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Foreign investment decisions of western Canadian firms Wahab, Abdul 1977

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FOREIGN INVESTMENT DECISIONS OF WESTERN CANADIAN FIRMS by ABDUL WAHAB M.B.A., University of Karachi, 1964 M.B.A., Indiana University, 196 7 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY i n THE FACULTY OF COMMERCE AND BUSINESS ADMINISTRATION (Marketing Division) We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA December, 1977 Abdul Wahab, 1 9 7 7 In present ing th i s thes is in p a r t i a l fu l f i lment of the requirements for an advanced degree at the Univers i ty of B r i t i s h Columbia, I agree that the L ibrary sha l l make it f ree l y ava i lab le for reference and study. I fur ther agree that permission for extensive copying of th is thesis for scho la r l y purposes may be granted by the Head of my Department or by h is representat ives . It is understood that copying or pub l i ca t ion of th is thes is for f i n a n c i a l gain sha l l not be allowed without my wr i t ten permiss ion. Department of The Univers i ty of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5 - i i -ABSTRACT An e a r l i e r study of the foreign investment decision process of U.S. firms by Aharoni had suggested the dominance of behavioural charac-t e r i s t i c s over c r i t e r i a based on economic theories i n determining such decisions. His research did not however, provide strong a n a l y t i c a l proofs and part of the i n t e l l e c t u a l d erivation f o r t h i s study was the search for such proof. This was combined with the e f f o r t to bring into the f i e l d of knowledge some information about an under-reported sub-sample of foreign investors, namely firms from Western Canada. The main structure of the research model consisted of s i x iden-t i f i e d stages i n the foreign investment decision process. In turn, s i x sets of variables were developed which corresponded to each of these stages: awareness through i n i t i a t i n g forces, i n v e s t i g a t i o n , commitments, negotiations, uncertainty, and the f i n a l decision. To test the research model f i v e hypotheses were developed. The f i r s t hypothesis corresponding to stage one contended that endogenous i n i t i a t i n g forces are more important i n creating awareness of foreign d i r e c t investment opportunities than exogenous i n i t i a t i n g forces. The second hypothesis r e l a t i n g to stage two claimed that those who conduct a sequential i n v e s t i g a t i o n w i l l judge the s u b j e c t i v e l y estimated cost of that i n v e s t i g a t i o n to be s i g n i f i c a n t l y higher than those who do not con-duct a sequential i n v e s t i g a t i o n . The t h i r d hypothesis concerning stage three stated that the extent of i n v e s t i g a t i o n and the degree of commitments are p o s i t i v e l y r e l a t e d . The fourth hypothesis r e l a t i n g to negotiations i n stage four and - i i i -uncertainty i n stage f i v e said that there e x i s t s a p o s i t i v e r e l a t i o n s h i p between the extent of negotiations and the amount of uncertainty. The f i f t h hypothesis corresponding to stage s i x claimed that i n those cases where the decision has been made to invest abroad, there w i l l be strong i n i t i a t i n g forces, more i n v e s t i g a t i o n , greater degree of commitments, greater extent of negotiations, and smaller amount of uncertainty than i n those cases where the decision has been made not to invest abroad. The hypotheses were tested against data c o l l e c t e d on 89 decisions. The data supported a l l the hypotheses excepting the f i r s t part of the l a s t hypothesis which said that the i n i t i a t i n g forces w i l l be stronger i n the case of p o s i t i v e decisions. This was explained i n terms of the presence of intervening v a r i a b l e s such as i n v e s t i g a t i o n , commitments, negotiations, and uncertainty. The research has implications f o r home and host country and the theory of the firm. P r o f i t i s shown as an important consideration i n the investment decisions. Resource-based firms are led by the l o c a t i o n of resources and they have a desire to i n t e r n a l i z e the source of supply and demand. Some of the areas f o r further research are: a comparison of foreign and domestic investment decisions and a study of buying and financing p r a c t i c e s of Canadian firms that invest abroad. J . W. C. Tomlinson - i v -Table of Contents Page I. INTRODUCTION 1-17 A. The Importance of Foreign Direct Investment 1 B. The Meaning of Foreign Direct Investment 2 1. Control 2. Flow of Funds and Direct Investment 3 . Technology and Management 4 . I n i t i a l and Ongoing Direct Investment C. H i s t o r i c a l Growth and D i s t r i b u t i o n of Direct Investment 5 1. P o r t f o l i o Investment 2. Foreign Di r e c t Investment (a) Size and Growth (b) Geographical D i s t r i b u t i o n I I . A SURVEY OF FOREIGN DIRECT INVESTMENT THEORIES 18-56 A. The Issues i n Foreign Direct Investment 18 B. The Maximization Theories 21 1. The C l a s s i c a l Economic Theory 2. Investment Theories (a) Rate of Interest or Cost of Ca p i t a l (b) Capacity U t i l i z a t i o n Theory 3 . The Theory of Growth of the Firm 4 . The Monopolistic Advantage Theory 5. Exchange Risk and S e c u r i t i e s Markets Imperfections Theories (a) The Exchange Risk Theory (b) The Se c u r i t i e s Markets Imperfections Theory C. The S a t i s f i c i n g Theory 3 9 D. The Product L i f e Cycle Theory 4 3 — v -Page 1. ' The Background 2. The Assumptions 3. The Theory 4. The Explanatory Power of the Theory E. The Modern Imperialism Theory 52 III. THE RESEARCH MODEL 5 7-75 A. Aharoni's Research Design 58 1. The Sample 2. The Scope of Research 3. Research Methodology B. Aharoni's Research Findings 61 C. Weaknesses in Aharoni's Theory 72 IV. THE RESEARCH DESIGN 76-88 A. Objectives of the Study 76 B. The Hypotheses 77 C. The Operational Definitions 77 D. The Sample 85 E. The Methodology 86 V. THE RESEARCH FINDINGS 89-123 A. Initiationg Forces and Awareness of Foreign Direct Investment Opportunities 1. Initiating Forces (a) Endogenous Initiating Forces (b) Exogenous Initiating Forces 2. The Relative Importance of Individual Initiating Forces 3. A Comparison of Endogenous and Exogenous Initiating Forces B. Sequential Investigation and Subjectively Estimated Cost of Investigation - v i -Page 1. The Sequential Investigation 2. The Cost of Investigation 3. A Comparison of Sequential Investigation Cost with the Cost of Non-Sequential Investigation C. Relation between Intensity of Investigation and Degree of Commitments 9 8 1. Investigation Variables 2. Commitment Variables 3. The Test of the Hypothesis D. Relation between Extent of Negotiations and Amount of Uncertainty 10 7 1. The Negotiation Variables (a) Negotiations with Host Country Government (b) Negotiations with Host Country Banks (c) Negotiations with Partners 2. The Uncertainty Variables 3. The Relation between the Extent of Negotiations and Amount of Uncertainty E. Relation between P o s i t i v e and Negative Decisions i n Terms of I n i t i a t i n g Forces, Investigation, Commitments, Negotiations, and Uncertainty 116 1. I n i t i a t i n g Forces 2. Investigation 3. Commitments 4. Negotiations 5. Uncertainty VI. COMPARISON OF RESEARCH.FINDINGS WITH OTHER STUDIES 124-145 A. I n i t i a t i n g Forces and Awareness of Foreign Direct Investment Opportunities 124 B. Sequential Investigation and Subjectively Estimated Cost of Investigation 133 C. Relation between Intensity of Investigation and Degree of Commitments 135 D. Relation between Extent of Negotiations and Amount of Uncertainty 137 - v i i -E. The Comparison of P o s i t i v e and Negative Decisions VII. CONCLUSIONS, SUMMARY, IMPLICATIONS, AND AREAS FOR FUTURE RESEARCH A. Conclusions 1. Contribution of the Present Study 2. Areas of Differences 3. The V a l i d i t y of the Behavioural Model B. Summary of the Study 1. The Research Model 2. The Hypotheses 3. The Sample and Methodology 4. The Research Findings C. Implications 1. Implications for Host Countries 2. Implications f or Home Country 3. Implications f o r the Theory of the Firm D. Areas f o r Further Research Appendix Bibliography - v i i i -ACKNOWLEDGEMENTS Many thanks are due to Dr. J . W. C. Tomlinson, who, as chairman of my d i s s e r t a t i o n committee, guided me from the beginning of. t h i s d i s s e r t a t i o n . Without h i s useful suggestions my d i s s e r t a t i o n would not have been completed. Dr. Tomlinson spent several weekends i n minutely reading my d r a f t s . I very much appreciate h i s assistance. The other members of my committee,-namely, Dr. Merle E. Ace, Dr. Herbert D. Drechsler, and Dr. S. M. Oberg were very h e l p f u l i n o f f e r i n g u s e f u l comments and suggestions. I s i n c e r e l y thank.them f o r t h e i r assistance. The suggestions of Dr. G. B. Hainsworth and Dr. Vance F. M i t c h e l l , as members of my o r a l examination committee, were us e f u l i n c l a r i f y i n g the concepts I have used i n t h i s d i s s e r t a t i o n . Thanks are also due to Mrs. S y l v i a W i l l i e for o f f e r i n g her assistance. I s i n c e r e l y thank the presidents and vice-presidents of the firms i n B r i t i s h Columbia who spent t h e i r valuable time i n answering my questions. I am very g r a t e f u l to them for the information they provided about the foreign d i r e c t investment decisions of t h e i r firms. I also want to thank the D i v i s i o n of International Business Studies and the Faculty of Commerce and Business Administration for the f i n a n c i a l assistance which enabled me to complete my d i s s e r t a t i o n . My children,- Wasimy Baber, and Shazia also deserve thanks for not putting demands on my time and for.praying f or my success. Abdul Wahab - i x -dedicated to Razia (whose prayers, patience and love made t h i s possible) - 1 -I. INTRODUCTION A. The Importance of Foreign Di r e c t Investment One of the most s i g n i f i c a n t and dramatic world trends of the post war period has been the rapid and sustained growth of foreign d i r e c t investment. According to an IMF estimate, the t o t a l foreign d i r e c t investment at book value i n 19 74 was $216 b i l l i o n , more than the combined gross national product of two-thirds of the countries of the world."'" The annual average rate of growth of foreign d i r e c t investment has been estimated to. be 10.to 2 20 percent. Foreign d i r e c t investment i s proving to be one of the most important means of transfer of technology, e f f i c i e n t managerial prac-t i c e s and c a p i t a l across national boundaries. An important measure of the s i g n i f i c a n c e of foreign d i r e c t investment i s i t s contribution to foreign production. During 19 71, foreign production was estimated at $330 b i l l i o n . The t o t a l exports of market economies for the same period was $311 b i l l i o n . Thus foreign production as a percentage 3 of export reached the high figure of 105.8. The unprecedented expansion of foreign d i r e c t investment has evoked a strong i n t e r e s t i n the motives underlying the decision process. While some information and understanding has been gained from t h i s surge i n i n t e r e s t , the complexity of the decision-making process and the contro-versy that surrounds i t require more attention f or i t s analysis. L International Monetary Fund, Balance of Payments Yearbook, Volume 26 (Washington D.C. 19 74). 2 Stefan H. Robock and Kenneth Simmonds, International Business and M u l t i - n a t i o n a l Enterprises (Homewood, I l l i n o i s : Richard D. Irwin, 1973), p. 37. 3 United Nations, Department of Economic and S o c i a l A f f a i r s , M u l t i n a t i o n a l  Corporations i n World Development (New York, 19 73), p. 159. - 2 -B. The Meaning of Foreign Direct Investment A business f i r m thinking of going abroad can do so by export, l i c e n -sing, or d i r e c t investment. The s e l e c t i o n of a strategy for each market" may vary and depends on a number of factors which w i l l be discussed i n this d i s s e r t a t i o n . 1. Control The e s s e n t i a l feature of foreign d i r e c t investment i s control over the decision making process of the business enterprise i n the host country 4 by investors who are not c i t i z e n s of that country. The extent of control may vary according to equity p a r t i c i p a t i o n . According to Kindleberger the extent of desired control i s determined by the amount of monopolistic advantages enjoyed by a firm. The bigger the advantage, the higher the p r o b a b i l i t y of avoiding sharing of control with l o c a l s . The p o s s i b i l i t y of clash of i n t e r e s t s over p o l i c i e s regarding dividends, reinvestment-of earnings, and transfer p r i c i n g may also determine the extent of control desired. Government regulations i n the host country also play an impor-tant role i n determining the extent of c o n t r o l . The government i n India, f o r example, requires foreign corporations, as a condition of entering, to undertake to s e l l as much as 30 percent of t h e i r equity to l o c a l investors. Control i s sometimes used i n the l e g a l sense. The U.S. government defines d i r e c t investment as an ownership i n t e r e s t i n foreign enterprises Richard E. Caves, "International Corporations: The I n d u s t r i a l Economics of Foreign Investment" i n John H. Dunning, ed i t o r , International Investment (Harmondsworth, Middlesex, England: Penguin Books Ltd., 1972), p. 266. Charles P. Kindleberger, American Business Abroad: Six Lectures on Direct  Investment (New Haven and London: Yale University Press, 1969), pp. 27-31. - 3 -of at l e a s t 10 percent. This d e f i n i t i o n was used by the U.S. government i n 1968 to r e s t r i c t foreign investment. In p o r t f o l i o investment ownership i n t e r e s t i s present, but there i s no managerial control. Even i f a business firm owns the equity of a foreign enterprise by 100 percent, the investment w i l l not q u a l i f y as d i r e c t i n v e s t -ment unless the investor exercises control over the decision-making process. Control has p o l i t i c a l implications too. According to Kindleberger, "The control aspect of d i r e c t investment, which economists have been i n -c l i n e d to dismiss, i s increasingly assuming p o l i t i c a l s i g n i f i c a n c e . In part t h i s i s the r e s u l t of an unresolved c o n f l i c t i n i n t e r n a t i o n a l law; i n part the r e s u l t of what we may loosely characterize as pure nationalism. On the f i r s t score, for example, the United States assumes that i t has the r i g h t to require parent companies to d i r e c t the operations of t h e i r subsid-i a r i e s i n ways that conform to American purposes, while foreign governments, sovereign over the t e r r i t o r y where these s u b s i d i a r i e s are located, deny the existence of such a r i g h t . T h e controversy over control has strengthened economic nationalism. 2 . Flow of Funds and Direct Investment H i s t o r i c a l l y , economists considered foreign d i r e c t investment as an i n t e r n a t i o n a l flow of funds. In the case of the United States, the c a p i t a l movement part of d i r e c t investment remained s i g n i f i c a n t and was a cause of concern due to balance of payments problems. In February 1965 voluntary controls were imposed. These were made mandatory i n January 1968. As economists discovered l a t e r , d i r e c t investment did not necessarily involve an outflow of funds from the investing country. Investors who acquire Charles P. Kindleberger, American Business Abroad, o p . c i t . , p. 5. - 4 -control of an enterprise would borrow in the local capital market in the host country or they could borrow in the international capital markets. Direct investment is also possible through the exchange of assets such as technology, patents, or machinery without any exchange of funds through the foreign exchange markets. Direct investment may also be financed by reinvesting earnings. This also does not involve a flow of funds from the investing country. 3. Technology and Management Flow of funds may not be necessary for direct investment, but i t usually carries with i t valuable knowledge in the form of research and development, technical guidance, production technology, entrepreneurship, marketing s k i l l s , or managerial expertise. These-rarely accompany port-fo l i o investment. It i s because of the involvement of these factors that a multinational enterprise i s regarded as a vehicle for the dissemina-tion of superior inputs. Most of the direct investment is channelled through multinational corporations. 4. I n i t i a l and Ongoing Direct Investment Foreign direct investment may be classified as i n i t i a l direct investment i.e. the decision to invest direct in a market for the f i r s t time. This involves an analysis of motives of the investing enterprise. Direct investment may also be seen as ongoing i.e. an enterprise had already invested in a market, i t is merely repeating the decision. In the words of Richardson, "An important theoretical distinction must be drawn between this i n i t i a l decision and the ongoing investment decision which is made periodically for an established foreign a f f i l i a t e . - 5 -In p r i n c i p l e the i n i t i a l decision i s discrete and has no backdrop of re-sources already committed to the foreign market."^ Thus, foreign d i r e c t investment involves control of varying degrees. I t may or may not accompany a flow of funds from the invest i n g country, but i t usually accompanies some superior inputs i n the form of technology, management, entrepreneurship and marketing. Foreign d i r e c t investment involves formation or a c q u i s i t i o n with ownership of production f a c i l i t i e s i n a host country. Direct investment decisions may therefore be i n i t i a l investment decisions or ongoing investment decisions. C. H i s t o r i c a l Growth and D i s t r i b u t i o n of Di r e c t Investment 1. P o r t f o l i o Investment P r i o r to the F i r s t World War, 90 percent of a l l long term i n t e r -n a t i o n a l c a p i t a l movements consisted of p o r t f o l i o investment i n the form g of foreign s e c u r i t i e s and bonds acquired by i n d i v i d u a l s or i n s t i t u t i o n s . The period from 1864 to 1914 was uniquely favourable to free movement of c a p i t a l . The world could e a s i l y be divided into c a p i t a l exporting and importing countries. The U.K. was the leading credi t o r country followed by France, Switzerland and Germany. The countries i n North America (U.S.A. and Canada), L a t i n America, Oceania ( A u s t r a l i a and New Zealand), Asia and A f r i c a c l e a r l y being debtors. There were few exchange problems because J. David Richardson, "On Going Abroad: The Firm's I n i t i a l Foreign Investment Decision," Quarterly Review of Economics and S t a t i s t i c s , (Winter 19 71), p. 7. John H. Dunning, ed i t o r , International Investment (Harmondsworth, Middlesex, England: Penguin Books Ltd., 1972), p. 59. - 6 -the currencies of almost a l l countries were pegged to gold. Trade between cre d i t o r and debtor countries was growing. The upheaval following the F i r s t World War changed the positions of debtor and c r e d i t o r countries. The U.S. emerged as the prime credito r country during the war. By 1919 she had invested $6.5 b i l l i o n abroad, excluding the large war loans to her A l l i e s . In 19 30, the United States investment rose to $15.7 b i l l i o n , , about two-thirds of the world t o t a l of new investment. Continental Europe was transformed from a net c r e d i t o r to a net debtor area. Most countries i n Europe l i q u i d a t e d a large share of t h e i r foreign investment during the war. The U.K. sold 15 percent of her foreign investment, while France disposed o f f more than h a l f of her foreign assets. Germany not only gave up a l l her foreign investments, but she became the largest borrower a f t e r the war. During t h i s period, the U.S. had loaned as much as $7.5 b i l l i o n to Germany. By 19 30, the U.K., France, the Netherlands, Switzerland, Belgium and Sweden had recovered t h e i r l o s t p ositions and again became lenders. But t h i s recovery was short l i v e d because the Great Depression changed the en t i r e s i t u a t i o n . Dunning says, "... the depression which followed constituted the d i v i d i n g l i n e i n the h i s t o r y of investment. Not only were i t s immediate e f f e c t s f a r more serious than anything which had occured before - as shown by the wholesale defaults of debtor countries and sales of assets by c r e d i t o r countries. The c r i s i s i t s e l f was but a prelude to a ser i e s of events which were cumulatively disastrous for the i n t e r n a t i o n a l savings/investment process as i t was then organized. _ I b i d . , p. 60. ^ John H. Dunning, International Investment, o p . c i t . , p. 61. - 7 -Exchange controls replaced the gold standard and free c o n v e r t i b i l i t y of currencies. Free trade was replaced by import r e s t r i c t i o n s and b i l a t e r a l trading. P o r t f o l i o investment, for a l l p r a c t i c a l purposes, was halted. At the end of the Second World War, when foreign investment resumed, i t s char-acter was completely changed. 2. Foreign Direct Investment The post World War II period was dominated by foreign d i r e c t i n v e s t -ment channelled through the multinational corporations. S i m i l a r i t i e s i n s p i r i t and i n s t i t u t i o n a l set up of foreign d i r e c t investment could be found i n the seventeenth century when three powerful groups of I t a l i a n f i n a n c i e r s established agencies i n Rome, Lyon, Bruges, P a r i s , Antwerp, London and other centres throughout Europe.^ The emergence of nation states i n Europe resulted i n the subordi-nation of commerce and finance to the n a t i o n a l i s t i c aspirations of the s t a t e . The i n d i v i d u a l s and companies were rewarded for t h e i r support and cooperation by exclusive rights which l e d i n the beginning of seventeenth century to the r i s e of commercial monopolistic enterprises l i k e B r i t i s h East India Company, the Levant Company, the Dutch East India Company and the Hudson Bay Company. The monopolistic c o l o n i a l enterprises were b a s i c a l l y concerned with trade and raw materials e x p l o i t a t i o n i n the colonies. However, on a small scale, they manufactured goods l o c a l l y , which did not compete with the goods manufactured i n mother countries. The c o l o n i a l monopolies dominated world Endel J . Kolde, International Business Enterprises, Second E d i t i o n , (Englewood C l i f f s : P r e n t i c e - H a l l , Inc., 1973), p. 3. - 8 -trade u n t i l the lat e eighteenth century. Their influence was eroded by 12 the advent of the I n d u s t r i a l Revolution. The I n d u s t r i a l Revolution brought inventions, technology, s p e c i a l i -zation and concentration of production i n the f a c t o r i e s . Cottage industry was replaced by the new factory system. Government functions were taken away from the companies. Attitudes of nations changed from s e l f - s u f f i c i e n c y and protectionism to free trade. Great philosophers l i k e John Locke sup-ported the l a i s s e z f a i r e movement. Adam Smith advocated free trade. I t was during this period that d i r e c t investment was made by England, France and Holland on a small scale, i n thei r . c o l o n i e s i n Asia, A f r i c a and America. The investment took the form of subsidiary operations of metro-p o l i t a n trading or manufacturing companies i n need of raw materials - both a g r i c u l t u r a l and minerals. These c o l o n i a l subsidiary arrangements of the nineteenth century metropolitan firms were forerunners of the modern m u l t i -n a t i o n a l corporation. The s i m i l a r i t y between the two consists i n the . tra n s f e r of c a p i t a l , know-how, s k i l l e d managers, and technicians f o r permanent operations i n overseas areas. There were two major differences i n the companies that operated during the- c o l o n i a l period and the modern multinational corporations. F i r s t , the companies operated i n a c o l o n i a l area or a sphere of influence of the mother country compared to the present day multinational corpora-tions that operate i n sovereign states. Second, the di r e c t investment of those companies was production oriented compared to the dir e c t investment of modern multinational corporations which i s market oriented. The output of s u b s i d i a r i e s i n the colonies or spheres of influence was for further _ Arvind V. Phatak, Evolution of World Enterprises (American Management Association, 19 71), p. 5. - 9 -processing. The modern multinational corporation's b a s i c purpose i s to manufacture and market the parent company's products i n the host country, though goods may be exported to other countries including the home country. I t was i n the l a t t e r h a l f of the nineteenth century that several of the modern multinational corporations s t a r t e d manufacturing abroad, on a small scale, by s e t t i n g up s u b s i d i a r i e s . Singer established i t s f i r s t foreign subsidiary i n Glasgow i n 186 7 to assemble sewing machines, f o l -lowed by another assembly plant i n Montreal i n 1873. In 1879 Westinghouse sta r t e d a shop i n Paris to manufacture brakes. The General E l e c t r i c Company, soon a f t e r i t s incorporation i n 1892, acquired a l l the stock of the Thomson Houston International Company, which mostly consisted of f o r -eign d i r e c t investment. In 189 7, Wyeth and Company, a pharmaceutical firm, opened a manufacturing plant i n Canada. By 1889, Eastman Kodak incorporated i n London the Eastman Photographic Materials Company to manufacture fil m s . In 1879, Standard O i l of Ohio made i t s f i r s t investment i n a r e f i n e r y i n G a l i c i a . In Europe the f i r s t breakthrough was made by the Swedish inventor and i n d u s t r i a l i s t A l f r e d Nobel who founded the f i r s t foreign branch plant i n Hamburg i n 1866. Lever and Nestle also s t a r t e d s e t t i n g up foreign manu-factu r i n g plants i n the same period. Following the example of Lever and Nestle, a large number of such companies as Imperial Chemical, P h i l i p s and Royal Dutch S h e l l appeared on the horizon with a global outlook. Thus, by the s t a r t of 1890's, leading American and European inven-tors, manufacturers, and marketers were concerned with foreign d i r e c t investment, though on a small scale. American and European manufacturers of sewing machines, harvesters, typewriters, elevators, p r i n t i n g presses, b o i l e r s , e l e c t r i c a l appliances, drugs, explosives, f i l m s , petroleum, - 10 -margarine, soaps, coffee and insurance already had investments outside t h e i r respective countries. In the words of Wilkins, "The U.S. triumph abroad was one of ingenuity, new products, new methods of manufacturing 13 and new sales and advertising techniques." P r i o r to the F i r s t World War d i r e c t investment i n foreign markets was made by Ford, G.M., Studebaker and Computing Scale Company, the pre-decessor of IBM. Despite the appearance of the firms that were going to grow into multinationals of the present day, foreign d i r e c t investment remained a small part of the t o t a l investment because the U.S. market was b i g enough to a t t r a c t most of the attention of American investors. A f t e r the Second World War the composition of long term i n t e r n a t i o n a l c a p i t a l flows was completely changed. Most of such flows consisted of d i -rect investment, foreign a i d , loans by i n t e r n a t i o n a l agencies, and only 5 percent p o r t f o l i o investment. Direct investment dominated the scene. (a) Size and Growth The stock of foreign d i r e c t investment, as given i n Table 1, shows that the United States remained the major investi n g country followed by the United Kingdom, Germany, Switzerland, France, Japan, Canada, I t a l y and the Netherlands. The eight countries owned 90 percent of foreign d i r e c t i nvest-ment i n 19 74. A comparison of the share of these countries i n the stock of d i r e c t investment shows that the U.S. share declined from 55 percent i n 1967 to 47.9 i n 1974. The U.K. and I t a l y also experienced a decline i n t h e i r shares. The countries that remarkably increased t h e i r share during t h i s Mira Wilkins, The Emergence of M u l t i n a t i o n a l Enterprise: American  Business Abroad, (Cambridge, Mass.: Harvard University Press, 1970), p. 42. - 11 -Table 1. Stock Value of Foreign Direct Investment of Market Economies at Book 196 7 19 71 1974 Country B i l l i o n s % Dis-of US $ t r i b u t i o n B i l l i o n s of US $ % Dis-t r i b u t i o n B i l l i o n s of US $ % Dis-t r i b u t i o n United States 59.5 55.0 86.0 52.0 103.5 47.9 U.K. 17.5 16.2 24.0 14.5 31.5 14.6 France 6.0 5.5 9.5 5.8 11.4 5.2 Germany, FR 3.0 2.8 7.3 4.4 13.7 6.3 Switzerland 4.3 3.9 6.8 4.1 12.0 5.6 Canada 3.7 3.4 5.9 3.6 7.6 3.5 Japan 1.5 1.3 4.5 2.7 8.7 4.0 Netherlands 2.3 2.1 3.6 2.2 5.7 2.6 Sweden 1.5 1.4 3.5 2.1 4.3 1.9 I t a l y 2.1 1.9 3.4 2.0 4.0 1.8 Belgium 2.0 0.4 3.2 2.0 3.7 1.7 Others 4.9 6.1 7.4 4.6 10.3 4.9 108.2 100.0 165.0 100.0 216.4 100.0 Sources: 196 7 and 19 71: United Nations, Department of Economic and S o c i a l A f f a i r s , M u l t i n a t i o n a l Corporations i n World Development, New York, 1973, p. 139. 1972-74: Computed from International Monetary Fund, Balance of  Payments Yearbook, Volume 26, Washington, 19 74-75. The figures f o r 19 74 are p r o v i s i o n a l . - 12 -period were Japan (from 1.5 percent i n 1967 to 4.0 percent i n 1974), Germany (from 2.8 percent i n 196 7 to 6.3 percent i n 19 74) and Switzerland (from 3.9 percent i n 196 7 to 5.6 percent i n 19 74). An analysis of the t o t a l s i z e of foreign d i r e c t investment shows an increase of 70.9 percent from 1967 to 19 71, the annual average growth being 14.2 percent. The same high rate of growth could not be maintained during 19 71-74 because this was the period of f i n a n c i a l , economic and po-l i t i c a l c r i s e s . The d i r e c t investment during 19 71-74 increased by 31.1 percent only, the annual average growth rate being 7.7 percent. The book value measure of d i r e c t investment has inherent l i m i t a t i o n s because i t does not take care of the tremendous increase i n the value of assets due to the high rate of i n f l a t i o n . Thus the t o t a l value of d i r e c t investment i s highly understated. I f the assets are valued i n terms of t h e i r market p r i c e , the figures of d i r e c t investment w i l l increase by 14 three or four times. (b) Geographical D i s t r i b u t i o n Over two-thirds of the estimated book value of d i r e c t investment i s located i n the developed market economies where the advanced economic l e v e l and s i m i l a r i t i e s i n i n s t i t u t i o n a l and s o c i a l structures have f a c i l i -tated the spread of multinational corporate systems.^ A study of the geographical d i s t r i b u t i o n of the d i r e c t investment of the United States, s t i l l the biggest investor, i l l u s t r a t e s the concentration of d i r e c t investment i n developed countries. See Stefan H. Robock and Kenneth Simmonds, International Business and  M u l t i n a t i o n a l Enterprises, o p . c i t . , Chapter 3. United Nations, M u l t i n a t i o n a l Corporations i n World Development, op.cit. p. 8. See also Tables 11 and 12 i n the Annex II of the same book. - 13 -Table 2. Geographical D i s t r i b u t i o n of Foreign Direct Investment of USA 1965-73. ( M i l l i o n US $) Year UK Other Western Europe Japan Canada L a t i n American Rep. & Other W. Hemisphere Other coun-t r i e s I n s t i -tutions Total 1965 566 1,247 70 1,435 59 7 858 123 4,896 1966 574 1,665 80 1,626 616 648 50 5,259 1967 423 1,285 112 1,036 428 998 317 4,599 1968 583 853 180 1,356 928 913 354 5,167 1969 435 1,568 168 1,556 720 888 264 5,602 19 70 878 1,980 251 1,706 1,003 1,035 477 7,330 19 71 943 2,148 336 1.272 1,041 1,403 738 7,881 19 72 433 2,291 342 1,609 809 1,359 456 7,299 19 73 1,486 4,741 335 2,315 1,650 1,580 496 12,517 Source: IMF Balance of Payments Yearbooks, 1965- 73. The figures i n the IMF Balance of Payments Yearbook up to 19 70 were given i n US $, while those for the remaining years were i n SDRs. For the sake of consistency, the SDRs were converted into the US $. The following exchange rates were computed from the exchange rates given i n the IMF Balance of Payments Yearbook: 1971: US $ = SDR 1 1972: = SDR 0.98 19 73: = SDR 0.85 - 14 -The United States d i r e c t investment was concentrated i n Western Europe followed by Canada, L a t i n American Republics and the United Kingdom. Only 15.9 percent of d i r e c t investment during 1965-73 went to other coun-t r i e s of Asia, A f r i c a and Oceania. Canada remained the most important s i n g l e country from the U.S. investors' point of view by taking a record of 22.9 percent of t o t a l U.S. investment during this period. The geographical d i s t r i b u t i o n of direct investment by Canada shows a concentration i n the United States followed by the UK and other(non-OECD) countries. Canada's d i r e c t investment i n other OECD countries seems to have l e v e l l e d o f f a f t e r 1968. In 1973, d i r e c t investment i n this region showed a decline from the previous year's $30 m i l l i o n to $12/million. A look at the geographical d i s t r i b u t i o n of West Germany's d i r e c t investment shows large increases i n a l l areas except the United States and Canada, where i t shows a modest increase. As discussed before, Japan i s showing the f a s t e s t rate of growth i n her foreign d i r e c t investment. The highest concentration of Japan's d i r e c t investment i s i n the t h i r d world countries. As Japan i s not r i c h i n natural resources, she i s i n v e s t i n g i n the t h i r d world countries to develop t h e i r natural resources so that she can have dependable sources of supply of raw materials. An i n t e r e s t i n g feature of the d i s t r i b u t i o n of d i r e c t investment of the UK, France, I t a l y , Belgium and the Netherlands r e f l e c t s the importance of former c o l o n i a l t i e s . More than two-thirds of the French and Belgium d i r e c t investment was i n A f r i c a , mostly i n French speaking countries. The investment of the UK was concentrated i n Commonwealth countries. - 15 -Table 3. The Geographical D i s t r i b u t i o n of Canada's Foreign Direct Investment. ( M i l l i o n US $)* Year USA UK Other OECD Countries Other Countries To t a l 1968 42 1 45 38 126 1969 265 7 31 39 342 19 70 208 15 37 38 268 19 71 181 26 31 64 302 19 72 122 32 30 181 366 19 73 353 108 12 98 571 Source: IMF, Balance of Payments Year Books, 1968-73. ( c) Composition of Direct Investment by Industry During 1946-58 most d i r e c t investment was made i n extractive indus-t r i e s p a r t i c u l a r l y i n petroleum i n the Middle East, Canada and L a t i n America. From 1958 onward, the emphasis s h i f t e d to manufacturing of consumer goods, mostly durables. The d i r e c t investment during this period was dominated by automobiles, e l e c t r i c appliances, food, chemicals and petrochemicals. Direct investment industries are dominated by large s i z e multinational corporations. The su b s i d i a r i e s i n the natural resources sector appear to be three to four times larger than i n manufacturing. The industries i n which _ The figures i n IMF Balance of Payments Yearbook f o r 1968 were given i n Canadian d o l l a r s . For the sake of consistency these were converted into US do l l a r s by using US $1 = CN $1.0728. The figures f or 1969 and 1970 were i n US d o l l a r s . The figures f o r 19 71, 19 72, and 19 73 were i n SDRs. These were converted into US do l l a r s by using the exchange rates d i s -cussed at the bottom of Table 2 of th i s paper. - 16 -Table 4. The Geographical D i s t r i b u t i o n of Germany's Foreign Direct Investment. ( M i l l i o n US $) Year US & Canada EEC Other OECD Countries Other Countries Total 1967 44 83 61 76 264 1968 54 140 117 85 396 1969 83 208 149 109 549 19 70 103 242 178 16 3 686 19 71 136 232 227 76 671 19 72 n.a. n.a. n.a. n.a. n.a. 19 73 141 585 455 458 1,640 Source: IMF, Balance of Payments Yearbooks, 196 7-73. For conversions of SDR figures for 1971, 1972 and 1973 into US d o l l a r s , see note on Table 2 of this paper. The following table shows the geographical d i s t r i b u t i o n of d i r e c t investment i n Japan: Table 5. The Geographical D i s t r i b u t i o n of Foreign Direct Investment of Japan. ( M i l l i o n US $) Year USA Canada Other OECD Countries . Finland, A u s t r a l i a New Zealand, and South A f r i c a Other Countries To t a l 1967 16 0 3 5 53 77 1968 67 0 16 7 54 144 1969 1 0 9 18 106 134 19 70 20 0 41 39 161 261 19 71 114 27 4 88 145 150 19 72 70 16 162 27 246 521 1973 585 63 436 49 735 1,868 Source: IMF, Balance of Payments'Yearbooks, 1967-73. For conversions of the SDR figures for 19 71, 1972 and 19 73 into US d o l l a r s , see note on Table 2 of this paper. d i r e c t investment i s being made are dominated by a few firms i n each country. For the United States, 250 to 300 firms account for over 70 percent of dir e c t investment. In case of the United Kingdom, over 80 percent of the t o t a l i s co n t r o l l e d by 165 firms. For the Federal Republic of Germany, 82 firms control over 70 percent and the nine larges t foreign investors alone control 37 percent of the t o t a l . In the case of Japan, although there are some giant firms active abroad, many small firms appear to have p a r t i c i p a t e d i n foreign d i r e c t investment a c t i v i t i e s . ^ Summarizing the above discussion, the following conclusions can be drawn about foreign d i r e c t investment a f t e r the Second World War: 1) Direct investment became the major form of investment replacing port-f o l i o investment. 