asset exploitation versus asset seeking

Asset-Exploitation versus Asset-Seeking: Implications for Location Choice of Foreign DirectInvestment from Newly Industrialized EconomiesAuthor(s): Shige Makino, Chung-Ming Lau, Rhy-Song YehSource: Journal of International Business Studies, Vol. 33, No. 3 (3rd Qtr., 2002), pp. 403-421Published by: Palgrave Macmillan JournalsStable URL: http://www.jstor.org/stable/3069523 .Accessed: 01/03/2011 06:09

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Asset-Exploitation Versus Asset-Seeking: Implications for Location Choice of

Foreign Direct Investment from Newly

Industrialized Economies

Shige Makino* THE CHINESE UNIVERSITY OF HONG KONG

Chung-Ming Lau** THE CHINESE UNIVERSITY OF HONG KONG

Rhy-Song Yeh*** PEKING UNIVERSITY

This study examined several hypotheses regarding the location choice of foreign direct investment from newly industrialized economies (NIEs). Us- ing a sample of 328 Taiwanese firms in the analysis, this studyfound that the firms' motivations had a significant impact on the choice of their

INTRODUCTION

The existing studies of foreign direct investment (FDI) have focused mainly on the FDI from developed countries

investment location (developed countries vs. less developed countries), yet this impact was moderated by the capabilities that the firms possessed. The results suggest that both asset-exploitation and asset-seeking aspects of investments are predictive of the ME firms' location choice of investment.

(DCs). These studies have primarily ex-

amined either why FDI occurs from a DC

to another DC, or from a DC to less de-

veloped countries (LDCs) or newly in-

*Shige Makino is Professor in the Department of Management at the Chinese University of Hong Kong. His current research interests include strategies for international expansion of Asian enterprises, inter-organizational imitation, and management of international strategic alliances.

**Chung-Ming Lau is currently Chairman and Professor in the Department of Management at the Chinese University of Hong Kong. His research interests include strategic change, organizational culture, and management of Chinese organizations.

***Ryh-song Yeh is Professor of Guanghua School of Management at Peking University. His current research interests are in leadership and cultural values in Chinese context, and international management of Chinese firms.

We wish to thank Professor John Dunning for his comments and continuous encouragement. We also thank three anonymous referees for their very insightful and helpful comments on earlier drafts. The work described in this paper was partially supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region (Project No. CUHK4052/99H).

JOURNAL OF INTERNATIONAL BUSINESS STUDIES, 33, 3 (THIRD QUARTER 2002): 403-421 403

ASSET-EXPLOITATION VERSUS ASSET-SEEKING

dustrialized economies (NIEs). About two decades ago, researchers (e.g., Wells, 1977, 1983; Kumar and McLeod, 1981; Lall, 1983) investigated why FDI occurs from LDCs or NIEs. However, they mainly investigated why firms from LDCs or NIEs invested in other LDCs or NIEs, or "downstream" countries, and did not examine any specific cases in which LDC or NIE firms expanded their international activities from their home countries to DCs, or "upstream countries."

Recently, researchers have started in-

vestigating why and when LDC and NIE firms engage in upstream investments

(e.g., Lecraw, 1993; Chen and Chen, 1998; van Hoesel, 1999). However, sys- tematic conceptual and empirical inves-

tigations are still needed to build con- sensus on this issue. The primary purpose of this study is to provide additional evidence to the literature in this emerging stream of research.

In developing hypotheses, we focus on two distinct but complementary perspectives of FDI: asset-exploitation and

asset-seeking. In the asset-exploitation perspective, FDI is viewed as the transfer of a firm's proprietary assets across borders. In the asset-seeking perspective, FDI is viewed as a means to acquire stra-

tegic assets (i.e., technology, marketing, and management expertise) available in a host country. We argue that NIE firms

engage in FDI in a DC not only when

they possess certain forms of firm-specific advantages exploitable to a DC, but also when they intend to seek technology- based resources and skills in a DC that are superior or not available in their home countries in a particular product market domain. To test this general proposition, this study examines FDI decisions made by 328 firms from Tai- wan-one of the Asian-based NIEs.

Specifically, this study focuses on two critical factors that would influence the choice of location of FDI: an investing firm's motivations and capabilities to en-

gage in FDI. A motivation for FDI refers to the reason that gives an investing firm the impetus for investing abroad. A ca-

pability refers to an investing firm's resources and skills necessary to invest abroad. Firms engage in foreign direct investment because they are motivated and have the capability to do so. To re- late this definition of motivation and ca-

pability to the research subject, we pro- pose the following general hypotheses. NIE firms are motivated to invest in LDCs when the labor costs in their home

country made their products non-com-

petitive in LDC markets. Those that have

superior capabilities in labor intensive

production relative to firms in the LDCs form the intent to do so, and hence, invest in LDCs. Conversely, NIE firms are motivated to invest in DCs when they lacked some component of technology that is necessary to compete in DC market that is available in the DC. Those that have the capability to absorb this tech-

nology form the intent to do so, and hence, invest in DCs.1

LITERATURE REVIEW

One of the key issues in the field of international business research is how firms exploit their existing assets and

explore new assets in host countries

through FDI. From the organization learning perspective, March (1991) suggested that exploration involves gaining new information about alternatives and thus improving future returns, and ex-

ploitation involves using the information currently available and thus im-

proving present returns. Both exploitation and exploration involve different

aspects of organizational learning, yet are equally essential for organizational

JOURNAL OF INTERNATIONAL BUSINESS STUDIES 404

SHIGE MAKINO, CHUNG-MING LAU, RHY-SONG YEH

survival and prosperity. Building on the

organization learning perspective, Hed- lund and Ridderstrale (1997) suggested that dominant theoretical perspectives in international business research

adopted the exploitation rather than the

exploration (creation) perspective. They argued that due to the neglect of aspects of asset exploration, the conventional theories of MNE have not successfully explained how MNEs can create innova- tions through international expansion and activities. Recent studies (Lecraw, 1993; Wesson, 1994; Chen and Chen, 1998; Dunning, 1995; Makino and De- lios, 1996; Kumar, 1998; van Hoesel, 1999; Frost, 2001) suggested that firms would engage in FDI not only to transfer their resources to a host country, but also to learn, or gain access to, the necessary strategic assets available in the host

country. This alternative form of FDI is referred to as a strategic asset-seeking FDI, as contrasted with the asset-exploit- ing FDI that underlies the traditional international business literature.

