Abstract
Over the past two decades, developments in the global economy have deeply affected the pattern of foreign investment (FDI) by multinational enterprises (MNEs),1 giving rise to a spectacular increase in investment to Asia and to Central and Eastern Europe, modest increases to Japan and the EU, and relatively smaller gains to all other areas of the world.2 This chapter describes these shifts in investment and explores the underlying causes of change. The evidence presented suggests that MNEs have altered their patterns of investment in response to three factors: changes in their own competitiveness; alterations in what they seek from countries in which they invest; and a transformation in the way they link production to local markets. These factors are strongly interrelated and can be defined more technically as:
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(i)
the competitive or ownership-specific (O) advantages of firms;
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(ii)
the competitive or location-specific (L) advantages of countries; and
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(iii)
the modalities by which firms coordinate their mobile O-specific advantages with the immobile L specific advantages of countries (for example, whether firms choose to buy or sell assets, or rights to assets through intermediate product markets and/or network relationships, or whether they prefer to internalize (I) the market for these assets or rights).3
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References
Throughout this chapter, FDI stocks or flows are used as proxies for the value added activities of firms which own or control such activities outside their national boundaries (i.e. MNEs). Though an imperfect measure of these activities, the FDI data, published by all the major countries in the world, are broadly comparable. This is not the case with other data, sales, net output or employment.
1996 is the latest year for which detailed data on FDI stock and flows are available at the time of writing. These do not fully take into account the effects of the East Asian crisis nor the problems of the Russian economy. However, preliminary data for 1997 suggest that FDI inflows to South East and South Asia were 6.2% higher than those for 1996, which in turn were 16.6% above those for 1995. By contrast, foreign portfolio capital inflows dropped dramatically; indeed there was a net exodus of capital from the region in 1997. FDI outflows from the region in 1997 were also about marginally higher than those in 1996 ($50.2 billion cf. $47.4 billion). Rather surprisingly, FDI inflows into the Russian Federation more than doubled from $2.5 billion to $6.2 billion in 1997: UNCTAD, World Investment Report1998 (Geneva: United Nations, 1998).
The OLI configuration, explaining the extent and pattern of the foreign value-added activities was first put forward by the author in the mid-1970s. For a recent exposition of the eclectic paradigm of international production. See John H. Dunning, ‘Reappraising the Eclectic Paradigm in the Age of Alliance Capitalism’, journal of International Business Studies 26:3 (1995) 461— 91; John H. Dunning, The Eclectic Paradigm as an Envelope for Economic and Strategic Theories of MNE Activity (Newark, US and Reading, UK: mimeo, 1999).
Of course, there are other modalities than FDI in promoting the cross-border mobility of goods, services and assets. Indeed, it is likely — though this is very difficult to quantify- that non-equity strategic alliances and networking have become increasingly important vehicles for the transfer of assets, particularly intangible assets, over the past two decades. See particularly, in this connection, the work of John Hagedoorn and his colleagues at MERIT and the University of Limburg.
Dunning, ‘Reappraising the eclectic paradigm’ and The Eclectic Paradigm.
These latter I have termed strategic asset acquiring advantages: John H. Dunning, Multinational Enterprises and the Global Economy (Wokingham, UK: Addison Wesley, 1993). In the last decade, FDI of this kind — particularly that by firms investing in advanced industrialized countries by way of mergers and acquisitions — has become one of the dominant factors affecting the geography of FDI.
For further details, see the next section and also M. Kenney and R. Florida, ‘The Organization and Geography of Japanese R&D: Results from a Survey of Japanese Electronics and Biotechnology Firms’, Research Policy 23 (1993) 305–23; and M. Kenney, and R. Florida, ‘The Globalization of Japanese R&D: the Economic Geography of Japanese R&D Investment in the US’, Economic Geography 70 (1994) 344–69.
The former period was chosen as this was immediately prior to the wave of liberalizing markets, and the current generation of technological advances.
See, for example, IMF, Balance of Payments Yearbook (Summary Tables) (Washington, DC; International Monetary Fund, various dates); and UNCTAD, World Investment Report 1996, Transnational Corporations, Investment, Trade and International Arrangements (Geneva: United Nations, 1996).
Previously called the European Community. The composition of the EU is taken to be that existing on 1 January 1995 for all years discussed in this chapter.
The US, in particular, substantially increased its share of worldwide FDI in the 1980s. Between 1983 and 1989 it accounted for 42.6% of all inflows, compared with 24.5% in 1975–80. However, between 1990 and 1996, its share fell back to 19.1%.
