By Evodio Kaltenecker and Miguel Montoya
In a virtuous cycle of mutual reinforcement, world cities such as New York, London, and Paris have taken on a central role as production spaces and conduits for key inputs required by multinationals to operate their international organizations. Such regions present economic, political, and ideological influences beyond their physical boundaries and even their own country.
Enter the Global Cities (GC) phenomenon. Global cities have more robust, more stable, and business-friendly institutional environments that reduce the difficulties for foreign firms. As a result, emerging market multinationals (EMNE) opted to operate international subsidiaries in global cities because they provided legitimacy, transportation links, markets, resources, and capital.
Our research analyzed FDI from multinationals from Latin America and compared their choices of global cities and entry ownership modes to understand how EMNEs internationalize through global cities.
The Nature of Global Cities
The three key attributes that define global cities are the availability of advanced producer services (APS), the cosmopolitan mentality, and the high degree of interconnectedness to local and international markets.
First, these locations are home to many high-value and specialized service providers, such as consultancy, advertising, accounting, law, and finance, essential to multinational functions that facilitate the operations of the subsidiaries of international firms.
Second, the cosmopolitan environment emanates from its founding conditions and continued development as a high-status location characterized by a culturally diverse population.
Third, the high level of physical and digital connectivity with other areas and global cities facilitates and speeds up the international transfer of goods, people, and information.
These characteristics appear essential in making global cities distinct from other subnational locations, such as mega-cities, characterized by population size and density and economic clusters, which are more industry and technology-focused.
From a managerial perspective, multinational firms expand to global cities to establish subsidiaries and act as bridgeheads to further international and subnational expansion. On the one hand, multinational companies encounter many difficulties when entering foreign locations with distinct market characteristics and sometimes weak institutional environments. On the other hand, global cities have more robust, more stable, and business-friendly institutional environments that facilitate internationalization.
As a result, MNEs are attracted to global sites to lower Liaiblity of Foreignness (LOF). In the case of emerging market multinationals (EMNE), such firms opted to locate in a global city because it provided legitimacy, transportation links, markets, resources, and capital.
To evaluate the global cities phenomenon regarding the EMNE from Latin America (multilatinas), we researched the location choices (country and city) for each entry and the category of global cities. Additionally, the authors investigated three variables regarding the entry mode: establishment (acquisition of greenfield), ownership (joint-venture or wholly-owned subsidiary), and reasons for the internationalization (knowledge-seeking, market-seeking, efficiency-seeking, resource-seeking, and capital-seeking).
Multinationals in the service sector predominantly internationalize through highly-connected cities. In contrast, secondary sector multinationals internationalize through little or non-global cities. Additionally, multilatinas from the tertiary sector show a solid preference for highly connected cities, such as London, New York, Madrid, Paris, Frankfurt, and Shanghai. Moreover, our research suggests that Wholly Owned subsidiaries are the preferential ownership model adopted by multilatinas through global cities.
Multilatinas are avid buyers of other companies, indicating that multinationals from emerging markets acquire other firms to speed up their internationalization process. Once again, the preference for highly connected cities is present because most acquisition targets were based in highly connected cities. Surprisingly, the authors found that multilatinas preferred to use a wholly-owned subsidiary ownership model.
Finally, differences in the country of origin affect the selection of global cities. For example, our research suggests that firms from Brazil and Mexico use indistinct levels of Global Cities, while Argentine, Colombian, and Chilean firms preferentially use highly globalized locations.
Due to the solid nature of its economic ties with the US, Mexico is an exception to other Latin American countries regarding ownership modes because Mexican multinationals use Joint-Ventures more frequently than other multilatinas.
Implications for Theory and Practice
We contributed to both theory and practice. First, we make a significant theoretical contribution by showing that multilatinas take advantage of the global cities phenomenon. However, only a few multinationals, mainly from the service sector, take full advantage of advanced producer services (APS), the cosmopolitan mentality found in GC, and the high degree of interconnectedness to local and international markets characteristics offered by Global Cities. Consequentially, EMNEs are in the initial phases of using global cities as internationalization.
Practitioners will also benefit from our research because we provided a road map for the internationalization of multilatinas through global cities.
Miguel Montoya is a Full Professor at the Tecnológico de Monterrey. He received his Master´s and Ph.D. degrees from the Universidad Autonoma de Barcelona. He manages the Hub Comillas of the Institute For the Future of Education in Santander, Spain. He has published numerous articles and books on management
Evodio Kaltenecker completed an MBA from Harvard Business School and a .D.Ph.D. from the University of Sao Paulo. He has published and co-authored articles in management in several critical academic journals and teaches in several executive education programs in business schools in the US and Europe.
Globalization and World Cities Research Network. GaWC – Globalization and World Cities. (n.d.). Retrieved November 5, 2021, from https://www.lboro.ac.uk/gawc/.
Kaltenecker, E., & Montoya, M. A. (2022). Global cities and multilatinas: the search for global cities-specific advantages, establishment and ownership entry modes. Competitiveness Review: An International Business Journal (ahead-of-print).