Predicting Locational Decisions of Multinational Corporations

This Note is an introduction to and survey of the literature on multinational corporations, or enterprises (MNEs), defined as corporations that have located production and/or a significant amount of research and development or management in two or more countries. It also offers a suggestion, based on some empirical evidence, on how the theory can be improved. The Note reviews four theories that might be used to explain MNE investment and location decisions: (1) the theory of economic comparative advantage, (2) "transaction cost" theory, (3) imperfect capital markets theory, and (4) Michael Porter's theories on factors that lead to competitive advantage. None of the theories provides a complete explanation for locational decisions. Using the available empirical evidence that bears on these theories, this Note attempts to integrate and extend them into a coherent whole. One strong regularity emerges from the empirical survey: political influence and politically induced economic conditions greatly affect the location decisions of firms. In addition, there is some agreement that an MNE's presence confers economic benefits on the host country, the greatest benefit coming from the creation of highly skilled jobs. The political effects are more difficult to determine.