2) More of the d i r e c t investment i s being made i n the developed market economies of the world, p a r t i c u l a r l y i n Western Europe a f t e r the formation of the European Economic Community i n 1958. The share of the developing countries i s d e c l i n i n g . 3) The emphasis has s h i f t e d from extractive industries to manufacturing. 4) About 90 percent of the stock of di r e c t investment i s owned by nine countries v i z . , the U.S.A., the U.K., Germany, Switzerland, France, Japan, Canada, I t a l y and the Netherlands. The shares of the United States and the U.K. are decli n i n g , while those of Germany, Japan and Switzerland are increasing. 5) The multinational corporations are the most important channels of foreign d i r e c t investment. See United Nations, Multin a t i o n a l Corporations i n World Development, op . c i t . , Chapter 1. - 18 -I I . A SURVEY OF FOREIGN DIRECT INVESTMENT THEORIES A. The Issues i n Foreign Direct Investment The rapid growth i n foreign d i r e c t investment a f t e r the Second World War rai s e d many issues i n the minds of a l l those who were i n any way con-cerned with i t - economists, i n t e r n a t i o n a l trade t h e o r i s t s , f i n a n c i a l ex-perts and government p o l i c y makers, both i n home and host countries. Some of these issues were the e f f e c t s of foreign d i r e c t investment on the balance of payments, the threat to the sovereignty of host countries, i t s contribu-t i o n to economic development of host countries, the impact of foreign d i r e c t investment on the employment l e v e l i n the home country and economic nation-alism. These macro issues are not within the scope of th i s research which i s concerned with the determinants of foreign d i r e c t investment. The issues at the micro l e v e l can be b r i e f l y stated as follows: 1) What fact o r s , i n t e r n a l and external, motivate a business firm to expand i t s operations across national boundaries? 2) What factors determine the form of going abroad i . e . why some firms expand t h e i r operations i n foreign markets by means of export, others by means of l i c e n s i n g and s t i l l others choose d i r e c t investment by acquiring or b u i l d i n g production f a c i l i t i e s i n foreign markets? 3) Why do firms prefer to make d i r e c t investment i n certain countries and regions and not i n others? P a r t i c u l a r l y , why i s foreign d i r e c t i nvest-ment concentrated i n developed countries compared to developing regions? 4) Why i s foreign d i r e c t investment concentrated i n cer t a i n i n d u s t r ies rather than others? 5) Why i s i t that some firms i n the same industry invest abroad, while others decide to stay home? - 19 -6) Why does the two way flow of foreign d i r e c t investment take place between developed countries even i n the same industry? A comprehensive theory of foreign d i r e c t investment should o f f e r a s a t i s f a c t o r y explanation of these issues. As for e i g n d i r e c t investment i s a new phenomenon i n terms of i t s s i z e and growth, no comprehensive theory has yet developed to provide acceptable answers to these i s s u e s . The f o r -eign d i r e c t investment decision theory i s s t i l l i n i t s infancy. Mostly theories and concepts borrowed from economics, investment theory, i n t e r -n a t i o n a l trade theory and organizational behaviour are being applied to explain the determinants of foreign d i r e c t investment and i t s pattern. The lack of a comprehensive theory can be a t t r i b u t e d to the d i f f i -c u l t i e s encountered i n i n t e r p r e t i n g the motives of corporations which have grown tremendously i n s i z e and complexity. The o f f i c i a l s of the O f f i c e of International Investment i n the U.S. Department of Commerce faced the same problem when they t r i e d to investigate the causes and e f f e c t s of U.S. di r e c t investment abroad. They admitted i n the report that "Sorting out the motives underlying e i t h e r i n d i v i d u a l or c o l l e c t i v e behavior i s a very complex process not rea d i l y amenable to q u a n t i f i c a t i o n or to f a c i l e gener-a l i z a t i o n s . Yet c r i t i c i s m of the motives underlying a c t i v i t i e s of mu l t i -n a t i o n a l companies by ce r t a i n industry and labour groups have tended to oversimplify the motives for investing abroad or have implied invidious motives to s p e c i f i c investments.""'7 Another d i f f i c u l t y i n probing the determinants of foreign d i r e c t investment l i e s i n the fact that on a number of occasions behaviour i s "*" U. S .• Department of Commerce, Bureau of International Commerce, The  Mul t i n a t i o n a l Corporation: Studies on U.S. Foreign Investment, Vol. 1 (Washington D.C: Superintendent of Documents, U.S. Government P r i n t i n g Press, 1972), p. 15. - 20 -influenced not by one, but by several motives. In the words of Dunning, "Since foreign d i r e c t investment represents the t e r r i t o r i a l expansion of business a c t i v i t i e s , i t may be assumed that, i n p r i n c i p l e at l e a s t , i t i s undertaken to advance the i n t e r e s t s of the investing i n s t i t u t i o n - whatever these i n t e r e s t s may be. I t i s true that most firms are influenced i n t h e i r behaviour by more than one objective and sometimes d i f f e r e n t values are placed on the same objectives. Moreover, not a l l firms view t h e i r over-2 seas investments i n the same l i g h t as t h e i r domestic investments." The theories explaining foreign d i r e c t investment can be grouped in t o : the maximization theories, the s a t i s f i c i n g theory, the product l i f e cycle theory and the neo-imperialism theory. The maximization theories include the c l a s s i c a l economic theory, the i n t e r e s t rate d i f f e r e n t i a l or cost of c a p i t a l theory, the capacity u t i l i z a t i o n theory, the theory of the growth of firm, the monopolistic advantage theory and the c a p i t a l market imperfections theory. The emphasis i n a l l these theories i s on maximization of economic goals of the firm such as p r o f i t , i n t e r e s t , u t i l i z a t i o n of capacity, sales, return from monopolistic advantages, and the avoidance of the r i s k of c a p i t a l depreciation. In the s a t i s f i c i n g theory, greater attention i s paid to noneconomic goals and less attention i s given to purely r a t i o n a l decisions. The pro-duct l i f e cycle theory relates the l o c a t i o n of production to the stages i n the l i f e cycle of a product. The neo-imperialism theory stresses the collaboration between the i m p e r i a l i s t powers and the multinational cor-porations to achieve the p o l i t i c a l goals of the former. John H. Dunning, International Investment: Selected Readings, o p . c i t . , p. 13. - 21 -B. The Maximization Theories 1. The C l a s s i c a l Economic Theory The emphasis i n c l a s s i c a l economic theory i s on p r o f i t maximization, which i s held to be "the strongest, the most unive r s a l , and the most p e r s i s -3 tent of the forces governing entrepreneurial behaviour." Mi l t o n Friedman says, "Few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate o f f i c i a l s of a s o c i a l responsi-4 b i l i t y other than to make as much money for t h e i r stockholders as possible." Caves introduces the idea of o v e r a l l maximization. "... the maximiza-tio n of p r o f i t can safe l y be assumed to be the p r e v a i l i n g motivation of the firm, multinational or not. Indeed, the ava i l a b l e evidence supports the view that the multinational maximizes p r o f i t s from i t s a c t i v i t i e s as a whole, rather than, say, t e l l i n g each subsidiary to maximize independently and ignoring the p r o f i t interdependencies among them. But o v e r a l l maximi-zation by the multinational can lead i t s subsidiary to behave d i f f e r e n t l y from an independent firm. ... A subsidiary might pass up an otherwise prof-i t a b l e l o c a l use of funds i f the expected y i e l d would be higher elsewhere i n the global corporation, whereas a l o c a l f i r m would make the l o c a l com-mitment. Another difference arises because the multinational firm almost automatically spreads i t s r i s k s , and could therefore behave quite d i f f e r e n t l y i n an uncertain s i t u a t i o n from an independent having the same r i s k . . _ George J. S t i g l e r , The Theory of P r i c e , Revised E d i t i o n , (New York: Macmillan, 1952), p. 149. ^ Milton Friedman, Capitalism and Freedom (Chicago: University of Chicago Press, 1962), p. 133. "* Richard E. Caves, International Trade, International Investment, and  Imperfect Markets, Special Papers i n International Economics, No. 10 (Princeton: International Finance Section, Department of Economics, Princeton University, 1974), p. 21. - 22 -According to the c l a s s i c a l economic theory, the f i r m i s assumed to be composed of a s i n g l e , omniscient economic man. A l l problems, t h e i r a l t e r n a t i v e s and consequences of each a l t e r n a t i v e are known to him. Firms cannot grow beyond a c e r t a i n s i z e because management i s i n d i v i s i b l e . Each fir m i n the market i s very small and t h e i r number i s i n f i n i t e l y large. This assumption was relaxed and oligopoly and monopolistic competition were added. P r o f i t maximization i s achieved at the l e v e l where marginal revenue equals marginal cost. The optimizer t r i e s to formulate corporate goals i n quantitative terms and to combine them in t o a s i n g l e measure of o v e r a l l corporate per-formance. He may not succeed completely, but he usually manages to trans-l a t e some vaguely formulated q u a l i t a t i v e objectives into more precise quantitative terms. The optimizer tends to ignore goals that he cannot quantify. He e i t h e r .tries to minimize the resources required to obtain a s p e c i f i e d l e v e l of performance or to maximize the performance that can be attained with resources that are a v a i l a b l e . He may also try to obtain the best balance of costs and b e n e f i t s . When applied to foreign d i r e c t investment, the c l a s s i c a l economic theory answers some of the issues. A business f i r m i s motivated to expand i t s operations i n foreign countries because of i t s desire to maximize pro-f i t . P r o f i t maximization w i l l p a r t l y determine the form of going abroad, i . e . export, l i c e n s i n g or d i r e c t investment. The types of industries and 6 See f o r a b r i e f discussion of the c l a s s i c a l economic theory, Y a i r Aharoni, Foreign Investment Decision Process, Chapters 1 and 10 (Boston: D i v i s i o n of Research, Graduate School of Business Administration, Harvard Univer-s i t y , 1966). See also Russell L. Ackoff, A Concept of Corporate Planning, Chapter 1 (Toronto: Wiley Interscience, A D i v i s i o n of John Wiley and Sons, 1974). For a d e t a i l e d discussion of c l a s s i c a l economic theory, see James Henderson and Richard Quandt, Microeconomic Theory (New York: McGraw-Hill Book Co., 1958). - 23 -markets are also selected on the basis of t h e i r p r o f i t p o t e n t i a l s . Some firms i n the same industry decide not to invest abroad because they see more p r o f i t opportunities i n the domestic market. However, the theory does not provide a good explanation of the two-way flow of d i r e c t investment. The c l a s s i c a l theory has been c r i t i c i z e d on several grounds. I t i s s a i d that the theory i s too simple, vague and nonoperational. P r o f i t maxi-mization i n the short-run appears to make some sense, but i n the long run i t creates many problems i n view of r i s k s and uncertainties pertaining to costs and revenue i n the future. Another objection to p r o f i t maximization i s that a person i s also motivated by non-pecuniary motives such as job se c u r i t y , l e i s u r e , freedom from worry and retention of c o n t r o l . P r o f i t maximization i n the modern complex organization i s seen more as a constraint subject to which other goals can be followed rather than as the sole motivating force. "In teaching the t h e o r e t i c a l model-building, the modern large corporation i s ignored. An entrepreneur i s assumed. To most economists, even today, entrepreneur s t i l l means only the owner-manager, usually by im p l i c a t i o n , of a small manufacturing business."^ In f a c t , the earnings of modern organizations are much less compared to owner-manager type of firms. Monsen, Chiu and Cooley have compared f o r twelve years from 1952 to 1963 the earnings of large firms i n which there i s f u l l management control with those i n which there i s s u b s t a n t i a l owner-ship i n t e r e s t . The return on the invested c a p i t a l f o r the management g c o n t r o l l e d firms was s u b s t a n t i a l l y and consistently lower. ^ John Kenneth Galbraith, The New I n d u s t r i a l State, Second E d i t i o n , Revised (Boston: Houghton M i f f i n Company, 1971), pp. 121-122. R. Joseph Monsen, John S. Chiu and David E. Cooley, "The E f f e c t s of Separation of Ownership from Control on the Performance of the Large Firms," Quarterly Journal of Economics, Vol. 82, No. 3 (August 1968), pp. 435-446. The explanation offered by the c l a s s i c a l economic theory of foreign d i r e c t investment, despite i t s l i m i t a t i o n s , has several advantages. I t i s a f u l l y integrated theory of investment, production and d i s t r i b u t i o n . The theory gives a strong power of p r e d i c t i o n f o r foreign d i r e c t investment be-cause i t can be subjected to mathematical manipulations. The most important reason for not ignoring the c l a s s i c a l economic theory i s that the investment incentives of many countries, p a r t i c u l a r l y those of developing countries are based on p r o f i t maximization. 2. Investment Theories (a) Rate of Interest or Cost of Capi t a l Similar to the c l a s s i c a l economic theory with i t s emphasis on p r o f i t maximization i s the rate of i n t e r e s t or cost of c a p i t a l theory of inv e s t -ment. Contributions to this theory were made by Ricardo, Hume, M i l l and Iverson. H i s t o r i c a l l y , the purpose of this theory was to explain the i n t e r -n a t i o n a l flow of c a p i t a l f o r p o r t f o l i o investment. "Thus, the immediate cause which c a l l s f o r t h c a p i t a l movement i s usually a difference between the i n t e r e s t rates of two countries, which i s large enough to outweigh the 9 costs of transfer occasioned by the obstacles to such c a p i t a l flows." The main reason f o r the lower rates of i n t e r e s t i n the home country i s abundance of c a p i t a l . As investors are maximizers, they invest i n coun-t r i e s where they get a higher return f or t h e i r investment. John Stuart M i l l speaking of the mobility of c a p i t a l i n response to i n t e r e s t rates d i f f e r -ences sai d , " C a p i t a l i s becoming more and more cosmopolitan; there i s so much greater s i m i l a r i t y of manners and i n s t i t u t i o n s than formerly, and so Ca r l Iversen, Aspects of the Theory of International C a p i t a l Movements (New York: Augustus M. Kelley, Publishers, 1967) pp. 93-94. - 25 -much less a l i e n a t i o n of f e e l i n g s , among the more c i v i l i z e d countries, both population and c a p i t a l now move from one of those countries to another on much less temptation than heretofore. When applied to i n t e r p r e t f o r e i g n d i r e c t investment, the explana-ti o n of the theory appears to be somewhat l i k e t h i s : Direct investment i n foreign countries i s made because the rate of i n t e r e s t i n the domestic mar-ket i s much lower while i n the foreign countries i t i s much higher. According to this theory, businessmen calculate the rate of return from an investment and compare i t with the rate of i n t e r e s t . The c a l c u l a -tion i s then adjusted for r i s k and the required rate of i n t e r e s t i s raised by the r i s k factor. While doing so i t i s being assumed that the exact p r o b a b i l i t y d i s t r i b u t i o n of r i s k i s known. Knight''""'" distinguished between r i s k and uncertainty. According to him, r i s k i s a s i t u a t i o n where the p r o b a b i l i t i e s of a l t e r n a t i v e outcomes are known. Thus r i s k can be insured. An exact p r o b a b i l i t y d i s t r i b u t i o n of uncertainty i s not known, therefore, i t cannot be insured. Economists take uncertainty into account by saying that what i s maximized i s the expected return. The most recent p r o f i t experience i s used as a measuring rod for expectations. Thus c a l c u l a t i o n of return on investment i s i n fact precarious i f not impossible. As mentioned e a r l i e r , this theory was developed to explain the flow of funds during the mid-nineteenth and early twentieth century. I t does not explain much of the foreign d i r e c t investment which i s not always accompanied by a flow of John Stuart M i l l , P r i n c i p l e s of P o l i t i c a l Economy, Book I I I , Chapter XVII, London, 1848, Quoted i n C a r l Iversen, Aspects of the Theory of  International C a p i t a l Movements, p. 98. Frank H. Knight, Risk, Uncertainty, and P r o f i t (Boston: Houghton, M i f f i n Company, 1921), quoted i n Y a i r Aharoni, Foreign Investment  Decision Process, p. 251. - 26 -funds. The theory does not say anything about why control i s desired by the inves t i n g f i r m and why the movement of c a p i t a l , i f any, uses the firm as a medium rather than the organized and e f f i c i e n t i n t e r n a t i o n a l c a p i t a l markets. I t also f a i l s to explain the simultaneous inflow and outflow of foreign d i r e c t investment. The geographical d i s t r i b u t i o n of foreign d i r e c t investment i s also not explained by this theory. Moreover, empirical studies show no apparent r e l a t i o n s h i p between 12 the rate of i n t e r e s t and investments. As th i s model was too simple, changes were made to include variables other than i n t e r e s t rates. Also t h i s theory does not take into consideration the strong preference of management for financing investments out of i n t e r n a l l y generated funds i n the form of retained earnings. (b) Capacity U t i l i z a t i o n Theory According to t h i s theory, at f u l l employment the change i n c a p i t a l stock i s s t r i c t l y proportional to the p o s i t i v e rate of change i n output. The 'rate of change' was substituted by ' l e v e l of output.' Also changes were made by introducing various lags, created both by delays i n reaching a decision and by the period between c a p i t a l goods production and the s t a r t of operations using these goods c a l l e d 'gestation l a g . ' The majority of studies undertaken by Moose, Popkin, Severn and Stevens support the capacity u t i l i z a t i o n or 'accelerator p r i n c i p l e ' of investi n g overseas, which U.S. economists have found to be dominant with respect to domestic John R. Meyer and Edwin Kuh, The Investment Decision,: An Empirical  Study (Cambridge, Mass.: Harvard University Press, 1957), quoted i n Yai r Aharoni, Foreign Investment Decision Process, p. 253. - 27 investment, but as yet data are not s u f f i c i e n t l y disaggregated on an 13 i n d u s t r i a l basis f o r conclusions of any p r a c t i c a l value to be drawn. The l i m i t a t i o n of the capacity u t i l i z a t i o n theory i s that i t t r i e s to explain induced investment or 'ongoing investment' to maintain capacity of e x i s t i n g plants. I t does not explain autonomous investment, i . e . i n -vestment associated with innovation. Also the theory can be used only i f past experience i s a v a i l a b l e . I t o f f e r s no guidance f o r action f o r i n i t i a l foreign d i r e c t investment. 3. The Theory of Growth of the Firm 14 15 Contributions to this theory were made by Baumol, Rothschild, and G a l b r a i t h . A c c o r d i n g to this theory, p r o f i t i s considered a con-s t r a i n t subject to which other goals are sought. Going beyond the minimum l e v e l of earnings necessary for s u r v i v a l may mean i n v i t i n g increased r i s k of l o s s . Once th i s l e v e l i s achieved, the firm has a choice' with regard to goals. Overwhelmingly, t h i s choice i s to achieve the greatest possible rate of corporate growth as measured i n s a l e s . Expansion of output means more jobs with r e s p o n s i b i l i t y and hence more promotion and more compensation. Growth of the f i r m i s also desired by management as protection against 13 See John H. Dunning, International Investment: Selected Readings, o p . c i t . , p. 16. 1 ^ See William J . Baumol, Business Behavior, Value and Growth (New York: Macmillan Company, 1959). 1 5 See K. W. Rothschild, "Price Theory and Oligopoly," Economic Journal Vol. LVII, No. 227, (September 1947), pp. 299-320. 16 See John Kenneth Galbraith, The New I n d u s t r i a l State, Second E d i t i o n , Revised, Chapter XV. This section i s mainly based on Galbraith's i n t e r p r e t a t i o n of growth. - 28 -contraction. In large corporations men work i n groups and whole groups cannot be discharged. Growth as an objective i s also selected because i t i s consistent with economic growth which i s the most desired s o c i a l goal. Capacity for growth depends very l a r g e l y on capacity f o r innovation. The 17 growth theory was also supported by the findings of M i k e s e l l . When applied to explain foreign d i r e c t investment, the theory of growth of the f i r m answers some of the issues. A f i r m invests abroad be-cause i t wants to grow. Markets and areas are selected for d i r e c t invest-ment because of t h e i r growth p o t e n t i a l . Beyond t h i s , the theory does not o f f e r any explanation of the issues. I t does not say why a f i r m chooses di r e c t investment compared to other forms of going abroad. However, the theory implies that a f t e r achieving a minimum l e v e l of earnings, the choice of objectives w i l l be determined by the s e l f - i n t e r e s t of manage-ment . 4. The Monopolistic Advantage Theory This major theory was o r i g i n a l l y propounded i n 1960 by Stephen H. Hymer while w r i t i n g h i s doctoral d i s s e r t a t i o n on "The International Operations of National Firms: A Study of Direct Investment" under the supervision of Charles P. Kindleberger at the Massachusetts I n s t i t u t e of Technology. Later, i t was r e f i n e d and extended by Kindleberger i n h i s "American Business Abroad: Six Lectures on Direct Investment." Unlike other theories discussed so f a r , t h i s was s p e c i a l l y developed to explain foreign d i r e c t investment. R. M i k e s e l l , "Decisive Factors i n the Flow of American Direct Investment to Europe," Economica Internazionale (August 1967), pp. 431-452. According to Hymer, d i r e c t investment belongs more to the theory of i n d u s t r i a l organization than to the theory of i n t e r n a t i o n a l c a p i t a l move-ments. I f a higher rate of return was the only issue then c a p i t a l would move through organized c a p i t a l markets rather than through firms that spe-c i a l i z e i n the production and d i s t r i b u t i o n of goods. The c l a s s i c a l c a p i t a l -flow theory assumes perfect competition for goods and factor markets. Hymer's theory i s based on the imperfections i n goods and factor markets. A foreign investor has many disadvantages i n the host country. Besides the p o l i t i c a l disadvantage of being a foreigner, he has to bear a d d i t i o n a l costs such as t r a v e l , transportation, communication and delays i n communicating information and decisions. The l o c a l firm does not s u f f e r from any of these disadvantages. To overcome these disadvantages the f o r -eign firm must have an advantage over e x i s t i n g or p o t e n t i a l l y competitive firms i n the host country. This advantage should be transferable from one country to another at no extra cost. The l o c a l firm should be unable to acquire i t . I f there was perfect competition i n the factors market, the foreign market w i l l be served by l o c a l firms only. In a world of perfect competition f o r goods and fact o r s , d i r e c t investment cannot e x i s t . To meet the a d d i t i o n a l costs, the foreign inves t i n g f i r m must earn a higher return i n the market where i t i s operating compared to what l o c a l firms earn . To reduce the weight of the argument that foreign d i r e c t investment i s undertaken because production costs may be lower i n the host country due to favorable wage rates, raw material p r i c e s , i n t e r e s t rates and reduction i n the cost of transportation, distribution-, inventory and s e r v i c i n g , Kindleberger remarked, "In the present view, cheaper costs - 30 -abroad than at home are not enough. What must be explained i s why the production abroad i s not'undertaken by .local entrepreneurs, who have an inherent advantage over foreign investors. There must be a more than com-pensating advantage on the part of the foreigner before d i r e c t investment w i l l be c a l l e d f o r t h . " " ^ These advantages i n a goods market, which i s imperfect, may include product d i f f e r e n t i a t i o n , s p e c i a l marketing s k i l l s , r e t a i l p r i c e maintenance and administered p r i c i n g . Product d i f f e r e n t i a t i o n i s the main reason f o r the prevalence of foreign d i r e c t investment i n branded products such as automobiles, t i r e s , e l e c t r i c appliances, e l e c t r i c components, farm machin-ery, o f f i c e equipment, cosmetics, pharmaceuticals, s o f t drinks and s p e c i a l t y foodstuffs. Foreign d i r e c t investment i s not made i n standardized goods such as t e x t i l e s , clothing, f l o u r m i l l i n g and d i s t r i b u t i o n . This answers the question r e l a t i n g to the concentration of foreign d i r e c t investment i n cer t a i n types of i n d u s t r i e s . Product d i f f e r e n t i a t i o n i n o l i g o p o l i s t i c i n d u s t r i e s also explains the two-way flow of foreign d i r e c t investment. There i s an urge i n such industries f or each fi r m to get a foothold i n each important or p o t e n t i a l l y important market i r r e s p e c t i v e of the rate of p r o f i t a v a i l a b l e i n absolute terms. The main purpose of facing the competitors i n th e i r own t e r r i t o r i e s i s to prevent any of i t s few competitors from obtaining a s u b s t a n t i a l advantage which i t could put to use over a wider area. The best defence i s offence i n the market of the fir m threatening to enter into the home market. 18 Charles P. Kindleberger, American Business Abroad, o p . c i t . , p. 13. This section i s mainly based on chapter one of the above book and Richard E. Caves, International Trade, International Investment, and Imperfect  Markets, o p . c i t . - 31 -The foreign firm may enjoy an advantage i n the factor markets which includes patented or unavailable technology, access to c a p i t a l , differences i n the s k i l l s of managers organized into firms rather than h i r e d i n com-p e t i t i v e markets. The function of patents and r e s t r i c t e d technology i s to l i m i t entry. The decision to license or undertake foreign production i s determined by which of these two methods causes the foreign f i r m to r e a l i z e the f u l l rent of the monopolistic advantage. I f the license fee f a i l s to capture the f u l l rent inherent i n technical s u p e r i o r i t y , the advantage l i e s i n d i r e c t investment. Licenses tend to bring i n a lower 19 return, but are less expensive i n c a p i t a l , time and energy. This ex-plai n s the form of expanding abroad. Though d i r e c t investment does not necessarily involve a flow of funds i n ind u s t r i e s that need large amounts of c a p i t a l , a foreign f i r m w i l l have an advantage over a domestic fi r m because of i t s superior c r e d i t standing. The i n t e r n a t i o n a l c a p i t a l market i s not perfect, and though c a p i t a l markets are joined, d i f f e r e n t rates are charged to bor-rowers of d i f f e r e n t c r e d i t standing. Many borrowers cannot command the large sums of money necessary f o r c a p i t a l intensive investments. Hymer's theory of monopolistic advantage, as re f i n e d by Kindleberger and Caves, answers many of the issues raised i n foreign d i r e c t investment. I t provides a s a t i s f a c t o r y answer to the question r e l a t i n g to the motives of firms expanding t h e i r a c t i v i t i e s abroad. According to this theory, firms go abroad because they have advantages i n factors or goods markets. As these advantages are transferable from one country to another, the firms enjoying these advantages want to get the maximum return on them. ~19 Charles P. Kindleberger,- American Business Abroad, o p . c i t . , p. 14. - 32 -When domestic markets are well served and sales reach the point of satura-t i o n , a f i r m w i l l try to go abroad to e x p l o i t these advantages. According to this theory, firms s e l e c t foreign d i r e c t investment rather than l i c e n s i n g because l i c e n s i n g may not bring f u l l return of the monopolistic advantages enjoyed by the firm. Foreign production may also be selected due to the desire to ensure supply of goods and adapt the product to l o c a l needs. The theory of monopolistic advantage also o f f e r s an acceptable answer to the question of concentration of foreign d i r e c t investment i n c e r t a i n i n d u s t r i e s and the types of firm that undertake foreign d i r e c t investment. Direct investment requires larger and r i s k i e r f i x e d costs than exporting or l i c e n s i n g . Given the presence of lender's r i s k or out-r i g h t imperfections of c a p i t a l markets, d i r e c t investment becomes the province of the large firms with s u b s t a n t i a l i n t e r n a l l y generated funds to finance the i n i t i a l f i x e d charges. On a p r o b a b i l i s t i c b a s i s , the requirement of large s i z e f o r the investing f i r m implies that foreign investment w i l l occur p r i n c i p a l l y i n industries where s e l l e r s are few i n number. One may expect to f i n d d i r e c t investment i n manufacturing indus-t r i e s marked by d i f f e r e n t i a t i o n and fewness of s e l l e r s or " d i f f e r e n t i a t e d , • , ..20 olxgopoly. Firms also engage i n what i s c a l l e d "defensive" d i r e c t investment, i . e . investment that produces a less than average return, but where the difference between the gross returns plus the loss that would have re-s u l t e d from exclusion gives the necessary rate of return on a marginal Richard E. Caves, International Trade, I n t e r n a t i o n a l Investment and  Imperfect Markets, o p . c i t . , p. 19. - 33 -b a s i s . Direct investment may also be undertaken i n raw materials and minerals due to v e r t i c a l i n t e g r a t i o n , i . e . the ownership and control of production process backwards to ensure supplies of raw materials and to r e s t r i c t the entry of competitors. The theory of monopolistic advantage i s superior to many other theories because i t off e r s acceptable answers to most of the questions ra i s e d i n foreign d i r e c t investment. I t does not however, give reasons f o r the recency i n e x p l o i t a t i o n of monopolistic advantages by firms, i . e . i t does not explain why the firms s t a r t e d using t h e i r monopolistic advan-tages on such a large scale a f t e r the Second World War. The theory also does not throw much l i g h t on the geographical d i s t r i b u t i o n of foreign d i r e c t investment. I t does not say much about foreign d i r e c t investment through takeovers. Despite these l i m i t a t i o n s , i t i s a powerful tool for explaining foreign d i r e c t investment. 5. Exchange Risk and Se c u r i t i e s Markets Imperfections Theories (a) The Exchange Risk Theory The exchange r i s k theory was propounded by A l i b e r i n a seminar on the in t e r n a t i o n a l corporation at the Massachusetts I n s t i t u t e of Technology i n the spring of 1969. According to A l i b e r , "the key factor i n explaining the pattern of foreign d i r e c t investment involves c a p i t a l market r e l a t i o n -ships, exchange ri s k s and the market's preferences for holding assets 21 denominated i n selected currencies." Direct foreign investment involves the a c q u i s i t i o n of plant and equipment for production i n a customs area or Robert Z. A l i b e r , "A Theory of Direct Foreign Investment" i n Charles P. Kindleberger, e d i t o r , The International Corporation (Cambridge, Mass.: The M.I.T. Press, 19 70), p. 20. - 3 4 -i n a currency area other than that area i n which a f i r m i s located. The European Economic Community, as an example, i s one customs area and several currency areas. The central question i s whether foreign d i r e c t investment i s b e t t e r explained as a customs-area phenomenon or a currency area phenomenon. Al i b e r ' s argument proceeds on the assumption that the home country firm has a monopolistic advantage which he c a l l s a "patent." Whatever i s s a i d about t h i s advantage, can also apply to other monopolistic advantages enjoyed by the firm. The firm has a choice between e x p l o i t i n g the patent wi t h i n the country and exporting or l i c e n s i n g the patent. According to A l i b e r , one of the major weaknesses of l i c e n s i n g i s that a fir m which licenses a patent must p o l i c e i t s use and prevent infringement. In a world of separate customs areas and a u n i f i e d currency area, t a r i f f s a f f e c t where a patent w i l l be exploited to meet demand i n each customs area. I f customs areas are u n i f i e d while currency areas remain separate, i n t e r e s t rates on s i m i l a r assets denominated i n d i f f e r e n t currencies may d i f f e r because exchange rates might be changed. The change i n the in t e r e s t rates r e l a t i o n s h i p a f f e c t s the rel a t i o n s h i p between c a p i t a l i z a -t i o n r a t i o s . Thus the decision to invest abroad or not depends on na t i o n a l differences i n c a p i t a l i z a t i o n r a t i o s and not on the height of the t a r i f f . The income stream of home country firms may be c a p i t a l i z e d at a higher rate than those of host-country firms for many reasons such as rapid economic growth and increasing share of p r o f i t s i n national i n -come. The difference i n c a p i t a l i z a t i o n rates may r e f l e c t that the assets are denominated i n d i f f e r e n t currencies and that the c a p i t a l i -zation rate of assets with c e r t a i n income streams i n the two countries d i f f e r s . The pattern of d i r e c t foreign investment r e f l e c t s that home - 35 -country firms c a p i t a l i z e the same stream of expected earnings at a higher rate than host country firms. This difference i n c a p i t a l i z a t i o n rates r e s u l t s because the market attaches d i f f e r e n t c a p i t a l i z a t i o n rates to i n -come streams denominated i n d i f f e r e n t currencies. The differences i n c a p i t a l i z a t i o n rates determine which country w i l l be the host and which the home country. The market applies d i f f e r e n t c a p i t a l i z a t i o n rates to assets denomi-nated i n d i f f e r e n t currencies because the market demands a premium f o r bearing uncertainty about exchange r i s k s and as a r e s u l t of that the difference between i n t e r e s t rates on f i x e d p r i c e assets denominated i n d i f f e r e n t currencies may exceed the expected change i n t h e i r exchange rates. This difference may be c a l l e d a currency premium. Thus the two factors necessary i n understanding foreign d i r e c t investment are sched-ules of currency premiums and the fact that the market applies a higher c a p i t a l i z a t i o n rate to the same income stream generated i n the host country when received by a home country f i r m than by a host-country firm. Thus, according to A l i b e r , "the advantages of U.S. firms are inherent i n investor preferences for assets denominated i n d o l l a r s . U.S. firms by d e f i n i t i o n are i d e n t i f i e d with d o l l a r e q u i t i e s , j u s t as B r i t i s h firms are i d e n t i f i e d with s t e r l i n g e q u i t i e s , and German firms with deutsche marks. A firm cannot change the currency denomination of i t s equity without changing i t s i d e n t i t y and firms almost never change 22 t h e i r n a t i o n a l i t y . " Robert Z. A l i b e r , The International Money Game (New York: Basic Books, Inc., 19 73), p. 187. - 36 -The theory of exchange r i s k i s an attempt to o f f e r explanations of a number of issues i n foreign d i r e c t investment. The geographical pattern of foreign d i r e c t investment i s interpreted i n terms of the dispersion i n c a p i t a l i z a t i o n rates for equities denominated i n d i f f e r e n t currencies. According to t h i s theory, the United States i s the l a r g e s t net source of foreign investment because c a p i t a l i z a t i o n rates for U.S. firms are higher than those of foreign firms. Higher c a p i t a l i z a t i o n rates attached to U.S. equities r e f l e c t a preference by the markets for having assets denominated i n d o l l a r s ; the currency premium on d o l l a r denominated assets exceeds that on assets denominated i n other currencies . The cross-haulings i n foreign d i r e c t investment are explained p a r t l y i n terms of h i s t o r i c a l premiums on the currencies of the Netherlands, Switzerland and B r i t a i n . Investment by these countries were made when th e i r currencies were stronger than the d o l l a r . "Foreign firms invest i n the United States to reduce t h e i r borrowing costs i n d o l l a r s and to secure a higher p r i c e for t h e i r equities once a larger proportion of t h e i r earnings i s i n a preferred currency l i k e the d o l l a r . Thus, B r i t i s h Petroleum pur-chased a part of S i n c l a i r and also invested extensively i n Alaska so as to be able to borrow do l l a r s on more equal terms with U.S. petroleum firms. Moreover, B r i t i s h Petroleum also anticipated that investors would pay a higher p r i c e f o r i t s shares i f a l a r g e r part of i t s t o t a l earnings were 23 i n d o l l a r s , and preferred currency." A l i b e r ' s example i s o v e r - s i m p l i f i e d and ignores a l l other factors contributing to foreign d i r e c t investment decisions. Robert Z. A l i b e r ^ The International Money Game, op. c i t . , p. 188. - 37 -The theory does not help much i n explaining the continued dominance of foreign d i r e c t investment by U.S. firms even during 1971-74 when the d o l l a r was a weak currency compared to German mark, Swiss Franc, Japanese yen and Canadian d o l l a r . Kindleberger, while introducing A l i b e r ' s paper perhaps r i g h t l y remarked, "the theory encounters d i f f i c u l t i e s i n explaining cross investments i n the same industry ... In many formulations exchange r i s k has nothing to do with long-term fo r e i g n investment, since i t cancels out both numerator and denominator i n the r a t i o of p r o f i t to assets. 