The Motives For Foreign Production
Foreign investment my be divided into two components: portfolio investment, which is the purchase of stocks and bonds solely for the purpose of obtaining a return on the funds invested, and direct investment, by which the investors participate in the management of the firm in addition to receiving a return on their money. Direct investment is differently motivated than is portfolio investment.
A foreign investment is treated as direct if the investing entity has a financial equity interest in a foreign company sufficient to give it some control or influence over the latter's decision taking. Portfolio investment is an expression of faith in the existing organization and management of the company, and is undertaken to earn profits or to gain capital appreciation.
Portfolio investment is presumed to involve passive management whereas direct investment is presumed to involve active management.
It can be identified four types of foreign production (direct investment) undertaken by multinational corporation:
- Natural resources seekers. These enterprises are prompted to invest abroad to acquire particular and specific resources at a lower real cost than could be obtained in their home country (if, indeed, they are obtained at all).
- Market seekers. These are enterprises that invest in a particular country or region to supply goods or services to markets in these or in adjacent countries.
- Efficiency seekers. The motivation of efficiency seeking FDI is to rationalize the structure of established resource based or market-seeking investment in such a way that the investing company can gain from the common governance of geographically dispersed activities.
- Strategic asset or capability seekers. These MNE engage in FDI, usually by acquiring the assets of foreign corporations, to promote their long-term strategic objectives -especially that of sustaining or advancing their international competitiveness.
There are other reasons for MNE activity which do not easily fit into the four categories just described:
- Escape investment. Some FDI is made to escape restrictive legislation or macro-organizational policies by home governments.
- Support investment. The purpose of these investments is to support the activities if the rest of the enterprise of which they are part.
- Passive investment. Most direct investments vary in the degree of active management pursued by their owners, ranging from "complete" to "non-existent". There is some suggestion that the passive element in the foreign operations by MNEs may be increasing. Those which veer to the passive end of the spectrum are of two kinds. The first kind of passive investment are those of large institutional conglomerates that specialize in the buying and selling of companies. The second kinds of passive investment is that made by small firms and individual investors in real estate. Although classified as direct, these purchase have more the attributes of portfolio management. The problem of identifying the passive or portfolio component of a direct investment is not unique to FDI.