdue to its shared ownership. These conjectures arealready consistent with work on how firms convert

learning from one type of experience into betterperformance on closely related forms of experience(Zollo & Reuer, 2010). Conversely, operating mul-tiple modes that share few characteristics representshurdles that make their simultaneous use lesslikely. These predictions follow readily from a viewof learning new routines from own experience, andthey are easily testable. Clearly, firms using multi-ple modes can be explained by this mechanism,and the theory predicts that the likelihood of doingso (and the resulting performance) is a function ofexperience associated with each mode.

Vicarious LearningOrganizations can also learn by observing theactions of other firms and noting the outcomes ofthose actions. Vicarious learning (Duysters, Lavie,Sabidussi, & Stettner, 2019; Ingram & Baum, 1997;Kim & Miner, 2007; Myers, 2018) involves makingmeaning of, and imitating (most likely with someadaptations), the actions or characteristics of otherorganizations, in the belief that emulating them isassociated with a higher likelihood of achieving abetter result than if the focal firm would make itsdecisions in isolation, perhaps through a lengthyand risky process of trial-and-error (Duysters et al.,2019; Haunschild & Miner, 1997). As a shortcut tolearning, identifying positive outcomes (with someregularity) reinforce beliefs about the appropriate-ness of those actions, whereas spotting negativeoutcomes may lead to avoiding the actions per-ceived to have caused them. This type of learning isparticularly important for the modern MNE, per-haps more so than knowledge acquired mainlythrough experience of operating abroad. Advance-ments in IB have recognized the importance oflearning from others (Johanson & Vahlne, 2009)but still focus on learning as a replication ofpositive behavior.Of course, the conjunction of actions and out-

comes is, at times, an uneasy one. Sometimesactions can be observed, but not outcomes, perhapsbecause the process of producing an outcome islengthy (Kim & Miner, 2007). Sometimes, out-comes can be observed, but it is hard to link themto a specific action because the cause-effect relationis ambiguous, or because the outcome is due to acombination of several actions (Myers, 2018).Either way, the focus on positive replications ofroutines and strategies is problematic. The organi-zations and strategies that are often observed, arethose which have survived the selection processand achieved success (Denrell, 2003). Focusing on


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the behavior of successful firms may bias theobservations of managers, and thus the lessonslearned through vicarious learning.

The earlier findings concerning the effects ofvicarious learning, suggest that firms most effec-tively learn from the failures or near failures ofother firms (Ingram & Baum, 1997; see also Kim &Miner, 2007). In practice, the management of MNEactivities is more dynamic and involves a regular re-evaluation of investments in international marketsby, for instance, partial divesting from marketswhere the MNE is under-performing (which caninvolve a switch from a full ownership mode to amarket-based mode) and increasing investment inmarkets where the MNE is more likely to achieve adominant position (therefore switching to highercommitment, ownership-based modes of opera-tion). In more extreme cases, firms are forced tocompletely divest their market operations, inwhich case, they formulate new internationalstrategies to reallocate resources or seek for waysin which to re-enter.

The mechanism of vicarious learning, we pro-pose, is a likely candidate to understand themanner in which MNEs dynamically alter theirstrategic behavior in international markets. Forinstance, in the case of exit and re-entry, vicariouslearning would involve multiple processes: indus-try-level under-performance can mean near-failurefor firms and trigger them to search for newstrategies or new markets; provide an example ofwhat activities to undergo and avoid; provide anexample of how to manage local competitors andinstitutional actors or how to negotiate with old ornew partners; provide an opportunity to look fornew markets to enter and sustain growth goals.Own experience often presents only part of thisinformation at a given point in time. Firms may notlearn from their own failures in a timely manner(Kim & Miner, 2007) either because the failure istoo traumatic in the short term or because relevantdecision makers may have left the company.Learning from others’ failure may incentivize firmsto engage in search activities, as they are still able toavoid their own underperformance. Importantly,MNEs which have experienced a near failure buthave strategically recovered (e.g., firms which onlypartially exited, or which re-entered) provide otherfirms with the conditions that can threaten theirown survival but also with the strategic options torecover from failure. Learning from firms whichhave both failed and have managed to recover (e.g.,re-entrants) provides a good indication of the

symptoms of a problem (what happened andwhy) but most importantly, its cure (a provensolution).At the same time, vicarious learning involves

complex sequences of actions and events whichcomplicate managerial ability to make sense of thelessons learned, leading to uncertainty around theassociated strategic outcomes (Kim & Miner, 2007).Organizational members have cognitively heldbeliefs and biases that influence the manner inwhich lessons learned are interpreted and incorpo-rated into organizational routines. For instance,some managers may be overconfident in their skillsand ability to strategize and underestimate theprobability that their own organizations can fail inthe market. Thus, less managerial attention is paidto the actions and outcomes of other firms. In turn,managers who have significant experience withmanaging failure, may become more alert tounsuccessful strategies of other firms in theirindustry, and allocate more managerial attentionto linking actions to outcomes. Learning processesalso do not always incur in the individual firmalone. Firms compete as well as collaborate, and theinteractions within and between firms can consti-tute valuable inputs to learning (Myers, 2018)which may differ in each institutional environmentin which the firm operates.