FDI as Asset-Exploitation The perspective which views FDI as

the transfer or exploitation of firm-

specific advantage assumes that firms should possess certain forms of rent-

yielding resources when investing in a host country. Hymer (1976) suggested that such advantages included the abili- ties to acquire factors of production at a lower cost than other firms, the knowl-

edge or control of a more efficient production function, and better distribution facilities or a differentiated product. As a

corollary, Caves (1971) suggested tech-

nological and marketing expertise as primary sources of a firm's monopolistic advantage. This perspective postulates that FDI would occur when firms possess proprietary resources and skills which

give rise to a monopolistic (or competi-

tive) advantage in a host country (Caves, 1971; Hymer, 1976).

From a different perspective, internalization theory (Buckley and Casson, 1976; Rugman, 1981) focuses on another characteristic of firm resources-a rent-

yielding resource as a public good which is transferred within a firm with lower cost than via some other method, e.g., licensing or exporting, where the assets is embodied in the product. The theory suggests that firms have an incentive to internalize a transfer of intermediate

goods, know-how, and financial capital under common control and ownership so as to reduce transactions costs associated with this transfer. Recently, Kogut and Zander (1993) challenged the theo-

ry's public good assumption and suggested that the firm's decision as to whether or not to engage in FDI would

depend on the relative efficiency of the

knowledge transfer 'within' and 'between' firms, irrespective of the exis- tence of market failure. This literature, however, cannot clearly explain whether, and under what conditions, knowledge 'seekers,' not the 'owners' of the knowl-

edge, would internalize transactions across borders. In sum, no matter whether FDI is viewed as the exploitation of firm-

specific advantage or the response to market failure for rent-yielding resources, the traditional literature generally assumes that for FDI to take place, firms should

possess certain types of proprietary resources to exploit in the host country.

Most early studies of FDI from LDCs share a similar perspective. In examining the nature of FDI by LDC firms, Wells

(1981) raised two important questions: what are the skills of the LDC firms that enable them to earn profits abroad and

why do these companies choose to ex-

ploit their skills through direct investment. With regard to the first question, Wells (1977, 1981, 1983) suggested the

VOL. 33, No. 3, THIRD QUARTER, 2002 405


skills of the LDC firms are to develop small scale, labor intensive, and flexible

processes and products which are suit- able to the LDC markets, and to find

ways to substitute locally available in-

puts. Similar distinct characteristics of LDC firms have also been observed in ASEAN countries (Lecraw, 1993) and in NIEs such as Hong Kong, Korea, Taiwan, and Singapore (Lecraw, 1977; Kumar and McLead, 1981; Ting and Schive, 1981), although Lall (1983) found that there were noticeable differences in

types and degree of their firm-specific assets and skills. With regard to the second question, Wells suggested that LDC firms would prefer to engage in FDI when: (1) the local market is uncertain due to the lack of information about the value of the assets produced by local firms and the less developed distribution network; (2) the internalization of local firms' skills (e.g., small scale manufac-

turing) is difficult; and (3) there is not a formal legal or control system to protect investing firms' technological knowl-

edge. These explanations are applicable primarily to LDCs firms investing in other LDCs, usually much less devel-

oped than their home countries. Al-

though these studies recognized the possibility of LDC firms' upstream investments, such investments are considered

"exceptional" cases in these studies (Lall, 1983).

FDI as Strategic Asset-Seeking Recent studies have recognized that

firms invest in foreign countries not only to exploit but also to develop their firm-

specific advantages or acquire necessary strategic assets in a host country (Almeida, 1996; Chang, 1995; Dunning, 1993, 1995; Frost, 2001; Shan and Song, 1997; Teece, 1992). These studies suggest that a firm's firm-specific advantages would arise not only from the possession

of proprietary assets but also from the

capacity to acquire, or the efficient coor- dination of, the complementary assets owned by other firms in a host country (Dunning, 1995, 1998, 2000). Underlying this perspective is that critical resources and capabilities that firms seek are more often found to be spatially determined than simply existing within any single firms (Enlight, 1998). Firms that intend to build advantages through FDI therefore have a natural incentive to seek opportunities to invest in a particular location (host country) in which their needed strategic assets are available.

