Foreign Location Choice: Review and Extensions

• Published date: 01 April 2016
• Author: Ruth V. Aguilera,Jin Uk Kim
• Date: 01 April 2016
• DOI: http://doi.org/10.1111/ijmr.12064

International Journal of Management Reviews, Vol. 18, 133–159 (2016)

DOI: 10.1111/ijmr.12064

Foreign Location Choice: Review

and Extensions

Jin Uk Kim and Ruth V. Aguilera1,2

College of Business, University of Illinois at Urbana-Champaign, 350 Wohlers Hall, 1206 S. Sixth St., Champaign, IL

61820, USA, 1International Business and Strategy Department, 313 Hayden Hall, D’Amore-McKim School of

Business, Northeastern University, 360 Huntington Avenue, Boston, MA 02115, USA, and 2ESADE Business School,

Universitat Ramon Llull, Barcelona, Spain

Corresponding author email: jkim198@illinois.edu

International Business (IB) researchon foreign-location choice has experienced a revival

in recent years, yeta comprehensive review has been sorely lacking. The purposeof this

review is to synthesize the findings of recentlypublished articles on the topic of foreign-

location choice and offer fruitful directions for future research. This review consists of

three sections: first, the authors providea historical overview of this research streamby

tracing its origins and analyzing the general trend that has shaped research on foreign-

location choice. Next, the authors conduct a review of 137 recent articles published in

leading IB and business/management journals. These articles arecategorized according

to common topics, and the main findings of each category are synthesized in order to

bring some cohesion to this fragmented field. Lastly, the authors identify issues that

remain under-researched or require re-thinking some taken-for-granted assumptions.

Through this effort, they areable to connect the past, present and future of research on

foreign-location choice and to shed some new light on the IB literature.

Introduction

Multinational enterprises (MNEs) – firms that own

and control value-added activities in more than one

national market – are the main agents driving the

drastic spatial reconfiguration of the global econ-

omy. Well-known indicators of this transformation

include the near 30-fold increase in foreign direct

investment (FDI) (UNCTAD 2013) as well as the

heightened prominence of emerging markets as both

homes and hosts to multinational activities (Luo and

Tung 2007). Motivations driving internationalization

have also evolvedsignificantly, with firms seeking ac-

cess not only to new markets and natural resources,

but also to learning opportunities and knowledge-

intensive assets in foreign locations (Dunning 2000).

The engine crafting the topography of this transfor-

mation is the increasingly sophisticated firm-level

decisions regarding ‘how’, i.e. ownership and gov-

ernance strategies, and ‘where’, i.e. location strategy,

to conduct value-added activities, enabling MNEs to

fine-slice and coordinate their activities across bor-

ders with greater efficiency (Aguilera 2011; Buck-

ley and Ghauri 2004; Dunning 1998; Gereffi and

Fernandez-Stark 2011). Unsurprisingly,inter national

business (IB) scholars have devoted substantial en-

ergy to studying the antecedents, processes and out-

comes associated with the how and where decisions

of MNEs (see Ahsan and Musteen 2011; Brouthers

and Hennart 2007; Casillas and Acedo 2013; Deng

2012; Hitt et al. 2006, for reviews on relevanttopics).

The current review focuses exclusively on the

‘where’ side of this story and reviews the IB research

subsumed under the umbrella of ‘research on for-

eign location choice’, centered around the question

of ‘where and why firms place specific activities in

particular (geographic) areas’ (Goerzen et al. 2013,

p. 427). This line of research has experienced a re-

naissance of sorts in recent years, especially follow-

ing Dunning’s (1998) lucid call for scholars to pay

more attention to the spatial dimension of MNE ac-

tivities. While undoubtedly a welcome development,

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134 J.U. Kim and R.V. Aguilera

rapid growth and diversification within a relatively

short period of time have left the research stream

fragmented since, as with IB research in general, re-

search on foreign-location choice cuts across multiple

disciplinary boundaries. Accordingly, the aim of the

current review is to bring clarity to the research stream

by: (i) providing a historical overview; (ii) categoriz-

ing, reviewing and synthesizing recent research; and

(iii) offering new directions for future research. We

connect the past, present and future of location choice

research to offer a blueprint for those interested in this

line of research.