A Complementary Lens for UnderstandingInternationalizationAs suggested in Figure 1, these three theoreticalmechanisms – problemistic search, learning bydoing and vicarious learning – can be used toenrich our understanding of firm decisions beyondentry mode dynamics and foreign market re-entry.Importantly, the behavioral theory of the firm canexplain firm heterogeneity and firm change. Theinstitutional characteristics of multiple goals andmultiple actors mean that the goals and perfor-mance configuration of firms differ from eachother, so at any one time, some firms are notengaged in problem solving while other firms areengaged in solving problems that may differdepending on the firm. An important reason forthis is multiple actors, as the experience of eachfirm’s dominant coalition of decision makersshapes their strategic decisions.Among the theoretical mechanisms of behavioral

theory, learning from own experience is especiallyconsequential over time, because firms build expe-rience that alters their decisions, and each firm hasa unique stock of experience, leading to both firm


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change and interfirm heterogeneity. These areobservable and their effects are easy to understandand predict from the behavioral theory of the firm,but they require attention to how experiencesdiffer. Similarly, vicarious learning is a source offirm change and firm heterogeneity because theactions of others change over time, in part as aresult of their learning from experience, and firmsthemselves differ in what firms they learn from.Again, these are observable characteristics, andtheir effects are easy to understand from thebehavioral theory of the firm. Together, thesecharacteristics and mechanisms can help explain abroad range of decision areas, including but notlimited to those listed in Figure 1.

In the following section, we explore the relation-ships between individual/organizational character-istics, theoretical mechanisms and key IB decisionsand highlight the value that a behavioral perspec-tive can bring to further our understanding ofinternationalization behaviors.

BEHAVIORAL THEORY AND INTERNATIONALBUSINESS DECISIONS

So, how can behavioral theory help to answerquestions about MNE internationalization thatcannot be answered effectively with extant theory?We identify IB strategic decisions of practical,managerial relevance, some of which have been arecurring theme in IB research (i.e., pre-interna-tionalization decisions) and others constitute grow-ing areas of study (i.e., post-internationalizationdecisions such as international market adaptation).We identify five major areas where IB scholarscould benefit from using alternative insights restingin the behavioral theory of the firm: (1) thedecision to internationalize; (2) nascent MNEinternationalization; (3) international locationchoices; (4) international market adaptation; and(5) headquarter–subsidiary relationships. The list isfar from comprehensive and is somewhat reflectiveof our own research interests, but we offer it as aguide for future inquiries and meaningful develop-ments in the internationalization literature and itspractice.

Exploring the Motivationsfor the Internationalization DecisionThe decision to internationalize in the first placemay be accurately explained through the lens ofproblemistic search. Extant research has depictedinternationalization as the decision of a firm

endowed with superior resources and capabilities– which are assumed to constitute a source of firm-specific advantage (Caves, 1971; Hymer, 1976) – toenter new, international markets where theseresources are likely to be successfully exploited,generally through high commitment operationmodes (Narula, 2006; Narula & Verbeke, 2015).Also, drawing on March (1991), Cuervo-Cazurra,Narula, and Un (2015) make an important distinc-tion between exploitation and exploration ofresources and capabilities as drivers for internation-alization. However, internationalization (i.e., thedecision to engage in cross-border business activi-ties) is not something most firms do. The over-whelming majority of firms – even in small, openeconomies – have an exclusively domestic focus(Bonaccorsi, 1992). It seems narrow to assume thatthe dominant domestic focus is because all domes-tic firms lack a source of firm-specific advantagewhich they could effectively exploit in interna-tional markets. Instead, a broader view is that overtime, factors in the internal and external environ-ment of the firm change and thus, will drive somefirms to internationalize, while others do not facesuch drivers.The current assumption is that external, more

easily measurable changes such as a decline in homemarket sales or increased host market attractivenesslead to internationalization (Guler & Guillen, 2010).To explore whether changes in aspiration levelsdrive internationalization, we need some furtherresearch on firm goals and dynamic responses tothose goals. Firms have financial goals, in which casea lack of performance below aspiration levels athome may stimulate them to look for alternative,international markets to enter. Such an internation-alization motive would be consistent with theevidence on how performance below aspirationlevels in financial goals such as return on invest-ment (ROA) can lead to a broad range of strategicactions (Greve & Gaba, 2017; Shinkle, 2012). Still,this does not fully explain the heterogeneity in firmbehavior, i.e., why some firms internationalize, andmany others do not. Here, we particularly disagreewith the idea that the mechanisms driving interna-tionalization – the notions of incrementalism andpath dependence – have remained unchanged(Vahlne, 2020), as path dependence is not alwaysthe most relevant aspect of firm behavior anddynamism is reflected in more than incremental,stepwise decision-making.Our question is whether inability to achieve the

