PD6 - Research Paper. Rozen-Bakher, Z. Technological Location Factors of Foreign Direct Investment (FDI): R&D Expenditure, Technological Strategic Assets, Technical Labour, and ICT Infrastructure
Rozen-Bakher, Z. Technological Location Factors of Foreign Direct Investment (FDI): R&D Expenditure, Technological Strategic Assets, Technical Labour, and ICT Infrastructure. Research Paper, PD6. https://www.rozen-bakher.com/research-papers/pd6
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Rozen-Bakher, Z.
Technological Location Factors of Foreign Direct Investment (FDI): R&D Expenditure, Technological Strategic Assets, Technical Labour, and ICT Infrastructure
Abstract
This study explores how the technological location factors of a country affect the Multinational Enterprises (MNEs) activities, either in the host country or in the home country. More specifically, the study explores how the technological capabilities of a country namely, R&D Expenditure, Technological Strategic Assets (e.g. patents), Technical Labour, and ICT infrastructure influence the location decision of MNEs when they conduct, either FDI outward or FDI inward. The study concludes that the technological capabilities of a country are like ‘Live or Die’ in relation to the location choice of FDI and for the survival of the activity, thereby, without proper technological capabilities, MNEs won’t conduct FDI even if other location factors are attractive. Although, even if an MNE conduct FDI, but the technological capabilities fail to fulfil its promises, then it will impact the survival of the MNE’s activities, either in the home country or the host country. Thus, lack of appropriate R&D expenditure or lack of technological patents or shortage in technical labour or unreliable ICT infrastructure will determine the location choice of MNE, the types of activities and products, as well as if the activity has a chance for success or if it dooms to fail. Although, the study highlights the need to distinguish between R&D expenditure and patents in relation to the location choice of MNEs.
Keywords: Technological Location Factors, Foreign Direct Investment (FDI), R&D Expenditure, Patents, ICT
1. Introduction
The location advantages of Foreign Direct Investment (FDI) stem from the country's characteristics that are available to all companies that operate in the country (Dunning, 1981). The location advantages refer to the availability, cost and quality of the resources, assets and infrastructure in a country (Dunning, 1981). Hence, the ‘location-specific factors’ of a country characterise the country in relation to other countries (Dunning, 1981, 1988b) and thereby, determine the country's relative advantages compared to other countries. The location advantages of a host country influence the MNE's location decision when an MNE conducts FDI inward in host countries, while the location advantages of a home country affect the ability of the local companies to carry out FDI outward from the home country to host countries. In other words, there are two different perspectives at a country level: the perspective of the host country regarding location factors that affect FDI inward and the perspective of the home country regarding the location factors that affect FDI outward.
This study explores how the technological location factors of a country affect the Multinational Enterprises (MNEs) activities, either in the host country or in the home country. More specifically, the host country and its institutions have an essential role in creating technological capabilities for the benefit of the local firms and MNEs that operate in the host country. However, and may even more important, the technological capabilities in the home country influence the ability of domestic companies to engage in international activity, especially regarding the ability of domestic companies to carry out a significant amount of FDI inward in host countries (Ashford & Hall, 2018; Dunning & Lundan, 2008; Kemeny, 2010; Narula, 2014; Nelson, 1993). Hence, the technological capabilities of a country influence the types of products and services that MNEs enable to develop, produce, purchase and market worldwide. Besides, the technological capabilities also influence the quality of products and services, as well as the process and working methods of production, operations, management and marketing that can be implemented in the country, especially in the fields of E-commerce, R&D of technological patents and innovative web applications (Choquette et al., 2021; Di Minin et al., 2012; Gholami et al., 2006; Mrinalini et al., 2013; Landry et al., 2005; Rozen-Bakher, 2017; Terzi, 2011).
In spite of the above, we should keep in mind that there are significant differences between developed and developing countries in relation to technological location factors. The technological location factors in developing countries focus on the availability and quality of the technological infrastructure due to the existing poor infrastructure, while in developed countries, the focus is on the availability of technological assets, rather than on technological infrastructure because they already have a good technological infrastructure. That’s influence the MNEs’ criteria of the technological location factors in the host country, depending on the level of development. For example, in Africa, MNEs may examine whether there is a basic technological infrastructure for establishing the company's operations, such as the existence of an adequate ICT infrastructure, while in Western Europe, MNEs may examine the market potential for web applications and buying patents.
