Samsung and IDP model

Journal of International Management 13 (2007) 241–257

Dynamic capabilities, entrepreneurial rent-seeking and theinvestment development path: The case of Samsung

Jaeho Lee ⁎, Jim Slater 1

Birmingham Business School, Edgbaston, Birmingham, B15 2TT, United Kingdom

Received 1 July 2006; received in revised form 1 April 2007; accepted 1 May 2007Available online 24 July 2007

Abstract

As noted by Narula and Dunning [Narula, R., Dunning. J.H., 2000. Industrial Development,Globalization andMultinational Enterprise: New Realities for Developing Countries. Oxford DevelopmentStudies, 28, 141–167.], it has been observed that some of the more advanced developing countries, thoserapidly ‘catching-up’, outpaced the postulated Investment Development Path (IDP), in which the strategicasset-seeking type of outward foreign direct investment is supposed to occur in later stages, i.e., whencountries reach the higher “developed” levels of economic progress. Firms who led the outpacing in thosecountries did so through their entrepreneurial commitment to upgrade technological capabilities to maintainand augment their O-advantages rather than because of the overall economic development of theirhome country. Samsung Electronics' recent success in the semiconductor industry allows us to identifyand analyse the factors whereby it not only utilised status-quo resources but also developed dynamiccapabilities as it rose to the top. Aggressive and risk-taking investment behaviour in search ofentrepreneurial rent and the effective policy of managing technology development contributed to theextraordinary achievement of Samsung Electronics. The company's remarkable transformation overthe last decade or so can shed light on how a firm's dynamic capabilities, the ability to improve itsO-advantages by reconfiguration, transformation and learning, contribute to its home country'sidiosyncratic development path.© 2007 Elsevier Inc. All rights reserved.

Keywords: Resource-based view (RBV); Investment development path (IDP); Dynamic capability; Technologicalcapability; Entrepreneurship; Third-world multinationals; Samsung electronics; Semiconductor industry

⁎ Corresponding author. Tel.: +44 121 414 7562; fax: +44 121 414 3553.E-mail addresses: [email protected] (J. Lee), [email protected] (J. Slater).

1 Tel.: +44 121 414 6703; fax: +44 121 414 3553.

1075-4253/$ - see front matter © 2007 Elsevier Inc. All rights reserved.doi:10.1016/j.intman.2007.05.003

mailto:[email protected]

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http://dx.doi.org/10.1016/j.intman.2007.05.003

242 J. Lee, J. Slater / Journal of International Management 13 (2007) 241–257

1. Introduction

Since the early 1980s, the world economy has experienced rapid ‘globalisation’. Globalisationhas changed the pattern of trade, foreign direct investment (FDI) in world economic activity.However, globalisation has not affected all countries and regions to the same degree. Narula andDunning (2000) contend that globalisation has resulted in both convergence and divergence:whilst it has resulted in increasing convergence among developed countries and betweendeveloped countries and the more advanced developing countries, it has also led to a widening gapbetween ‘catching up’ countries (e.g. newly industrialised countries) and ‘falling behind’ (lessdeveloped) countries. Mathews (2006) states that those firms from Far-East countries able to takeadvantage of the new opportunities arising from globalisation have achieved remarkable successand have even risen to challenge incumbent multinational enterprises (MNEs), leaving behind thefirms which did not adapt themselves to the new environment.

Globalisation has brought about changes in the Investment Development Path (IDP) paradigm,in which a country's FDI position is systematically associated with its economic development. Asis well-known among International Business scholars, The IDP paradigm postulates that countrieshave a tendency to go through five stages of development and that these stages can be categorisedaccording to the pattern of inward and outward investment. The pattern will rest on three factors inthe ‘eclectic’ paradigm: ownership-specific (O) advantages of the local firms; location-specific(L) advantages of the country; the degree to which local and foreign firms choose to employ theirO specific advantages coupled with L specific advantages by the way of internalising the cross-border market (i.e., their (I) advantages) (Dunning and Narula, 1998).

However, the rapid economic development of the Newly Industrialised Economies (NIEs) hasdisturbed the original IDP concept. MNEs from the Far-East have accelerated their inter-nationalization, leading to an increase of outward FDI from those countries on a scale earlier thanthe IDP would suggest. Outward FDI from developing countries increased from $60 billion in1980 to $148 billion in 1990 to $871 billion in 2000 and, in 2005, it surpassed $ 1.25 trillion(UNCTAD, 2006). Outward FDI from Asia Pacific firms comprises more than two thirds of the2005 total. Furthermore, out of the top 40 transnational companies from developing countriesidentified by UNCTAD, 30 corporations are based in Asia-Pacific and 8 of the top 10 are all fromAsia-Pacific.2 Perhaps more revealing, only 3 of the 30 Asian firms compared with more than halfof the non-Asian are natural resource-based.

How could globalisation enable firms from the NIEs to emerge so rapidly in the world arena?As Narula (1996) has pointed out, the shape and position of the IDP for any particular country isidiosyncratic. However, there appear to be some generalisable implications of globalisation forthe IDP. First, Globalisation allowed the new challengers or latecomers to take advantage of newopportunities such as unexplored consumer markets, extended firm linkages, and facilitatedresources leverage (Mathews, 2006). Second, in this process, the companies that developedtechnological capability and creative assets played a major role in the increase of outward FDIfrom the ‘catching-up’ countries. Third, the globalisation process, itself, helped the MNEs fromdeveloping countries to organize and integrate their global business effectively through newstrategic and organizational innovations that are well suited to the new business environment.

2 Mathews (2006) terms these 'Dragon Multinationals' and briefly states short histories of how they emerged, using theexamples of Ispat (India), Acer (Taiwan), City Developments Ltd (Singapore), Li & Fung (Hong Kong), Lenovo (China)and Samsung (Korea).