In the case of both Africa and West Asia, it was the oil-exporting countries which recorded the least gains, and, indeed, in the 1990s, the flow of new investment has been less than one-half that of the second half of the 1980s.
India, for example, recorded a ninefold increase in direct investment inflows between 1990–92 and 1994–96. The Central and Eastern European countries recorded a fivefold increase.
See Dunning, Multinational Enterprises, for the original formulation.
B. Kogut, ‘Foreign Direct Investment as a Sequential Process’, in C. P. Kindleberger and D. B. Audretsch (eds), The Multinational Corporation in the 1980s (Cambridge, MA: MIT Press, 1983) 38–56.
The kind of O advantages which scholars, in the 1970s, used to explain FDI are set out in Dunning, Multinational Enterprises, and R. Caves, Multinational Firms and Economic Analysis, 2nd edn (Cambridge: Cambridge University Press 1996). The ones which consistently offered the greatest explanatory power were proprietary knowledge and product differentiation, and access to markets.
John H. Dunning, ‘The European Internal Market Program and Inbound Foreign Direct Investment’, journal of Common Market Studies, 35, 1 (1997) 1–30.
J. F. Hennart and Y. R. Park, ‘Location, Governance and Strategic Determinants of Japanese Manufacturing Investment in the US’, Strategic Management Journal, 15 (1994) 419–36.
John H. Dunning, R. Narula and R. Van Hoesel, ‘Explaining International R&D alliances and the Role of Governements’, International Business Review, 7, 4 (August 1998) 377–98.
Michael E. Porter, The Competitive Advantage of Nations (New York: The Free Press, 1990).
So-called Ot (t standing for transactions) in the literature.
Exceptions included R&D by MNEs from the UK, Canada and some smaller European nations, and in sectors such as food, beverages and pharmaceuticals, where local supply or demand conditions made it desirable for some R&D to be decentralized.
W. Kuemmerle, The Drivers of Foreign Direct Investment into Research and Development: An Empirical Investigation (Boston: Harvard Business School Working Paper No. 96:062, 1996), p. 9.
In 1993, US firms conducted 13% of their R&D outside their home countries; the Japanese were increasingly establishing R&D facilities in Europe; while in the US, foreign firms accounted for 15.5% of total R&D expenditures in 1991, compared with 4.8% in 1977: John H. Dunning and R. Narula, ‘The R&D Activities of Foreign Firms in the US’, International Studies of Management and Organization, 25, 1–2, Spring—Summer (1995) 39–75.
Kuemmerle, The Drivers of Foreign Direct Investment.
For example, investment by US MNEs in the UK. See John H. Dunning, American Investment in British Manufacturing Industry (London: George Allen and Unwin, reprinted by Arno Press, New York, 1958. Updated and revised edition published by Routedge (London and New York) in 1998).
One of the reasons for this is that part — and probably an important part — of the growth of foreign-based R&D has taken the form of acquisition rather than of ‘greenfield’ R&D. In the US, almost four-fifths of the total investment outlays by foreign direct investors in the 1980s was through the purchase of existing US businesses.
It is noted that there are certain parallels between the kind of FDI designed to acquire natural resources in the nineteenth and early twentieth century, and that designed to acquire created assets, notably technology, information and learning experience of the 1980s and 1990s. Both were (or are) aimed at facilitating, or enhancing, the use of the existing O advantages of the investing companies; and both were (or are) frequently prompted by aggressive, or defensive, production, marketing and innovatory strategies of large oligopolists.
S. E. Guisinger and associates, Investment Incentives and Performance Requirements (New York: Praeger, 1985).
UNCTAD, World Investment Report 1995: Transnational Corporations and Competitiveness (Geneva: United Nations, 1995).
UNCTAD, World Investment Report 1995; World Investment Report 1996; World Investment Report 1998.
