This article argues that a focus on the institutional underpinnings of multinational enterprise (MNE) strategy and behavior is not only consistent with the emerging literature on dynamic capabilities, but it also serves to highlight the unique role played by MNEs in generating new organizational routines by combining locally embedded capabilities with those that are mobile across borders. Firms shape markets rather than the other way around, because of the role organizational innovation plays in redefining the rules of selection in the operating environment. Of such innovations, some proportion will remain proprietary, while others become diffused more widely in the industry, as the choices made by pioneering firms are imitated by others. We argue that the combination of increasing interconnections between geographically dispersed markets and the greater use of market-based transactions have intensified the incentives for MNEs to engage in the development of new routines, and to formalize them into transferable practices. This is likely to increase the overall transparency of the origins of firm capabilities, leading potentially to more specialization and less internalization at the industry level.
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