243J. Lee, J. Slater / Journal of International Management 13 (2007) 241–257

In this article, Section 2 outlines the main features of the IDP paradigm. In Section 3, weaccount for howKorea followed its own idiosyncratic IDP path in terms of governmental industrialpolicy and the big conglomerates' attempts to internationalize. Section 4 presents the Resource-based View (RBV) of strategy which can be considered as a complementary theory, offeringinsights into the new trend of increasing outward FDI from developing countries in terms of micro-level firm-specific resources and capabilities. Section 5 outlines our methodology. In Section 6, weexpound and analyse the case study of Samsung, narrating the company's rise to become a top-tiersemiconductor producer and suggesting a few factors critical in its success as well as its motives foroutward FDI. Section 7 concludes with a summary and implications of this research for con-ventional FDI theories together with some discussion on possible theoretical development infuture research.

2. Investment development paradigm (IDP)

As briefly mentioned in the Introduction, The IDP paradigm postulates a systematic as-sociation between a country's level of economic development and its inward and outward FDIposition (Dunning and Narula, 1998; Narula and Dunning, 2000; Dunning, 2000). In thisparadigm, a country experiences five stages of economic development, each of which ischaracterised as having different pattern of inward and outward investment. Outward FDI isexpected to take place in later stages when a country has accumulated a certain amount ofownership advantages among firms.

In stage 1, a least developed country will have very little inward or outward investment, becauseit possesses no O or L advantages. Inward investment, if any, is likely to occur with the aim ofexploiting natural resources. In stage 2, a country starts to attract inward investment because it hassome L advantages such as natural resources or cheap labour, but the outward investment is stilllow or negligible. In Stage 3, a country begins to experience a decline of the rate of growth ofinward FDI, while it witnesses the acceleration of outward investment. At this stage, firms achievea certain level of technological capability, sufficient to compete with foreign investors in thedomestic market, and their foreign investment increases in line with their enhanced com-petitiveness. Stage 4 is marked by increasing outward investment, to the extent of exceeding orequalling inward investment. The growth rate of outward investment is higher than that of inwardinvestment. At this stage, most domestic firms are expected to compete with foreign firmseffectively not only in domestic markets but also in foreign markets. Stage 5 is that of a developedeconomy: the net FDI position oscillates around zero, that is, inward and outward investment areroughly equal (but both inward and outward investment are likely to be increasing).

3. The Korean IDP, FDI motives and Samsung

Globalisation has not uniformly affected the FDI modes and motives across countries. Someless developed countries have been left behind while a handful of more advanced developingcountries at Stage 3 converged and caught up with the industrialised countries at Stages 4 and 5.The widely accepted wisdom is that, when inward FDI is combined with the implementation ofindustrial policy aiming at growing created assets such as education and technological capacity, itcan improve the level of competitiveness of national companies and speed up the IDP by raisingoutward FDI (Hoesel, 1999).

In the Korean case, there is an observed variation in this IDP pattern. In Korean development,which has some similarities to that of Japan, the large domestic conglomerates served as the main


drivers of growth, with relatively low inward FDI from foreign MNEs. As reported by Narula andDunning (2000), industrial upgrading and cluster development took place in Korea withoutsignificant involvement of MNEs from advanced countries. The Government protected domesticconsumer markets from foreign MNEs until the indigenous conglomerates were strong enough totake pre-emptive initiatives. Korea attracted less inward FDI from developed countries for naturalresource-seeking and efficiency-seeking than many LDCs did. The focus of industrial policy wasin rapidly developing created assets and in building up industrial strength. Korean MNEs did notacquire their technology capabilities via knowledge spill-over transferred from MNEs fromindustrialised countries at Stages 1 and 2. In a sense, Korea did not experience Stages 1 and 2, but,rather, suddenly appeared in Stage 3, ready to go overseas by having accumulated their owntechnological capabilities. Further, the determination to internationalize by the big conglomerates,such as Samsung, Hyundai and LG, so as to tap into the most advanced technology, led Koreanoutward FDI to increase significantly. It can be argued that this accelerated internationalization ofthe big conglomerates would not have been possible if they had not acquired pre-technologycapabilities accumulated through the preferential industrial policies by the government (Dunning,2006).

The different stages of the IDP are associated with different relative importance of the fourmotives for FDI: resource-seeking; market-seeking; efficiency-seeking; and strategic asset-seeking (Narula and Dunning, 2000). Asset-augmenting FDI, such as strategic asset-seeking, isunlikely to take place in Stages 1 and 2. Such investment is mainly undertaken in Stages 4 and 5countries and, to a lesser degree, in Stage 3. There are recent examples of some developingcountries in Stage 3 experiencing this type of strategic asset-seeking inward FDI (such as the caseof Bangalore in India for software design). There are also examples of firms from countries in thesame stage asset-seeking via outward FDI (e.g. Chinese subsidiary companies in California).3

However, while there has been an increase in this type of FDI from/to some developing countriesduring the last decade, the phenomenon has been viewed as exceptional. Generally speaking, thefirst three types of FDI will predominate in Stage 1, 2 and 3 countries, the latter type of FDI willoccur in Stage 4 and 5 countries.

Some advanced developing countries, including Korea, have passed Stage 3 and entered Stage 4.Samsung Electronics – one of the most important conglomerates in Korea's industrial upgrading –has been taking a major role in enabling Korea to outpace its IDP position, developing itstechnological capability through aggressive strategic asset-seeking behaviour in the FDI process.

4. IDP, Resource-based View (RBV) and the development of dynamic capabilities inemerging economies

The IDP paradigm traditionally attempts to account for cross-border FDI at the country level interms of macroeconomic change in economic systems. This economic approach provides anexplanation of investment patterns among countries using macro-economic variables (Dunning,1993). Even though it embraces firm-specific micro-factors in the O advantage, which can beregarded as an alternative collective label for resources and capabilities, its main focus is innational economic development. However, recently, it has been observed that, as the globalisationprocess proceeds and the operations of MNEs grow, many firms cross borders, less in relation to

3 Child and Rodrigues (2005) document that companies in developing countries implement asset-augmenting type ofoutward FDI to address their competitive advantage by closing the gap between them and leading companies throughgaining assets and resources which would not be otherwise available.


the economic status of their home country, but more according to their own competitiveadvantages, which are embedded in their technological capabilities and accumulated knowledge-based assets. Accordingly, while IDP is still a valid paradigm that shows an empirically confirmedpattern of inward and outward FDI, we argue that there are particular dynamics of firm-specificfactors that may lead to yet further deviation from the conventional pattern.

