Cultural Factors in Multinational Enterprise Location. The Case of Foreign Direct Investment in Thailand

Contents

Illustrations and Tables

List of Abbreviations

Part I: Introduction and Theoretical Background
1. Introduction
1.1 Introduction and Objective of the Paper
1.2 Outline
2. Theory of International Production
2.1 Definitions
2.1.1 Foreign Direct Investment
2.1.2 Multinational Enterprise
2.2 Theories of Multinational Enterprise Activity
2.3 International Location Decisions and Transaction Costs
2.4 The Eclectic Paradigm of International Production
3. Culture
3.1 Culture in Economic Theory
3.2 Cultural Environment of International Business
3.2.1 Religion
3.2.2 Language
3.3 Hofstede's Value System
3.3.1 Unequal Distribution of Power
3.3.2 Avoiding Uncertainty
3.3.3 The Individual and the Group
3.3.4 Male and Female Values
3.3.5 Confucian Dynamism: Time Orientation
3.4 Casson's Economics of Business Culture
3.4.1 Trust
3.4.2 Leadership
3.4.3 Implications for Multinational Enterprises
3.5 Environment, Values, and Trust
3.6 Shaping Inter-Cultural Trust
3.6.1 Contrasting Value Systems
3.6.2 Environmental Factors

Part II: Observations in the Real World
4. USA meets Thailand - Issues in Building Trust
4.1 Similarities and Distinctions in the Value Systems
4.1.1 Individualism and Collectivism
4.1.2 Masculinity and Femininity
4.1.3 Uncertainty Avoidance
4.1.4 Power Distance
4.1.5 Long Term and Short Term Orientation
4.2 Similarities and Distinctions in the Environment
4.2.1 Protestantism and Theravada Buddhism
4.2.2 Language
5. Culture as Location Factor - Anecdotal Evidence
5.1 Research Procedure
5.2 Results
5.2.1 Initial Consideration
5.2.2 Comparing Locations
5.2.3 Doing Business in Thailand
5.2.4 Sexual Cultures - A Side Note on a Controversial Topic
5.3 Conclusions - In Pursuit of the Cultural Fit

Part III: Synthesis
6. Discussion - Trust and Multinational Enterprise Location
6.1 Ownership Assets
6.2 Internalization Incentives
6.3 Location Advantages
7. Conclusion

Appendix: Guideline for Interviews

Literature

Notes

to my family and friends,

who taught me inter-cultural tolerance

Preface and Acknowledgements II

Preface and Acknowledgements

The decision to write my Diplomarbeit on the allocation of multina- tional enterprise activity has been based on two things: first of all, my interest in international business that has influenced my curriculum vitae since high school. Secondly, in preparation for the paper I could indulge in my favorite occupation, which is traveling. I had the chance to visit Thailand, one of the many cultures in the world I had never been able to experience before, for an internship in Bangkok. This new experience, especially as it included a severe culture shock when returning home, has proved invaluable and will hopefully con- tinue to do so in future.

There are several people who I would like to thank for assisting me in taking this opportunity, both morally and financially. These are first of all my parents and sister. Then there are my friends in Germany, the USA, and those whom I met in Bangkok. Special thanks go out to Anja Ernst for sharing her knowledge about the advertised internship. Finally, I would like to express my gratitude to Martin Godau in Bang- kok.

Klaus Schmidt

Illustrations and Tables

Exhibits

Exhibit 4.1: Differences in Values between Thailand and the USA according to Hofstede

Exhibit 6.1: Ownership Advantages Influencing Trust

Exhibit 6.2: Internalization Incentives Influencing Trust

Exhibit 6.3: Locational Advantages influencing Trust

Tables

Table 2.1 FDI versus Foreign Portfolio Investment

Table 2.2 The Eclectic Paradigm of International Production

Table 2.3 Some Illustrations of how OLI Characteristics may vary according to Country, Industry, and Firm specific Circumstances