24 Al i b e r ' s paper i s provocative. I t may be r i g h t . " (b) The Se c u r i t i e s Markets Imperfections Theory This theory was developed i n 19 73 by Giorgio Ragazzi, an economist i n the International Monetary Fund. The main cause of the foreign d i r e c t investment of U.S. firms i n Europe, according to this theory, i s the im-perfections i n s e c u r i t i e s markets i n Europe. "Imperfections i n markets for s e c u r i t i e s may be an important determinant of d i r e c t foreign investment abroad. Even i n the absence of o l i g o p o l i s t i c behavior or of technological advantages, d i r e c t investment may be att r a c t e d towards areas where average rates of p r o f i t are higher when such rates are not equalized i n t e r n a t i o n a l l y by p o r t f o l i o c a p i t a l flows due to i n e f f i c i e n c i e s i n s e c u r i t i e s markets. This argument seems to be relevant i n explaining the expansion of U.S. 25 d i r e c t investment abroad, p a r t i c u l a r l y i n Europe." Charles P, Kindleberger, The International Corporation, o p . c i t . , p. 2. Giorgio Ragazzi, "Theories of the Determinants of Direct Foreign Investment," IMF Sta f f Papers, No. 20 (July 1973), p. 480. - 38 -The lack of information about a company's f i n a n c i a l a f f a i r s i s an important i n e f f i c i e n c y or weakness of the c a p i t a l markets i n most of the European countries. This makes the holding of p o r t f o l i o shares i n European companies unattractive f o r Americans because i t increases the r i s k of pos-s i b l e deviations from expected rate of return. The d i r e c t investor, being i n the control of the company, has immediate and d i r e c t access to a l l i n f o r -mation; h i s r i s k i s l i m i t e d to the normal i n d u s t r i a l r i s k . Another weakness of the European s e c u r i t i e s markets, according to Ragazzi, i s the smaller s i z e of these markets compared to the United States. This may cause larger fluctuations i n stock p r i c e s , which may cause concern i n the minds of p o r t f o l i o investors because they are in t e r e s t e d i n the day-to-day prices of stocks as opposed to d i r e c t investors who are interes t e d i n the medium and long term p r o f i t a b i l i t y of the company. These two fac-tors r e s u l t i n foreign d i r e c t investment by U.S. firms i n Europe and p o r t f o l i o investment by Europeans i n the United States. The U.S. f i n a n c i a l market i s so e f f i c i e n t that there i s no a d d i t i o n a l advantage i n control stocks over p o r t f o l i o stocks. In Europe, i n s t i t u t i o n a l factors r e s u l t i n s u b s t a n t i a l a d d i t i o n a l advantages of control over p o r t f o l i o stocks. This theory o f f e r s an explanation which i s l i m i t e d to U.S. foreign d i r e c t investment i n Europe. I t ascribes the foreign d i r e c t investment of U.S. companies to the i n e f f i c i e n c i e s of European s e c u r i t i e s markets. This explanation should be seen more as a part of the monopolistic advantage theory. Ragazzi has simply pointed out another advantage enjoyed by American firms. The same may apply to English, French and Japanese firms. - 39 -C. The S a t i s f i c i n g Theory The emphasis i n this theory i s not on maximization of economic goals, but on s a t i s f i c i n g . "... the s a t i s f i c i n g man i s one whose problem solving i s based on search a c t i v i t y to meet c e r t a i n a s p i r a t i o n l e v e l s rather than a maximizing man whose problem s o l v i n g involves f i n d i n g the best a l t e r n a t i v e s 26 i n terms of s p e c i f i e d c r i t e r i a . " The useful term " s a t i s f i c i n g " was coined by Herbert A. Simon to repre-sent e f f o r t s to achieve a c e r t a i n l e v e l of s a t i s f a c t i o n , but not necessarily to exceed i t . To s a t i s f i c e means to do "well enough," but not necessarily "as w e l l as p o s s i b l e . " The l e v e l of attainment that defines s a t i s f a c t i o n i s one that the decision maker i s w i l l i n g to s e t t l e f o r . The s a t i s f i c e r sets goals and objectives that are considered f e a s i b l e , desirable and simple. He tends to use only a v a i l a b l e knowledge and understanding of the system; the s a t i s f i c e r seldom engages i n research designed to expand such knowledge and understanding.^ Like most of the other theories discussed so f a r , the s a t i s f i c i n g theory was not developed to explain foreign d i r e c t investment. The behav-i o u r i s t i c school of economic analysis l e d by Boulding, Simon and March developed i t as a reaction to the c l a s s i c a l p r o f i t maximization theory. The underlying idea of the theory from a decision making point of view i s that the decision makers prefer to s a c r i f i c e some of the rewards of a Herbert A. Simon,' "Theories of Decision-Making i n Economics and Behavioral Science," The American Economic Review, Vol. XLIX, No. 3 (June 1959), p. 277. See also, Herbert A. Simon, "Invited Lecture: New Developments i n the Theory of the Firm," The American Economic Review, Vol. L I I , No. 2 (May 1962) . Russell L. Ackoff, A Concept of Corporate Planning, o p . c i t . , pp. 7-9. - 4 0 -maximization s o l u t i o n i n order to reduce the pains incurred i n searching for i t . The r a t i o n a l i t y of the " s a t i s f i c e r " i s d e l i b e r a t e l y bounded be-cause the f e a s i b l e set of a l t e r n a t i v e s he could explore would be so great, the information he would need to evaluate them so vast that even an approxi-mation to objective r a t i o n a l i t y i s hard to conceive. Y a i r Aharoni, generally agreeing with the basic assumptions of the s a t i s f i c i n g theory regarding "bounded r a t i o n a l i t y " , developed h i s theory of foreign d i r e c t investment. According to him, the foreign d i r e c t i n v e s t -ment decision processes cannot be explained i n terms of pure economic ra-t i o n a l i t y . Aharoni does not believe i n a perfect r a t i o n a l behaviour i n organizations because they are composed of i n d i v i d u a l s and groups belonging to a c e r t a i n culture, are faced with uncertainty, operate on the basis of incomplete information, and are constantly pressed by s e r v i c i n g demands of ongoing a c t i v i t i e s . Under these circumstances one simply cannot believe i n a r a t i o n a l way as t h i s term i s defined i n economic theory - even though executives pretend that they are behaving as r a t i o n a l beings. In elaborating h i s views further Aharoni says, "In Western c i v i l i z a -t ion r a t i o n a l i t y i s considered a supreme v i r t u e . Executives l i k e to be considered sophisticated people. They f e e l that they are expected to be always absolutely l o g i c a l and never humanly emotional. In order to maintain a pretense of s o p h i s t i c a t i o n , r a t i o n a l i t y , and t o t a l absorption with the task at hand without any regard to f e e l i n g s , they work hard to present i n a written report an orderly and l o g i c a l presentation of problem-definition, r a t i o n a l ordering of a l t e r n a t i v e s and consequences, and i n t e r p r e t a t i o n of v e r i f i a b l e f a c t s . However, the mental decision process i t s e l f - although not neces s a r i l y the f i n a l written version of i t - i s a c t u a l l y a cooperative - 41 -s o c i a l process, through which commitments are made under the cumulative 28 weight of small acts." According to Aharoni's theory, the decision to recognize foreign d i r e c t investment as a legitimate problem i s a major breakthrough i n the normal course of a company's a f f a i r s . Many companies do not consider f o r -eign d i r e c t investment as a legitimate problem because "there are ample investment opportunities i n the home market," or because "we do not invest abroad," or simply because "foreign d i r e c t investment i s too r i s k y . " For the p o t e n t i a l investor, foreign d i r e c t investment i s f u l l of unknowns, which create uncertainty. The recognition that investment abroad i s an opportunity to be pursued and examined i s c a l l e d by Aharoni "the decision to look abroad." In order to a t t a i n the major breakthrough of the decision to look abroad some external and i n t e r n a l i n i t i a t i n g forces are necessary. The external i n i t i a t i n g force may be an outside proposal that comes from a source that cannot be e a s i l y ignored, fear of l o s i n g a market, the bandwagon e f f e c t , or strong competition from abroad i n the home market. The i n t e r n a l i n i t i a t i n g forces include the i n t e r e s t and drive of a high ranking executive. Besides these two categories of i n i t i a t i n g forces there are a u x i l i a r y forces, such as creation of markets f o r components and other products, u t i l i z a t i o n of o l d machinery, c a p i t a l i z a t i o n of • know-how, spreading of research and development and other costs, and i n d i r e c t return to a l o s t market through investment i n a country that has commercial agreements with those l o s t t e r r i t o r i e s . Y a i r Aharoni, The Foreign Investment Decision Process, o p . c i t . , p. 31. - 42 -Thus the decision to look abroad i s undertaken as a r e s u l t of a chain of events. Environmental forces, organizational f a c t o r s , personal t r a i t s and sheer accidents are a l l blended i n disrupting the balance of forces i n the organization and bringing about such a decision. The decision to look abroad leads to c o l l e c t i o n of information. However, "Sometimes the decision i s made before the i n v e s t i g a t i o n begins and the i n v e s t i g a t i o n i s c a r r i e d out with the s p e c i f i c aim of fi n d i n g an 29 optimal way of implementing i t . " According to Aharoni, during the pro-cess of i n v e s t i g a t i o n commitment i s created which represents a state of mind, a f e e l i n g that guides action, not a l e g a l o b l i g a t i o n . Commitments are also made through the process of i n d i v i d u a l adjustment to s o c i a l p o s i -tions e.g. having once claimed to be a certain kind of person, one may 30 f i n d i t necessary to act, as far as possibl e , i n an appropriate way." The concept of commitment, according to Aharoni, has s i g n i f i c a n t implications f o r the investing firm. The very f a c t that an organization i s making an i n v e s t i g a t i o n creates new commitments. Some of these emerge because money and time are spent; executives apparently f i n d i t d i f f i c u l t to look at t h i s investment of scarce resources as a sunk cost. They r e s i s t the idea of abandoning the project. They f e e l an urge to p e r s i s t and to f i n d ways to overcome d i f f i c u l t i e s . Commitments are not only created by f i n a n c i a l investments, but they also emerge because of a psychic or s o c i a l investment. S i m i l a r l y , the creation of an i n t e r n a t i o n a l d i v i s i o n within an organization generates an i n t e r n a l force which strongly stimulates an Ibi d , p. 122. Ib i d , pp. 123-124. - 43 -organization towards making d i r e c t investments abroad. The creation i t s e l f i s a kind of commitment to the idea and the process of going abroad. Aharoni suggests that i f economic theory i s going to be a predictor of behaviour and a t h e o r e t i c a l basis f or p o l i c y formulation, i t must include concepts such as management time as a scarce resource and the cost of i n f o r -mation. When these concepts are recognized, i t can be seen that organiza-tions are s a t i s f i c e r s and not maximizers. The theory of foreign d i r e c t investment decision process propounded by Aharoni helps immensely i n understanding the complex process of decision making. His theory appears to be near to r e a l i t y , though i n h i s enthusiasm f o r modifying c l a s s i c a l economic theory, he has gone a l i t t l e f arther than was needed. His concepts of i n i t i a t i n g forces, s o c i a l influences, s a t i s -f i c i n g and commitment are of p r a c t i c a l value i n understanding the a t t r a c t i o n of foreign d i r e c t investment towards a s p e c i f i c country. His emphasis on subjective preferences and c u l t u r a l and p o l i t i c a l s i m i l a r i t y also help i n understanding the geographical d i s t r i b u t i o n of foreign d i r e c t investment. D. The Product L i f e Cycle Theory 1. The Background 31 This theory was developed by Raymond Vernon and h i s colleagues at the Harvard School of Business i n 1966. For many years i t was suspected that a close r e l a t i o n s h i p existed between technology, i n t e r n a t i o n a l trade and foreign d i r e c t investment. Louis T. Wells J r . , Seev Hirsch, Robert B. Stobaugh, William Gruber, Dileep Mehta, F. Michael Adler, Yoshihiro Tsurumi, Raymond Vernon, "International Investment and International Trade i n the Product Cycle," The Quarterly Journal of Economics, Vol. LXXX, No. 2, (May 1966), pp. 190-207. - 44 -S o t r i r i o s Mousouris and Jose R. De La Torre, J r . , a l l contributed to the 32 refinement of this theory through empirical studies. The inadequacy of c l a s s i c a l and n e o c l a s s i c a l theories i n explaining i n t e r n a t i o n a l trade became obvious with the p u b l i c a t i o n of the important study of U.S. trade conducted by Leontief i n 195 3. He showed that the United States export i n d u s t r i e s were more labour-intensive than the indus-t r i e s which would replace American imports. L e o n t i e f s conclusion appeared to contradict the factor proportions theory or Heckscher-Ohlin theory, which claims that a country w i l l export those products which use i n i t s production the abundant factor. This s t a r t l e d the i n t e r n a t i o n a l trade th e o r i s t s because according to the commonly believed factor proportions theory the U.S. should export c a p i t a l intensive goods as i t i s w e l l endowed with c a p i t a l and poorly endowed with labour. An important factor contributing to the development of th i s theory was the concept of lag i n technological innovation, which was developed to explain the pattern of i n t e r n a t i o n a l trade during the pe r s i s t e n t world-wide shortage of d o l l a r s soon a f t e r the Second World War. The product l i f e cycle the o r i s t s incorporated into t h e i r theory many of the concepts of the lag i n technological innovation. 2. The Assumptions The underlying assumptions i n the product l i f e cycle theory re l a t e to production function, economies of scale, consumption patterns and trans-mission of knowledge. See Louis T. Wells, J r . , e d i t o r , The Product L i f e Cycle and International  Trade (Boston: D i v i s i o n of Research, Graduate School of Business Administration, Harvard University, 19 72). - 45 -According to t h i s theory, production functions change over the l i f e cycle of a product. In the early part of the l i f e cycle, the product i s more s k i l l e d - l a b o u r intensive. In the l a t e r stages, production functions i n a l l countries tend to be i d e n t i c a l . More c a p i t a l i s used i n the l a t e r stages and whatever labour i s used i s mostly u n s k i l l e d . The frequent design changes that occur i n the early stage of a pro-duct lead to short production runs, which require a greater input of s k i l l e d labour compared to c a p i t a l . The manufacturing process i s not broken down into simple tasks to the extent that i t w i l l be l a t e r i n the product's l i f e cycle. Special s k i l l s are needed for constructing p i l o t models, engineering changes i n designs and manufacturing tools and dies many of which, due to design changes, w i l l be discarded before they are worn out. As there are not many economies of scale i n the early part of the l i f e cycle, the cost of production per unit i s high. There i s no mass production because con-sumer desires have not been f u l l y i d e n t i f i e d . As consumers' desires become w e l l known through e x p l o i t a t i o n of a l t e r n a t i v e product forms, standardization begins to take place. Produc-t i o n functions tend to be i d e n t i c a l and economies of scale appear. The manu-fac t u r i n g process i s broken down into parts. A higher degree of automation can be introduced which increases the use of c a p i t a l and s k i l l e d labour i s mostly replaced by u n s k i l l e d labour. The per unit cost of production i s considerably reduced. This f a c i l i t a t e s the production of the product i n those areas where labour i s cheap. Economies i n the cost of production become necessary because competition increases. P o t e n t i a l demand plays a c r i t i c a l r ole i n the theory of l i f e cycle because whosoever provides funds for the commercial production of the new product must be assured of s u f f i c i e n t p o t e n t i a l demand and p r o f i t s . The - 46 -entrepreneur w i l l think of production i n a market with which he i s f a m i l i a r and i s able to make a forecast of expected p r o f i t s . This means that i n a l l l i k e l i h o o d the production of a new product w i l l s t a r t near the market where s u f f i c i e n t p o t e n t i a l demand and p r o f i t opportunities e x i s t . During the early part of a product's l i f e cycle; most buyers are unable to compare prices of d i f f e r e n t versions d i r e c t l y because performance meas-ures have not appeared. The p r i c e e l a s t i c i t y of demand facing a si n g l e producer i s not as great as i t w i l l be l a t e r when the buyer can be turned to a competitor's product which i s c l e a r l y cheaper than that of another firm. The r e l a t i v e i n e l a s t i c i t y of demand facing a f i r m leads to a skimming p r i c i n g p o l i c y . The shorter production runs r e s u l t i n costs and prices that are higher early i n the cycle than they w i l l be l a t e r . Those who buy the product i n i t s early phase w i l l have higher incomes compared to those who w i l l purchase i t i n the l a t e r stages i n i t s l i f e cycle. According to marketing l i t e r a t u r e , the innovators, who buy a product i n i t s early phase, are generally younger, more educated, earn higher incomes and 33 are mobile. In the l a t e r phase of l i f e cycle, the product f i l t e r s to the lower segments of the market. The assumption regarding s c i e n t i f i c knowledge that e x i s t s i n p h y s i c a l , chemical and b i o l o g i c a l sciences i s that the entrepreneurs i n a l l the ad-vanced countries of the world have almost an equal access to this kind of knowledge and have an equal capacity to comprehend s c i e n t i f i c p r i n c i p l e s . The difference l i e s i n a p p l i c a t i o n . " I t i s a mistake to assume, however, that equal access to s c i e n t i f i c p r i n c i p l e s i n a l l the advanced countries means equal p r o b a b i l i t y of the a p p l i c a t i o n of these p r i n c i p l e s i n the ~33 See Everett M. Rogers, D i f f u s i o n of Innovations (New York: Free Press of Glencoe, 1962). - 47 -generation of new products. There i s o r d i n a r i l y a large gap between the knowledge of a s c i e n t i f i c p r i n c i p l e and the embodiment of the p r i n c i p l e i n a market place. An entrepreneur usually has to intervene to accept the 3^ r r i s k s involved i n tes t i n g whether the gap can be bridged." According to the assumptions made i n the product l i f e cycle theory, knowledge i s not a free good, nor does i t flow f r e e l y across n a t i o n a l -boundaries. This leads to three important conclusions: F i r s t , innovations of new products and processes are more l i k e l y to occur near a market where there i s a strong demand for them than i n a country with l i t t l e demand; second, a businessman i s more l i k e l y to supply r i s k c a p i t a l f o r the pro-duction of the new product i f demand i s l i k e l y to e x i s t i n his home market than i f he has to turn to a foreign market; and t h i r d , a producer located close to a market has a lower cost i n t r a n s f e r r i n g market knowledge into 35 product design changes than one located far from the market. 3. The Theory According to this theory, the three stages i n the l i f e cycle of a 36 new product are: new product, maturing product and standardized product. The production function, the economies of scale and the consumption patterns i n each of these stages have already been discussed e a r l i e r . The phases i n the l i f e cycle of a new product determine i t s l o c a t i o n of production, 3 A-Raymond Vernon, "International Investment and International Trade i n  the L i f e Cycle", o p . c i t . , p. 191. 35 Louis T. Wells, J r . , The Product L i f e Cycle and International Trade, o p . c i t . , p. 6. 36 Raymond Vernon, International Investment and International Trade i n the  L i f e Cycle, o p . c i t . , p. 199. Wells c l a s s i f i e d these stages i n t o : early, growth and mature. He based h i s c l a s s i f i c a t i o n on the work done by Seev Hirsch, "The United States E l e c t r o n i c s Industry i n International Trade" p r i n t e d i n The Product L i f e Cycle and International Trade, o p . c i t . - 48 -d i r e c t i o n of i n t e r n a t i o n a l trade and timing of foreign d i r e c t investment. The i n i t i a l empirical studies were based on U.S. manufacturing and i n t e r -n a t i o n a l d i r e c t investment. Under the assumptions discussed previously, the United States i s more l i k e l y than other countries to i n i t i a t e production of new products which appeal to high income consumers or are labour saving. The two important advantages enjoyed by the United States are: the higher per capita income of American consumers and the highly s k i l l e d labour and. r e l a t i v e l y unrationed c a p i t a l compared with p r a c t i c a l l y a l l countries. The theory can be further c l a s s i f i e d into s i x phases depending on the stage i n the l i f e cycle of a new product. These phases describe l o c a -t i o n of production, d i r e c t i o n of i n t e r n a t i o n a l trade and foreign d i r e c t investment. In the new product stage of the l i f e cycle of the product, a l l production i s concentrated i n the United States because of high income and p o t e n t i a l demand. As incomes i n foreign countries grow and prices i n the United States begin to f a l l due to economies of scale and information about the new product travels abroad, p o t e n t i a l demand i s created f o r the new product outside the United States, p a r t i c u l a r l y i n Western Europe. The American firm(s) s a t i s f y t h i s demand through export. Thus the United States s t a r t exporting the new product to Western Europe and on a small scale to less developed countries. Af t e r a certain time, the markets abroad expand, p a r t i c u l a r l y i n Western Europe, t i l l they reach the point where l o c a l production becomes f e a s i b l e . The length of the time period i s determined by t a r i f f s , trans-portation costs, income e l a s t i c i t y f o r the new product, economies of scale, income l e v e l s and s i z e of the market. One l o c a l production - 49 -s t a r t s , the U.S. exports to Western Europe e i t h e r cease to grow or decline. The U.S. exports to less developed countries, however, continue. At t h i s stage i n the l i f e cycle when foreign production becomes f e a s i b l e , a most important question f o r d i r e c t foreign investment a r i s e s : who w i l l manufacture i n Western Europe, an American firm(s) which was ex-porting to this market'previously or a l o c a l entrepreneur? According to Vernon, "As long as the marginal production cost plus the transport cost of the goods exported from the United States i s lower than the average cost of prospective production i n the market of import, United States producers 37 w i l l presumably prefer to avoid an investment." However, the fear of production by a l o c a l f i r m i s enough of a threat to the established p o s i t i o n of the U.S. exporter to take action. "Threat i n general i s a more r e l i a b l e stimulus to action than opportunity i s l i k e l y to be. In the i n t e r n a t i o n a l f i e l d , threats appear i n various forms once a large scale export business i n manufactured products has developed. Local entrepreneurs located i n the countries which are the target of these exports grow r e s t i v e at the opportunities they are missing. Local governments con-cerned with generating employment or promoting growth or balancing t h e i r trade accounts begin thinking of ways and means to replace the imports. An i n t e r n a t i o n a l investment by the exporter, therefore, becomes a prudent means of f o r e s t a l l i n g the loss of a market. In this case, the y i e l d on the investment i s seen l a r g e l y as the avoidance of a loss of income to 38 the system." Raymond Vernon, International Investment and International Trade i n  the Product Cycle, o p . c i t . , p. 19 7. Ibid , P. 200. - 50 -The decision to produce abroad by a U.S. firm s t a r t s a series of reactions. "... other major producers i n the United States sometime see i t as a threat to the status quo. They see themselves as l o s i n g p o s i t i o n r e l a t i v e to the investing company, with vague intimations of further losses to come. Their share of the market i s i m p e r i l l e d , viewing share of-the mar-3 9 ket i n global terms." This r e s u l t s i n further foreign d i r e c t investment i n the same industry. The o r i g i n a l investor may maintain h i s lead over h i s competitors from the United States or from the l o c a l market through product d i f f e r e n t i a t i o n or technological improvements i n the product. In the t h i r d phase, the manufacturing plants i n Western Europe grow i n s i z e and a t t a i n the economies of scale which reduce t h e i r per unit cost of production. Moreover, the cheaper cost of inputs i n these countries help f u r t h e r i n reducing the per unit cost of the new product. The cost of transportation from the United States to less developed coun-t r i e s i s higher for many regions. Because of these factors the U.S. export to less developed countries i s displaced by export from Western Europe. Foreign production i n Western Europe reaches s u f f i c i e n t scale that costs are low enough to overcome the transportation and t a r i f f protection of the American manufacturer. The countries i n Western Europe s t a r t exporting to the United States. Thus the United States becomes: a net importer of the product. As the product becomes highly standardized, assembly l i n e production makes longer production runs possible. Most labour used i n t h i s stage i n the cycle i s u n s k i l l e d . With an increase i n competition, p r o f i t and p r i c e margins are considerably reduced. Thus reducing the cost 3 9 I b i d , pp. 200-201. - 51 -of production becomes very necessary. As labour costs are extremely low i n less developed countries, the l o c a t i o n of production s h i f t s to these areas. Due to low cost production, the less developed countries s t a r t exporting to the United States. 4. The Explanatory Power of the Theory The theory provides a powerful t o o l f or explaining the r e l a t i o n s h i p between technological changes, i n t e r n a t i o n a l trade and foreign d i r e c t investment. The empirical studies conducted to test the theory tend to 40 confirm i t . The emphasis on technology, defensive and preemptive motives i n d i r e c t investment bring i t nearer to r e a l i t y . The major contributions of the theory l i e i n the areas of geo-graphical d i s t r i b u t i o n of foreign d i r e c t investment and the industries which w i l l make dir e c t investment. The stages i n the product l i f e cycle very much correspond to the phases described i n the theory. Much of the U.S. d i r e c t investment during 1950s and 1960s followed t h i s pattern. The United States dominates foreign d i r e c t investment because of the huge research and development expenditures by American firms. Though the theory uses the United States as the source of innovation for i l l u s t r a t i o n purposes, i t equally applies to any country innovating a product. The increasing European and Japanese d i r e c t investment abroad may be explained i n terms of this theory. By r e l a t i n g stages of a product i n i t s l i f e cycle to l o c a t i o n of production, d i r e c t i o n of i n t e r n a t i o n a l trade and foreign d i r e c t investment, the theory gives an analyst strong power of p r e d i c t i o n . The theory suffers from c e r t a i n l i m i t a t i o n s . I t does not explain d i r e c t investment i n non-manufacturing sectors such as extractive industries 4b" See Country and Industry Studies i n Wells, o p . c i t . - 52 -and agriculture. Even in the manufacturing sector i t applies only to high technology consumer durables and office equipment. The theory also does not say why firms do not consider licensing for defending their positions or preempting competition. Moreover, the theory may be losing i t s signi-ficance in view of the emergence of global corporations, which skip or short-cut some of the phases in l i f e cycle because they think i n global terms. The product l i f e cycle theory also does not throw much light on the two-way flow of direct investment. E. The Modern Imperialism Theory Another interpretation of foreign direct investment may be found in the modern imperialism theory, which originally was developed by Lenin in his book "Imperialism: The Highest Stage of Capitalism", in 41 April 1917, a few months before the Russian Revolution. Earlier work in this area was done by Hobson whose study was considered a turning point in the study of the subject. Later contributions were made by a 42 43 number of authors such as Magdoff and Wolff. This theory explains foreign direct investment in terms of surplus capital and the desire for control. The opportunities for profitable investment i n capitalist countries reach a point of saturation due to constant exploitation of the masses and concentration of wealth in fewer ^ 1 V. I. Lenin, Imperialism: The Highest Stage of Capitalism (New York: International Publishers, 1939). 42 Harry Magdoff, The Age of Imperialism: The Economics of U.S. Foreign  Policy (New York: Monthly Review Press, 1969). 43 Richard D. Wolff, "Modern Imperialism: The View from the Metropolis," American Economic Review, No. 2 (May 1970), pp. 225-230. - 53 -hands. At t h i s stage the c a p i t a l i s t s look abroad for p r o f i t a b l e i n vest-ment opportunities for t h e i r surplus c a p i t a l . "The necessity for exporting c a p i t a l a rises from the fact that i n a few countries capitalism has become over ripe and (due to the backward stages of a g r i c u l t u r e and the im-poverished state of the masses) c a p i t a l cannot f i n d p r o f i t a b l e investment."^ According to Lenin, modern imperialism has the following features: 1) The concentration of production and c a p i t a l development to such a high stage that i t creates monopolies which play a decisive role i n economic l i f e . 2) The merging of bank c a p i t a l with i n d u s t r i a l c a p i t a l and the creation, on the basis of t h i s finance c a p i t a l , of a f i n a n c i a l oligarchy. 3) The export of c a p i t a l , which has become extremely important, as d i s -tinguished from the export of commodities. 4) The formation of i n t e r n a t i o n a l c a p i t a l i s t monopolies which share 45 the world among themselves. The desire for control by a c a p i t a l i s t government, using multi-n a t i o n a l corporations as i t s main agents, means uninterrupted supply of e s s e n t i a l raw materials, food, markets for i t s manufactured exports and p r o f i t a b l e locations for the investment of c a p i t a l . Uninterrupted supply means that i t should be free from e f f e c t s of p o l i t i c a l u n certainties, competitive manipulations and imperfections of the market. "Thus modern c a p i t a l i s t imperialism comprises a complex of private corporate p o l i c i e s , supplemented by induced government support, seeking to develop secure V. I. Lenin, Imperialism ..., o p . c i t . , p. 140. Ibi d , p. 195. - 54 -sources of raw materials and food, secure markets for manufactures and 46 secure outlets f or both p o r t f o l i o and d i r e c t c a p i t a l investment." Control i s achieved without p h y s i c a l l y occupying the country as was done during the c o l o n i a l era. The country thus penetrated apparently retains i t s p o l i t i c a l freedom, but the r e a l power l i e s i n the hands of giant enterprises and foreign modern i m p e r i a l i s t powers. According to this theory, the United States has emerged as the biggest modern i m p e r i a l i s t power a f t e r the Second World War. The small s i z e of d i r e c t foreign investment as a percentage of gross na t i o n a l product should not reduce i t s importance for an i m p e r i a l i s t power. One should look into the importance of the investment for the economy. Magdoff i l l u s t r a t e s h i s point by showing the importance of ce r t a i n raw materials f o r the U.S. economy. "The a v a i l a b i l i t y of such supplies at any moment of time thus enters as a determinant into the heart of the productive processes of the c a p i t a l i s t economy. For one i l l u s t r a t i v e example, consider the modern j e t engine. The series of technical innovations that produced t h i s item have made i t s production absolutely dependent on columbium, chromium and c o b a l t - a l l commodities whose consumption i n the United States i s t o t a l l y dependent on imports. Or consider that i n 1966 net imports of i r o n ore equaled 43 percent of domestic United States production. " ^ The modern imperialism hypothesis comes into c o n f l i c t with the f a c t that most of the foreign d i r e c t investment i s concentrated i n ^ Richard D. Wolff, "Modern Imperialism: The View from the Metropolis" o p . c i t . , p. 225. 