INTRODUCTION

Increasingly, international business (IB) and economic geography (EG) are taking advantage of each other’s comparative advantages (Beugelsdijk et al., 2010). Whereas IB has traditionally been concerned with how the strategy of multinational enterprises (MNEs) is influenced by national borders and institutions (McCann and Mudambi, 2005), EG’s core concern is the effects of proximity and place (Lorenzen et al., 2012). More specifically, EG’s analysis at network level is complementary to IB’s analysis at firm and national levels, paving the way for analyzing not just how MNE strategy adapts to locations, but also how such locations change as a result of diverse and interacting firm strategies.

The synergies between IB and EB are embryonic and more research is needed in order to enrich the core IB concepts. In this paper, we take steps towards such theory development. We investigate two core IB concepts, capability development and cultural distance. By complementing IB’s and EG’s levels of analysis, our approach addresses three research gaps common to extant research on these two core concepts. First and foremost, the extant analytical perspective in IB is largely static. Extant research black boxes the processes of capability development in order to focus on its outcomes (for exceptions, see Montealegre, 2002; Parida, Wincent and Kohtamäki, 2013). Furthermore, extant research analyzes ways of mitigating for negative effects of cultural distance, but assumes that such distance remains unchanged (Shenkar, 2001), By contrast, our approach is dynamic, addressing the processes through which these phenomena change over time, i.e. how capabilities develop and how greater cultural proximity may emerge.

Second, extant IB research has primarily studied capability development at the firm level, ignoring lower levels (e.g. projects and teams) or higher levels (e.g. cluster and region) of

analysis (Foss, 1996; Lahiri and Kedia, 2009; Un and Montoro-Sanchez, 2010). Concerning cultural distance, extant research typically analyses it as a national phenomenon, ignoring regional or local levels of analysis. Our approach takes inspiration from the observation that collective capabilities and cultural institutions can be influential in attracting new entrants and investments to clusters (Zaheer, Lamin and Subramani, 2009). Analyzing the dynamics of capability development and development of cultural proximity at the cluster level, a core question is how firm-level processes aggregate to collective phenomena. Examining spillovers of knowledge and skills from firms to clusters, our analysis may improve extant research’s limited understanding of how clusters emerge and evolve (Manning, Ricart, Rique and Lewin, 2010).

We address a third gap in extant research: Partiality. Extant IB research takes the strategic perspective of parent MNEs or international clients, paying scant attention to other parties of international business relationships. In particular, the literature on offshoring has disregarded local firms, who have been considered subordinate in supplier relationships (Luo, Wang, Zheng and Jayaraman, 2012). However, recent examples of Indian ICT services and Chinese manufacturing (Ge and Ding, 2008) suggest that while MNEs possess comparatively more developed capabilities, local firms can develop theirs and become global competitors through various catching up mechanisms. Our approach, therefore, includes the perspectives of MNEs as well as local firms. In sum, the paper poses the following research question: How do knowledge and skills spill over from firms to develop cluster capabilities and cultural proximity?

The paper’s research strategy is to use an explorative case study to develop testable theoretical propositions. Our empirical setting is the digital creative industries (DCI):

Animation, visual effects (VFX) and games. This sector constitutes a fruitful setting because it is young, its technologies and markets are emerging, and its patterns of MNE activity are under development. We undertake a case study of the DCI cluster in Bengaluru (India). We selected this cluster because it is a latecomer to the DCI and currently experiencing MNE entry, allowing us to juxtapose the development of local firms with MNE subsidiaries. Studying a cluster in such a nascent stage furthermore makes is easier for us to discern relationships and causalities.

First, our case study identifies the development of DCI cluster capabilities in Bengaluru.

Most notably, the cluster is developing a skilled labor pool and a local industry association undertaking political lobbying, promoting international-grade animation courses, arranging conferences and fairs, and establishing a startup incubator. We find that local firms and subsidiaries develop two broad categories of capabilities: the first relates to general animation skills and the second are relational capabilities developed through working with international clients. Furthermore, there is evidence that local DCI labor is undergoing a slow process of developing cultural proximity to international markets for DCI products, in the guise of understanding the necessary content quality levels and the aesthetics, customs and preferences of foreign consumers.

Next, the case study analyzes the processes of developing capabilities at the firm level and how it spills over into the cluster. We find that DCI capabilities are developed particularly rapidly by MNE subsidiaries, through transfer of technical knowledge from parent firms.

Subsidiaries operating in animation and mobile games industries, where Indian and East Asian markets are sizeable, also obtain mandate from their parents to develop final products.

Compared to local firms, however, MNE subsidiaries have fewer spillovers to cluster capabilities: subsidiaries refrain from using local suppliers due to tight integration into their

parents’ value chains, as well as strong concerns of safety and security. By contrast, local firms’

use of local suppliers is contingent upon technology: While in animation and visual effects industries, the use of local suppliers is modest, in the games industry, task modularity facilitates the use of local suppliers as well as spin-offs of new firms. Furthermore, local firms are highly incentivized to participate in the development of cluster capabilities through participating in the local industry association, while MNE subsidiaries are less committed. Several of them entered Bengaluru in a low-commitment mode, through ‘dedicated units’ hosted by an incumbent firm.

Third, we analyze how the capabilities developed by firms compensate for their cultural distance to international DCI markets may create cultural proximity in the cluster. MNE subsidiaries make their employees grasp the cultural aspects of international markets by transfers of personnel and cultural knowledge from parent firms. By contrast, in local firms, cultural knowledge is disseminated to employees by managers who obtained it through their personal connections to former employers, early customers, friends or family in Europe and North America. The case study finds that the presence of rapidly expanding MNE subsidiaries lowers spillovers of cultural knowledge from firms to cluster: by offering attractive career opportunities, MNE subsidiaries currently appropriate an increasing share of the skilled DCI labor in Bengaluru, and further reduce the generally low Indian labor mobility. Hence, the emerging cultural proximity at the cluster level is mainly due to collective investments in education. In this process, as mentioned, local firms are more active compared to MNE subsidiaries.

Our findings on capability development at the firm level and the role of MNEs align with extant theory. Other findings on capability development at the level of the cluster and of the role of personal relationships in the development of cultural proximity, complements and

extends extant theory. They tie to the emergent theme connectivity at the intersection of IB and EG research (Beaverstock et al, 2002; Lorenzen and Mudambi, 2013; Cano-Kollmann et al, 2016). The paper develops theoretical propositions on the basis of these findings, and discusses how they relate to extant research. The paper is structured as follows. Section 2 presents its theoretical foundations, and sections 3 and 4 outline the paper’s empirical setting and method, respectively. Section 5 presents the empirical findings, and section 6 discusses these, positions them to extant literature and develops five testable propositions.