Why Do Firms Invest Abroad? An Analysis of the Motives Underlying Foreign Direct Investments

Abstract

Although Foreign Direct Investments (FDI) have been at the forefront of the economic debate since a long time, economists have not yet developed a unified framework for their investigation. This paper puts forward the idea that an essential point to analyze FDI concerns their underpinning motives. Motives are at the core of FDI, and FDI are only but one of different alternative means for firms to grasp an opportunity in a foreign country. The paper discusses the factors that shape the set of available alternatives and analyze those affecting the decision to engage in FDI (internalization determinants), along with those influencing their localization (localization determinants). Starting from Dunning (1993), this paper puts forward a revised taxonomy of FDI motives consistent with this framework - resource seeking, market seeking and non-marketable asset seeking. In order to show its practical implications, the paper surveys common empirical issues on FDI showing how the analysis can shed light on seemingly contradictory empirical results.