In this context, the Resource-based View (RBV) can be viewed as an effective theory toprovide insights into recent trends in FDI. RBV aims to account for outward FDI in terms of theidiosyncratic resources and capabilities a firm possesses (Trevino and Grosse, 2002). The RBVwould advocate a detailed analysis of the firm-specific resources and capabilities that underpin theownership advantage necessary for competitive advantage. The RBV views organizations asbundles of resources combined with organizational capabilities or core competencies and statesthat these resources and capabilities are the primary determinants of strategy and performance(Barney, 1991; Grant, 2003). Barney (1991) argued that successful strategy rests on sustainingcompetitive advantage derived from resources and capabilities, the bundles of all assets,management skills, organizational processes and routines etc. Grant (2003) approaches the RBVsimilarly, classifying resources into the tangible (financial and physical resources), the intangible(technological resources, reputation), and human: capabilities reflect the effective deployment ofthese resources. The RBV shifts the perspective on strategy formulation from the externalenvironment towards the internal environment of the firm, in the sense of identifying the latter interms of the bundles of resources and capabilities it possesses (or can access), from whichsustainable competitive advantage may be constructed.

Resources owned by a firm direct its diversification process and determine its organizationalform for diversification (Wernerfelt, 1984). Outward FDI is a mode of diversification that takesplace at international level and is an effective vehicle to absorb and generate new resources andcapabilities, leading to improved performance. Empirical research has linked resources andcapabilities to international diversification. Example of resources and capabilities in this contextfor successful outward FDI include administrative heritage (Collis, 1991), organizationalpractices (Zaheer and Mosakowski, 1997), bargaining power (Moon and Lado, 2000), experiencewith product diversification (Hitt et al., 1997), experience of innovation and R&D (Bettis andHitt, 1995), international experience of top management teams (Sambharya, 1996) etc.

Whilst the IDP is a stage model which links the different patterns of FDI in terms of theirmacro-economic development, the RBV does not offer any analogous stages that a firm mayexperience in the process of international expansion (Peng, 2001). Rather, RBV posits that a firmwith appropriate resources and capabilities may sustain competitive advantage through FDI, but,though achieving this may be path dependent, there is no prescribed path. In this respect, RBVchallenges the stage models and a lot of theoretical and empirical studies demonstrate thepresence of international entrepreneurship from emerging economies. There is recent evidencethat size is becoming less important in the process of globalisation: many small and medium-sized enterprises (SMEs) are able to internationalise more rapidly predicted (Hoskisson et al.,2000; Lu and Beamish, 2001) with superior tacit knowledge about global opportunities (Penget al., 2000), or superior capability to control such knowledge in an unequalled manner (Peng andYork, 2001).

Another approach, complementing and enhancing the RBV, enables us to analyze successfuloutward FDI from emerging economies in terms of “dynamic” capabilities and entrepreneurialrent-seeking behavior. Teece et al. (1997) define dynamic capabilities of a firm as ‘the subset of thecompetencies/capabilities which allow the firm to create new products and processes, and respondto changing market circumstances’. They state that competition among firms (on the basis of


product design, product quality, process efficiency and other attributes) can be explained, at onelevel, ‘in terms of exploiting arbitrary gains that remained previously unexplored in the market',and that, from the point of view of the dynamic capabilities approach, ‘firms are constantly seekingto create new combinations of the product, process, organisation and technology, and rivals arecontinuously attempting to improve their competencies or to imitate the competencies of their mostqualified competitors'. Such processes entail the process of ‘creative destruction’ in Schumpeter's(1934) terms. Teece et al. (1997) also state that ‘differences in firms' capabilities to improve theirdistinctive competencies or to develop new distinctive competencies play a critical role in shapinglong-term competitive outcomes'. It has been observed that some MNEs from emergingeconomies went overseas with an array of resources and capabilities that might be viewed asinsufficient from the RBV. However, through their dynamic capabilities they transformed theirmanagement practices and organizational routines in an innovative way, redesigning andreconfiguring their resources and capabilities. The important implication of ‘dynamic capabilities’for management research is that resources and capabilities do not constitute a, ‘static’ pool but, maybe creatively reorganized, improved and upgraded, taking an organization on to another level ofcompetitiveness.

Dynamic capabilities have another important theoretical implication, reinforcing the recog-nition that firm-specific methods of coordinating resources may result in the heterogeneousbehavior of firms in the same industry. The notion of ‘path dependency’ explicitly allows for firmsto have developed different capabilities through the unique histories and strategic trajectories.Tokuda (2004) argues that the RBV views the valuable resources of a firm as given and that, in thisparadigm, the planning and investment to utilize such resources are exogenous. He also argues thatthe RBV is more likely to overestimate the potential profitability of firms that have uniqueresources, because it ignores the cost of acquisition and accumulation of such resources and thedifferent ways of utilizing them. The standard RBV itself cannot answer why firms invest invaluable/unique resources rather than in other types.

Barney (2001) states that a firm's competitive advantage over others may derive, in part, fromits expectation, different from others, about future returns from its resources. Entrepreneurialexpectation, heterogeneous across firms, and the insight and perspective which influence theorganization and coordination of resources inside the firm can be significantly importantresources in themselves and may contribute to super-normal returns from an investment (Tokuda,2004). Gick (2002) affirms that ‘entrepreneurial innovation’ is a source of entrepreneurial rent,which can be viewed as the pay-off that the entrepreneur receives as a result of his innovative wayof combining resources and capabilities. Casson (2005) also points out that an entrepreneur'sunique way of coordinating resources, especially human resources, is reflected in rent-seekingbehavior. The capabilities of scientists and mangers are not as important in themselves asentrepreneurs' abilities to coordinate, because it is the entrepreneurs who ultimately controlorganizations.

