4.4.6 Location-specific advantages
These are advantages for production arising from assets or resource endowments which exist in specific localities and thus attract FDI. Three examples illustrate why firms establish production facilities where these assets are located:
- The world's oil companies invest where oil is located and they combine their technological and managerial skills with the location-specific resource.
- Household appliance manufacturers such as Electrolux and Kambrook invest in China which has a large pool of well-educated low-cost labour.
- Corporations from many countries invest in Silicon Valley where cutting-edge semi-conductor research and development is located.
These examples constitute what economists call externalities (also called 'spillovers' (Hill, 2005, p. 228). An externality is an effect exerted by the process of producing (or consuming) goods which by-pass the price system.
Before beginning the section on vertical FDI, work through the more detailed explanation of horizontal FDI in your textbook.
In your text
Hill 2005, Chapter 6, pp. 224-229.
Activity 4.2
Compare and contrast the explanations of horizontal FDI: Knickerbocker's theory, Vernon 's PLC theory, and the market imperfections theory. Which theory do you think offers the best explanation of the historical pattern of horizontal FDI? Why?
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