Resource-Seeking Investment Essay

Resource-seeking investment is one of the types of foreign direct investment; it mainly focuses on rich raw materials, low-cost unskilled and skilled labor, technological assets, and physical infrastructure. According to the United Nations Conference on Trade and Development (UNCTAD), resource-seeking investment was the most common foreign direct investment (FDI) type in the 19th and 20th centuries, representing the basis of colonial relationships between Europe and other countries. It still remains very significant, but it has been overtaken in importance by other types of FDI in today’s more globalized world.

John Dunning defines three groups of resource seeking multinational companies. The first group looks for physical resources such as oil, minerals, raw materials, or agricultural products. This kind of FDI mostly asks for significant capital expenditure and is relatively location bound. The second group of resource seeker looks for cheap, mostly unskilled labor. The third group wants to acquire technological capacity, management or marketing expertise, and organizational skills. An example of the latter group can be Chinese firms that set up collaborative alliances with U.S. firms in high-technology sectors. The foreign-based multinational companies invest abroad to gain access to resources, for example, minerals, agricultural products, unskilled labor, and so forth, that are either unobtainable or available only at a much higher cost in the home country.

Resource-seeking investment may provide training and enhance skills, create opportunities for employment, and reduce underemployment of labor and resources. On the other hand, resource-seeking investment done by foreign multinational companies can be exploitative if monopolization happens in factor markets, and can also be damaging if long-term contracts are combined with monopolization activities of these companies.

For Rajneesh Narula and Dunning, where a region or a country has an absolute advantage in a given scarce resource, the government of that location is in a strong bargaining position. If this scarce resource is a natural one, then the marginal cost of its extraction to both parties is almost zero. According to David Johnson and C. Turner, while availability and cost of access to natural resources would be the key criteria for foreign-based multinational companies to make investment profitable, countries that own these resources also benefit from these investments as these companies bring technical expertise that is essential in exploration and production; employ skilled and unskilled labor; and use resources that otherwise would not be used.

In the case of raw material, resource-seeking investment is the most important one for developing countries as it acquires absolute advantage in a particular scarce natural resource, such as oil, natural gas, and timber. In the Middle East and Africa, these products provide a strong bargaining power position to those countries that own them. For example, countries like Nigeria or Iran attract resource-seeking investment in oil carried out by big multinational companies from all over the world, as the countries have rich oil fields and the marginal cost of extracting oil to both parties (to the country and to the company that extracts the oil) is considered very low as both parties benefit from generating economic rent based on locational advantages.

Resource-seeking investment in natural resources can be carried out by companies based in the primary sector (they either invest in resource-poor countries or resource-rich developing countries) or companies based in natural resource–related sectors, like metal manufacturing. Even though it has been generally accepted that multinational companies from developing countries should be able to access natural resources and secure the supply of raw materials for their rapidly growing economies, those companies from countries poor in natural resources have the motive to invest in locations determined by the availability of assets.

It is also commonly known that when international prices of raw materials have risen, the competition between American, Asian, and European companies for this kind of scarce resources, for example in Africa, has dramatically increased as well. However, multinational firms still prefer nonequity agreements with foreign firms or purchase their inputs at arm’s length prices.

In the case of low-cost-labor–seeking investment, which Dunning defines as investment by companies from countries with higher labor cost setup, or by those who acquire subsidiaries in countries with lower labor cost, companies seek cheaper labor in the field of manufacturing and service sectors to lower their production costs. However, when the countries develop, the cost of utilizing cheap labor rises, and the labor-intensive production becomes gradually less attractive to foreign investors. For example, countries like China and India can attract foreign investments because of their unskilled labor as they are cheaper, but as the countries become more developed, foreign investors will find it very difficult to compensate for wage increases. Companies whose production extensively depends on raw materials for their products can either move their production to a foreign site where the raw material is located or extract and import the material to their home-country plants.

Other resource-seeking investment types in the context of Dunning’s location factor include tourism and construction, which means that investment can take place only in a particular location because it utilizes resources or attributes that are immobile.

Bibliography:

  1. John Dunning, “The Eclectic Paradigm as an Envelope for Economic and Business Theories of MNE Activity,” International Business Review (v.9, 2000);
  2. John Dunning, Multinational Enterprises and the Global Economy (Addison-Wesley, 1993);
  3. David Johnson and C. Turner, International Business: Themes, and Issues in the Modern Global Economy (Routledge, 2003);
  4. Rajneesh Narula and John Dunning, Globalisation and New Realities for Multinational Enterprise-Developing Host Country Interaction (University of Oslo, 1998);
  5. Rajneesh Narula and John Dunning, “Industrial Development, Globalisation and Multinational Enterprises: New Realities for Developing Countries,” Oxford Development Studies (v.28, 2000);
  6. UNCTAD, Case Study on Outward Foreign Direct Investment by Indian Small and MediumSized Enterprises (United Nations, 2005);
  7. UNCTAD, Foreign Direct Investment Report 2006: FDI From Developing and Transition Economies: Implications for Development (United Nations, 2006).

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