4 7 Magdoff, o p . c i t . , pp. 50-52. See also Wolff, o p . c i t . , p. 226. - 55 -developed countries rather than the p o l i t i c a l l y and economically weak developing countries. Magdoffs comments on t h i s c o n f l i c t i s "Nowadays i t i s frequently said that the greater involvement by the United States c a p i t a l i n Western Europe, as contrasted with investments i n the under-developed countries, i s evidence of a departure from imperialism. This view of course i s untenable i f one recognizes that antagonism between unevenly developed i n d u s t r i a l centers i s the hub of the i m p e r i a l i s t wheel ... The higher standard of l i v i n g and the great amount of c a p i t a l accumulated i n Western Europe are rooted i n past and present advantages obtained by the l a t t e r area through e x p l o i t a t i o n of c o l o n i a l and neo-c o l o n i a l countries. By penetrating the metropolitan centers of Europe, U.S. c a p i t a l skims o f f part of the cream: i t benefits from (a) the en-larged consumer markets of Western Europe and (b) the opportunity to trade through channels developed by the metropolitan centers i n t h e i r r e l a t i o n s with t h e i r dependencies."^ In view of the importance of multinational corporations and foreign d i r e c t investment as an agent of modern imperialism "... today i t i s business that i s expected to serve the needs of national p o l i c y . The problem i s how to stimulate private investment abroad. Private foreign investment i s considered such a necessary t o o l of n a t i o n a l p o l i c y that various forms of investment guaranty programs have been designed to protect foreign investors against losses due to confisca-49 cation, wars and the uncertainties of currency c o n v e r t i b i l i t y . " However, i t i s also true that the United States, the U.K., and France "48" Magdoff, o p . c i t . , p. 16. 4 9 I b i d , pp. 175-176. - 56 -on a number of occasions r e s t r i c t e d foreign d i r e c t investment due to balance of payments problems. The modern imperialism theory does contain some elements of truth i n i t , but most of i t highly exaggerates the f a c t s . The proponents of the modern imperialism theory forget that foreign d i r e c t investment flows i n both directions among the developed countries. The U.K., Japan, Germany and France are also investing i n the United States. I f the theory i s true, i t means that the United States, which i s pictured as the biggest modern i m p e r i a l i s t power, i s a "colony" of these smaller countries. As observed above, the theory has some truth i n i t . The m u lti-national corporations have used the assistance of t h e i r governments, i n a l l possible ways, to safeguard t h e i r i n t e r e s t s . The days of sending gun boats and marines to protect property abroad may be gone, but the same ends are achieved through other means, e.g. CIA and t i e d loans. - 57 -I I I . THE RESEARCH MODEL A theory i s a systematic statement of relationships among variables of c e r t a i n observed phenomenon which has been v e r i f i e d to some extent. Theories are used to reveal r e a l i t y and to serve as instruments for ex-p l a i n i n g the past and the present, and for p r e d i c t i n g and c o n t r o l l i n g the future. One of the major weaknesses of most of the theories of foreign d i r e c t investment i s that they explain the phenomenon by using only one va r i a b l e , e.g. p r o f i t maximization, cost of c a p i t a l , capacity u t i l i z a t i o n , growth, exchange r i s k , technology, imperialism, etc. Another important weakness of these theories i s that they explain foreign d i r e c t investment by emphasizing mainly economic v a r i a b l e s . The t h i r d major weakness of these theories i s that they do not treat foreign d i r e c t investment deci-sions as a process that goes i n stages. I t appears that these theories were not concerned with this p a r t i c u l a r aspect. The advantage i n using Aharoni's behavioural theory of foreign d i r e c t investment i s that i t i s considerably free from the weaknesses of the major theories that explain foreign d i r e c t investment. His theory i s comprehensive because i t emphasizes more than one v a r i a b l e . Aharoni explains foreign d i r e c t investment by using economic and s o c i a l v a r i a b l e s , although there appears to be greater emphasis on behavioural v a r i a b l e s . Perhaps the best thing about Aharoni i s that he explains foreign d i r e c t investment as a process - analyzing i t into stages. I t i s for these reasons that Aharoni's basic approach to foreign d i r e c t investment decisions i s being used as the research model for our study. > Aharoni developed h i s theory of foreign d i r e c t investment i n 1961 while working for h i s doctorate at Harvard. He was distressed by the apparent f a i l u r e of the less-developed countries to a t t r a c t United States manufacturing investments. To analyze the s i t u a t i o n , he decided to study the way foreign investment decisions were made by United States manufac-turing firms. Because of h i s f a m i l i a r i t y with I s r a e l as a less-developed country i n 1960, he chose to carry out h i s research among a sample of firms that e i t h e r had invested or had considered investment i n I s r a e l . A. Aharoni's Research Design 1. The Sample To develop a sample, Aharoni chose 44 business firms from a l i s t of 300 corporations which were known to have ei t h e r invested or considered investment i n a manufacturing enterprise i n I s r a e l . The sample of 44 firms was clustered into subgroups of 30 firms that a c t u a l l y invested i n manufacturing i n I s r a e l and 14 firms which investigated the p o s s i b i l i t y of investment but rejected i t . The actual investors also included those who had subsequently disposed of t h e i r investments. The firms i n the sample ranged i n s i z e from very small c l o s e l y - h e l d enterprises to giant corporations. Although Aharoni had chosen h i s sample from a l i s t of those who had invested or considered investment i n I s r a e l , the interviews were not con-f i n e d to the experiences of the respondents i n I s r a e l alone. The interviews were concerned with a wide range of countries. The t o t a l number of Y a i r Aharoni, The Foreign Investment Decision Process, o p . c i t . The description of Aharoni's model i s adopted from this book. - 59 -investment decisions studied i n the firms was 105. Out of these occasions for investment decisions, 12 cases were studied i n considerable depth. Also included i n the sample were 12 "outsiders" selected from among the I s r a e l i Government o f f i c i a l s and the U.S. consultants who were involved i n these decisions. 2. The Scope of Research The scope of Aharoni's research included an i n v e s t i g a t i o n into the causes of f a i l u r e of I s r a e l ' s law for Encouragement of C a p i t a l Investments to a t t r a c t U.S. d i r e c t investment i n t o I s r a e l . He was t e s t i n g the basic economic premise that tax incentives make otherwise unpromising investments a t t r a c t i v e because they permit a higher rate of return. The c o n f e r r a l of tax benefits i s intended to induce foreign investors to i n i t i a t e i n v e s t i g a -tions which they would not otherwise have taken. Later, the scope of the study was broadened to ascertain the way i n which a decision to invest or to r e j e c t an investment opportunity abroad was made, and to get i n s i g h t into the impact of the p o l i c i e s of foreign governments on this decision. In h i s f i e l d research, Aharoni t r i e d to f i n d answers to the following issues: (a) The way foreign d i r e c t investment opportunities were brought to the attention of management i n d i f f e r e n t types of organizations. (b) The nature of the organizational hierarchy. (c) The processing of information at d i f f e r e n t stages. (d) The cost of c o l l e c t i n g a d d i t i o n a l information. (e) The communication and u t i l i z a t i o n of such information. (f) The important variables i n the decision process. - 60 -^ (g) The importance assigned by management to various factors through the decision process. (h) The evaluation of foreign government's concessions. (i) The practical deterrents to an increased stream of direct foreign investments in less developed countries. These questions were presented at the end of the open-ended part of the interview i f they were not touched upon by respondents themselves. 3. Research Methodology Aharoni used the case study method to collect his data. It con-sisted of extensive open-ended interviews with key individuals (managers and above) who were involved in various phases of the foreign direct invest-ment decision process. In these interviews, the nature of the research was explained and the respondents were asked to discuss their experiences. Toward the end of the interviews, various hypothetical situations were presented orally to the respondents, and they were asked to t e l l the writer how they would decide in such a situation and why. The data collected through interviews was compared with theories of investment and decisions. It was also compared with public addresses of corporate executives. Supplementary data on other foreign investment deci-sions were received through interviews conducted by several case writers at the Harvard Graduate School of Business Administration. Aharoni also used the corporations' f i l e s containing information on investment decisions. Aharoni ju s t i f i e s his research methodology in these words: "One of the criticisms of my research may be that the suggested variables are unmeasurable and therefore my basic framework is not fully substantiated. I certainly must agree that no way to measure the variables mentioned has - 61 -been suggested, and that any research based on case studies may be attacked as not well substantiated. However, although my contribution is not offered as a definitive solution, i t is claimed that the analytical framework sug-gested in the book f i t s the data on which i t was developed and presents a meaningful and operational way of analyzing organizations. I see the aim of s c i e n t i f i c research not necessarily as constructing a theory that is validated under a l l circumstances, but as accumulating a body of empiri-cally verifiable generalizations. I do not think that a hypothesis 'proved' at a 5% level of significance has more claim to be true than one proved by a large series of case studies. In both cases, the hypotheses may be 2 plausible, but there i s s t i l l a probability that they may not be correct." B. Aharoni's Research Findings Aharoni did not find any simple relationships between tax incentives and investment decisions. He discovered that investment decisions embody a wide range of components. It was impossible to reduce these decisions to a neat mathematical explanation. His findings were inconsistent with the classical economic theory of profit maximization. Aharoni discovered that the irrational behaviour (i.e., behaviour inconsistent with economic theory) was not confined to Jews or to consideration of investments in the Holy Land. He found no distinct differences in the elements of the decision process when Israel or any other country were scrutinized, though less-developed countries were considered much more risky, and therefore less attractive than the developed countries. Aharoni, op.cit., p. x i i . According to Aharoni's findings, the s i m p l i f y i n g assumptions of c l a s s i c a l economic theory represented so gross a departure from r e a l i t y that the theory was an extremely i n e f f i c i e n t frame of reference from which to observe, project, and prescribe on the subject of foreign d i r e c t i n v e s t -ment. What was needed, instead, was to look for the elements i n the baf-f l i n g complexity of the organizational system that could explain the behaviour and the i n t e r - r e l a t i o n s h i p between the v a r i a b l e s . The decision process that he described involved a group of i n d i -viduals with time pressures, l i m i t e d information, operating under conditions of uncertainty, i n t e r a c t i o n of s o c i a l influences and creation of commitment. Aharoni divided the foreign d i r e c t investment decision process into four d i s t i n c t i n t e r r e l a t e d stages: F i r s t , the decision to look abroad; second, the i n v e s t i g a t i o n of an investment opportunity; t h i r d , negotiations with the host country government; and fourth, the f i n a l decision to invest or not to invest. Stage I. The Decision to Look Abroad "The decision to look abroad", i s an a r b i t r a r y point, chosen by Aharoni, i n the continuous process of organizational a c t i v i t i e s from which a description of a decision to invest abroad i s made. The decision to look abroad i s the recognition by the decision makers of a f i r m that an i n v e s t -ment abroad i s an opportunity to be pursued and examined. This means that management becomes w i l l i n g to examine the p o s s i b i l i t y of a s p e c i f i c foreign investment on i t s own merits and w i l l not " k i l l " i t a p r i o r i because i t i s not i n t e r e s t e d i n foreign investment or becuase of the notion that foreign investment i s too r i s k y . The forces that bring the opportunities of foreign d i r e c t investment to the attention of management and that lead some i n d i v i d u a l s i n a company - 63 -to focus attention on the p o s s i b i l i t i e s of investment abroad i n terms of devoting time and other resources for i t s i n v e s t i g a t i o n are c a l l e d " i n i - 1 t i a t i n g forces" by Aharoni. According to Aharoni, the decision to have a look at the p o s s i b i l i t -of foreign d i r e c t investment i s a major breakthrough i n the normal course of a company's a f f a i r s . The most c r u c i a l decision i s taken when the f i r s t venture abroad i s considered. At this stage, the organization has had no experience whatsoever i n the complicated f i e l d of foreign investment. Quite a strong push i s needed for making the decision to look abroad. When sub-sequent foreign investment decision processes are car r i e d through, the company w i l l b enefit from i t s experience i n previous i n v e s t i g a t i o n s . The forces leading a fir m to investigate d i r e c t investment oppor-tunites abroad were c l a s s i f i e d by Aharoni into two categories: exogenous and endogenous. In the exogenous or environmental forces he included an outside proposal from a credible or i n f l u e n t i a l source (e.g., a represen-t a t i v e of a foreign government, a d i s t r i b u t o r of the firm i n a foreign country, a customer of the firm, a close f r i e n d , a bank i n home or foreign country); fear of l o s i n g a l u c r a t i v e export market (due to p r o h i b i t i v e increase i n t a r i f f rates or quota imposition or a t o t a l ban on imports of products being exported by a company): the band wagon e f f e c t (very successful a c t i v i t i e s abroad of a competing firm i n the same industry or a general b e l i e f that investment i n a c e r t a i n area i s a must e.g., EEC); strong competition from abroad i n the home market; and saturation i n the home market. The endogenous or i n t e r n a l forces include the keen i n t e r e s t of a high ranking executive of the fir m i n a p a r t i c u l a r foreign country due to - 64 -personal reasons (need f o r prestige, extensive t r a v e l abroad, a s p i r a t i o n to contribute to the economic development of other countries or desire to l i v e i n a country) or through perceiving d i r e c t investment as a means for growth of the firm; opportunities f o r the u t i l i z a t i o n of old or semi-obsolete machinery; c a p i t a l i z a t i o n of patents or technical know-how; the desire to create a market f o r components (e.g., supplying car parts to foreign assembly p l a n t s ) ; and spreading of research and development and other f i x e d costs . According to Aharoni, these forces can disrupt the e x i s t i n g state of a f f a i r s i n a corporation, and i f these forces are strong, the decision process enters i n t o the next l o g i c a l stage of i n v e s t i g a t i o n . Stage I I . Investigation of An Investment Opportunity In this stage the f i r m gathers information that serves as a basis for a decision. The decision to investigate i s made i n terms of a s p e c i f i c p roject i n a s p e c i f i c country. According to Aharoni, companies do not investigate p o s s i b i l i t i e s of investment i n several countries i n order to f i n d the best a l t e r n a t i v e . Opportunities are weighed on t h e i r own merits and are r a r e l y compared with other investment a l t e r n a t i v e s . The strength of the i n i t i a t i n g forces determines the extent to which unfavourable circumstances are ignored or certain stages i n i n v e s t i g a t i o n , which w i l l be described l a t e r , are skipped. The i n v e s t i g a t i o n , according to Aharoni, i s ca r r i e d out i n three d i s t i n c t phases: c o l l e c t i o n of information on general economic and p o l i t i c a l i n d i c a t o r s , on-the-spot i n v e s t i g a t i o n into the country where investment i s being considered, and presentation of report. - 65 -The factors p e c u l i a r to foreign investment are those stemming from the differences i n l e g a l , s o c i a l , economic, and p o l i t i c a l environments between a foreign country and the inves t i n g country. Other factors are s i m i l a r to those considered i n a domestic investment e.g., market s i z e , d i s t r i b u t i o n system, production method and cost of production, s e l l i n g expenses, c a p i t a l requirements, method of financing, and plant l o c a t i o n . The purpose i n using general ind i c a t o r s i n the f i r s t phase i s to form an opinion on the r i s k and uncertainties involved, to measure the market s i z e , and to f i n d out possible c o n f l i c t s of the suggested project with e x i s t i n g company p o l i c i e s and resources. The f i r s t phase i s l a r g e l y c a r r i e d out at the company's o f f i c e . Depending on the strength of i n i -t i a t i n g forces and data obtained i n this preliminary screening, the i n v e s t i g a t i o n may be terminated due to high r i s k and uncertainty, small siz e of the market or c o n f l i c t with e x i s t i n g p o l i c i e s of the company e.g. i f company p o l i c y i s 100 percent ownership of the c a p i t a l , any i n d i c a t i o n of sharing ownership with the l o c a l s w i l l tend to terminate i n v e s t i g a t i o n . I f the r e s u l t of preliminary i n v e s t i g a t i o n i s p o s i t i v e or i f the i n i t i a t i n g forces were strong, i n v e s t i g a t i o n i s c a r r i e d out by one or several executives i n the prospective host country i n the second phase. Companies with previous experience i n the area may ask even t h e i r area manager or other personnel with knowledge of or contacts i n the area to carry out i n v e s t i g a t i o n . This i n v e s t i g a t i o n i s expensive and time con-suming compared to preliminary screening. S p e c i f i c information i s gathered on those product c h a r a c t e r i s t i c s that are deemed most important according to the way the problem was i n i t i a l l y defined or those regarded as most c r u c i a l f o r success or f a i l u r e . - 66 -Inquiries are made int o the character and f i n a n c i a l standing of proposed partners or other associates. A check i s made into the problems of imports, regulations governing them, and transportation f a c i l i t i e s . Often check l i s t s containing as many as 300 questions are used to c o l l e c t information. According to Aharoni, executives i n an organization have d i f f e r e n t motives, backgrounds, and needs. The goals of management vary with the motivational patterns of the men who make the managerial ranks. They i d e n t i f y with the goals of the organization, but they have to f i t t h e i r personal goals Into the p i c t u r e . They are also influenced by the general b e l i e f s and moral values of the society i n which they l i v e . In t h e i r d e c i -sions, they must consider the needs and work patterns of other i n s t i t u t i o n s with which they deal. The i n v e s t i g a t i o n of these organizational factors can be seen i n the t h i r d phase when a report on a foreign investment proposal i s presented to higher echelons i n the company. The higher the echelon the more "accu-rate flavour" the report has. There i s a strong tendency to forget the s t a t i s t i c a l l i m i t a t i o n s of the figures and the assumptions behind them and to present them as the truth. Ranges of p o s s i b i l i t i e s are replaced by d e f i n i t e figures. An outcome which was f i r s t considered as one of many p o s s i b i l i t i e s i s treated as the only possible one. Sometimes, the inves-t i g a t o r adds contingency allowances, often of unspecified s i z e , and these allowances are treated as r e a l i t y or another layer of allowances i s added by another executive. Aharoni suggests these reasons for the elaborate use of figu r e s . F i r s t , when a report has to be sent to a higher echelon, the i n v e s t i g a t o r t r i e s to make i t look r a t i o n a l . Secondly, q u a n t i f i c a t i o n gives a f e e l i n g - 67 -of certa i n t y . Third, quantitative analysis i s often prescribed i n the company's standard operating procedure. A l l reports are influenced - sometimes unconsciously - by the per-sonal feelings of the wr i t e r toward the project and i t s impact on him personally. For instance, i f the in v e s t i g a t o r believes that i f the project i s approved he w i l l be asked to serve as i t s l o c a l manager, the tone of the report i s influenced by h i s at t i t u d e toward this p o s s i b i l i t y . The hypotheses formulated by Aharoni were: 1) The stronger the impact of i n i t i a t i n g forces, the further the inves-t i g a t i o n may be c a r r i e d through d i f f e r e n t phases before i t i s stopped due to general i n d i c a t o r s showing signs of r i s k and uncertainty or other unsatisfactory conditions. 2) Investigation i s c a r r i e d out i n a sequential way due to cost of i n v e s t i g a t i o n . 3) The report i s influenced both by the b e l i e f s of the investigators about the country and investment and by t h e i r perception of the thinking of t h e i r boss. 4) The creation of commitment during i n v e s t i g a t i o n strengthens the decision to invest. Aharoni defines commitment as a state of mind, a f e e l i n g that guides action. A commitment i s created when an i n d i v i d u a l , by h i s own previous action, has put himself i n a p o s i t i o n i n which his decision with regard to some p a r t i c u l a r l i n e of action has consequences for other i n t e r e s t s and a c t i v i t i e s not necessa r i l y related to i t . A series of small acts creates i n d i v i d u a l commitments. Acts of i n d i v i d u a l s may also create organizational commitments. A form of i n s t i t u t i o n a l i z e d commitment i s the creation of an i n t e r n a t i o n a l d i v i s i o n i n an organization. The creation of such a d i v i s i o n - 6 8 -means that a group of persons are formed into a decision-making unit which has vested interests in promoting and developing the international opera-tions of an organization. Stage III. Negotiations Once the highest management echelon approves the project, i t enters into the negotiation stage. The purpose of negotiation i s to reduce the amount of a company's own capital investment, search for local partners, injection of f l e x i b i l i t y into the investment programme and bargaining with the foreign government for concessions to reduce risk and uncertainty. One of the important purposes of negotiations is to attempt to minimize risk. The negotiations are carried with foreign governments, potential local partners, bankers in the host and home country. Aharoni suggests that a typical risk reducing preference is to borrow required capital funds in the money markets of host countries to avoid exchange losses due to devaluation. Several years may elapse between the beginning of investigation and the f i r s t o f f i c i a l approval of a project by the highest authority in the company. Further time may be taken between fi n a l approval and actual ap-proval of the plant. Aharoni found in his f i e l d research that the time taken between on-the-spot investigation and the actual physical preparations (buying of land or erection of plant) was from one to seven years, with an average of two years. The time element makes i t more imperative to give important weight to risk and uncertainty factors, and to efforts to reduce their impact. The long period of decision stems partly from the involvement of many people, both inside and outside the organization. Trying to mould a fin a l - 69 -programme that w i l l s a t i s f y so many i n t e r e s t s necessitates many modifica-tions i n the investment programme. The f a i l u r e of a f i r s t venture abroad may be an obstacle to consid-eration of subsequent opportunities, while i t s success often results i n an expansion of foreign operations. Gradually, organizations may evolve into multinational corporations, vigorously looking for investment opportunities abroad. Repeat investment decisions, according to Aharoni's findings, are much more expeditious and the proposals are processed much more rapidly. The l o c a l manager of an e x i s t i n g subsidiary tends to be an i n i t i a t i n g force for new investments and to push f o r approval of his suggestions. Information i s much more r e a d i l y a v a i l a b l e . Head o f f i c e s of firms are more confident of the estimates a r i s i n g out of i n v e s t i g a t i o n . The creation of an i n t e r n a t i o n a l d i v i s i o n creates several important i n s t i t u t i o n a l as w e l l as i n d i v i d u a l commitments. The creation of such a d i v i s i o n i s a commitment by the board of directors to consider foreign d i -rect investment as an i n t e g r a l part of the company's t o t a l a c t i v i t i e s . I t i s more than an act of f a i t h i n the p o s s i b i l i t i e s of opportunities i n the i n t e r n a t i o n a l f i e l d . When a f i r m a l l o c a t e s c a p i t a l and manpower resources to some a c t i v i t y , i t expects r e s u l t s . The employees of the i n t e r n a t i o n a l d i v i s i o n f e e l they must seek and f i n d opportunities for foreign d i r e c t investment. The top management i s now committed to consider these projects on t h e i r own merit, and not to r e j e c t them on general p o l i c y grounds such as "the company i s not i n t e r e s t e d i n foreign investment." Thus the creation of an i n t e r n a t i o n a l d i v i s i o n represents a major change i n a company's s t r a -tegy. I t i s a recognition that the company sees as part of i t s goal the search f o r opportunities for manufacturing purposes overseas. - 70 -Aharoni points out that every investor i s a member of a s o c i a l system or a number of s o c i a l systems. An important v a r i a b l e a f f e c t i n g the decisions may be the sentimental attachment of top executives to a given country. This v a r i a b l e , he found, was very s i g n i f i c a n t i n the case of American Jews' investment i n I s r a e l . But this sentiment had to be r a t i o n a l i z e d by the Jews themselves i n terms of more business-like .motiva-tions . Aharoni also mentions the case of Henry Ford's investment i n Ireland as an attempt to create "a great factory r i s i n g i n the land of h i s ancestors l i k e a creative monument to h i s achievements." General values and b e l i e f s may also be important. The b e l i e f that i t i s unpa t r i o t i c to invest abroad; the f e e l i n g that A f r i c a , f o r example, i s too r i s k y ; the inference from the n a t i o n a l i z a t i o n of a p u b l i c u t i l i t y that every business i n the same country w i l l be expropriated; the i n t e r -pretation of governmental controls as encroachments on private enterprise -a l l these b e l i e f s stem from the s o c i a l and c u l t u r a l environments i n which executives operate. The attitudes of stockholders and bankers toward foreign d i r e c t investment also influence the foreign d i r e c t investment decision. The desire of an executive and h i s wife to l i v e or not to l i v e i n a country can a f f e c t t h e i r attitudes towards a decision. The vigorous opposition of many Americans to partnership proposals with an agency of a foreign government, which can p a r t i a l l y be explained i n terms of a strong b e l i e f i n a free enterprise system, i s another t y p i c a l d e c i s i o n - i n f l u e n c i n g a t t i t u d e i n t h i s context. Thus the decision process may be described as a bargaining process among the various p a r t i c i p a n t s . Decision making i n complex organizations i s a long s o c i a l process, not s o l e l y an i n t e l l e c t u a l exercise. This process - 71 -i s composed of many small acts, c a r r i e d out by d i f f e r e n t people at d i f f e r e n t points of time. Pa r t i c i p a n t s i n the decision process are a part of a s o c i a l system. The ra t i o n a l e of a decision process are a part of a s o c i a l system. The ra t i o n a l e of a decision process can be seen only when the t o t a l i t y of a l l forces i n f l u e n c i n g the decision makers i s taken into account. In view of the complexities i n decision making, Aharoni concludes that i t i s v i r t u a l l y impossible to f i n d out at what point and by whom a decision to invest was made. Even i n those cases i n which a point can be defined, the decision to invest i s not necessarily the l a s t i n a chain of decisions nor i s i t always the outcome of the re l a t e d i n v e s t i g a t i o n process. Sometimes the decision i s e f f e c t i v e l y made before the i n v e s t i g a t i o n begins, and the l a t t e r i s c a r r i e d out with the s p e c i f i c aim of find i n g an optimal way of implementing a pre-determined decision. Conclusions: Aharoni draws the following conclusions from his empirical research based on the case method: 1) Foreign governments' announcements of investment incentives to a t t r a c t d i r e c t investment do not t r i g g e r managements' decision to investigate foreign investment opportunities i n the respective countries. 2) One of the important reasons why developing countries are les s a t t r a c -t i v e to foreign d i r e c t investors i s because of the high cost of information c o l l e c t i o n about these countries. 3) I n i t i a t i n g forces t r i g g e r a firm's decision to investigate and nego-t i a t e foreign d i r e c t investment opportunities abroad. 4) Investigation of foreign d i r e c t investment opportunities i s c a r r i e d out i n a sequential way. 5) A firm's decision to invest abroad i s influenced by the attitudes of stockholders, bankers, i n v e s t i g a t o r s , and executives towards foreign d i r e c t investment and the country where d i r e c t investment i s being considered. 6) P r i o r commitments and the ones created during i n v e s t i g a t i o n and negotiation strengthen the decision to inves t . 