THE MOTIVES FOR FOREIGN PRODUCTION

3.3 THE MAIN TYPES OF FOREIGN PRODUCTION

We identify four types of MNE activity.
1. Natural Resource Seekers
2. Market Seekers
3. Efficiency Seekers
4. Strategic Asset of Capability Seekers.
3.3.1 The Natural Resource Seekers
These enterprises are prompt to invest abroad to acquire particular and specific resources of a
higher quality at a lower real cost than could be obtained in their home country.
Motivation for the FDI-> Investment could be more profitable and competitive.
*Most, or all, of the output of the affiliates of resource seekers tend to be exported to developed
industrialized countries.
3 TYPES OF RESOURCE SEEKERS:
1. Those seeking physical resources of one kind or another
They include: Primary producers and manufacturing enterprises from develop and
development countries.
Motives: cost minimization and security of supply sources.
The seek: mineral fuels, industrial minerals, metals and agricultural products, but
especially those whose production requires the kind of complementary
capabilities and markets that MNEs are well equipped to provide.
Chinese and Indian investors in Africa
Some FDI in service activities also intended to exploit location-bound resources.
Examples: Tourism, car rental, oil drilling, construction, medical and educational
services.

2. Those seeking plentiful supplies of cheap and well-motivated unskilled or semi-skilled
labor.
They include: manufacturing and services MNE from countries with high real labor
cost.
They seek: countries with lower real labor cost, to supply labor-intensive
intermediate or final product to export.
Most of the activities take place on the more advanced developing countries ->
Mexico, Taiwan and Malaysia
In order to attract such production, host countries have set up free trade or export
processing zones (EPZs)
Examples: Establishment of call centers in Indian and other developing countries.
Home countries have sometimes allowed their of MNEs tariff concessions on
products imported from their foreign subsidiaries.

3. Those who are prompted by the need of firms to acquire technological capability,
management or marketing expertise and organizational skills.
Korean, Taiwanese and Indian companies with EU or US firms in high technology
sectors, or R&D listening post established by UK chemical companies in Japan
pharmaceutical companies in the US.
Each of these value added activities parallels the investment made in the natural
resources in which their home countries are deficient.
The rising importance of other kinds of investment coupled with the voluntary or involuntary
indigenization of many primary sectors previously dominated by MNE is largely responsible for this
development.
Furthermore, the declining role of unskilled labor in value-added process of manufacturing
activities. On the other hand, increasing tendency of both service and manufacturing MNE to
decentralize some of their routing service activities to low labor cost locations, while FDI to gain
access to technology, information and specialized management skills is more important than it
used to be.
*Not only are MNEs from emerging economies investing in the industrial nation to gain access to
knowledge, also foreign investors in industrialized countries are diversifying their R&D activities.

3.3.2 The Market Seekers
These are enterprises that invest in a particular country or region to supply goods or services to
markets in these or in adjacent countries.
In most cases, part or all of these markets will have been serviced previously by exports from the
investing company which, either because of tariff or other cost-raising barriers imposed by the
host countries, or because of the size of the markets now justifies local production, are no longer
best supplied by the route.

Market-seeking investment may be undertaken to: sustain or protect existing markets, or to
exploit or promote new markets.
Apart from the market size and the prospect of market growth, there are four main reasons, which
might prompt firms to engage in either sorts of market seeking investments.
Reasons for market seeking investments:
1. Their main suppliers or costumers have set up foreign producing facilities, and that to
retain their business they need to follow them overseas.
Examples:
a. Japanese auto-component suppliers which have set up manufacturing subsidiaries
in the US
b. Cross-border M&A among accounting, auditing, law and advertising firms. To
improve their global competitive position, they need to have presence in leading
markets of the world.

2. Products need to be adapted to local tastes or needs, to cultural mores and to
indigenous resources and capabilities.
In addition, without familiarizing themselves with local language, business customs, legal
requirements and marketing procedures, foreign producers might find themselves at
disadvantage vis--vis local firms in selling consumer goods.

3. The production and transaction cost of so doing are less than supplying it form a
distance. This decision will be highly activity and country specific.
The production of goods that are relatively costly to transport and can be
produced economically in small quantities is more likely to be located near the
main centres of consumption than those that cost relatively little to transport
and yield substantial economies of scale in their production.
Firms from countries that are geographically removed from important markets
are more likely to engage in market seeking FDI that those that adjoin those
markets.