In support of this perspective, a growing amount of literature has suggested that much of inward FDI in the U.S. is motivated by strategic asset-seeking purposes. Kogut and Chang (1991) examined whether Japanese FDI would reflect the exploitation of Japanese firms' firm-

specific advantages or the targeting of U.S. technology, and found that Japanese firms tended to form a JV with U.S. firms to source U.S. technology. Chang (1995) investigated the sequential entry of the

Japanese electronic manufacturing firms in the U.S. and found that the Japanese firms' FDI in the U.S. was motivated primarily for capability development. More

recently, Almeida (1996) studied inward FDI in the U.S. semiconductor industry and found that foreign firms tended to cite local patents more frequently than similar domestic firms, suggesting that a

primary purpose of inward FDI by for-

eign firms in the U.S. semiconductor in-

dustry was to source local technology. Shan and Song (1997) found similar evidence in the U.S. biotechnology indus-

try. Recent studies of both LDC and NIE

multinationals suggest that a growing, yet small, number of LDC and NIE firms have engaged in strategic asset-seeking FDI (Kumar, 1998; Chen and Chen, 1998;



van Hoesel, 1999). Lecraw (1993) inves-

tigated international expansion strate-

gies of both export-enhancing and operation-extending firms in Indonesia. He found that export-enhancing Indonesian firms tended to be less scale, cost and

technology efficient than operation-extending firms yet had more advantages in access to low cost natural resources and labor than uninational firms. Based on the analysis of the data collected from the interviews, Lecraw suggested that ex-

port-enhancing firms tended to invest in

higher income countries than operation- extending firms primarily to acquire management, technology, and marketing expertise, using the capital that they earned in their home country, combined with their competitive advantages in access to low-wage labor and physical in-

puts. Kumar (1998) investigated a recent

trend in strategic asset-seeking FDI conducted by firms from Asian NIEs. He found that the amount of the outflow of FDI from Asian NIEs to DCs has been

rapidly increasing over the past decade and suggested that the NIE firms invest-

ing in DCs tended to use outward FDI to

strengthen their non-price competitiveness, whereas those NIE firms investing in LDCs used FDI primarily to strengthen their price competitiveness. Chen and Chen (1998) found a similar pattern in outward FDI of Taiwanese firms. Re- search also suggests that many of the NIE firms investing in DCs have gained access to established brand names, novel

product technology, and extensive networks of distributors, typically via ag- gressive acquisitions of DC firms in the host countries (Kumar 1998; van Hoesel, 1999) and/or through 'relational networks' of local suppliers and customers that share cultural or ethnic backgrounds similar to the investing firms' (Chen and Chen, 1998).

CONCEPTUAL FRAMEWORK AND

HYPOTHESES

Conceptual Framework

Figure 1 depicts four groups of economic regions, DCs, NIEs, small LDCs, and large LDCs. These regional groups are identified based on level of economic

development and market size. In this

study, we focus specifically on FDI from NIEs to LDCs and DCs.

In developing hypotheses, we focused on three key motivations for FDI: strate-

gic asset-seeking, resource-seeking, and

market-seeking (Dunning, 1993). To sim-

plify our discussions, we hereafter use the term 'resource-seeking' as a synonym of "labor-seeking."

The asset-exploitation perspective of FDI commonly posits that firms that

possess firm-specific advantages utilize these advantages to operate abroad to seek markets or low-cost natural resources or labor force. Therefore, we consider both resource/labor- and mar-

ket-seeking FDI can be better understood from the asset-exploitation perspective, whereas strategic asset-seeking FDI is better understood from the asset-seeking perspective. As will be discussed in the

subsequent sections, we argue that stra-

tegic asset-seeking FDI would occur more likely in upstream countries than in down stream countries, and resource/

labor-seeking FDI more likely in downstream countries than in upstream countries. Market-seeking FDI would occur more likely in large countries than in small countries for standard goods, and more likely in upstream countries than in downstream countries for differentiated goods. Taken together, we argue that, a priori, NIE firms tend to invest in DCs for either strategic asset-seeking or market-seeking purposes, small and

large LDCs for resource/labor-seeking



FIGURE 1 REGIONAL GROUPS AND FDI MOTIVATIONS

Advanced (Upstream)

DCs

Asian NIEs

Level of economic

development

( Srmall > ( Large LDCs Less LDCs (e.g., China,

advanced India) (Downstream)

Small Large Market Size

Market-seeking (standard goods)

purposes, and large LDCs for both resource and market-seeking purposes.

However, whether NIE firms actually invest in these locations may depend on the firms' capabilities that support the investments. In this study, we focused on three types of capabilities: labor intensive production capability, technology-based assets, and prior tech-

nology-seeking experience. These capabilities are firm-specific and constitute the sources of the NIE firms' unique ad-

vantages over indigenous firms and/or the basis for further development of their

advantages through FDI. We argue that the likelihood that the NIE firms invest in a particular country (location) for a

specific investment motivation may vary depending upon the types and amounts

of the firm's capabilities that support the investment.

Figure 2 provides a conceptual framework for hypotheses development. First, as depicted in Figure 1, a firm's motivation to engage in FDI in a particular country (location) would be driven by country-specific factors-either natural endowments (e.g., low cost labor and natural resources) or created endowments (e.g., strategic assets) available in a host country (location). Second, the firm's motivation directly influences its location decision. Finally, the firm's ca-

pabilities strengthen or weaken the influence of motivation on location decision.

In the following sections, we discuss how NIE firms' motivations and capabil-



FIGURE 2

CONCEPTUAL MODEL

Capabilities

? labor intensive production * technology-based assets ? prior technology-seeking experience

ities would influence their actual FDI decisions regarding the choice of FDI location.

Hypotheses Strategic asset-seeking. As discussed

in earlier sections, it is expected that, when NIE firms intend to source advanced technology, marketing, and man-

agement expertise, they are more likely to invest in DCs than in LDCs. This is because most advanced strategic assets and sophisticated customer segments tend to be spatially concentrated in DCs

(Kumar 1998; Dunning 1998). Building on the argument discussed earlier, we

expect that NIE firms seeking technolo-

gy-based resources and skills via FDI would more likely invest in DCs than in LDCs. We set forth the following hypothesis.

