University of Amsterdam MSc in Business Administration Faculty of Economics and Business Track International Management
FDI location decisions from a combined IB and EG perspective A garments tale into China
Master Thesis by Karlijn Wen Student number 6113117
2nd Draft January 22nd, 2015
First Supervisor Erik Dirksen MSc Second Supervisor
Abstract
As a result of the changing competitive environment, firms are closer than ever looking at their foreign direct investment (FDI) location choice. In an environment where retail prices are under pressure and consumers demanding more corporate responsibility, the firm’s profit and long term planning is under great pressure. And although recent literature has indicated the significance of a fit between the home and host country for the FDI’s success (Dicken, 2000), not enough emphasis is given in the creation of a sub-national location specific investment theory. Consequently this study contributes by researching which economic geographical and international business aspects contribute to FDI location decision. The qualitative study was conducted on the locational differences between the regions Shanghai and Hong Kong. The importance of Dunning & Lundan’s (2008) natural resource-seeking motive is indicated, as well as the tangible and intangible assets of the OLI framework (Dunning & Lundan, 2008) within modern metropolitan areas (Krugman 2011) and bounded rationality experiences (Williamson’s, 1981; Simon, 1947) have been confirmed. Additional dimensions as ethics, ability to improve, regional cultural difference, intangible knowledge, non-uniformity of experiences and individual’s reactions have been identified. As a result of the combined modern metropolitan area model this study argues that further development of a united international business and economic geography framework concerning FDI location decisions is needed.
Contents
Abstract ... 1
1. Introduction ... 4
2. Literature review ... 8
2.1 International business ... 8
2.1.1 Concept of international trade and FDI ... 8
2.1.2 Process of FDI ... 10
2.1.3 International business location decisions ... 16
2.1.4 Criticism on IB’s locational viewpoints ... 16
2.2 Economic geography ... 16
2.2.1 Concept of economic geography ... 16
2.2.2 Theories of economic geography ... 18
2.2.3 Theory of new economic geography ... 20
2.2.3 Criticism on EG’s locational viewpoints ... 22
2.3 Combining Theories ... 22
3. Methodology ... 25
3.1 Research Design ... 25
3.2 Research context: People’s Republic of China: Shanghai versus Hong Kong ... 27
3.2.1 Region of Shanghai ... 27
3.2.2 Hong Kong Special Administrative Region ... 28
3.2.3 Comparison of regions Shanghai and Hong Kong ... 29
3.3 Sample ... 29
3.4 Data collection... 32
3.5 Data analysis ... 32
3.6 Validity, reliability and generalizability ... 33
4. Results ... 34
4.1 General results ... 34
4.2 FDI Motive ... 35
4.2.1 Motives of Shanghai and Hong Kong ... 37
4.2.2 FDI motive results summarized ... 38
4.3 Tangible and intangible assets of the OLI framework and NEG ... 38
4.3.1 Tangible and intangible assets in location decisions ... 39
4.3.2 Tangible and intangible assets of Shanghai and Hong Kong ... 42
4.3.3 Tangible and intangible assets within OLI framework ... 43
4.3.4 Tangible and intangible aspects of the OLI framework and NEG results summarized 46 4.4 Experience ... 46
4.4.1 Experiences of Shanghai and Hong Kong ... 48
4.5.2 Experience results summarized ... 49
5. Discussion ... 50
5.1 Discussion of results ... 50
5.1.1 FDI motive ... 50
5.1.2 OLI framework and NEG ... 52
5.1.3 Experiences ... 53
5.2 What it signifies ... 54
5.3 Practical implications ... 55
5.4 Limitations and suggestions for future research ... 55
6. Conclusion ... 56
References ... 57
1. Introduction
Foreign direct investment (FDI) is defined as “cross-border investment by a resident entity in one economy, with the objective of obtaining a lasting interest in an enterprise residing in another economy” (OECD, 2013). FDI has become an increasingly important driver of company’s growth. During the last decade, the continuous globalisation of trade and the rapid economic development of multiple countries further stimulated the increase in the volume of FDI. Because of this, FDI has become an important part in strategies of multiple enterprises. The 2013 World Investment Report of the United Nations Conference on Trade and Development (UNCTAD, 2013) shows that the global flux of FDI increased with 49% (to US$1.82 trillion1) from 2003 to 2008. However, the fragile economic situation of the last five years has caused the increase on global FDI inflow from 2009 to 2012 to diminish to 18% (ending at US$1.35 trillion). Recovering to the 2008 volume of global FDI inflow has been at a slower rate than expected, mostly because of policy uncertainties and the fragile global economy. However, when splitting the FDI inflow into the different stages of countries’ economic development (developed or emerging (IMF, 2009)), it becomes clear that, for the first time in history, particular emerging economies (economies with low income) have taken over the inward FDI flow by attracting 52% of the global inward FDI flow.
Why do enterprises pick these emerging economies for their FDI strategies? Enterprises engaging in FDI face not only trade barriers, but several other factors that influence decisions during this investment process. According to international business (IB) theorists these challenges vary between three main drivers, namely: where markets emerge, where natural or other resources are ample and cheap, and locational efficiency factors. However, economic geographers state that this decision-making process is far more complex, and argue that it is largely based on spatial pull-factors and personal and organisational push-factors.
Out of the wealth of IB publications on FDI, it can be understood that specific strategic goals lead to certain investment motives, thereby answering the why question. Traditionally these objectives (why) are focussed on finding new markets, finding natural resources or increase efficiency and these are the foundation for the location (where) and entry mode (how) decisions. With respect to the location decision, most IB theories are vague and lack specific locational aspects. Nevertheless, a more
oriented and recently frequently used instrument in helping to assess whether and where FDI will be successful, is described by IB theorist Dunning (1977) as the OLI framework for FDI. This eclectic paradigm shows that, in order to achieve successful FDI, an organization needs to possess unique ownership characteristics (O), invest in a location with locational advantages (L), and gain advantage out of internalising the local presence (I). However, up to today, the distinction between different types of locational characteristics within individual countries (sub-national clusters and their industry-specific factor endowment) has not been theorized despite its importance for mapping the nature of current FDI behaviour (McCann & Mudambi, 2004).
Although of all existing IB literature the OLI framework describes the locational decision in most detail, many scholars (e.g., Breugelsdijk & Mudambi, 2013; Dicken, 2000; Phelps & Fuller, 2000; McCann & Mudambi, 2004; 2005) suggest that these conventional theories need to intertwine subnational locational differences. Particularly, Dicken (2000) argues that place and geography do matter in the success factor of the MNE. Although globalization transformed the MNE’s scope, places do have specific endowments and these are of different value to different industries.
