Market-Seeking Investment Essay

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Market-seeking  investment  is one  of the  types  of foreign direct investment. According to Rajneesh Narula and John Dunning, it occurs when companies internationalize to a particular country because they want to supply this particular  market with goods or services to grow in that market, and to be competitive within the industry as well as to provide opportunities  to achieve production economies  of scale. To benefit from the production economies  of scale requires  a sizable population  and the ability of the market  to support  the expected  demand  on which the investment  is based. Therefore, Dunning  states that   market-seeking   foreign  direct  investment   is based  on  a  single  central  location  (L) advantage. According  to  Narula  and  Dunning,  market-seeking investment  becomes  preferable  either  if there are substantial barriers to exporting from the home country  or if the  local markets  offer potential  foreign investors  significant  opportunities to  achieve scope and production economies of scale as well as a chance to grow.

Therefore, for John Dunning, the most important reason  for  market-seeking  investment  is the  attitude  of host  governments  toward  such investment and their encouragements. However, there are four other reasons to explain why and how firms engage in market-seeking investment in foreign markets through  a subsidiary.

Companies engage in market-seeking  investment in foreign markets through  (1) becoming accustomed: When  goods and  services are  modified  to local culture,  to indigenous  resources  and to standards, companies can survive and become more successful in a foreign environment. In particular,  it is commonly believed that if foreign companies do not adapt themselves to local customs, they might find themselves disadvantaged  compared  to local firms; (2) lowering costs: One of the most important reasons for companies to establish a subsidiary in a foreign market is to reduce transportation costs in that particular  market.  Otherwise,  serving that  market from a distance by exporting from the home market to the foreign market  would be much more expensive;  (3) following  customers   or  suppliers:  When main  suppliers  or  customers   move  overseas,  the firm may need to follow them in order to retain their business. If they do not do this, there is a high risk that they might lose their business to another  competitor; and finally, (4) global positioning: A multinational company establishes subsidiaries as part of its global production and marketing strategy to have physical presence  in the leading markets  served by their competitors.

Therefore, John Dunning, Bruce Kogut, and Magnus Blomstrom explain that companies aim either to maintain  existing markets  or to penetrate  new markets. Nevertheless,  it is argued  that  businesses  are more likely to be pushed toward this type of investment out of fear of losing a market rather than discovering a new one.

According to UNCTAD Global Survey results, market-seeking  investment  mainly  concentrates on industries such as chemicals, food, finance, transport, and communication largely because of local or neighboring multinational companies and their specializations. The multinational companies from a few developing countries specialize in manufacturing industries like China, information  technology (IT) services like India, and consumer electronics like Korea, and invest mainly in other developing countries.

In addition, the motives of multinational companies from developing countries are substantially different from the motives of multinational companies from developed countries  in the same industry. Whereas  multinational companies  from  developing countries invest in extracting oil or gas for the reason of market-seeking  investment,  multinational companies from developed countries  invest in these industries for resource-seeking  motives. According to the UNCTAD  World  Investment  Report, foreign  direct investment in neighboring countries is the most common feature of internationalization because of cross border spillovers, factor similarities, and cultural familiarities in different markets.


  1. John Dunning, Multinational Enterprises and  the  Global  Economy  (Addison-Wesley,  1993);
  2. John Dunning, Bruce Kogut, and Magnus Blomstrom, Globalization of Firms and the Competitiveness of Nations (Institute of Economic Research, Lund  University, and  ChartwellBratt, 1991);
  3. Gilpin, U.S. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment  (Basic, 1986);
  4. Rajneesh Narula and John Dunning, Globalisation  and  New Realities for Multinational Enterprise-Developing Host Country  Interaction,  MERIT Occasional Papers 2/98-015 (1998);
  5. Rajneesh Narula and John Dunning, “Industrial Development, Globalisation and Multinational Enterprises; New Realities for Developing Countries,” Oxford Development Studies (v.28/2, 2000).

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