Therefore, we find it necessary to add further dimensions to the RBV framework. Theconventional RBV considers a firm as a relatively ‘static’ pool of resources and capabilities.However, if firms' competences to identify and utilize resources are heterogeneous, where do thesecapabilities derive from? We observe that some outward FDIs from emerging economies wereimplemented specifically to develop technological capability and we need to consider to whatextent, and how, firms perceive the resources they possess idiosyncratically and develop theircapabilities differently. We are focusing on, through the analysis of the Samsung case in the nextsections, a sort of second order organizational capability which is dynamic: the ability to recognizecore capabilities and change them.


5. Methodology

Samsung is the focus of this article. We believe that the case study methodology is best suited toinvestigating the uniqueness of entrepreneurially-driven strategy. A case study can be employedwhen it raises the question of what specially can be learned about even the single case (Stake, 2005)and, conventionally used, the case methodology can shed light on understanding the developmentprocess that Samsung has experienced in terms of its pertinence to RBV theories and the IDPparadigm. While it is likely that quantitative methodology would yield ambiguous empiricalresults about Samsung's emergence and performance, it was expected that the case study wouldprovide a more in-depth and clear analysis of the factors which led to success in terms of RBV/Dynamic Capabilities accounts of strategy and international business.

Samsung started with few resources to develop semiconductor products, but aggressively anddynamically attempted to access and tap into the relating technologies in global markets. Througha series of events during the last decades in the process of development of new technology,Samsung rose to become a first-rate company in the semiconductor and consumer electronicsindustries, proving itself as a flagship of the Korean economy. The analysis of the Samsung casewithin the enhanced RBV framework will provide us not only with insights into the successfulstrategy of this company, but also into the apparent discontinuity with the IDP.

We aim to single out the factors which contributed to Samsung's success and analyze how theyare relevant to understanding the RBV theories that challenge the IDP paradigm. Further, we aimto identify and examine the entrepreneurial aspects which have driven the dynamic capabilitiesleading to the unique organizational capabilities that made it possible to develop and sustain themost advanced cutting-edge semiconductor technology. In order to do this, we mainly usesecondary data, although supplemented by primary data from Samsung Electronics employees.This case study owes its writing to a number of previous case studies written by major businessschools, newspapers, magazines and annual reports of Samsung. It needs to be backed up by moreinterviews and probably ethnographic studies in the future, but we would say that the abundantsecondary data were sufficient for us to understand what factors have had an impact on thedevelopment of Samsung's technological capabilities and their implications for the theories andparadigm of international business and strategy.

6. Samsung Electronics, dynamic capability development and implications for the RBV

6.1. Overview of Samsung Electronics

In 2005, the Samsung Group, of which Samsung Electronics is a subsidiary, was the largestconglomerate (chaebol) in South Korea. The total net sales of the Samsung Group reached$140.9 billion in 2005, and net income $9.4 billion. In the same year, the Samsung Group had totalassets worth $233.8 billion and its market capitalisation amounted to $80.8 billion (see Table 1 inAppendix). Having its headquarters in Seoul, the Samsung Group has 337 offices and facilities in58 countries globally. It employs approximately 229,000 people worldwide. It has 14 listedcompanies within the group and the three core business sectors are electronics, finance, and tradeand services.

Samsung Electronics is the flagship company. It was established in 1969 as a black-and-whiteTV set production company and grew to be one of the largest electronics companies in the world.At the end of 2004, the company had $78.5 billion in net sales, $66 billion in assets, and 113,000employees worldwide. According to Interbrand, the company's brand value increased from


$5.2 billion (ranked 43rd in the world survey) in 2000, to $12.6 billion (ranked 21st) in 2004, andto $15.0 billion (ranked 20th) in 2005. Over the 5 years, Samsung Electronics has posted thebiggest gain in value out of the other global 100 brands, with a 188 percent surge. In 2005, thebrand value of Samsung Electronics exceeded, for the first time, that of Sony, which remained at28th. Samsung Electronics consists of five business divisions, including the SemiconductorBusiness that is the core business within the company. Other divisions include the Digital MediaBusiness, which produce TVs, AV equipment, and computers; the Telecommunication Business,which manufactures mobile phones and network equipment; the LCD Business, which makesLCD panels for notebook computers, desktop monitors, and HDTV; and the Digital AppliancesBusiness, which produces refrigerators, air conditioners and washing machines.

6.2. Samsung Electronics' emergence as a top-tier global semiconductor and consumerelectronics company

Samsung Electronics' interests in semiconductors started in the early 1970s, with the initiativeof Byung-chul Lee (who was the founder of Samsung Group) and his son, Kun-hee Lee (who laterrose to the same position after his father died). They saw the potential of semiconductor industry inexpectation of its high growth and profitability, and decided tomove into this industry. At that time,Samsung Electronics was a mere producer of low-end consumer electronics, which imported andassembled semiconductors and other items to export the consumer electronics products.

During the 1980s, Samsung Electronics chose to enter DRAM (Dynamic Random AccessMemories) production, the high-growth memory segment. To design and produce its first 64 KDRAMs, Samsung Electronics searched around the globe for a company willing to license itsDRAM technology. Leading foreign producers declined Samsung Electronics' request to licenseDRAM technology, but the company approached a number of financially-distressed small semi-conductor companies in the US and ultimately purchased chip designs and process technologyfrom Micron (Kim, 1997).