set sales, production, and profitability goals at


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home is what actually triggers internationalization,or whether it is changes in the goal structure (e.g.,due to comparing with, and learning from, otherfirms) that are the main drivers to internationalize.From a behavioral theory lens, firms are expected tomeasure their performance in comparison to anaspiration level on a given goal. Here, currentresearch on the behavioral theory of the firm lagsbehind because there is much research on firmreactions to multiple goals (Baum & Dahlin, 2007;Gaba & Greve, 2019), but not yet sufficient work onhow firms choose their goals. The need for moreresearch on how firms come to incorporate goalsheld by other firms in their peer group has beennoted (Greve & Teh, 2018), but few studies haveexamined what drives decision makers to set newgoals to measure their organization’s performanceand make strategic changes. When firms create newnon-financial goals, a range of new implicationsbecome possible. Importantly, internationalizationmay become a goal simply because top managersobserve the decisions of other firms in their indus-try to internationalize. This is exacerbated by thefact that there are mostly positive outcomes asso-ciated with the decision to internationalize, such asenhanced reputation for the firm and individualdecision makers (Thams, Alvarado-Vargas, & New-burry, 2016). This means that, when domestic firmsare exposed to the activities of more global com-petitors, they may alter their goals, potentiallyleading them to set internationalization as a newgoal, which in turn may create a discrepancybetween the firm’s actual performance and itsaspirations. Situations where performance is belowaspiration levels will lead to a reassessment oforganizational practices and a pr2020sity to takerisks and develop remedial actions, such as direct-ing more resources towards internationalizing(Cuervo-Cazurra et al., 2015). Over time, if perfor-mance raises above aspiration levels, it provideslegitimacy and support for the MNE to engage infurther internationalization activities.

Research into internationalization as an emerg-ing goal offers a shared opportunity for researchersin IB and the behavioral theory of the firm. Casualobservation suggests that internationalization does,indeed, enter the goal structure of many firms, andobservation of peer firms internationalizing andreaping rewards from doing so may be an impor-tant driving force. This theoretical idea is a goodmatch with the availability of new data and ana-lytical methods for examining firms’ goal

structures, such as through text analysis of annualreports and other communications to investors.

The Internationalization of Nascent MNEsFrom its inception, IB has been concerned with,and developed theory for, the traditional, largeWestern MNE. It is increasingly evident that firmsdiffer in their ability to internationalize, interna-tionalization motives and strategies (Awate, Larsen,& Mudambi, 2012; Li & Fleury, 2020; Narula, 2012;Sutherland, Anderson, & Hu, 2020). The idea thatinternationalization is driven by firm-specificresources and capabilities that constitute an advan-tage in international markets often limits ourunderstanding of internationalization to certaintypes of MNEs i.e., the older Western MNEs whichhave accumulated significant stocks of knowledgeand experience over time and developed routinesthat often shape their internationalization. Firmswith deeply embedded organizational routines areexpected to absorb new knowledge accrued fromexperience, learn, upgrade their firm-specificadvantages and make superior internationalizationchoices (Kogut & Zander, 1992; Narula & Verbeke,2015; Santangelo & Meyer, 2011, 2017).Whilst the principles behind becoming an MNE

(e.g., ability to compete internationally) may nothave drastically changed (Narula, 2012), the inter-national success or failure of firms does not alwaysrest in their routines and pre-existing firm-specificadvantages. Nascent multinational firms (such asborn globals or emerging market multinationals)cannot rely on their international legacy or drawfrom a rich pool of knowledge acquired throughinternational experience (Knight & Liesch, 2016).Born globals – firms which internationalize fast,generally within 3 years after inception (Knight &Cavusgil, 2004) – are relatively young and thus areunlikely to possess an organizational history ormemory, or have deeply embedded routines thatcan be used to reduce the costs and uncertaintyassociated with internationalization (Mathews &Zander, 2007). Firms originating from emergingmarkets may have been operating domestically forlonger, but they lack international experiencerelative to developed market counterparts (Suther-land et al., 2020); which has led to them also beinglabelled as nascent (see Narula, 2012). Emergingmarket firms are also less likely to rely on routine-based learning as a prerequisite to internationaliza-tion. Alternative explanations build on the role ofnetwork embeddedness as a source of learning(Elango & Pattnaik, 2007; McDermott &


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Corredoira, 2010) or learning from other firmsthrough engaging in cross-border mergers andacquisitions (Deng, 2009).

From a behavioral perspective, the lack of expe-rience and knowledge generally drawn on todevelop routines does not necessarily put nascentfirms at a competitive disadvantage. Nascent firmslikely possess other advantages, such as moreflexible routines (Kumar, Singh, Purkayastha, Popli,& Gaur, 2020) that allow them to learn and repeatappropriate behaviors, whilst at the same timebeing able to unlearn and disregard less appropriatebehaviors. This is particularly relevant in the con-text of constantly changing environmentaldemands, in that nascent firms will seek to growinternationally faster and catch up with globalcompetitors and are thus faced with a multitude ofenvironmental demands and opportunities to learnin each market entered (Li & Fleury, 2020). Knowl-edge and experience accumulated in the past maynot always provide useful routines that can aid infuture internationalization endeavors such asdeciding which market to expand into and whichmodes of operation to opt for. Changes in the hostmarket environment may mean that firms have todisregard current knowledge and make room fornew learning. Nascent MNEs are less likely to sufferfrom learning myopia (Levinthal & March, 1993)and thus, may be more willing and able to makechanges to their organizational practices and strate-gies to realign them with environmental demands.Firms that are able to weave new knowledge intotheir organizational routines – whether this knowl-edge comes from own experience or the experienceof others – may be able to internationalize faster, bewilling to enter and re-enter riskier markets, as wellas engage in a rapid adjustment of their initial entrydecisions. Importantly, we note that, by incorpo-rating new constraints such as lack of resources,young age and myopia, and the factors needed tomanage them, especially strategic flexibility andexperience with trial-and-error learning, the behav-ioral theory of the firm could broaden the applica-bility of traditional models such as the Uppsalamodel and internalization theory to these nascentfirms.

