Asset-Exploitation versus Asset-Seeking: Implications for Location Choice of Foreign Direct

Investment from Newly Industrialized Economies

Author(s): Shige Makino, Chung-Ming Lau, Rhy-Song Yeh
Source: Journal of International Business Studies, Vol. 33, No. 3 (3rd Qtr., 2002), pp. 403-421
Published by: Palgrave Macmillan Journals
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Asset-Exploitation Versus Asset-Seeking:
Implications for Location Choice of
Foreign Direct Investment from Newly
Industrialized Economies

Shige Makino*
THE CHINESEUNIVERSITYOF HONG KONG

Chung-Ming Lau**
THE CHINESEUNIVERSITYOF HONG KONG

Rhy-Song Yeh***
PEKINGUNIVERSITY

This study examined several hypoth- investmentlocation (developedcoun-

eses regardingthe location choice of
foreign direct investmentfrom newly
industrialized economies (NIEs).Us-
ing a sample of 328 Taiwanesefirms
in the analysis, this studyfound that
the firms' motivations had a signifi-
cant impact on the choice of their
tries vs. less developed countries),yet
this impact was moderatedby the ca-
pabilitiesthatthefirmspossessed. The
resultssuggestthatbothasset-exploita-
tion and asset-seekingaspects of in-
vestments are predictive of the ME
firms'location choice of investment.

INTRODUCTION (DCs). These studies have primarily ex-

The existing studies of foreign direct amined either why FDI occurs from a DC
investment (FDI) have focused mainly to another DC, or from a DC to less de-
on the FDI from developed countries veloped countries (LDCs) or newly in-

*Shige Makino is Professor in the Departmentof Managementat the Chinese University of

Hong Kong. His current research interests include strategies for international expansion of
Asian enterprises, inter-organizationalimitation, and managementof internationalstrategic
alliances.
**Chung-MingLau is currently Chairmanand Professorin the Departmentof Managementat
the Chinese University of Hong Kong. His research interests include strategic change,
organizationalculture, and management of Chinese organizations.
***Ryh-song Yeh is Professor of Guanghua School of Managementat Peking University. His
current research interests are in leadership and cultural values in Chinese context, and
international management of Chinese firms.
We wish to thank Professor John Dunning for his comments and continuous encouragement.
We also thank three anonymous referees for their very insightful and helpful comments on
earlier drafts. The work described in this paper was partially supported by a grant from the
Research Grants Council of the Hong Kong Special Administrative Region (Project No.
CUHK4052/99H).