7) I t i s d i f f i c u l t to point out when and by whom the actual decision to invest was made due to involvement of large numbers of persons and the complex nature of decision making. C. Weaknesses i n Aharoni's Theory Aharoni has been c r i t i c i z e d f o r basing h i s conclusions on an unre-presentative sample. Weigel , for example, tested a rel a t e d hypothesis (the r e l a t i o n between government economic p o l i c y and d i r e c t investment i n developing countries). He disagreed with the lack of emphasis on p r o f i t maximization i n Aharoni's findings. Weigel also questioned some of Aharoni's contentions such as "search for new d i r e c t investment seems biased," "some people push c e r t a i n undesir-able projects because t h e i r goals are d i f f e r e n t from the firm's" and "creation of commitment during the process of in v e s t i g a t i o n . " According to him, much of the substance of Aharoni's points i s consistent with the maximization of the value of a f i r m under uncertainty. Weigel concludes that Aharoni's behavioural approach i s not r e a l l y that d i f f e r e n t from p r o f i t maximization under uncertainty. Weigel, D., The Relation between Government Economic P o l i c y and Dir e c t  Investment i n Developing Countries. Unpublished Doctoral D i s s e r t a t i o n , Stanford University, Graduate School of Business Administration, 1966. - 73 -Weigel suggests that i f the risk-adjusted expected returns from search are less than the costs, then i t does not pay to invest i n search. Costs of search may be p a r t i c u l a r l y high for small companies, which do not have access to established and low-cost sources of information, and t h i s may be e s p e c i a l l y true f o r proposed projects i n foreign countries. Also, there are l i k e l y to be decreasing costs of search per unit of investment, as the proposed scale of the investment increases. Thus, i t may be more p r o f i t a b l e for a l l but the largest firms to eschew the search for foreign investments unless some favourable information arises without cost, such as from an u n s o l i c i t e d proposal. Another major weakness i n Aharoni's theory i s that he creates the impression that t h e ' f i r s t decision to invest abroad i s most often the r e s u l t of negative forces - fear of l o s i n g an export market, strong com-p e t i t i o n from abroad, saturation i n the home market, bandwagon e f f e c t , or waiting for an outside proposal. The only p o s i t i v e force i s the "drive of a high ranking executive." This weakness i s consistent with h i s findings that firms are not maximizers but s a t i s f i c e r s . However, a business firm, according to h i s theory, becomes active i n searching opportunities for foreign d i r e c t investment when i t creates an i n t e r n a t i o n a l d i v i s i o n . Despite these weaknesses i n Aharoni's theory, i t s t i l l remains a useful model for research because i t describes i n d e t a i l the various stages i n the decision making process. I t also remains superior to other theories because i t explains the foreign d i r e c t investment decision process by i n c l u d i n g behavioural as well as economic v a r i a b l e s . As mentioned e a r l i e r , the research model used i n t h i s study was b a s i c a l l y patterned a f t e r Aharoni's behavioural theory. Certain v a r i a b l e s , as explained i n d e t a i l i n the body of this report, mentioned by Aharoni - 74 -were dropped and other variables found s i g n i f i c a n t during the research were added i n the model. The basic design of Aharoni's model, however, remained unchanged. The stages i n the decision making process, the sets of variables with the l i s t of variables i n each set, and the d i r e c t i o n of influence of each set of variables i s shown i n the following table: Table 6. The Research Model (IV = Independent variable) (DV = Dependent variable) Stage One (Awareness) _^ Stage Two (Investigation) Stage Three (Coirani tments) Stage Four (Negotiations) _^  Stage Five (Uncertainty Evaluation) Stage Six ( F i n a l Decision) I n i t i a t i n g Forces (IV) I n i t i a t i n g Forces (IV) Investigation (DV) Investigation (IV) Commitments (DV) Investigation, . . Commitments ^ ' Negotiations (DV) Investigations Commitment > (IV) Negotiations ' Uncertainties (DV) I n i t i a t i n g Forces Investigation Commitments ) (IV) Negotiations Uncertainties F i n a l Decision (DV) I n i t i a t i n g Forces  Exogenous: 1. An outside proposal 2. Growing demand for. product 3. High prices for commodities 4. Unfavourable p o l i t i c a l environment i n the home • country 5. Fear of losing an export market 6. Successful direct inves tment operations of one's competitors abroad Endogenous: 1. Keen in t e r e s t of a high ranking executive 2. Desire to i n t e r -nalize source of supply 3. Desire to i n t e r -nalize demand 4. Export experience i n the host country 5. C a p i t a l i z a t i o n of patents or tech-n i c a l know-how Investigation  Sequential: Library Research -*• In-vestigation -»• Report Sources of Information 1. Published material 2. Outside consultant 3. Proposal from out-side 4. Export experience 5. Internal sales records 6. C a p i t a l cost c a l c u l a t i o n 7. Information from host government departments Type of Information 1. Market s i z e 2. P r i c e behaviour 3. Information about partners i n the host country 4. Competition 5. Consumer taste 6. Cost of production 7. Market share 8. A v a i l a b i l i t y of minerals Commitments 1. Creation of Inter-national d i v i s i o n 2. S t a b i l i z e demand 3. S t a b i l i z e p r o f i t 4. D e s i r a b i l i t y of retaining an export market Negotiations With Host Governments: 1. Repatriation of dividends 2. Repatriation of c a p i t a l 3. Applicable rates of taxation 4. . Environmental or p o l l u t i o n control 5. Special depreciation or depletion allowances With Host Banks: 1. Relied on information i n published sources 2. Inquired about general credi t climate 3. Made i n q u i r i e s about loans for s p e c i f i c project 4. Submitted application for loan 5. Established a c r e d i t l i n e With Partners: 1. Just discussion 2. Negotiations for type of j o i n t venture 3. Lawyers were involved i n negotiations 4. Preparation of a draft agreement 5. Signing of the f i n a l draft Uncertainties 1. Demand for product 2. I n f l a t i o n 3. Local competition 4. Corruption 5. Devaluation 6. Government i n t e r -vention 7. A v a i l a b i l i t y of minerals 8. Red tape 9. Labour unrest 10. Nationalization 11. Cultural differences 12. Change i n government through democratic process 13. Expropriation 14. M i l i t a r y coup 15. C i v i l war 16. War with another country F i n a l Decision Yes/No H tr ro & ro CO ro l-S n tr S o ro H ta - 76 -IV. THE RESEARCH DESIGN A. Objectives of the Study The main objective of the research was to f i n d out how the Canadian firms, which have t h e i r head o f f i c e s i n B r i t i s h Columbia, make th e i r foreign d i r e c t investment decisions. The emphasis i n the research was on i d e n t i f i -cation of variables that make a firm aware of d i r e c t investment opportunities abroad. An e f f o r t was made to explain foreign d i r e c t investment as a process rather than as an end product. The research also focussed on making a comparison of subj e c t i v e l y estimated cost of search between those firms that conduct sequential re-search and those which do not conduct sequential research. Other areas of emphasis were measurement of re l a t i o n s h i p s between extent of i n v e s t i g a t i o n and degree of commitment, extent of negotiations and amount of uncertainty, and a comparison of p o s i t i v e decisions to invest with negative.decisions i n terms of strength of i n i t i a t i n g forces, ex-tent of in v e s t i g a t i o n s , degree of commitments, extent of negotiations, and amount of uncertainty. As Aharoni's behavioural theory of foreign d i r e c t investment was used as a research model, the role of behavioural variables i n the decision making process was emphasized. Aharoni's research findings were mainly based on the case method. An-attempt was made i n t h i s research study to quantify the variables that play an important role i n decision making. The hypotheses were tested by using s t a t i s t i c a l techniques. - 77 -B. The Hypotheses To test the behavioural theory, the following hypotheses were developed: Endogenous i n i t i a t i n g forces are more important in creating awareness of foreign direct investment opportunities than exogenous i n i t i a t i n g forces. H Those who conduct a sequential investigation w i l l judge the subjec-tively estimated cost of that investigation to be significantly higher than those who do not conduct a sequential investigation. H^ The extent of investigation and degree of commitments are positively related. H^ There exists a positive relationship between the extent of negotiations and amount of uncertainty. Hj. In cases where the decision has been made to invest abroad, there w i l l be stronger i n i t i a t i n g forces, more investigation, greater degree of commitments, greater extent of negotiations, and smaller amount of uncertainty than in those cases where the decision has been made not to invest abroad. (For questions based on these hypotheses, please see Appendix A). C. The Operational Definitions H^ Initiating Forces Initiating forces are those independent variables that bring the opportunities of foreign direct investment to the attention of management and that lead some individuals i n a company to focus attention on the pos-s i b i l i t i e s of direct investment in terms of devoting time and other resources for i t s investigation. - 78 -Initiating forces are classified into two categories: exogenous and endogenous. The exogenous or environmental forces include: an outside proposal from a credible or influential source (e.g. a representative of a foreign government, a distributor of the company in a foreign country, a customer of the company, a friend, a banker etc.), fear of losing a lucra-tive export market due to prohibitive increase in t a r i f f rates or quota limitations, a total ban on import of products being exported by a company, the band wagon effect (very successful activities abroad of a competing firm in the same line of business or a general belief that investment in some area is a must), strong competition from abroad in the home market, and saturation in the home market. The endogenous or internal forces may include: the keen interest of a high ranking executive of the firm in a particular foreign country due to personal or perceived economic reasons, opportunities for the u t i -lization of old or semi-obsolete machinery, capitalization of patents or know-how, the desire to create a market for components and other products, the liquidity position of a company, unabsorbed or under uti l i z e d managerial resources. Initiating Forces: Exogenous  An Outside Proposal: A proposal is a written document or a verbal discussion that suggests a firm should consider making direct investment abroad. It tends to contain information on product, market, i n i t i a l investment levels, expected rate of return, host government policies on foreign investment etc. The proposals can be classified according to their sources e.g. government, distributor, customer, banker, friend or a foreign competitor. Importance attached to the proposal by executives of the firm i s a subjective matter, but i t can - 79 -be measured f o r each proposal by obtaining a scaled response on say a seven or f i v e point scale ranging from " c r i t i c a l " to "not even considered". Fear of Losing a Market: This assumes that the company was serving the market through export. Such a market may be l o s t as a r e s u l t of a t o t a l ban on import of the com-pany's products or due to imposition of p r o h i b i t i v e t a r i f f s on the company's products. When such s i t u a t i o n s occur, they are usually a matter of record and often public documentation; as such they should present fewer problems i n obtaining objective measurements. I t i s also useful to supplement t h i s l e v e l of measurement with subjective assessments of importance by respondents. Strong Competition from Abroad i n the Home Market: When a foreign competitor enters into the domestic market with a better product, an aggressive promotional programme, a lower pr i c e or better channels of d i s t r i b u t i o n , companies f e e l threatened. One of the r e t a l i a t o r y measures they may consider i s di r e c t investment i n the country of o r i g i n of "the intruder" as part of a balance of power or p o t e n t i a l i n -fluences strategy. The time of entry of foreign competitors i s usually a known phenomenon, while t h e i r success and, therefore, a true measure of the threat, can be determined from t h e i r respective market share perform-ance over time. Examples of such products are b i c y c l e s , typewriters, radios, and cotton t e x t i l e s from Japan or Western Europe into North America. Saturation i n the Domestic Market: A long term l e v e l l i n g - o f f i n industry sales i n the domestic market i s a feature of saturation i n the domestic market. This may be an important i n i t i a t i n g force for a firm to seek opportunities abroad for making d i r e c t - 80 -investments i n foreign markets. Any l e v e l l i n g - o f f of industry sales i n Canada i s measurable o b j e c t i v e l y through examination of figures for industry sales i n the domestic market which are ava i l a b l e i n published sources. Band Wagon E f f e c t : Band Wagon or "follow the leader" means that when several companies i n the same industry invest abroad, other firms f e e l a strong urge to do the same to maintain t h e i r r e l a t i v e s i z e , rate of growth and market share. Many firms invested i n the European Economic Community because other b i g firms i n the industry had done so. Other Exogenous I n i t i a t i n g Forces Besides the above i n i t i a t i n g forces mentioned by Aharoni, the respond-ents i n the present study suggested high prices of a commodity, unfavourable p o l i t i c a l environment i n the home country, and growing demand for the pro-duct i n the host country as exogenous i n i t i a t i n g forces. High prices of a commodity mean an increase i n the prices of commodities considered above the normal or t r a d i t i o n a l l e v e l of prices for those commodities. This com-monly happens i n the mining and other resource-based i n d u s t r i e s . For example, i n December 19 74, when the pri c e of gold reached close to $200 per ounce, th i s increase was considered much above the normal or t r a d i t i o n a l l e v e l of gold p r i c e s . Unfavourable p o l i t i c a l environment i n the home country refers to changes i n fe d e r a l and p r o v i n c i a l government p o l i c i e s which may a f f e c t adversely the p r o f i t s of companies. Any c r i t i c i s m of firms by federal or p r o v i n c i a l government leaders, which threatens the existence or operations or expected p r o f i t l e v e l s of these firms, i s also considered an unfavourable p o l i t i c a l environment i n the home country. - 81 -Growing demand for the product in the host country obviously means a continuous increase in sales i n units of a product either being exported from Canada or being manufactured in a host country. Initiating Forces: Endogenous Keen Interest of a High-Ranking Executive: The keen interest of a high-ranking executive in looking abroad for direct investment opportunities may be due to such factors as: the need for prestige gained in the domestic market from manufacturing abroad, the desire to see the world, an aspiration to contribute to the economic develop-ment of other countries, some favourable personal experience in a particular foreign country, and extensive travel abroad. Utilization of Old Machinery: Machinery, which has scrap value for a firm in the domestic market because i t was fully depreciated may well be good and usable in a develop-ing country. Sometimes such equipment is sold to subsidiaries for exorbitant prices. Capitalization of Patents or Know-how: Foreign direct investment may also be i n the form of patents or technical or managerial know-how. Such companies receive shares in con-sideration of patents, know-how, and blueprints. Markets for Components and Parts: This i s an important by-product of a foreign direct investment. Export markets are created for components or other products. For several years, a foreign subsidiary may not produce a l l the components because i t is only an assembly plant, the required components being exported by the - 82 -parent company. For example, car manufacturing i s e s s e n t i a l l y an assembly operation i n the beginning, and a long time usually passes before a sub-s i d i a r y can produce engines. Spreading R and D and Other Fixed Costs: A foreign subsidiary gives a company an opportunity to spread i t s R & D and other f i x e d costs over a larger number of units of a product manufactured at home and abroad. Other Endogenous Forces Other endogenous forces mentioned by respondents i n the present study were the desire to i n t e r n a l i z e the source of supply, the desire to i n t e r n a l i z e demand, and export experience i n the host country. The desire to i n t e r n a l i z e a source of supply means backward in t e g r a t i o n . Instead of putting i t s e l f to the r i s k s of disruptions i n supply, a firm i n t e r n a l i z e s the source of supply by acquiring the source or by forming a j o i n t venture. Thus the f i r m has complete control over the source of supply. The desire to i n t e r n a l i z e demand refers to forward i n t e g r a t i o n . Through acquiring c o n t r o l l i n g i n t e r e s t s , outright purchases, or forming j o i n t ventures with firms that were buying or p o t e n t i a l l y could buy a firm's products, the firm i n t e r n a l i z e s demand. Export experience i n the host country apparently means the knowledge a firm acquires as the r e s u l t of operating i n the host country as an exr-porter. H 2 Sequential Investigation Sequential i n v e s t i g a t i o n means that a firm f i r s t conducts a l i b r a r y research, followed by f i e l d research ( i f the l i b r a r y research r e s u l t s were p o s i t i v e ) , and preparation of a written report. - 83 -Subjectively Estimated Cost The reasons why actual cost of i n v e s t i g a t i o n was avoided and subjective estimates of cost were sought were that the s i z e of actual cost varies with the lo c a t i o n of investment opportunity (distance from B.C.)j number of days spent i n the host country, and the p o s i t i o n of the i n v e s t i -gators. A comparison of the actual cost due to these v a r i a t i o n s may not be meaningful. Another reason for not asking the actual cost of i n v e s t i g a t i o n was the fear that the firms may be reluctant to release this information. Extent of Investigation Investigation of a foreign d i r e c t investment opportunity can be c a r r i e d out i n three phases: l i b r a r y research, f i e l d i n v e s t i g a t i o n , and w r i t i n g a report. Library research refers to the use of information a v a i l -able i n published sources. This research i s lar g e l y c a r r i e d out i n the head o f f i c e of the i n v e s t i g a t i n g firm. F i e l d research refers to on-the-post i n -ve s t i g a t i o n i n the host country. Writing a report implies processing of information through the perceptual process, organization of material and presentation. Extent of i n v e s t i g a t i o n refers to the phases covered by a fir m i n the i n v e s t i g a t i o n process. A fir m may e f f e c t i v e l y end i t s i n v e s t i g a t i o n of an opportunity a f t e r l i b r a r y research. Intensity of i n v e s t i g a t i o n refers to the measurement of perceived cost of i n v e s t i g a t i o n . Kg Commitments A commitment i s a state of mind or f e e l i n g that guides act i o n . A commitment i s created when an i n d i v i d u a l , by h i s own previous action, has put himself i n a p o s i t i o n i n which h i s decision with regard to some - 84 -p a r t i c u l a r l i n e of action has consequences for other i n t e r e s t s and a c t i v i -t i e s not necessarily r e l a t e d to i t . Examples of commitments are creation of an i n t e r n a t i o n a l d i v i s i o n , serving a market through export, money and time spent on i n v e s t i g a t i o n , negotiations etc. Extent of Negotiations Once the top management of a f i r m approves i n p r i n c i p l e a foreign d i r e c t investment project, the f i r m enters into negotiations with govern-ment, bankers, and p o t e n t i a l partners i n the host country to minimize uncertainty. The firm's representatives bargain with the host country government on concessions r e l a t i n g to income taxes, t a r i f f s on raw mate-r i a l s , p rotection against imports, remittance of p r o f i t etc. The purpose of negotiations with host country banks i s to reduce the amount of a company's own c a p i t a l by borrowing from them i n l o c a l currency. Local partners also spread the r i s k of investment by providing part of the c a p i t a l and l o c a l contacts. Uncertainty Uncertainty refers to a s i t u a t i o n i n decision making when the p r o b a b i l i t y d i s t r i b u t i o n of a l t e r n a t i v e outcomes i s not known. Thus, uncertainty i s not d i r e c t l y measurable and cannot be insured. The uncer-tainty variables used i n this study were demand f o r a product i n a host country, i n f l a t i o n , l o c a l competition i n the host country, corruption, devaluation, government intervention, a v a i l a b i l i t y of minerals, red tape, labour unrest, n a t i o n a l i z a t i o n , c u l t u r a l differences, change i n government through democratic process, expropriation, m i l i t a r y coup, c i v i l war, and war with another country. - 85 -T r u i t t has distinguished between expropriation and n a t i o n a l i z a t i o n . According to him n a t i o n a l i z a t i o n refers to the transfer of an en t i r e industry or sector of economy from private to p u b l i c ownership, with no discrimination against those firms that are foreign owned. Expropriation i s takeover of a foreign owned company by the host country government.^" If no compensation 2 i s paid, Weekly c a l l s i t confiscation. D. The Sample The population for t h i s research study consisted of foreign d i r e c t investment decisions made by firms which have t h e i r head o f f i c e s i n B r i t i s h Columbia. The B.C. firms selected were e i t h e r e n t i r e l y owned by Canadians or the l a t t e r had c o n t r o l l i n g shares i n them. Finance firms, including banks, and service firms (e.g. consultants) were excluded because the nature of t h e i r business does not make them comparable with manufacturing or mining companies. A l i s t of 25 firms was prepared i n A p r i l 19 76 from f i l e s of the D i v i s i o n of International Business Studies, University of B r i t i s h Columbia, the F i n a n c i a l Post Survey of I n d u s t r i a l s (1975), the F i n a n c i a l Post Survey of Mines (1975), and B r i t i s h Columbia Directory of Manufacturers (1975). The s e l e c t i o n c r i t e r i a were: foreign d i r e c t investment, Canadian ownership or control, head o f f i c e i n B r i t i s h Columbia, and manufacturing>or mining. J. Frederick T r u i t t , "Expropriation of Foreign Investment: Summary of the Post World War II Experience of American and B r i t i s h Investors i n the Less Developed Countries," Journal of International Business Studies, ( F a l l 1970), p. 23. James K. Weekly, "Expropriation of U.S. Mu l t i n a t i o n a l Investments," MSU Business Topics, Vol. 25, No. 1 (Winter 19 77), pp. 27-36. - 86 -The 25 firms were contacted by telephone i n the l a s t week of A p r i l 19 76 and b a s i c information was obtained about t h e i r e l i g i b i l i t y i n meeting the c r i t e r i a . The l i s t was revised i n September 19 76 a f t e r the a v a i l a b i l i t y of 19 76 editions of the above p u b l i c a t i o n s . The firms were contacted again to obtain the l a t e s t information about t h e i r e l i g i b i l i t y . As a r e s u l t of the information obtained on telephone and from published sources, the l i s t was reduced to 20 firms. Information was also obtained on the names and positions of the key executives responsible for foreign d i r e c t investment decisions i n each firm. To get maximum cooperation, the Chairman, D i v i s i o n of International Business Studies, wrote l e t t e r s i n December 19 76 to the top executives who had f i n a l r e s p o n s i b i l i t y for foreign d i r e c t investment decisions i n each firm. The l e t t e r explained the purpose of the survey and introduced the interviewer. Out of the 20 firms contacted, 16 firms from mining, f o r e s t r y , sea food, and manufacturing industries cooperated. Two of the four firms, which did not cooperate, had quite small foreign d i r e c t investments, one had moved i t s head o f f i c e out of B r i t i s h Columbia and the fourth f i r m had become i n a c t i v e . Information was obtained on 89 foreign d i r e c t investment decisions from the 16 firms. These 89 decisions covered 95 percent of the known and s i g n i f i c a n t foreign d i r e c t investment decisions made by firms i n B r i t i s h Columbia. E. The Methodology Executives (managers and above) involved i n foreign d i r e c t i n vest-ment decisions were interviewed i n January and February 19 77. A structured - 87 -questionnaire, containing questions about the background of firms and each decision and 12 questions r e l a t i n g to the hypotheses, was used to interview the respondents. The questionnaire was not mailed to the respondents be-cause i t had a sequence. A l l the interviews were conducted i n the o f f i c e s of the executives concerned. Following the general p r a c t i c e i n s o c i a l sciences and considering the needs f o r this research, an alpha l e v e l of .05 was chosen. Hypotheses H^, H^, and H<. were tested by using t - t e s t s . H^ involved a comparison of the strength of endogenous variables versus exogenous v a r i -ables i n causing awareness of foreign d i r e c t investment opportunities. In H the comparison was between those who conduct sequential i n v e s t i g a t i o n i n r e l a t i o n to the s u b j e c t i v e l y estimated cost of i n v e s t i g a t i o n . The main concern i n H^ was measurement of the strength of i n i t i a t i n g forces, extent of i n v e s t i g a t i o n , degree of commitments, extent of negotiations, and amount of uncertainty between p o s i t i v e decisions to invest and negative decisions. The main i n t e r e s t i n these hypotheses was l o c a t i o n of strength of the mean for each group. T-tests were considered most appropriate f o r t e s t i n g these hypotheses. As the v a r i a b l e i n these hypotheses were measured on an assumed i n t e r v a l s cale, i t was possible to use the operations of arithmetic (adding, d i v i d i n g , f i n d i n g the means, etc.) on the scores. This i s one of the e s s e n t i a l conditions f o r the use of t - t e s t s . The ob-servations i n the survey were independent. That i s , the s e l e c t i o n of any one case from the population for i n c l u s i o n i n the sample did not bias the chances of any other case for i n c l u s i o n . The other major condition for use of t - t e s t s , that i s , the observations be drawn from a normally d i s t r i b u t e d population, was assumed to be true. - 88 -The remaining two hypotheses and were tested by using canonical c o r r e l a t i o n because the main i n t e r e s t i n these hypotheses was f i n d i n g a r e l a t i o n s h i p between two sets of variables i . e . extent of i n v e s t i g a t i o n and degree of commitment i n case of and extent of negotiations and amount of uncertainty for H . The basic strategy of canonical c o r r e l a t i o n analysis i s to derive a l i n e a r combination from each of the sets of variables i n such a way that the c o r r e l a t i o n between the two l i n e a r combinations i s maximized. Canonical c o r r e l a t i o n analysis was considered very appropriate for t e s t i n g these two hypotheses because Pearson's product moment c o r r e l a t i o n c o e f f i -cient deals with only two v a r i a b l e s , that i s , i t i s b i v a r i a t e . - 89 -V. THE RESEARCH FINDINGS Hypothesis No. 1 A. I n i t i a t i n g Forces and Awareness of Foreign Direct Investment Opportunities 1. I n i t i a t i n g Forces (a) Endogenous I n i t i a t i n g Forces An analysis of the responses i n the present study showed that impor-tant endogenous i n i t i a t i n g forces mainly consisted of keen i n t e r e s t of a high ranking executive i n foreign d i r e c t investment, c a p i t a l i z a t i o n of patents or technical know-how, the desire to i n t e r n a l i z e the source of supply, the desire to i n t e r n a l i z e demand, and export experience i n the host country. Other endogenous i n i t i a t i n g forces mentioned infrequently (less than three responses) by respondents i n th i s survey were: partnership i n a pro-j e c t , minimizing t a r i f f and transportation costs, the desire f o r greater control i n management, and the desire f o r d i v e r s i f i c a t i o n . (b) Exogenous I n i t i a t i n g Forces The set of exogenous i n i t i a t i n g forces consisted of an outside proposal, fear of l o s i n g an export market, successful d i r e c t investment operations of one's competitors abroad, growing demand f o r the product i n the host country, high prices f o r the commodity, and unfavourable p o l i t i c a l environment i n the home country. Other exogenous i n i t i a t i n g forces mentioned infrequently i n this research were: problems with custom o f f i c i a l s , delays i n delivery due to long distances, depressed domestic market conditions, plane f a i l u r e i n X country, pressure from a l o b b y i s t , low cost of mining conditions outside Canada, be t t e r grade of ore south of Canada, fast growing pines i n Alabama, - 90 -high cost of transportation, and access to the:European Common Market.- The number of responses for each of these i n i t i a t i n g forces was less than three. 2. The Relative Importance of Individual I n i t i a t i n g Forces In h i s research, Aharoni was not concerned with the r e l a t i v e strength of the i n i t i a t i n g forces. As he was doing pioneering work i n the area of behavioural determinants of foreign d i r e c t investment decisions, Aharoni was mainly i n t e r e s t e d i n l i s t i n g the s i g n i f i c a n t variables causing awareness of foreign d i r e c t investment opportunities. In the present study an e f f o r t was made to measure the strength of the i n i t i a t i n g forces i n terms of an i n t e r v a l scale ranging from 0 to 4. The following table gives the r e l a t i v e importance of these variables i n causing awareness of foreign d i r e c t investment opportunities. Table 7 shows that w i t h i n exogenous i n i t i a t i n g forces, an outside proposal was the most important variable i n causing awareness of foreign d i r e c t investment opportunities followed by growing demand for product, high prices for commodities, unfavourable p o l i t i c a l environment i n the home country, fear of l o s i n g an export market, and successful d i r e c t investment operations of one's competitors abroad. In the set of endogenous va r i a b l e s , keen i n t e r e s t of a high ranking executive was most s i g n i f i c a n t , followed by the desire to i n t e r n a l i z e the source of supply, the desire to i n t e r n a l i z e demand, export experience i n the host country, and c a p i t a l i z a t i o n of patents or technical know-how. 3. A Comparison of Endogenous and Exogenous I n i t i a t i n g Forces The main i n t e r e s t i n this part of the study was measurement and comparison of variables r e l a t i n g to the sets of exogenous and endogenous va r i a b l e s . The endogenous variables mainly consist of behavioural - 91 -Table 7. The Rated Importance of I n i t i a t i n g Forces i n Causing Awareness of Foreign Direct Investment Opportunities, Relative to the 89 Investment Decisions. Degree of Importance I n i t i a t i n g Forces Critical Very Important Important Unimportant Not Even Considered Total No. of Decisions Exogenous 1. An outside proposal 32 3 1 0 53 89 2. Growing demand for the product 15 1 0 0 73 89 3. High prices for commodities 12 1 1 0 75 89 4. Unfavourable p o l i t i c a l en-vironment i n the home 11 2 0 0 76 89 country 5. Fear of l o s i n g an export marke t 4 0 0 0 85 89 6. Successful d i r e c t i n v e s t -ment operations of one's competitors abroad 2 1 0 0 86 89 Endogenous 1. Keen i n t e r e s t of a high ranking executive 25 17 0 1 46 89 2. The desire to i n t e r n a l i z e the source of supply 17 3 0 0 69 89 3. The desire to i n t e r n a l i z e demand 15 3 0 0 71 89 4. Export experience i n the host country 4 8 0 0 77 89 5. C a p i t a l i z a t i o n of patents or technical know-how 3 3 0 0 83 89 variables while the exogenous variables mostly consist of economic vari-ables. Unfortunately, Aharoni had not made a quantitative comparison of these two sets of variables, so there were no figures to compare with the results of this study. Nevertheless, a comparison is useful because Aharoni had emphasized the endogenous variables. The hypothesis formulated to compare endogenous and exogenous i n i -tiating forces was as follows: Endogenous i n i t i a t i n g forces are more important in creating awareness of foreign direct investment opportunities than exogenous i n i t i a t i n g forces. The findings with regard to the above hypothesis are presented in the following table: Table 8. The Relative Strength of Endogenous and Exogenous Initiating Forces. Initiating Forces No. of Cases Mean Standard Deviation One-tail t-value _. , , ., . . Probability Endogenous 0.81 0.606 89 -1.67 0.05 Exogenous 0.62 0.538 To eliminate the bias of unequal number of variables in each set (endogenous having five variables and exogenous having six variables), the score of each set was divided by the number of variables in i t i.e. endo-genous variables' score was divided by five and the score of exogenous variables was divided by six. The n u l l hypothesis (HQ) was that U^ (mean of endogenous variables) = U (mean of exogenous variables). The alterna-tive hypothesis (H^) stated that U^ > U^ .^ The level of significance, as mentioned earlier, for a l l hypotheses was set at .05. As i n d i c a t e d i n Table 8, the n u l l hypothesis (H Q) i s f a l s e because U (.81) 4 U 2(.62). The a l t e r n a t i v e hypothesis (H Q) i s true because ^(.81) > V>^{.b2') . As the o n e - t a i l p r o b a b i l i t y of .05 meets the condition of this re-search, i t can be said that these r e s u l t s are s t a t i s t i c a l l y s i g n i f i c a n t . The n u l l hypothesis (H^) was rejected and the al t e r n a t i v e hypothesis (H^) was accepted. The acceptance of the a l t e r n a t i v e hypothesis indicates the r e l a t i v e strength of endogenous v a r i a b l e s , which mainly consist of behavioural v a r i -ables as i n i t i a t i n g forces - a r e s u l t which supports Aharoni's f i n d i n g s . Hypothesis No. 2 B. Sequential Investigation and Subjectively Estimated Cost of Investigation 1. The Sequential Investigation According to Aharoni, strong i n i t i a t i n g forces lead to i n v e s t i g a t i o n of foreign d i r e c t investment opportunities. However, as Robinson says, "The decision to investigate a foreign project i s not to be taken l i g h t l y , for such a decision i n i t s e l f may mean the investment of a su b s t a n t i a l amount of company resources."''" S t i g l e r also considers the cost of search as one 2 of the major constraints. Perhaps f or t h i s very reason, Aharoni emphasized that i n v e s t i g a t i o n of foreign d i r e c t investment opportunities was sequential. The f i r s t step i n i n v e s t i g a t i o n i s l i b r a r y research or use of general i n d i -cators. I f the r e s u l t s of this phase are favourable or i f the i n i t i a t i n g Richard D. Robinson, International Business Management: A Guide to  Decision Making, (New York: Holt, Rinehart and Winston, Inc., 1973), p. 22. George J . S t i g l e r , "The Economics of Information," The Journal of P o l i t i c a l  Economy, Vol. LXIX, No. 2 (June 1961), p. 224. - 94 -forces were strong, the search enters i n t o the second phase of on-the-spot i n v e s t i g a t i o n . The t h i r d and the l a s t phase i s presentation of the report to the top executives of the firm. The types of i n v e s t i g a t i o n of foreign d i r e c t investment opportuni-t i e s as found i n the present study are given i n the following tab l e : Table 9 The Types of Investigation of Foreign Direct Investment Opportunities. S e r i a l No. Type of Investigation No. of Decisions 1. Library Research -> F i e l d Investigation Report 37 2. Export Experience F e a s i b i l i t y Study Report 20 3. Export Experience ->• F i e l d Investigation -> Report 10 4. Export Experience -»- Proposal -*• F e a s i b i l i t y Study •+ Report 5 5. • F i r s t FDI Experience Industry Sales Analysis Report 4 6. Proposal Library Research -> F i e l d Investigation -*• Report 3 7. Proposal -»- Library Research •+ Report 2 8. Partnership -> Library Research -> Report 2 9. F i r s t FDI Experience -* Proposal Report 1 10. Proposal •+ Internal Evaluation -> Report 1 11. Information from Government •> Lease of Property -> Test D r i l l i n g -> Report 1 12. Experience with Supplier -> F i e l d Investigation ->• Report 1 13. Experience of Director ->• Loss -> Disinterested -> A c q u i s i t i o n 1 14. Information from Friend -> F i e l d Investigation Report _1 89 - 95 -A d e t a i l e d i n v e s t i g a t i o n of the 37 sequential decisions i n Table 9 showed that these were e i t h e r the f i r s t foreign d i r e c t investment decisions i n the l i f e of a firm, or they were f i r s t decisions i n a country with which the firm had no previous contact. In those cases where these two conditions were not met a d i f f e r e n t sequence was followed. I f a fir m had previous export experience i n a mar-ket, the management already possessed the basic and necessary amount of information available from l i b r a r y research or general economic i n d i c a t o r s . S i m i l a r l y , other kinds of experiences such as foreign d i r e c t investment experience i n a country, experience with a supplier, experience of a d i -rector, etc., also make redundant the need for l i b r a r y research. 2. The Cost of Investigation In the case of sequential i n v e s t i g a t i o n the management of a.firm has to carry out a more extensive search f o r information as compared to other types of i n v e s t i g a t i o n where the management e i t h e r possesses part of the needed information because of previous experience, or the management i s supplied with some information almost free of cost as i n the case of a proposal. Search for information i n the case of sequential i n v e s t i g a t i o n , as explained by Aharoni, means i n c u r r i n g cost for the c o l l e c t i o n of information. Thus, according to Aharoni's reasoning, the cost of sequential i n v e s t i g a t i o n i s much higher compared to the cost incurred by those who do not conduct sequential i n v e s t i g a t i o n ( i n Aharoni's sense). This i s an important fi n d i n g because the high cost of sequential i n v e s t i g a t i o n tends to discourage a firm from adequate i n v e s t i g a t i o n of a l l or even most of the possible a l t e r n a t i v e s . As the cost of sequential i n v e s t i g a t i o n i n developing countries i s much - 96 -higher (according to Aharoni) than i t s cost in developed countries, because of insufficient or non-existent data, this tends to discourage firms from probing foreign direct investment opportunities in such countries. The responses of the executives with regard to the cost of investi-gation in relation to the size of the project are presented in the following table: Table 10. The Cost of Investigation in Relation to the Size of Project. the Subjective Estimate of Cost of Investigation Very Expensive Somewhat Not Insigni-Expensive Expensive Expensive ficant Total No. of Responses 3 8 22 50 6 89 The responses in Table 10 indicate that in 56 out of 89 cases the subjective estimate of the cost of investigation was not expensive. In 22 cases the response was expensive followed by somewhat expensive (8 cases), and very expensive (3 cases). 