Our observations on nascent MNEs point to aresearch opportunity shared by researchers in IBand behavioral theory. Although firm age is recog-nized as an important factor in determining speedof learning (and unlearning), with younger firmsbeing more flexible (Barnett & Pontikes, 2008;Vermeulen & Barkema, 2001), concerns such as

data availability have led to overreliance on olderfirms as a research context. The main exception isthe work on emerging industries, but such researchis equally limited because it studies young firms,with limited variation in firm age (but see Carroll,Bigelow, Seidel, & Tsai, 1996). When data limita-tions prevent comparisons that are theoreticallyimportant, such as the differences in learningbehavior due to firm age and experience types,and the resulting differences in internationaliza-tion behaviors and outcomes, it is time to look forbetter data.

MNE Location ChoicesAnother important issue in IB is whether firmsfollow global strategies in the sense of havingworldwide footprints (i.e., covering many countriesin different parts of the world), or more regionalstrategies by concentrating on fewer markets in oneor two regions (or continents). We note that thisdecision is different from firms’ degree of interna-tionalization per se. Firms may well be highlyinternationalized (measured as a ratio of foreign-to-total along some key dimension such as sales,production, assets, employees), but retain a con-strained geographical footprint. The explanationfor MNE location choices has been that MNEsconcentrate their international activities in hostlocations that share similar characteristics such assimilar technological infrastructures, the presenceof knowledge intensive, innovative firms and rela-tively homogeneous demand (Rugman & Verbeke,2004). Again, this is often explained by industryfactors, which masks substantial firm heterogene-ity. An alternative explanation builds on the role offirm positions in domestic networks and on the roleof absorptive capacity required to benefit from theflows of knowledge originating from these net-works and use it to broaden or constrain the scopeof internationalization locations (Iurkov & Benito,2018). Overall, scholars conclude that concentrat-ing international operations in one or few countriesor regions is beneficial for the MNE because itreduces the control and co-ordination costs associ-ated with managing operations in dispersed mar-kets, allowing for an overall effective resourceallocation and resource management.However, MNE location choices are idiosyncratic

and vary with the firms and managers making thesechoices (Buckley, Devinney, & Louviere, 2007).Indeed, there is evidence that location choices areinfluenced by remarkably simple sources of infor-mation availability, such as media coverage


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unrelated to the business opportunities of thelocation (Kulchina, 2014). The behavioral theoryof the firm could provide additional understandingof international location decisions by analyzinghow they are shaped by different types of experi-ences and routines. For instance, internationallocation strategies may vary as a result of MNEsbeing able to draw from repetitive compared tomore flexible organizational routines. To the extentthat a firm operates in multiple markets, it is morelikely to consider those markets which are similarto one another and thus, which enable utilizationof existing knowledge (about customers, competi-tors) and routines (about what strategies work anddo not work in the market). Hence, a typicalexpectation in international business is that firmswill, all else equal, tend to start their internation-alization in markets that are close and similar totheir home market (Johanson & Vahlne, 1977). The‘‘all else equal’’ condition is key, however, as suchdecisions are also affected by other factors such asthe motivation – or economic rationale – for theinternational venture, which delimits the feasibleset of location alternatives. For example, Norwe-gian firms seeking low cost locations for theirmanufacturing may have to search for viable sitesin nations that are at considerable distance –however measured –, simply because nearbynations also have high cost. Still, as demonstratedby Benito and Gripsrud (1992), even if the initiallocation decisions entail a significant step in termsof distance, firms tend to favor host countriesnearby the initial entry when making subsequentforeign entries, thereby taking advantage of exist-ing and transferable knowledge.

Indeed, repetitive routines may reduce the costsassociated with learning about different markets.There is evidence that firms apply learning bothfrom own experience and from the experience ofpeer firms when choosing location choices forinternationalization (Bastos & Greve, 2003). Yet,learning is considered most effective – but alsomost challenging – when experience acquired inone market can be transferred into a different, moredistant market location (Eriksson, Johanson, Majk-gard, & Sharma 1997). As Pedersen and Shaver(2011, p. 273) remark ‘‘the first step is the mostdifficult and demanding’’; the time and resourcesinitially spent on developing internationalizationcompetence and routines is an investment thatenables further steps abroad. Here, we suggest thatflexible routines may enable MNEs to use knowl-edge acquired from experience in one market

location into another market location. Further-more, the experience and intentions of the man-agers may influence how choice attributesassociated with each international location areweighed; a market can be characterized by highgrowth and high investment potential (allowing forthe exploitation of firm-specific resources), but alsohigh risks such as political instability and poorprotection of intellectual property rights.An important and relatively more recent devel-

opment in behavioral theory is exploration of howdecision makers (e.g., managers and board mem-bers) are shaped by their experience, which makesfirm choices a function of coalition building amongdecision makers with shared experience and exper-tise (Zhang & Greve, 2019). It follows that high-riskconditions may deter less internationally experi-enced managers but not managers (and boardmembers) with international experience. In turn,inexperienced managers may be less deterred byentering stable markets, even if they require a highlevel of adaptation or even changes to the MNE’sbusiness model. We note recent efforts to betterunderstand the roles of managerial intentionalityand experience in internationalization (Dow,Liesch, & Welch, 2018; Hutzschenreuter, Pedersen,& Volberda, 2007) and encourage more research onthis topic.