Table 3.1 The Value System and Trust

Table 3.2 Languages and Trust

Table 3.3 Religion and Trust

Table 5.1 Building trust between USA and Thailand

List of Abbreviations

illustration not visible in this excerpt

Part I: Introduction and Theoretical Background

1. Introduction

1.1 Introduction and Objective of the Paper

Despite crises and uncertainty in international capital markets, for- eign direct investment (FDI) by multinational enterprises (MNE) is booming. The buzzword is globalization. The business world is ex- pected to be moving closer together through more or less recent de- velopments in communication technologies and transportation facili- ties. The political ideal of democracy along with a liberalization of national economies seems to have finally gained the recognition it deserves as the system that in the end allows for the best utilization of wealth creating endowments. Besides differences in economic development, cultural differences remain as a single important means of distinguishing between people from several nations (Huntington 1996; Axford 1995). The critical issue is that this situa- tion is being recognized and mankind restrains from emphasizing distinctions, and instead focuses on working out compatibility be- tween cultures.

Culture has been given the attribute of being responsible for eco- nomic performance by several scholars, namely Hofstede and Bond (1988), Hofstede (1993), Casson (1991, 1993), Berger (1994), and Fukuyama (1995), over the past decade. The original aim has been at explaining the continuous growth of the economies of Asian NICs which, however, came to an abrupt and widely unexpected end on 2 July 1997¹. Still the importance of culture seems to have been under- estimated, otherwise the crisis might have been foreseeable.²

If cultural factors are of significant importance for overall economic performance, i.e. on the macro-economic level, they must be of at least the same importance for the performance of companies that work within the particular culture, i.e. on the micro-economic level. In this case, not only local but international investors in particular are affected by their respective cultural environment as two - or even more - different cultures have to be brought to work together. Obvi- ously, a consensus has to be found between influences from home and host country culture. This situation often is expected to be a threat to the economic performance of the MNE. However, no exist- ing culture in the world today can be viewed as superior to others in all aspects. Moreover, each culture has positive as well as negative factors (Berger 1994). A MNE then, if it is able to effectively bring together several cultures in order to achieve one common goal, should be able to make use of the positive sides of the cultures at its different locations.

Dunning & Bansal (1997) analyze the effects of culture on multina- tional enterprises applying John H. Dunning's "Eclectic Paradigm of International Production" (Dunning 1988, 1993a), which is seen as the most comprehensive approach to explaining MNE behavior. They mainly base their findings on identifying cultural influences on foreign investment in existing literature. The unequal distribution of com- parative competitive advantages in different industrial sectors be- tween countries is attributed to culture. MNEs from one country that have an advantage in one sector are found to be able to export this advantage to a foreign location at least to some extent. Home coun- try culture is expectedly found to influence a company's perception about its ownership advantages, the necessity and its ability to inter- nalize markets, and its perception about locational advantages in both the home and the host countries.

This paper extends that point of view by taking into account not only the culture in the MNE's home country, but also cultural features in the host country. The perspective is changed in so far as the host country culture is given a greater role in influencing the MNE's per- ceptions about its ownership advantages and internalization and lo- cational opportunities. One may argue that each company has a unique business culture that is supported by the home country cul- ture and will be taken everywhere the company goes. However, Berger (1994) found that it is not possible to export the basic cultural factors that are held responsible for economic performance. There- fore, it is desirable to integrate the MNE's business culture and the host country's culture.

According to Smith (1992), business culture is strongly dependent on national culture anyway. Therefore, in order to make this paper applicable to all companies in one country and to make cultures comparable, it will make no difference between national culture and busi - ness culture. This implies that culture not only is a firm specific but also a location specific factor in MNE activity.

