Location theory: Firm Strategy
Strategic factors that influence the location choices ofMNCs include the need to locate near important clients or customers, to locate close to key rivals in order tomonitor their actions, or to deter the entry of key rivals.For example, service firms such as advertising agencies often locate their foreign operations near important clients.
This literature uncovers some fundamental motives underlying firms’ FDI location decisions. First, and perhapsmost important, althoughFDI flows are often discussed in the aggregate by economists and policymakers, it is important to remember that these aggregate flows represent the sum of a great many decisionsmade by individualMNCs. Since firms are so different fromone another, clearly, their own state variables will be very important in determining where they choose to locate. Second, the heterogeneity of firms implies that all the aforementioned characteristics of locations will not be equally attractive to all firms. Advertising agencies probably will not care about the presence of natural resources such as coal, and evenmanufacturing firmsmight not care about labor or natural resources if they are trying to decidewhere to locate a research and development (R&D) laboratory.
Thus, in focusing on micro mechanisms underlying FDI location choices, recent research on firm strategy has considerable potential to shed light on which location characteristics will be valued by what type of MNC. Moreover, by looking at different kinds of location decisions such as the location of manufacturing plants and the location of R&D, this research should contribute valuable insight into the conditions underwhich some location characteristics may be more or less important. The recent availability of large new data sets on multinational firms such as the data from the U.S. Department of Commerce, Bureau of Economic Analysis, should help advance research in this area.