For a recent review of the interaction between trade and location theory, see a special edition of the Oxford Review of Economic Policy 1:2 (Summer 1998). For an examination of the evolving relationship between modern trade and FDI theory, see John H. Dunning, ‘What’s Wrong — and Right — With Trade Theory?’, International Trade Journal, IX:2 (1995) 153–202; J.R. Markusen, ‘The Boundaries of Multinational Enterprises and the Theory of International Trade’, Journal of Economic Perspectives; 9:2 (1995) 169–89; J. R. Markusen. and A. Venables, Multinational Firms and the New Trade Theory (Cambridge, MA.: NBER Working Paper No. 5036, February 1995); and for a discussion of the changing locational attributes sought after by MNEs, see R. Kozul-Wright and R. Rowthorn, ‘Spoilt for Choice? Multinational Corporations and the Geography of International Production’, Oxford Review of Economic Policy, 14, 2 (1998) 74–92, and John H. Dunning, Location and the Multinational Enterprise: a Neglected Factor’, Journal of International Business Studies, 29, 1(1998) 45–66.
For a description of the various kinds of industrial districts, see B. Harrison ‘Industrial Districts: Old Wine in New Bottles’, Regional Studies, 26, 5 (1992) 469–83; A. Gray, E. Golog and A. Markusen, Big Firms, Long Arms, Wide Shoulders: The Hub and Spoke Industrial District in the Seattle (New Brunswick, NJ: PRIE Working Paper No. 79, 1995); S. O. Park and A. R. Markusen, ‘Generalizing New Industrial Districts: a Theoretical Agenda and an Application from a Non-Western Economy’, Environment and Planning, A 27 (1995) 81–104; M.J. Enright, ‘Regional Clusters and Firm Strategy’, in A. D. Chandler Jr, P. Hagström and Ö. Sölvell (eds), The Dynamic Firm, The Role of Technology, Strategy, Organization and Regions (Oxford: Oxford University Press, 1998); A. L. Saxenian, Regional Advantage: Culture and Competition in Silicon Valley and Route 128 (Cambridge, MA: Harvard University Press, 1994).
See, for example, S. O. Park and A. R. Markusen, New Industrial Districts: A Critique and Extension from the Developing World (paper presented at the Symposium of the IGU Commission on Industrial Change, Time Space, Competition and Contemporary Industrial Change, Florida, August 1992); Park and Markusen, ‘Generalizing New Industrial Districts’; K. Ohmae, The End of the Nation State: The Rise of Regional Economies (London: Harper, 1995); V. N. Balasubramanyan and A. Balasubramanyan, Software in South India (The Management School, Lancaster University, 1996).
Industrial clusters are, of course, not confined to high-technology firms. Examples of the concentration of more traditional industries are to be found in M. E. Porter, The Competitive Advantage of Nations (New York: The Free
Press, 1990); M. J. Enright ‘Regional Clusters’, and ‘The Globalization of Competion and the Localization of Competitive Advantage: Policies Towards Regional Clustering’, in N. Hood and S. Young (eds), The Globalization of Multinational Enterprise Activity (London: Macmillan, 1999); B. Harrison, Lean and Mean: The Changing Landscape of Corporate Power in the Age of Flexibility (New York: Basic Books, 1994). However, one’s sense is that, in the contemporary global economy, these clusters are becoming more, rather than less, important.
36 T. Arita and M. Fujita, Local Agglomeration and Global Networks of the Semiconductor Industry: A Comparative, e Study of US and Japanese Firms (University of Pennsylvania and Kyoto University: mimeo, 1996).
UNCTAD, World Investment Report1994: Transnational Corporations, Employment and the Workplace (Geneva: United Nations, 1994); World Investment Report1998 (Geneva: United Nations, 1998).
From 280 to 631: UNCTAD, World Investment Report 1998. For further details of strategic alliances in higher technology sectors, see J. Hagedoorn, ‘Strategic Technology Alliances and Modes of Cooperation in High Technology Industries’, in G. Grabher (eds), The Embedded Firm (London and Boston: Routledge 1993) pp. 116–37; J. Hagedoorn, ‘Trends and Patterns in Strategic Technology Partnering since the Early Seventies’, Review of Industrial Organization, 11 (1996) 601–16; R. Narula and J. H. Dunning, ‘Technocratic-Corporate Partnering, Extending Alliance Capitalism’, in G. Boyd and J. H. Dunning (eds), Structural Change and Cooperation in the Global Economy (Cheltenham, UK and Northampton, MA, USA: Edward Elgar, 1999) 137–59.
Hagedoorn, ‘Strategic Technology Alliances’ and ‘Trends and Patterns’; Narula and Dunning, ‘Technocratic-Corporate Partnering’.
In 1996 and 1997 cross-border M&A sales involving developing countries amounted to $178656 million compared with $133729 in 1994–95 and $89 844 million in 1992–93: UNCTAD, World Investment Report 1998, p. 413.
