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Location and the multinational enterprise: A neglected factor?

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Abstract

This article first traces the changing world economic scenario for international business over the past two decades, and then goes on to examine its implications for the location of foreign direct investment and multinational enterprise activity. It suggests that many of the explanations of the 1970s and early 1980s need to be modified as firm-specific assets have become mobile across natural boundaries. A final section of the article examines the dynamic interface between the value-added activities of multinational enterprises in different locations.

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Notes

  1. Such international-specific transaction costs have recently been explicitly identified by Klaus Meyer in a volume (Meyer, 1998) based upon his doctoral dissertation at the London Business School.

  2. For example, of the 1150 or so publications cited in his volume, only 13 percent are to monographs or articles published after 1990.

  3. Author's estimate, based on data on the royalties paid for managerial know how; and of the relationship between foreign portfolio and foreign direct investment.

  4. There have been only a few attempts to use transaction cost analysis to explain the spatial distribution of economic activity. One example is that of the industrial geographers Michael Storper and Allen Scott. See, for example, Storper (1995), Storper and Scott (1995), and Scott (1996). Yet, such analysis offers a powerful tool for explaining why firms requiring idiosyncratic inputs, e.g., tacit knowledge of various kinds, and/or those supplying idiosyncratic and uncertain markets tend to value proximity with their suppliers and/or customers. Perhaps the best illustration of a spatial cluster, or agglomeration, of related activities to minimize distance-related transaction costs, and to exploit the external economies associated with the close presence of related firms is the Square Mile of the City of London.

  5. Scott (1996) gives some examples, including the growing concentration and specialization of both manufacturing and service activities in large metropolitan areas within both developed and developing countries. In an interesting recent paper, Davis and Weinstein (1997) conclude that intra-national concentration of value-added activity is likely to obey the dictates of economic geography more than that of the inter-national concentration of such activity.

  6. Estimates of such ventures vary enormously. A recent study by Booz Allen Hamilton (1997) has put the number of cross-border alliances (including mergers and acquisitions) formed in 1995 and 1996 to be as high as 15,000. Another assessment by Hagedoorn (1996) suggests that between 1980 and 1994, the number of newly established cross-border technology-related inter-firm agreements rose by over three times. Finally, the value of international mergers and acquisitions over the same period were estimated to have accounted for between 50 percent and 60 percent of all new FDI (UNCTAD, 1997).

  7. For a detailed exposition of the development of a new trajectory of technological advances, see Lipsey (1997) and Ruigrok and Van Tulder (1995).

  8. Though there have been marked fluctuations in the shares within and between these periods, which reflect, inter alia, changes in exchange rates and the positioning of countries in their cycles of economic development. For example, during 1975–1980, the United States attracted 32 percent of FDI received by developed countries; by 1985–1990 that share had risen to 42 percent. However, it fell again to 18 percent in 1991 and 1992; but since then it has recovered, and in 1995–1996 it stood at 35 percent.

  9. Japan is a classic case in point. In the period 1990–1994 it accounted for 29 percent of the world's gross fixed capital formation, but only 0.8 percent of inbound FDI flows.

  10. To give just one example; in the period 1990–1994, 49 percent of US direct investment flows were directed to Western Europe, 10 percent to Asia and 25 percent to Latin America. The corresponding percentages for Japanese direct investment flows were 20 percent, 19 percent and 10 percent (UNCTAD, 1997; Dunning, 1998).

  11. Unlike the theory of the firm, although if there had been a well developed theory of the multi-activity firm prior to the work of scholars such as Buckley, Casson and Hennart, one wonders if this aspect of international business activity would have attracted so much attention!

  12. We use the word “customized” deliberately, following the contention of Peck (1996) that host governments may sometimes need to individualize or customize the upgrading of their physical and human infrastructure both to meet the specific needs of mobile investors, and promote the competitive dynamic advantage of the location-bound resources within their jurisdiction.

  13. I am indebted to the reviewer of this paper for making this point.

  14. An expression first used in David (1984), and since taken up by Wheeler and Mody (1992) and Mytelka (1996).

  15. In Markusen's words “multinational enterprises in this framework are exporters of the services of firm specific assets…subsidiaries import these assets” (Markusen, 1995: 175).

  16. Abbreviated, Ot transaction (or coordinating) cost-minimizing advantages, c.f. Oa=asset-specific advantages.

  17. Which foreign country, or countries, is decided by the normal locational criteria.

  18. Other data on royalties and management fees received by US firms from foreign firms are regularly published by the United States Department of Commerce in the Survey of Current Business, and in the Benchmark Surveys of US Direct Investment Abroad. See also UNCTAD (1995, 1996a, 1997).

  19. The concepts of “voice” and “exit” strategies as applied to MNE-related activity are explained in Dunning (1997a).

  20. The idea of a region as a spatial unit which internalizes distance-related transaction costs which otherwise would fall upon its constituent firms is an interesting notion worth pursuing by international business scholars. For, like a firm, the strategies pursued by a region to provide a set of unique, non-mobile and non-imitatable locational advantages for its firms may well determine its own competitive advantages relative to those of other regions. At the same time, regions, like firms, may decline as well as prosper; but our knowledge about the focus leading to the spatial disagglomeration of related activities is woefully inadequate.

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  1. State of New Jersey Professor of International Business at Rutgers University, United States, and Emeritus Research Professor of International Business, University of Reading, UK

    John H Dunning

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Correspondence to John H Dunning.

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This paper was previously published in Journal of International Business Studies (1998) 29: 45–66.

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Dunning, J. Location and the multinational enterprise: A neglected factor?. J Int Bus Stud 40, 5–19 (2009). https://doi.org/10.1057/jibs.2008.74

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