JOURNAL OF INTERNATIONALBUSINESS STUDIES, 33, 3 (THIRD QUARTER 2002): 403-421 403

ASSET-EXPLOITATIONVERSUS ASSET-SEEKING
dustrialized economies (NIEs). About
two decades ago, researchers (e.g., Wells,
1977, 1983; Kumar and McLeod, 1981;
Lall, 1983) investigated why FDI occurs
from LDCs or NIEs. However, they
mainly investigated why firms from
LDCs or NIEs invested in other LDCs or
NIEs, or "downstream" countries, and
did not examine any specific cases in
which LDC or NIE firms expanded their
international activities from their home
countries to DCs, or "upstream coun-
tries."
Recently, researchers have started in-
vestigating why and when LDC and NIE
firms engage in upstream investments
(e.g., Lecraw, 1993; Chen and Chen,
1998; van Hoesel, 1999). However, sys-
tematic conceptual and empirical inves-
tigations are still needed to build con-
sensus on this issue. The primary pur-
pose of this study is to provide
additional evidence to the literature in
this emerging stream of research.
In developing hypotheses, we focus on
two distinct but complementary per-
spectives of FDI: asset-exploitation and
asset-seeking. In the asset-exploitation
perspective, FDI is viewed as the transfer
of a firm's proprietary assets across bor-
ders. In the asset-seeking perspective,
FDI is viewed as a means to acquire stra-
tegic assets (i.e., technology, marketing,
and management expertise) available in
a host country. We argue that NIE firms
engage in FDI in a DC not only when
they possess certain forms of firm-spe-
cific advantages exploitable to a DC, but
also when they intend to seek technology-
based resources and skills in a DC that
are superior or not available in their
home countries in a particular product
market domain. To test this general
proposition, this study examines FDI de-
cisions made by 328 firms from Tai-
wan-one of the Asian-based NIEs.
404
Specifically, this study focuses on two
critical factors that would influence the
choice of location of FDI: an investing
firm's motivations and capabilities to en-
gage in FDI. A motivation for FDI refers
to the reason that gives an investing firm
the impetus for investing abroad. A ca-
pability refers to an investing firm's re-
sources and skills necessary to invest
abroad. Firms engage in foreign direct
investment because they are motivated
and have the capability to do so. To re-
late this definition of motivation and ca-
pability to the research subject, we pro-
pose the following general hypotheses.
NIE firms are motivated to invest in
LDCs when the labor costs in their home
country made their products non-com-
petitive in LDC markets. Those that have
superior capabilities in labor intensive
production relative to firms in the LDCs
form the intent to do so, and hence, in-
vest in LDCs. Conversely, NIE firms are
motivated to invest in DCs when they
lacked some component of technology
that is necessary to compete in DC mar-
ket that is available in the DC. Those that
have the capability to absorb this tech-
nology form the intent to do so, and
hence, invest in DCs.1
LITERATURE REVIEW
One of the key issues in the field of
international business research is how
firms exploit their existing assets and
explore new assets in host countries
through FDI. From the organization
learning perspective, March (1991) sug-
gested that exploration involves gaining
new information about alternatives and
thus improving future returns, and ex-
ploitation involves using the informa-
tion currently available and thus im-
proving present returns. Both exploita-
tion and exploration involve different
aspects of organizational learning, yet
are equally essential for organizational
JOURNAL OF INTERNATIONAL BUSINESS STUDIES
 SHIGEMAKINO,CHUNG-MINGLAU, RHY-SONGYEH
survival and prosperity. Building on the
organization learning perspective, Hed-
lund and Ridderstrale (1997) suggested
that dominant theoretical perspectives
in international business research
adopted the exploitation rather than the
exploration (creation) perspective. They
argued that due to the neglect of aspects
of asset exploration, the conventional
theories of MNE have not successfully
explained how MNEs can create innova-
tions through international expansion
and activities. Recent studies (Lecraw,
1993; Wesson, 1994; Chen and Chen,
1998; Dunning, 1995; Makino and De-
lios, 1996; Kumar, 1998; van Hoesel,
1999; Frost, 2001) suggested that firms
would engage in FDI not only to transfer
their resources to a host country, but also
to learn, or gain access to, the necessary
strategic assets available in the host
country. This alternative form of FDI is
referred to as a strategic asset-seeking
FDI, as contrasted with the asset-exploit-
ing FDI that underlies the traditional in-
ternational business literature.
FDI as Asset-Exploitation
The perspective which views FDI as
the transfer or exploitation of firm-
specific advantage assumes that firms
should possess certain forms of rent-
yielding resources when investing in a
host country. Hymer (1976) suggested
that such advantages included the abili-
ties to acquire factors of production at a
lower cost than other firms, the knowl-
edge or control of a more efficient pro-
duction function, and better distribution
facilities or a differentiated product. As a
corollary, Caves (1971) suggested tech-
nological and marketing expertise as pri-
mary sources of a firm's monopolistic
advantage. This perspective postulates
that FDI would occur when firms possess
proprietary resources and skills which
give rise to a monopolistic (or competi-
VOL. 33, No. 3, THIRDQUARTER,2002
tive) advantage in a host country (Caves,
1971; Hymer, 1976).
From a different perspective, internal-
ization theory (Buckley and Casson,
1976; Rugman, 1981) focuses on another
characteristic of firm resources-a rent-
yielding resource as a public good which
is transferred within a firm with lower
cost than via some other method, e.g.,
licensing or exporting, where the assets
is embodied in the product. The theory
suggests that firms have an incentive to
internalize a transfer of intermediate
goods, know-how, and financial capital
under common control and ownership
so as to reduce transactions costs associ-
ated with this transfer. Recently, Kogut
and Zander (1993) challenged the theo-
ry's public good assumption and sug-
gested that the firm's decision as to
whether or not to engage in FDI would
depend on the relative efficiency of the
knowledge transfer 'within' and 'be-
tween' firms, irrespective of the exis-
tence of market failure. This literature,
however, cannot clearly explain whether,
and under what conditions, knowledge
'seekers,' not the 'owners' of the knowl-
edge, would internalize transactions
across borders. In sum, no matter whether
FDI is viewed as the exploitation of firm-
specific advantage or the response to mar-
ket failure for rent-yielding resources, the
traditional literature generally assumes
that for FDI to take place, firms should
possess certain types of proprietary re-
sources to exploit in the host country.
Most early studies of FDI from LDCs
share a similar perspective. In examining
the nature of FDI by LDC firms, Wells
(1981) raised two important questions:
what are the skills of the LDC firms that
enable them to earn profits abroad and
why do these companies choose to ex-
ploit their skills through direct invest-
ment. With regard to the first question,
Wells (1977, 1981, 1983) suggested the
405
ASSET-EXPLOITATION
VERSUSASSET-SEEKING
skills of the LDC firms are to develop
small scale, labor intensive, and flexible
processes and products which are suit-
able to the LDC markets, and to find
ways to substitute locally available in-
puts. Similar distinct characteristics of
LDC firms have also been observed in
ASEAN countries (Lecraw, 1993) and in
NIEs such as Hong Kong, Korea, Taiwan,
and Singapore (Lecraw, 1977; Kumar
and McLead, 1981; Ting and Schive,
1981), although Lall (1983) found that
there were noticeable differences in
types and degree of their firm-specific
assets and skills. With regard to the sec-
ond question, Wells suggested that LDC
firms would prefer to engage in FDI
when: (1) the local market is uncertain
due to the lack of information about the
value of the assets produced by local
firms and the less developed distribution
network; (2) the internalization of local
firms' skills (e.g., small scale manufac-
turing) is difficult; and (3) there is not a
formal legal or control system to protect
investing firms' technological knowl-
edge. These explanations are applicable
primarily to LDCs firms investing in
other LDCs, usually much less devel-
oped than their home countries. Al-
though these studies recognized the pos-
sibility of LDC firms' upstream invest-
ments, such investments are considered
"exceptional" cases in these studies
(Lall, 1983).
FDI as Strategic Asset-Seeking
Recent studies have recognized that
firms invest in foreign countries not only
to exploit but also to develop their firm-
specific advantages or acquire necessary
strategic assets in a host country
(Almeida, 1996; Chang, 1995; Dunning,
1993, 1995; Frost, 2001; Shan and Song,
1997; Teece, 1992). These studies sug-
gest that a firm's firm-specific advantages
would arise not only from the possession
406
of proprietary assets but also from the
capacity to acquire, or the efficient coor-
dination of, the complementary assets
owned by other firms in a host country
(Dunning, 1995, 1998, 2000). Underlying
this perspective is that critical resources
and capabilities that firms seek are more
often found to be spatially determined
than simply existing within any single
firms (Enlight, 1998). Firms that intend
to build advantages through FDI there-
fore have a natural incentive to seek op-
portunities to invest in a particular lo-
cation (host country) in which their
needed strategic assets are available.
In support of this perspective, a grow-
ing amount of literature has suggested
that much of inward FDI in the U.S. is
motivated by strategic asset-seeking pur-
poses. Kogut and Chang (1991) exam-
ined whether Japanese FDI would reflect
the exploitation of Japanese firms' firm-
specific advantages or the targeting of
U.S. technology, and found that Japanese
firms tended to form a JV with U.S. firms
to source U.S. technology. Chang (1995)
investigated the sequential entry of the
Japanese electronic manufacturing firms
in the U.S. and found that the Japanese
firms' FDI in the U.S. was motivated pri-
marily for capability development. More
recently, Almeida (1996) studied inward
FDI in the U.S. semiconductor industry
and found that foreign firms tended to
cite local patents more frequently than
similar domestic firms, suggesting that a
primary purpose of inward FDI by for-
eign firms in the U.S. semiconductor in-
dustry was to source local technology.
Shan and Song (1997) found similar ev-
idence in the U.S. biotechnology indus-
try.
Recent studies of both LDC and NIE
multinationals suggest that a growing,
yet small, number of LDC and NIE firms
have engaged in strategic asset-seeking
FDI (Kumar, 1998; Chen and Chen, 1998;
JOURNAL OF INTERNATIONAL BUSINESS STUDIES
 SHIGEMAKINO,CHUNG-MINGLAU, RHY-SONGYEH
van Hoesel, 1999). Lecraw (1993) inves-
tigated international expansion strate-
gies of both export-enhancing and oper-
ation-extending firms in Indonesia. He
found that export-enhancing Indonesian
firms tended to be less scale, cost and
technology efficient than operation-ex-
tending firms yet had more advantages in
access to low cost natural resources and
labor than uninational firms. Based on
the analysis of the data collected from
the interviews, Lecraw suggested that ex-
port-enhancing firms tended to invest in
higher income countries than operation-
extending firms primarily to acquire
management, technology, and marketing
expertise, using the capital that they
earned in their home country, combined
with their competitive advantages in ac-
cess to low-wage labor and physical in-
puts.
Kumar (1998) investigated a recent
trend in strategic asset-seeking FDI con-
ducted by firms from Asian NIEs. He
found that the amount of the outflow of
FDI from Asian NIEs to DCs has been
rapidly increasing over the past decade
and suggested that the NIE firms invest-
ing in DCs tended to use outward FDI to
strengthen their non-price competitive-
ness, whereas those NIE firms investing
in LDCs used FDI primarily to strengthen
their price competitiveness. Chen and
Chen (1998) found a similar pattern in
outward FDI of Taiwanese firms. Re-
search also suggests that many of the NIE
firms investing in DCs have gained ac-
cess to established brand names, novel
product technology, and extensive net-
works of distributors, typically via ag-
gressive acquisitions of DC firms in the
host countries (Kumar 1998; van Hoesel,
1999) and/or through 'relational net-
works' of local suppliers and customers
that share cultural or ethnic backgrounds
similar to the investing firms' (Chen and
Chen, 1998).
VOL. 33, No. 3, THIRDQUARTER,2002
CONCEPTUAL FRAMEWORK AND
HYPOTHESES
Conceptual Framework
Figure 1 depicts four groups of eco-
nomic regions, DCs, NIEs, small LDCs,
and large LDCs. These regional groups
are identified based on level of economic
development and market size. In this
study, we focus specifically on FDI from
NIEs to LDCs and DCs.
In developing hypotheses, we focused
on three key motivations for FDI: strate-
gic asset-seeking, resource-seeking, and
market-seeking (Dunning, 1993). To sim-
plify our discussions, we hereafter use
the term 'resource-seeking' as a synonym
of "labor-seeking."
The asset-exploitation perspective of
FDI commonly posits that firms that
possess firm-specific advantages utilize
these advantages to operate abroad to
seek markets or low-cost natural re-
sources or labor force. Therefore, we
consider both resource/labor- and mar-
ket-seeking FDI can be better understood
from the asset-exploitation perspective,
whereas strategic asset-seeking FDI is
better understood from the asset-seeking
perspective. As will be discussed in the
subsequent sections, we argue that stra-
tegic asset-seeking FDI would occur
more likely in upstream countries than
in down stream countries, and resource/
labor-seeking FDI more likely in down-
stream countries than in upstream coun-
tries. Market-seeking FDI would occur
more likely in large countries than in
small countries for standard goods, and
more likely in upstream countries than
in downstream countries for differenti-
ated goods. Taken together, we argue
that, a priori, NIE firms tend to invest in
DCs for either strategic asset-seeking
or market-seeking purposes, small and
large LDCs for resource/labor-seeking
407
 VERSUSASSET-SEEKING
ASSET-EXPLOITATION

