Locational or location-specific advantages refer to various business opportunities present in individual foreign markets so that companies are encouraged to invest in such markets. Companies invest in a particular foreign market as long as this market has something to offer to the company so that investment in this particular market can be profitable for the company. For example, among other things, China and India offer location-specific advantages to apparel firms because labor cost in these countries is low and apparel is a labor-intensive product. So, apparel firms benefit from the cheap-labor opportunity that the Chinese market offers. Similarly, the Middle Eastern countries offer locational advantages to oil companies because they have large oil reserves; companies in search of oil can benefit from the locational advantages of large oil reserves by investing in these countries. Highly populated countries, assuming other conditions are also appropriate, can also be an example of locational advantages. Their high population may be an indication of a locational advantage (i.e., large market) for some firms. In sum, locational advantages are very important for global business because they explain to a certain extent why companies invest in a particular country rather than in others.
After companies have decided to internationalize their operations, a very important question is which foreign market(s) to invest in. Investment decisions in a particular foreign market (location) are made after careful and thorough analyses have been done. Companies analyze politics, laws and regulations, economy, geography, climate, taxation, market characteristics, and many other factors in a market, and unless a particular market offers some sort of advantage to foreign companies, this market will not be chosen as an investment location.
Companies generally internationalize their operations to get resources, to seek a market, to seek a strategic asset, and to increase the efficiency of their operations. Locational advantages also mainly refer to these four factors (resource, market, strategic asset, and efficiency). When companies lack resources (raw materials and intermediary materials, labor, knowhow, and others) in their domestic markets, a logical option is to seek them in foreign markets that have appropriate resources. When the domestic market is saturated, meaning that there is not much possibility of further increasing demand in the domestic market, companies try to find markets in which there is still demand. When companies want to further strengthen and protect their ownership advantages or diminish those of their rivals, they seek appropriate strategic assets in foreign countries. Therefore, these four locational advantages play important roles for companies in deciding an appropriate location in their internationalization process.
The term ownership advantages (also called competitive or monopolistic advantages) is closely related to locational advantages in the internationalization process. Ownership advantages mean that companies possess something valuable and/or unique that gives the company a competitive edge over its rivals; this may be a unique product, brand name, technological expertise, resources, and managerial and marketing skills. Locational advantages alone may not mean much unless ownership advantages are also present. That means that a particular country can offer some sort of locational advantage; however, it will be costly for a foreign firm to come to this foreign country and establish its operations rather than operating in its domestic market.
How, then, is it possible for a foreign firm to invest in a foreign country and be more successful than already established domestic companies, given that it has additional costs of establishing operations, facilities, and factories when compared to domestic companies? The answer is related to ownership advantages; the foreign firm should have ownership advantages that will provide higher returns than domestic companies. For example, a company can have a well-known brand name, but it may lack a resource in its domestic market to produce the product, or the domestic market may be saturated. By investing in a foreign market that has the resource used in the production of the product and yet is saturated, the company can effectively produce the product and get a benefit from its well-known brand and the large size of the foreign market.
Some examples of locational advantages are as follows: Alcoa, the U.S.-based aluminum company, invested in Brazil because Brazil has large reserves of bauxite, the most important aluminum ore. Nike, the U.S.-based shoe company, relocated its production to low-wage Asian countries that offer low-labor-cost advantage. Many computer companies in the 1990s invested in the Philippines, which offered low-cost and well-educated and trained labor advantages. Some companies exporting to the United States relocated their operations in Mexico and export their products across the border. The reason for such production relocations is related to locational advantages that Mexico offers; companies that relocated their production to Mexico first benefited from cheap labor costs, and in addition, they benefited from duty-free export since goods manufactured and assembled in Mexico can be shipped to the United States without paying duty according to the North American Free Trade Agreement (NAFTA). Therefore, Mexico provided cheap labor and duty-free export locational advantages to foreign firms.
Locational advantages can include anything that individual markets or countries have and that companies utilize to increase their performance. Availability, quality, quantity, and efficiency of factors of production differ in countries. Companies in search of increased performance, new markets, new resources, and appropriate labor can relocate their operations toward locations having appropriate advantages.
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- T. Cavusgil, G. Knight, and J. R. Riesenberger, International Business, Strategy, Management, and the New Realities (Prentice Hall, 2008);
- Dunning, Multinational Enterprises and the Global Economy (Edward Elgar, 2008);
- Dunning, “The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions,” Journal of International Business Studies (v.19/1, 1988);
- Dunning, “Toward an Eclectic Theory of International Production: Some Empirical Tests,” Journal of International Business Studies (v.1, 1980).
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