Hypothesis la: NIE firms are more

likely to invest in DCs than in LDCs when their primary motivation of investment is to seek technology-based assets in a host country.

Some may wonder why some NIE firms are more active in strategic asset-

seeking FDI and thus investing in DCs, and other NIE firms are less active in this

type of investment. One possible expla- nation for this question is that firms

might differ in their capabilities to eval- uate, acquire, and integrate strategic assets from external sources. This difference would lead to a varying degree of the likelihood that the firms would en-

gage in strategic asset-seeking FDI in DCs. In the literature of organization the-

ory, this type of capability is referred to as an 'absorptive capacity'.

An absorptive capacity is largely a function of the level of prior related

knowledge, which takes the forms of both basic and recent scientific and tech-

nological developments in a given field

(Cohen and Levinthal, 1990, p. 128). Such related knowledge is used as a plat- form for a firm's further development of

capability. For successful strategic asset-

seeking FDI, the NIE firms need to possess related expertise prior to engaging in FDI in DCs. While the traditional as-

set-exploitation perspective of FDI suggests that these related expertise would create the investing firms' firm-specific advantage that drives outward FDI, the

VOL. 33, No. 3, THIRD QUARTER, 2002

Country specific factors

* Natural endowments * Created endowments

Motivations

* Market- seeking * Resource (labor)-seeking " Strategic asset-seeking

409


asset-seeking perspective of FDI suggests that such expertise would work as an

absorptive capacity that facilitates further development of capabilities. In support of the latter perspective, van Hoesel (1999) found that NIE firms that invested in DCs tended to possess superior tech-

nology and marketing advantages over other domestic firms. Similarly, Chen and Chen (1998) found that Taiwanese firms investing in the U.S.A. tended to have a greater R&D intensity and a higher rate of sales growth than those investing in LDCs. These studies generally suggest that firms that possess superior firm-specific advantages are more likely to en-

gage in strategic asset-seeking FDI (and hence invest in DCs) than those firms that do not possess such advantages. The fact that NIE firms possess superior firm-

specific advantages over their domestic

competitors, however, does not neces-

sarily imply that these firms would au-

tomatically engage in asset-seeking FDI in DCs. For an asset-seeking FDI to occur in a DC, the NIE firms should possess related technological capabilities that are advanced enough to absorb the superior technological capabilities owned by the source firms in the DC. We therefore

expect that the likelihood that NIE firms would invest in DCs for asset-seeking purposes will be higher when they possess advantages in technology-based ca-

pabilities over indigenous competitors in a particular product market domain in a host country, and lower when they have no such advantages.

Hypothesis lb: NIE firms are more

likely to invest in DCs than in LDCs for strategic asset-seeking motivations when they possess more superior tech-

nological assets than indigenous com-

petitors in a host country.

Development of absorptive capacity requires cumulative, path-dependent

processes of organizational learning (Co- hen and Levinthal, 1990). Given that an

absorptive capacity is one form of a firm's learning capability, it is expected that the level of absorptive capacity that the firm possesses would be closely associated with the amount of prior experience that the firm has in acquiring stra-

tegic assets from non-domestic firms. In

support of this view, van Hoesel (1999) observed that most NIE firms investing in DCs had made extensive OEM con- tracts or alliances with DC-based firms in their home country prior to their investments in DCs. We therefore expect that the NIE firms with prior experience of

strategic asset-seeking through OEM or alliance formation in their home country may have a stronger propensity to engage in asset-seeking FDI, and hence, invest in DCs, compared to those firms with no such experience.

Hypothesis Ic: NIE firms are more

likely to invest in DCs than in LDCs for strategic asset-seeking motivations when they have prior experience of

seeking strategic assets from foreign firms.

Resource (labor)-seeking. The primary purpose of firms which engage in re-

source/labor-seeking FDI is to acquire particular and specific resources in a host country at a lower real cost than could be obtained in their home country (Dunning, 1993). Probably the most immediate resources to be acquired through this type of FDI involve labor, natural resources, and capital in a host

country. In the traditional trade theory, these factors of production are assumed to be unevenly distributed and immobile

among nations (locations), and are the basis for comparative advantages of nations (locations). FDI is often used to source these resources in a comparatively advantaged country. Unlike strate-



gic asset-seeking FDI, the primary focus of this type of FDI is to lower total delivered cost including transportation and tariffs by gaining access to low cost factor inputs for production such as low cost labor. Assuming that the firm's access to a low cost labor force is easier in LDCs than in DCs, we expect that NIE firms are more likely to invest in LDCs when this is their primary motivation of investment.

Hypothesis 2a: NIE firms are more

likely to invest in LDCs than in DCs when their primary motivation of investment is to gain access to low cost labor in a host country.

In principle, firms would engage in

resource/labor-seeking FDI when they can successfully combine their superior product or process technology with low cost labor to make delivered cost in the host country market, or other market, lower than the costs of exports to the host country. In the case of FDI, if foreign firms possess advantages in superior labor intensive production capabilities over the indigenous competitors in a host country, they would better exploit the low cost labor and hence gain higher returns than the competitors in the same host country (Hymer, 1976). Again, as-

suming that foreign firms can gain access to low cost labor more easily in LDCs than in DCs, we expect that NIE firms with more superior capabilities in labor intensive production than the indigenous competitors are more likely to invest for labor-seeking purposes in LDCs, and less likely to invest in DCs, than those firms with no such capabilities.

Hypothesis 2b: NIE firms are more

likely to invest in LDCs than in DCs for

labor-seeking purposes when they possess more superior labor intensive

production capabilities than indigenous competitors in a host country.