FIGURE 1
REGIONALGROUPS AND FDI MOTIVATIONS

Advanced
(Upstream)
DCs

Asian
NIEs
Level of
economic
development

(Srmall > ( LargeLDCs

Less LDCs (e.g., China,
advanced India)
(Downstream)

Small Large
MarketSize

Market-seeking
(standardgoods)

purposes, and large LDCs for both re-
source and market-seeking purposes.
However, whether NIE firms actually
invest in these locations may depend
on the firms' capabilities that support
the investments. In this study, we fo-
cused on three types of capabilities:
labor intensive production capability,
technology-based assets, and prior tech-
nology-seeking experience. These capa-
bilities are firm-specific and constitute
the sources of the NIE firms' unique ad-
vantages over indigenous firms and/or
the basis for further development of their
advantages through FDI. We argue that
the likelihood that the NIE firms invest
in a particular country (location) for a
specific investment motivation may vary
depending upon the types and amounts
of the firm's capabilities that support the
investment.
Figure 2 provides a conceptual frame-
work for hypotheses development. First,
as depicted in Figure 1, a firm's motiva-
tion to engage in FDI in a particular
country (location) would be driven by
country-specific factors-either natural
endowments (e.g., low cost labor and
natural resources) or created endow-
ments (e.g., strategic assets) available in
a host country (location). Second, the
firm's motivation directly influences its
location decision. Finally, the firm's ca-
pabilities strengthen or weaken the in-
fluence of motivation on location deci-
sion.
In the following sections, we discuss
how NIE firms' motivations and capabil-

