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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 
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
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,
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