Market-seeking investment is one of the types of foreign direct investment. According to Rajneesh Narula and John Dunning, it occurs when companies internationalize to a particular country because they want to supply this particular market with goods or services to grow in that market, and to be competitive within the industry as well as to provide opportunities to achieve production economies of scale. To benefit from the production economies of scale requires a sizable population and the ability of the market to support the expected demand on which the investment is based. Therefore, Dunning states that market-seeking foreign direct investment is based on a single central location (L) advantage. According to Narula and Dunning, market-seeking investment becomes preferable either if there are substantial barriers to exporting from the home country or if the local markets offer potential foreign investors significant opportunities to achieve scope and production economies of scale as well as a chance to grow.
Therefore, for John Dunning, the most important reason for market-seeking investment is the attitude of host governments toward such investment and their encouragements. However, there are four other reasons to explain why and how firms engage in market-seeking investment in foreign markets through a subsidiary.
Companies engage in market-seeking investment in foreign markets through (1) becoming accustomed: When goods and services are modified to local culture, to indigenous resources and to standards, companies can survive and become more successful in a foreign environment. In particular, it is commonly believed that if foreign companies do not adapt themselves to local customs, they might find themselves disadvantaged compared to local firms; (2) lowering costs: One of the most important reasons for companies to establish a subsidiary in a foreign market is to reduce transportation costs in that particular market. Otherwise, serving that market from a distance by exporting from the home market to the foreign market would be much more expensive; (3) following customers or suppliers: When main suppliers or customers move overseas, the firm may need to follow them in order to retain their business. If they do not do this, there is a high risk that they might lose their business to another competitor; and finally, (4) global positioning: A multinational company establishes subsidiaries as part of its global production and marketing strategy to have physical presence in the leading markets served by their competitors.
Therefore, John Dunning, Bruce Kogut, and Magnus Blomstrom explain that companies aim either to maintain existing markets or to penetrate new markets. Nevertheless, it is argued that businesses are more likely to be pushed toward this type of investment out of fear of losing a market rather than discovering a new one.
According to UNCTAD Global Survey results, market-seeking investment mainly concentrates on industries such as chemicals, food, finance, transport, and communication largely because of local or neighboring multinational companies and their specializations. The multinational companies from a few developing countries specialize in manufacturing industries like China, information technology (IT) services like India, and consumer electronics like Korea, and invest mainly in other developing countries.
In addition, the motives of multinational companies from developing countries are substantially different from the motives of multinational companies from developed countries in the same industry. Whereas multinational companies from developing countries invest in extracting oil or gas for the reason of market-seeking investment, multinational companies from developed countries invest in these industries for resource-seeking motives. According to the UNCTAD World Investment Report, foreign direct investment in neighboring countries is the most common feature of internationalization because of cross border spillovers, factor similarities, and cultural familiarities in different markets.
- John Dunning, Multinational Enterprises and the Global Economy (Addison-Wesley, 1993);
- John Dunning, Bruce Kogut, and Magnus Blomstrom, Globalization of Firms and the Competitiveness of Nations (Institute of Economic Research, Lund University, and ChartwellBratt, 1991);
- Gilpin, U.S. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment (Basic, 1986);
- Rajneesh Narula and John Dunning, Globalisation and New Realities for Multinational Enterprise-Developing Host Country Interaction, MERIT Occasional Papers 2/98-015 (1998);
- Rajneesh Narula and John Dunning, “Industrial Development, Globalisation and Multinational Enterprises; New Realities for Developing Countries,” Oxford Development Studies (v.28/2, 2000).
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