Edited by Philip McCann
Chapter 9: The Location Decision of the Multinational Enterprise
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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