However, these clusters are not comprehensive, and in order to accomplish a combination of location specific characteristics, economic geography (EG) needs to be integrated into the existing models. Additionally, most models described in IB literature handle the ‘ceteris paribus’2 principle, while EG describes the constantly changing location characteristics (McCann & Mudambi, 2004). Choosing a well-suitable location for establishing FDI is of uppermost importance, as it partially determines the success of the FDI. If the location does not suit the first step (the why question) in the foreign direct investment process, issues such as high transaction costs (amongst others, due to insufficient control or changing regulations) can occur. Therefore, it is suggested that IB and EG should be uniting and creating a more overlapping location theory (Breugelsdijk & Mudambi, 2013). In this process, EG will play a large role in assessing the sub-national differences that determine the success of FDI.
This research paper is intended to study which economic geographical aspects contribute to the foreign direct investment location decisions of multinational enterprises. Especially, this research will be concentrated on the locational decisions on
2 The Ceteris Paribus principle is a Latin expression that translate to “holding other things constant” and describes that the other variables besides the independent variable in the theory stay constant and thus do not impact the dependent variable (Schlicht, 1985).
inward FDI in the regions of Hong Kong and Shanghai3, both located in China. Over the last decades, a lot has changed in the inward FDI of developing countries and particularly in China. Where the communication and confidence in the direct investment into developing countries in the past was poor and based on mistrust, the ease of connecting and sharing knowledge nowadays has led this mistrust to change into trust and enables these companies to keep tighter connections with the foreign direct investment. Not only can foreign direct investment accommodate a larger scale of production, the Chinese market can grow exponentially and thereby can open up possibilities for these investments (Davidson, 2014).
This study will examine the following research question:
Which economic geographical aspects contribute to the foreign direct investment location decisions of multinational enterprises?
This research is focussing on the regions of Shanghai and Hong Kong Special Administrative Region (HKSAR, Hong Kong SAR or HK). The evaluation of these two areas is of particular relevance because technically they belong to the same country, but have a different cultural, historical and economical background. Shanghai has traditionally been operating under communist rules; on the other hand Hong Kong has been operating under free market regulations since it was a British colony. Shanghai and Hong Kong are competing to become the strongest sub-national economy in China. With this they focus on FDI though different local government policies. It is important to investigate whether FDI locational drivers differ, using the different decision making theories.
This research consists of six chapters. Next, a critical theoretical framework will be developed in order to find the overlap between international business theories and economic geography theories. The third chapter will be the description of the methodology, stating the research design with its propositions, background information on the research context of China (in particular the regions Shanghai and Hong Kong) and the sample selection.
This will be followed by a qualitative exploration of the decisions made by
3 When reading Shanghai or Hong Kong, one should read: region of Shanghai or Hong Kong Special Administrative Region (HKSAR or HK) of the People’s Republic of China.
organisations to invest in either region, in the form of in-depth interviews. Chapter 5 elaborates on the discussion of the results, the implications for research and proposes suggestions for future research. From the interviews patterns will emerge, and they will be matched with existent international business and economic geography literature. Finally, this research will be completed with the sixth chapter consisting of the conclusions.
2. Literature review
This chapter builds on the understanding of foreign direct investment (FDI) and its location choice. It elaborates on the evolving perception of both international business (IB) theorists and subsequently economic geography (EG) theorists. After this the concepts of both fields will be integrated, leading to propositions for this research. 2.1 International business
This section studies the international business concept of foreign direct investment (FDI) and reviews the main theories on FDI described in the field of international business. It links the different principles and concentrates on specific location decisions.
2.1.1 Concept of international trade and FDI
Before exploring the literature of foreign direct investment, it is important to create a better understanding of the reason international business researchers have for enterprises to trade outside their home market. It is depicted that multinational enterprises (MNEs) are enterprises that own value-adding activities (e.g., conduits of capital, technology and internal market makers) in multiple locations, possibly by crossing borders (Daniels et al., 2007). The initial drive of why MNEs engage in FDI instead of exporting to or licencing in the host country is mostly explained by the MNE pursuing the ability to grow and add value in geographically dispersed places other than the home country (Daniels et al., 2007).
For a complete understanding of the concept of FDI it is important to define this concept. International business scholars use different explanations of FDI and the literature does not provide a standard definition of the concept. However, The World Bank provides a detailed and therefore widely used description. It describes foreign direct investments as “[…] the net inflows of investment to acquire a lasting management interest (ten percentage or more of voting stock) in an enterprise operating in an economy other than that of the investor.” This is complemented by the United Nations Conference on Trade And Development (UNCTAD), which states that “FDI involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated” (UNCTAD, 2013). This incorporated and unincorporated FDI reflects the subsidiaries of the direct investments (the so-called “indirectly owned direct
investment enterprises” (Organisation for Economic Cooperation and Development (OECD, 2013))).
In addition to the definitions above, the OECD argues that direct investment includes a long-term relationship with the direct investment enterprise, which is regarded as in effect with ten or more percentage ownership of the subsidiary. While the ten percentage might not be significant voting power in one (large) enterprise, less ownership might give direct investors effective voting power in another (small) enterprise, because the small enterprise may depend on the investment. Consequently, to provide for a universal consistency across countries, the ten percentage is strictly handled. Furthermore, OECD describes the effect of FDI: “It encourages the transfer of technology and know-how between countries, and allows the host economy to promote its products more widely in international markets. FDI is also an additional source of funding for investment and, under the right policy environment, it can be an important vehicle for enterprise development”.
In the present research, foreign direct investment (FDI) will be defined as follows: the long-term direct investment of capital, technology and knowledge into an enterprise (or its subsidiary) located in another country than the home country, in which the investor has at least a ten percentage ownership.
The value of FDI is calculated by taking “the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital, as shown in the balance of payments” (The World Bank). For a worldwide standard or definition, FDI is mainly measured in FDI flows and stocks (both inward and outward) per country.
As the above definition of FDI portrays, the flow of FDI is mainly explained by economic measure (mostly Gross Domestic Product (GDP)) of the receiving country. However, there are multiple international business (IB) theories on why some countries receive more FDI than others. Several variables contribute to attractiveness in terms of receiving FDI, such as: factor endowment, liability of foreignness (LOF)4, opportunism, geographic distance, transaction cost (TC) economics, and (national) location bound firm specific assets (FSA) (Rugman, Verbeke and Nguyen, 2011).