408 BUSINESS STUDIES

JOURNALOF INTERNATIONAL
 SHIGE MAKINO, CHUNG-MING LAU, RHY-SONG YEH

FIGURE 2
CONCEPTUALMODEL

Capabilities

? labor intensive production

* technology-based assets
? prior technology-seeking
experience

Country specific factors Motivations

* Natural endowments * Market- seeking

* Created endowments * Resource (labor)-seeking
" Strategic asset-seeking

ities would influence their actual FDI
decisions regarding the choice of FDI lo-
cation.
Hypotheses
Strategic asset-seeking. As discussed
in earlier sections, it is expected that,
when NIE firms intend to source ad-
vanced technology, marketing, and man-
agement expertise, they are more likely
to invest in DCs than in LDCs. This is
because most advanced strategic assets
and sophisticated customer segments
tend to be spatially concentrated in DCs
(Kumar 1998; Dunning 1998). Building
on the argument discussed earlier, we
expect that NIE firms seeking technolo-
gy-based resources and skills via FDI
would more likely invest in DCs than
in LDCs. We set forth the following hy-
pothesis.
Hypothesis la: NIE firms are more
likely to invest in DCs than in LDCs
when their primary motivation of in-
vestment is to seek technology-based
assets in a host country.
Some may wonder why some NIE
firms are more active in strategic asset-
seeking FDI and thus investing in DCs,
and other NIE firms are less active in this
type of investment. One possible expla-
nation for this question is that firms
might differ in their capabilities to eval-
uate, acquire, and integrate strategic as-
sets from external sources. This differ-
ence would lead to a varying degree of
the likelihood that the firms would en-
gage in strategic asset-seeking FDI in
DCs. In the literature of organization the-
ory, this type of capability is referred to
as an 'absorptive capacity'.
An absorptive capacity is largely a
function of the level of prior related
knowledge, which takes the forms of
both basic and recent scientific and tech-
nological developments in a given field
(Cohen and Levinthal, 1990, p. 128).
Such related knowledge is used as a plat-
form for a firm's further development of
capability. For successful strategic asset-
seeking FDI, the NIE firms need to pos-
sess related expertise prior to engaging
in FDI in DCs. While the traditional as-
set-exploitation perspective of FDI sug-
gests that these related expertise would
create the investing firms' firm-specific
advantage that drives outward FDI, the