International Market AdaptationAnother IB behavior on that can be examinedthrough the lens of behavioral theory is whetherfirms deploy their business models unchanged asthey move into new international markets or adaptthem to specific local market conditions. Theprevailing view in IB and strategy is that suchdecisions are largely driven by external factors,such as industry characteristics – some industriesare more amenable to standardized solutions, forexample consumer electronics, whereas otherindustries favor localized solutions, such as legalservices – and country characteristics such as hostmarket legislation, culture, norms and customs(Bartlett & Ghoshal, 1989; Ghemawat, 2007; Yip,1989).Despite the influence of external factors, there is

considerable firm heterogeneity within industriesand countries (Nachum & Song, 2011). Suchheterogeneity suggests that internal rules and rou-tines better explain firm behavior than external,contextual factors (Jensen & Szulanski, 2004;Papadakis, Lioukas, & Chambers, 1998). A usefulway of thinking about home-host country


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differences is that firms learn from some contexts,mainly their home country and earliest interna-tionalization experiences, and seek to apply thisknowledge in each new entry. External factorsintroduce tensions, but such tensions alone donot explain behavior. Firms need to learn about theproblems resulting from the external factors of eachnew location, and subsequently find solutions tothese problems. This is another application ofproblemistic search theory, indicating that a behav-ioral view of the MNE would offer a much-neededfirm-level explanation that accounts for the hetero-geneity in international market adaptation strate-gies. Although early internationalization research(Johanson & Vahlne, 1977) defined local marketadaptation as a distinct form of market commit-ment, later research mostly focused on the amountof resources committed to internationalization,which is the easy-to-grasp and simple-to-measureside of market commitment.

Here, we propose that the extent to which firmsadapt will depend on their ability to recognize theneed for, and implement, adaptive strategies. Byobserving industry and country factors, researchershave focused on the objective outcomes of adapta-tion strategies, i.e., to adapt or not to adapt (withbest performers being the ones who effectivelyadapt) but failed to understand the process ofsearching for solutions to problems which originateinternally. From a behavioral perspective, perfor-mance below aspiration levels will trigger firms toengage in problemistic search and look for alterna-tive strategies to serve the host market. A centralpart of such research is to correctly understand thefirm’s goals. Although a firm will always haveprofitability or ROA as a goal, its presence in aninternational market may have other objectives.Chinese consumer electronics companies nowseeking to enter (and for some, re-enter) the U.S.market are a good example of multiple goals. Thesecompanies associate globalness with operating inthe U.S. market, despite the need to adapt to localregulation, overcome trade barriers, and managethe country-of-origin reputation disadvantages – allto enter an already highly saturated market. It isevident a priori that the required local marketadaptations threaten their low-cost business modeland reduce their profitability. However, adapting tothe U.S. market is consistent with an overarchinggoal of becoming global like their developed mar-ket counterparts (i.e., the firm-level goal), whilsttheir decision makers may attribute a presence inthe attractive U.S. market to their own knowledge

and expertise (i.e., individual-level goal). Suchmarket entries cannot be explained by profit max-imization and exploitation of firm competitiveadvantages logics, but they become easier to under-stand when seeing each firm as having multiplegoals.In order to successfully adapt to already entered

international markets, the causes of why firms haveperformed below their aspiration levels also need tobe well understood. When uncertainty associatedwith effectively serving the market becomes signif-icant, firms seek coping mechanisms that may helpthem anticipate market changes. These are oftenrooted in the firm’s past experiences, e.g., experi-ence with market adaptation failure and solutionsidentified to manage it. Furthermore, adaptationchoices come from learning processes which, overtime, develop into routines. Organizations withfewer resources are more likely to look for familiarsolutions to problems than organizations withsignificant resources (which may exploit solutionsthat come from untested strategic repertoires).Firm learning, and subsequent behavioral

changes, such as changes in strategy to adapt toan international market, do not occur in a vacuum.Learning vicariously, i.e., by observing the actionsof other market players (intentionally or uninten-tionally) may constitute a less resource-intensiveform of knowledge acquisition (Kim & Miner,2007). Observation may be a strong driver ofbehavioral changes (Bandura, 1977), as managerscan learn from observing the actions and conse-quences of such actions on other firms, withouthaving to directly experience the feedback them-selves. This may teach firms about forms of marketadaptations that lead to negative consequences,and thus should be avoided; for example, choosinga product name that may be offensive to localcustomers. In turn, firms may seek to replicatesuccessful behaviors. At the same time, when firstmover advantages are important, observationallearning may lead to firms being late to implementmarket adaptations.Since MNEs operate in dynamic environments,

over time, they are expected to adapt their goalsand aspirations. A comprehensive understanding ofinternational market adaptation mechanismswould require an understanding of firm behaviorin relation to environmental feedback. When thelevel of ambiguity around the outcomes of envi-ronmental changes increases, it may become diffi-cult to understand the extent to which pastdecisions are applicable to new contexts; thus,


