Abstract This paper tests some hypotheses about the location of foreign direct investment drawn from the so-called internationalization process framework. The central tenet of this framework, which is primarily supply-side oriented, is that location decisions should be regarded as a learning process at the company leveL From this framework one would expect to find a close relationship between factors thatincrease the perceived level of uncertainty (such as distance), factors that serve to reduce uncertainty (such as experience), and factors that reduce the relative impact of the risk inherent in a project (company resources), in the , observed patterns of location choices. The hypotheses are tested on data material consisting
of 203 foreign direct investments made by Norwegian companies in the period 1910-1984.
Only limited support is found for the internationalization process modeL The results suggest that the internationalization process model is a partial model, and that both demand-side and supply-side factors must be included in order to explain the location of foreign direct investments.
Co-authored with Geir Gripsrud. Forthcoming in
The Location of Foreign Direct
Investment: Geographic and
BusinessApproaches,
edited by Rod B. McNaughton and Milford B. Green, to be published by Avebury Press.Introduction
Foreign direct investment (FDI) serves as an important avenue for company growth, and it plays a significant role in transfers of capital, technology and managerial resources between countries. The immense increase in foreign direct investment during the last decades has therefore attracted the attention of scholars from various fields, in particular business, economics and geography. Location decisions are at the core ofFDI as a field of investigation.
From the perspective of the investor company, which seeks to maximize the returns from an investment, profit streams may depend on where particular subsidiaries are located. From the perspective of host countries, being able to attract incoming FDI is generally regarded as vital in order to maintain and further develop their economies.
Previous work has analyzed the location of FDls from various perspectives. According to economic theory, decisions about the location of production are predominantly taken on the basis of traditional sources of comparative advantage such as relative wages, market size, and transportation costs (Vernon, 1966; Aliber, 1970; Hirsch, 1976). In addition, impediments to international trade, such as tariffs and non-tariff barriers, may also influence the location of production (Clegg, 1992)1.A second strand in the literature, rooted in economic geography and dating back to the classic works by Englander (1926) and Palander (1935), focuses on the importance of agglomeration economies in the location of production facilities (Berry, Conkling and Ray, 1993). Agglomeration economies refer to the advantages of co-locating different economic units (Wheeler and Mody, 1992). The attractiveness of an area is increased by factors such as the quality of infrastructure, the availability of specialized service suppliers and of skilled labor, location related reputational effects, and the development of so-called
"industrial clusters" (Porter, 1990). Once location advantages have been achieved they tend to be self-perpetuating. The empirical evidence available suggests that both traditional comparative advantage factors, in particular tariff barriers (Culem, 1988), market size and market growth (Kravis and Lipsey, 1982; Culem, 1988; Veugelers, 1991), and agglomeration factors, such as infrastructure quality and the level of the existing stock ofFDI in a country
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(Wheeler and Mody, 1992), have an important impact on international investment location decisions.
However, both economic and geographic approaches to location decisions focus primarily on factors that are external to the individual company (markets for input factors and end-users, macroeconomic and environmental conditions, etc.). As pointed out by Buckley (1987), these approaches tend to neglect how location decisions might be shaped by characteristics of the investor companies and of the individuals actually making the decisions. Buckley (1987, p. 54) remarks that: "in the undoubted improvement in the theory of the multinational enterprise, location theory has been curiously stationary. This is partly because theorists believe that there is nothing that has not been said because the "rational manager" in the individual firm is deemed to be able to calculate location costs, including trade and tariff.
barriers, and on a comparative cost basis to select the optimal strategy ...Crucially, communication costs and cultural values are not fully integrated in to the calculus. This lack of interest is unwarranted, and must be rectified through renewed research initiatives".
Buckley's comment may certainly describe the "state-of-the-art" in economics, but disregards a strong research tradition in international business, the so-called internationalization process model, which, almost exclusively, focus on precisely internal factors (Vahlne and Nordstrom, 1993). The internationalization process approach, which builds on the behavioral theory of the firm developed by Cyert and March (1963), has since the pioneering work of Aharoni (1966) constituted the theoretical basis for a large number of studies concerned with various aspects of the internationalization of the firm (e.g., Luostarinen, 1970, 1979; Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977).
The aim of the present study is to test some hypotheses on location decisions drawn from the internationalization process framework. The central tenet of this framework is that such decisions should be regarded as a learning process. Decisions at the company level are undertaken by decision makers displaying a high degree of risk aversion. One should, in particular, expect to find a close relationship between factors that increase the perceived level of uncertainty (such as distance), factors that serve to reduce uncertainty (such as experience),
and factors that reduce the relative impact of the risk inherent in a project (company resources), in the observed patterns of location choices. The article proceeds as follows; the next section presents a sketch of the internationalization process framework and discusses the central concepts investigated in this study, then follows a description of how the study was conducted, a report of the findings, and finally, there is a concluding discussion of the results and some of their implications.