VOL. 33, No. 3, THIRDQUARTER, 2002 409

ASSET-EXPLOITATION
VERSUSASSET-SEEKING
asset-seeking perspective of FDI suggests
that such expertise would work as an
absorptive capacity that facilitates fur-
ther development of capabilities. In sup-
port of the latter perspective, van Hoesel
(1999) found that NIE firms that invested
in DCs tended to possess superior tech-
nology and marketing advantages over
other domestic firms. Similarly, Chen
and Chen (1998) found that Taiwanese
firms investing in the U.S.A. tended to
have a greater R&Dintensity and a higher
rate of sales growth than those investing
in LDCs. These studies generally suggest
that firms that possess superior firm-spe-
cific advantages are more likely to en-
gage in strategic asset-seeking FDI (and
hence invest in DCs) than those firms
that do not possess such advantages. The
fact that NIE firms possess superior firm-
specific advantages over their domestic
competitors, however, does not neces-
sarily imply that these firms would au-
tomatically engage in asset-seeking FDI
in DCs. For an asset-seeking FDI to occur
in a DC, the NIE firms should possess
related technological capabilities that
are advanced enough to absorb the supe-
rior technological capabilities owned by
the source firms in the DC. We therefore
expect that the likelihood that NIE firms
would invest in DCs for asset-seeking
purposes will be higher when they pos-
sess advantages in technology-based ca-
pabilities over indigenous competitors
in a particular product market domain in
a host country, and lower when they
have no such advantages.
Hypothesis lb: NIE firms are more
likely to invest in DCs than in LDCs
for strategic asset-seeking motivations
when they possess more superior tech-
nological assets than indigenous com-
petitors in a host country.
Development of absorptive capacity
requires cumulative, path-dependent
410
processes of organizational learning (Co-
hen and Levinthal, 1990). Given that an
absorptive capacity is one form of a
firm's learning capability, it is expected
that the level of absorptive capacity that
the firm possesses would be closely as-
sociated with the amount of prior expe-
rience that the firm has in acquiring stra-
tegic assets from non-domestic firms. In
support of this view, van Hoesel (1999)
observed that most NIE firms investing
in DCs had made extensive OEM con-
tracts or alliances with DC-based firms in
their home country prior to their invest-
ments in DCs. We therefore expect that
the NIE firms with prior experience of
strategic asset-seeking through OEM or
alliance formation in their home country
may have a stronger propensity to engage
in asset-seeking FDI, and hence, invest
in DCs, compared to those firms with no
such experience.
Hypothesis Ic: NIE firms are more
likely to invest in DCs than in LDCs
for strategic asset-seeking motivations
when they have prior experience of
seeking strategic assets from foreign
firms.
Resource (labor)-seeking. The primary
purpose of firms which engage in re-
source/labor-seeking FDI is to acquire
particular and specific resources in a
host country at a lower real cost than
could be obtained in their home country
(Dunning, 1993). Probably the most
immediate resources to be acquired
through this type of FDI involve labor,
natural resources, and capital in a host
country. In the traditional trade theory,
these factors of production are assumed
to be unevenly distributed and immobile
among nations (locations), and are the
basis for comparative advantages of na-
tions (locations). FDI is often used to
source these resources in a compara-
tively advantaged country. Unlike strate-
JOURNAL OF INTERNATIONAL BUSINESS STUDIES
 SHIGEMAKINO,
gic asset-seeking FDI, the primary focus
of this type of FDI is to lower total deliv-
ered cost including transportation and
tariffs by gaining access to low cost fac-
tor inputs for production such as low
cost labor. Assuming that the firm's ac-
cess to a low cost labor force is easier in
LDCs than in DCs, we expect that NIE
firms are more likely to invest in LDCs
when this is their primary motivation of
investment.
Hypothesis 2a: NIE firms are more
likely to invest in LDCs than in DCs
when their primary motivation of in-
vestment is to gain access to low cost
labor in a host country.
In principle, firms would engage in
resource/labor-seeking FDI when they
can successfully combine their superior
product or process technology with low
cost labor to make delivered cost in the
host country market, or other market,
lower than the costs of exports to the
host country. In the case of FDI, if foreign
firms possess advantages in superior la-
bor intensive production capabilities
over the indigenous competitors in a
host country, they would better exploit
the low cost labor and hence gain higher
returns than the competitors in the same
host country (Hymer, 1976). Again, as-
suming that foreign firms can gain access
to low cost labor more easily in LDCs
than in DCs, we expect that NIE firms
with more superior capabilities in labor
intensive production than the indige-
nous competitors are more likely to in-
vest for labor-seeking purposes in LDCs,
and less likely to invest in DCs, than
those firms with no such capabilities.
Hypothesis 2b: NIE firms are more
likely to invest in LDCs than in DCs for
labor-seeking purposes when they
possess more superior labor intensive
production capabilities than indige-
nous competitors in a host country.
VOL. 33, No. 3, THIRDQUARTER,2002
CHUNG-MING
LAU,RHY-SONG
YEH
Market-seeking. Dunning (1993) sug-
gested that firms seek market expansion
opportunities through FDI for a variety
of reasons: to expand the existing domes-
tic buyer-supplier relationships in host
countries; to either preempt or avoid be-
ing preempted by the rivals' entry into a
particular host country; to produce prod-
ucts close to local markets; to lower
transportation costs; and, to benefit from
investment incentives. Some studies
have specifically investigated whether
market-seeking FDI would occur more
likely in DCs or in LDCs. Lecraw (1991)
studied factors that influenced inward
FDI in LDCs and found that the rate of
growth of domestic demand and changes
in the tariff rate had a significant and
positive impact on market-seeking FDI
in LDCs. With regard to inward FDI from
NIEs to DCs, Kumar (1998) suggested
that an increasing number of NIE manu-
facturers (Korean firms) have made nu-
merous trade supporting investments in
DCs, establishing affiliates to develop
marketing networks in the host countries
and provide after sales activities. Van
Hoesel (1999) conducted in-depth case
studies of Korean consumer electronics
and Taiwanese PC industries and found
that the firms in these industries tended
to produce labor intensive goods in loca-
tions with abundant, non- or semi-
skilled labor, whereas they preferred as-
sembling final goods in high income
markets for such reasons as protection-
ism or because of fast changing con-
sumer demands. These evidence gener-
ally suggest that NIE firms exploring new
market opportunities abroad are more
likely to invest in countries where mar-
ket potential is large than in countries
with small market potential. Building on
the above arguments, we expect that,
with the exception of large LDCs such as
China and India, NIE firms seeking mar-
ket opportunities would invest more
411
ASSET-EXPLOITATION
VERSUSASSET-SEEKING
likely in DCs, where market size is rela-
tively large, than in LDCs, where market
size is relatively small.
Hypothesis 3a: NIE firms are more
likely to invest in DCs than in LDCs
(except large LDCs) when their pri-
mary purpose of investment is to ex-
plore market opportunities.
The above discussion also suggests
that, ceteris paribus, NIE firms tend to
invest in high income countries to pro-
duce differentiated goods to high income
customers, and LDC markets to produce
labor intensive goods to low income cus-
tomers. To gain higher returns than in-
digenous firms in the host country, NIE
firms need to possess superior techno-
logical capabilities to produce more
unique differentiated goods, and supe-
rior labor intensive production capabili-
ties to produce more low cost standard
goods to the customers. Taken together,
we expect that market-seeking FDI by
NIE firms would occur more likely in
LDCs when they have superior labor pro-
duction capabilities, and in DCs when
they have superior technological capa-
bilities over the firms in the host coun-
tries.
Hypothesis 3b: NIE firms are more
likely to invest in DCs than in LDCs for
market-seeking purposes when they
possess more superior technology-
based capabilities than indigenous
competitors in a host country.
Hypothesis 3c: NIE firms are more
likely to invest in LDCs than in DCs for
market-seeking purposes when they
possess more superior labor intensive
production capabilities than indige-
nous competitors in a host country.
RESEARCH METHODOLOGY
Sample
A sample used in the present study
was based on a survey conducted in
412
1996 by the Statistics Department of the
Ministry of Economic Affairs in Taiwan.
The questionnaire was sent to 2,712 ran-
domly selected Taiwanese manufactur-
ing firms that were registered in the For-
eign Investment Commission as of Sep-
tember 1996. The sample included the
Taiwanese firms that had invested or had
the intention to invest overseas. Of the
returned questionnaires, 1,312 were us-
able. The non-responding firms were
those which had not started actual in-
vestment, retreated from investing over-
seas, or had closed down already. The
usable sample represented 92% of the
effective size. Of the total cases avail-
able, only 328 cases were selected for the
analysis in this study. The cases ex-
cluded from the original sample in-
cluded the cases of the firms that in-
vested in newly industrialized econo-
mies (NIEs) such as Singapore, Hong
Kong, and South Korea, and in China,
and those firms which had invested
in non-manufacturing sectors. We ex-
cluded the cases of the firms investing in
NIEs from the sample, because our pri-
mary purpose in the present study was to
examine the determinants of NIE firms'
FDI in DCs and LDCs, not those in other
NIEs. We excluded the cases of the firms
that had invested in China for two major
reasons. Firstly, since the total number
of Taiwanese firms investing in China
was conspicuously large (about 70% of
the total cases), we consider that the re-
sults of the analysis might have a bias
towards the firms investing in China.
Secondly, China is different from other
LDCs in terms of market size as well as
cultural connections and may not fall
into a regular LDC category, which un-
derlies the previous literature (e.g.,
Wells, 1977, 1983). We also focused only
on FDI in manufacturing sectors in order
to avoid possible industry effects on the
choice of FDI location.
JOURNALOF INTERNATIONAL
BUSINESS STUDIES
 CHUNG-MING
SHIGEMAKINO, YEH
LAU,RHY-SONG

Table 1 provides the distribution of
FDI locations across industries. Firms in
most industries tended to have more in-
vestments in LDCs than in DCs. In some
industries such as textile, leather prod-
ucts, lumber & wood products petroleum
& coal, primary metals, firms had no in-
vestments in DCs. Firms in electronic
equipment industry had the largest num-
ber of investment both in LDCs (55 cases)
and in DCs (58 cases).
Variables
The hypothesized relationships were
examined using logistic regression anal-
ysis. A dependent variable (LOCATION)
represents the investment location, ei-
ther DCs or LDCs. The firms were asked
to choose their most representative FDI
based on the amount of investment and
indicate the location of the FDI from a
list of 18 countries and regions. We clas-
sify countries in North America (U.S.
and Canada), Western Europe (U.K.,
France, and others), two Oceanic coun-
tries, Australia and New Zealand, and
Japan into the DC category, and coun-
tries in Middle/South America, Africa,
and ASEAN countries into the LDC cat-
egory. The variable was defined by a
dummy variable, coded "1" when the
firm invested in a DC, and "0" when it
invested in a LDC.
The independent variables used in the
analysis consist of three capability-re-
lated and three motivation-related vari-
ables. The first two capability-related
variables represent advantages in labor
intensive production capability (LABOR-
CAP) and advantages in technology-