3. A Comparison of Sequential Investigation Cost with the Cost of Non-Sequential Investigation To compare the cost of sequential investigation with the cost of non-sequential investigation, the following hypothesis was formulated: Those who conduct a sequential investigation w i l l judge the subjectively estimated cost of that investigation to be significantly higher than those who do not conduct a sequential investigation. - 97 -There were several reasons for comparing the subjectively estimated cost rather than the actual cost of investigation. First, there was a realization that obtaining figures of actual cost would be d i f f i c u l t be-cause the executives did not like to disclose the information or they did not know i t or remember i t . Second, a comparison of actual cost of inves-tigation might not be meaningful because comparing the actual cost of investigation of a direct investment opportunity, say, in Washington State with that in Australia would obviously weigh against Australia. The results of the t-test performed on those cases where sequential investigation was conducted against those cases where sequential investiga-tion was not followed are reported in Table 11. Table 11. A Comparison of the Subjectively Estimated Cost of the Cases Involving Sequential Investigation Against the Cases where Sequential Investigation was not Carried Out. Variable Groups No. of Cases Mean* Standard Devia-tion One-tail .. Probabi-t-value l i t y Subjec- - Cases where sequen-tively t i a l investigation 37 2.84 .800 Estimated was carried out Cost of Investi- 3.64 .0005 gation Cases which did not involve se-quential investi- 42 2.19 .840 gation The mean is based on the scores obtained for subjectively estimated cost of investigation. - 98 -The null hypothesis (H^) was that (the mean of those cases where sequential investigation was carried out) was equal to (the mean of the cases where sequential investigation was not followed). The alternative hypothesis (H ) was that > U^. The level of significance remained un-changed at .05. The results of the t-test presented i n Table 11 show that the null hypothesis (H^) was not supported because U^(2.84) ^U^(2.19), therefore, the null hypothesis was rejected. The alternative hypothesis was accepted because 11^(2.84) > u"2(2.19), the one-tail probability of .0005 indicating that these results are s t a t i s t i c a l l y significant. This confirms the hypothesis. Hypothesis No. 3 C. Relation between Intensity of Investigation and Degree of Commitments Aharoni has emphasized the creation of commitments during investi-gation. Commitments are created because money and time are spent on in-vestigation and executives find i t d i f f i c u l t to look at this investment of scarce resources as a sunk cost. As investigation gets deeper and deeper, more and more commitments are created and ceteris paribus the reluctance to back off becomes correspondingly greater. 1. Investigation Variables The investigation variables mentioned by Aharoni were grouped under general environmental variables affecting uncertainty, market related vari-ables, and variables pertaining to the sources of information. The frequency distribution of the responses relating to the sources of information as obtained during the present research, i s given in the following table: - 99 -Table 12. Rated Importance of Eight Sources of Information on the 89 Investment Decisions. Sources of Information Critical Very Important Important Unimportant Not Even Considered Total No. of Decisions 1. Published material 30 11 0 0 48 89 2. Outside consultant 30 5 0 0 54 89 3. An outside proposal 28 3 0 1 57 89 4. Export experience 11 14 0 0 64 89 5. Internal sales records 9 0 0 0 80 89 6. C a p i t a l cost c a l c u l a t i o n 8 11 0 0 70 89 7. Cost of a c q u i s i t i o n 8 2 0 0 79 89 8. Information from host government 5 1 0 0 83 89 I t i s obvious from Table 12 that the most important source of i n f o r -mation used by firms i n B r i t i s h Columbia for the i n v e s t i g a t i o n of foreign d i r e c t investment opportunities was published material. This source was almost always used by mining companies because t h e i r decision to invest abroad i s b a s i c a l l y determined by the geology of the area, provided other factors are also favourable. Geological information i s a v a i l a b l e i n books, magazines, and s p e c i a l reports published by numerous organizations. The firms making t h e i r f i r s t d i r e c t investment decision also very frequently used t h i s source of information. Other important sources were: outside consultants, proposals from outside the firm,, export experience, i n t e r n a l sales records (frequently used i n expansion decisions) and c a p i t a l cost c a l c u l a t i o n s . Aharoni had not d i s -cussed d i r e c t investment through a c q u i s i t i o n of e x i s t i n g companies i n - 100 -the host countries. In the present study about 12 such cases were men-tioned. Some other sources of information mentioned by respondents were: a friend informed the firm about the opportunity, availability of a commodity, information from the Canadian International Development Agency (CIDA), i n -formation from the Department of Industry, Trade and Commerce, and using previous foreign direct investment experience. These responses were not shown in Table 12 because the number of responses in each case was only one. During the interviews, the following market related variables were mentioned by respondents as being important considerations: Table 13: Rated Importance of Nine Market Related Investigation Variables on the 89 Decisions. Market Related Investigation Variables Critical Very Important Important Unimportant Not Used Total No. of Decisions 1. Market size 38 14 1 0 36 89 2. Price behaviour 38 8 3 0 40 89 3. Information about partners in host country 27 12 2 0 48 89 4. Competition 19 10 3 1 56 89 5. Consumer tastes 19 6 3 0 61 89 6. Cost of production 18 27 9 2 33 89 7. Market share 10 22 2 0 55 89 8. Availability of minerals 9 0 0 0 80 89 9. Dealer survey 1 5 1 1 81 89 - 101 -Table 13 shows that the most important market r e l a t e d i n v e s t i g a t i o n v a r i a b l e was market s i z e . This could be understood i n terms of the small market i n Canada (population 22 m i l l i o n ) . According to one executive of the Vancouver Board of Trade, the tendency i n Canada i s to look to the immediate south for export or d i r e c t investment. Because of the large area of Canada and i t s scattered population i t i s natural on the part of Canadian executives to investigate markets for t h e i r products i n the., nearest state i n the United States. The managing d i r e c t o r of a Vancouver manufacturing firm, while d i s -cussing the constraints imposed by the small s i z e of the market i n Canada sa i d , "How can we ignore C a l i f o r n i a which i s much closer to us than many Canadian provinces and this one state i n terms of population i s almost equal to the whole of Canada and i f you consider income, the s i z e of the market i s much larger than Canada."* The second important i n v e s t i g a t i o n variable mentioned by respondents i n the present study was p r i c e behaviour. This variable was almost always mentioned by the executives of mining firms. As the prices of commodities r i s e , the search f o r them i s i n t e n s i f i e d not only i n B r i t i s h Columbia and the rest of Canada, but many firms s t a r t looking for properties outside the country. As reported by the executive of a mining firm, often the mining firms know of properties which are r i c h i n c e r t a i n minerals, but they neither e x p l o i t them (because of low prices) nor do they l e t others know about\them. As soon as the prices s t a r t moving up, these properties become very a t t r a c t i v e . See also A l f r e d Powis, "Public P o l i c y and the Mineral Industry," Address  before the Mining Association of Canada, November 24, 19 76. - 102 -Another important investigation variable i n Table 13 was informa-tion about partners in the host country. This was important in the case of joint ventures. The total number of joint ventures in the present study were 48. In 27 decisions this information was considered c r i t i c a l . The number of respondents saying that this information was very important was 12. Thus out of 48 joint ventures 81 percent considered information about local partners either c r i t i c a l or very important. In the remaining cases the partners were already well enough known to the executives because their export experience or else as old friends, so that further information was no longer perceived as necessary. Other important variables mentioned by the executives were: com-petition, consumer tastes, cost of production, market share, and avail-a b i l i t y of minerals. Certain other variables, which were not mentioned in Table 13 because the number of responses was insignificant (one or two responses), were: terms for acquiring plant, infrastructure, real estate prices, labour problems, and attitudes of a host country government towards foreign direct investment. 2. Commitment Variables In his research, Aharoni emphasized the creation of an international division as a major indication of commitment to the consideration of for-eign direct investment opportunities. Other commitments mentioned by him were psychic or social, i.e. the concern about corporate image once inves-tigation is being carried out, the desire to retain an export market, and friendship. It was realized that measuring the impact of friendship through a direct questionnaire would be d i f f i c u l t because very few executives would admit that the direct investment was mainly due to friendship. Therefore, - 103 -this v ariable was not included i n the questionnaire. The responses r e l a t i n g to commitment are shown i n the following table: Table 14: Rated Importance of Four Commitment Variables for the 89 Investment Decisions Critical Very-Important Important Unimportant Not Even Considered Total No. of Decisions 1. Creation of i n t e r -n a t i o n a l d i v i s i o n 51 14 0 0 27 89 2. The desire to s t a b i l i z e demand 30 2 0 , 0 57 89 3. The desire to s t a b i l i z e p r o f i t 18 0 0 0 71 89 4. The desire to r e t a i n an export market 10 0 0 0 79 89 I t i s obvious from Table 14 that concern about corporate image as a commitment variable i s missing because i t was not considered a commitment by any respondent. Two new v a r i a b l e s , the desire to s t a b i l i z e demand and the desire to s t a b i l i z e p r o f i t , appear i n the above table. The desire to s t a b i l i z e demand can be seen as a form of forward i n t e g r a t i o n . I t can be i l l u s t r a t e d with a r e a l example without naming the f i r m or the country concerned. A c e r t a i n firm i n B r i t i s h Columbia was exporting a semi-finished product to another fi r m i n a developed country. This product was used as a basic ingredient i n the product manufactured by the l a t t e r f i r m . The semi-finished product exported from B r i t i s h Columbia was bulky and - 1 0 4 -consequently transportation costs were high giving a competitive disadvan-tage to the B r i t i s h Columbian firm. The semi-finished product was also exported by other countries located quite close to the importing country. The exports by the B r i t i s h Columbian firm fluctuated widely from year to year. The f l u c t u a t i o n i n export demand was a constant cause of concern for the management of the firm. The B.C. f i r m l o s t no time i n acquiring the c o n t r o l l i n g shares of i t s customer fi r m when shares became a v a i l a b l e . By i n t e r n a l i z i n g demand, the B r i t i s h Columbia firm not only s t a -b i l i z e d export, but i t used t h i s experience as the basis for further acqui-s i t i o n s u n t i l i t became a pattern f o r s t a b i l i z i n g exports. S t a b i l i z i n g demand i s d i f f e r e n t from Aharoni's desire to r e t a i n an export market because, according to h i s i n t e r p r e t a t i o n , the desire to r e t a i n an export market through d i r e c t investment i s aroused as the r e s u l t of some action (e.g. a t o t a l ban on imports or r e s t r i c t i o n s on imports) taken by the government of a country to which a fir m was exporting i t s products. The desire to s t a b i l i z e p r o f i t as a commitment variable r e f l e c t s the concern of management to increase or maintain a l e v e l of p r o f i t achieved before and considered s a t i s f a c t o r y by the stockholders. The most important commitment va r i a b l e , as emphasized by Aharoni, was creation of an i n t e r -n a t i o n a l d i v i s i o n . 3. The Test of the Hypothesis To determine the r e l a t i o n s h i p between the i n t e n s i t y of i n v e s t i g a t i o n and the degree of commitment, the following hypothesis was formulated: H^ The i n t e n s i t y of i n v e s t i g a t i o n and degree of commitment are p o s i t i v e l y related. - 105 -The i n t e n s i t y of i n v e s t i g a t i o n and the degree of commitment were measured i n terms of weighting or scores obtained on each variable depending on the responses given by an executive for each decision. The n u l l hypothesis (H„) s a i d that R (canonical c o r r e l a t i o n c o e f f i c i e n t ) = 0 and the a l t e r n a t i v e 0 c hypothesis (H, ) stated that R > 0. 1 c The r e s u l t s of the canonical c o r r e l a t i o n analysis are given i n the following table: Table 15. The Relationship Between Intensity of Investigation and Degree of Commitments Canonical Correlation TT.,, , T , , . n Degrees Eigenvalue _ . Wilk s Lambda Chx-Square c ° , Sxgnxfxcance 6 Coeffxcxent n of Freedom (R ) (P) c 0.497 0.705 0.281 98.973 68 0.007 The hypothesis was tested by using canonical c o r r e l a t i o n analysis, which takes as i t s basic input two sets of v a r i a b l e s , each of which can be given t h e o r e t i c a l meaning as a set (extent of negotiations and amount of uncertainty i n the case of the present study). The basic strategy of canonical c o r r e l a t i o n analysis i s to derive a l i n e a r combination from each of the sets of variables i n such a way that the c o r r e l a t i o n between the two l i n e a r combinations i s maximized. Many such pairs of l i n e a r combina-tions, c a l l e d canonical v a r i a t e s , may be derived. Both principal-component analysis and canonical c o r r e l a t i o n analysis produce l i n e a r combinations of the o r i g i n a l v a r i a b l e s . Canonical c o r r e l a -t i o n analysis does so, not with the object of accounting for as much 106 -variance as possible within one set of v a r i a b l e s , but with the aim of accounting for a maximum amount of the r e l a t i o n s h i p between two sets of v a r i a b l e s . The f i r s t p a i r of canonical variates are selected so as to have the highest i n t e r c o r r e l a t i o n possible, given the p a r t i c u l a r variables involved. A second set of canonical variates i s then selected to account fo r a maximum amount of the r e l a t i o n s h i p between the two sets of variables 3 l e f t unaccounted for by the f i r s t canonical v a r i a t e s , and so f o r t h . As can be seen i n Table 15, the n u l l hypothesis ( HQ) cannot be accepted because R = 0.705 i s greater than zero. Therefore, the n u l l c hypothesis (H^) i s rejected and the a l t e r n a t i v e hypothesis (H^) i s ac-cepted. This conclusion i s supported by other values of s t a t i s t i c a l measures i n Table 15. The eigenvalue, which i s a measure of the r e l a t i v e importance of the function, i s 0.49 7. This value i s obtained by squaring the canonical c o r r e l a t i o n c o e f f i c i e n t . The eigenvalue indicates the pro-portion of variance i n the function explained by the two sets of v a r i a b l e s , namely, i n t e n s i t y of i n v e s t i g a t i o n and degree of commitment. The eigen-value 0.497 i n Table 15 indicates 50% of the variance i n the two sets of variables i s held i n common. The value of Wilk's lambda i n Table 15 i s 0.281. This indicates that considerable reliance could be placed on the canonical c o r r e l a t i o n c o e f f i c i e n t because the smaller the value of lambda, the higher the con-fidence i n the canonical c o r r e l a t i o n c o e f f i c i e n t . The value of lambda (0.281) i s quite small, therefore, the r e j e c t i o n of the n u l l hypothesis (Hfi) See Norman H. Nie, C. Hadlai H u l l , Jean G. Jenkins, Karin Steinbrenner and Dale H. Bent, S t a t i s t i c a l Package for S o c i a l Sciences, second e d i -t i o n (New York: McGraw-Hill Book Company, 1975), pp. 515-527. - 107 -i s j u s t i f i e d . The high value of chi-square (98.9 73) also shows a strong re l a t i o n s h i p between i n t e n s i t y of i n v e s t i g a t i o n and extent of commitment. The P value of R i n Table 15 i s 0.007 which i s much smaller than c the alpha l e v e l of .05 considered acceptable for t h i s research. This f u r -ther j u s t i f i e s the r e j e c t i o n of the n u l l hypothesis. On the basis of the above discussion, i t can be concluded that there e x i s t s a s t a t i s t i c a l l y s i g n i f i c a n t p o s i t i v e r e l a t i o n s h i p between the inten-s i t y of i n v e s t i g a t i o n and the degree of commitment. Hypothesis No. 4 D. Relation between Extent of Negotiations and Amount of Uncertainty 1. The Negotiation Variables Favourable i n v e s t i g a t i o n and commitments created during i n v e s t i g a t i o n lead to negotiations with the host country government, the host country banks, and the p o t e n t i a l partners i n the host country i f i t i s a j o i n t ven-ture. The purpose of negotiation i s to reduce the amount of uncertainty perceived by the management of a f i r m i n the case of a foreign d i r e c t investment opportunity. (a) Negotiations with Host Country Government Federal, p r o v i n c i a l or state and l o c a l governments can play a very important role i n a t t r a c t i n g or discouraging foreign d i r e c t investment. I f the role of governments i s so important, one can ask about the issues on which a p o t e n t i a l d i r e c t investor would l i k e to negotiate with host country governments. As mentioned e a r l i e r , Aharoni was mainly i n t e r e s t e d i n h i s research i n measuring the effectiveness of incentives offered by less developed countries, p a r t i c u l a r l y I s r a e l , i n a t t r a c t i n g d i r e c t investment from the United States. - 108 -The most widely used issues i n negotiations with host country governments, according to Aharoni, were income tax exemptions, accelerated depreciation f o r tax purposes, t a r i f f protection, and relaxation or r e s t r i c -tion of import duties. The following table shows the responses of executives i n the present study with regard to negotiations with host country governments: Table 16: Rated Importance of Five Negotiation Variables for the 89 Investment Decisions. Negotiation Variables Critical i Very Important Important Unimportant Not Even Considered Total No. of Decisions 1. Remittance of dividends 25 0 1 1 62 . 89 2. Repatriation of c a p i t a l 1 18 5 1 64 89 3. Applicable rates of taxa- 2 6 17 '..3 61 89 t i o n 4. Environment or p o l l u t i o n 7 0 0 0 82 89 control 5. Special depreciation or •1 2 4 6 76 89 depletion allowances Table 16 indicates that the most important issue i n negotiations with the host country governments was dividends. The importance attached to r e p a t r i a t i o n of dividends i n negotiations with government shows the con-cern of B.C. firms with p r o f i t . The second most important issue was repa-t r i a t i o n of c a p i t a l . The importance given to r e p a t r i a t i o n of c a p i t a l shows that the business firms were aware of the p o s s i b i l i t y of misjudgement i n the case of an investment and the consequent need f o r r e p a t r i a t i o n of - 109 -c a p i t a l . Another important issue was the applicable rate of taxation. Environment or p o l l u t i o n control and s p e c i a l depreciation or depletion allowances were other issues. A close look at Table 16 reveals that the number of p o s i t i v e re-sponses ( c r i t i c a l , very important, important) for none of the issues were more than 26. This figure matches the t o t a l number o f - d i r e c t investment decisions of B.C. firms i n developing countries. An examination of i n d i -v i d u al cases also confirmed that the p o s i t i v e responses i n Table 16 regarding remittance of c a p i t a l , r e p a t r i a t i o n of c a p i t a l , applicable rates of taxation, and s p e c i a l depreciation or depletion allowances applied to developing countries. This was most probably due to the fac t that i n developing countries these issues are negotiable on an i n d i v i d u a l ( i . e . f i r m by firm) basis depending on the importance of the p a r t i c u l a r d i r e c t investment f or the country concerned. This i n no way implies that there are no rules i n developing countries regarding these issues. The only implication here i s that the developing countries are f l e x i b l e with regard to these r u l e s . The seven d i r e c t investments, where negotiations were held with host country governments on the issue of environment or p o l l u t i o n control, were a l l i n developed countries and the products were p o t e n t i a l l y hazardous to human health. (b) Negotiations with Host Country Banks The purpose of negotiations with host country banks i s to reduce the s i z e of investment due to perceived r i s k s . Five variables were used to measure the extent of negotiations with host country banks. These stages i n the process were: r e l i e d on information i n published sources, - 110 -inquired about general c r e d i t climate, made i n q u i r i e s about a v a i l a b i l i t y of loans, and established a c r e d i t l i n e . The following table summarizes the responses of the executives i n the present study: Table 17. Extent of Negotiations with Host Country Banks for Each of the 89 Investment Decisions No. of Extent of Negotiations Decisions 1. Relied on information i n published sources 1 2. Inquired about general c r e d i t climate 5 3. Made i n q u i r i e s about a v a i l a b i l i t y of loans for a s p e c i f i c project 10 4. Submitted an a p p l i c a t i o n f o r loan 1 5. Established a c r e d i t l i n e _72 Total 89 The figures i n Table 17 give f u l l support to Aharoni's findings that firms reduce the s i z e of t h e i r foreign d i r e c t investments due to perceived r i s k s . The number of decisions i n the above table, where a c r e d i t l i n e was established, were 72 (81%) out of 89. An examination of the o r i g i n a l re-sponses disclosed that the remaining 17 responses i n Table 17 r e l a t e d to those decisions where the firms decided not to i n v e s t . (c) Negotiations with Partners Aharoni considers a j o i n t venture another frequently used device to reduce the impact of uncertainty, although he thinks that j o i n t ventures are a mixed b l e s s i n g because executives weigh the desire to reduce fi n a n -c i a l r i s k and the benefits of association with l o c a l groups who "know the ropes" against the desire to maintain control over management. - I l l -The firms i n B r i t i s h Columbia appear to be quite w i l l i n g to enter into j o i n t venture type of arrangements. The following were the responses of executives with regard to negotiations with l o c a l partners: Table 18. The Extent of Negotiations with P o t e n t i a l Partners i n Host Countries f o r the 48 J o i n t Ventures. t i a t i o n s with Partners i n Host Countries _ ! . Decisions 1. Just discussion 5 2. Negotiations for type of j o i n t venture 7 3. Lawyers were involved i n negotiations 0 4. Preparation of a draft agreement 4 5. Signing of the f i n a l draft _32 T o t a l 48 Table 18 shows that the t o t a l number of the proposed j o i n t ventures i n the sample was 48. In 32 decisions, the f i n a l draft of agreement was signed by both the partners i n the proposed j o i n t ventures. The remaining cases involved negotiations short of signing the f i n a l d r a f t . During the interviews, the respondents emphasized the importance of t h i s stage i n the decision process. The f a i l u r e of the proposed j o i n t ventures was ascribed to insistence e i t h e r on "seed money" by government o f f i c i a l s i n case of j o i n t ventures i n v o l v i n g minerals or the f a i l u r e of negotiations was due to lack of concensus on the terms of agreement. 2. The Uncertainty Variables Uncertainty i s a s i t u a t i o n where the i n d i v i d u a l does not know the p r o b a b i l i t y d i s t r i b u t i o n s connecting behaviour choices and environmental choices. A f i r m may perceive a number of uncertainties when i t becomes - 112 -aware of a foreign d i r e c t investment opportunity i n a foreign country. The purpose of i n v e s t i g a t i o n and negotiations i s to minimize the uncertainties faced by a firm. A l i s t of 16 uncertainty variables was prepared from the type of uncertainties mentioned by Aharoni. The responses of executives i n the present study are summarized i n the following table: Table 19. Rated Uncertainty of Sixteen Uncertainty Variables for the 89 Investment Decisions Uncertainty Variables Very High Uncertainty High Uncertainty Uncertain Somewaht Uncertain Insignficant Uncertainty Total No. of Decisions 1. Demand for product 36 10 8 5 • 30 89 2. I n f l a t i o n 24 18 7 2 38 89 3. Local competition 14 7 5 2 61 89 4. Corruption 13 8. 4 0 64 89 5. Devaluation 12 11 2 2 62 89 6. Government intervention 12 5 2 1 69 89 7. A v a i l a b i l i t y of product (minerals) 11 1 0 0 77 89 8. Red tape 8 12 4 0 65 89 9. Labour unrest 8 4 1 1 75 89 10. N a t i o n a l i z a t i o n 7 3 0 2 77 89 11. C u l t u r a l differences 5 8 2 1 77 89 12. Change i n government through democratic process 5 2 4 0 78 89 13. Expropriation .3 1 0 1 84 89 14. M i l i t a r y coup 2 3 5 2 77 89 15. Civil'war 2 3 1 2 81 89 16. War with another country 1 1 0 0 87 89 - 113 -Table 19 indicates that the most s i g n i f i c a n t uncertainty variable was demand f o r product. A l l these decisions r e l a t e d to d i r e c t investments i n developed countries. "When we introduced a new product i n X country, we thought we would set the world on f i r e , " s a i d the vice-president of a firm, "but when the harsh r e a l i t i e s dawned upon us a f t e r two years f a i l u r e i n that market, we r e a l i z e d that the number one uncertainty was demand for the product." Due to the very high rate of f a i l u r e of new products and new brands (80 to 90 percent) i n North America the management i s uncertain about the fate of t h e i r d i r e c t investment. This uncertainty p r e v a i l s i n varying degrees despite forecasts and data c o l l e c t i o n . The second most important uncertainty r e l a t e d to i n f l a t i o n . This was i n a l l l i k e l i h o o d due to the f a c t that 52 (58.4 percent) foreign d i r e c t investment decisions i n the present study were made during 19 71-75. This was the period when very high rates of i n f l a t i o n p r e v a i l e d i n a l l the developed countries. Another important uncertainty variable was l o c a l competition i n the host country. The responses i n Table 19 were r e l a t e d to some of the de-veloped countries. The firms going to developing countries did not face competition because e i t h e r there was no competition or i t was i n s i g n i f i c a n t . Corruption was another important v a r i a b l e . This v a r i a b l e was generally v a l i d i n the case of developing countries. The respondents t o l d numerous s t o r i e s about corruption. "The guys were postponing the signing of the agreement f o r one or the other excuse. We had spent a considerable amount of money on i n v e s t i g a t i o n . As the agreement was not signed, I l e f t the country. A f t e r a few months, they asked for negotia-tions and signing of the agreement. - 114 -"I went again to the country, but on a r r i v a l I found that they were using the same t a c t i c s . Two days before my planned departure, I was asked to see Mr. X, a consultant, who was working as an agent for government o f f i -c i a l s . A f t e r the breakfast, he introduced me to an a t t r a c t i v e g i r l . 'She i s a very fast and accurate t y p i s t , ' he sa i d , 'we can draft the agreement according to your terms and she can type i t i n one hour, but to please the o f f i c i a l s , your company has to give $400,000.' As the mining concessions were not worth the money being asked f o r , I l e f t i n utter-disgust. Since then they have been w r i t i n g us to re-open the negotiations. We receive t h e i r l e t t e r s and throw them i n the wastepaper basket. See (picking a l e t t e r from the basket) here i s a l e t t e r I received t h i s morning. We do not even acknowledge t h e i r l e t t e r s . " Another executive narrated h i s story thus: "When we went into country X, we took very expensive equipment with us f o r exploration. As we were extremely disappointed due to corruption and poor prospects for what we were looking f o r , we decided to discontinue our e f f o r t s and take back our so p h i s t i c a t e d equipment. We were to l d to pay a certain amount of bribe to custom o f f i c i a l s . We refused because i t was very close to the value of the new equipment. They refused to give customs clearance for loading our equipment on the ship and sent us a notice f o r payment of import duty, which according to the notice, we should have paid when the equipment was brought i n . As the amount of duties was twice the value of the equipment, we decided to give the equipment to the government as a g i f t . " "We love you North Americans for your g i f t s to our country," s a i d one o f f i c i a l , "but you have to pay g i f t taxes which w i l l come to the same amount as custom duties." In utter disappointment the company o f f i c i a l s - 115 -h i r e d a boat, loaded the equipment on i t , took the boat to deep water and dumped the so p h i s t i c a t e d equipment i n the sea i n the presence of a custom o f f i c i a l . "We returned empty handed but f u l l of b i t t e r memories," sa i d the o f f i c i a l . Devaluation, government intervention, a v a i l a b i l i t y of product, and red tape were other important v a r i a b l e s . An i n t e r e s t i n g remark about red tape i n a c e r t a i n country i n L a t i n America was, "The (naming the c i t i z e n s of that country) are super i n red tape. The amount of paper work they require shows that they invented paper before Egyptians and Chinese." I t appears from Table 19 that the B.C. firms were not very much concerned about p o l i t i c a l uncertainties such as war with another country, c i v i l war, m i l i t a r y coups, expropriation, and change i n government. The most probable reason f o r this lack of concern was that 63 out of 89 deci-sions of B.C. firms were i n developed countries. The remaining 26 decir-sions i n developing countries were made i n countries enjoying r e l a t i v e p o l i t i c a l s t a b i l i t y . 3. The Relation between the Extent of Negotiations and Amount of Uncertainty The purpose of negotiations, as stated e a r l i e r , i s to reduce uncer-t a i n t y . To measure the r e l a t i o n s h i p between the extent of negotiations and the amount of uncertainty, the following hypothesis was formulated: H, There ex i s t s a p o s i t i v e r e l a t i o n s h i p between the extent of negotiations 4 and amount of uncertainty. The r e s u l t s of canonical c o r r e l a t i o n analysis are given i n the following table: - 116 -Table 20. The Relation Between Extent of Negotiations and Amount of Uncertainty. Eigenvalue Canonical Correlation C o e f f i c i e n t <v Wilk's Lambda Chi-square Degrees of Freedom Significance 0.827 0.909 0.008 372.34 112 0.000 The n u l l hypothesis (H„) stated that R = 0 and the a l t e r n a t i v e 0 c hypothesis (H ) s a i d that R > 0. The n u l l hypothesis (H ) cannot be 1 c 0 accepted because R^ > 0. As R > 0, the n u l l hypothesis (H^) i s rejected and the a l t e r n a t i v e hypothesis (H^) i s accepted. The acceptance of the a l t e r n a t i v e hypothesis (H^) was also supported by the eigenvalue and the extremely low values of Wilk's lambda. The c h i -square i n Table 20 i s very high. The l e v e l of s i g n i f i c a n c e i n the above table i s much lower than the .05 l e v e l of s i g n i f i c a n c e considered acceptable for this research. Hypothesis No. 5 E. Relation between P o s i t i v e and Negative Decisions i n Terms of I n i -t i a t i n g Forces, Investigation, Commitments, Negotiations, and Uncertainty So f a r , the f i v e sets of va r i a b l e s , namely, i n i t i a t i n g forces, inves-t i g a t i o n , commitments, negotiations, and uncertainty were e i t h e r compared with subsets i n the same group of v a r i a b l e s , f o r example, endogenous i n i -t i a t i n g forces were compared with exogenous i n i t i a t i n g forces, or two sets of variables were compared with each other f or strength of r e l a t i o n s h i p . The purpose of analysis i n this section was to compare the strength of the f i v e sets of variables f o r p o s i t i v e d i r e c t investment decisions with - 1 1 7 -the negative decisions. For this comparison, the following hypothesis was formulated: H,. In cases where the decision has been made to invest abroad, there w i l l be stronger i n i t i a t i n g forces, more investigation, greater degree of commitments, greater extent of negotiations, and lower amount of uncer-tainty than in those cases where the decision has been made not to invest abroad. To test the above hypothesis, five t-tests were used on the five sets of variables. The results of the t-tests are summarized in Table 2 1 . Table 2 1 . A Comparison of Positive and Negative Decisions i n Terms of Initiating Forces, Investigation, Commitments, Negotiations, and Uncertainty. Variable Sets Type of No. of Decisions Cases Mean Standard Devia-tions t-value One-tail P rob ab i -l i t y Initiating Yes decisions 72 U l 7 .58 2 . 5 5 5 Forces No decisions 1 7 u 2 8 .53 2 . 2 9 4 Investi- Yes decisions 72 U 3 20 .14 5 . 9 8 9 gation No decisions 17 U 4 16 .94 5 . 9 3 2 Commit- Yes decisions 72 U 5 4 .14 1 . 4 2 7 ments No decisions 1 7 U 6 3 .24 0 . 6 6 4 Negotia- Yes decisions 72 u 7 8 .97 4 . 3 3 5 tions No decisions 1 7 u 8 8 .82 3.486 Uncer- Yes decisions 72 25 .68 6 . 8 6 7 tainty No decisions 1 7 U 1 0 36 .94 1 4 . 6 8 6 - 1 . 4 0 1.98 2.50 0 . 1 3 4.72 0 . 0 8 3 0 . 0 2 5 0 . 0 0 7 0 . 4 4 8 0 . 0 0 0 5 - 118 -1. I n i t i a t i n g Forces To compare the strength of p o s i t i v e decisions against the negative decisions i n terms of the set of i n i t i a t i n g forces, the n u l l hypothesis (HQ) stated that = U and the a l t e r n a t i v e hypothesis (H^) was that > U^. The chosen l e v e l of alpha remained unchanged at .05. As shown i n Table 21, u"l ^ U2 and < U •, therefore, on the basis of strength of the means of p o s i t i v e and negative decisions both the hypotheses should be rejected. Unfortunately, the n u l l hypothesis cannot be rejected because the o n e - t a i l p r o b a b i l i t y i s .083, which i s larger than .05, the l e v e l of alpha considered necessary for t h i s research. The a l t e r n a t i v e hypothesis cannot be accepted because U^ < U^. This means that despite somewhat weaker i n i t i a t i n g forces the decision to invest abroad may be p o s i t i v e . In other words, strong i n i t i a t i n g forces do not necessarily guarantee a p o s i t i v e decision. This f i n d i n g i s not i n agreement with Aharoni's emphasis on i n i t i a t i n g forces. This may be due to the fact that Aharoni had not q u a n t i f i e d h i s v a r i a b l e s . Had he quan-t i f i e d the set of v a r i a b l e s , which he c a l l e d i n i t i a t i n g forces, Aharoni might have ended up with the same r e s u l t s . Another probable explanation of s l i g h t l y weaker i n i t i a t i n g forces i n cases of p o s i t i v e decisions and somewhat stronger i n i t i a t i n g forces i n cases of negative decisions may be the presence of intervening variables such as i n v e s t i g a t i o n , commitments, negotiations, and uncertainties. The i n i t i a t i n g forces i n cases of nega-tiv e decisions may be somewhat stronger but i f the r e s u l t s of i n v e s t i g a t i o n are not favourable, less commitments are created, negotiations are not successful, and uncertainties are higher, then the strong i n i t i a t i n g forces may not produce p o s i t i v e d i r e c t investment decisions. - 1 1 9 -2. Investigation I f the i n i t i a t i n g forces are s u f f i c i e n t l y strong, they lead the decision makers i n a f i r m to i n v e s t i g a t i o n . The set of i n v e s t i g a t i o n v a r i -ables, as discussed before, consisted of seventeen variables r e l a t i n g to sources of information and type of information c o l l e c t e d . The hypothesis that was being tested stated that i n cases of p o s i t i v e decisions to invest abroad more i n v e s t i g a t i o n w i l l be done than i n cases of negative decisions. The t - t e s t performed on the set of seventeen i n v e s t i g a t i o n variables gave mean values of 2 0 . 1 4 and 1 6 . 9 4 for p o s i t i v e and negative decisions r e s p e c t i v e l y . The n u l l hypothesis ( H ^ ) s a i d that the mean of p o s i t i v e decisions ( U ^ ) was equal to the mean of negative decisions ( U ^ ) , or sym-b o l i c a l l y stated, H Q : = U ^ . The al t e r n a t i v e hypothesis ( H - ^ ) stated that the mean of p o s i t i v e decisions (U^) i s greater than the mean of negative decisions ( U , ) , or H,: U „ > U , . 4 1 3 4 The n u l l hypothesis (H^: = U ^ ) can be e a s i l y rejected because ( 2 0 . 1 4 ) i s not equal to ( 1 6 . 9 4 ) . The al t e r n a t i v e hypothesis ( U ^ > U ^ ) i s very much acceptable because ( 2 0 . 