Location motif of multinational companies

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The collective term location motive of multinational companies describes in the economic literature reasons for the activities of multinational companies in different countries. The location question shows why the production of one and the same good takes place not only in one country but in several countries (differentiation from internalization theory ).

Definition of terms

For the attractiveness of foreign markets and the related location decisions of multinational companies for the production of a good, essentially the same factors are decisive that are also the causes of the foreign trade theory .

Location motifs in detail

There is no all-encompassing theory on the development of multinational companies, so the question of location motives as a partial theory has only been partially clarified.

In the following, essential location motives are shown, which are derived from the development factors of the foreign trade theory and can occur both independently of one another and in combination.

  • A company produces goods abroad because the place of production is often determined by the resources available. This means that companies settle where the raw materials required for production and cheaper energy are available. This leads to a reduction in transport costs. In addition, a production facility at the place of consumption can secure the supply of raw materials and reduce the risk of short-term delivery bottlenecks. If raw material extraction is included in the production process, it can be adapted directly to the company's needs. There is no intermediate trade and the costs are further reduced.
  • If the finished goods are sold at the place of production, the production and transport costs also decrease, since the goods are not exported to foreign sales markets. Trade barriers such as tariffs only play a subordinate role.
  • The sale of goods in different countries requires the products to be adapted to the respective sales market due to the cultural and religious differences between the countries. Foreign production facilities simplify the manufacture of market-specific products and also enable faster reactions to market changes.
  • Tax conditions that apply abroad can be beneficial for companies, as can existing investment incentives. They are therefore an argument in favor of establishing branches.
  • Cheaper wages in developing countries compared to industrialized countries reduce personnel costs and thus lead to lower production costs for a company. They are therefore an incentive for foreign production facilities.
  • Since multinational corporations are typically larger than other companies, more resources are devoted to research and development. Lower costs for research and development in other countries are therefore another location aspect for companies. In addition, research and development activities in certain technological fields are concentrated in a few regions around the world (example Silicon Valley). This particularly attracts companies that are active in the field of basic research and work less production or customer-oriented.
  • A company can secure a monopoly rent for itself by taking over and controlling branches abroad . Here the company-specific advantages (such as patents, reputation of the company, special skills of the management) are exploited to their full extent, which are not shared with any other company.

Entry into foreign markets

There are several ways of participating in the market in previously untapped economic areas. The specific skills of the company are a prerequisite for the successful implementation of the strategies.

If no location is set up in the new market itself, access to the new market takes place by exporting the goods produced.

If cooperation with companies already active in the new market is sought, this is usually realized through joint ventures . The reasons for this lie in the high transport costs and customs duties as well as unfavorable production conditions, which often make production in the home country seem unsuitable.

Joint ventures often go hand in hand with the granting of licenses to third-party producers. For many companies, such disclosure of their patents, production and sales secrets means a loss of control. If the transfer of knowledge turns out to be difficult in this way, the advantages of internalization outweigh the advantages of the company and the acquisition of foreign subsidiaries and branches via international direct investments is an option. This involves the transfer of resources and a shift in capital flows, with control of the branch being acquired and becoming part of the corporate structure.

Individual evidence

  1. ↑ a b c d e P. Krugman, M. Obstfeld; International Economy, 7th edition, Munich a. a., 2006, p. 220
  2. ↑ P. Krugman, M. Obstfeld; International Economy, 7th edition, Munich a. a., 2006, p. 219
  3. ↑ H. Adebahr, W. Maenning; Foreign trade and world economy, Duncker & Humblot, Berlin, 1987, p. 305
  4. ^ A. Sell; Introduction to international economic relations, 2nd edition, Oldenbourg-Wissenschaftsverlag, 2003, p. 199
  5. ↑ H. Adebahr, W. Maenning; Foreign trade and world economy, Duncker & Humblot, Berlin, 1987, p. 304
  6. ↑ a b c WJ Ethier; Modern Foreign Economic Theory, 4th edition, Munich, 1997, pp. 385–386
  7. ↑ M. Fritsch; Strategies to improve regional innovation conditions - An overview of the state of research, Technical University Bergakademie Freiberg, Freiberg working papers No. 19, 1999
  8. ^ WJ Ethier; Modern Foreign Economic Theory, 4th edition, Munich, 1997, p. 384
  9. ↑ a b c A. Sell; Introduction to international economic relations, 2nd edition, Oldenbourg-Wissenschaftsverlag, 2003, p. 201
  10. ↑ H. Adebahr, W. Maenning; Foreign trade and world economy, Duncker & Humblot, Berlin, 1987, p. 303
  11. ↑ P. Krugman, M. Obstfeld; International Economy, 7th edition, Munich a. a., 2006, p. 218

bibliography

  • Hubertus Adebahr, Wolfgang Maenning: Foreign Trade and World Economy , Duncker & Humblot, Berlin, 1987
  • Armen A. Alchian: Economic Forces at Work , Liberty Press, Indianapolis, 1977
  • Jörn Altmann: Foreign trade for companies European internal market and world market , Gustav Fischer Verlag, Stuttgart, Jena, UTB 1750, 1993
  • Jörn Altmann: Foreign trade for companies , Lucius & Luciu, Stuttgart, UTB 1750, 2001
  • Gustav Dieckheuer: International Economic Relations , R. Oldenbourg Verlag, Munich, Vienna, 2001
  • Wilfried J. Ethier: Modern Foreign Economic Theory , R. Oldenbourg Verlag, 2nd edition, Munich, Vienna, 1991
  • Paul R. Krugman, Maurice Obstfeld: Internationale Wirtschaft , Pearson, 7th edition, Munich a. a., 2006
  • Ram Mudambi: The location decision of the multinational enterprise , In: Philip McCann: Industrial location economics , Elgar Verlag, Cheltenham [u. a.], 2002, pp. 263-285
  • Axel Sell: Introduction to international economic relations , Oldenbourg-Wissenschaftsverlag, 2nd edition, Munich, 2003