Considering the outlined above, this study examines four main technological location factors namely, R&D expenditures, technological strategic assets, technical labour force, and ICT infrastructure, which are supposed to influence the scope and types of MNEs' activities at a country level, either from the perspective of a home country or host country.
2. Technological Location Factors of FDI
2.1 R&D Expenditure
The R&D expenditure of a country has a huge impact on the technological innovation of the domestic companies that operate in the country (Callejón & García-Quevedo, 2005). In recent decades, there has been a dramatic increase in the R&D expenditures of many developed and developing countries to create technological assets (Dunning & Lundan, 2008). However, the global financial crisis in the past decade has led to a reduction in the R&D of MNEs' activities worldwide (Dachs, 2014). The R&D expenditure (Callejón & García-Quevedo, 2005) along with the creation of a supportive technological industry (Porter & Stern, 2001) in the home country impact the ability of domestic companies to develop technological products, as well as to conduct successfully export and FDI outward (Lall, 1992; Porter, 2008; Porter & Stern, 2001). The R&D expenditure helps companies to create technological assets (Callejón & García-Quevedo, 2005; Kogut & Chang, 1991). That's encouraging strategic assets-seeking FDI in order to maintain the firm's competitive advantages (Dunning & Narula, 1995; Porter, 2008; Porter & Stern, 2001; Rozen-Bakher, 2017), such as the R&D FDI that carried out in host countries like India, Israel and Finland (Dunning & Lundan, 2008; Porter & Stern, 2001). Nevertheless, MNEs also conduct FDI inward in host countries to acquire technological know-how in order to use it for R&D of technological assets in the home country, such as the R&D FDI outward from China to European host countries (Di Minin et al., 2012). Notably, there is a difference between countries regarding the R&D expenditure by sector. In many countries, R&D expenditure performs in certain sectors based on the expertise of the country, and thereby it also influences the FDI inward in these sectors (Mrinalini et al., 2013).
2.2 Technological Strategic Assets
The existence of technological strategic assets in a country is considered a significant factor in the country's technological capabilities. The technological strategic assets in a country refer to the technological assets owned by the companies who operate in the country, such as technological know-how, patents, technological innovations, and technical methods of work (Archibugi & Coco, 2004; Barney, 1991; Caves, 1996; Dunning, 2013b; Hamilton, 1997; Guimón et al., 2018; Shan & Song, 1997; Rozen-Bakher, 2017).
From the viewpoint of the host country, the existence of technological strategic assets in a host country encourages FDI inward, particularly in R&D activities (Dunning, 2013b; Guimón et al., 2018). Domestic companies with technological intellectual properties in a host country are considered as a target for cross-border M&As due to the MNEs' motive of strategic assets-seeking (Dunning, 2013b; Rozen-Bakher, 2017; Shan & Song, 1997). MNEs seek to acquire strategic assets, such as reputation, customer base, tactical knowledge, R&D capabilities, trade names, and technological assets (Barney, 1991) to increase the value and competitive advantages of the company over competitors (Amit & Schoemaker, 1993; Dunning, 1998; Porter & Stern, 2001). Acquiring technological assets helps to solve the company's commercial disadvantages, especially in situations where the company has inferior technology (Dunning & Lundan, 2008) that hinders its ability to compete in international markets. Many high-tech companies must maintain the technological innovation of their products to cope with the rivals' innovation to maintain their competitive advantages (Porter, 2008). In these situations, usually arises the dilemma of 'make-or-buy'. In the case of 'make', companies can develop a brand-new technology accordingly to the exact requirement of the firm's product, but without a promise for R&D success (Almeida, 1996; Feinberg & Majumdar, 2001; Rozen-Bakher, 2017). However, in the case of 'buy', companies can get it through acquiring a company that already developed the required new technology, which allows a fast market entry alongside the saving of the high costs of R&D (Almeida, 1996; Feinberg & Majumdar, 2001; Rozen-Bakher, 2017). 'Time to market' is critical for technological products because a delay in market entry with technological innovation that the competitors already sold it in the market could lead to a dramatic decline in the firm's sales until obtaining the required technological innovation. In these cases, companies first try to obtain the required new technology in the home country. Yet, if the required technology is not available in the home country or it is too expensive, then the domestic companies try to get it by acquiring foreign companies in host countries that already developed the required new technology, such as the buying of Israeli start-ups by foreign companies due to technological strategic assets motives.