4 Liability of foreignness is the costs involved in doing business abroad because of unfamiliarity to the environment (Zaheer, 1995).
2.1.2 Process of FDI
As described in the introduction section, according to IB theory, the process of engaging in FDI consists of three main phases, namely why, where and how. In this study we will mainly focus on the first two phases because the main objective of this research is the location choice. The location decision is made in the where part and, as will be elaborated, the why question is the fundament for this where question.
2.1.2.1 Internationalisation strategy (why)
The first and most important issue when engaging in FDI is the why question. Having a good fit with the enterprise’s goal is the fundament for the success or failure of the FDI. The why question is therefore first addressed by the enterprise’s specific assets, after which we move to the strategies and motives for the FDI.
A widely used theory on the why question is the resource-based view (RBV), which analyses the success of global business by differences in available (firm) specific resources (tangible assets) and capabilities (intangible assets). For achieving a competitive advantage, the resources need to consist of a combination of value (V), rare (R), inimitability (I) and organizational (O) features, also known as the VRIO framework (Barney, 1995). One of the strongest critics of Barney`s RBV are Priem and Butler (2001). Priem and Butler have amongst others stated that the RBV analysis contains circular reasoning: its value creating strategy contains amongst others valuable resources. Furthermore these resources are identified valuable through a SWOT analysis. SWOT analyses are subjective. Priem and Butler also point out that since it is difficult to know which resources will be valuable in the future, the RBV lacks predictive capabilities.
Next to the RBV for analysis of the success of the FDI, the specific FDI motives are traditionally specified as market-seeking, natural resource-seeking and efficiency seeking (Dunning & Lundan, 2008). In this context the first motive to engage in FDI, market-seeking, has a focus on sustaining existing markets or exploiting new markets. The markets are initially served from an export base, however, due to a growing market or because of changing import tariffs, local production is perceived to be a better option than exporting to these markets. In some cases the production is moved to a third country to export from there. Dunning & Lundan (2008) describe four main reasons for the market-seeking motive. The market-seeking reasons are described as: the need to follow customers or suppliers, to be close to the local market, to decrease the production
and transaction costs and as a fourth reason a strategy to be present in leading markets where the competition is operating. However, the main driver behind market-seeking is presented (Dunning & Lundan, 2008) as the (change on) import tariffs for certain markets. Next to this, the foreign affiliates are treated as self-operating units in order to respond swiftly to local changes and demands.
The second motive to engage in FDI, natural resource-seeking, concentrates on three types: physical resources, an abundant supply of cheap well-motivated (un) skilled labour and the acquirement of technological capabilities/management or marketing expertise (Dunning & Lundan, 2008). The first natural resource-seeking type are physical resources, and are as the concept name reveals, resources such as fuels and industrial minerals. Using these at a certain location for manufacturing leads to the minimization of cost and secure the steady supply of resources. However, this involves high capital investment and after its establishment, this foreign direct investment is long-term bound to the location. The second natural resource-seeking type is the availability of abundant supplies of cheap, well-motivated (un) skilled labour and becomes an FDI motive in case of a strong need for intensive labour in the production of intermediate or final products. Hereby the wages in the home country are increasing and/or high and the host country has abundant cheap labour. The third natural resource-seeking type is to acquire technological capabilities, management or marketing expertise, and is usually parallel with the other two natural resource-seeking motives.
Dunning and Lundan (2008) advocate that FDI is not only directed from developed countries but also from developing countries. Developing countries like India and china are investing into foreign natural resources and using FDI to gain access to technology. Something most scholars don`t realise is that the importance of cheap well-motivated (un) skilled labour in production is a factor that will diminish in the future through automation and robotising of production. Recycling of physical resource will also impact the importance of the natural resource-seeking motive.
The third motive, efficiency seeking, increases productivity through the rationalisation of process within established natural resource-seeking or market-seeking investments. This notion comes from the cross border product or process specialisation, learning by experience and review of cost and price differences across the locations. The objective of the efficiency seeking motive is to create common governance and is mainly implemented by large, experienced and diversified MNEs. This motive is
divided in two patterns; the first is the advantage a firm has of different traditional factor endowments from business locations and their difference in relative costs. The second pattern is characterised by similarities of economic structures and differences within local characteristics in economies of scale and scope5, consumer taste and supply possibilities.
Alongside the three traditional FDI motives, modern internationalizing has progressed and added three additional motives: competence creating, innovation or technology seeking and strategic asset seeking (SAS) (Dunning & Lundan, 2008). The competence-creating motive reflects the search for a subsidiary with a more creative role than solely production (Cantwel & Mudambi, 2005). Its function is to generate new insights in line with the competitive advantage of the enterprise. The second modern motive (innovation or technology seeking) is described as locating FDI in countries and regions where world-class innovations are generated (e.g. Silicon Valley). The SAS objective focuses on creating a global portfolio (multiple assets) of physical assets and human competences, by strengthening the own firm specific assets (FSA) or weaken those of competitors (Dunning & Lundan, 2008). Furthermore Dunning & Lundan (2008) describe the impact of politics on the why question. This is stated as the encouragement of FDI in certain sectors or locations by home government in case of long term economic and political win.
2.1.2.2 Internationalisation location decision (Where)
From the internationalisation strategy (why) we move to the location decisions. The internationalizing motives drive the FDI process, such that the why question directly impacts the second (where) and the third (how) phases. The where question has traditionally been answered by the ”product cycle” model (Vernon, 1966), which argues that, by first putting a new product in the home market, second exporting, and possibly third locating production abroad, will exploit home country strengths in the products’ life cycle. Relatively newer theories, such as the Uppsala stage model which depicts how gradually host countries are entered (Vahlne & Johanson, 1977), are heavily criticized, because they do not consider the following three aspects: a) the differences in the impact of distance on the various parts of the value chain (e.g., market-seeking versus
5 Economies of scale occur when the costs per unit produced decrease by increasing the volume. Likewise, economies of scope occur when the costs per unit produced decrease by diversification of products (Panzar & Willig, 1977; 1981).
resource – and efficiency seeking); b) long distance may create new learning opportunities, and c) the possibly mediating effects of entry modes (McCann & Mudambi, 2004).
Alternative to these two traditional theories is Williamson’s (1981) Transaction Cost Theory (TC), in which the costs of doing business (for example: currency changes, differences in regulations regarding intellectual property) are described as outcome for the success of the foreign direct investment. Williamson uses the term “bounded rationality” to describe the limit which the “organization man” has for analytical and data-processing capacity. In contrast to a hyper rational “economic man” an “organizational man” cannot make all decision fully rational. The “organisational man” however, does not make some decision irrational.