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cause and effect linkages become difficult to estab-lish (Levitt & March, 1988). Managers may find itmore difficult to assess the performance of pastexperiences and their usefulness. Longitudinalstudies are useful to capture firm decisions atdifferent points in time and analyze them inrelation to changes in the environment of the firm.We conjecture that heterogeneity of experiences(learning from own experiences and from vicariouslearning) would lead to more successful and timelymarket adaptation in constantly changing hostenvironmental contexts.

Headquarter–Subsidiary RelationshipsMuch of the literature on headquarter–subsidiaryrelationships has focused on the position of thesubsidiary within the MNE (Benito, Grøgaard, &Narula, 2003; Birkinshaw & Pedersen, 2010), toexplain how an international subsidiary canacquire deep knowledge about its local environ-ment (e.g., knowledge about customers, competi-tors, business partners) and transfer this knowledgeto sister subsidiaries and the MNE headquarters(Andersson, Forsgren, & Holm, 2001, 2007; Foss &Pedersen, 2004; Meyer, Mudambi, & Narula, 2011).A positive impact is generally expected between asubsidiary becoming embedded in its network ofcustomers and suppliers, its competence develop-ment and the transfer of such competences whichare likely to become a source of competitiveadvantage for the MNE (Andersson et al., 2001;Dhanaraj, Lyles, Steensma, & Tihanyi, 2004;Hakanson & Nobel, 2001). In practice, MNEs donot always have strong, complementary ties withtheir subsidiaries (Verbeke, 2009); it is unsurprisingthat these relationships do not always result ineffective knowledge creation and knowledgetransfer.

We propose that, a complementary explanationto headquarter–subsidiary relationship manage-ment may be achieved through a behavioral lens.Our rationale is that, in practice, internationalsubsidiaries engage in the pursuit of multiple goals,beyond those related to achieving high profitabil-ity. Subsidiaries take initiatives (Birkinshaw & Ped-ersen, 2010), and may set their goals around localmarket legitimacy, status, market growth, ordesired position in the corporate hierarchy (Lun-nan, Tomassen, Andersson, & Benito, 2019). TheMNE headquarters also has goals, however, andaspiration levels for each goal and each subsidiary.Some subsidiary goals may conflict with the goalsset out by MNE headquarters, and even when goals

are shared, headquarters and subsidiary may havedivergence in judgement (Lunnan et al., 2019)concerning the effects of market forces and the bestcourses of action. The result is conflict around goalsand aspiration levels, as well as levels of accept-able risk. There is evidence that headquarter–sub-sidiary goal conflicts exist and are resolved to theadvantage of the subsidiary when the subsidiary ismore powerful relative to the headquarter (Gaba &Joseph, 2013).Power use is not the only way that the subsidiary

can influence this process and resolve the conflictbetween its goals and aspiration levels and those ofheadquarters. For instance, subsidiaries may chooseto withhold knowledge about the local market toavoid losing their competitive edge and positionwithin the MNE network (Lunnan et al., 2019); thismay be the case even when such knowledge wouldconstitute a source of competitive advantage forthe MNE or other sister subsidiaries. This may bemore probable when profitability and or marketshare fall below the aspiration levels and sub-sidiaries require resources in order to understand,and adapt to, the local environment in order topreserve their own position in the market; as such,less resources will be allocated to the transfer ofknowledge to headquarters (at least in the shortterm). Satisfaction of subsidiary goals may come atthe expense of satisfaction of MNE goals (whichmay not always be financial performance-relatedfor each subsidiary), which complicates the processof prioritizing goals and searching for solutions toproblems particularly when performance fallsbelow aspiration levels. Subsidiary relationshipmanagement is likely to require the MNE to resolveconflict through temporary compromises betweendiffering goals. Resolving such conflicts is of signif-icant importance (Ethiraj & Levinthal, 2009), espe-cially for multi-unit firms such as MNEs. Coalitionscan be used to resolve conflicts and chooseamongst alternative goals.A behavioral perspective – focusing on the pro-

cess by which headquarters resolve their conflictswith their subsidiaries – takes us beyond the taken-for-granted, static view of MNEs and their sub-sidiaries operating in a hierarchical structure. Evenfor goals that are replicated on a smaller scale at thesubsidiary level, such as ROA, it is not obvious whatthe aspiration levels will be and how the subsidiaryor headquarter will react to them. For instance,MNE headquarters may design performance goals(and incentives) that relate specifically to knowl-edge transfer – of operations to a new subsidiary,


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and of consumer preferences back to headquarters.Such an understanding would better reflect busi-ness practice by capturing how and under whatconditions MNE headquarters and subsidiaries aremore or less likely to reduce their goals to commondimensions, thus alleviating some of the boundedrationality challenges. The concept of boundedreliability (Verbeke & Greidanus, 2009) has beenproposed to explain how actors inside the MNEselect and prioritize different facets of informationin order to make biased decisions, which, in turn,triggers conflicts such as those between MNEs andtheir subsidiaries. Naturally, actors’ goals changeover time in relation to environmental feedback(Verbeke & Greidanus, 2009), which will thenrequire a renegotiation of those goals.