Market-seeking. Dunning (1993) suggested that firms seek market expansion opportunities through FDI for a variety of reasons: to expand the existing domestic buyer-supplier relationships in host countries; to either preempt or avoid be-

ing preempted by the rivals' entry into a

particular host country; to produce products close to local markets; to lower

transportation costs; and, to benefit from investment incentives. Some studies have specifically investigated whether

market-seeking FDI would occur more

likely in DCs or in LDCs. Lecraw (1991) studied factors that influenced inward FDI in LDCs and found that the rate of

growth of domestic demand and changes in the tariff rate had a significant and

positive impact on market-seeking FDI in LDCs. With regard to inward FDI from NIEs to DCs, Kumar (1998) suggested that an increasing number of NIE manu- facturers (Korean firms) have made nu- merous trade supporting investments in DCs, establishing affiliates to develop marketing networks in the host countries and provide after sales activities. Van Hoesel (1999) conducted in-depth case studies of Korean consumer electronics and Taiwanese PC industries and found that the firms in these industries tended to produce labor intensive goods in locations with abundant, non- or semi- skilled labor, whereas they preferred as-

sembling final goods in high income markets for such reasons as protection- ism or because of fast changing consumer demands. These evidence generally suggest that NIE firms exploring new market opportunities abroad are more

likely to invest in countries where market potential is large than in countries with small market potential. Building on the above arguments, we expect that, with the exception of large LDCs such as China and India, NIE firms seeking market opportunities would invest more



likely in DCs, where market size is rela-

tively large, than in LDCs, where market size is relatively small.

Hypothesis 3a: NIE firms are more

likely to invest in DCs than in LDCs

(except large LDCs) when their primary purpose of investment is to ex-

plore market opportunities. The above discussion also suggests

that, ceteris paribus, NIE firms tend to invest in high income countries to produce differentiated goods to high income customers, and LDC markets to produce labor intensive goods to low income customers. To gain higher returns than in-

digenous firms in the host country, NIE firms need to possess superior techno-

logical capabilities to produce more

unique differentiated goods, and superior labor intensive production capabilities to produce more low cost standard

goods to the customers. Taken together, we expect that market-seeking FDI by NIE firms would occur more likely in LDCs when they have superior labor production capabilities, and in DCs when

they have superior technological capabilities over the firms in the host countries.

Hypothesis 3b: NIE firms are more

likely to invest in DCs than in LDCs for

market-seeking purposes when they possess more superior technology- based capabilities than indigenous competitors in a host country.

Hypothesis 3c: NIE firms are more

likely to invest in LDCs than in DCs for

market-seeking purposes when they possess more superior labor intensive

production capabilities than indigenous competitors in a host country.

RESEARCH METHODOLOGY

Sample A sample used in the present study

was based on a survey conducted in

1996 by the Statistics Department of the

Ministry of Economic Affairs in Taiwan. The questionnaire was sent to 2,712 ran-

domly selected Taiwanese manufactur-

ing firms that were registered in the For-

eign Investment Commission as of Sep- tember 1996. The sample included the Taiwanese firms that had invested or had the intention to invest overseas. Of the returned questionnaires, 1,312 were usable. The non-responding firms were those which had not started actual investment, retreated from investing overseas, or had closed down already. The usable sample represented 92% of the effective size. Of the total cases available, only 328 cases were selected for the

analysis in this study. The cases excluded from the original sample included the cases of the firms that invested in newly industrialized economies (NIEs) such as Singapore, Hong Kong, and South Korea, and in China, and those firms which had invested in non-manufacturing sectors. We excluded the cases of the firms investing in NIEs from the sample, because our primary purpose in the present study was to examine the determinants of NIE firms' FDI in DCs and LDCs, not those in other NIEs. We excluded the cases of the firms that had invested in China for two major reasons. Firstly, since the total number of Taiwanese firms investing in China was conspicuously large (about 70% of the total cases), we consider that the results of the analysis might have a bias towards the firms investing in China.

Secondly, China is different from other LDCs in terms of market size as well as cultural connections and may not fall into a regular LDC category, which underlies the previous literature (e.g., Wells, 1977, 1983). We also focused only on FDI in manufacturing sectors in order to avoid possible industry effects on the choice of FDI location.



Table 1 provides the distribution of FDI locations across industries. Firms in most industries tended to have more investments in LDCs than in DCs. In some industries such as textile, leather products, lumber & wood products petroleum & coal, primary metals, firms had no investments in DCs. Firms in electronic

equipment industry had the largest number of investment both in LDCs (55 cases) and in DCs (58 cases).

Variables The hypothesized relationships were

examined using logistic regression anal-

ysis. A dependent variable (LOCATION) represents the investment location, either DCs or LDCs. The firms were asked to choose their most representative FDI based on the amount of investment and

indicate the location of the FDI from a list of 18 countries and regions. We clas-

sify countries in North America (U.S. and Canada), Western Europe (U.K., France, and others), two Oceanic countries, Australia and New Zealand, and

Japan into the DC category, and countries in Middle/South America, Africa, and ASEAN countries into the LDC cat-

egory. The variable was defined by a

dummy variable, coded "1" when the firm invested in a DC, and "0" when it invested in a LDC.

