A Model of Asset-seeking Foreign Direct Investment Driven by Demand Conditions

Abstract This paper presents a simple game theoretic model in which a firm may undertake foreign direct investment (FDI) in order to gain access to favourable demand conditions as described by Porter (1990). The purpose of the model is to illustrate an important motivation for foreign direct investment: to secure access to certain types of valuable assets by participating in a particular foreign market. The implications of this asset-seeking FDI are then discussed, including the need for firms to manage the process of transferring knowledge from subsidiary to parent carefully and for public policy makers to recognize that the public policy implications of asset-seeking FDI are very different from those of FDI as it has traditionally been viewed. Resume Le present article traite d'un modele simple inspire de la theorie des jeux simple selon lequel une societe peut engager des investissements etranger directs (lED) afin d'acceder a des conditions favorables en ce qui concerne la demande, tel que Porter le decrit (1990). Le modele a pour objectif de mettre en evidence une motivation importante de l'investissement etranger direct, celle d'assurer l'acces a certains types d'actifs de valeur en participant a un marche exterieur particulier Nous debattrons ensuite des consequences de l'investissement etranger direct en quete d'actifs, notamment de la necessite pour les societes de gerer avec soin le processus de transfer des connaissances entre filiale et societe mere. Nous nous pencherons egalement sur le besoin des responsables de l'elaboration des politiques d'admettre que cet IED en quete d'actifs a, sur les politiques gouvernementales, des consequences tres differentes de celles qui ont ete traditionnellement etudiees. Foreign direct investment (FDI) has mainly been characterized as being motivated by a firm's desire to exploit its existing proprietary advantages abroad (the internalization model) or as part of the firm's equilibrium strategy in a game of imperfect international competition (Graham & Krugman, 1991). The goal of this paper is to illustrate a third general motive for undertaking FDI: to profit by securing access to certain types of valuable assets1 by participating in a particular foreign market. I call this type of FDI "asset-seeking FDI. " In contrast, FDI to exploit existing proprietary advantages could be called "asset-exploiting FDI. " In this paper, asset-seeking FDI will be explored using a simple gametheoretic model. The assets being sought in the model presented are attractive demand conditions, as described by Porter (1990). Asset-seeking FDI is an important concept that should be developed more fully for several reasons. First, it is important to develop an understanding of this type of FDI as it is a useful tool for managers to apply in formulating international strategies for their firms. Second, as will be discussed later in the paper, the welfare implications of asset-seeking FDI are very different for the host and home nations from those of asset-exploiting FDI. Finally, asset-seeking FDI can help to explain the overall pattern of FDI flows in the world economy. Specifically, asset-seeking FDI can explain some of the large two-way flows of FDI between nations within a single industry. Asset-seeking motivations for FDI are complementary to the more traditional internalization motives but have not been exhaustively studied in the literature. Caves (1998) summed up the literature on asset-seeking FDI by stating that "Asset-seeking FDI has been much discussed but few sharp tests have been devised to distinguish it" (p. 13). In an earlier review of the literature, Caves (1996) mentioned extensive case study evidence that described asset-seeking FDI (e.g., Alsegg, 1971; Tsurumi, 1976; Yoshino, 1976) but cited only the work of Pugel (1985) and Wesson (1993) as providing broader empirical investigations of asset-seeking FDI. Elsewhere in the literature, Dunning (1993) described a group of multinational enterprises (MNEs) that he called "strategic asset seekers" (p. …