Dynamics of Industrial Location

Direct Foreign Investment

Foreign direct investment (FDI) is referred to throughout the book and it is the focus of chapters 11 and 15. As Ian MacLachlan pointed out to me recently, however, no explicit definition of FDI is offered. Simply put, and slightly paraphrasing Dunning's (1988: 1) words, FDI comprises activities that are controlled and organized by firms (or groups of firms) outside of the nation in which they are headquartered and where their principal decision makers are located. In the context of the manufacturing sector, FDI is conventionally thought of in terms of branch plant or subsidiary company operations that are controlled by parent companies based in another country. In the terms of Figure 11.1, the foreign country is the host economy, the country that receives the FDI, and the country where decision making control resides is the donor (or home) country.

An important distinction is normally made between FDI and portfolio investment. Thus, portfolio investment, which is not discussed by the text, is the supply of capital ('money') from a lender (for example, a bank) to a borrower (for example, a manufacturing company or railway company) in an agreement which requires borrowers to pay back the 'loan' plus interest (the rate of return to the lender) over a number of years. The distinction between FDI and portfolio investment may get entangled and clearly shareholders (equity owners) are interested in a rate of return. Indeed, 'maximizing shareholder value' has become a widely touted goal of many corporations in present times. Nevertheless, there are clearly important differences between FDI and portfolio investment. As Dunning (1988: 15) points out, FDI involves issues of direct control as resources are transferred internally within firms rather than externally between independent firms. In the case of FDI, parent companies have control over both day to day operations of their investment and their nature and scope in the long run. It is true that parent companies often devolve many aspects of decision making to subsidiaries or branch plants themselves (see page 286 of the text), but even so parents have 'ultimate' control over strategy and the right to change the decision making autonomy of subsidiaries. Moreover, in the case of FDI (but not portfolio investment) it is not simply capital that is transferred but potentially a range of resources (technology, management, marketing skills). Indeed, it is the return on these resources (what the text refers to as 'entry advantages') that is of primary concern to FDI while it is the rate of return on capital that motivates the supply of portfolio investment.

It might also be noted that in the context of FDI, control and ownership are related but different concepts. The classic reference, cited in your text, is Berle and Means (1932) who noted that ownership of corporations by shareholders does not imply control by these same shareholders. Their point was that the great mass of shareholders may have little to say in the direction of companies. In recent decades, the point is frequently made that minority 'institutional' shareholders may exercise effective control. Dunning (1988) and Dicken (1976) provide good discussions of the issues relating to ownership and control. In geography, the locus of control is normally taken as the location of head-offices, regardless of whether the key decision makers are shareholders or not, and regardless of where the shareholders live.

Tables 11.2 and 11.3 in Dynamics of Industrial Location only refer to FDI and as the note in the Oops file mentions, not all countries and regions are listed so that the data from do not add to 100%. The most important omissions are 'other developed countries' (e.g. Australia, South Africa) and in the early decades 'other Europe'. In Table 11.3 the UK and Germany figures are listed in brackets because they are part of the 'Western Europe' totals. In this same table, the brackets around the figures for Japan, Latin America, Africa and Asia should be ignored (they are typos).