The independent variables used in the

analysis consist of three capability-related and three motivation-related variables. The first two capability-related variables represent advantages in labor intensive production capability (LABOR- CAP) and advantages in technology-

TABLE 1

DISTRUTION OF FDI LOCATION BY INDUSTRY

Industry LDC* DC Total

Textile 18 18 Apparel 18 2 20 Leather products 2 2 Lumber & wood products 11 11 Furniture 10 1 11 Paper mills & paper products 6 1 7 Printing & publishing 1 1 Chemical materials 3 3 6 Chemical products 15 4 19 Petroleum & coal products 1 Rubber products 9 1 10 Plastic products 21 11 32 Stone, clay & glass products 1 3 4 Primary metal 7 7 Fabricated metal products 31 3 34 Machinery & equipment 9 4 13 Electronic equipment 55 58 113 Transportation equipment 6 1 7 Instruments 4 3 7 Miscellaneous manufacturing 4 1 5

Total 231 97 328

*The cases of inward FDI in China are not included.



based capability (TECHNOLOGY). The firms were asked to indicate their relative advantages in a particular product market domain over the indigenous firms in the host country. These variables were measured on a dichotomous scale (high-low), coded "1" when the firms possessed relative advantages in the respective areas over their competitors in a specific product market domain in the host county, and "0" otherwise. Another capability variable is an invest-

ing firm's prior technology seeking expe- riences at arm's length (EXPERIENCE), which was defined by a dummy variable, coded "1" when the firm had a prior experience of technology seeking with DC firms through licensing or OEM

agreements, and "0" otherwise. Note that the first two capability vari-

ables (LABORCAP and TECHNOLOGY) are self-reported measures. Since managers of each firm may have different eval- uation criteria and different reference

groups for comparison of advantages, some may argue that what is being tested in our study would actually be the extent to which the managers' perceptions are consistent and rational rather than the

capabilities of the firms. Nonetheless, self-reported measures are commonly used, especially in strategic human resource management and strategy research where objective measures are not

directly comparable (c.f. Delaney and Huselid, 1996). Tomaskovic-Devey, Le- iter, and Thompson (1994) suggest that a

comparative method is more effective in

eliciting responses than asking respon- dents directly to provide exact numbers for performance. Although there is the

danger of self-reporting bias, research has found that perceived measures were correlated positively with objective measures. To examine potential problems of

self-reporting bias in our study, we conducted two additional analyses. Here,

we assume that firms with advantages in

technology-based and labor intensive

production capabilities (TECHNOLOGY and LABORCAP) tend to be large in size and attain higher overall performance in their overseas activities than those firms without such advantages. We used the two measures available in the database as proxy for the firm size and performance: the number of employees (a parent firm) and the perceived performance of overseas operations measured by a

three-point scale (unsatisfactory, satis-

factory, and excellent). Consistent with our expectation, the results of t-tests (both parametric and non-parametric tests) suggest that both the firms with

advantages in technology-based capability (TECHNOLOGY=1) and those firms with advantages in labor intensive production capabilities (LABORCAP= 1) had a significantly larger number of parent firm employees and a significantly higher level of perceived performance than those firms with no such advan-

tages. With this evidence, we consider that there exists no critical self-reporting bias in our sample.2

The motivation-related variables represent access to local labor force (LA- BORSEEK), local market expansion (MARKETSEEK), and technology seek-

ing (TECHSEEK), respectively. These variables were constructed from their in- dication of reasons for investing overseas

along different dimensions, and defined

by a dummy variable (coded "1" when the firms had the described motivations, and "0" otherwise).

Three variables were used in the anal-

ysis to control for possible subsidiary age, entry mode, and parent firm size effects on the choice of FDI location: year of foundation (FOUNDATION), entry mode (MODE), firm size (EMPLOYEES), and percentage of overseas sales (FOR- EIGNSALES). FOUNDATION was mea-



sured by the number of years between the year of establishment and 1996, the

year of observation in the present analysis. MODE was defined by a dummy variable, coded "1" when the firm's foreign affiliate was a joint venture, and "0" when it was a wholly-owned subsid-

iary.3 EMPLOYEES was measured by the total number of employees of parent firms. FOREIGNSALES was measured by percentage of a parent firm's overseas sales relative to its total sales. We also included an electronics industry dummy in the analysis (ELECTRONICS), coded "1" when the subsidiary's industry was electronic equipment and "0" otherwise. We included this variable to control for

possible industry bias because the majority of FDI cases in DCs (113 cases) were in the electronic equipment industry.4 Further, we included a financial asset

dummy variable (FINANCE), coded "1" when the firm possessed more financial assets than indigenous firms in a host

country, and "0" otherwise. Firms with a

large amount of financial resources may treat FDI as a portfolio investment, where they do not have substantial control over local operations. We included this variable to control for this possibility.

The correlation matrix is presented in Table 2, which suggests no critical mul-

ticollinearity problems for logistic re-

gression analysis.

RESULTS

The results of the analyses are presented in Table 3. Consistent with Hy- potheses la, 2a, and 3a, our results (Model 1) suggested that technology seeking motivations (TECHSEEK) and

market-seeking motivations (MARKET- SEEK) were both significantly associated with investment in DCs, and labor-seek-

ing motivations (LABORSEEK) were significantly associated with investment in

LDCs. In order to examine the moderat-

ing effects of a firm's capabilities on the

impact of the firm's motivations on the location choice, we created four interaction variables. The results indicated that the three interaction variables, TECH- NOLOGY x TECHSEEK (Model 2), EX- PERIENCE x TECHSEEK (Model 3), and TECHNOLOGY x MARKETSEEK (Model 4), had a significant and positive impact on the dependent variable, and the coefficients of these interaction variables were all greater than those of the original motivation variables (i.e., TECHSEEK and MARKETSEEK). The implications of these results are twofold. First, the NIE firms engaging in strategic asset-seeking FDI were more likely to invest in DCs over LDCs when they possessed ad-

vantages in technology-based capability over indigenous firms (Hypothesis lb) and prior seeking experience (Hypothe- sis Ic), than when they did not possess such advantages and experience. Sec- ond, the NIE engaging in market-seeking FDI were more likely to invest in DCs over LDCs when they possessed ad-

vantages in technology-based capability over indigenous firms (Hypothesis 3b). The results provided in Models 4 and 6

suggested that the two interaction variables, LABORCAP x LABORSEEK and LABORCAP x MARKETSEEK, were not

significant, although the signs of the coefficients of these variables were consistent with the predicted directions. Thus,

Hypotheses 2b and 3c were rejected.

