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Investment Generation Toolkit

Module 1: About FDI

Step 1: Why do companies engage in FDI?



There is no single definition that applies to all types of FDI, and TNCs certainly do not label their activities in this way. Instead, it is principally the academic community that has set out to define the varieties of FDI. One view breaks foreign investment into four distinct types: resource seeking, market seeking, efficiency seeking, and strategic asset seeking. Having a clear understanding of the investor's motivation helps you to target more effectively particular varieties of investors for your location.

FOREIGN DIRECT INVESTMENT CLASSIFIED BY MOTIVATION
Resource seeking
  • FDI in natural resources (minerals, raw materials, and agricultural products)
  • FDI seeking low-cost or specialized labor
Market seeking
  • FDI into markets previously served by exports, or into closed markets protected by high import or other barriers
  • FDI by supplier companies following their customers overseas 
  • FDI that aims to adapt products to local tastes and needs, and to use local resources
 Efficiency seeking
  • Rationalized or integrated operations (regionally/globally) leading to cross-border product or process specialization
 Strategic asset seeking
  •  Acquisitions and alliances to promote long-term corporate objectives


Most FDI in developing and transition economies is resource seeking. This type of investment aims to exploit a country's comparative advantage. For instance, countries rich in primary materials, such as oil or minerals, will attract companies seeking to develop these resources. Low-cost or specialized labor are two other factors that attract resource-seeking FDI. Resource-seeking FDI is generally used to produce goods for export.

In contrast, market-seeking investment is aimed at reaching local or regional markets, often including neighboring countries. Companies making this type of investment typically manufacture a wide variety of household consumer products or other types of industrial goods in response to actual or future demand for their products. In some cases, market-seeking FDI occurs as supplier companies follow their customers overseas. For example, an auto components manufacturer may follow a car producer. Market-seeking investment is often defensive and is used by companies to try to circumvent real or threatened import barriers. A liberal trade regime is essential if the investor wishes to serve neighboring or overseas markets.

Efficiency-seeking FDI frequently occurs as a follow-on form of investment. A TNC may make a number of resource- or market-seeking investments, and over time, it may decide to consolidate these operations on a product or process basis. Companies are able to do this, however, only if cross-border markets are open and well developed. As a result, this form of FDI is most common in regionally integrated markets, most notably in Europe and Asia. 

TNCs also may undertake smaller-scale product rationalization among a few neighboring countries. This type of investment is illustrated by Nestlé's North African and Middle Eastern affiliates. Each affiliate produces a specialized product for the regional market. Each affiliate also imports other products from sister affiliates in neighboring countries. Taken together, the region has access to a full spectrum of products, but each affiliate is responsible for the production of only a small segment.

Strategic asset-seeking FDI occurs when companies undertake investments, acquisitions or alliances to promote their long-term strategic objectives. For example, a TNC may form a strategic alliance with a company based in another country to jointly undertake mutually beneficial R&D. Strategic asset-seeking FDI is common in industrialized countries.