By the mid 1980s, Samsung Electronics was building its first large manufacturing facility. Thecompany accomplished the construction for a new production facility in just six months. With theaim of developing its first frontier technology, Samsung Electronics set up two task forces inAmerica and Korea and employed Korean–American Ph.D.s in the field of electronic engineering.The two taskforces interacted actively and the team in Korea succeeded in developing 64 KDRAM. The two groups cooperated but competed at the same time to come up with their ownsolution, and they took turns in developing next generation DRAM technology (Kim, 1997).Samsung gained number one market share position in the DRAM industry in 1992 and havemaintained their leadership position since (Siegel and Chang, 2005). From 1994, the DRAMboomturned to decline and in 1995 Samsung Electronics' total return on investment was only 60% of1994 levels. The DRAMmarket was saturated. Even though Samsung Electronics suffered, it keptinvesting in facilities and R&D, establishing joint ventures in many countries. Through thisaggressive and bold investment in developing the next-generation DRAM chips, SamsungElectronics would crack the 1 G DRAM by 1996 (Haour and Cho, 2003).

In 1997, the Asian Financial Crisis began to aggravate the DRAM situation. The stock price ofSamsung Electronics recorded its lowest since 1994. Over this period, the Samsung Group,including Samsung Electronics, had to go through substantial corporate restructuring. However,the company benefited from the weakened Korean currency and a strong rebound in marketdemand and price for DRAM in the late 1990s. Samsung Electronics' commitment to DRAMdevelopment despite falling demand paid off finally, outwitting rival companies. However, the


company learned a lesson and began to devise a new strategy to reduce its dependence on DRAMby diversifying into other areas. Samsung Electronics also made a major move into non-memorychips. Entering the 2000s, Samsung Electronic aimed at a ‘digital convergence’ strategy where itdiversified product mix to provide full-range products from memory chips to high-end state-of-the-art consumer products. It would aim for convergence through continuous innovationin product lines (Kumar, 2004) (see Table 2 in Appendix for a detailed history of SamsungElectronics).

6.3. Samsung Electronics' technological capability development and its implications for RBVand IDP

6.3.1. Motives for FDI: strategic asset-seeking, efficiency-seeking and market-seekingSamsung Electronics' FDI in the US for the development of DRAM technology was primarily

strategic asset-seeking and market-seeking. Even after Samsung Electronics was able to standon its own two feet for developing DRAM technology, the company invested heavily in theestablishment of joint ventures and production plants in various countries. These investments hadtwo motives. First, by founding joint ventures and sharing research centres, Samsung Electronicswas not only trying not to lag behind, but also leap to the forefront of DRAM technology4. ThisFDI was not only in developed countries: Samsung Electronics established a subsidiary inBombay, India, to employ local highly-skilled software engineers. This case is a good example toshow how Samsung Electronics attempted to maximise its I advantage using the O advantageamassed over the period combined with a newly found L advantage — all with the overridingmotive of exploiting a strategic asset crucial to its technology development. Given Korea's IDPposition (between Stage 3 and Stage 4) Samsung's venture into this type of FDI is remarkable. Themost significant factor influencing this investment behaviour is in the competencies of SamsungElectronics rather than from the overall economic position of Korea. Firm-specific O advantages(tangible and intangible resources and the capability to deploy them) were embedded anddeveloped dynamically. Second, it is noted that this strategic asset-seeking investment has beenintertwined with market-seeking. Samsung Electronics has carefully noted the potential ofconsumer markets and attempted to devise appropriate strategies to tap into them and catch up. Forexample, a design centre was founded in London, UK for a variety ofmotives: to learn design skillsfrom London designers, who are considered to be in the van of world design and to researchconsumer taste about mobile phone design, which can be very different from that in Korea. Thiscase also shows how Samsung utilised its O-advantage, coupled with the UK's locationalattraction, to select the internalisation mode to maximise its I-advantage.

6.3.2. Entrepreneurial rent-seeking aggressive and entrepreneurial investment behaviorSamsung Electronics did not start with adequate resources to enter the DRAM industry.

Rather, Samsung Electronics possessed the dynamic capabilities to use and leverage a limitedrange of resources and competencies to improve their technological capabilities through an on-going development process. Samsung Electronics' advance to become a top-tier innovative firm

4 The collaborative forms of gaining entry undertaken by Samsung, such as partnerships and joint ventures, areconsistent with the phenomena described by Wells (1998) about multinationals from the Third World. Mathews (2006)points out that multinationals from the Third world tend to internationalise through the collaborative entry to reduce therisks and to utilise web-like global interlinkages. This compares with incumbent MNEs from the developed world whoprefer the internalisation mode, through establishing subsidiaries.


does not conform to conventional resource-based theory. There is no correlation between ex-ante resources and ex-post performance in Samsung Electronics' case. However, while theconventional RBV views the firm as a static bundle of resources and capabilities and assumeshomogenous expectations about costs of strategic factor markets and profitability of futureoperation, revision of RBV from a dynamic viewpoint offers a richer perspective. Subjective,heterogeneous expectations, characteristic of entrepreneurial behavior, of firms regarding costsand profitability in the current and future business environments may generate different actionsfor the dynamic development of resources and capabilities. Samsung Electronics' continuousaggressive and bold investment in DRAM technology throughout the 1980s and 1990s despitethe severity of the industry cycle shows how differently Samsung Electronics' leadershipperceived the industry potential. While competitors in Japan and the US started to reduce theirinvestments in the face of adverse conditions in the mid-1990s, Samsung Electronics continuedwith huge investments in the technology, which finally paid off when the industry reboundedin 1999.

This continuous commitment to DRAM investment is characteristic of entrepreneurialbehavior: to seek for rents that can be won in a high risk venture. In this process, as Casson (2005)pointed out, the entrepreneur's (in Samsung Electronics' case, top manager's) vision andstrategic cohesion enabled crucial decisions such as selecting the right people with the rightcapabilities and allocating the right resources to the right tasks and positions. In short, SamsungElectronics' extraordinary technological capability development in the DRAM industry suggeststhat dynamic entrepreneurial capabilities should be interwoven more into the theoreticalmainstream of strategy.