DISCUSSION

This study examined the impact of both the capabilities and motivations of Taiwanese firms on the choice of FDI location between DCs and LDCs. The

proposed hypotheses were generally supported in this study. The results of the analyses are summarized as follows.


T^ O

TABLE 2 CORREIATION MATRIX

Std. Variables Mean Dev. 1 2 3 4 5 6 7 8 9 10 11 12

1 LOCATION Choice of location: LDC = 0; 0.30 0.46 DC=1

2 FOUNDATION Year of foundation 79.73 5.50 -0.01 3 MODE Entry mode: WOS = 0; 0.61 0.49 0.00 0.06

JV=1 4 EMPLOYEES Total # of employees 231.12 395.83 0.08 -0.07 -0.02 5 FOREIGNSALES Percentage of overseas sales 4.19 2.99 -0.16 0.03 -0.09 -0.10 6 ELECTRONICS Industry dummy (Electronics 0.34 0.48 0.35 0.01 -0.06 0.31 -0.04

0S =1) 7 FINANCE Financial resources 0.50 0.50 0.00 -0.05 -0.04 0.08 0.16 -0.04 8 LOBOOCAP AdventAges in labor intensive 0.60 0.49 -0.35 -0.02 -0.06 0.01 0.14 -0.10 -0.01

production capability 9 TECHNOLOGY Advantages in technological- 0.16 0.37 -0.01 0.04 0.12 0.11 -0.05 0.04 0.00 0.06

based capability 10 EXPJK NCE Prior seeking experience 0.36 0.48 0.35 0.02 -0.02 -0.04 -0.07 0.24 0.06 -0.14 -0.06

through licensing or OEM 11 LABORSEEK Labor-seeking FDI 0.61 0.49 -0.48 -0.07 -0.06 0.00 0.15 -0.21 -0.01 0.25 -0.10 -0.18 12 MAXKETSEEK Market-seeking FDI 0.48 0.50 0.32 -0.07 0.13 0.04 -0.21 0.15 0.00 -0.15 -0.08 0.16 -0.27 13 TECHSEEK Strategic asset-seeking FDI 0.12 0.32 0.42 0.10 0.02 0.12 -0.06 0.33 -0.03 -0.25 0.09 0.34 -0.40 0.08

N= 328

tn[

I~

SHIGE MAYINO, CHUNG-MING LAU, R.HY-SONG YEHl

TMJLE3

RIESUILTS OF LOGISTC REGRIFSSTON AuNAYSIS'

Dependent variable: LOCATION (LDC = 0 and DC = 1)

Model I Model 2 Model 3 Model 4 Model 5 Model 6

Control FOUNDATION -0.027 -0.027 -0.025 -0.027 -0.027 -0.027 (0.023) (0.023) (0.024) (0.024) (0.024) (0.024)

Control MODE -0.156 -0.175 -0.277 -0.158 -0.154 -0.158 (0.351) (0.353) (0.359) (0.353) (0.357) (0.352)

Control EMPLOYEES 0.000 0.000 0.000 0.000 0.000 0.000 (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)

Control FOREIGNSALES -0.055 -0.053 -0.072 -0.055 -0.054 -0.055 (0.063) (0.063) (0.065) (0.063) (0.063) (0.063)

Control ElECTRONICS 1.023*** 1.034*** 1.023*** 1.026*** 1.016*** 1.019*** (0.353) (0.355) (0.356) (0.356) (0.356) (0.353)

Control FINANCE -0.051 -0.039 -0.072 -0.051 -0.023 -0.056 (0.341) (0.344) (0.343) (0.341) (0.344) (0.342)

Capability LABORCAP -1.152*** -1.262*** -1.166*** -1.127*** -1.186*** -1.062** (0.334) (0.345) (0.336) (0.453) (0.338) (0.524)

Capability TECHNOLOGY -0.144 -0.484 -0.188 -0.150 -0.885* -0.142 (0.471) (0.551) (0.474) (0.477) (0.669) (0.470)

Capability EXPERIENCE 1.160*** 1.127*** 0.955*** 1.160*** 1.256*** 1.153*** (0.345) (0.349) (0.365) (0.345) (0.356) (0.347)

Motivation LABORSEEK -1.693*** - 1.689** -1.708*** -1.666*** -1.838*** -1.692*** (0.355) (0.358) (0.354) (0.497) (0.370) (0.355)

Motivation MIARKETSEEK 0.976*** 0.919*** 1.008*** 0.975*** 0.673** 1.056** (0.358) (0.363) (0.361) (0.359) (0.397) (0.510)

Motivation TECHSEEK 1.180** 0.675 0.056 1.179** 1.044** 1.180** (0.572) (0.650) (0.855) (0.572) (0.592) (0.571)

Interaction TECHNOLOGY X 1.920* TECHSEEK (1.381)

Interaction EXPERENCE X 1.944** TECHSEEK (1.147)

hinteraction LABORCAP X -0.054 LABORSEEK (0.682)

Interaction TECHNOLOGY X 1.643** MARKETSEEK (0.959)

Interaction LABORCAP)( -0.150 MARKETSEEK (0.675)

