In 1969 Perlmutter was ahead of his time claiming that the multinational corporation is a new kind of institution which, from his point of view, could make a valuable contribution to world order and conceivably exercise a constructive impact on the national states. As a pioneer in MNE research, he categorized MNE characteristics in a concept known as the ethnocentric-polycentric-regiocentric-geocentric scheme (E. P. R. G. model). The E. P. R. G. was further developed by Wind et al. (1973) concerning marketing strategies and by Bartlett and Goshal (1986, 1998). In light of increasingly globally shared value-added activities, based on the E. P. R. G. model Bartlett and Goshal (1986, 1998) proposed corresponding MNE strategies such as the ‘transnational strategy.’ When it was published in 1969, the organizational/behavioral elements of the E. P. R. G. model made it novel and opposite to dominant mainstream ‘rational thinking’ approaches related to international business, such as the international product life-cycle theory by Vernon (1966) or the internalization theory by Buckley and Cason (1976). According to Perlmutter, behavioral attitudes of the management towards foreign markets are crucial in assessing a firm’s multinational competitive success. The value orientation and the firm’s philosophies implemented by the management greatly influence and shape the firm’s internationalization path (Glowik 2017; Perlmutter 1969; Wind, Douglas & Perlmutter 1973).
The first element of E. P. R. G., the ethnocentric approach (home-country orientation) claims significant levels of control and standardized management procedures, implemented by top-down governance from the headquarters. The firm’s international business concentrates on exports without being significant in terms of the marketing mix (e.g., prices, product and services similar as at home). The ethnocentric concept has been defined by Barlett and Ghoshal (1990) as global strategy.
However, headquarters of multinational organizations often lack experience and knowledge of foreign markets and the diverse environments where their firm subsidiaries are operating. Those firms that have acknowledged the existence of national differences and the importance of considering these have pursued international expansion by adopting a polycentric approach (host-country oriented). Host-country oriented organizations tend to rely on locals’ expertise and provide each subsidiary with a certain degree of autonomy to manage their operations, as it is best suitable in the given context (Perlmutter 1986). According to Bartlett and Goshal (1990) the polycentric concept is described as international strategy.
A polycentric organization (region-oriented) consists of loosely connected quasi-independent subsidiaries where each subsidiary is usually comprised predominantly of local nationals, and processes and practices are adapted to the local conditions and needs of the respective target market. Bottom-up decision making has enabled organizations to capitalize on better-informed executives, better relationships with local authorities and improved perceptions of the company among locals (Lee, Kozlenkova & Palmatier 2015; Perlmutter 1969). The regiocentric organized firm, termed by Bartlett and Goshal (1990) as multinational strategy, emphasizes the existence of diverse regional markets. Similarities, for example between countries are summarized based on common characteristics when developing a regional strategy of the firm. Management decision authorities are mutually negotiated and agreed within the regions, which are, to a certain degree, independent from other regions (Glowik 2017; Perlmutter 1986).
In the case of a geocentric approach, the firm emphasizes a mutual global exchange of resources between the entire organizations’ units. The firm sets universal standards to responsively react to local needs, and the relationship between headquarters and its subsidiaries is characterized by collaboration. The aim is to make use of each country’s markets and corresponding national resources with what fits best and seems most suitable for increasing the profitability of the firm. Management norms, values and styles are broadly interpreted and governance is mutually negotiated within the whole organization Perlmutter 1986; Perlmutter & Heenan 1974).
The E. P. R. G. model provides valuable theoretical guidelines on how MNEs should organize their internationalization strategies according to firm resources, human behaviors and location-specific (institutional) environments in the foreign target markets. However, in business practice there is a permanent challenge for the firm’s management in terms of the organization’s degree of centralization or decentralization and the uncertainty as to whether home-based, single-country-based or region-oriented organizational structures fit best (Bartlett 1986). In business reality, decision-making processes are geographically overlapping. Therefore, the E. P. R. G. model tends to be complex and concreted quantification of ‘behavioral’ attitudes, naturally is difficult. The geocentric approach (transnational strategy) appears to be the ideal concept for MNEs. Specific challenges concerning the geocentric approach are related to limited flexibility, opportunistic behavior and local egoisms. For example, in managerial business practice the question is whether all organizations’ members are always willing to voluntarily exchange knowledge when they compete as regional profit centers within the organization. In addition, employees and managers, with family-related responsibilities, for example, are naturally less willing to frequently re-locate anywhere worldwide where the firm wants them to following global resource exchange necessities as in the geocentric model (Ahmadi et al. 2012; Glowik2017).
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Perlmutter, H. V. (1969). The tortuous evolution of the multinational corporation. Columbia Journal of World Business, 4:9-18.
Perlmutter, H. V. (1986). The tortuous evolution of the multinational corporation. Columbia Journal of world business, 4(1):9-18.
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Source: Glowik Mario (2020), Market entry strategies: Internationalization theories, concepts and cases, De Gruyter Oldenbourg; 3rd edition.