Table 1 below summarizes the differences insome of the key assumptions of traditional andbehavioral perspectives around the international-ization-related decisions discussed.

DISCUSSIONIB has learned extensively about firm internation-alization from traditional theoretical perspectives,but there is more to learn about international firms,especially given the heterogeneity observed in theirbehaviors over the years. We encourage scholars todeviate from relying primarily on traditional mod-els and theories of internationalization, becausethese theories and models have been developed toexamine different behaviors unfolding in a differ-ent time. Given the increased pressures for firms toperform under conditions of change and uncer-tainty and their – often conflicting – strategic goals,we believe this to be an opportune time to enrichour way of thinking, and theorizing, about theinternational firm.

We also encourage scholars in IB and other areasof management research to increase the jointdevelopment of theory and evidence. Many firmsare international, but scholars in organizationaltheory and strategic management rarely distinguishinternational firms from firms that are mainly orfully domestic. Much theory and evidence inorganizational theory and strategic managementis drawn from investigation of international firms,but scholars in IB often fail to recognize thisconnection. Undoubtedly, scholars in each of theseparallel fields understand these connections andwish to transfer knowledge. The problem is thatdivergence of theories complicate communicationsamong the fields. Theories that are broadly used in

each field are useful because the evidence generatedtranslates easily from field to field, thus creating acommon language between scholarly contribu-tions. Our argument – an increased collaborationbetween IB and other areas of managementresearch – favors using any theory that is wide-spread and crosses fields of investigation, and weraise it here because the behavioral theory of thefirm has been, and continues to be used in bothorganizational theory and strategic management,with researchers in both fields fully aware of, andbuilding upon, the progress done in the other.Applying a theory to a field always offers the

potential to enrich it. A theory provides a lens and amagnifying glass that allows us to examine a firmbehavior and explain it in more detail. It addsdetails and focus at the cost of explaining thebehavior from a narrower perspective. This is whybehaviors of any complexity can be fruitfullystudied by more than one theory, and it is alsowhy a theory of reasonable parsimony cannot fullyexplain behaviors of any complexity. Existing IBtheories and models may therefore provide thestarting point to which we add to gain a morenuanced understanding of current international-ization behaviors. That is the rationale behindproposing a complementary theoretical perspectiverooted in the behavioral theory of the firm. We areadvocates of the behavioral perspective because itcaptures what has been often either overlooked orinsufficiently emphasized in past studies – theimportance of perceived performance, the recogni-tion of multiple (individual and firm) goals andhow these may not always align, the role ofcoalitions in reconciling multiple goals, and theimportance of different types of learning. In doingso, behavioral theory enables a relevant under-standing of how MNEs strategize and welcomesexamination of firm change and heterogeneity.Thus, the behavioral theory of the MNE provides asuitable foundation to add to our understanding ofinternationalization-related choices as well as addto, and enrich, traditional models and theories.In our view, at least two main contributions arise

from our proposed behavioral approach. First, thebehavioral theory can help to answer questionsabout firm internationalization that cannot beanswered effectively with extant theory. We startedour discussion with two key IB behaviors whichhave remained under-explained due to the limita-tions of traditional approaches: multi-mode entriesand international market re-entry after previousexit. One of the explanations for this lack of


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research – despite the empirical evidence thatMNEs are often confronted with such strategicchoices – has been the poor translation of tradi-tional models. Incremental insights and contribu-tions at the edge of established theories – a practiceoften associated with scientific rigor – are, however,insufficient to explain why firms decide to combinemultiple modes of entry into an internationalmarket and switch between them. From a learningperspective, operating multiple modes puts a strainon the firm, which then needs to make adjustmentsto convert knowledge acquired from one type ofexperience into knowledge useful to utilize in otherchoice contexts.

In the same way, traditional models shouldaccount for firms choosing to divest from, and re-enter into, international markets. From the per-spective of problemistic search, re-entry may beexplained by understanding how firms frame themarket exit experience and whether such a marketsetback weakens collations associated with interna-tionalization (resulting in re-allocating resources).Further, how the initial entry experience isretrieved, interpreted and embedded into differenttypes of routines influences whether firms repeatpast behaviors or adapt by incorporating newstrategies in their repertoires. Complex anddynamic MNE choices should not be viewed merelyas an opportunity for theoretical testing (Buckleyet al., 2017); rather, we should seek to provide themwith their own identity.