1 4 ) i s considerably l a r g e r than ( 1 6 . 9 4 ) . The o n e - t a i l p r o b a b i l i t y . 0 2 5 i n Table 2 1 for the set of in v e s t i g a t i o n variables i s smaller than v 0 5 , which i s the l e v e l of alpha considered necessary for this research. The acceptance of the al t e r n a t i v e hypothesis ( H : U 3 > U ^ ) supports Aharoni's contention that i n the case of p o s i t i v e foreign d i r e c t investment decisions the l e v e l and e f f e c t s of i n v e s t i g a t i o n are stronger than i n the cases of negative decisions. - 1 2 0 -3 . Commitments The set of commitment variables consisted of four v a r i a b l e s , namely, creation of an i n t e r n a t i o n a l d i v i s i o n , the desire to s t a b i l i z e demand, the desire to s t a b i l i z e p r o f i t , and the desire to r e t a i n an export market. The hypothesis to be tested stated that there w i l l be greater degree of commit-ment i n those cases where the decision has been made to invest abroad. The n u l l hypothesis ( HQ ) stated that the mean of those cases where a decision was made to invest abroad (U,.) was equal to the mean of those cases where the decision was not to invest abroad (U,). The a l t e r n a t i v e 6 hypothesis (HJ s a i d that the mean of p o s i t i v e decisions (U c) w i l l be 1 5 stronger than the mean of negative decisions (U ). The results of the 6 t - t e s t i n Table 2 1 show that the mean of p o s i t i v e decisions (U^) was 4 . 1 4 and the mean of negative decisions (Ug) was 3 . 2 4 . The n u l l hypothesis (HQ) was rejected because the mean of p o s i t i v e decisions (U^ = 4 . 1 4 ) was not equal to the mean of negative decisions ( U > = 3 . 2 4 ) . The a l t e r n a t i v e o hypothesis was accepted because the mean of p o s i t i v e decisions (U,_ = 4 . 1 4 ) was greater than the mean of negative decisions (U^ = 3 . 2 4 ) or symbolically, H . . : U > U,. The o n e - t a i l p r o b a b i l i t y i n Table 2 1 for commitments was . 0 0 7 , 1 5 o which was smaller than the . 0 5 l e v e l of alpha considered acceptable f o r th i s research. The acceptance of this a l t e r n a t i v e hypothesis supports Aharoni's contention that commitments are stronger i n those cases where the decision was made to invest. 4 . Negotiations The main concern i n t h i s s ection was about the set of negotiation variables concerning the issues on which negotiations took place between - 121 -the prospective direct investor and the government, the banks, and the potential partners in the host country. The hypothesis stated that in cases where the decision has been made to invest abroad, there w i l l be a greater extent of negotiations than in those cases where the decision has been made not to invest abroad. The n u l l hypothesis (HQ) said that the mean of the extent of nego-tiations for positive decisions (U-,) w i l l be equal to the mean of the extent of negotiations for negative decisions (Ug) or i n symbolic terms H : U = U . The alternative hypothesis (H ) stated that the mean of the U / o 1 extent of negotiations of positive decisions (U^) w i l l be greater than the mean of the extent of negotiations of negative decisions (H ) . In symbolic o terms this i s represented as H : U 7 > U . 1 / o The results of the t-test, as given in Table 21 show that the mean of the extent of negotiations for positive decisions (U^) was 8.9 7 and the mean of the extent of negotiations for negative decisions (U ) was 8.82. o If the hypothesis is tested simply on the basis of the strength of the means of positive and negative decisions, the null hypothesis (HQ: U^ = Ug) can be rejected because the mean of extent of negotiations for positive decisions (U^ = 8.9 7) was not equal to the mean of the extent of negotia-tions for negative decisions (U_ = 8.82). o The problem in testing a hypothesis is that the two-tail or one-tail probability in a t-test must meet the requirement of the level of s i g n i f i -cance considered necessary for that research. The one-tail probability for the set of negotiation variables in Table 21 was .448, which was larger than the .05 level of alpha considered acceptable for this re-search. This conclusion cannot be compared with Aharoni's findings - 122 -because he had not q u a n t i f i e d h i s research. Moreover, he did not treat negotiation with banks and p o t e n t i a l partners as a process. In the pre-sent research, as shown i n Tables 17 and 18, negotiations with host country banks and p o t e n t i a l partners were treated as a process. 5. Uncertainty The set of uncertainty variables consisted of sixteen variables as shown i n Table 19. The hypothesis to be tested stated that there w i l l be a lower amount of uncertainty i n those cases where the decision was made to invest abroad than i n those cases where the decision was not to invest abroad. The n u l l hypothesis (HQ) s a i d that the mean of the set of uncertainty variables for p o s i t i v e decisions (U^) w i l l be equal to the mean of the set of uncertainty variables for negative decisions (U Q) or i n symbolic terms H • IT = U.,.. The a l t e r n a t i v e hypothesis (H ) stated that the mean of the U 9 10 o set of uncertainty variables f o r p o s i t i v e decisions (U^) would be smaller than the mean of the set of uncertainty variables f o r negative decisions, o r H r V V The r e s u l t s of the t - t e s t , as given i n Table 21 for the set of un-certainty v a r i a b l e s , show the mean of the set of uncertainty variables for p o s i t i v e decisions (U„) as 25.68 and the mean of the set of uncertainty y variables f o r negative decisions (U^Q) as 36.94 and the n u l l hypothesis (H^: Ug = U^Q) was therefore rejected. The r e j e c t i o n was also supported by the o n e - t a i l p r o b a b i l i t y of .0005 given i n Table 21 which was much smaller than the .05 l e v e l of alpha considered acceptable f o r the present study. - 123 -The a l t e r n a t i v e hypothesis (H^: U G < U ) was accepted because the mean of the set of uncertainty variables f o r p o s i t i v e decisions (U = 25.68) 9 was smaller than the mean of the set of uncertainty variables f o r negative decisions (U-^ Q = 36.94) at our appropriate l e v e l of s i g n i f i c a n c e . It appears, therefore, as emphasized by Aharoni, that one of the most important considerations before the management of a fi r m i s the amount of uncertainty i n a given s i t u a t i o n . I f the perceived uncertainties i n the case of a foreign d i r e c t investment opportunity are very high, the in v e s t -ment decision i s negative. In hypothesis number f i v e (H,_) an e f f o r t was made to compare the rel a t i o n s h i p between p o s i t i v e and negative decisions i n terms of i n i t i a t i n g forces, i n v e s t i g a t i o n , commitments, negotiations, and uncertainty. The f i v e t - t e s t s performed on the above sets of variables showed that i n cases where the decision was made to invest abroad, there was more i n v e s t i g a t i o n , greater degree of commitments, greater extent of negotiations, and lower amount of uncertainty than i n those cases where the decision was made not to invest abroad. I n i t i a t i n g forces were found to be s l i g h t l y weaker i n the case of p o s i t i v e decisions and somewhat stronger i n the case of negative decisions. The s l i g h t l y stronger i n i t i a t i n g forces i n the case of negative decisions were explained i n terms of lack of q u a n t i f i c a t i o n of the set of i n i t i a t i n g forces by Aharoni and the presence of intervening variables such as i n v e s t i -gation, commitments, negotiations, and uncertainty. In the l i g h t of above discussion i t could be concluded that the re s u l t s of the t-test s generally provided support to hypothesis number f i v e . - 124 -VI. COMPARISON OF RESEARCH FINDINGS WITH OTHER STUDIES In the previous chapter an attempt was made to test the f i v e hypotheses r e l a t i n g to f i v e sets of var i a b l e s , namely, i n i t i a t i n g forces, i n v e s t i g a t i o n , commitments, negotiations, and uncertainty. In this chapter an e f f o r t w i l l be made to compare the findings i n the present study with the findings of other studies. A. I n i t i a t i n g Forces and Awareness of Foreign Direct Investment Opportunities Some of the i n i t i a t i n g forces found i n the present study were s i m i l a r to Aharoni's l i s t while others were d i f f e r e n t . The following two tables compare Aharoni's i n i t i a t i n g forces with those found i n the present study: Table 22. A Comparison of Aharoni's Exogenous I n i t i a t i n g Forces with the Present Study. Aharoni's I n i t i a t i n g Forces I n i t i a t i n g Forces i n the Present Study Exogenous I n i t i a t i n g Forces 1. An outside proposal 2. Fear of l o s i n g an export marke t 3. Successful d i r e c t i nvest-ment operations of one's competitors abroad 4. Strong competition from abroad i n home market 5. Saturation i n the domestic market Exogenous I n i t i a t i n g Forces 1. An outside proposal 2. Fear of l o s i n g an export market 3. Successful d i r e c t investment opera-tions of one's competitors abroad 4. Growing demand for the product i n the host country 5. High prices for the commodity 6. Unfavourable p o l i t i c a l environment i n the home country - 125 -The comparison i n Table 22 shows that i n the set of exogenous v a r i -ables the f i r s t three v a r i a b l e s , an outside proposal, fear of l o s i n g an export market, and successful d i r e c t investment operations of one's com-pe t i t o r s abroad, were common to Aharoni's l i s t and the present study. The two other variables i n Aharoni's l i s t , namely, strong competition from abroad i n the domestic market and saturation i n the domestic market, were not mentioned by any respondent i n this study as variables causing aware-ness of foreign d i r e c t investment opportunities. The most probable reason for the difference i n the two studies r e l a t i n g to strong competition i n the domestic market was that the firms i n the present sample were motivated more by endogenous forces, as w i l l be discussed l a t e r . Also i t appeared that the firms i n the present study were aggressive enough not to wait t i l l t h e i r competitors enter the domestic market and create an environment of strong competition. Most of the firms i n t his sample were leaders i n t h e i r i n d u s t r i e s . Saturation i n the domestic market was not an i n i t i a t i n g force i n the present study for the simple reason that most of the firms preferred to look towards the south rather than waiting for saturation of the domestic market and then s t a r t i n g to look for markets abroad. Three a d d i t i o n a l variables, growing demandfor the product, high prices of commodities, and unfavourable p o l i t i c a l environment i n the home country, were important i n the present study as causes of awareness of foreign d i r e c t investment opportunities. Growing demand for the product as an exogenous i n i t i a t i n g force i s t y p i c a l of firms that enter i n t o foreign markets i n stages."*" High prices of commodities was an important motivating 1 See Stefan H. Robock and Kenneth Simmonds, International Business and  Mul t i n a t i o n a l Enterprises, o p . c i t . - 126 -force because 80 percent of the decisions i n the present study were rel a t e d to resource-based firms. I t appears that such firms are activated by i n -creases i n the prices of commodities. An u n f a v o u r a b l e - p o l i t i c a l environment i n the home country r e f l e c t s the concern of firms ( p a r t i c u l a r l y mining com-panies) regarding changes i n attitudes and taxation laws i n Canada i n the 2 early 1960s. These concerns of Canadian firms were also r e f l e c t e d i n a recent report prepared for the U.S. Congress by Arthur D. L i t t l e Inc. on "The Reasons and Outlook for Foreign D i r e c t Investment i n the United States." In this report emphasis was l a i d on unfavourable Canadian domestic environment (e.g. taxation and government regulations). Other important variables were small domestic markets and labour unrest i n Canada. The report was based on an interview survey of Canadian executives involved i n 3 d i r e c t investment i n the United States. Litvak and Maule also h i g h l i g h t e d the role of unfavourable conditions i n the domestic market "... firms undertake di r e c t foreign investment so as to escape from unfavourable conditions i n t h e i r domestic markets, such as saturation of the domestic market, taxation, a n t i - t r u s t p o l i c y , and union m i l i t a n c y . " 4 The importance of an unfavourable domestic environment was also emphasized by C o t t r e l . He stated that one of the major reasons for London's success as a f i n a n c i a l centre of the world was the unfavourable p o l i t i c a l environment i n Western Europe. "Merchants and f i n a n c i e r s were 2 See A l f r e d Powis, "Public P o l i c y and the Mineral Industry", o p . c i t . 3 John van der Feyst, "Exodus! The F l i g h t of Canadian C a p i t a l , " Canadian  Business (December 19 76), pp. 13-26. 4 Isaiah A. Litvak and Christopher J. Maule, Foreign Investment: The Experience of Host Countries (New York: Praeger Publishers, Inc., 1970), p. 11. - 127 -driven out of Europe by the disruption of war, and were attracted to London, which offered p o l i t i c a l s t a b i l i t y and p r o f i t a b l e opportunities with the rapid growth of B r i t i s h overseas trade. Table 23. A Comparison of Aharoni's Endogenous I n i t i a t i n g Forces with the Present Study. Aharoni's I n i t i a t i n g Forces I n i t i a t i n g Forces i n Present Study Endogenous I n i t i a t i n g Forces" 1. Keen i n t e r e s t of a high ranking executive i n foreign d i r e c t i nvest-ment 2. C a p i t a l i z a t i o n of patents or technical - know-how 3. The desire to create a market f o r components abroad 4. The desire to u t i l i z e abroad o l d machinery 5. The desire to spread R & D and other f i x e d costs Endogenous I n i t i a t i n g Forces 1. Keen i n t e r e s t of a high ranking executive i n foreign d i r e c t investment 2. C a p i t a l i z a t i o n of patents or technical know-how 3. The desire to i n t e r n a l i z e the source of supply 4. The desire to i n t e r n a l i z e demand 5. Export experience i n the host country The two l i s t s of endogenous variables shown i n Table 23 indicate that the var i a b l e s , keen i n t e r e s t of a high ranking executive i n foreign d i r e c t investment and c a p i t a l i z a t i o n of patents or technical know-how, are common to Aharoni's l i s t and the present study. The desire to create a market f o r components abroad, the desire to u t i l i z e o l d machinery abroad, } P. L. C o t t r e l , B r i t i s h Overseas Investment i n the Nineteenth Century (London: The Macmillan Press Ltd., 19 75), p. 17. k Keen i n t e r e s t of an executive was the only variable l i s t e d by Aharoni as an endogenous v a r i a b l e . Other variables were termed by him as a u x i l i a r y forces, which were included i n the present study i n the l i s t of endogenous variables because l o g i c a l l y they belong to this group. - 128 -and the desire to spread R and D and other fixed costs were not mentioned by any respondent as causing awareness of foreign d i r e c t investment oppor-t u n i t i e s . Most probably these i n i t i a t i n g forces were not mentioned because of lack of innovative R and D i n B r i t i s h Columbia. Three other v a r i a b l e s , the desire to i n t e r n a l i z e the source of supply, the desire to i n t e r n a l i z e demand, and export experience i n the host country, were mentioned i n the present study as causing awareness. Coase,^ 7 8 Hymer, and Brown, have emphasized i n t e r n a l i z a t i o n of operations by firms due to imperfections of markets. Kindleberger, while commenting on the i n t e r n a l i z a t i o n of operations by a firm, went to the extent of saying that "Even when there are no economic advantages i n coordinating production at various stages, or of coordinating new investments at d i f f e r e n t l e v e l s of production to carry through innovation, companies may f e e l safer with Q assured access to sources of inputs and to outlets for products." A s t r i k i n g example of i n t e r n a l i z a t i o n of operations by a c q u i s i t i o n given by Kindleberger was that of Alcan Aluminium Limited of Canada. This company purchased a h a l f i n t e r e s t i n the government owned Aardal og Sunndal Verk (A.S.V.) aluminum smelter i n Norway to expand i t s aluminum capacity by about 20 percent and to eliminate a source of p r i c e competition that had Ronald Coase, "The Nature.of the Firm," Economica (Winter 1937), pp. 386-405. 7 Stephen Hymer, The International Operations of National Firms; A Study  of Direct Investment, o p . c i t . , p. 48. o Brown B. Wilson, "Islands of Conscious Power: MNCs i n the Theory of the Firm," MSU Business Topics (Summer 19 76), pp. 37-45. 9 Charles P. Kindleberger, American Business Abroad, o p . c i t . , pp. 21-22. - 129 -vexed the e n t i r e industry."^ Numerous cases (see Table 1) of i n t e r n a l i z i n g supply and demand were found i n the present study. Other endogenous variables mentioned infrequently (less than three responses) by respondents i n t h i s survey were: partnership i n a project, minimizing t a r i f f and transportation costs, the desire for greater control i n management, and the desire for d i v e r s i f i c a t i o n . Tomlinson and Himmelsbach i n a'survey of foreign d i r e c t investment decisions of 52 European and 57 Canadian firms found the preference or experience of senior executives a very important determinant of foreign d i r e c t investment decisions. Sixty-one percent of Canadian respondents stressed that this was an important factor i n foreign d i r e c t investment decisions. According to Tomlinson and Himmelsbach "The most common preferences or experiences of the senior executives, who r e p l i e d to t h i s question, i n -cluded s p e c i f i c knowledge of ce r t a i n foreign markets, education and i n t e r -n a t i o n a l t r a v e l . In some cases p r o f i c i e n c y i n the host country's language or ethnic o r i g i n s accentuated these preferences and influnced the decision making to some extent. In other cases, e s p e c i a l l y i n the mining and o i l i n d u s t r i e s , such experiences consisted merely of the knowledge of c e r t a i n 12 geological formations." This de s c r i p t i o n matches almost exactly the v a r i a b l e , keen i n t e r e s t of an executive, as emphasized i n the present study. 1 0 I b i d , p. 22. J . W. C. Tomlinson and H. J . Himmelsbach, Foreign Trade and Investment  Decisions of Canadian Companies, Working Paper No. 182, (Vancouver: Faculty of Commerce and Business Administration, University of B r i t i s h Columbia, March 1973), p. 21. 1 2 I b i d , p. 39. - 130 -Another variable, where the findings of Tomlinson and Himmelsbach and the present study were similar concerned patent or technical know-how. As can be seen i n Table 23, in the group of endogenous variables, patents or technical know-how were the least significant. Tomlinson and Himmelsbach also reached the same conclusion. With regard to patents or technical know-how "the majority of executives stressed that their products were rather 13 unsophisticated and were not originally invented or developed in Canada." Table 23 shows that i n the set of exogenous variables successful direct investment operations of one's competitors abroad was an i n s i g n i f i -cant variable. Only two respondents considered i t c r i t i c a l and one thought i t was very important. Contrary to this, Tomlinson and Himmelsbach found 59 percent of European executives attaching various degrees of importance and 52 percent Canadian respondents considering this variable important. The most important reason for the difference in the two findings in this respect was that the two studies were based on different samples. The sample of Tomlinson and Himmelsbach contained 36 firms from Ontario, the most industrialized region i n Canada, followed by 14 firms from Quebec, the second most important industrialized province. The manufacturing firms in those regions are more conscious of what their competitors are doing. Compared to this, the firms involved i n foreign direct investment in British Columbia are highly specialized by product, they are resource-based, and most of them are leaders i n their own industry. Hence the question of following others or the band-wagon effect does not arise. 1 3 Ibid, p. 40. - 131 -Knickerbocker, who was studying the tendency of following one's competitors i n foreign d i r e c t investment, excluded resource-based firms because he found that " i n no instance did two or more U.S. parent firms belonging to the same industry e s t a b l i s h competing manufacturing s u b s i d i a r i e s i n the same country i n the same overseas industry.""^ When a l l the twenty-one variables i n the Tomlinson-Himmelsbach survey were subjected to factor analysis by Tomlinson and W i l l i e , the f i v e components of the foreign investment decision i d e n t i f i e d were: market development, ready-made opportunity, corporate p o s i t i o n , governmental i n -centives, and profitability.''"^ Market development (or market r e l a t e d v a r i -ables, as c a l l e d i n the present study) supports the contention i n this study that the small market i n Canada i n i t s e l f i s an important motivating force for foreign d i r e c t investment. Ready-made opportunity (or an outside pro-posal as c a l l e d i n the present study) was also the most important exogenous variable i n the present study (see Table 2 3). The background material c o l l e c t e d on the firms i n the present study supports what Tomlinson and W i l l i e found under the heading "corporate p o s i t i o n " i n terms of a corpora-tion's f i n a n c i a l , o l i g o p o l i s t i c or i n t e r n a t i o n a l status. (Please see Appendices A-E). With regard to governmental incentives, the findings i n the present study are i n agreement with the findings of Tomlinson and W i l l i e . The home country influence on foreign d i r e c t investment was minimal i n both the Frederick T. Knickerbocker, O l i g o p o l i s t i c Reaction and M u l t i n a t i o n a l  Enterprise, o p . c i t . , p. 42. J . W. C. Tomlinson and C. S y l v i a W i l l i e , Foreign Investment Decisions of  Canadian and European Companies, 19 75, p. 18. - 132 -studies as was the influence of p o l i t i c a l s t a b i l i t y . The importance of p r o f i t a b i l i t y as a motive i s also common i n both the studies. The conclusion of the r e l a t i v e strength of endogenous va r i a b l e s i n i n the present study p a r t l y contradicts the hypothesis presented by Robinson. His hypothesis states that "The investment decisions of the MNCs are less l i k e l y to be stimulated by an i n t e r n a l market survey and more l i k e l y to be the r e s u l t of external pressure on the f i r m . " ^ However, his hypothesis was not based on an empirical study and thus i t was not tested. Despite t h i s difference i n emphasis on exogenous variables i n Robinson's work, he agrees with the major f i n d i n g i n t h i s study, that i s , he agrees with the importance of the keen i n t e r e s t of an executive i n f o r -eign d i r e c t investment decisions. "Throughout the decision-making process personal i n t e r e s t on the part of key members of management i s l i k e l y to play a l a r g e r r o l e than i n the domestic case p r e c i s e l y because of the greater number of imponderables i n assessing a foreign market opportunity.""'" 7 Basi i n his study of the determinants of U.S. d i r e c t investment i n foreign countries c o l l e c t e d data from 160 American foreign investors. He found such exogenous variables as p o t e n t i a l s i z e of the market, p o l i t i c a l s t a b i l i t y , and favourable host government attitudes important determinants 18 of the decision to invest abroad. Basi used a mail questionnaire which requested the executives to rate the importance of f i f t e e n investment determinants along a three point scale. As a l l the f i f t e e n variables were exogenous the question of endogenous variables did not a r i s e . ^ Richard D. Robinson, International Business Management: A Guide to  Decision Making, o p . c i t . , p. 22. ^ Ibid , p. 22." 18 R. S. Basi, Determinants of U.S. Direct Investment i n Foreign Countries (Kent, Ohio: Kent State Un i v e r s i t y Press, 1966). - 133 -Daniels, who c o l l e c t e d data on the foreign d i r e c t investment d e c i -sions of business firms investing i n the United States, found a combination of exogenous va r i a b l e s (such as host country government pressure to produce l o c a l l y and natural advantages of l o c a l production) and endogenous variables 19 (such as the desire f o r d i v e r s i f i c a t i o n ) to be important. He did not however, compare the strength of exogenous and endogenous v a r i a b l e s . While adding to the body of knowledge concerning the foreign investment decision process therefore, the work of neither Basi nor Daniels provides a r e a l i s t i c ranking of the importance of i n t e r n a l versus external determinants. They do not therefore, weaken the present findings concerning the primacy of endo-genous variables but add further recognition of t h e i r importance. B. Sequential Investigation and Subjectively Estimated Cost of Investigation The cost of search makes i t necessary to investigate foreign d i r e c t investment opportunities i n a sequence. The responses of the executives i n the present study, as shown i n Table 9, confirmed t h i s sequential process and were i n turn also supported by the findings of Margolis. "Important decision problems are broken down into a sequence of l e s s e r component de c i -sions. Only the most pressing of these component decisions are made imme-d i a t e l y . Others i n the sequence are treated only as necessary, i n the l i g h t 20 of the l a t e s t a v a i l a b l e information." John D. Daniels, Recent Foreign D i r e c t Manufacturing Investment i n the  United States: An Interview Study of the Decision Process (New York: Praeger Publishers, Inc., 1971). J u l i u s Margolis, "Research on the Theory of the Firm: Sequential Decision Making i n the Firm," American Economic Review 50 (1960), pp. 526-33. - 134 -Simon applied marginal analysis to the cost of information. "There i s one way i n which the formation of expectations may be reincorporated i n the body of economic theory: by t r e a t i n g information gathering as one of the processes of production, so to speak, and applying to i t the usual rules of marginal a n a l y s i s . Information, says p r i c e theory, should be gathered up to the point where the incremental cost of a d d i t i o n a l information i s ••21 equal to the incremental p r o f i t that can be earned by having i t . According to the findings of the present study, as shown i n Table 9, 14 types of i n v e s t i g a t i o n patterns were found as compared to only one pattern discussed by Aharoni. Table 9 shows further that only 37 out of 89 decisions followed the sequence mentioned by Aharoni. This means that h i s sequential i n v e s t i g a t i o n g e n e r a l i z a t i o n was v a l i d only i n the case of the f i r s t foreign d i r e c t investment decision i n a country with which the f i r m had no previous contact. It seems therefore that he was describing the i n v e s t i g a t i o n pro-cess for the f i r s t d i r e c t investment decision i n a country. Aharoni was perhaps assuming that the f i r m had l i t t l e or no previous knowledge of the p o t e n t i a l host country at the time of t h i s f i r s t decision. If he had i n -cluded export experience, proposals, information from government, experience with s u p p l i e r s , information from friends and partnership with the p o t e n t i a l investors i n a project, he might have reached the same conclusions as the ones found i n t h i s study. The findings of i n the present study are also supported by the analysis of H e l l i w e l l . "... the preparation and analysis of investment proposals i t s e l f i s a c o s t l y undertaking. Since the c o l l e c t i o n and analysis of information requires some of the same management s k i l l s required for 21 Herbert A. Simon, "Theories of Decision-Making i n Economics and Behavioural Science," o p . c i t . , p. 270. - 135 -successful current operations, there may be a high shadow pri c e attached to the use of scarce management s k i l l s (including the e f f o r t s of a r c h i t e c t s , en-22 gineers etc.) i n the c o l l e c t i o n and analysis of information for decisions." C. Relationship between Intensity of Investigation and Degree of Commitments The findings i n i n the present study r e l a t e d to i n v e s t i g a t i o n v a r i -ables which consisted of sources of information and type of information and commitments created during i n v e s t i g a t i o n . The creation of commitments during i n v e s t i g a t i o n , as found i n the present study, i s s i m i l a r to the s i t u a t i o n described by March and Simon. According to them "the process of commitment i s generally sequential. An i n i t i a l commitment i s a commitment pr i m a r i l y to undertake search a c t i v i t y . The outcome of i n i t i a l search becomes i t s e l f a major determinant of how r a p i d l y and with what resources the a c t i v i t y w i l l 23 continue to be pursued." Selznick also places greater stress on the crea-t i o n of commitments during i n v e s t i g a t i o n . His emphasis on the r o l e of leadership (keen i n t e r e s t of a high ranking executive i n the present study) 24 also compares well with the findings i n the present study." The v a l i d i t y of the market r e l a t e d variables described i n Table 13 i s supported by the findings of Kobrin, who investigated the r e l a t i o n s h i p between the flow of foreign d i r e c t investment from the United States and various aspects of economic, p o l i t i c a l , and s o c i o - c u l t u r a l environments. He reached the conclusion that "Market rel a t e d variables appear to be the 22John F. H e l l i w e l l , P u b l i c P o l i c i e s and Private Investment (Oxford: Clarendon Press, 1968), p. 63. 23 James G. March and Herbert A. Simon, Organizations, o p . c i t . , p. 186. 24 P. Selznick, Leadership i n Administration (New York: Harper and Row, 1957). - 136 -overriding f a c t o r in'the a l l o c a t i o n of manufacturing foreign d i r e c t invest-ment." 2 5 The r e s u l t s of Table 12 are comparable with the work of Tomlinson and Himmelsbach. According to th e i r findings, i n the Canadian sample 24 percent of the respondents attached various degrees of impor-tance to a proposal as compared with 34 percent i n the present study. The experiences of executives as a source of information was used by 30 percent of the respondents in.the Tomlinson-Himmelsbach survey. In the pre-sent study the export experiences of executives accounted for 28 percent of the responses. In the Tomlinson-Himmelsbach study only 2 percent of the respondents 26 used Canadian Government departments as a source of information. The number of respondents using government sources i n the present study was less than 2 percent. The president of a company, who had used one of the government agencies as a source of information, spoke very b i t t e r l y about his experience. "We stay away from government as far as possi b l e , using i t as a l a s t resort. Once we used the f a c i l i t i e s of X (a Canadian govern-ment agency) f o r Y (a country i n L a t i n America). The r e s u l t s were extremely disappointing." Stephen J . Kobrin, The Environmental Determinants of Foreign Direct  Investment: An Ex Post Empirical Analysis, Working Paper No. 819-75 (Cambridge, Mass.: Massachusetts I n s t i t u t e of Technology, December 19 75), p. 20. J. W. C. Tomlinson and H. J . Himmelsbach, Foreign Trade and Investment  Decisions of Canadian Companies, o p . c i t . , p. 28. - 137 -D. Relation between Extent of Negotiations and Amount of Uncertainty. In an e f f o r t was made to define a r e l a t i o n s h i p between negotia-ti o n v a r i a b l e s , which consisted of negotiations with host country govern-ments, banks, and l o c a l partners ( i f i t was going to be a j o i n t venture) and sixteen uncertainty v a r i a b l e s . The purpose of negotiations, according to Aharoni, i s to reduce the amount of uncertainty perceived by the management of a f i r m i n the case of foreign d i r e c t investment opportunities. Similar views were expressed by Radford, "To reduce uncertainty, many organizations endeavour to negotiate 2 7 an environment i n which they can operate." Cyert and March also concluded that firms s t r i v e to avoid uncertainty by trying to create negotiated and 2 8 c o n t r o l l a b l e environments. Kapoor emphasized the growing importance of negotiations with host country governments for the simple reason that the governments of many developing countries are playing a growing role as regulators and p a r t i c i -pants i n the economic a f f a i r s of t h e i r countries, r e s u l t i n g i n greater 29 i n t e r a c t i o n between MNCs and host governments. The southern states of the United States are a t t r a c t i n g d i r e c t investment on a large scale from the North including Canada. " I t appears that the richly-endowed South of the U.S. exerts a magic appeal to 2 7 K. J . Radford, Managerial Decision Making (Reston, V i r g i n i a : Reston Publishing Company, Inc., 1975), p. 219. 28 Richard M. Cyert and James G. March, A Behavioral Theory of the Firm (Englewood C l i f f s , N.J.: P r e n t i c e - H a l l , 1963), pp. 119-120. 29 Ashok Kapoor, "MNC Negotiations: C h a r a c t e r i s t i c s and Planning Implica-t i o n s , " Columbia Journal of World Business (Winter 1974), pp. 121-130. - 138 -investors and corporations from both areas within i t s borders and f o r -eigners ... The incentives the South offers a t t r a c t the c a p i t a l which not only helps reduce the h i s t o r i c a l l y - h i g h unemployment, but allows these states to acquire s u f f i c i e n t technology to make them economically inde-pendent of the North. "Among incentives offered are such powerful arguments i n favor as: low wages, a large pool of e a s i l y trainable workers, low corporate taxes, taxation holidays, good transportation, communications, and i n d u s t r i a l 30 revenue bond financing (up to $5 m i l l i o n ) with low i n t e r e s t rates." Another success story i n a t t r a c t i n g considerable d i r e c t investment i s that of New Hampshire i n the United States. According to Lawrence D. Maloney, associate e d i t o r of the U.S. News and World Report, the State i s v i r t u a l l y being flooded by companies ranging i n s i z e from small operations employing a handful of people to D i g i t a l Equipment Corporation, which i s b u i l d i n g two huge f a c i l i t i e s that w i l l employ some 3,100 workers. Execu-ti v e s c i t e these reasons f o r the State's appeal to business: low taxes (no sales and state income tax), s k i l l e d labor at reasonable prices and a 31 f i s c a l l y conservative government that has put out the welcome mat. Jan van der Feyst, "Exodus! the F l i g h t of Canadian C a p i t a l , " o p . c i t . , p. 24. Lawrence D. Maloney, "A Standout State i n a Hard-luck Area," U.S. News  and World Report (December 1976), p. 37. For d e t a i l s on the role of government i n foreign d i r e c t investment, see Jack N. Behrman, "Multinational Corporation, Transnational Interests, and National Sovereignty," Columbia Journal of World Business (March-A p r i l 1969), pp. 15-22. , National Interest and Mu l t i n a t i o n a l Enterprise: Ten- sions Among the North A t l a n t i c Countries (Englewood C l i f f s , N.J.: Pr e n t i c e - H a l l , 19 70). - 139 -Green, who did empirical work on p o l i t i c a l i n s t a b i l i t y as a deter-minant of U.S. foreign investment, found that negotiations with foreign governments were increasing i n importance because " P o l i t i c a l phenomena exert a major influence on the overseas - operations of U.S. firms. The magnitude of that influence i s explained p a r t l y by the d i r e c t control that the governments of most foreign firms exert over t h e i r economic system, a much greater degree of control than that exerted by the U.S. government 32 over the economy of the United States." The issues found s i g n i f i c a n t i n the present study i n negotiations 33 with governments were remittance of dividends, r e p a t r i a t i o n of c a p i t a l , applicable rates of taxation, environment or p o l l u t i o n control, and spe-c i a l depreciation or depletion allowances. These are s i m i l a r to the findings of Behrman who prepared a det a i l e d l i s t of c r i t e r i a used by governments i n L a t i n American countries to evaluate foreign d i r e c t i nvest-ment from o f f i c i a l proclamations and views expressed i n several countries." Robert T. Green, P o l i t i c a l I n s t a b i l i t y as a Determinant of U.S. Foreign  Investment (Austin, Texas: Bureau of Business Research, Graduate School of Business, The University of Texas, 19 72), p. 3. Some countries have r e s t r i c t i o n s on the remittance of dividends. See Kirkwood, Kaplan, Russin, and Vecchi Law Firm, Columbia: Business-Legal  Handbook (Toronto: The Royal Bank of Canada, 1976). "Decision 24" was a r u l i n g adopted by the Andean Pact nations r e s t r i c t i n g remittances of p r o f i t by foreign companies to 14 percent of registered c a p i t a l . According to an amendment, the l i m i t was r a i s e d to 20 percent of the registered c a p i t a l . See Operating i n L a t i n America's Integrating Markets (New York: Business International Corporation, 1977), p. 9'. Jack N. Behrman, Decision C r i t e r i a f o r Foreign Direct Investment i n L a t i n  America (New York: Council of the Americas, 1974), p. 36. - 140 -Tomlinson and Himmelsbach (19 73) i n t h e i r study of foreign trade and investment decisions of Canadian firms also mentioned r e p a t r i a t i o n of dividends and r e p a t r i a t i o n of c a p i t a l as important issues i n negotiations with host country governments. The concern of the U.S. government over p o l l u t i o n i s well known.