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...economists provides powerful analytical tool with which to review the recent empirical and theoretical literature on the effects of foreign direct investment (FDI) on national competitiveness. The contention is that FDI can indeed be a source of competitiveness but that previous studies have neglected the role of location, in particular the role of clustering on the absorptive capacity of the host State. The aim of this paper is to provide a comprehensive conceptual framework for assessing the effects of FDI on competitiveness to guide policy-makers as well as further research.
Keywords FDI * MNE * Competitiveness * Cluster * Investment policy
JEL L50 * O10 * R10
Introduction
Despite the close relationship between the activities of multinational enterprises (MNEs) and the competitiveness of recipient countries, few studies have linked these two subjects from a global perspective. This is surprising, given that two major schools have provided important contributions on both issues: namely, the "international business scholar community" and the "Porter school" (Porter 1990, 1998; Dunning 1993). Since the 1990s, several scholars of international business have analysed the relevance of the Porter model in the light of the theory of international production. The need to adapt both schools has been addressed and some studies have been conducted in this regard (Birkinshaw and Solvell 2000). There is, however, still room for a more in-depth analysis of the impact of foreign direct investment (FDI) on the competitiveness of host countries.
In our opinion, there is a need to review the existing literature on the effects of FDI on national competitiveness, since the cluster dimension has previously been neglected. The aim of this paper is to provide an overview of what we actually know about the impact of FDI on national competitiveness. The theoretical framework developed may subsequently be used to guide policy-makers as well as to inform further research. We will base our paper on the Porter approach, and by reference to the work accomplished by international business economists, we will connect the two approaches.
This paper is structured as follows. To provide a comprehensive assessment, we first outline a theoretical framework combining elements from Porter's theory and from the school of international business. Second, we review the existing theoretical and empirical literature on technology transfer and the upgrading of human capital on the basis of this framework. In the third section we refocus our lens from the usual national dimension to the cluster dimension. We argue that the cluster dimension is more significant in analysing the effects of FDI on a micro level as both MNE activity and absorptive capacity, are better captured on the cluster level. Finally, the policy implications of the findings are elaborated.
The Diamond of National Competitiveness and MNEs
Because the term competitiveness means different things to different people, it is important at the outset that we have a working definition. Like Porter, we assume that "the only meaningful concept of competitiveness at the national level is productivity" (Porter 1998, p. 160). Why are firms in a particular nation more productive in a certain industry? According to Porter (1990), the answer lies in four broad attributes of a nation that shape the environment in which local firms compete.
Porter's Diamond
Whether a nation achieves international success in a particular industry is determined by four broad attributes of that nation which promote or impede the creation of competitive advantage (Porter 1990). These are as follows:
(1) Factor conditions: the nation's position in factors of production such as skilled labour, infrastructure, physical resources and technologies, necessary to successfully compete in a given industry;
(2) Firm strategy, structure and rivalry: the conditions in the nation governing how companies are created, organized and managed as well as the nature of domestic rivalry;
(3) Related and supporting industries: the presence or absence in the nation of supplier industries and related industries and institutions (research, education) that are internationally competitive; and
(4) Demand conditions: the nature (from a qualitative and/or quantitative point of view) of home demand for the industry's products or services.
These determinants, individually and as a system, create the context in which a nation's firms are born and compete (Porter 1990, p. 71). The diamond is a mutually reinforcing system which is also influenced by the government and by chance events.
National economies are neither identical nor static. Porter distinguishes three major stages of competitive development reflecting the specific sources of advantage of a nation's firms in international competition and the nature and extent of internationally successful industries and clusters: factor-driven, investment-driven, and innovation-driven (Porter 1990, p. 545). This categorisation does not provide an adequate description of the situation of countries in the real world and is not intended to do so. Indeed, Porter (1990, p. 545) notes that "no nation will fit a stage exactly." Nevertheless, the following categorisation offers a powerful analytical tool for highlighting the elements that are important for a particular nation's industry.
In factor-driven economies, virtually all internationally successful industries draw their advantage almost entirely from favourable factor conditions, such as plentiful natural resources, favourable growing conditions for certain crops, or an abundant and inexpensive pool of semi-skilled labour (Porter 1990, pp. 546-547). Firms compete primarily on the basis of price in industries that require either little product and process technology or technology that is inexpensive and widely available. In the investment-driven stage, national competitive advantage is based on the willingness and ability of a nation and its firms to invest aggressively using complex foreign product and process technology acquired on global markets through licences, joint ventures, and other means (Porter 1990, p. 548). Competitive advantage stems mainly from favourable factor conditions as well as firm strategy, structure, and rivalry. In the innovation-driven stage, firms compete using global strategies and possess their own international marketing and service networks along with the growing reputation of their brand abroad. The full "diamond" is in place for a wide range of industries (Porter 1990, p. 552). At this stage, all the determinants of the diamond are at work and their interactions are at their strongest. Foreign manufacturing develops in those industries whose structure favours a dispersed value chain. As underlined by Porter (1990 p. 554), "the innovation-driven stage, then, marks the onset of significant foreign direct investment."
Introducing MNE Activity
Although Porter's model was generally very well accepted it also stimulated debate, in particular by international business scholars. The lack of explicit incorporation of the MNEs has led to some misunderstanding about Porter's approach. Some scholars held that the original diamond model fails to incorporate or misunderstands the effect of the activities of MNEs on the competitiveness of the host country's economy.
Some modified diamond approaches have been developed. Dunning (1993a, p. 8) argues that Porter does not sufficiently take the "globalisation of economic activity" into account. FDI has important effects on national competitiveness which are not adequately covered by the facet "firm strategy, structure, and rivalry." A firm engages in cross-border activities to exploit its specific ownership advantages. These advantages may initially have been based on the diamond of the home base, but their competitive assets are now largely multinationalised. Inward FDI is likely to bring new resources and technologies into a nation. Indeed, a foreign investor might import advantages from his or her home base and some of its assets could contain ownership specific advantages (Dunning 1993, p....
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