The importance of location according to Dunning (1998) has been unjustifiably neglected by international business researchers in the past. He argues that "more attention needs to be given to the impor- tance of location per se as a variable affecting the global competi- tiveness of firms" (p. 60). The main reasons for this he sees in the changing environment which has gradually moved towards being characterized by three features. First, non-material assets such as intellectual capital have become the key to wealth creating activities due especially to the growth of knowledge intensive services and a shift in the labor force from being dominated by blue-collar workers to a dominance of white-collar employees (p. 47). The second feature is that despite a reduction of investment and trade barriers that suggest further geographical dispersion of economic activity, certain comple- mentary value-added activities are restricted to fixed locations. An example for this is when transportation costs or benefits of spatial proximity are high³ (p. 48). The third feature is the emergence of what Dunning (1995) calls alliance capitalism, i.e. the growing need for (inter-national) collaboration in wealth creating processes (p. 48).

The cultural sensitivity of the features cannot be questioned.

Having talked about the significance of culture for MNEs, the ques- tion arises of what culture is and how exactly does it influence the location selection of MNEs. Studies on culture have identified several categories which Dunning & Bansal (1997, p. 3) found to be differing only in certain minor details. In agreement with this statement, this paper focuses on the study on countries' value systems introduced by Hofstede (1980), extended by Hofstede & Bond (1988), and re- stated and summarized in Hofstede (1993). It is the most widely known and applied approach to explain international cultural differ- ences. Moreover, it represents a strong means of analyzing the core dimensions of both home and host country culture.

On the other hand, it has been shown, for example, by Aharoni (1966) and Davidson (1980) that certain country characteristics such as language and customs play a major role in MNE location. There- fore, on the basis of Terpstra & David's (1991) anthropological ap- proach, further factors from the international business environment, that are more obvious on the outer layer of a country's culture, are taken into consideration.

Both the environmental factors and the underlying value system will be shown to influence and support the central prerequisite for the positive outcome of economic transactions: trust. Trust has been identified by Fukuyama (1995) and Berger (1994) as the single most important aspect influencing economic performance. The relevance of trust to economic theory, thereby, is derived from the fact that es- sentially economic life consists of multiple encounters between indi- viduals. Indeed, economic transactions depend on individual deci- sions made within an interdependent system. If trust is lacking be- tween the individuals the respective decisions will lead to a negative outcome of economic transactions due to rising transaction costs (Casson 1991).

Furthermore, trust can be seen as the single cultural component that is generated by interaction between people and, therefore, may be influenced by outsiders (Casson 1991). It is a characteristic that is shown to be of great importance to a foreign company aiming at in- ternalizing markets in distant cultural settings. Casson (1991) ana- lyzes the effects of trust and the efforts of the outsider, who takes the role of the group leader, on the level of transaction costs.

By analyzing the significance Hofstede's value system and the two environmental factors of religion and language have for trust, this thesis will show how the perception on the achievability of intercultural trust between a foreign investor and the host country culture influences the location selection of MNE.

In the part that is intended to show the relevance of culture in inter- national business activities in the real world, this study will for several reasons consider operations of firms from only one source country - the United States of America⁴ - in only one host country - Thailand. Restrictions in financial resources, as well as time and space, are self-explanatory causes for this limitation. More important, however, is the need to narrow down the research to a country by country scope due to the vast cultural differences that exist between each country⁵.

So why does it make sense to choose the very countries of the USA and Thailand? The United States of America as a country is in the lead position in the world, both from a political and economic stand- point. Moreover, the USA serves as a model for industrialized as well as for developing nations. The development of multinational enter- prises initially was started by U.S. firms (Rode 1996) and FDI by U.S. companies still accounts for the largest part of world wide foreign investment (Zänker 1998). In 1995, U.S. companies controlled 21,318 foreign subsidiaries worldwide, worth $2,815 billion in foreign direct investment. Of these investments $614 Billion were located in the Pacific Asian region, including Southeast Asia (BEA 1997).