However, from the viewpoint of the home country, the existence of technological strategic assets in a home country contributes to the entry of domestic companies into international activities (Dunning, 2013b; Dunning & Lundan, 2008) because of the companies' ability to exploit the availability of local technological assets (Tseng, 2007) with the aim of expanding their activities in foreign markets (Anand & Kogut, 1997). There are two main motives for conducting FDI outward of technological assets: The first one is focused on exploiting existing local technological assets of a home country (Tseng, 2007) in order to enter with these technological assets into new foreign markets (Anand & Kogut, 1997). In other words, the company has a technological asset that can be leveraged in foreign markets. The second one is focused on obtaining a new technological asset (Tseng, 2007) in host countries in order to fulfil the MNE's technological demands due to the lack of the required technology asset in the home country. In this case, the FDI outward is carried out in order to acquire a domestic company in a host country that has in hand a technological asset that complies with the MNEs' technological requirements. Notably, FDI outward of technological assets is undertaken not only in developed countries but also in developing countries. The FDI outward from China through international M&As is an example of acquiring technological assets or technological know-how (Di Minin et al, 2012). That's done to improve the competitive advantages of Chinese companies, as well as to provide solutions for a lack of some technologies in the Chinese home market (Di Minin et al, 2012). FDI of technological assets-seeking may also perform due to mutual interests (win-win) of two companies from different countries because both firms possess complementary knowledge and technology, such as the international joint ventures that were carried out due to a motivation of synergy in R&D.
The scope of technological strategic assets in a country, such as patents and technological know-how (Archibugi & Coco, 2004; Shan & Song, 1997), is affected by various factors, such as R&D expenditures, financial resources, technological labour force, and technological infrastructure (Dunning, 2013b), which contribute to R&D of technological assets. The issue of property rights has created a situation in which companies make registrations for their technological R&D patents due to the concern that rival firms may violate their intellectual property rights (Shan & Song, 1997). Therefore, the number of technological patents in a country indicates the extent of existing technological assets that own by the companies who operate in the country (Archibugi & Coco, 2004; Shan & Song, 1997). In other words, it refers to the technological knowledge that is ready for marketing, leveraging or selling. It should be noted, that R&D expenditures and availability of technological labour in a country reflect the potential for creating technological assets in the country, but it does not reflect the availability of technological assets in the country that is ready for marketing. In other words, a distinction should be made between technological knowledge that is already registered as a patent and it's ready for production and marketing worldwide, and the technological idea that has a potential for creating a patent, but still requires R&D expenditures and technological workers in order to develop the idea into a real product. Hence, R&D expenditures indicate that at a certain point in the future, if the R&D will succeed, then it may realise into a patent. However, a patent indicates that an existing technological asset can be realised immediately as a real product. That's mean that there is not necessarily a direct relationship between R&D expenditure and the availability of patents in a country, especially in the short-run, and in particular if the R&D expenditure has increased recently because it takes time until the R&D expenditure materialized into patents. Thus, the allocation of R&D expenditure is supposed to contribute to the creation of new patents at a future time point because of the reason that exists gap between the fund's allocation and the finalizing of R&D patents. However, patents in force in a country can dwindle over time ("cash cow") without a constant allocation of funds for R&D, such as the case of the Israeli company, Teva, whose scope of activity has significantly reduced after the patent expiration of the Copaxone that was considered as the flagship product of Teva (Globes, 2018; Tsipori, 2017).
2.3 Technical Labour Force
The technological capabilities of a country and the innovation of local companies are also affected by the availability and quality of the country's technological labour force (Archibugi & Coco, 2004; Lee et al., 2018; Powell & Dent‐Micallef, 1997). In the global age, the availability of a technological workforce, such as researchers, engineers, technology managers, and technicians, is essential for the economic success of a country (Lee et al., 2018; Vind, 2008).
Education and formal technical training in a country through research institutions, higher education, research laboratories, and institutes for vocational training are essential for the creation of a technological labour force in the country (Kruss et al., 2015; Lin et al., 2016). Technological employment experience and a longstanding tradition of technological skills in a country also contribute to industrial development (Kogut & Chang, 1991; Lall, 1992), such as the industry sector in Germany that whose functioning is rooted in a long-standing tradition of professional education and training.
