Multinational corporations are not limited to the markets of the country in which they are based. Due to this freedom, these corporations have a peculiar ability to make capital investments in markets worldwide. Economist John Dunning identifies four reasons multinational corporations engage in foreign direct investment -- investing in countries other than the one in which they are based -- according to the website Globalization 101; they are seeking new markets, new resources, or are seeking strategic assets or efficiency.
Multimational corporations use their resources to identify and invest in markets in which smaller companies from the same country cannot afford to compete. A multinational could invest in a foreign market if its products will be more desirable or affordable than the competition in that market, or if too much of the corporation's revenue or sales come from one particular market, according to the website Globalization 101. Market seeking also allows a multinational to identify arbitrage opportunities -- which means it can sell a product in one market for a higher price than it paid for it in another, according to "Arbitrage" magazine.
A multinational might invest resources in a particular market to source cheaper products. Though these opportunities might also behoove a smaller company, such a foreign direct investment requires more resources than a smaller company can muster. Resource seeking allows a multinational to manufacture goods, mine natural resources and train employees who will work at a lower wage, thus creating a return on the company's investment. According to a study by Arturs Kalnins and Wilbur Chung published in a 2004 edition of "Strategic Management Journal," resource seeking in one market may spill over into geographically proximate markets.
Strategic Asset Seeking
Strategic assets are relationships such as financing agreements, commodity distribution networks -- even human resources and information technology -- that enable a multinational to use its position in one market to further its position in another. For example, a multinational could invest in establishing a customer service call center in a market where labor is cheaper than in other markets. The multinational's call-center investment reduces labor costs, which creates a corresponding reduction in the cost of offering customer service to consumers in markets around the world, which could potentially grow sales and revenue.
A multinational's ability to invest in markets whose costs and lower and whose returns are higher creates a competitive advantage over smaller corporations without such positions. Creation of a new free trade zone or fluctuation or stabilization of exchange rates can motivate a multinational to restructure its position in markets to work more efficiently, according to the website Globalization 101. Research by Carsten Eckel in the May 2003 edition of the "Review of International Economics" suggests that multinationals move labor-intensive production processes to markets where labor is cheaper when the cost of transportation drops.
- Globalization 101: Why Do Companies Invest Overseas?
- "Arbitrage" magazine; What is Arbitrage?; Saif Qureshi; May 2011
- "Strategic Management Journal"; Resource-Seeking Agglomeration: A Study of Market Entry in the Lodging Industry; Arturs Kalnins and Wilbur Chung
- "Baltic IT & T Review"; IT as a Function Within the Enterprise...; Trent Berghofer; April 2008
- "Review of International Economics"; Fragmentation, Efficiency-Seeking FDI, and Employment; Carsten Eckel; May 2003
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