Thailand, as one of the NICs in Southeast Asia⁶, is predestined for this study due to two major characteristics that make it unique in the world. First, it has never been colonized by Western countries and, therefore, could retain its distinct cultural identity much clearer than other nations. Secondly, before the start of the crisis in July 1997, the Thai GNP had grown for 30 consecutive years. Indeed, in 1988 the fastest annual growth rate ever recorded in the world's economic history was calculated in Thailand at 13.2 percent (Warr 1993). Therefore, the country has been attributed the "fifth tiger" following Hong Kong, South Korea, Singapore, and Taiwan (Muscat 1994). Mainly supported by rising exports and continuing foreign invest- ments, the annual growth from 1992 to 1996 continued at an esti- mated average of 8.2 percent (Barta 1996). Untill the mid-1980s U.S. companies were the largest foreign investors. It was only after 1987 that net inflows of investment from Japan and the four original "ti- gers" exceeded that of the United States (Schoellermann 1996, p. 74).

1.2 Outline

This paper is separated into three interactive parts. Part I deals with the theoretical background behind this study, and after these intro- ductory notes, gives an overview of the theory of international pro- duction in order to show which factors influence MNEs and their ac- tivities. First, the basic terms are defined and then the most important theories are summarized. Chapter three starts with the definition of culture and goes on to show some basic elements of the environ- ment international companies have to deal with, namely, religion and language. It then summarizes Hofstede's value system approach and Casson's findings on trust and leadership. Finally, the environmental factors and the value system are integrated into the theory of trust and leadership in order to show how they are able to reduce the cultural distance between investors and host countries.

Part II of the paper is devoted to the interaction between the two cultures of Thailand as a host country and the USA as the investor's home country. First, both value systems and environmental factors are analyzed and compared. Then some findings from interviews with U.S.-American⁷ investors on cultural factors that influenced their location selection will be summarized in order to provide some anec- dotal evidence on how trust was generated in their decision to invest in Thailand.

In Part III, the findings from the two previous parts will be synthesized into the theory of international production. Based on the assumption developed in the preceding parts that location decisions are made in pursuit of a fit between the investor's and the host country's cultures, the findings on the influences of inter-cultural trust and leadership on transaction costs will be integrated into the respective components of the Eclectic Paradigm of International Production. Finally, the find- ings are summarized and some conclusions are drawn.

2. Theory of International Production

2.1 Definitions

2.1.1 Foreign Direct Investment

Foreign Direct Investment (FDI)⁸ has to be distinguished from ex- porting and licensing as one of the three archetypal methods of servicing foreign markets. According to Rugman (1985), as an alter- native to producing abroad by engaging in FDI, a firm has the choice to either produce at home and service foreign markets by exporting or to license production to a firm in the respective country.

In order to be called foreign direct investment, an economic transac- tion must fulfill three prerequisites. First, the investing party has to come from a country other than the one where the investment takes place. Secondly, the investing entity has to achieve ownership of as- sets in the host country. It has to be able to execute control of deci- sion making over these assets as well as bear the risk of ownership and utilization thereof. The third prerequisite is that capital has to flow from the investor's country of origin to the country of destination. Pro- vision number two implies that pure portfolio investments are not considered as FDI (e.g. Robock & Simmonds 1989, Dunning 1993a, and Hymer 1976). For a comparison of direct and indirect (or portfo- lio) investment see Table 2.1. FDI may take the forms (choices of entry mode) of joint ventures, wholly owned greenfield investments, or acquisitions (e.g. Kogut & Singh 1988). Investments in joint ventures are considered FDI if the foreign investor "can exert a significant amount of control or influence over decision making in a foreign company" (Dunning 1993a, p. 5).

Table 2.1 FDI versus Foreign Portfolio Investment Foreign Direct Investment

illustration not visible in this excerpt

Source: Adopted from Dunning 1993a, p. 5

2.1.2 Multinational Enterprise

The term Multinational Enterprise (MNE)⁹ implies that the respective company is actively involved in economic transactions in more than one nation. According to Rugman (1985, p. 7), the MNE produces abroad as well as at home. Production thereby includes not only the manufacturing of physical goods but also foreign investment in serv- ices such as finance, insurance, construction, transportation, com- munication, and retail trade.