Besides the focus on (transaction) costs, Porter (1990) developed the Diamond Theory on national competitive advantages of industries to weigh FDI’s successfulness. This theory presents four aspects to focus on why certain industries participate in international business: 1) country factor endowments, 2) firm structure and rivalry, 3) domestic demand conditions, and 4) related and supporting industries. Nonetheless, criticism (McCann and Mudambi, 2004) describes the latter two theories of Williamson and Porter as vague and lacking specific locational aspects.
The culture and cultural differences between home and host countries are specific location aspects and play a significant role in the where decision. The differences are classified in high and low context cultures (Hall & Hall, 1987), cultural clusters (Ronen & Shenkar, 1985), or cultural dimensions (Hofstede, 2005). The first two are seen as generic, leading to the cultural dimensions model as most common used. The cultural dimension model is however on a general national basis and does not make any distinction on subnational level.
The process of an MNE engaging in FDI between countries is described by the Trade-Based Theory (Leamer & Levinsohn, 1995) as a network to invest capital over country borders. In this model, the competitive advantage, country endowment (country specific assets (CSA)) and portfolio capital are fundamental. The model overcomes the traditional notion of countries’ endowments of capital to be fixed. The theory describes that the MNE’s investment should flow from countries with low returns on capital to countries with high returns. However, this theory is missing the understanding that flows go both directions, that is, also from countries with high capital returns investing
in low capital return countries.
The Industrial Organization (IO) Theory (Tirole, 1998) builds on the criticisms on the Trade-Based Theory and states technology monopoly and technological advantage as the main drivers for FDI. These two drivers overcome the liability of foreignness (LOF) and the market position in the industry focuses on internalisation and performance. Still an important question remained: Why do MNE’s not licence the technology instead of engaging in costly FDI?
Building on the question arising from the IO theory, the Internalisation theory (Rugman & Simon, 2012) focuses on the internalisation of imperfect markets by the MNE. Especially internalising is interesting when transaction costs become too high, caused by the need to monitor the licensee for appropriate use of the (valuable) technology. Again, this theory does not address the firm specific advantages (FSA) and relies on the balanced behaviour of agents.
Most of the IB literature on FDI described above is vague and lacks specific locational (where) aspects. Therefore, Dunning (1980) created his eclectic paradigm, the OLI framework. This framework attempts to incorporate the trade-based, IO- and Internalisation Theory. The OLI framework is constantly being fine-tuned and improved by Dunning since the mid-1950s (Dunning, 2001). The main goal of the OLI framework is to provide a general model for the pattern and size of FDI. The main principle of the model is that capabilities or certain assets are not/more difficult or costly to acquire for certain (countries’) MNEs. Assets are defined as resources and capabilities capable of generating future income stream. Two types of assets are distinguished, tangible and intangible assets (Dunning & Lundan, 2008). Tangible assets are defined as “natural endowments, manpower and capital” (Dunning & Lundan, 2008). Intangible assets are defined as “technology & information, managerial, marketing and entrepreneurial skills, organisational systems, incentive structures, and favoured access to intermediate or final goods markets” (Dunning & Lundan, 2008).
The OLI framework is built on three pillars; unique ownership characteristics (O), locational advantages (L) and internalising advantage (I). The ownership characteristics are seen as ownership specific advantages because they are unique to MNEs of certain origin. The L advantage is described as the specific assets bounded to a location, but accessible to all organisations. Locational bounded endowments are a major part of MNE activity. Dunning and Lundan (2008) describe that an advantage can be exclusively an O
or L advantage and a successful FDI does not requires them both. Market internalisation (I) advantages are focused on hierarchical control. These hierarchical control advantages are greater organisational efficiency, superior incentive structure or monopolise the assets under their governance. Although this paradigm is the one model within IB that focuses on the locational decision within the FDI process, it does not address subnational differences.
Beugeldijk and Mudambi (2013) emphasise the need to take subnational differences in “economic” and geographical distances into account. They define the measurement of economic distance as “the difference between the mean GDP per capita of the home and the mean GDP per capita of the host” (Beugeldijk & Mudambi, 2013, 415). They state that both geographical and economic distances within a country (subnational) can differ more than the geographical and economic distance between the home and host country (national). This is illustrated by figures 1 (low subnational heterogeneity) and 2 (high subnational heterogeneity). This subnational variation is more likely to occur at larger home and host countries. They however did not develop a theory or framework.
2.1.2.3 Internationalisation entry (how)
After having set the strategic goal (why) and the location (where) of the FDI, the last phase is deciding on the entry mode (how). Different strategic goals are in need of various location specifics and different locations have diverse sets of formal and informal institutions. Therefore, it is of high importance to link the why and the where (the location and its characteristics) to the entry mode (how). This is demonstrated by certain locational incentives, which do not facilitate the complete ownership of local
Figure 1 Relatively low sub-national spatial Heterogeneity (Beugelsdijk & Mudambi, 2013, 417)
Figure 2 Relatively high sub-national spatial Heterogeneity (Beugelsdijk & Mudambi, 2013, 417)
presence by foreign enterprises. For instance, wanting to create a “wholly owned subsidiary” in China is not an option, as the Chinese government does not allow this kind of FDI (Wang, 2011).
2.1.3 International business location decisions
Concluding we can summarise that international business literature on FDI focuses on specific strategies as to which goals lead to investment motives, thereby answering the first question, the why question. The decision-makers’ objectives (why) are focussed on finding new markets, finding natural resources, or increase efficiency, which lead to the location (where) and entry mode (how) decisions. All these ideas are based on rational financial choices by investors, who determine the feasibility of entry to a foreign market.
2.1.4 Criticism on IB’s locational viewpoints
These studies from an IB perspective focus mainly on the business characteristics and goals. When focussing at the location specific decisions, the location is described only as a national border with the same culture and location specifics. In reality this is far more complex and diverse and regional differences do exist and influence the location specific decisions. Therefore the perspective of economic geography can complement the international business perspective.
2.2 Economic geography
In this part the concept of economic geography (EG) and EG’s main principles on location decision are described. The principal focus is on the location-specific theories, which can contribute to our understanding of the decisions foreign investors make.
2.2.1 Concept of economic geography
Economic geography (EG) is one of the many sub disciplines in the wider field of geographic studies. It is assumed that the first studies on economic geography date back to British colonialism, where the need arose to study and improve trade routes and types of transportation (Barnes, 2000).
