Question

1. Generally, there are four motives for MNC to engage in foreign direct investment. Each of these motives has different implications on the volume of intra-firm trade around the world. Describe each motive and explain how each affects the volume of intra-firm trade.

Answer 1

The four motives that ensure MNC engage in foreign direct investments and their effects on the volume of intra-firm trade are as follows:

1) Market seeking motives

This category of motives focuses on the demand aspects. If decision-makers within the MNC, acknowledge the importance of accessing specific target markets abroad and believe that a direct presence internationally is essential for this access they will focus on the market seeking motives. The MNC that invest in a particular country or region with the intention to supply goods and services are called market seekers.

2) Resource seeking motives

The resource seeking MNC are those investing abroad in order to obtain resources. The search for cheap and unskilled (or semi-skilled) labor is an important activity for many MNC trying to minimize costs and maximize profits.

3) Efficiency seeking motives and

The MNC tries to rationalize structures of established investments in order to gain from common governance. Often those benefits come from economies of scale and scope, but also risk diversification. Therefore, efficiency-seeking is seen as gaining from the differences in factor endowments, cultures, institutional arrangements, and economic systems.

4) Strategic resource seeking motives

Strategic resources are intangible resources dealing with the technology and core competence of the MNC. Patents, knowledge, the skills of the employees, and strategic supplies necessary for developing comparative advantages are examples of strategic resources.