The question is how large the international operations must be and in how many countries a corporation must be involved in order to be classified as an MNE. Rugman (1979), for example, proposes the use of a ratio of foreign to total operations. However, he does not state at which ratio a company reaches the status of an MNE.

John H. Dunning defines a MNE as "an enterprise that engages in foreign direct investment and owns or controls value-adding activities in more than one country" (Dunning 1993a, p. 3; for a similar defini- tion see also Caves 1996, p. 1). This prerequisite is sufficient, because fixing a point when a company turns "multi"-national is arbi- trary, especially due to the fact that companies' involvement most often may exceed pure ownership. In addition to the forms of FDI described above, this involvement may take the form of subcontrac- tual agreements where firms may build into these agreements the right to execute financial or operational control over the subcontrac- tors. This may especially be the case when a supplier of components or specialty products is dependent on a sole customer (Dunning 1993a, p. 5-6).

This definition leads to the assumption that the Eclectic Paradigm of International Production (ch. 2.4) can be applied in the research of small and medium sized companies just as well as in that of large corporations. For a company to be called an MNE it may be suffi- cient, for example, that its American owner operates an office in Thailand while still having affiliates in the USA who may be subcon- tractors supplying supportive knowledge, data, and technology in the service industry, or being the single customer in the import-export business. Stressing this point has practical as well as theoretical rea- sons, which will become important in chapter five.

2.2 Theories of Multinational Enterprise Activity

The research of MNE activities has brought up several approaches for explanation. The Eclectic Paradigm of International Production (Dunning 1988, 1993a), as the single most comprehensive approach, will serve as the basic theory for this paper and, therefore, is ex- plained in detail later on. However, even the Eclectic Paradigm "falls short of being a general theory" (Agarwal et. al. 1991, p. 5). Caves (1996) provides an extensive overview of alternative and comple- mentary theories.

One approach in explaining MNE behavior has been sought by closely linking it to the theory of the international flow of capital, in- cluding the theory on international trade, movement of factors of pro- duction, and distribution of income. This implies that MNEs based in countries well endowed with capital invest in countries less well en- dowed with capital in pursuit of higher marginal products of capital (Caves 1996). This approach was not found to be provable empiri- cally because of obvious patterns in MNE behavior, such as the fact that some capital rich countries not only serve as home bases for MNEs but are also host countries at the same time (Hymer 1976).

Alternatively growth and international diversification of firms has been linked to the product cycle theory (Vernon 1966; Hirsch 1967). This implies that with the maturity of a product, i.e. at a stage of stan- dardization of quality and technology, and when entry barriers for competitors diminish, companies move production to low cost loca- tions in pursuit of cost reduction. These in turn are mainly found in developing countries. Moreover, due to saturation of the home coun- try market, firms must move closer to (potential) new markets in or- der to be competitive against local firms.

Furthermore, FDI has been explained by trade barriers that restrict the possibility for firms to take advantage of economies of scale and scope by exporting, and therefore, forcing them to build up subsidiaries within foreign boundaries even though they would have enjoyed lower costs in a different location (Caves 1996).

A complete summary of the theory of international production is be- yond the scope of this paper. More elaborate reviews of theories of FDI and MNE can be found, for example, in Caves (1996) and Dun- ning (1993a). Collections of basic contributions can be found in Buckley (1990) and, most extensively, in the 20 Volume "United Na- tions Library on Transnational Corporations" (Dunning 1993b).

2.3 International Location Decisions and Transaction Costs

The goal to reduce transaction costs explains the existence of both horizontally and vertically integrated MNEs. The MNE is regarded as a multiplant firm that sprawls across borders falling under common ownership and control rather than trading on the open market. FDI, for example, enables the firm to capitalize on lower labor costs in labor-intensive stages of production or to evade problems of im- pacted information. Also, investing in diverse industries and geo- graphic areas serves as a means for spreading risks and gaining di- versification value. Another important factor is the utilization of the firm's own R&D discoveries on an international basis (Caves 1996, ch. 1).

