This article examines how firm-level capabilities relate to competitive outcomes between multinational firms from advanced economies (MNCs) and challengers from emerging economies. It presents John Sutton’s theory of the “capability window” with new empirical evidence on competition between MNCs and Chinese firms inside China, in particular. Market share leadership by MNCs in China is found to be positively related to industry R&D and advertising-intensities, and where leadership varies by segment, MNCs tend to lead in high-end segments and Chinese firms in low-end segments. The empirical research provides support for Sutton’s model but also suggests a set of extensions to it—most significantly the incorporation of horizontal distance alongside the vertical distance emphasized in the baseline model.
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