Belasco 15
the relationship I demonstrate in order to provide a greater understanding of the “race to
the bottom” in LDC political economies.
Business Incentives
Businesses wishing to invest abroad straddle incentives of profit and stability.
Other authors have made this clear, but the incentives need to be disaggregated in order
to understand what leads firms to consider an LDC investment locale relatively more
attractive than others. Investing firms balance the incentives of profit and stability, two
conditions that firms rank as paramount for investment decision criteria.
34
Profit Incentives
Since firms are attracted not to perfectly stable investments, but to investments
where instability is mitigated by the potential for profit, it is clear that firms do not avoid
unstable investments entirely – some risk exists in all forms of investment. However, as
discussed above, certain political and economic developments can lead to a reduction in
investment activity, and other economies where these risks are better mitigated by profits
appear more attractive. Firms’ profit incentive provides motivation to invest abroad, and
this incentive is realized through the framework of Dunning’s OLI theory of
investment.
35
Firms seek to invest abroad based on reasons of ownership, location, and
internalization. Each provide justification as to why a firm would seek to expand
production of its goods and services beyond merely licensing, producing at home and
exporting, expanding into a new line of business at home or indulging in portfolio
investment in the host country.
34
Hatem, Fabrice. 1997. International Investment: Towards the Year 2001. New York, United
Nations.
35
Dunning, 1998.
Belasco 16
Firms possess ownership incentives to invest abroad because they own an asset –
a patent, a product, a style of governance or other intangible assets – that would provide
them with an advantage if they chose to invest abroad. Ownership across borders permits
economies of scale and monopoly power based on those items the firm owns. Li and
Resnick’s argument that provides evidence as to the importance of property rights finds
this argument as a compelling component of firm investment decisions.
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Firms possess location incentives to invest abroad because the host location
possesses specific qualities that cannot be obtained in the home market or elsewhere.
Such location incentives consist of: input cost, productivity, property rights, stability, the
presence of a favorable macroeconomic climate and preferential government policy that
favors multinational investment. Such location advantages constitute the “comparative
advantage” of FDI theory, stating that other things being equal, firms choose a location
because they find the conditions listed above as presenting the greatest advantages for the
firm within the host economy where investment has occurred.
The final set of incentives that a firm possesses consists of the advantages firms
gain from internalizing the business activity abroad. Firms that invest abroad determine
that the advantage of retaining hierarchical internal control of the production process
provides greater benefits than licensing the product for production abroad or exporting to
the host economy. Hierarchical control becomes necessary to consider in situations where
concerns exist about the possibility of licensees backsliding on their respect for the
property rights of a firm that has chosen licensing.
Firms invest abroad because they expect to gain from the level of expansion they
undertake. Firm investment indicates that advantages that firms derive from expansion
36
Li and Resnick, “Reversal of Fortunes?” 179.
Convention