When it comes to the choice on where to place foreign operations, MNEs pick locations where their perceived information and transaction costs are minimal (Caves 1996, ch. 2 and 3). Economic decision making, especially in FDI, is not always a matter of rationality but often subjectivity has a great influence (e.g. Meyer Ehrman & Hamburg 1986). Besides that, economic decision making often is influenced by noneconomic goals (e.g. Fukuyama 1995).

Davidson (1980) found that country characteristics such as customs and language, besides companies' experiences from former invest- ments and/or trade relations, influence the location selection. Due to financial restrictions companies cannot research each and every country that might be a potential host (Aharoni 1966) but will focus their investigations on those countries where the perceived psychic distance - differences in culture, customs, and language - is small. Hence the firm or rather the - potentially biased - location selection team will first look at the locations that, because of their obvious characteristics and the investor's experiences, appear to be similar to the home country considering culture, language, and the business methods.

Only after excluding countries presumed to be unfavorable due to psychic distance, classical economic factors are taken into consid- eration. Koechlin (1992), in a study about FDI by U.S. companies, found that second only to the potential market size (measured by host country GDP) the socio-political situation is considered more important than such factors as taxation, geographical distance, or labor costs. The socio-political situation thereby is presumed to be more favorable the better the investor's language is spoken. The next most important prerequisite is the stability of the political environment (i.e. the likelihood of social conflict disrupting economic life) and the state of political and economic dependency of the potential host country on the home country.

A measure intended to reduce transaction costs often applied by host country governments in order to enhance attractiveness for foreign investors, is to grant investment incentives such as tax breaks or im- port duty reductions. However, Wheeler and Mody (1992) argue that these - mostly short term - incentives are deemed less important by investors than the quality of infrastructure, stable international rela- tions, industrial growth, and expanding domestic markets.

2.4 The Eclectic Paradigm of International Production

John H. Dunning's "Eclectic Paradigm of International Production" (Dunning 1988, 1993a) is a general approach in explaining the extent and pattern of "activities of enterprises engaging in cross-border value-adding activities" (Dunning 1993a, p. 76). "It prescribes a con- ceptual framework for explaining 'what is' rather than 'what should be' the level and structure of foreign activities" (p. 76). It is supposed to explain the activities of MNEs and does not claim to be "a theory of the MNE per se" nor is it concerned with the financial aspects of FDI (p. 76).

According to the Eclectic Paradigm, in order to enable a company to successfully prosper through international production, it must have advantages over competing firms in three areas:

First, the fact that companies supply a foreign or a domestic market from a foreign location depends on their possessing of, or ability to acquire, assets or capabilities which are not available, at least not in the same terms, to a company from another country. The company must have ownership - or O - advantages. This does not only include tangible assets (e.g. personnel, capital) but also intangible assets such as technology, information, managerial, marketing and entre- preneurial skills, organizational systems, and market access (p. 77).

Second, these capabilities may be derived only at a certain location. These location-specific - or L - advantages include, besides endow- ments such as natural resources, also cultural, legal, political and institutional environments, as well as a favorable market structure (p. 77).

Third, the international firm, as well as the domestic company, is in- fluenced by market imperfections which it seeks to overcome by di - versifying its value-adding activities through realigning the ownership and organization of these activities. Market imperfection "reflects the inability of the qua market to organize transactions in an optimal way" (Dunning 1993a, p. 78). The use of common governance in an inter- national setting enables the firm to reduce production and/or transac- tion costs. At the same time, the company aims at maximizing the economic rent (if exceeding perceived risk) it expects from its owner- ship advantages. By applying hierarchical control, internalization - or I - advantages are generated and external markets are bypassed (p. 78-79).

How the company will precisely organize its international activities depends on the configuration of the O assets of the firm and the L assets of potential host countries and the home country itself. Fur- thermore, the coordination of the MNE's transactions is influenced by the company's perception about the extent to which its I advantages in organizing the O and L assets are superior to the ability of external markets to do so.

