Motives for Foreign Direct Investment

The purpose of this section is to relate the initial motives for establishing a new subsidiary to whether or not it will possess, as part of its overall mandate, responsibility for carrying out innovation activities which add new or enhanced capabilities and hence value to the MNE. Modern MNEs have been characterized as geographically dispersed innovation networks which create and integrate new knowledge in order to generate new value (Almeida, 1996; Bartlett and Ghoshal, 1989; Birkinshaw, 1997; Cantwell, 1989; Feinburg and Gupta, 2004; Hedlund, 1986; Zander, 1999). Each subsidiary within the

network is initially established for one or more reasons including market, resource, efficiency and strategic asset seeking (Dunning, 2000). A particular subsidiary may not initially be part of the MNE innovation network, but its mandate can evolve over time as it develops capabilities and takes on new roles (Birkinshaw and Hood, 1998; Frost, Birkinshaw and Ensign, 2002; Garcia-Pont et al, 2009). This section provides an examination of which initial motives for establishing a subsidiary are more likely to result in an innovation component as part of the overall subsidiary mandate.

Market seeking involves setting up foreign sales and service affiliates to tap new markets with existing products and services, but can also include varying levels of R&D to adapt or develop new products and services for local sale (Cantwell and Mudambi, 2005; Kuemmerle, 1999b). Firms following a resource seeking motive for FDI are interested in accessing the natural resources and labour forces of the host nation while the efficiency seeking motive entails geographical diversification amongst functional areas of the MNE in order to achieve division of labour and its associated specialization advantages. Finally, MNE FDI is sometimes motivated to improve its competitive positioning viz. its competitors by accessing complementary strategic assets through FDI which augment existing competencies. The rent seeking logic and potential innovation mandates of newly established foreign subsidiaries are summarized in Table 1.

Market seeking is associated primarily with demand-pull oriented innovation in that local adaptation is often necessary to effectively serve markets. Resource seeking motives are not associated with an innovation mandate as the logic is primarily associated

with sourcing material inputs to production more efficiently. Efficiency seeking motives primarily entail foreign investments made to benefit from labour cost differences between the home and host country. Subsidiaries set up according to an efficiency seeking motive may provide the MNE efficiency gains in supporting the R&D function, but do not, at least initially, actively contribute to competency creation. Strategic asset seeking, conversely, is associated with supply-push innovation, in that knowledge assets acquired through FDI give the MNE opportunities to integrate and coordinate internationally dispersed strategic assets for the purpose of globally focused innovation.

Table 1: Internationalization motives, rent seeking logic, and subsidiary innovation mandate.

Rent Seeking Logic

(Dunning, 2000) Innovation Mandate In te rn at ion ali zat ion M ot ive Markets Seeking Economies of scale/scope Adaptation of MNE

capabilities to local context. Resource

Seeking

Input cost reduction No initial innovation mandate.

Efficiency Seeking

Production cost reduction

No initial innovation mandate. Strategic Asset Seeking Enhanced competencies or competitive positioning Augmentation of MNE capabilities.

In Dunning‟s original formulation of the eclectic paradigm (1977; 1988; 1993; 1998), the MNE primarily internationalized to exploit assets developed at home, and hence strategic motives for internationalization were mainly considered in the context of

industry positioning. Later, researchers recognized that internationalization was also undertaken to secure increasingly strategic knowledge assets (Almeida, 1996; Cantwell, 1995; Dunning and Narula, 1995; Kogut and Chang, 1991). Hence, strategic asset seeking is now more often associated with the motivation to acquire geographically dispersed strategic assets, most often in the form of knowledge workers.

This preceding review establishes a general linkage between the initial motives of the MNE for establishing a particular subsidiary and the type of innovation mandate, if extant, that the subsidiary receives. There are three caveats to address before proceeding to the discussion on subsidiary mandate characteristics and evolution. First is that in the presence of any of the four motives it is not absolutely certain that an innovation mandate will be established. MNEs can access markets without making any adaptations by setting up marketing and/or production satellites (White and Poynter, 1984), or by making any necessary adaptations from a subsidiary located elsewhere. As well, although less often the case, firms may access pools of knowledge workers through FDI without granting an innovation mandate. Such would be the case, for example, in a pharmaceutical company managing clinical trials through a foreign subsidiary while handling drug discovery elsewhere. Second, it is important to note that the innovation mandates proposed in Table 1 refer only to the initial purposes for which the subsidiary was established. Although head office assignment of mandates is perhaps the most common mode of establishment, it is not the only one (Birkinshaw and Hood, 1998). As the MNE evolves, mandates can change with subsidiaries taking on new or enhanced responsibilities for

value creation (Delany, 2000). Hence, innovation internationalization and associated capability development pathways evolve contemporaneously with subsidiary mandates (Cantwell and Piscitello, 2000). The evolution of subsidiary mandates, and their relation to established taxonomies are presented in the next section. Finally, although the four categories presented here are conceptually distinct from one another, MNEs may be pursuing multiple objectives when establishing foreign subsidiaries. In any case, the presence of a market or strategic asset seeking motive greatly increases the likelihood that a subsidiary will receive an innovation mandate at inception, hastening the transfer of innovation practices from the MNE.