Economic geography is defined by Krumme (2003) as the study of “the principles governing the spatial allocation of resources and the resulting consequences”. In the present study this can be transformed into a more pragmatic definition: economic geography focuses on economic differences between and within regions and the origins
of these differences. This field of research tries to find answers to questions such as: ”What are the major growth drivers of (global, national, regional or local) economy x? And why is this economy overachieving economy y?” This definition encompasses the basic principles of EG. To research EG, however, it misses a component that links a specific EG situation to time and location.
In 2008, Krugman (1991) won a Nobel Prize for his creation of a more extensive definition of the EG research field by defining economic geography as the study “of the location of factors of production in space”. The notion of space is described in Krugman’s new economic geography (NEG) and the notion of space is especially important for modern scholars, because it adds dimension to the location specifics. This additional dimension space represents the present tense and its specifics (Gertler, 2003). This definition, which does link EG with time and location, will be used in this research paper.
Compared to a decade ago, two major shifts have changed the MNE’s and market’s circumstances. The first shift is that of the market characteristics; where these used to be a push market it has shifted to a pull market. In the past, companies would push the products and services to the consumers. Nowadays, consumers, thanks to modern information technology, are more informed of the possibilities and demand certain products and services: a so-called pull market. Due to this change, some strategic decision-making is extended to the subordinates level (Cui et al. 2013): only then is it possible to react swiftly to the demands of the consumers. The second shift is the evolution of IT and its new technologies becoming commodities. In the past, only large enterprises could afford to invest in costly and custom information and communication solutions. Nowadays, IT has matured to a level at which off-the-shelf solutions are affordable for a lot of businesses. This has led to a reduced impact of the scale advantages large enterprises had. Since information and communication are shared more extensively, the society has changed with it. The new competitive advantage nowadays is leaning more towards the ability to share knowledge. Both shifts caused the location to be intertwined with time, leading to the creation of the notion of space.
An example of consequences of the ability to share knowledge and the MNE’s evolution is the relationship between the MNE and its subsidiaries has changed because of the need to be close to the market. This created a shift in the responsibilities of the subordinates to a role of centre of knowledge and excellence, which has led to difficulties in managing the subsidiary in the traditional way, since in the past the
subsidiary was only involved in a part of the enterprise, mostly in production of goods or services. In order to let the MNE and subsidiary function and to have both scale advantage and local knowledge inflow, the subsidiary needs to be more fully involved in the enterprise.
Having described the definition of EG, it must be noted that economic geography (EG) has linkages with other fields of study, such as social geography (SG), regional scientists (RS), geographical economics (GE) and IB’s location theories. However, SG, RS and GE are completely different fields than EG. Where EG is studied by geographers and focuses on differences, uniqueness and spread of economic arenas, the other fields are studied by social scientists, regional scientists, and econometrists respectively. These studies focus more on the spatial patterns of social factors (SG), specific world regions (RS) and economic activity in agglomerates (GE).
In the field of economic geography, different interpretations on location theories exist. Various authors use the terms economic geography and ‘regional science’ incorrectly as the same concept. Where economic geography focuses on qualitative research, regional science is based on quantitative mathematical calculations. Therefore, when the term economic geography (EG) is used in this research, this concept is used as declared by the EG field: as qualitative research.
2.2.2 Theories of economic geography
The field of economic geography describes a variety of factors that clarify the process of economic geographic development. Within certain periods, EG studies focussed on several political important themes such as race (Harvey, 1974) and sociocultural aspects (Castells, 1984). However, within EG six general factors are outlined as (historical) influential and still applicable nowadays (Aoyama et al., 2011). These six general factors are: labour, firms, state, innovation, entrepreneurship and accessibility. Within the different periods of EG studies these six factors remained common items.
The first factor, labour, has long been a leading concept as it is presumed to be key in economic development (Walker & Storper, 1983). Herod (1997) proposed that labour, by its spatial variation in skills, even dominates the location decision. The last two decades, just as globalisation changed the labour force, the research interest on EG has shifted from low wage labour into different levels of skilled labour, new work
patterns (i.e., flexibility), and gender differences. As emphasised by Storper and Scott (2009) “industrial location is still very much depended on people following jobs”.
Firms, the second factor, have a major impact in the shaping of EG by their characteristics and decision-making. In classical EG theories the decision-maker is seen as an economic man (Watts, 1980), referring to a rational choice maker. However, Simon (1947) perceived the decision-maker as one pursuing maximal revenue with minimal costs, whilst making decisions on bounded rationality. The latter is of great importance, because it underlines the difference between a firm’s rationale and the experience and knowledge of the individual decision-makers.
The third factor is the role of the state in economic development. The state’s influence is studied through the lens of two perspectives. One perspective is that the state has influence on the economic geographic development process by either intervening or correcting market failures and threats (Aoyama et al., 2011). The other perspective argues that the state is inseparable from capitalist systems. Furthermore governance strategies, bilateral and regional trade and investment agreements and the state’s territorial organization influence economic geographic development (Aoyama et al., 2011).
The fourth factor that of innovation is a growth engine for the development of new economic activity and leads to regional economic growth (Dosi, 1982). Innovation is a factor that is hard to measure because of many different meanings, such as: the measure of R&D-spending, number of approved patents, and the size of the technologically-skilled labour. Besides research on innovative breakthroughs, the process and product innovation are currently also included in the factor of innovation. Various concepts of the role of geography on innovation are studied. However, it is proven to be very hard to grasp this factor since innovation is perceived to be path-dependent, driven by routines, compromised by lock-in, context-specific, and evolving around co-evolution (both economic- and institutional geography (Aoyama et al., 2011)).
From the innovation factor the step to entrepreneurship is a gentle one. This factor is proven to be significantly different amongst countries and regions (Bosma & Schutjens, 2009). This difference is viewed by Malecki (1997) as the influence of cultural views on risk taking, national differences in regulations, the regional industrial mix,
spatial concentration or agglomeration, the presence of skilled labour and networks that give access to knowledge and financial resources.
Last of the six factors is accessibility. This factor describes the ease of reaching a destination and the ability to connect with knowledge, information and people, either by physical mobility or via the Internet. The accessibility of a place or network is closely linked to the growth or decline of its economy and is affected by the network conditions and the place of an individual within this network. It is important to note that physical accessibility is becoming less determining for the shaping of economic change, due to internationalization of economic activities (Malecki & Moriset, 2008).
