Challenges in the Era of Globalization - iaabd

Proceedings of the 12th Annual Conference © 2011 IAABD
categories; natural resource seeking, market seeking, efficiency seeking, and strategic asset or capability
seeking (ibid). He also notes that firms may engage in FDI for more than one of the above motives (ibid).
Other researchers such as Buckley and Casson (1976), and Teece (1986) based their explanation on
transaction cost theory. This theory purports that the existence of MNEs is as a result of transaction costs.
Companies tend to internalize their transactions when the transaction cost in a specific market is high
therefore they undertake FDI in order to reduce the transaction costs. In explaining the
internationalization process of the firms, Johanson and Wiedersheim-Paul (1975) argue in their Uppsala
model that engaging in international operations is the result of a sequence of incremental decisions and
that the lack of knowledge about foreign countries and the tendency to avoid uncertainty are the factors
that push firms to choose the least risky way to engage in international operations. Thus, firms begin to
export to neighboring countries in order to have the same business practices. Once they gain enough
experience, they move forward and undertake FDI in this country taking into account the size of its
market (ibid). From an industrial perspective, Vernon (1966) argues that when a firm introduces a new
product in a market, the firm’s home country will be the base for producing this product and exporting it
to other developed countries. Once the market for the product increases in a developed country, producers
will start to set up a local production facility in order to engage in the production of that product. Later,
when the product becomes fully standardized, developing countries will become a location for producing
the product because of their competitive advantages (ibid). For instance, seeking low-cost labor may be
the primary motive for investors to undertake FDI in developing countries. Consequently, the production
of this product shifts finally into developing countries (ibid). Another line of thinking is introduced by
Knickerbocker (1973) in the theory of oligopolistic competition which explains the behavior of US
manufacturing firms. Knickerbocker (1973) argues that when a member of an oligopolistically structured
industry undertakes FDI in any important foreign market, other risk-aversion members in this industry
will follow this member and undertake FDI as well since these firms will not want to lose market share. In
addition, there are some empirical studies that have provided an evidence of what are the most important
location factors for a specific location. Cleeve (2006) investigated the institutional impediments to FDI
inflows in Sub-Saharan Africa. He found that location factors such as large market size, the growth rate of
the economy, good infrastructural development, high skills level, the openness of the economy, and
institutional and political risk variables (such as democratic system, socioeconomic conditions and
investment profile) are important determinants of FDI inflows, whereas, corruption, government and
political instability have no effect on the inflow of FDI. Lately, there has been a debate concerning the
location of FDI after the recent global financial crisis. According to UNCTAD (2010), the global
financial crisis has affected both developed and developing countries, and their share of FDI inflows.
However, developing countries in general and China, India, and Brazil in particular, were less affected
and managed to recover faster than developed countries (ibid). Consequently, this fact may affect the
global business strategy in relation to developing countries as a destination for FDI inflows. However, in
general, the empirical evidence on the location of FDI post the financial crisis is scarce. The next section
presents the research methods and data sources.
Research methods and data sources
The data for this study were collected directly from subsidiaries of international firms in Syria and Jordan
in order to enhance this research area because of the lack of good, firm-level data on FDI and location
decision regarding those two countries. International companies identified for inclusion in this study
were drawn from the database of the Federation of Chambers of Commerce in Syria and Jordan. The
companies were selected according to the following criteria: (1) companies that are fully foreign-owned
subsidiaries, (2) companies that are as a result of Joint Venture between a foreign company and a local
one (partly foreign-owned subsidiaries), and (3) companies that are merged or acquired by a foreign
company. This study targeted around 1442 multinational companies’ subsidiaries in both countries. After
removing those, which were branches of foreign companies, distributors, franchisees, the survey was then
applied to the 418 resulting firms, which have undertaken FDI. For the purpose of this study, a
248