Increasing Agricultural Productivity:
Encouraging Foreign Direct Investments in the COMCEC Region
21
(Natural) resource seeking MNEs typically invest abroad to acquire specific resources at a lower
cost than would be obtained in the MNE’s home market (if available at all). Resource seeking MNEs
are often primary producers who want to secure physical supply of resources. Most of FDI during
the early 1990s was driven by US and European MNEs seeking to secure sources of supply of
minerals and primary products. Up to the Second World War three fifths of the accumulated
foreign direct capital stock was of this kind, while by the mid 1980s resource-seeking FDI had
declined to about one third of worldwide MNE activity 26.
The bulk of FDI is market oriented to supply goods or services in the investing market or
(adjacent) third markets. In most cases these markets were previously served through exports
from the domestic market.27 There are four different reasons for market-seeking FDI:
Firstly, firms may have to follow main suppliers or customers that have set up businesses
overseas. This is a common practice in the automotive industry, where the Original Equipment
Manufacturers (OEM) such as BMW, Ford, and Hyundai demand that their first tier suppliers
will also relocate to secure just in time management.
Secondly, MNEs may favour a strategy of “thinking global and acting local”, implying that
products have to be adapted to local tastes.
Thirdly, it may be cheaper to serve a foreign market or adjacent market locally than supplying it
from a distance. This last rationale is especially country- and industry- specific. Some third
markets cannot be served through exports from the domestic market, due to local content
requirements, tariff barriers or import-substituting trade regimes. Not investing in the foreign
market would harm the competitive position of the firm.
The fourth and increasingly important reason for market led FDI is “that an MNE may consider it
necessary, as part of its global production and marketing strategy, to have a physical presence in
the leading markets served by its competitors”.28 This type of strategic market seeking FDI is
largely driven by a defensive rationale.
The key motivation of efficiency-seeking investments is to rationalize the structure of
established resource-based or market-seeking investments.29 Efficiency-seeking FDI takes place
among MNEs seeking plentiful supplies of cheap and well-motivated unskilled or semi-skilled
labour (manufacturing and service MNEs from countries with high wage costs). This type of FDI is
often located in populous and industrializing economies, such as Indonesia, Turkey and Bangladesh
(often in the form of export processing zones –EPZs), but also to a lesser extent in Eastern European
countries such as Romania.
26 Dunning, 1993.
27 Ibid
28 Dunning, 1993: 58-59.
29 Ibid