With the six factors explained above the differences between and within regions can be described. They are highly influential in the location decision-making process within economic geography.
2.2.3 Theory of new economic geography
Currently the most influential economic geographical theory is Krugman’s (1991) new economic geography. This theory has its roots in Marshall’s (1920) model of industrial agglomeration. This agglomeration model aimed at the importance of economies of scale in industrializing. Many scholars (e.g. Atwood, 1925, Moses, 1958) have built on Marshall’s model and moreover it has been the fundamental model for the theory of new economic geography (NEG) described by Krugman (1991). This new economic geography theory focuses on the interaction between economies of scale, transportation costs and factor mobility. The model defines region’s peripheries and cores and links agriculture and manufacturing respectively. Within this model geographical development is explained by agricultural areas in which cores arise. Near these cores the manufacturing of goods is located, as these firms aim for minimal transportation costs. As a result the core and periphery are shaped. Once a core is formed to supply both the local market and possibly export, this will attract even more inhabitants, leading to bigger cores.
However, some criticisms arose, two common criticisms are:
1) The NEG model does not give enough new insights. And it is simplified, leading to flaws in the model’s fundament. Furthermore it is not comprehensive for the full complexity of economic geography.
2) The NEG model is perceived to be out-dated, as it explains industrial development of economies in the past. Agriculture is no longer the driving force of regional
development.
An example of the critique is that “of agglomerating (centripetal) forces are basically Marshall’s (1890) triad of ‘localisation externalities’” (Martin, 1999, p. 68). This summarises the critique that the model is simplified and out-dated. Something that most scholars do not realize is that the difference in transport costs and its consequences between periphery and core are no longer valid. In current economies the goods, both agricultural and industrial, are transported over (long) distance fairly easy.
The latest version of NEG (Krugman, 2011) is a response to the criticism and indeed Krugman states that this 1991 NEG approach has some limitations. His answer to the first critique is that “the new economic geography was designed to attract the attention of mainstream economists” (Krugman, 2011, p. 3). Therefore the NEG model is developed as an abstract model, which does not grasp all (sub) aspects of the full complexity of economic geography. Krugman’s (2011) answer to the second critique is that his model is indeed more valid for advanced economic developments of the 1900. However, current developing countries like China and India have more in common with advanced economics of 1900 than the current Western economies. Furthermore, these developing countries are responsible for the majority of economic growth.
Additionally, Krugman states that regions do not differ as much as the NEG model suggests, as he (Krugman, 2011, p.5) describes, “[currently] most people in every metropolitan area are doing the same things”. Krugman (2011) describes the 1990’s economy in the U.S., where regions were defined by their means of generating income. Nowadays this clear distinction has decreased to a point where most metropolitan areas are merely the same or do not have a specialisation, only once you look closer they are showing relative distinction. This is exemplified by two cases. The first being Atlanta, which in contrast to New York (financial services) and Pittsburgh (steel), does not have a distinct specialisation. The second example is that of Boston and Minneapolis, which are both medical clusters, but are presumed to have a fine distinction between them. Krugman (2011) does describe the modern metropolitan areas however, he does not give it a clear definition and label. In this study his notion will be labelled as modern metropolitan area. The modern metropolitan area is defined as developed regions, which have multiple areas of expertise with subtle differences between them.
2.2.3 Criticism on EG’s locational viewpoints
The research in the field of economic geography is mainly conducted via case studies. This has resulted in a variety of studies, but is still lacking constant and generalizable theories. Furthermore, the field of EG up to today has not focussed on complexities of the firm’s specific advantages, thereby creating a gap in the explanation of the FDI’s location decision.
2.3 Combining Theories
Both international business and economic geography have shown to have their shortcomings in addressing the locational decision for foreign direct investment. Internal business (IB) focuses mainly on firm and national specific attributes. At the same time most IB theories are vague and lack locational specific aspects, Dunning’s OLI does have locational aspects. However, these only describe national differences and leave sub-national differences out of scope. Beugeldijk and Mudambi (2013) stress the importance of research at the subnational level.
Economic geography (EG) does focus on locational specific aspects. EG focuses mainly on geography disparity between regions and economic development. However EG is a more descriptive field of study; EG has typically few specific variables and is more related to ideas than theories that stand up to validation. However, EG misses out on the complexity of firms and their investment motives. Krugman’s new economic geography is an abstract model that does take sub-national differences in scope but lacks specific locational aspects.
In an attempt to combine these two fields of study, and create an integrated model that: is focussed at the sub-national level, has locational aspects and takes the decision maker into account, three models/concepts will be combined. This study will focus on Dunning’s (1980) OLI framework, Krugman’s (2011) latest version on his new economic geography model and both Williamson’s (1981) and Simon`s (1947) concept of “bounded rationality”. This combination leads to the study of the following combined model:
Current locations are modern metropolitan areas, which are developed regions and have multiple areas of expertise with subtle differences between them. The differences between the modern metropolitan areas are that capabilities or certain assets are not/more difficult or costly to acquire for certain metropolitans’ MNEs. The
MNE’s decision maker’s choice for FDI into modern metropolitan areas is based on bounded rationality.
This implies not only differences in availability, access or cost of certain assets between MNEs of a modern metropolitan area but also differences in availability, access or cost of certain assets between the modern metropolitan areas themselves. These assets can be tangible or intangible assets. To enhance the definition of tangible and intangible assets, Dunning’s definition (2008) will have the following addition in the combined model: Tangible assets are physical economic resources and intangible assets are non-physical economic resources (capabilities). Examples of tangible assets: “natural endowments, manpower and capital” (Dunning & Lundan, 2008). Examples of intangible assets: “technology & information, managerial, marketing and entrepreneurial skills, organisational systems, incentive structures, and favoured access to intermediate or final goods markets” (Dunning & Lundan, 2008).
Dunning only emphasised this distinction of assets at a later iteration of his eclectic paradigm in 2008 (Dunning & Lundan, 2008). Perhaps this inclusion occurred by inspiration of Barney’s VRIO framework (1995). In a similar way Dunning was inspired to improve his OLI framework before by Peter Buckley, Marc Casson and Nils Lundgren (Dunning, 2001). Dunning has not elaborated much on the tangible or intangible assets; perhaps to avoid the criticism Barney has received regarding the tangible and intangible assets. This study avoids the criticism Barney has received regarding the valuations of tangible and intangible assets, as they are in this study not valued and hereby this study remains objective. What most scholars don`t realise is the additional insight the distinction of the assets can generate within a combined EG and OLI model. A pattern of tangible and intangible assets between firms and location can lead to new FDI insights. Besides the theoretical insights, this observed pattern can help MNEs in their decision making process and provide assistance for modern metropolitan areas to distinguish their self and develop an attractive asset package for receiving FDI.
