CROSS-BORDER ENGAGEMENT: AN INTEGRATED ANALYTICAL FRAMEWORK l 73
distance between the home and foreign firms or markets. In this situation, experience is the key source of learning. In network theory, which views markets as networks of relationships between firms, the liability of foreignness is replaced by a liability of outsidership. In this framework, internationalization success depends on the firm’s relationships and networks in the destination country or the industry globally—its insidership. Thus, foreign firms may face a liability of outsidership that may be overcome if they are well connected. Networks provide a source of knowledge that may reduce uncertainty in foreign markets, foster trust in relationships, increase awareness of opportunities, and induce quicker commitment abroad, as in the case of “born global” firms (Madsen and Per 1997). Based on the analysis above, the final three propositions are developed: Proposition 10. Lowering sunk entry costs will increase international entry by firms. Proposition 11. Given the rich diversity of communities and migration in South Asia, there are likely to be large differences among national firms in knowledge connectivity compared to businesses and communities across national boundaries. Proposition 12. Information-enhancing, uncertainty-reducing, transaction-costlowering, connection-building networks, as well as inherent knowledge, reduce sunk entry costs. Learning may be viewed as the reduction of sunk entry costs over time through experience.
Concluding Remarks This chapter has developed key elements of a simple framework that guides the ensuing analysis of international engagement by firms. First, the value chain approach highlights the various frictions that accompany international engagement. It also provides an intuitive means of conceptualizing different forms of international engagement and the relationship between trade and investment. Second, the framework of firm entry with varying fixed entry costs and trade costs enables analysis of exporting-versus-investing options and enables analysis across a spectrum of entry modes. The most productive firms can afford to cover the highest fixed entry costs, but there are also intermediate options between exporting and direct horizontal investment. Third, knowledge connectivity (the level of information and networks in a destination market) across firms may be readily incorporated into sunk entry costs for a particular entry mode. Higher knowledge connectivity reduces sunk entry costs, which is important because, given intraregional migration, there is likely to be significant variation in knowledge connectivity and social capital across firms and entrepreneurs relating to markets in South Asia. The next chapter provides a comprehensive picture of intraregional investment in South Asia using an outward investment lens. It analyzes underutilized aggregate bilateral investment data and firm-level data collected specifically for this report, as well as case studies of regional pioneers. The types of investments, the sector of origin,