Our second contribution is that we explain howthe behavioral theory fits with what we alreadyknow about some of the most studied internation-alization decisions, and how we can extend thisknowledge to enrich our theorizing. As we expandour examination beyond multi-mode and re-entrystrategies, in each line of research, we found areasof investigation that could be opened by applying abehavioral lens more rigorously. Addressing thesecond question – how does behavioral theory fit withwhat we already know? – as shown in Table 1,internationalization research so far can be placedside by side with our proposed theoretical mecha-nisms from the behavioral theory of the firm. Thiscomparison shows that a richer view of eachprocess is reached by considering both jointly.Accordingly, this paper theorizes on the impact ofproblemistic search and organizational learning onfive main internationalization decisions: (1) thedecision to internationalize; (2) nascent MNEinternationalization; (3) international locationchoices; (4) international market adaptation; and

(5) headquarter–subsidiary relationships. We dis-cuss how, so far, the decision to internationalize isoften explained in terms of the push to escape adeclining home market and utilize firm-specificadvantages. Even so, firm behavior is far lessrational than that and much more influenced byindividual and firm-level goals (Buckley et al., 2007;Puig et al., 2020). These goals may in turn beheterogeneous across firms and lead to specificaspiration levels which, when not met at a givenpoint in time, may drive a change in firm behaviorsuch as the decision to internationalize. Otherdecisions, such as where and when, are shaped bythe problem the firm seeks to solve, its ownexperience with similar decisions, along with vicar-ious learning. In the same way, once firms enterinternational markets, they need to constantlysearch for strategies to serve those markets throughtheir international subsidiaries, which, more oftenthan not, develop their own goals and aspirationsaround what constitutes best performance. Under-standing the dynamics of subsidiary managementthrough new theoretical lenses such as behavioraltheories, has recently been placed at the forefrontof the IB research agenda (see Meyer, Li, & Schotter,2020).Further, we emphasize the importance of organi-

zational learning as a key mechanism of behavioraltheory, which goes beyond acquiring and usingexperiential knowledge to enter, and increasecommitment in, nearby international markets.International location choices are not merely afunction of entering similarly advanced host mar-kets where firm-specific advantages can be utilized,in that firms enter foreign markets depending ontheir strategic motivations; as well as their ability todraw on flexible routines to use experienceacquired in one market location into another. Thismay be more so for nascent internationalizers, whoare less likely to suffer from learning myopia andwho may better adapt their learning base androutines to changing internal goals and externalcontexts. Traditional models such as internaliza-tion theory and the Uppsala model would benefitfrom integrating behavioral insights more rigor-ously, in order to discuss decision alternatives inresponse to strategic problems and changes in theenvironments of firms, not necessarily strategicopportunities at a given point in time.In summary, drawing on the behavioral theory of

the firm makes sense of under-explained IB behav-iors. Using the behavioral theory of the firm canproduce distinctive and managerially relevant


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insights on firm internationalization. This, webelieve, captures the essence of our discussion.

CONCLUSIONWhile research on internationalization has devel-oped well in the past, as with any established fieldof study, there are opportunities to rejuvenate it. Asthis discussion has shown, the behavioral theory ofthe firm is sufficiently general that it can be used toexamine multiple firm behaviors of interest to IBscholars. In each case, the theory seems easilyapplicable, predictions follow naturally, and empir-ical investigation is needed in order to discover theexistence and strength of the effects. Research oninternationalization decisions and their conse-quences has a long and distinguished track record,but this does not mean that it is time to stop, orthat there is no room for complementary ideas andnew evidence. In fact, we see broad areas ofopportunity opening from applying additionaltheoretical lenses, and we believe the behavioraltheory of the firm is a great place to start.

ACKNOWLEDGEMENTSWe thank Rajneesh Narula for his effective andsupportive editorial guidance during the review

process as well as two anonymous reviewers for theirinsightful and valuable comments. We thank ØivindRevang for his helpful comments on an earlier versionof this manuscript. The authors are listed in reversealphabetical order.

NOTE

1This perspective piece focuses specifically onhow a behavioral theory of the firm adds to whatwe already know about firm internationalization.We do not focus on its outgrowth, organizationallearning theory because the latter constitutes alarger group of theories (including learning curves,organizational memory, capability development,and so on). We are aware that such reasoning hasbeen used in IB with some studies already drawingbroadly on organizational learning. As such, weexplicitly called for the behavioral theory of thefirm because that is the part that is missing most,although it is prominent elsewhere in the manage-ment field.

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ABOUT THE AUTHORSIrina Surdu is an Associate Professor of Interna-tional Business Strategy at Warwick BusinessSchool, University of Warwick, UK. Her currentresearch agenda focuses on the internationalgrowth and subsequent investment strategies ofMNEs, with a particular interest in their exit and re-entry strategies. Recent works appear in Journal ofInternational Business Studies, British Journal of Man-agement and Journal of International Management,among others.

Henrich R. Greve is the Rudolf and Valeria MaagChaired Professor of Entrepreneurship at INSEAD.He received his Ph.D. from Stanford University’sGraduate School of Business. His current research isorganizational learning from performance feedbackand aspiration levels, organizational adaptation toinstitutional environments, and (football) teamperformance and misconduct.

Gabriel R. G. Benito is Professor at the Departmentof Strategy and Entrepreneurship, BI NorwegianBusiness School, Oslo. He is a Fellow of Academy ofInternational Business and a Fellow of European

International Business Academy. His currentresearch agenda focuses on corporate governance,the strategies and organization of multinationalenterprises, and the economic organization ofinternational business.

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Accepted by Rajneesh Narula, Area Editor, 22 October 2020. This article has been with the authors for two revisions.


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