TABLE 1
DISTRUTION OF FDI LOCATIONBY INDUSTRY

Industry LDC* DC Total

Textile 18 18
Apparel 18 2 20
Leatherproducts 2 2
Lumber& wood products 11 11
Furniture 10 1 11
Paper mills & paper products 6 1 7
Printing & publishing 1 1
Chemical materials 3 3 6
Chemical products 15 4 19
Petroleum & coal products 1
Rubberproducts 9 1 10
Plastic products 21 11 32
Stone, clay & glass products 1 3 4
Primarymetal 7 7
Fabricatedmetal products 31 3 34
Machinery & equipment 9 4 13
Electronic equipment 55 58 113
Transportationequipment 6 1 7
Instruments 4 3 7
Miscellaneous manufacturing 4 1 5
Total 231 97 328

*The cases of inward FDI in China are not included.

VOL. 33, No. 3, THIRDQUARTER,2002 413

ASSET-EXPLOITATIONVERSUS ASSET-SEEKING
based capability (TECHNOLOGY). The
firms were asked to indicate their rela-
tive advantages in a particular product
market domain over the indigenous
firms in the host country. These vari-
ables were measured on a dichotomous
scale (high-low), coded "1" when the
firms possessed relative advantages in
the respective areas over their competi-
tors in a specific product market domain
in the host county, and "0" otherwise.
Another capability variable is an invest-
ing firm's prior technology seeking expe-
riences at arm's length (EXPERIENCE),
which was defined by a dummy variable,
coded "1" when the firm had a prior
experience of technology seeking with
DC firms through licensing or OEM
agreements, and "0" otherwise.
Note that the first two capability vari-
ables (LABORCAP and TECHNOLOGY)
are self-reported measures. Since manag-
ers of each firm may have different eval-
uation criteria and different reference
groups for comparison of advantages,
some may argue that what is being tested
in our study would actually be the extent
to which the managers' perceptions are
consistent and rational rather than the
capabilities of the firms. Nonetheless,
self-reported measures are commonly
used, especially in strategic human re-
source management and strategy re-
search where objective measures are not
directly comparable (c.f. Delaney and
Huselid, 1996). Tomaskovic-Devey, Le-
iter, and Thompson (1994) suggest that a
comparative method is more effective in
eliciting responses than asking respon-
dents directly to provide exact numbers
for performance. Although there is the
danger of self-reporting bias, research
has found that perceived measures were
correlated positively with objective mea-
sures. To examine potential problems of
self-reporting bias in our study, we con-
ducted two additional analyses. Here,
414
we assume that firms with advantages in
technology-based and labor intensive
production capabilities (TECHNOLOGY
and LABORCAP) tend to be large in size
and attain higher overall performance in
their overseas activities than those firms
without such advantages. We used the
two measures available in the database
as proxy for the firm size and perfor-
mance: the number of employees (a par-
ent firm) and the perceived performance
of overseas operations measured by a
three-point scale (unsatisfactory, satis-
factory, and excellent). Consistent with
our expectation, the results of t-tests
(both parametric and non-parametric
tests) suggest that both the firms with
advantages in technology-based capabil-
ity (TECHNOLOGY=1) and those firms
with advantages in labor intensive pro-
duction capabilities (LABORCAP= 1)
had a significantly larger number of par-
ent firm employees and a significantly
higher level of perceived performance
than those firms with no such advan-
tages. With this evidence, we consider
that there exists no critical self-reporting
bias in our sample.2
The motivation-related variables rep-
resent access to local labor force (LA-
BORSEEK), local market expansion
(MARKETSEEK), and technology seek-
ing (TECHSEEK), respectively. These
variables were constructed from their in-
dication of reasons for investing overseas
along different dimensions, and defined
by a dummy variable (coded "1" when
the firms had the described motivations,
and "0" otherwise).
Three variables were used in the anal-
ysis to control for possible subsidiary
age, entry mode, and parent firm size
effects on the choice of FDI location: year
of foundation (FOUNDATION), entry
mode (MODE), firm size (EMPLOYEES),
and percentage of overseas sales (FOR-
EIGNSALES). FOUNDATION was mea-
JOURNAL OF INTERNATIONAL BUSINESS STUDIES
 SHIGE MAKINO, CHUNG-MING LAU, RHY-SONG YEH
sured by the number of years between
the year of establishment and 1996, the
year of observation in the present analy-
sis. MODE was defined by a dummy vari-
able, coded "1" when the firm's foreign
affiliate was a joint venture, and "0"
when it was a wholly-owned subsid-
iary.3 EMPLOYEES was measured by the
total number of employees of parent
firms. FOREIGNSALES was measured by
percentage of a parent firm's overseas
sales relative to its total sales. We also
included an electronics industry dummy
in the analysis (ELECTRONICS), coded
"1" when the subsidiary's industry was
electronic equipment and "0" otherwise.
We included this variable to control for
possible industry bias because the major-
ity of FDI cases in DCs (113 cases) were
in the electronic equipment industry.4
Further, we included a financial asset
dummy variable (FINANCE), coded "1"
when the firm possessed more financial
assets than indigenous firms in a host
country, and "0" otherwise. Firms with a
large amount of financial resources may
treat FDI as a portfolio investment,
where they do not have substantial con-
trol over local operations. We included
this variable to control for this possibil-
ity.
The correlation matrix is presented in
Table 2, which suggests no critical mul-
ticollinearity problems for logistic re-
gression analysis.
RESULTS
The results of the analyses are pre-
sented in Table 3. Consistent with Hy-
potheses la, 2a, and 3a, our results
(Model 1) suggested that technology
seeking motivations (TECHSEEK) and
market-seeking motivations (MARKET-
SEEK) were both significantly associated
with investment in DCs, and labor-seek-
ing motivations (LABORSEEK) were sig-
nificantly associated with investment in
VOL. 33, No. 3, THIRD QUARTER, 2002
LDCs. In order to examine the moderat-
ing effects of a firm's capabilities on the
impact of the firm's motivations on the
location choice, we created four interac-
tion variables. The results indicated that
the three interaction variables, TECH-
NOLOGY x TECHSEEK (Model 2), EX-
PERIENCE x TECHSEEK (Model 3), and
TECHNOLOGY x MARKETSEEK (Model
4), had a significant and positive impact
on the dependent variable, and the coef-
ficients of these interaction variables
were all greater than those of the original
motivation variables (i.e., TECHSEEK
and MARKETSEEK). The implications of
these results are twofold. First, the NIE
firms engaging in strategic asset-seeking
FDI were more likely to invest in DCs
over LDCs when they possessed ad-
vantages in technology-based capability
over indigenous firms (Hypothesis lb)
and prior seeking experience (Hypothe-
sis Ic), than when they did not possess
such advantages and experience. Sec-
ond, the NIE engaging in market-seeking
FDI were more likely to invest in DCs
over LDCs when they possessed ad-
vantages in technology-based capability
over indigenous firms (Hypothesis 3b).
The results provided in Models 4 and 6
suggested that the two interaction vari-
ables, LABORCAP x LABORSEEK and
LABORCAP x MARKETSEEK, were not
significant, although the signs of the co-
efficients of these variables were consis-
tent with the predicted directions. Thus,
Hypotheses 2b and 3c were rejected.
DISCUSSION
This study examined the impact of
both the capabilities and motivations of
Taiwanese firms on the choice of FDI
location between DCs and LDCs. The
proposed hypotheses were generally
supported in this study. The results of
the analyses are summarized as follows.
415
 T^
TABLE
2
CORREIATIONMATRIX