In order to explain the level and structure of foreign value-added ac- tivities of a firm, the following conditions need to be satisfied (Dun- ning 1993a, p. 79-80). The firm must posses ownership advantages which exceed those of firms from other countries who are active in the same market. If the company makes use of these advantages by internalizing markets, it will be able to increase its wealth creating capacity. The willingness to internalize markets depends on the company's perception about its ability to make use of its O advan- tages on its own, rather than by licensing or selling them of. Once the decision to make use of its advantages by internalization is made, the company must decide if it wants to satisfy its global interests by producing in a foreign location which possesses L advantages com- pared with the home country as well as foreign countries. Finally the configuration of the OLI advantages the firm possesses must be con- sistent with its long term strategic planning.

Dunning (1993a, p. 142-146) gives an overview of empirical evidence about O, L, and I advantages that have been found to influence a company's decision on whether to go international and if it decides to do so, where to go and how. The main factors are summarized as follows:

O advantages are mainly derived from a superior quality of goods or services and/or the possibility to produce these at lower cost. Trade- marks, brandnames and the ability of customization to the local needs are other important factors. There are differences in the perception of advantages depending on the home country of the enterprise. The differences stem from diverse approaches to organization and are more culture or firm specific and less industry specific. In addition experience effects of the particular firm play a major role in the perception of its O advantages.

When it comes to the decision on where to locate FDI, the stage of development of both the home and the host countries are important. Political stability is the single prerequisite that must be given in all cases. However, political stability alone is not sufficient. Other factors depend to a great extent on the MNE's strategic goals. Three types of investments have to be distinguished: Market-seeking invest- ments, resource-based investments and efficiency-seeking invest- ments.

For the market-seeking firm such factors are of paramount impor- tance as size and growth of markets, competition, production costs, labor costs, availability of space for a production unit, necessary product customization, transfer costs (e.g. transport costs, tariff bar- riers), import restrictions, the need for risk diversification, the lack of possibility to expand in the home country, and the relative costs of producing in a foreign country. Skilled, productive labor, the quality of infrastructure for transport and communication, proximity to clients, familiarity of language, and the availability of specialist services also are of significant importance.

For a resource-seeking firm it is clear that it will want to go where the resources are. However, the availability of skilled labor, a reasonable infrastructure, and a favorable institutional and legal framework are complementary assets that are prerequisites for this kind of MNE activity.

The efficiency-seeking companies must be divided in those engaged in taking advantage of differential costs of factor endowments and those engaged in economies of scale or scope. The first is looking for low production costs and low real costs of unskilled or semi-skilled labor. Government incentives are much more important to the effi- ciency-seeker than to the market- or resource-seeker. For the sec- ond, which is usually more capital or technology intensive, skilled labor, low transport and communication costs, and an appropriate economic and cultural environment, are of significant importance.

The decision to internalize can be seen as a choice between direct investment and non-equity activities (referred to as 'licensing' e.g. by Dunning 1993a, p. 145). Companies seem to prefer FDI over licens- ing in order to protect themselves against supply disruptions, price hikes, and revealing critical information to competitors. Furthermore, companies do not want to give up control over marketing, after-sales services, pricing, and quality management due to a fear of losing their flexibility towards processes or markets. More often than not, a qualified licensee can not be located or no agreement on the value of the O advantage can be found. Unsatisfactory experiences with mar- keting and distribution agents seem to play a major role in the deci- sion of the firm to take over control itself. Dunning also found evi- dence that the success of internalizing is country specific (Dunning 1993a, p. 146).

The following tables give an extensive overview of the determinants for multinational enterprise activity, i.e. the OLI advantages companies need to possess in order to engage in FDI.

Table 2.2 The Eclectic Paradigm of International Production

illustration not visible in this excerpt

Source: Largely adopted from Dunning 1993a, p. 81

Table 2.3 Some Illustrations of how OLI Characteristics may vary according to Country, Industry, and Firm specific Circumstances

illustration not visible in this excerpt

Source: Largely adopted from Dunning (1993a), p. 84

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