The availability of a technological labour force in a country affects the scope of MNEs’ activities (Dunning, 2013b; Dunning & Norman, 1987; Huggins, 2001; Lee et al., 2018). Nonetheless, the quality of the technical labour force is even more important for MNEs, particularly for innovative R&D, which stems from the labour force with advanced degrees alongside the education quality in the country (Dunning & Lundan, 2008). In this context, a distinction should be made between R&D activity in order to develop innovative knowledge versus technological activity, such as technical services and engineering consultancy. To develop innovative knowledge, needed a high-quality technological labour force with advanced degrees. However, providing technological services may match technical workers at a rank of technicians, engineers, and technical graduates with a bachelor’s degree. Besides, for conducting R&D of multidisciplinary products, may needed researchers and scientists with advanced degrees from other fields. Considering the outlined above, it should be noted that there are substantial gaps between countries in relation to advanced degrees. That affects the ability of MNEs to develop new advanced technologies (Dunning & Lundan, 2008), especially in host countries that suffer from a lack of appropriate labour force. From the standpoint of MNEs, the availability of graduates with bachelor's degrees indicates the ability to use existing technological knowledge, while the availability of graduates with advanced degrees, especially those with a PhD or equivalent, indicates that a county has the required capabilities to conduct innovative R&D to accelerate technological changes (Dunning & Lundan, 2008).
2.4 ICT Infrastructure
Governments play an important role in creating a technological infrastructure to encourage technological and business activities in the country (Duncan, 1995; Dunning, 2013b; Dunning & Lundan, 2008; Tassey, 1991). The technological infrastructure of a country stems from three factors: Firstly, the availability of the country's technological infrastructure in terms of scope, geographical deployment and ways of usage in the country. Secondly, the infrastructure quality in terms of performance, bugs, technical disruptions and breakdowns. Thirdly, the costs of infrastructure in terms of the prices of usage, maintenance, installation and purchase of equipment. Hence, the availability, quality and cost of the technology infrastructure in a country affect the scope and types of MNEs’ activities in the country (Dunning, 2013b; Wekesa et al., 2016). From the viewpoint of MNEs, a technological infrastructure in a country is needed to create a variety of business activities. The availability of technological infrastructure even may be considered as an essential condition to carry out FDI in R&D activities in host countries (Dunning, 2013b).
One of the most important factors of technology infrastructure in a country in the internet era is the existence of an information and communications technology (ICT) infrastructure. The ICT allows technological R&D activities and advanced technological operations, which contribute to the company's innovation and competitive advantages over the competitors (Duncan, 1995; Porter, 2008; Porter & Stern, 2001; Powell & Dent‐Micallef, 1997). The ICT infrastructure in a country includes mobiles, landlines, Internet, satellites, microwave, computer networks, television and radio networks, computer systems, information, and a variety of media types (Archibugi & Coco, 2004; Dicken, 1998; Duncan, 1995; Lall, 1992; Loree & Guisinger, 1995; Pradhan et al., 2017; Rozen-Bakher, 2017). The ICT infrastructure provides an Infrastructural base for MNEs’ activities, particularly in R&D fields, and especially in high-tech industries. An ICT infrastructure is also important for the operation of e-commerce alongside the expansion of technological entrepreneurship in a country (Leitão & Baptista, 2011; Rozen-Bakher, 2017; Zhu, 2004). Availability of ICT among personal users, business companies and public organizations, allow linkage and share database between branches within the country and abroad, information sharing between different companies, strategic cooperation, e-commerce, advertising, giving information to customers via various media channels, and more (Lall, 1992; Loree & Guisinger, 1995).