As described by Aoyama et al. (2011) “human agents are far less competent in calculations and less trust-worthy than the model of economic man implies, and bounded rationality and opportunism may better characterize the decisions made by firms.” Taken this into account, the combined model has the assumption that the FDI decision is based on bounded rationality. Williamson (1981) described bounded rationality as the limit that the “organization man” has for analytical and data processing
capacity. Therefore the “organizational man” cannot make all decision fully rational. Simon (1947) described bounded rationality as decision making with a limit to the cost/effort in making the decision. Hereby underlining the difference between a firm’s rationale and the experience and knowledge of the individual decision-makers. These descriptions complement each other. In the combined model bounded rationality is defined as rational decisions based on limited information and limited analytical and data processing. Part of the limited information is the experience and knowledge of the individual decision-makers.
3. Methodology
In this chapter the central subject will be the structure of the research. First, a description of the research design will be given. This will be followed by a description of the research context and the background of the two regions of this research: Shanghai and Hong Kong. After this, the case selection will be explained. Last, the validity, reliability and generalizability of the present study will be discussed.
3.1 Research Design
In the previous chapter, two rival theories explaining why organisational decision-makers decide to invest internationally, and how they decide where to invest, were discussed. The literature overview provides a fundament for this research on factors influencing the foreign direct investment (FDI) location decisions by firms. Specifically, this research will focus on an existing overlap between economic geographic (EG) aspects and international business (IB) aspects. This had led to the combined model of this study.
As already stated in the introduction, the research question of this study is:
Which economic geographical aspects contribute to the foreign direct investment location decisions of multinational enterprises?
To answer this research question using the combined model, three propositions are created. As described previously, it is important to first grasp the foreign direct investment motive before the location aspects. Therefore, this study will first focus on the why question.
1) FDI decision-makers make the location choice where to invest predominantly based on natural resource-seeking, and to a lesser extend with market and/or efficiency seeking motives.
This proposition aims at pinpointing a distinctive difference on the motives to invest abroad.
Natural resources are becoming increasingly important because of the economic development. For FDI in China this is especially important because China is used as a mass production location and this requires an abundant supply of cheap well-motivated (un) skilled labour.
2) The OLI aspects of tangible and intangible assets determine the FDI decision makers’ choice for an investment in modern metropolitan areas as described in NEG.
This proposition aims at pinpointing the tangible and intangible assets of the OLI paradigm FDI decision-makers take into account in investing in areas as described from an EG point of view.
The combined model gives the opportunity to study specific aspects of the tangible and intangible assets from the OLI model as variables for the locational aspects of FDI in subnational areas. Not only will the ownership-specific advantages, locational-specific factors and internalisation advantages, but the tangibility or intangibility of the assets will be studied in order to come to a pattern of determining factors.
The third proposition is the following:
3) FDI decision makers rationalize their decision for investment based on experiences (both personal and organisational) with the investment location.
This proposition aims at pinpointing the meaning of experiences on FDI decision-making. Traditional economics use the term “economic man” for a decision maker fully competent in calculations and use of information. However the second factor of EG, the firm and the concept of the organization man (Williamson, 1981), and the decision maker with bounded rationality (Simon, 1947), state otherwise.
This research follows an inductive research structure, allowing the researcher to gain valuable insights on the topic (Saunders, Lewis, & Thornhill, 2009). The assessment to conduct an inductive research emanates from the absence of research on this particular subject. The inductive approach will be implemented by using case studies. This is argued by Eisenhart (1989) as explicitly suitable with the notion of the research area being fairly new. Moreover, this approach is particularly appropriate because the research subject does not require control of behavioural events. Finally, the research focuses on contemporary events (Yin, 2009).
As described in this chapter’s introduction, this research contains two regions; Shanghai and Hong Kong. The distinct difference between these regions is especially momentous because it provides an embedded structure for the case study. Combining these two regions with multiple cases leads to a repetitive research, which is not based on sampling logic and therefore more generalizable (Yin, 2009). Consequently, to provide sufficient knowledge on the replicating case study approach, the research
context and case selection are described in the next sections. In this research, the interviewees are individual experts.
3.2 Research context: People’s Republic of China: Shanghai versus Hong Kong
As described in the introduction, this research focuses on two sub-national regions in the continent of East Asia. This continent is interesting to study locational differences because it has seen major developments over the last decades. To further delimit the scope of the research and to be able to compare between different sub-national locations specifics, this research will focus on the People’s Republic of China (PRC or China) and more specifically the regions of Shanghai and Hong Kong Special Administrative Region (HKSAR, Hong Kong SAR or HK). The People’s Republic of China is explicitly interesting because it is the second biggest attractor (after the United Stated of America) of inward FDI in 2012 (UNCTAD, 2014). Hong Kong and Shanghai are not only regions, but also cities. The figures and facts in this study are from the regions Shanghai and HK, and not of the cities.
3.2.1 Region of Shanghai
The region of Shanghai is geographically located halfway on China’s Eastern coast and is connected with the inland Yangtze River Delta. This makes it a great connection to China’s inland and thus an excellent international trade centre. This is amplified by the number one ranking of the Shanghai harbour as the busiest harbour since 2004 (World shipping council, 2015). Furthermore, the Shanghai region is one of the three biggest agglomeration of the world (after Tokyo and Guangzhou ("Major agglomerations of the world,” 2014)). In 1976 the region Shanghai was positively affected by the opening of China’s boarders to international trade. And since then the region of Shanghai has seen vast regional development. This has led to high inequity between the urban and rural
areas (Golley, 2007). Shanghai’s GDP per capita in 2012 was $13,471, whilst China’s
2012 overall GDP per capita only hit $6,067 (International Monetary Fund, Report April 2013). This difference in economic development causes inhabitants of the rural areas to migrate to the bigger cities in the hope for a better income and future.
China’s currency, the Yuan, is pegged to the USD, leading to a stable exchange rate for international trade. The significance of Shanghai’s international trade is shown by the inward FDI figures; in 2013 Shanghai attracted $16.8 billion inward FDI (Bulletin of Statistical of National Economic and Social Development of Shanghai Municipality,
2013). The biggest portion of Mainland China’s inward FDI is dedicated to manufacturing, which is contributing for 58% (Hastings, 2014). This is partly ascribed to Shanghai’s access to many different natural resources (such as farmland, water, minerals and due to its wide industries, intermediate products) and human resources, all shaped and accessible close to the region of Shanghai (Hanson, 2012). Next to the natural resources, the tax policy introduced in Shanghai in 1992 created a positive stimulus for the economy (The World Bank, 2011).
