Locational Advantages Essay

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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.

Ownership Advantages

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.


  1. Albaum, J. Strandskov,  and  E. Duerr, International  Marketing and  Export Management  (Prentice Hall, 2002);
  2. T. Cavusgil, G. Knight, and J. R. Riesenberger, International  Business, Strategy, Management, and  the  New  Realities  (Prentice   Hall,  2008);
  3. Dunning, Multinational Enterprises and the Global Economy (Edward Elgar, 2008);
  4. Dunning, “The Eclectic Paradigm of International Production: A Restatement and Some Possible Extensions,” Journal of International Business Studies (v.19/1, 1988);
  5. Dunning, “Toward an Eclectic Theory of International Production:  Some Empirical Tests,” Journal of International Business Studies (v.1, 1980).

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