Firms investing in a foreign country face many obstacles including unfamiliar legal and regulatory structures, cultural differences, and the challenges of managing expatriates and production across time zones. So why do they do it? What makes the effort of investing in a foreign country worthwhile? These questions have been extensively probed in the economics and business literature.1
Simply put, a firm's direct investment in a host country is driven by one or a combination of the following three reasons:2
• Market seeking: The firm wants to participate in markets that are more dynamic and/or growing faster than its home market, or in markets where there is less competition for its products or services. If there are barriers to trade (tariffs, quotas or regulations that impede imports), direct investment can be a way of jumping the barriers. This was a major motivation for direct investment in industrialized countries when tariffs were high and quotas were important, but it is of declining importance today.
• Resource seeking: The firm is looking for natural resources that it cannot find (or find as cheaply) in its home market. These resources include forests, minerals, oil and natural gas, and they are usually exploited for export markets. In addition to resource-based companies, other manufacturing corporations such as chemical producers invest in facilities close to these resources in order to use them as materials in the production of goods.
• Efficiency seeking: The firm wants to organize its global operations in ways that maximize its strategic advantage while minimizing production, transportation and management costs. Its strategy is to take advantage of the relative strengths of countries.
For example, the strategy may include access to cheap labour for certain elements of production and to highly qualified workers for other activities. It may also include the acquisition of specialized know-how or advanced technologies available in a given country. Interviews done as part of this research project show that the efficiency-seeking motivation for FDI is becoming increasingly important, a result supported by other surveys.3 This trend has been greatly accelerated by improvements in transportation and logistics systems and by the integration of low-cost, high-speed global data and communications networks.