An alternative motivation for foreign direct investment

In the accepted industrial organization model of foreign direct investment (FDI), FDI is modeled as a means for the investing firm to exploit in the host nation some competitive advantage which it already had prior to undertaking the FDI. This advantage is often thought to be embodied in intangible assets which cannot be exploited internationally through any means other than FDI. Recently, it has been demonstrated that certain characteristics of a national industry can create for its member firms an environment which encourages the development of competitive advantage. This dissertation seeks to investigate the possibility that foreign firms might be motivated to invest in a nation in order to gain access to such attractive environmental assets, in the hope that doing so will improve their worldwide competitive position. The firms' operations in the host nation need not be profitable on a stand alone basis if such motivations exist. Two simple game theoretic models are presented in which equilibria exist in which a firm might undertake FDI in order to gain access to attractive elements of the host nation's environment in the industry in question. Next, a cross-sectional empirical study of inbound foreign direct investment in the United States is presented. This study shows strong evidence that foreign firms are investing in US where there are US based assets in an industry's environment which the firms can gain access to through participation in the US industry. Foreign firms are particularly attracted to certain types of human assets in the US. Finally, two longitudinal studies of individual firms investing in the US are presented to show how this new motivation for foreign direct investment might be operationalized. A striking finding of these studies is that, in order to successfully undertake FDI aimed at securing access attractive assets, a firm must become highly integrated into the host industry.