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international expansion of the new MNEs runs in parallel with a capability upgrading process through which newcomers seek to gain access to external resources and capabilities in order to catch up with their more advanced competitors, i. e. to reduce their competitiveness gap with established MNEs (Mathews 2006; Aulakh, 2007; Li, 2007). However, despite lacking the same resource endowment of MNEs from developed countries, the new MNEs usually have an advantage over them, as they tend to possess better political capabilities. As the new MNEs are more used to deal with discretionary and/or unstable governments in their home country, they are better prepared than the traditional MNEs to succeed in foreign countries characterized by a weak institutional environment (Cuervo-Cazurra and Genc, 2008). Taking into account the high growth rates of emerging countries and their peculiar institutional environment, political capabilities have been especially valuable for the new MNEs.

The first two features taken together point to another key characteristic of the new MNEs, they face a significant dilemma when it comes to international expansion because they need to balance the desire for global reach with the need to upgrade their capabilities. They can readily use their home-grown competitive advantages in other emerging or developing countries, but they must also enter more advanced countries in order to expose themselves to cutting-edge demand and develop their capabilities. This tension is reflected in Figure 2.1. Firms may evolve in a way that helps them to upgrade their capabilities or gain geographic reach, or both. Along the diagonal, the firm pursues a balanced growth path. Above the diagonal it enters the region of capability building, in which the firm sacrifices the number of countries entered (i.e. its geographic reach) so as to close the gap with other competitors, especially in the advanced economies. Below the diagonal the firm enters the unsustainable region because prioritizing global reach without improving firm competences jeopardizes the capability upgrading process.

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