Academic journal article Canadian Journal of Regional Science

Spatial-Sectoral Home and Host Country Assessment of United States Direct Investent in Canada

Academic journal article Canadian Journal of Regional Science

Spatial-Sectoral Home and Host Country Assessment of United States Direct Investent in Canada

Article excerpt

There is a large body of empirical research describing the geographic patterns of, and the underlying reasons for, foreign direct investment (FDI). Generally, this research has been conducted at an aggregate level both spatially and sectorally. However, it is certain that more disaggregated approaches can yield important insights. This is particularly true for developed economies where regional differences influence investment decisions. General macro level knowledge can be assumed but regional-based knowledge will be less certain (Qu and Green 1997; Mariotti and Piscitello 1995).

In this paper, we provide a detailed spatial assessment of US foreign direct investment in Canada disaggregated by industrial sector, province and state. Moreover, we explore the importance of established economic conditions (as measured by trade flows, number of establishments and distance) on the spatial choices made by US foreign direct investors operating within the highly-integrated and compatible Canadian and US economies. Due to this explicit home and host location viewpoint in explaining spatial-sectoral direct investments patterns, we believe this itemised spatial appraisal of Canada FDI from the US is distinctive.

The host country approach is typified by Dunning's (1977) "Eclectic Paradigm of International Production". According to Dunning's model, a firm is unlikely to invest directly in a foreign country if firm (ownership)-specific, internalisation and country (location)-specific advantages are missing (see also Rugman et al 1985). Firm-specific advantages (which are chiefly knowledge-based or technology-oriented attributes) and internalisation properties (the ability to keep these advantages intact) provide the `competitive edge' that a given multinational enterprise (MNE) has over rival firms operating in a market. However, consideration of differences in location-specific advantages is also important. In other words, host locations that are most frequently chosen are those that allow for the most profitable use of an MNE's firm-specific advantages. Some of the more common host country considerations that Dunning and others have recognised as important to foreign direct investors include:

* Market factors -- which consists of not only market size and growth potential but also the ability to maintain market shares and to promote trade between the subsidiary and parent company (and, thereby to realise transfer pricing advantages);

* Natural and created resource endowment;

* Cost factors -- which encompass factors influencing the cost of production (such as labour, energy and supporting industry);

* Societal and a financial infrastructure -- such as credit, legal, and educational facilities;

* Transportation and communication infrastructures;

* Economies of centralisation for R&D and marketing;

* Artificial barriers -- such as import controls on the trade of goods and services and exchange rate differentials;

* The investment climate -- which consists mainly of political stability, general attitudes toward FDI (which includes corporate tax rates and regulations), and industrial incentives and disincentives; and

* Cultural differences and similarities (Dunning 1977, 1993; Rugman 1980).

Although Dunning (1993) also recognised that home countries may benefit to varying degrees from the location-specific decisions of their MNEs, his theory is predominantly based on demonstrating what criteria enable host countries to attract FDI.

In 1990, Porter added to the FDI literature by providing a theory that helps to explain the global pattern of FDI (and trade) largely from the perspective of differing home country characteristics. With respect to FDI, Porter claims that firms that have attained success within the global market have done so because of their ability to extend their home-based advantages abroad. The home country, then, acts as an incubator and outward FDI is shaped by the country's: qualities of labour, appropriateness of production factors, market and demand conditions, support industries, competitive atmosphere, government policy and so on. …

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