Investing abroad remains an important part of scaling a business and requires an assessment to be made of what foreign locations are most attractive for that investment. These investments may have a variety of motives that are not mutually exclusive, including seeking attractive markets for growth, local conditions that can increase the efficiency of operations and/or allow access to unique and rare resources and capabilities that provide strategic advantages to a firm. For decades such foreign direct investment (FDI) decisions have been framed in terms of selecting countries for investments. However, two key trends are calling this into question as a lens for assessing locations for foreign investments, namely an increasing regionalisation of the world and greater information availability about locations within countries, especially cities.
It is increasingly understood that the world is in a process of regionalisation, that is observed in the organisation of the market access conditions negotiated between national governments. The European Union Single Market and related trade agreements with other countries globally representing the most advanced example. This regionalisation has however also been observed in firm level data in numerous studies of the Fortune Global 500 (Rugman and Verbeke, 2004; Rosa, Gugler and Verbeke, 2020) and industry specific studies (Kolk, Lindeque and van den Buuse, 2014). The regional orientations of the firms is not only determined by market access conditions, but also by the degree to which their approach to value creation can effectively be transferred to other regional contexts.
Data availability about subnational locations, in particular cities has increased significantly over the last two decades and this has made it possible to complete systematic comparisons of the attributes of cities as investment locations far more realistic. Data is available from both commercial sources and also public sources such as the United Nations (data.unhabitat.org), OECD (stats.oecd.org/Index.aspx?DataSetCode=CITIES), and Eurostat (ec.europa.eu/eurostat/web/cities/data/database). This makes both the hard and soft attributes of city locations accessible for inclusion in investment location attractiveness assessments. Combining this city data with national statistics allows far more granular analysis, across a greater number of evaluation dimensions.
Cities can now be understood as locations for investment with one or more motives, that are nested in national and regional contexts. As business activity is however increasingly understood as a regional phenomenon, it makes more sense to assess cities across a region for invest. Cities than have primary attributes directly tied to their economic activities and the flows of goods and services in which they are embedded regionally, with national conditions best understood as secondary attributes of each city location.
Managerial implications:
- Don’t think about international investment as targeting countries, rather think about multiple cities across countries as your investment locations, i.e. an investment in globally interconnected Singapore is not necessarily about the national Singaporean conditions, but rather access to the Asia Pacific market. Singapore in this case is not the only city you should consider, as there are multiple cities with the same features as Singapore in the Asia Pacific region that should be assessed.
- Cities should be considered within the context of the global region in which they are located, and not in their national context alone, e.g., the global city of Amsterdam is an attractive internationally connected city located in the European Union Single Market.
- Cities will be attractive as investment locations for specific investment motives to different degrees across the major global regions, i.e., market seeking investments by consumer goods firms in Asia Pacific are more likely to target cities in countries with large national markets, while in Europe the single market allows cities in smaller countries by population to be considered for serving consumers in the EU’s Single European Market.
- Cities will differ in their attractiveness depending on your industry and your motive for investing, e.g., investment banking foreign investment is highly likely to target cities with major financial markets that are internationally connected, while a manufacturing firm is likely to target city locations with good transportation infrastructure and related support industry and a strong pool of potential employees.
- The current trend towards a de-globalisation of business activities makes understanding cities as investment locations embedded in a global regional context essential, thereby allowing more effective strategic decision-making as international businesses restructure their operations.
Full Reference: Danes, D., van Eijck, P., Lindeque, J.P., Meyer, M.A. and Peter, M.K. (2023), “FDI motives and city location preferences in the automotive and commercial banking industries”, Competitiveness Review, Vol. 33 No. 3, pp. 602-626. doi.org/10.1108/CR-03-2022-0040
Cited References:
- Kolk, A., Lindeque, J., & van den Buuse, D. (2014). Regionalization Strategies of European Union Electric Utilities. BRITISH JOURNAL OF MANAGEMENT, 25, S77-S99.
- Rugman, A. M., & Verbeke, A. (2004). A perspective on regional and global strategies of multinational enterprises. JOURNAL OF INTERNATIONAL BUSINESS STUDIES, 35, 3-18.
- Rosa, B., Gugler, P., & Verbeke, A. (2020). Regional and global strategies of MNEs: revisiting Rugman & Verbeke (2004). JOURNAL OF INTERNATIONAL BUSINESS STUDIES, 51, 1045-1053.
Further information:
Please contact Dr Johan Lindeque at the FHNW School of Business for further information:
www.fhnw.ch/en/about-fhnw/schools/business/icc/focus-international-market-strategies-for-smes
Utilise our SME Internationalization Canvas for Strategy Workshops:
www.international-sme-strategy.ch