6.3.3. Development of technology capability: assimilation, imitation and competenceSamsung Electronics' technological learning in the process of DRAM chip development at

early stage shows that the company was totally engrossed in generating the new technology byusing their ‘dynamic capabilities’. All the resources and capabilities they could access at the timethat they entered semiconductor production resulted from their experience of assembling thesemiconductors imported from developed countries. In a ‘static capabilities’ sense, SamsungElectronics did not have the resources to design memory chips or to construct the facility toproduce them. However, the company improved and developed its technological capabilities,including the absorptive capacity to make effective use of foreign technological know-how,utilizing its dynamic capabilities in the process to create new combinations of product, process,organization and technology. Through persistence and determination, it gained access to foreigncompanies and license to imitate their memory chip technologies, but this does not explain theextraordinary absorption and innovation which followed.

Samsung Electronics' initial attempts to license 64 K DRAM technology were turned down bymajor semiconductor companies in the US and Japan. The company organized a task force team in1982 to devise an entry strategy for DRAM technology, but required a major technology leap fromits current form of operations. Samsung Electronics identified financially troubled small firms tobuy DRAM technology and licensed 64 K DRAM design from Micron Technologies in Idaho.Kim (1997) points out that the technology license from Micron provided Samsung Electronicswith a platform to reduce the time in learning explicit and tacit knowledge related to 64 K DRAMdesign and production. Samsung Electronics bought a design for a high-speed process instrumentfrom Zytrex of California, enabling them to acquire explicit knowledge. They dispatched theirengineers to these companies so that they could be trained to assimilate the license technologies(Kim, 1997). They arranged the process of transferred technology assimilation gradually from the


simplest to the more complicated: from the assembly process to process development, then tofacility development and inspection (Kim, 1997). Samsung Electronics' previous experience ofassembling chips enabled Samsung engineers to gain initial familiarity with the new products andprocesses imported from Micron and Zytrex, this time elevating the capability to assimilate andadapt to DRAM technology. This initial acquisition of DRAM technology from the US companiescan be described as the process of making the most of the company's current capabilities andcombining as many and as varied types of capability as possible to imitate and improve theiroverall technological capabilities. Samsung Electronics' dynamic capabilities were utilized toadvance from imitation to innovation.

The strategic issue facing an innovating firm in the process of developing dynamic capabilitiesis related to how ‘it decides upon and develops difficult-to-imitate processes and paths most likelyto support valued products and services' in the long-term (Teece et al., 1997). As argued byDierickx and Cool (1989), commitment to investment is central to this issue, with the firm'scompetencies being influenced by the actual paths followed. After successfully completing thedevelopment of 256 K DRAM, Samsung Electronics surpassed the initial stage of assimilatingDRAM technology from foreign companies and followed its own trajectory or path of competencedevelopment thereafter. Though faced by significant uncertainty about the future state of theDRAM industry in the mid-1990s, Samsung Electronics decided to take its own path to developnext-stage DRAM chips, resulting in global leadership. Mathews (2003, 2006) points out thatsuccessful multinationals from Asian countries effectively controlled the process of ‘economiclearning’ through using linkages (interconnected firm relationship) and leveraging resources.Samsung's persistent endeavor to learn DRAM technology from the US firms and to concentratefirm resources on cracking its own technology is in line with the strategic decisions taken by thoseother challenging firms from Asia.

6.3.4. Crisis management creation and human resources managementWe have referred to Samsung's “extraordinary” performance deriving from its unique dynamic

capabilities. The dynamic capabilities are manifest in the managerial means whereby it developedtechnological capability so rapidly. The organization's breakthrough in its own developmentof initial stage DRAM chip technology came with a specifically designed human resourcesmanagement mode: two task forces (in Korea and the US) were set to work in “crisis managementmode”, a deliberate means of creating tension to accelerate progress. Samsung Electronicssearched for information on the DRAM technology and market in early 1980s in the US andorganized a US R&D task force for DRAM chip development that was composed of five Korean–American with Ph.D.s in electronic engineering who had semiconductor design experience atmajor US semiconductor companies. Samsung Electronics also set up another task force in Koreawith two Korean–American scientists who had an experience of DRAM development. Activeinteraction and communication between these two taskforces through training, joint research andconsulting transferred explicit and tacit knowledge from the American outpost to Koreaeffectively, making Samsung Electronics' engineers prepared to assimilate DRAM technology(Kim, 1997). In order to intensify its effort, Samsung Electronics intentionally generated the ‘crisismanagement mode’ by insisting that the team in Korea develop a working development systemwithin certain deadline. After 6 months' time, the team in Korea assimilated the core tech-nologies. For the development of the next-stage, both task forces were assigned to develop theirown process. ‘The projects were in a sense competitive because they both were to work on thesame project. However, it was in another sense collaborative because they were to exchangeinformation, personnel and research results' (Kim, 1997). As in the case of 64 K DRAM, a


deadline was also given to both teams, putting a great deal of pressure on them in crisis man-agement mode again.

Samsung Electronics cracked the next-stage in DRAM technology by using competition andcollaboration between the two task forces. The American task force took a leading role in thedevelopment process and the Korean task force absorbed the necessary core technology tomaster the working process. Samsung Electronics introduced an effective HR strategy to placetwo task forces under pressure to compete and collaborate to elevate its technology level withina target, but relatively short, time.5

6.3.5. R&D support and technology capabilitiesSamsung Electronics' main R&D facilities are located at a single site, Kiheung, just south of

Seoul, Korea. The foremost and core semiconductor research is conducted at this site and all theinformation and research results from overseas are concentrated to this site. When a projectreaches a deadlock, all related researchers gather together to sort out the problems until theycome up with a solution. As in the case of the initial stage of DRAM chip development, theengineers and scientists are generally given a certain time of period such as a week, 2 weeks or amonth to complete a project. This perpetually crisis-generating approach results in most projectsbeing finalized within their deadlines. The projects are extremely well resourced. At Samsung'sprimary campus, the R&D engineers and scientists stay together in the same company-providedluxury housing. They share meals and their worksites are in proximity so that design and processengineering problems can be quickly solved together. This site was designed to provide allthe necessary R&D support enabling researchers to concentrate on the work itself. SamsungElectronics have invested more than 20% of its net income in R&D over the years, which isthe highest R&D ratio among the major semiconductor competitors. This company policy,specifically geared to expand and support R&D, is one of the resources and capabilitiesthat enabled Samsung Electronics to reach the top-tier of technological leadership in thesemiconductor industry.

