Location Decisions

Determinants of location choice for MNCs in developed and developing countries

C Brown

Introduction

During the last thirty years a gradual shift has occurred from focusing on national economies to that of a global economy, which is known as the process of globalization. The shift has occurred via transportation advancements and telecommunication technology, resulting in a minimization of the importance of location and distance. During that same period the transition from socialism to capitalism was occurring in European and Asian countries. (Bevan, Estrin, 2004) The world economy is growing and as a result Foreign direct investment (FDI) is increasing at a faster rate than that of world trade, world output, and world GDP. (Yavan, 2010)

Foreign direct investment is a component of globalization in that for a global economy to exist, FDI must occur. FDI is also significant due to the benefits that it provides multi-national corporations (MNCs), host countries, and home countries.

Host countries are desirous of attracting FDI because it aids economic development. FDI in particular can provide a country with: knowledge in management and marketing, capital, employment, competition to domestic firms, and advanced technologies. (Hamida, 2009; Bevan, 2004; Du, 2010; Cheng, 2000) In order for countries to attract FDI they must first understand the factors that influence MNCs when deciding where to locate their operations. (Yavan, 2010; Sridhar, 2010). Studying MNC locational determinants can also provide countries with guide which will enable them to focus on areas that require improvement in attracting FDI, while continuing to focus on improving their strengths.

Key concepts

Some key concepts that are discussed in the body of the paper are generally defined below.

Transition economies are defined as economies that are in the process of changing from a central economy towards a market economy. (Bevan,2004a; Bevan, 2004b)

Location economies are firms that engage in value creation activities in locations that are optimal for performing the activity

Market seeking is defined as a foreign based MNC activity in which firms seek a market for its goods. (Dunning, 2000)

Efficiency seeking is a foreign based MNC activity in which firms seek efficiency improvements. (Dunning, 2000)

Institutions refers to things that characterize a market economy such as: contract enforcement, property rights protection, government efficiency, and government intervention (Du, Lu, Tao, 2011)

Multinational corporations' principle goals are to increase their profitability. The underlying consensus that appears in the review of different researchers is that MNCs will pursue the locations where they will gain the most returns on their investment. Determinants vary and coincide for MNCs among different countries. This paper focuses on the most important determinants for MNCs as reported by different researchers.

Costs and Quality

Research conducted by Bevan and Estrin (2004) found that the majority of FDI from MNCs to Central European countries were market and efficiency seeking. This study examined the countries of: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, and Ukraine. One of the ways that firms attempt to increase their efficiency is by reducing its costs. Bevan et al., (2004a) concluded that lower labor and transactional costs were the principle influencers for MNCs to locate in Central European countries. Additionally, Fung, Iizaka, Parker (2002) concluded that labor-intensive firms, which were exporting goods to other markets, located in China in order to keep costs low. Low labor costs were also an important determinant for MNCs that wished to invest in Bulgaria. (Bitzenis, 2006)

In China and Turkey the quality of labor was much more important than the cost. (Fung, 2002; Yavan, 2009) Labor quality was significant to MNCs who required a skilled work force and were able to utilize regional educational levels to determine suitable labor sources. In China this was typically the case with capital and technology intensive industries. Information costs were also an important determinant for MNCs within Turkey, and a significant amount of MNCs found costs cheaper in larger cities such as Istanbul.

Accession into the European Union

Bevan and Estrin (2004a) found that countries integrating into the European Union (EU) successfully, were encouraging FDI. Countries that become EU members must meet requirements for admission, among which imply political stability, and sufficient development of institutional and legal environments. Bevan et al., (2004a) determined that Accession into the

EU acts as a political and economic signal to MNCs, which lessens their investment risk and acts as an investment influencer.

Market size

In the case of market size, researchers found MNCs considered this an important determinant in Central and Eastern European countries, and China. (Bevan, 2004; Fung, 2002; Cheng, 2000; Bitzenis, 2006) Market size appears to be a principle influencer when foreign firms require a new market in which to sell their product. This was evident in China particularly in firms that sold technology products. (Fung, Iizaka, Parker, 2002)

Infrastructure

Infrastructure as an important FDI determinant was found by some researchers for MNCs that wished to locate in China, Mexico, and India. (Sridhar, 2005; Sridhar, 2010; Cheng, 2000; Fung, 2002; Jordaan, 2008) Sridhar argues that MNCs in India would not have located there without infrastructure in place, which includes electricity, telecom, roads, and banking. Her findings were consistent with what other researchers had concluded regarding India.

Fung, Iizaka, and Parker (2002) found labor-intensive MNCs were more influenced by infrastructure. This was largely because these companies were exporting their goods which required access to good highways in order to reach seaports or airports. Also, Jordaan (2008) concluded that for MNCs in Mexico it was important that a good communications network was established.

Proximity

Bitzentis (2006) concluded that MNCs that entered into Bulgaria did so in order to take advantage of not only of its geographic