From the perspective of international activity, the Internet and e-commerce, in particular, have changed the rules of international trade. That has even led to a dynamic and dramatic change in the way that firms operate in the market in terms of marketing (Gregory et al., 2007), competitiveness, firm structure, workforce, and customer relations. On the one hand, e-commerce enables MNEs to export directly to customers in host countries without the need to establish a local distributors base, which reduces the transaction costs (Czinkota et al., 2002; Rozen-Bakher, 2017). E-commerce has also led to the growth of Internet MNEs that rely solely on online sales, such as Amazon and eBay (Nachum & Zaheer, 2005). On the other hand, the Internet is a powerful tool for customers in terms of supply, prices and information, which challenges the operating of MNEs worldwide. First, e-commerce allows small and medium-sized companies with limited capital and resources to operate in global markets. Second, customers can get information on the Internet about various companies, products, and prices, which increases competitiveness. Consequently, prices reduce in the global market, so it's somewhat pointless in giving exclusivity to local distributors in host countries. Third, the Internet has created a 'new game' in terms of customer satisfaction. Information about dissatisfaction from products and services in one of the host countries where an MNE operates can be rapidly distributed by customers worldwide through emails, forums, and social and professional networks, which may tarnish the company's reputation in other host countries (Czinkota et al., 2002). Considering the outlined above, e-commerce in the 21st century challenges the traditional way of international trade, which significantly influences the MNEs' decision making, particularly in relation to ICT infrastructure in the host country.
From the viewpoint of the host country, the availability and cost of ICT in a host country (Pradhan et al., 2017) significantly influence MNEs' location decision, particularly with regards to the quality of ICT, especially in cases that MNEs operate in advanced technology fields (Leitão & Baptista, 2011; Rozen-Bakher, 2017). An appropriate ICT infrastructure in a host country allows MNEs to operate effectively in the host country (Lall, 1995; Loree & Guisinger, 1995; Dunning, 2013b), with the ability to reduce the transaction costs (Dunning & Lundan, 2008). A high-quality ICT is also required to implement advanced technologies, new production processes and advanced working methods, particularly in cases of FDI inward in manufacturing with an orientation towards export because it allows international production (Wheeler and Mody, 1992) with full connectivity between the headquarter in the home country and the production plants in host countries worldwide.
However, from the viewpoint of the home country, a quality ICT in a home country is considered as an essential condition for leveraging international activity and conducting FDI outward of technological assets (Dunning, 2013b). The technological progress in general and the Internet in particular, have created a demand for enormous web applications and technological innovations, such as mobile content, app mobile, online media and e-commerce software. That requires a quality of ICT in a home country to allow the domestic companies to develop technological assets to sell them as patents to foreign companies that need those innovations or to market them as products in global markets (Tseng, 2007).
The ICT infrastructure in a country is examined in the literature through various indicators such as the number of fixed phones per 1,000 people (Asiedu, 2004), the number of mobile phones, the number of internet users (Pradhan et al., 2017), the internet monthly cost, and the country’s expenditure for ICT as a percentage of GDP. However, there are previous studies that examined the ICT through a combined measure that include various parameters to explore different aspects of ICT infrastructure (Hanafizadeh et al., 2009). In this context, future studies should put emphasis on examining the quality of the availability of ICT, especially in developed countries because many countries have improved the availability of ICT. Nonetheless, remain significant differences between countries in relation to the quality of ICT, particularly with regards to the ability to maintain in a propriety way an advanced ICT. Previous studies show that the ICT infrastructure positively influences the volume of FDI, especially in developing countries (Asiedu, 2002; Bellak et al., 2009; Loree & Guisinger, 1995; Rozen-Bakher, 2017; Wheeler & Mody, 1992).
3. Conclusions
This study explores how the technological location factors of a country affect the Multinational Enterprises (MNEs) activities, either in the host country or in the home country. More specifically, the study explores how the technological capabilities of a country influence the location decision of MNEs when they conduct, either FDI outward or FDI inward. The study concludes that the technological capabilities of a country are like ‘Live or Die’ in relation to the location choice of FDI and for the survival of the activity. It can be argued, that without proper technological capabilities, MNEs won’t conduct FDI even if other location factors are attractive. Worse, even if an MNE conduct FDI, but the technological capabilities fail to fulfil its promises, then it will impact the survival of the MNE’s activities, either in the home country or the host country. In particular, lack of appropriate R&D expenditure or lack of technological patents or shortage in technical labour or unreliable ICT infrastructure will determine the location choice of MNE, the types of activities and products, as well as if the activity has a chance for success or if it dooms to fail. Although, the study highlights the need to distinguish between R&D expenditure and patents in relation to the location choice of MNEs. Finally, most of the previous studies on Patent-FDI examined the FDI in relation to the entire range of patents, technological and non-technological patents (Ramasamy et al., 2012). Hence, future empirical research should focus specifically on technological patents to understand how they impact the scope of FDI.
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