Note that the assertion that FDI continues to be a major mode for exploiting or acquiring the O-specific advantages of firms in no way negates the proposition that firms need to engage in more cooperative ventures in order to best protect or enhance these advantages. In practice, however, many of these cooperative ventures will be between institutions within particular countries rather than across countries.
UNCTAD, World Investment Report 1996.
These data are culled mainly from: OECD, International Direct Investment Statistics Year Book 1998 (Paris: OECD. 1998). UNCTC, Transnational Corporations and World Development (New York, UN, 1988); UNCTAD, World Investment Report 1995: Transnational Corporations and Competitiveness (New York and Geneva, UN, 1995); and UNCTAD, World Investment Report 1998. In turn, these data were initially obtained from those published by the IMF (various dates), based on balance-of-payments statistics and those directly provided by national authorities of FDI stocks and/or flows.
Unlike its US and Japanese counterparts, Western Europe FDI includes intra-regional FDI — which, as the table reveals, has increased substantially over the last 20 years. Were such FDI excluded from the data, its pattern of FDI would look very different indeed.
Dunning, ‘The European Internal Market Program’.
Dunning, van Hoesel, and Narula, ‘Explaining the New Wave’.
UNCTAD, World Investment Report 1998.
T. Ozawa, ‘Japan: the Macro-IDP, Meso-IDPs and the Technology Development Path (TDP)’, in J. H. Dunning, and R. Narula (eds), Foreign Direct Investment and Governments (London and New York: Routledge 1996) 142–73.
‘Very recently’ reflects that it has only been in the last five years that substantial MNE activity has occurred in sectors in which there was previously no, or little, foreign investment. For an examination of the recent surge in FDI in infrastructure development, see UNCTAD, World Investment Report 1996.
For a description see one recent analysis of the interface between the new system and the globalization of economic activity is W. Ruigrok and R. Val Tulder, The Logic of International Restructuring (London and New York: Routledge, 1995).
The increasing tradability of services is a two-edged sword as far as FDI is concerned. On the one hand, it opens doors for trade in services previously closed; on the other, it facilitates the kind of FDI which itself makes for more intra-country (and intra-firm) trade in services.
OECD, International Direct Investment Statistics Year Book 1998.
Ibid.
The retrenchment in Japanese FDI in the US since the early 1990s explains why between 1994 and 1997 the share of new FDI in the service sector fell to 47.8%: ibid.
UNCTAD, World Investment Report 1993: Transnational Corporations and Integrated Production (Geneva: United Nations, 1993); OECD, International Direct Investment Statistics Year Book 1998.
Although, as a proportion of total FDI, it is still below that of most developed countries. In 1993, for example, 33% of the stock of inbound FDI in Taiwan was in the tertiary sector (compared with 20% in 1980). The corresponding percentages for Korea were 37% and 21 %: UNCTAD, World Investment Report1995.
UNCTAD World Investment Report 1995. This essentially represents an average of three measures of multi- or trans-nationality, viz. share of foreign sales to total sales, share of foreign assets to total assets, and share of total employment. This index was calculated for the top 100 MNEs in 1994, its total employment, ranked by their foreign assets.
OECD, International Direct Investment Statistics Year Book 1998.
John M. Stopford, The World Directory of Multinational Enterprises, 1992 edn (Basingstoke: Macmillan, 1992); John. M. Stopford, J. H. Dunning and K. O. Haberich, The World Directory of Multinrdional Enterprises (Basingstoke: Macmillan, 1980).
Thus, for example, the average ratio between the 1990 and the 1978 share of the sales (and or employment) of foreign affiliates in Europe, relative to all foreign sales of MNEs in the top half of the industry/country groupings, was 1.15; and for MNEs with a below-average share it was 1.05; corresponding ratios for North America were 1.97 and 1.31. For developing countries, the ratios for Asia were 0.94 and 1.35; and for Latin America 0.93 and 0.90. It will be observed that the time period chosen for this exercise was that in which the share of all FDI in the US increased sharply.
That is, the Czech Republic, Hungary and Poland. These countries accounted for 69% of the regions stock on inbound FDI in 1994: UNCTAD, World Investment Report1995, p. 100.
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Dunning, J. (2000). Globalization and the New Geography of Foreign Direct Investment. In: Woods, N. (eds) The Political Economy of Globalization. Palgrave, London. https://doi.org/10.1007/978-0-333-98562-5_2
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