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be exploited


Last Update: 2014-03-18
Subject: General
Usage Frequency: 1



Last Update: 2011-04-07
Subject: General
Usage Frequency: 1

The Motive for the Investment The motive for a foreign investment is crucial in determining how linkages and externalities develop. There are four main motives for investment: 1) seek natural resources; 2) seek new markets; 3) restructure existing foreign production; and 4) seek new strategic assets [Narula and Dunning, 2000]. These can be placed into two categories. The first category includes the first three motives: asset-exploiting, to generate economic rent by using existing firm-specific assets. The second category is the fourth motive: asset-augmenting, to acquire new assets that protect or enhance existing assets. In general, developing countries are unlikely to attract the second category of FDI; they primarily attract the first category. The relative importance of each motive partly reflects the stage of economic development [Narula and Dunning, 2000; Narula, 1996, 2004]. Least developed countries would tend to have mainly resource-seeking FDI and countries at the catching-up stage mostly market-seeking FDI. Efficiency-seeking investments, with the most stringent capability needs, will tend to focus on the more industrialised developing economies (though three or four decades ago they went to countries with relatively low capabilities, e.g. the electronics industry in Southeast Asia in the 1970s). Not all affiliates offer the same spillovers to host economies. A sales office, for instance, may have a high turnover and employ many people, but its technological spillovers will be limited relative to a manufacturing facility. Likewise, resource-seeking activities like mining tend to be capital intensive and provide fewer spillovers compared to market-seeking manufacturing FDI. During import substitution, most MNEs set up miniature replicas of their facilities at home, though many functions were not reproduced (they were ‘truncated’). The extent of truncation, however, varied by host country. The most important determinants of truncation – and thus the scope of activities and competence of the subsidiary – were market size and local industrial capabilities [Dunning and Narula, 2004]. Countries with small markets and weak local industries had the most truncated subsidiaries, often only single-activity subsidiaries (sales and marketing or natural resource extraction). Larger countries with domestic technological capacity (such as Brazil and India) had the least truncated subsidiaries, often with research and development departments. With liberalisation, MNE strategies on affiliate competence and scope have changed in four ways [Dunning and Narula, 2004]. First, there has been investment in new affiliates. Second, there has been sequential investment in upgrading existing subsidiaries. Third, there has been some downgrading of subsidiaries, whereby MNEs have divested in response to location advantages elsewhere or reduced the level of competence and scope of subsidiaries. DO WE NEED A NEW AGENDA? 451 Fourth, there has been some redistribution of ownership as the result of privatisation or acquisitions of local private firms. In many, but certainly not all, cases this also led to a downgrading of activities. MNEs are taking advantage of liberalisation to concentrate production capacity in a few locations, exploiting scale and agglomeration economies, favourable location and strong capabilities. Some miniature replicas have been downgraded to sales and marketing affiliates, with fewer opportunities for spillovers. Countries that receive FDI with the highest potential for capability development are, ironically, those with strong domestic absorptive capacities. The article by Lorentzen and Barnes on South Africa shows that domestic capacity – in the form of infrastructure or an efficient domestic industrial sector – is a primary determinant of high competence affiliates. They base their analysis on eight case studies in the South African automotive sector, and show that indigenous firms can compete with MNEs, and – given the appropriate domestic capabilities and infrastructure – can maintain and improve their competitive advantages through indigenous innovation. Like South Africa, other countries have succeeded in attracting such FDI, notably Mexico and the Caribbean Basin [ECLAC, 2000, 2001; Mortimore, 2000]. In addition to providing a threshold level of domestic capabilities and infrastructure, these countries have invested in developing their knowledge base (although to a lesser extent in the case of Mexico). Mortimore [2000] argues that much of this FDI has created export platforms for MNEs with limited benefits for the host countries [ECLAC, 2001]. This is a point reiterated by Mytelka and Barclay here in the case of Trinidad, where FDI has not been leveraged to develop the skills and capabilities of local downstream and supporting firms. The state has largely failed to act as a facilitator to stimulate and support domestic absorptive capacities and linkages with MNE affiliates. MNE Linkages FDI transfers technology to local firms in four ways: backward linkages, labour turnover, horizontal linkages and international technology spillovers. Studies of backward linkages have identified various determinants, including those internal to MNEs and those associated with host economies. The ability of the host economy to benefit from MNE linkages has been found to depend crucially on the relative technological capabilities of recipient and transmitter: the greater the distance between them, the lower the intensity of linkages. Again, MNE motives and strategies matter. Domestic market oriented affiliates generally purchase more locally than export-oriented firms because of lower quality requirements and technical specifications [Reuber et al., 1973; Altenburg, 2000]. MNE affiliates are more likely to be integrated with host countries where they source relatively simple inputs [Ganiatsos, 2000; Carillo,


Last Update: 2014-10-10
Usage Frequency: 13


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