Dynamic capability refers to an organization’s ability to purposefully create, extend, or modify its resource base. Within this framework, core competencies must be used to modify short-term competitive positions with the aim of building a longer-term competitive advantage.

In the context of multinational enterprises (MNEs) that produce or deliver services to more than one country, authors Xiao Zhang, Luqun Xie, Jiatao Li, and Li Cheng “conceptualize the dynamic capabilities of multinational enterprises (MNEs) as learning and adaptation capabilities that address the pressure of global integration and local responsiveness.”

Focusing on the demand side, the authors aimed to find out whether demand heterogeneity provides pressures and opportunities for MNEs to learn and adapt. Their research also aimed to demonstrate both theoretically and empirically how global demand heterogeneity can develop dynamic capabilities.

Using an empirical study of Chinese multinational service firms offering cross-border services to customers in multiple countries, the authors’ investigation found evidence to support that “Firm-specific advantages, particularly human capital (at the managerial and employee levels), facilitate the internalization of external knowledge and pressure into the development of dynamic capabilities.”

Operating at an international level, MNEs are able to seize global resources and opportunities to upgrade their capabilities by leveraging extended market opportunities and resources. That said, MNEs must consider the demands of different markets, and adjust their competencies accordingly.

Other studies have suggested that the firm-specific advantages (FSAs) of MNEs can be combined with the development of dynamic capabilities. However, the authors found demand environment to be a source of dynamic capabilities for MNEs. Their study also put forward the possibility that the dynamic capabilities of MNEs go beyond FSAs and are a combination of internal resources and external opportunities/forces.

The researchers said that their findings are significant, as they “contribute to international business research by bringing the demand-side perspective into the discussion of the dynamic capabilities of MNEs.”

The conventional application of internalization theory focuses on shaping internalization by the requirement to deploy and exploit FSAs. However, the authors explained that demand-side research has recognized the role of consumers’ heterogeneity of demand as an important contributor to firm heterogeneity.

Their findings also suggest that managers at the headquarter and subsidiary levels should pay close attention to their customers’ demands, and incorporate customers into their firm’s strategy. This is particularly the case for firms operating in professional services.

Looking ahead, the researchers said, “We hope that this study will spur a renaissance of research that explores the fertile intersection of demand-side research and dynamic capabilities of multinationals.”