Std.
Variables Mean Dev. 1 2 3 4 5

1 LOCATION Choice of location: LDC = 0; 0.30 0.46

DC=1
2 FOUNDATION Year of foundation 79.73 5.50 -0.01
3 MODE Entry mode: WOS = 0; 0.61 0.49 0.00 0.06
JV=1
4 EMPLOYEES Total # of employees 231.12 395.83 0.08 -0.07 -0.02
5 FOREIGNSALES Percentage of overseas sales 4.19 2.99 -0.16 0.03 -0.09 -0.10
6 ELECTRONICS Industry dummy (Electronics 0.34 0.48 0.35 0.01 -0.06 0.31 -0.04
0S =1)
7 FINANCE Financial resources 0.50 0.50 0.00 -0.05 -0.04 0.08 0.16
8 LOBOOCAP AdventAges in labor intensive 0.60 0.49 -0.35 -0.02 -0.06 0.01 0.14
production capability
9 TECHNOLOGY Advantages in technological- 0.16 0.37 -0.01 0.04 0.12 0.11 -0.05
based capability
10 EXPJK NCE Prior seeking experience 0.36 0.48 0.35 0.02 -0.02 -0.04 -0.07
through licensing or OEM
11 LABORSEEK Labor-seeking FDI 0.61 0.49 -0.48 -0.07 -0.06 0.00 0.15
12 MAXKETSEEK Market-seeking FDI 0.48 0.50 0.32 -0.07 0.13 0.04 -0.21
13 TECHSEEK Strategic asset-seeking FDI 0.12 0.32 0.42 0.10 0.02 0.12 -0.06

N= 328
tn[

I~
 SHIGEMAYINO,CHUNG-MINGLAU, R.HY-SONGYEHl

TMJLE3
AuNAYSIS'
OF LOGISTC REGRIFSSTON
RIESUILTS

Dependent variable:LOCATION(LDC= 0 and DC = 1)

ModelI Model 2 Model 3 Model 4 Model 5 Model 6

Control FOUNDATION -0.027 -0.027 -0.025 -0.027 -0.027 -0.027

(0.023) (0.023) (0.024) (0.024) (0.024) (0.024)
Control MODE -0.156 -0.175 -0.277 -0.158 -0.154 -0.158
(0.351) (0.353) (0.359) (0.353) (0.357) (0.352)
Control EMPLOYEES 0.000 0.000 0.000 0.000 0.000 0.000
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Control FOREIGNSALES-0.055 -0.053 -0.072 -0.055 -0.054 -0.055
(0.063) (0.063) (0.065) (0.063) (0.063) (0.063)
Control ElECTRONICS 1.023*** 1.034*** 1.023*** 1.026*** 1.016*** 1.019***
(0.353) (0.355) (0.356) (0.356) (0.356) (0.353)
Control FINANCE -0.051 -0.039 -0.072 -0.051 -0.023 -0.056
(0.341) (0.344) (0.343) (0.341) (0.344) (0.342)
Capability LABORCAP -1.152*** -1.262*** -1.166*** -1.127*** -1.186*** -1.062**
(0.334) (0.345) (0.336) (0.453) (0.338) (0.524)
Capability TECHNOLOGY -0.144 -0.484 -0.188 -0.150 -0.885* -0.142
(0.471) (0.551) (0.474) (0.477) (0.669) (0.470)
Capability EXPERIENCE 1.160*** 1.127*** 0.955*** 1.160*** 1.256*** 1.153***
(0.345) (0.349) (0.365) (0.345) (0.356) (0.347)
Motivation LABORSEEK -1.693*** - 1.689** -1.708*** -1.666*** -1.838*** -1.692***
(0.355) (0.358) (0.354) (0.497) (0.370) (0.355)
Motivation MIARKETSEEK 0.976*** 0.919*** 1.008*** 0.975*** 0.673** 1.056**
(0.358) (0.363) (0.361) (0.359) (0.397) (0.510)
Motivation TECHSEEK 1.180** 0.675 0.056 1.179** 1.044** 1.180**
(0.572) (0.650) (0.855) (0.572) (0.592) (0.571)
Interaction TECHNOLOGY X 1.920*
TECHSEEK (1.381)
Interaction EXPERENCEX 1.944**
TECHSEEK (1.147)
hinteractionLABORCAPX -0.054
LABORSEEK (0.682)
Interaction TECHNOLOGY X 1.643**
MARKETSEEK (0.959)
Interaction LABORCAP)( -0.150
MARKETSEEK (0.675)
Constant 1.515 1.634 1.544 1.488 1.704 1.424
(1.922) (1.925) (1.923) (1.951) (1.934) (1.966)
Model Chi-square 156.2** 158.9** 159.2** 156.2*** 159.2** 156.3**
d.f. 12 13 13 13 13 13
AChi-square - 2.7* 3.0* 0 3.0* 0.1
NagelkerkeR' .53 .54 .54 .53 .54 .53
DC cases correctly classified 94.4 93.5 93.5 94.4 93.1 93.9
(%
LDCcases correctly classified 67.0 66.0 69.1 67.0 63.9 66.0
(%
Overall classification rate (% 86.3 85.4 86.3 86.3 84.5 85.7
Lambda-p .53 .50 .53 .53 .47 .51
N 328 328 328 328 328 328