The rest of this paper is structured as follows. We

first offer an overview of early research on foreign-

location choice to set the context. Next, after describ-

ing our review design, we identify and categorize137

relevant articles published between January 1998 and

June 2014. We then discuss their main findings and

elaborate on their significance. The penultimate sec-

tion notes shortcomings of extant works and high-

lights opportunities for future research. Concluding

remarks follow.

Historical overview (1960s–1990s)

Before the founding of IB in the 1960s, research on

foreign-location choice was conducted within the si-

los of international trade and capital theory – an im-

perfect approach in light of the available empirical

evidence (Scaperlanda and Mauer 1969). The early

pioneers of IB were united under the contention that

the limitations of trade and capital theory stem from

treating the MNE as a ‘black-box’ and FDI as capital

movement that shifts according to interest rates and

factor endowment differentials across locations. They

further argued that building a general theory of the

MNE must begin with prying open the black-box and

explaining why MNEs exist and how strategic deci-

sions crystallize within the boundaries of the MNE.

Based on this common agenda, two distinct traditions

came to the fore: economics tradition, rooted in trade

theory and industrial organization; and behavioral tra-

dition, inspired by the behavioral theory of the firm

and the theory of the growth of the firm. We briefly

discuss the main features of these two classic tradi-

tions, the subsequent period of neglect and the recent

revival.

Economics tradition

The premise of the economics tradition is that the

MNE, as an owner of some rent-yielding proprietary

asset, seeks to maximize the returns on its assets in a

world of market imperfections (Hymer 1976 [1960]).

The most influential approach in this vein is the in-

ternalization theory, which, in the spirit of Coase

(1937), conceptualizes the MNE as a transaction-

cost-minimizing vehicle that sets its boundaries

where the marginal benefits of internalizing cross-

border imperfections are offset by the marginal cost

(Buckley and Casson 1976). Accordingly, MNEs seek

out ‘the least-cost location for each activity,taking its

linkages with other activities into account’ (Buck-

ley and Casson 2009, p. 1564), as location choices

reflect cost-minimizing outcomes, given the market

imperfections associated with transacting the firm as-

sets across national borders. The seminal eclectic or

ownership, location, internalization (OLI) paradigm

extends this approach and avers that MNEs’ location

decisions are reached through the interplay among

firms’ ownership advantage (e.g. proprietary tech-

nology/organizationalknow-how), internalization ad-

vantage associated with the specific transaction (e.g.

licensing vs. FDI), and location advantages of the host

country (e.g. low-cost labor) (Dunning 1980).

A similar yet distinct logic within this tradition

underlies the product life cycle (PLC). The PLC

argues that MNEs shift their location choices over

time in response to changes in the required locational

assets to exploit efficiently the production technol-

ogy embedded in the product (Vernon 1966). There-

fore, PLC predicts that the manufacturing of innova-

tive new products typically begins in lead countries

where capital/knowledge-intensive inputs are abun-

dantly available and sufficient market-demand for

such products is present. As the production technol-

ogy matures and standardizes overtime, the locational

assets required to exploit profitably the technology

shift towards less capital-/knowledge-intensive factor

inputs. Hence, MNEs are expected to gradually ‘fan-

out’ their production locations from lead to develop-

ing countries where less capital-/knowledge-intensive

factor inputs are available at lower cost. Again, the

basic logic driving the PLC model is the efficient

exploitation of proprietary assets, given market im-

perfections. The main difference between OLI and

PLC is that the latter offers a dynamic framework of

foreign-location choice by incorporating maturation

of production technology as the shift parameter.

Behavioral tradition

The behavioraltradition traces its origins back to Aha-

roni (1966) who, in the spirit of Cyert and March

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