Constant 1.515 1.634 1.544 1.488 1.704 1.424 (1.922) (1.925) (1.923) (1.951) (1.934) (1.966)

Model Chi-square 156.2** 158.9** 159.2** 156.2*** 159.2** 156.3** d.f. 12 13 13 1 3 13 1 3 AChi-square - 2.7* 3.0* 0 3.0* 0.1 Nagelkerke R' .53 .54 .54 .53 .54 .53 DC cases correctly classified 94.4 93.5 93.5 94.4 93.1 93.9

(% LDC cases correctly classified 67.0 66.0 69.1 67.0 63.9 66.0

(% Overall classification rate (% 86.3 85.4 86.3 86.3 84.5 85.7 Lambda-p .53 .50 .53 .53 .47 .51 N 328 328 328 328 328 328

'Figures shown are beta coefficients of the logistic regressions. Figures in the parenthesis are standard errors. ***p<.0l, **p<.05, *p<.10 (One tail test)



First, the NIE firms tended to invest in DCs when they had strategic asset-seek-

ing and market-seeking motivations, and in LDCs when they had labor-seeking motivations. This evidence suggests that the firms' motivation to invest in a particular location is pertinent to country- specific factors in the host country, supporting the idea that FDI is used as a means to gain access to comparatively advantaged country-specific assets in the host country.

Second, our study also suggested that the likelihood for the firms to invest in a

particular location was significantly influenced by the types and degree of the

capabilities that the firms possessed. Our evidence suggested that technology- based advantages and prior strategic as-

set-seeking experience strengthened the likelihood of FDI in DCs when the NIE firms' primary motivation was strategic asset-seeking. Technology-based advan-

tages also strengthened the likelihood for the firms to invest in DCs when they had

market-seeking motivation. If we can consider a market-seeking FDI as a typi- cal case of asset-exploitation FDI, we

suggest that technological advantages facilitate both asset-exploitation and asset-

seeking FDI in DCs. With regard to labor-seeking FDI, how-

ever, our evidence showed that the NIE firms with labor-seeking motivations tended to invest in LDCs, irrespective of whether they possessed advantages in labor intensive production capability. One

interpretation of this result is that access to natural country-specific endowments such as pooled low-cost labor markets in a LDC does not necessarily require the

investing firms to possess firm-specific advantages in labor intensive production capabilities because such endowments are available for any firms located in the same country (or location). In contrast, access to created country-specific en-

dowments such as strategic assets owned

by indigenous firms may require the in-

vesting firms to possess certain forms of

firm-specific absorptive capacity because the acquisition and integration of such endowments (assets) are difficult and

costly due to tacit and organizationally embedded nature of the endowments

(assets) (Makino and Delios, 1996). There are several implications for the

future study. First, our evidence suggests that the

NIE firms' choice of FDI location between DC and LDC be determined by both asset-exploitation and strategic as-

set-seeking motivations. As we discussed earlier, most previous studies have examined only either side of the motivations in explaining the location of FDI. Future studies should incorporate both aspects of FDI motivations into the analysis simultaneously. Especially, more comprehensive studies are needed to investigate how asset-seeking and as-

set-exploitation aspects of FDI are dy- namically linked in the choice of FDI location, and how the choice of FDI location influences the process of development of competitive advantage of the MNC.

Second, one of the key findings in our

study is that the NIE firms were more

likely to invest in DCs when they had

strategic asset-seeking motivations and

absorptive capacity (prior technology sourcing experience). This begs important questions of how the firms had de-

veloped the absorptive capacity and why they were motivated to seek more. An- other important question is whether both

types of FDI would require different or-

ganizational structures and processes of

investing firms. Although some researchers have recently touched upon these issues (e.g., Hedlund and Ridderstrale, 1997), more conceptual investigations



should be pushed forward to make the

theory more complete and relevant.

Finally, previous studies have exten-

sively examined why MNEs exist and where FDI is likely to take place. The

"why" question generally involves the issues of whether a firm possesses proprietary resources or capabilities that can be exploited or internalized across borders under the common ownership. The "where" question generally involves the issues of location advantages that can attract inward FDI. However, as exempli- fied by Dunning's early model of eclectic

paradigm, a majority of the previous studies have examined the "why" and "where" questions separately. Our evidence shows that a firm's choice of FDI location was influenced significantly by the investing firms' specific motivations and capabilities, which suggests that the effects of location and ownership advan-

tages on the location choice might be better specified as interactions than as direct effects (Dunning, 2000). Future studies should conduct more detailed examinations of possible interaction effects between firm-specific and country- specific factors on the location choice of FDI.

NOTES

1. We are very grateful to one of the reviewers for helpful advice for clarify- ing the conceptual difference between motivation and capability.

2. We admit that a further, more detailed analysis may be necessary to examine the possibility of a self-reporting bias. However, due to the limitation of the data, the analysis beyond this is not feasible. Thus, we have to acknowledge that our findings should be interpreted with caution.

3. Recent studies found that international joint ventures took a variety of

ownership structure according to the

number, the affiliatedness, and the

nationality of partners (Makino and

Beamish, 1998), as well as the levels of resource commitment, control, and risks shared among partners (e.g., Woodcock, Beamish, and Makino, 1994). In this

study, however, we simply defined a

joint venture as a subsidiary with a shared ownership structure.

4. To examine the possible industry bias in our analyses, we divided the sam-

ple into two groups. One group included a sample of the firms in the electronic

equipment industry and the other group included a sample of the remaining ob- servations. We ran separate regression analyses for each group and found no substantial differences in the results.

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asset exploitation versus asset seeking