6.3.6. Financial resources transferred within the groupWhen Samsung Electronics successfully developed its own 64 K DRAM and 256 K DRAM,

Japanese semiconductor moved quickly to dump their 64 K and 256 K DRAMs at the Koreanproducers' cost. This strategy worked early on, placing enormous financial strains on theirAmerican competitors. However, unlike the single business semiconductor producers in the US,Samsung Electronics could overcome this financial difficulty, mainly supported by the cash-cowsubsidiaries within the diversified Samsung Group. This financial assistance from other affiliateswithin the Group enabled Samsung Electronics to keep itself afloat during the financial crisisuntil Samsung Electronics emerged as dominant suppliers of the 64 K DRAM and 256 K DRAMin the US market. Furthermore, the continuous commitment to DRAM investment in times ofDRAMmarket recession and the Asian Financial crisis would have been impossible without thefinancial support from the Group affiliates. Samsung Electronics' ready access to funds fromcash-cow companies within the Group played one of the major roles in providing cushions toSamsung Electronics when it was faced by financial constraints and the need to expand

5 In an interview article with Mr. Jong-Yong Yun, CEO of Samsung Electronics, in Fortune, Lewis (2005) caught theword ‘perpetual crisis machine’ to account for the management and operation mode of Samsung. Mr. Yun emphasizedthat, despite the success over the last decade, Samsung cannot afford to relax but needs to be in continuous tension,looking 10 years ahead if not to be caught by competitors.


investment. The ability to generate funds and arrange favorable access to them can be called aunique resource (Dunning, 2006) and underpins at least some of Samsung's sustainable Oadvantages.

7. Conclusion: Samsung Electronics' technology development and its contribution toIB theories

As noted by Narula and Dunning (2000), it has been observed that some of the more advanceddeveloping countries, those rapidly ‘catching-up’, outpaced the IDP. That is, they reached thestage of strategic asset-seeking outward investment before the higher level economicdevelopment was attained. Dunning (2000) notes the dynamic competitiveness and locationalstrategy of the firms in those countries, and in particular, the path-dependency of their upgradingof core competencies. Firms that have leapfrogged their technological capabilities to come to thefore over this period have achieved this because of their capability to maintain and augment theirO-advantages rather than by the overall economic development stage of their home country,although, of course, the ‘growth’ of the firms is indebted to spillover from national economicdevelopment. While the state of economic development, especially the government's industrialpolicy, acted a catalyst for enabling firms to accumulate initial pre-globalisation resources andcapabilities, firms' pre-emptive initiatives to access resources available in the global market madepossible the rapid internationalization and the rise of outbound foreign direct investment.

Samsung Electronics' transformation from an ordinary second-rate consumer electronicsmanufacturer to a top-tier semiconductor producer is noteworthy and can assist in identifyingand analyzing the causes of success of prominent firms in the developing countries, especiallyof the East-Asian conglomerates. We suggest there are a number of implications. First, while theIDP has been considered a paradigm to account for the patterns and trends of inward andoutward FDI according to the economic development stage of countries, it needs to incorporatea broader view of the role of MNEs or entrepreneurial SMEs who attempt to elevate theirtechnology capability through their own initiatives. This may indicate that O-advantages ofentrepreneurial firms, which endeavour to utilise the specific resources with the motive ofstrategic-asset seeking, will have a greater role in accelerating cross-border investment in thefuture. Second, Samsung Electronics' success sheds light on understanding the resources ofthe firms that are considered crucial to their operation in the RBV. It is not the static pool ofresources, but the entrepreneurial dynamic development of capabilities that is central to thesuccess of firms which not only catch up, but also overtake their counterparts from thedeveloped economies. Subjective, heterogeneous expectations about production input costs andpotential profits can lead to different outcomes even with the same domains of resources thatdifferent firms possess. Samsung Electronics' advancement into a top-tier innovative companywas derived from the top management's anticipation of the market potential of semiconductorindustry and the ensuing aggressive commitment to the seemingly high-risk investment. Thecompetencies of the company were developed through the process of acquiring and deployingresources in a dynamic way to seek for entrepreneurial rents.

We also would like to suggest some theoretical developments to be considered in the futurefrom our research. First, IB theory needs to assimilate the knowledge of how firms develop theirO-advantage through developing dynamic capabilities and to recognise that entrepreneurialvitality is the driving force. We think that IDP paradigm, which basically represents the rela-tionship between economic development (technically, GNP level) and net investment position ofa country, can be conceptually strengthened by adopting different types of economic variables


that measure, for example, technological and innovation capacity along with entrepreneurialbehaviour, so possibly predicting more dynamically the future development path a country willexperience. Second, we suggest that there be more analyses which examine the emergence ofmultinationals from developing countries in terms of how different dynamic capabilities con-tingent upon specific conditions impact on technology and management practice. One plausiblearea of research might seek for commonalities or otherwise in the circumstances in which firmsdeploy their dynamic capabilities to reorganise resources and which kind of technology learningmodes are adopted. For example, Zahra et al. (2006) hypothesize that learning modes such asimprovisation, trial-and-error learning, experimentation and imitation are influenced by dynamiccapabilities under different conditions such as firm age. How does learning mode correlate withfirm age and how do dynamic capabilities evolve? Multinationals from developing countries arerelatively young compared to those from developed countries, so that a systematic relationship islikely to have significant implications for the strategies of these companies. Third, there needs tobe more examination of the relationship between dynamic capabilities and more basic (thresholdor substantive (Winter, 2003)) resources and capabilities. Would it have been possible forSamsung to rise to its current position without experience of assembling semiconductor parts asan OEM exporter before entering full scale D-RAM development and production? The tech-nological learning accumulated through this experience was itself a path-acquired resource.Samsung's dynamic capabilities could be regarded as a fertilizer for the next growth stage. Anattempt to coordinate organization resources in a more creative and innovative way may not workunless based upon adequate substantive capabilities. The interaction and co-evolution of dynamicand substantive capabilities could be a beneficial area for further research.