'Figures shown are beta coefficients of the logistic regressions. Figures in the parenthesis are standard
errors.
***p<.0l, **p<.05, *p<.10 (One tail test)

VOL. 33, No. 3, THIRD QUARTER, 200247 417

ASSET-EXPLOITATIONVERSUS ASSET-SEEKING
First, the NIE firms tended to invest in
DCs when they had strategic asset-seek-
ing and market-seeking motivations, and
in LDCs when they had labor-seeking
motivations. This evidence suggests that
the firms' motivation to invest in a par-
ticular location is pertinent to country-
specific factors in the host country, sup-
porting the idea that FDI is used as a
means to gain access to comparatively
advantaged country-specific assets in the
host country.
Second, our study also suggested that
the likelihood for the firms to invest in a
particular location was significantly in-
fluenced by the types and degree of the
capabilities that the firms possessed.
Our evidence suggested that technology-
based advantages and prior strategic as-
set-seeking experience strengthened the
likelihood of FDI in DCs when the NIE
firms' primary motivation was strategic
asset-seeking. Technology-based advan-
tages also strengthened the likelihood for
the firms to invest in DCs when they had
market-seeking motivation. If we can
consider a market-seeking FDI as a typi-
cal case of asset-exploitation FDI, we
suggest that technological advantages fa-
cilitate both asset-exploitation and asset-
seeking FDI in DCs.
With regard to labor-seeking FDI, how-
ever, our evidence showed that the NIE
firms with labor-seeking motivations
tended to invest in LDCs, irrespective of
whether they possessed advantages in la-
bor intensive production capability. One
interpretation of this result is that access
to natural country-specific endowments
such as pooled low-cost labor markets in
a LDC does not necessarily require the
investing firms to possess firm-specific
advantages in labor intensive production
capabilities because such endowments
are available for any firms located in the
same country (or location). In contrast,
access to created country-specific en-
418
dowments such as strategic assets owned
by indigenous firms may require the in-
vesting firms to possess certain forms of
firm-specific absorptive capacity because
the acquisition and integration of such
endowments (assets) are difficult and
costly due to tacit and organizationally
embedded nature of the endowments
(assets) (Makino and Delios, 1996).
There are several implications for the
future study.
First, our evidence suggests that the
NIE firms' choice of FDI location be-
tween DC and LDC be determined by
both asset-exploitation and strategic as-
set-seeking motivations. As we dis-
cussed earlier, most previous studies
have examined only either side of the
motivations in explaining the location of
FDI. Future studies should incorporate
both aspects of FDI motivations into
the analysis simultaneously. Especially,
more comprehensive studies are needed
to investigate how asset-seeking and as-
set-exploitation aspects of FDI are dy-
namically linked in the choice of FDI
location, and how the choice of FDI lo-
cation influences the process of develop-
ment of competitive advantage of the
MNC.
Second, one of the key findings in our
study is that the NIE firms were more
likely to invest in DCs when they had
strategic asset-seeking motivations and
absorptive capacity (prior technology
sourcing experience). This begs impor-
tant questions of how the firms had de-
veloped the absorptive capacity and why
they were motivated to seek more. An-
other important question is whether both
types of FDI would require different or-
ganizational structures and processes of
investing firms. Although some research-
ers have recently touched upon these is-
sues (e.g., Hedlund and Ridderstrale,
1997), more conceptual investigations
BUSINESS STUDIES
JOURNALOF INTERNATIONAL
 SHIGE MAKINO, CHUNG-MING LAU, RHY-SONG YEH
should be pushed forward to make the
theory more complete and relevant.
Finally, previous studies have exten-
sively examined why MNEs exist and
where FDI is likely to take place. The
"why" question generally involves the
issues of whether a firm possesses pro-
prietary resources or capabilities that
can be exploited or internalized across
borders under the common ownership.
The "where" question generally involves
the issues of location advantages that can
attract inward FDI. However, as exempli-
fied by Dunning's early model of eclectic
paradigm, a majority of the previous
studies have examined the "why" and
"where" questions separately. Our evi-
dence shows that a firm's choice of FDI
location was influenced significantly by
the investing firms' specific motivations
and capabilities, which suggests that the
effects of location and ownership advan-
tages on the location choice might be
better specified as interactions than as
direct effects (Dunning, 2000). Future
studies should conduct more detailed
examinations of possible interaction ef-
fects between firm-specific and country-
specific factors on the location choice of
FDI.
NOTES
1. We are very grateful to one of the
reviewers for helpful advice for clarify-
ing the conceptual difference between
motivation and capability.
2. We admit that a further, more de-
tailed analysis may be necessary to ex-
amine the possibility of a self-reporting
bias. However, due to the limitation of
the data, the analysis beyond this is not
feasible. Thus, we have to acknowledge
that our findings should be interpreted
with caution.
3. Recent studies found that interna-
tional joint ventures took a variety of
ownership structure according to the
VOL. 33, No. 3, THIRDQUARTER, 2002
number, the affiliatedness, and the
nationality of partners (Makino and
Beamish, 1998), as well as the levels of
resource commitment, control, and risks
shared among partners (e.g., Woodcock,
Beamish, and Makino, 1994). In this
study, however, we simply defined a
joint venture as a subsidiary with a
shared ownership structure.
4. To examine the possible industry
bias in our analyses, we divided the sam-
ple into two groups. One group included
a sample of the firms in the electronic
equipment industry and the other group
included a sample of the remaining ob-
servations. We ran separate regression
analyses for each group and found no
substantial differences in the results.
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