Shanghai is a modern metropolitan area because: a) its economy belongs to the twenty strongest (Global Financial Centres Index, 2014), making it a developed region. b) And with 60.7% of GDP coming from the service sector, and the remaining 39.3% of GDP coming from relatively high end manufacturing of automobiles, electronics, petrochemicals, iron & steel and equipment (the China perspective, 2015), it has multiple areas of expertise.
3.2.2 Hong Kong Special Administrative Region
The region of Hong Kong is geographically located at the Southern Chinese coast and consists of a part of Mainland, the island of Hong Kong and multiple small islands. Because of its geographical location between the Pearl River delta and the East Chinese Sea, and due to its deep waters, the harbour of Hong Kong is the fourth biggest port worldwide (World shipping council, 2015) and an important location for international trade. The Hong Kong region is the fiftieth biggest agglomeration of the world, and it is located next to Guangzhou, which is the second biggest (after Tokyo ("Major agglomerations of the world,” 2014)). This is important because due to this proximity to Guangzhou, Hong Kong has access to an area with an extensive pool of labour. The region of Hong Kong SAR (HK) has, due to its colonial history with the United Kingdom, a different history than Mainland China. The Hong Kong inhabitants have lived till 1997 in a capitalistic society under British liberal rule and nowadays still have a more democratic and capitalistic society than the Mainlanders.
The economy of Hong Kong is extraordinary due to its status of Special Administrative Region (SAR). Hong Kong’s economy is flourishing with a GDP of $36,668 per capita over 2012, leading to its population of 7.2 million to be ranked the seventh wealthiest in the World (International Monetary Fund, Report April 2013).
As well as Shanghai’s currency, Hong Kong’s Dollar is pegged to the USD, which makes it a stable exchange rate for international trade. Hong Kong attracted $77 billion
inward FDI over 2013 (UNCTAD, 2014) and most of this inward investment was service related (68.2% (Hong Kong Bureau of statistics, 2013)). This is partly ascribed to Hong Kong’s status as a financial centre. The region of Hong Kong is one of the bigger financial centres in the world (number three, according to the Global Financial Centres Index, 2014).
Hong Kong is a modern metropolitan area because: a) its economy is the third strongest in the world, making it a developed region. b) And with 24.9% of GDP coming from import/export, wholesale and retail trades, 16.3 % of GDP coming from Financing and insurance, and 11.1 % of GDP coming from Real estate, professional and business services (Census and statistics department (2014)), it has multiple areas of expertise.
3.2.3 Comparison of regions Shanghai and Hong Kong
The region of Shanghai and the region of Hong Kong share several geographical aspects; amongst others: both located within China, their natural harbours and close to locations with abundant cheap labour. As described in the previous sections, both are modern metropolitan areas. This makes them ideal subjects for locational comparison within this study. Looking at the differences, they do differ at subtle aspects. The region of Shanghai has a communist history and the region of Hong Kong capitalistic; however they are becoming more alike. With Shanghai’s excellent political ties to China`s central government, Shanghai has been able to compete with Hong Kong within a very short timeframe.
With Hong Kong being longer developed and a stronger financial centre in the world, it attracts roughly four and a half times more FDI. This FDI is more focussed on its financial services. While in Shanghai, being in the developed stadium for a shorter period, a bigger share of its FDI is focussed on manufacturing.
3.3 Sample
From the research context we delve deeper into the case selection process of this research. As Eisenhardt (1989) argues, the amount of interviewees is limited and therefore, at the selection process, one needs to select samples that fit the research goal. Having described this, it is evident that the sample selection needs to meet up to the research context. Meaning the sample needs to consist of FDI location decision-makers, who have experience with FDI in the regions Shanghai or Hong Kong, but preferably invest in both regions.
In order to attain such interviewees, I have contacted my extensive network in China and in Europe. This sampling method is described as convenience sampling (Saunders, Lewis, & Thornhill, 2009), in which the data is selected on its accessibility. However, because of my previous study in fashion engineering, my network extends reasonably far, which has resulted in a mixed sample of FDI decision-makers whom operate on different FDI levels. As shown in table 1, the selected decision-makers show a variation of years of employment and originate from both Europe and Asia. At the same time the number of decision-makers investing in the regions Shanghai (eleven) and Hong Kong (six) are sufficient to draw conclusions regarding findings. Furthermore, it is important to note, that all interviewees requested non-disclosure of their own or their company’s specifics. For that reason, no detailed information is shared and all interviewees are labelled with an “interviewee code”.
3.4 Data collection
In order to obtain data, semi-structured, qualitative interviews are conducted. This type of interviewing enables the researcher to extend the knowledge inflow in a way that it deepens the interview and makes it more exploratory (Eisenhardt, 1989; Saunders, Lewis, & Thornhill, 2009). Consequently, having a better view and knowledge on the context and reasoning behind foreign direct investment decision-making, existing literature and models can be further developed. In preparation to these qualitative interviews, an official invitation and an interview checklist was set up. This invitation allowed the researcher to contact the interviewees, whilst enabling the interviewees to assess whether they wanted to cooperate and to check if they comply to the required FDI location decision knowledge. Further, the checklist contained a brief introduction to the research, background information checks and it elaborated on the key themes for the interviews. The key themes are stated as followed:
Interviewee details Company details
The process of FDI location decisions Initial reason to engage in FDI
Reasoning behind the choice of the region
A complete structure of the checklist can be found in appendix 1. Moreover, all interviews were held in English, to overcome translation biases. The interviews were conducted by using Skype video call and were targeted to last for approximately one hour. As some interviewees were located in other European countries or Asia, it was not possible to conduct live, face-to-face interviews; using Skype allowed all the interviews to be conducted in the same manner. Furthermore, this interviewing method allowed the interviewee and researcher to respond to facial expressions. While introducing the research, all interviewees were asked for consensus to record the interview. This is needed to be able to correctly quote in the next phase.
3.5 Data analysis
After the gathering of the results, all interviews were transcribed, processed and analysed. The Skype audio footage was used for transcribing purposes, leading to 68 pages of transcripts. (The transcripts are available upon request.) Subsequently, the analysis of the data started by using Nvivo. The data were grouped into themes before