Recently, there has been debate concerning how new multinationals' strategic asset-seekingtype of FDI can be fitted into the conventional eclectic OLI paradigm. Mathews (2006)suggests this type of internationalization is driven by new three factors, which he terms theLinkage, Leverage and Learning (LLL) paradigm. His main point is that new multinationals,as both latecomers and newcomers, are able to gain advantage through access to foreigntechnology because of their abilities to network, overcome entry barriers and learn effectively.Future research may gain fresh insights from this perspective aligned with the traditional OLIparadigm.

There are other large companies from East Asia that have become multinational in a relativelyshort period. Some, like Lenovo and Acer, are in the information technology industries, andthere are similarities with Samsung in that entrepreneurial effort has been directed towardstechnological innovation. Others, such as Haier, have sought competitive advantage throughstrategic innovation: in quality management and marketing, for example. All seem to have incommon strong, entrepreneurial leadership.We have endeavoured in this article to shift the focuson growth and development from managerial processes to the primary dynamic capability ofentrepreneurship that drives their design, implementation and change.While this article aimed toanalyse the ‘unique’ path Samsung has taken, our arguments need to be reinforced by otherexamples in different countries, to identify whether the dynamic capabilities perspective wouldapply to the success of other companies. The comparative studies which examine why, to whatextent, and how differently dynamic capabilities affect the path and the process of organisationswill contribute to better understanding of success/failure of the companies in wider perspective.Furthermore, strategy, is of course, far from independent of the external environment, andalthough we have hinted at macro-environmental factors in the case of Samsung, the extent towhich external factors encourage, discourage, shape, direct or divert entrepreneurial behaviourhas not been covered in this paper and needs to be explored in future research.


Appendix A

Table A1Samsung's summarised financial and income statistics

2000
2001 2002 2003
(co

2004

ntinued on nex

2005

Net sales
119.5 98.7 116.8 101.7 121.7 140.9 Total assets 113.7 124.3 156.1 170.4 209.4 233.8 Total liabilities 84.8 88.8 110.3 113.8 137.2 153.0 Total stockholder's equity 28.9 35.5 45.8 56.5 72.2 80.8 Net income 7.3 4.5 8.9 5.6 11.8 9.4 Employees 174 170 175 198 213 229
Source: Samsung Group homepage (www.samsung.com).Dollars in billions (except for employees in thousands).

Table A2History of Samsung Electronics (1969–2005)

Year
Events
1969
Samsung Electronics Manufacturing Co., Ltd., Samsung–Sanyo Electronics Co., Ltd. Established 1970 Samsung–NEC Co., Ltd established 1972 Started production of black and white TV sets 1977 100% share of Korea semiconductor Co., Ltd acquired 1983 Started production of personal computers; 64K DRAM developed 1986 1 M DRAM developed; research labs established in the US and Japan 1988 4 M DRAM developed; Samsung Semiconductor and Telecommunications Co., Ltd. Merged with Samsung
Electronics Co., Ltd
1989 VLSI R&D Centre completed; company ranked 13th in the world for semiconductor sales 1990 16 M DRAM developed 1991 Super-VHS VCRs and Pen-based PCs developed 1992 64 M DRAM developed; technical cooperation with Toshiba of Japan for semiconductors 1993 Completed plans for the mass production of 16 M DRAM 1994 256 M DRAM developed; exports exceeded US $10 billion 1995 Stared mass production of 64 M DRAMs
TFT-LCD mass production startedEstablished a fully integrated production complex in Suzhou, ChinaInvestment (40.25%) in shares of AST Research

1996
Established a semiconductor plant in Austin, Texas, USA1 G DRAM developed
1997
Singed on as worldwide Olympics partner through year 2000Began to ship CDMA PCS handsets to Sprint SpectrumDeveloped 30-inch single glass TFT-LCD
1998
Shipped samples of world's first 128M SDRAMSAS (Samsung Austin Semiconductor) started productionWorld's first 256 M DRAM chips producedTFT-LCDs capture No.1 global market share position
1999
First DRAM manufacturer to receive Intel validation for its 72 M and 144 M Rambus DRAMs1 GHz alpha CPU developed1 GIGA bit flash memory chip developed
2000
Corporate Strategy shifted to specialization in Digital IndustryDeveloped world's smallest packages for SRAMsSamsung and Microsoft announced strategic alliances to deliver next-generation mobile phones
t page)

http://www.samsung.com


Table A2 (continued )

Year
Events
2001
Launched very-thin 0.7 mm flash memory packagesDeveloped colour motion picture function in mobile phoneDeveloped 576 MB RDRAM
2002
Developed 128 MB DDR graphic memory chipShipped the industry' first 256 MB SDRAMs made from 300 mm wafersDeveloped the industry's first DDR-SDRAM
2003
Introduced ITCAM-7: world's first HDD digital camcoderReceived Sun Microsystem's supplier of the yearDeveloped 57-inch TFT-LCD panel for HDTVs
2004
Developed 70-nanometer DRAM process technologySamsung Electronics and Qaulcomm, Inc. delivered MDDI display interface solution for wireless 3 G CDMAclamshell phonesDeveloped high-integrated HDTV system-on-chip
2005
Brand value published by Interbrand ranked 20th, exceeding that of Sony (28th) for the first timeDeveloped New Satellite DMB phoneDeveloped world's first 512-Megabit DDR2 with 70 nm Process Technology
Source: Press release section in Samsung Group homepage (www.samsung.com).

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