4. MNE may consider it necessary, as part of global production and marketing strategy, to
have physical presence in the leading markets served by its competitors.
Such strategic market seeking investment might be undertaken for defensive or aggressive
reasons.
Defensive investments: Follow the leader type of investment.
Aggressive investments: Those designed to advance to global interest of a firm by
investing in an expanding market.

However, undoubtedly the single most important reason for market seeking investment remains
the action of host governments encouraging such investment
Governments impose tariff or other import controls.
Governments attract inward investment by offering a gamut of investment incentives
ranging from tax concession to subsided labor and capital cost and favorable import
quotas.
*Market-seeking MNE tend to treat their foreign affiliates as self-contained production units
rather than as part of an integrated network of cross-border activities. They tend to be the most
responsive to local needs and cultural sensitivities. The affiliates of market seeking firms will
normally produce similar products to those supplied by their parent companies, though usually a
truncated range.

3.3.3 The Efficiency Seekers
The motivation of efficiency-seeking FDI is to rationalize the structure of established resource-
based or market-seeking investment in such a way that the investing company can gain from the
common governance of geographically dispersed activities. Such benefits are essentially those of
the economies of scale and scope and risk diversification.
The intention of the efficiency-seeking MNE is to take advantage of different factor endowments,
cultures, institutional arrangements, demand patterns, economic policies and market structures
by concentrating production in a limited number of locations to supply multiple markets.
In order for efficiency-seeking foreign production to take place, cross-border markets must be well
developed and open.
Efficiency seeking FDI is two main kinds:
1. The one designed to take advantage of differences in the availability and relative cost of
traditional factor endowments in different countries. -> Division of labor within MNEs
producing in both developed and developing countries. Technology and information
intensive value added activities in developed, and natural resource intensive activities in
developing countries.
2. The one that takes place in countries with broadly similar economic structures and
income levels and is designed to take advantage of the economies of scale and scope,
and of differences in consumer tastes and supply capabilities. Endowments play less
important role in influencing FDI, while created competences and capabilities play a
more important role.

3.3.4 The Strategic Asset Seekers
The fourth groups of MNEs comprise those which engage in FDI, usually by acquiring the assets of
foreign corporations to promote their long-term strategic objectives.
The investing firms involved including: established MNEs pursuing and integrated global or
regional strategy, and first time FDI investors seeking to access or to buy competitive strength in
and unfamiliar market.
The motive for strategic asset seeking investment is to augment the acquiring firms global
portfolio of physical assets and human competences, which they perceive will either sustain of
strengthen their ownership-specific advantages or weaken those of their competitors.
Strategic asset seeking acquirer aims to capitalize on the benefits of the common ownership of
diversified activities and capabilities, or of similar activities and capabilities in diverse economic
and potential environments.
3.3.5 other motives for MNE Activities
Escape Investment
Some FDI is made to escape restrictive legislation or macro-organizational policies by home
governments.
Examples: round tripping of investment between China and Hong Kong to exploit incentives
granted only to foreign investors.
Escape investments are clearly most likely to originate from countries whose governments adhere
to ideologies and economic strategies unacceptable to the business community: and they tend to
be concentrated in those sectors, which are most highly regulated.
Support Investments
The purpose of these investments is to support the activities of the rest of the enterprise of which
they are part. Their activities incur cost but major benefits accrue to the rest of the MNE
The kinds of value-added activity undertaken by MNE trading affiliates include not only wholesale
and retail distribution and marketing, but also a range of import facilitating, which they undertake
on behalf of the investing company.
There are other kinds of support services, which might be provided by the foreign affiliates of
MNEs. There are usually undertaken by regional or branch offices.
Regional offices: act as an intermediate center of control and administration between the head
office and the foreign operating units.
Branch offices: which are independent of trade and operating units are less common.
Passive Investment
Portfolio investment is presumed to involve passive management whereas direct investment is
presumed to involve active management.
In practice, most direct investment varies in the degree of active management pursued by their
owners, ranging from complete to non-existent. Those, which veer to the passive end of the
spectrum, are two kinds.
The first kind: large institutional conglomerates that specialize in buying and selling of companies.
The second kind: small firms and individual investors in real estate. Often this is simple to foster
the foreign ownership of holiday and second homes.

3.4 THE POLITICAL ECONOMY OF OUTWARD FDI.
In so far as the governments of the investing countries are also interested in the outcome of the
activities of MNEs, then, by influencing the conduct of such firms or their affiliates, they may affect
the amount and pattern of FDI. Such encouragement has only been forthcoming if the investment
was perceived to advance the long-term economic and political goals of the home country.