Industrial Location Economics

Industrial Location Economics

Edited by Philip McCann

Because space is not homogenous, economic activities occur in different locations. Understanding the reasons behind this and understanding exactly how industries are spatially organized is the central theme of this book. Industrial Location Economics discusses different aspects of industrial location behaviour from a variety of theoretical and empirical perspectives. Each of the analytical traditions provides insights into the nature of industrial location behaviour and the factors which can influence it.

Chapter 9: The Location Decision of the Multinational Enterprise

Ram Mudambi

Subjects: economics and finance, industrial economics, regional economics, geography, economic geography, urban and regional studies, regional economics

Extract

Ram Mudambi Temple University, USA and University of Reading, UK 1. INTRODUCTION The contribution of foreign direct investment (FDI) to development is now widely recognized. The location of investment by multinational enterprises (MNEs) is the largest single component of worldwide FDI stocks, which amounted to $16 trillion by 1998. In addition, sales of foreign affiliates amounted to $14 trillion in 1999, a figure that is nearly twice the global level of exports for that year (UNCTAD, 2000), implying that the location decision is becoming the most important consideration in the organization of the MNE. In the international business literature, the location decision has typically been addressed within the framework of the so-called ‘eclectic paradigm’ proposed by Dunning (1977). This paradigm offers a unifying framework for determining the extent and pattern of foreign-owned activities and posits that multinational activities are driven by three sets of advantages, namely ownership, location and internalization advantages. Hence the framework is often referred to using the acronym OLI. It is the configuration of these sets of advantages that either encourages or discourages a firm from undertaking foreign activities and becoming an MNE. Ownership advantages are firm-specific advantages (FSAs) that emanate directly from resources owned or controlled by a firm. Location-specific advantages (given the context, the location refers to a country) are based on resources, networks, institutional structures or other advantages that are specific to a geographic entity and are immovable. Finally, internalization advantages are those that accrue to a firm when...

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