- The Japanese government i s also becoming increasingly concerned about p o l l u t i o n . I t has made i t mandatory for industry to invest i n the prevention of p o l l u t i o n of a i r and water.^5 P o t e n t i a l investors also negotiate with banks i n the host country for loans to minimize r i s k s . The findings i n the present study showed that i n 72 percent of these decisions the firms i n the sample established a c r e d i t l i n e with banks i n the host country. This compares w e l l with the findings of Aharoni. In h i s research, Aharoni found that a l l the com-panies interviewed held equity commitments down and used higher debt to 36 equity r a t i o s i n t h e i r foreign d i r e c t investments than they did at home. None of the companies i n h i s sample f e l t that the higher debt r a t i o s increased the r i s k of loss or jeopardized the operations of the company. Local borrowing was also conceived as a hedge against p o t e n t i a l exchange losses. Aharoni had not discussed negotiations with banks as a process. He had simply mentioned the f i n a l act of e s t a b l i s h i n g a c r e d i t l i n e . I t Kunio Yoshihara, Japanese Di r e c t Investment i n Southeast A s i a , Occa-s i o n a l Paper No. 18 (Singapore: I n s t i t u t e of Southeast Asian"Studies, 1973), p. 17. 36 See also Robert W. Korthals, "Project Financing and How I t A f f e c t s Credit Ratings," Address Presented to the Bar Association Seminar on  Corporate and Commercial Financing, February 25-26, 19 75, Toronto. Korthals i s the Vice President of the Toronto Dominion Bank. - 141 -was r e a l i z e d that as this research was t r e a t i n g foreign d i r e c t investment decisions as a process, negotiations with banks should also be treated as a process. The home country banks were not discussed because most of the firms preferred to borrow i n the host country to minimize currency r i s k s . Negotiations with partners i s another way of minimizing uncertainty and reducing r i s k s of inves t i n g i n a foreign country. Root suggested that i n a highly v o l a t i l e p o l i t i c a l s i t u a t i o n , a l i c e n s i n g or a joint-ownership arrangement should probably be considered, since e i t h e r would decrease the amount of assets the f i r m r i s k s . Furthermore, the existence of a l o c a l partner would reduce the p o t e n t i a l of h o s t i l i t y toward the enterprise and 37 provide possible communication with current and future governments. In the set of uncertainty variables i n the present study those found to be s i g n i f i c a n t were demand for the product, i n f l a t i o n , l o c a l competition, corruption, devaluation, government intervention, a v a i l a b i l i t y of product (minerals), red tape, labour unrest, n a t i o n a l i z a t i o n , c u l t u r a l d ifferences, change i n government through democratic process, expropriation, m i l i t a r y coup, c i v i l war, and war with another country. These were c a l l e d uncertainty variables because each case from the firm's point of view was unique and f u l l of unknowns, as Knickerbocker has said, "each new market 38 represented something of t e r r a incognita." This f i t s i nto the d e f i n i t i o n of uncertainty given by March and Simon. "Uncertainty i s a s i t u a t i o n F r anklin R. Root, "Toward an Enterprise Theory of International Mar-keting," Unpublished paper, University of Pennsylvania, Wharton School of Finance and Commerce, Department of Marketing, p. 13. Frederick T. Knickerbocker, O l i g o p o l i s t i c Reaction and M u l t i n a t i o n a l  Enterprise, o p . c i t . , p. 22. - 142 -where the i n d i v i d u a l does not know the p r o b a b i l i t y d i s t r i b u t i o n s connecting 39 behavior choices and environmental choices." The importance of lack of demand f o r the product was also emphasized 40 by Root. Lamont analyzed the decisions of U.S. firms that had succeeded or f a i l e d i n the South of I t a l y . He found that an overwhelming number of American firms, which had started operations there because of s p e c i a l I t a l i a n government benefits granted to them had, i n general, overvalued s p e c i a l government benefits and improperly evaluated l o c a l demand and d i s -t r i b u t i o n factors. 4"*" The lack of concern for p o l i t i c a l uncertainties was also emphasized by Tomlinson and Himmelsbach i n t h e i r study of foreign d i r e c t investment decisions of Canadian firms. Only 30 percent of the respondents attached various degrees of importance to p o l i t i c a l r i s k i n t h e i r survey. The usual comments made by respondents were: "We can't do anything about p o l i t i c a l r i s k s anyway, so we neglect this aspect e n t i r e l y . " "The only country where we were ever expropriated i s Canada, so why should we 42 worry about r i s k s i n foreign countries." Another explanation of lack of concern f o r p o l i t i c a l r i s k s i s pro-vided by Robock. " P o l i t i c a l a c t i v i t i e s which do not s i g n i f i c a n t l y a l t e r 39 James G. March and Herbert Simon, Organizations, o p . c i t . , p. 113. 40 Fr a n k l i n R. Root, "U.S. Business Abroad and the P o l i t i c a l Risks," MSU  Business Topics (Winter 1968), p. 75. 41 Douglas F. Lamont, "American Business: Success or F a i l u r e i n the Messogiorno," I t a l i a n American Business 21 (November 19 70), pp. 38-46. 42 J. W. C. Tomlinson and H. J . Himmelsbach, Foreign Trade and Investment  Decisions of Canadian Companies, o p . c i t . , p. 35. - 143 -43 the business environment do not represent p o l i t i c a l r i s k s . " Kobrin's findings support Robock. "... the data and empirical findings are con-s i s t e n t with the conclusion that only the market matters. Factors, such as violent, p o l i t i c a l protests, governmental i n s t a b i l i t y , r e b e l l i o n , and 44 subversion do not appear to d i r e c t l y influence the FDI decision process." The findings of Bauer, Poole, and Dexter also suggest that p o l i t i c a l 45 i n s t a b i l i t y receives only a s u p e r f i c i a l evaluation. Zink suggests to the headquarters management not to be concerned unnecessarily even about de-veloping countries. According to him the headquarters management of some of the companies interviewed were reacting too strongly to short-range p o l i t i c a l conditions i n t h e i r frequent unwillingness to make new invest-ments or to explore possible modes of accommodation because this was causing 46 them to bypass p o t e n t i a l l y p r o f i t a b l e opportunities. The lack of concern of Canadians with expropriation i n foreign coun-t r i e s i s based on t h e i r experience. Though i n the case of U.S. firms there were numerous cases of expropriation, no purely Canadian fi r m has so far gone 47 through this b i t t e r experience. 4- 3 Stefan Robock, " P o l i t i c a l Risk: I d e n t i f i c a t i o n and Assessment," Columbia  Journal of World Business, Vol. 6 (July-August 1971), p. 7. 44 Stephen J . Kobrin, The Environmental Determinants of Foreign Direct  Investment: An Ex Post Empirical Analysis, o p . c i t . , p. 22. 45 Raymond A. Bauer, I t h i e l de Sola Poole, and Lewis Anthony Dexter, American Business and Public P o l i c y (New York: Atherton, 1967). 46 Dolph Warren Zink, The P o l i t i c a l Risks of M u l t i n a t i o n a l Enterprise i n  Developing Countries with a Case Study of Peru (New York: Praeger Publisher, Inc., 19 73), p. 144-145. 47 See E r i c N. Baklanoff, Expropriation of U.S. Investments i n Cuba, Mexico,  and Chile (New York: Praeger Publishers, Inc., 1975), p. 3. - 144 -E. The Comparison of P o s i t i v e and Negative Decisions The H,. was concerned with the comparison of p o s i t i v e and negative decisions i n terms of strength of i n i t i a t i n g forces, extent of i n v e s t i g a -t i o n , degree of commitments, extent of negotiations and amount of uncertainty. The findings i n the case of i n i t i a t i n g forces was not i n agreement with the findings of Aharoni. The f i n d i n g i n the present study was that i n i t i a t i n g forces can be f a i r l y strong even i n the case of negative d e c i -sions. This may be due to the fact that Aharoni had not q u a n t i f i e d his va r i a b l e s . Had he q u a n t i f i e d the set of i n i t i a t i n g forces, he might have ended up with the same r e s u l t . Another probable explanation of s l i g h t l y weaker i n i t i a t i n g forces i n the case of some p o s i t i v e decisions and s l i g h t l y stronger i n i t i a t i n g forces in ; the case of some negative decisions may be due to the presence of intervening v a r i a b l e s . The i n i t i a t i n g forces i n the case of negative decisions may be somewhat stronger but i f the re s u l t s of inves-t i g a t i o n are not favourable, less commitments are created, negotiations are not successful, and uncertainties are higher, then the strong i n i t i a t i n g forces may not produce p o s i t i v e investment decisions. The re s u l t s concerning extent of i n v e s t i g a t i o n were consistent with Aharoni's findings that in-'..the case of p o s i t i v e decisions more i n v e s t i g a -t i o n w i l l be c a r r i e d out, while less i n v e s t i g a t i o n w i l l be done f o r negative decisions. The findings that there were greater commitments i n the case of p o s i t i v e decisions and less commitments are developed when the r e s u l t i s a decision also confirmed Aharoni's analysis. The l a s t part of H^ related to the set of uncertainty v a r i a b l e s . The fin d i n g i n the present study with regard to the set of uncertainty variables was i n conformity with the findings of Cyert and March: - 145 -"Organizations avoid uncertainty by avoiding s i t u a t i o n s i n which future actions depend on uncertain future events." 4^ Richard M. Cyert and James G. March, A Behavioral Theory of the Firm, o p . c i t . , pp. 118-120. - 146 -VII. CONCLUSIONS, SUMMARY, IMPLICATIONS, AND AREAS FOR FUTURE RESEARCH A. Conclusions 1. Contribution of the Present Study Despite the growing importance of d i r e c t investment by Canadians i n other countries l i t t l e attention has been paid so far to i t s study. One obvious reason f o r this apparent lack of i n t e r e s t i s the s i z e of foreign d i r e c t investment i n Canada and the increasing concern of Canadians about the controversies surrounding i t . Most of the work done by Safarian,^ 2 3 4 Reuber, L e v i t t , Beige and others was rel a t e d to foreign d i r e c t invest-ment i n Canada. This work i s one of the few empirical studies on d i r e c t investment made by Canadians i n foreign countries. In B r i t i s h Columbia this i s the f i r s t study of i t s kind and can be c a l l e d a pioneering work. One of the e a r l i e s t work having references about d i r e c t investment by Canadians i n the United States was done by Herbert Marshall, Frank A. Southard, J r . , and Kenneth W. Taylor, Canadian-American Industry: A  Study i n International Investment (New Haven, Conn.: Yale University Press, 19 36). A. E. Safarian, The Performance of Foreign Owned Firms i n Canada (Montreal: Private Planning Association of Canada, 1969). Grant L. Reuber, "Foreign Investment Issues," The Canadian Business  Review (Winter 1974), pp. 29-34. K a r i L e v i t t , S i l e n t Surrender - The M u l t i n a t i o n a l Corporation i n Canada (Toronto: Macmillan of Canada, 19 70). C a r l E. Beige, "Foreign Investment i n Canada: The Shadow i s Gray," Columbia Journal of World Trade (November-December 1972), pp. 23-32. See also David Barrows and Peter Lyman, "Foreign Ownership and Corporate Behavior i n Canada," MSU Business Topics, Vol. 23, No. 2 (Spring 1975), pp. 13-20. - 147 -The present study made several elaborations upon the work done by Aharoni. The f i r s t improvement was i n o r d i n a l l e v e l q u a n t i f i c a t i o n of the variables and the use of s t a t i s t i c a l techniques to test the hypotheses. Aharoni himself was aware of this weakness i n h i s research when he wrote "Another c r i t i c i s m (of my work) may be that the suggested variables are unmeasurable, and therefore my b a s i c framework i s not f u l l y substantiated. I c e r t a i n l y must agree that no way to measure the variables mentioned has been suggested, and that any research based on case studies may be attacked as not w e l l substantiated."^ The q u a n t i f i c a t i o n of variables i n the pre-sent study helped i n substantiating the research findings. The second contribution of this research was the ranking of a l l those variables which were mentioned by Aharoni and also those which were found to be relevant i n the present study. This added to the refinement of the research findings and enhanced confidence i n i n t e r p r e t a t i o n . A l l variables i n the sets of i n i t i a t i n g forces, i n v e s t i g a t i o n , commitments, negotiations, and uncertainty were ranked i n the present study according to t h e i r r e l a t i v e explanatory strength. The t h i r d important improvement i n the present study over Aharoni's work was the addition of a number of new variables not mentioned by Aharoni. In the set of i n i t i a t i n g forces, growing demand f o r the product i n the host country, high prices for the commodity, unfavourable p o l i t i c a l environment i n the home country, the desire to i n t e r n a l i z e the source of supply, the desire to i n t e r n a l i z e demand, and export experience i n the host country were some of the important variables added to the l i s t of i n i t i a t i n g forces. ~* Y a i r Aharoni, The Foreign Investment Decision Process, op. c i t . , p. x i i . - 1 4 8 -Similar additions were made in the pattern of investigation. As mentioned before, Aharoni had emphasized only one pattern, but thirteen other investigation patterns were added during the present study. Aharoni had discussed some of them in very broad terms. The uncertainty variables, discussed in a general manner by Aharoni, were clearly li s t e d and ranked. Perhaps the most important addition was in the area of commitment variables. Aharoni had mentioned creation of an international division, desirability of retaining an export market, and some social commitments such as concern about company image once investigation started. Two important additions in this area were a firm's commitments to stabilize demand and profit. 2. Areas of Differences In two respects the present study is different from Aharoni's findings. The f i r s t area of difference is the lack of emphasis upon profit motivation in Aharoni's research. In this study the respondents repeatedly emphasized that profit was an important consideration in for-eign direct investment decisions. The most important reflection of profit as an important considera-tion in foreign direct investment decisions could be seen in the area of commitments, where stabilizing profit and demand were explicitly mentioned by respondents as commitments. An extreme comment made by the president of the subsidiary of one big company in Vancouver was that "Any talk of minimizing the importance of profit is nonsense, such talk can be afforded at universities only and reflects the desire on the part of such persons to gain cheap popularity and attention by saying something which is radically different from the traditional and accepted practices." The vice president - 149 -of another f i r m three times repeated that there was absolutely no truth i n theories which spoke of something other than p r o f i t . The emphasis on p r o f i t as an important consideration i n the foreign d i r e c t investment decisions does not however, appear to be p r o f i t maximiza-t i o n , as this term was explained by March and Simon (1963). There was no evidence i n the present study that the firms t r i e d to investigate a l l the al t e r n a t i v e s . The perceived cost of search i s so high that none of these firms ever conducted a f u l l y comprehensive search. For example, as stated by the vice president of one firm, the cost of preliminary i n v e s t i g a t i o n f o r o i l exploration on a small scale costs from 1.5 to 18 m i l l i o n d o l l a r s . Over twenty years ago C. Shannon demonstrated the ph y s i c a l l i m i t a t i o n s of al t e r n a t i v e evaluations, by c a l c u l a t i n g that a machine capable of evaluating each path i n a m i l l i o n t h of a second would take 1095 years to examine a l l the paths i n a chess game to decide on the f i r s t move. With respect to the emphasis on p r o f i t as an important consideration i n the foreign d i r e c t investment decisions, this research i s supported by the numerous empirical studies l i s t e d by Stevens. 7 Some of the important 8 9 studies i n th i s l i s t emphasizing p r o f i t were done by B e r l i n , Billsborrow, C. Shannon, "A Chess-Playing Machine," S c i e n t i f i c American 182 (February 1950), pp. 48-51. 7 Guy V. Stevens, "Determinants of Investment," i n John H. Dunning, ed., Economic Analysis and the Mu l t i n a t i o n a l Enterprise (London: George A l l e n and Unwin Ltd., 1974), pp. 47-88. P. D. B e r l i n , Foreign A f f i l i a t e Survey, 1966-69 (Washington D.C.: U.S. Department of Commerce, O f f i c e of Foreign Direct Investments, 1971). 9 R. E. Billsborrow, The Determinants of Fixed Investment by Manufacturing  Corporations i n Colombia, Unpublished Doctoral Thesis, Michigan University, 1968. - 150 -10 11 12 13 14 Horst, Knickerbocker, Kopits, Reuber, and Richardson.. Kindleberger goes to the extent of saying that "In addition to earning more abroad than at home, the invest i n g f i r m must be able to earn a higher return i n the mar-ket where i t i s inves t i n g than l o c a l firms earn (because) there are costs of operating at a distance, cost not only of t r a v e l , communication, and time l o s t i n communicating information and decisions, but also costs of mis-understanding that leads to errors.""'" 5 Kindleberger's remarks c l e a r l y imply an element of p r o f i t maximiza-tion i n the foreign d i r e c t investment decisions. The behaviour of the firms i n the present study i n respect to the importance attached to p r o f i t approxi-mates the behaviour of firms studied by Stobaugh. "Rather than taking bold leaps forward i n t o new s i t u a t i o n s that promised high returns, the managers i n our firms took small steps that represented a low-risk route i n the Thomas 0. Horst, A Theoretical and Empirical Analysis of American Exports  and D i r e c t Investment, Unpublished Ph.D. D i s s e r t a t i o n , University of Rochester, 1969. Frederick T. Knickerbocker, O l i g o p o l i s t i c Reaction and the M u l t i n a t i o n a l  Enterprise, o p . c i t . G. Kopits, "Dividend Remittance Behavior Within the International Firm: A Cross-Country Analysis," Review of Economics and S t a t i s t i c s 54 (1972), pp. 339-42. Grant L. Reuber, Private Foreign Investment i n Development (Oxford: Clarendon Press, 19 73). J. D. Richardson, "Theoretical Considerations i n the Analysis of Foreign Direct Investment," Western Economic Journal, 9 (1971). Charles P. Kindleberger, American Business Abroad: Six Lectures on Direct Investment, op . c i t . , p. 12. - 151 -normal course of t h e i r firms' evolution. They resembled more Caspar 1 6 Milquetoast than S i r Francis Drake." The second important area of difference between the present study and Aharoni's findings i s i n the passive r o l e he assigned to firms i n responding to foreign d i r e c t investment opportunities before the creation of an i n t e r -n a t i o n a l d i v i s i o n or before recognition of foreign d i r e c t investment as a legitimate problem area. His hypothetical Mr. John Smith, Executive Vice President of ABC Manufacturing Corporation, while commuting from his home, learns from the f i n a n c i a l pages of the New York Times that the government of Zambia has o f f e r e d a number of incentives to a t t r a c t foreign c a p i t a l . According to Aharoni, Mr. Smith w i l l i n a l l l i k e l i h o o d do nothing unless h i s company happens to be already very active abroad, i n c l u d i n g A f r i c a . The present study showed that firms are not only receivers of i n f o r -mation i n the form of proposals, news clippings etc., but they are also seekers of information. In other words, firms are constantly i n search of opportunities. The r e a l (unlike the hypothetical Mr. Smith) president of a medium s i z e mining company i n B r i t i s h Columbia was seen underlining a news item on the f i n a n c i a l pages of a l o c a l newspaper about the discovery of gold i n a Central American country. The president t o l d the w r i t e r of this report, who had gone to interview him at 9:00 a.m., about the news item and s a i d that he was going to investigate the p o s s i b i l i t y of a j o i n t venture f o r the e x p l o i t a t i o n of the gold deposit. The company was not very active Robert B. Stobaugh, Nine Investments Abroad and Their Impact at Home:  Case Studies on M u l t i n a t i o n a l Enterprise and the U.S. Economy (Boston: D i v i s i o n of Research, Graduate School of Business Administration, Harvard University, 1976), p. 187. - 1 5 2 -abroad. The president of another small mining company went to A u s t r a l i a a f t e r reading an a r t i c l e about the mining boom i n that country. The two examples quoted above show that even a news item may play the r o l e of an i n i t i a t i n g force. The very fact that executives read the-f i n a n c i a l pages of the l o c a l newspapers demonstrate that they seek informa-t i o n . The mining companies and other resource-based firms are often ac-t i v a t e d by the news of discoveries of resources. These comments i n no way imply that a f i r m w i l l necessarily pursue each and every lead, merely that i t i s i n f a c t constantly scanning the environment for a t t r a c t i v e oppor-t u n i t i e s . 3. The V a l i d i t y of the Behavioural Model The b a s i c premise i n Aharoni's behavioural theory was that foreign d i r e c t investment decisions may best be explained i n terms of complex organizational behaviour rather than as a r a t i o n a l economic review of a l t e r n a t i v e s . The findings of the present study are generally i n agree-ment with Aharoni's conclusion. Foreign d i r e c t investment decisions are i n i t i a t e d by a number of exogenous and endogenous forces. Investigation i s sequential, though there are many patterns of i n v e s t i g a t i o n , negotia-tions are conducted to minimize uncertainties and decisions are taken a f t e r the f i n a l assessment of uncertainties. The complexities of organizational behaviour are manifested i n the v a r i e t y of i n i t i a t i n g forces, i n v e s t i g a t i o n , creation of commitments, negotiations and perception of uncertainties. Although the search for p r o f i t was shown i n the present study to play an important motivational role i n the foreign d i r e c t investment decision process, i t i s only one of the considerations involved. The keen i n t e r e s t of a high ranking - 153 -executive, the desire to i n t e r n a l i z e the source of supply and demand, the p o l i t i c a l environment i n the home country etc. a l l play an important role i n focussing a firm's attention upon foreign d i r e c t investment opportunities and i n i n f l u e n c i n g i t s decisions. It appeared that the high ranking executive(s) of firms i n the present sample exercised greater influence over the decision process than the s i t u a t i o n described by March and Simon. According to them the be-haviour of the firm i s the product of the i n t e r a c t i o n of several groups, so rather than being predictable from p r o f i t or growth considerations alone, behaviour i s an uncertain and s h i f t i n g compromise among the several i n t e r e s t groups. The high ranking executives of the firms i n the present study appeared to dominate the decision process. In t h i s p a r t i c u l a r aspect the findings of the present study appeared to be closer to Selznick (1957) who emphasized the role of leadership i n the decision-making process. The behavioural model, as discussed i n the present study and by Aharoni, was also validated by an i n t e r e s t i n g study of eight foreign d i r e c t divestment decisions by U.S. multinational firms, though unfor-tunately t h i s study was also e n t i r e l y based on case studies. A f t e r the case studies, Torneden concluded that "In general this study supports Y a i r Aharoni's contention that c l a s s i c a l economic theory i s not p a r t i c u -l a r l y h e l p f u l i n understanding organizational decision-making. Organiza-t i o n a l and personal c h a r a c t e r i s t i c s are more important i n investment and divestment decisions than i s the objective a p p l i c a t i o n of concepts that . . C . I.17 attempt to maximize corporate p r o f i t s . ^ Roger L. Torneden, Foreign Divestment by U.S. M u l t i n a t i o n a l Corporations  with Eight Case Studies (New York: Praeger Publishers, Inc., 1975), p. 138. - 154 -H e l l i w e l l ' s study also provides support to the behavioural model. As h i s study progressed " i t became obvious that we could not r e l y on a t h e o r e t i c a l framework based merely on the e x p l i c i t c a p i t a l budgeting rules 18 used by the firms." B. Summary of the Study 1. The Research Model The purpose of this study was to f i n d out how the Canadian firms, which have their head o f f i c e s i n B r i t i s h Columbia, make t h e i r foreign d i r e c t investment decisions. The research model consisted of s i x stages because the foreign d i r e c t investment decisions were being studied as a process. The s i x sets of va r i a b l e s , corresponding to each stage, were i n i t i a t i n g forces, i n v e s t i g a t i o n , commitments, negotiations, uncertainty and f i n a l decision. In the f i r s t stage a business f i r m becomes aware of foreign d i r e c t investment opportunities through exogenous and/or endogenous i n i t i a t i n g forces. I f the i n i t i a t i n g forces are strong, the f i r m enters i n t o the second stage of i n v e s t i g a t i o n , which i n i t s e l f i s i n t e r n a l l y sequential. The t h i r d stage i s that of commitment created during i n v e s t i g a t i o n . In the fourth stage favourable i n v e s t i g a t i o n and strong commitments lead the firm to negotiations with host country government, banks and l o c a l part-ners ( i f the operation i s going to be a j o i n t venture). A f t e r i n v e s t i g a -t i o n , creation of commitments, and negotiations the f i r m enters into the f i f t h stage of f i n a l assessment of unce r t a i n t i e s . The s i x t h stage i s that of f i n a l decision. John F. H e l l i w e l l , P u b l i c P o l i c i e s and Private Investment, o p . c i t . , p. 59. - 1 5 5 -As the research model depicts a process, i t i s d i f f i c u l t to draw a clear-cut l i n e of demarcation to separate each stage, therefore, they should be seen more as approximations rather than as f i n a l l y defined i s o l a t e d stages. 2. The Hypotheses To test the research model f i v e hypotheses were developed. The f i r s t hypothesis corresponding to stage one of the model contended that endogenous i n i t i a t i n g forces are more important i n creating awareness of foreign d i r e c t investment opportunities than exogenous i n i t i a t i n g forces. The second hypothesis r e l a t i n g to stage two claimed that those who conduct a sequential i n v e s t i g a t i o n w i l l judge the subj e c t i v e l y estimated cost of that i n v e s t i g a t i o n to be s i g n i f i c a n t l y higher than those who do not conduct a sequential i n v e s t i g a t i o n . The t h i r d hypothesis concerning stage three stated that the extent of i n v e s t i g a t i o n and degree of commitments are p o s i t i v e l y related. The fourth hypothesis r e l a t i n g to negotiations i n stage four and uncertainty i n stage f i v e said that there e x i s t s a p o s i t i v e r e l a t i o n s h i p between the extent of negotiations and amount of uncertainty. The f i f t h and l a s t hypothesis corresponding to stage s i x of the research model claimed that i n those cases where the decision has been made to invest abroad, there w i l l be strong i n i t i a t i n g forces, more i n v e s t i g a t i o n , greater degree of commitments, greater extent of nego-t i a t i o n s , and smaller amount of uncertainty than i n those cases where the decision has been made not to invest abroad. - 156 -3. The Sample and Methodology To test the hypotheses data were collected through interviews from the executives of 16 firms using a structured questionnaire. The unit of study was the individual foreign direct investment decision as made by these firms. The total number of decisions on which data were collected was 89, out of which 44 decisions related to mining, 17 decisions were concerned with forestry, 10 decisions pertained to marine resources, and the remain-ing 18 decisions were in manufacturing. In terms of host countries, 63 decisions related to developed countries and 26 decisions to developing countries. 4. The Research Findings* The data supported the f i r s t hypothesis that the endogenous i n i -tiating forces were more important in creating awareness of foreign direct investment opportunities than exogenous i n i t i a t i n g forces. The means of endogenous and exogenous i n i t i a t i n g forces according to the t-test were .81 and .62 respectively. In the set of endogenous i n i t i a t i n g forces the variables causing awareness of foreign direct investment opportunities in order of importance were: keen interest of a high ranking executive, the desire to internalize the source of supply, the desire to internalize demand, export experience in the host country, and capitalization of technical know-how. The exogenous i n i t i a t i n g forces found in the present study in order of their significance were: a credible outside proposal, growing demand _ The level of significance was set at .05. The hypotheses H^, H^, and were tested by using t-tests. Canonical correlation analysis was used to test H 0 and H,. - 15 7 -for the product, high prices for the commodities, unfavourable p o l i t i c a l environment i n the home country, fear of l o s i n g an export market, and successful d i r e c t investment operations of one's competitors abroad. The second hypothesis s a i d that those who conduct sequential i n v e s t i g a t i o n w i l l judge the s u b j e c t i v e l y estimated cost of that inves-t i g a t i o n to be s i g n i f i c a n t l y higher than those who do not conduct such an i n v e s t i g a t i o n was also supported by the t - t e s t (U 2.82 for those who conducted sequential i n v e s t i g a t i o n and 2.19 f o r those who did not con-duct sequential i n v e s t i g a t i o n ) . During data c o l l e c t i o n t h i r t e e n other patterns of i n v e s t i g a t i o n were found to be v a l i d as compared to the one ( l i b r a r y research, f i e l d i n v e s t i g a t i o n , and report) emphasized by Aharoni. It was found that the pattern of i n v e s t i g a t i o n mentioned by Aharoni was v a l i d only i n 37 decisions while i n the remaining 52 decisions the f i r s t stage of l i b r a r y research was skipped by a l l firms because considerable information was i n t e r n a l to the firm. In other cases the second stage of f i e l d i n v e s t i g a t i o n was not followed f o r the same reason. The r e s u l t s of canonical c o r r e l a t i o n analysis (R = .705, eigen-c value = .497, Wilk's lambda = .281 and chi-square = 98.973) also supported the t h i r d hypothesis which contended that the i n t e n s i t y of i n v e s t i g a t i o n and degree of commitment are p o s i t i v e l y related. In the set of i n v e s t i g a -tion variables such sources of information as published materials, an outside consultant, a credible proposal from outside, export experience i n the host country, i n t e r n a l sales records, c a p i t a l cost c a l c u l a t i o n s , cost of a c q u i s i t i o n , and information from host government were found important. The market rel a t e d i n v e s t i g a t i o n variables found important i n the present study were: market s i z e , p r i c e behaviour, information - 158 -about partners in a host country, competition, consumer tastes, cost of production, market share, availability of minerals, and dealer survey. Market size and price behaviour are typical Canadian considerations because of the small size of markets in Canada and the dominance of re-source-based industries in British Columbia and the rest of Canada which are affected by frequent fluctuations in commodity prices. The four important commitment variables found in this study were the creation of an international division, the desire to stabilize demand, the desire to stabilize profits and the desirability of retaining an export market. It was repeatedly emphasized by respondents that their firms have strong commitments to profit and demand. The fourth hypothesis which claimed that there exists a positive relationship between the extent of negotiations and amount of uncertainty was also supported by canonical correlation analysis (R = .909, eigen-c value = .827, Wilk's lambda = .008, and chi-square = 372.34). The set of negotiation variables consisted of three subsets of variables, namely, negotiations with host country banks and negotiations with host country partners. The set of uncertainty variables consisted of 16 variables. The issues found important in negotiations with host country governments were remittance of dividends, repatriation of capital, applicable rates of taxation, environment or pollution control, and depreciation or depletion allowances. Negotiations with host country banks consisted of establishing a credit line, making inquiries about availability of loans for a specific project, and making inquiries about general credit climate. The extent of negotiations with potential part-ners in the host countries in order of importance were: signing of the - 159 -f i n a l d r a f t , negotiations f o r the type of j o i n t venture, j u s t discussion, and preparation of a draft agreement. The uncertainty variables i n order of importance i n the present study were: demand for the product, i n f l a t i o n , l o c a l competition, cor-ruption, devaluation, government intervention, a v a i l a b i l i t y of product (minerals), red tape, labour unrest, n a t i o n a l i z a t i o n , c u l t u r a l differences, change i n government through democratic process, expropriation, m i l i t a r y coup, c i v i l war, and war with another country. The l a s t hypothesis compared p o s i t i v e and negative decisions i n terms of i n i t i a t i n g forces, i n v e s t i g a t i o n , commitments, negotiations, and uncertainty. The hypothesis claimed that i n cases where the decision has been made to invest abroad, there w i l l be stronger i n i t i a t i n g forces, more i n v e s t i g a t i o n , greater degree of commitments, greater extent of negotia-tions, and lower amount of uncertainty than i n those cases where the decision has been made not to invest abroad. The r e s u l t s of the t- t e s t did not confirm the f i r s t part of the hypothesis which s a i d that the i n i t i a t i n g forces w i l l be stronger i n the case of p o s i t i v e decisions than negative decisions (U of p o s i t i v e decisions = 7.58 and of negative decisions = 8.53). The s l i g h t l y stronger i n i t i a t i n g forces i n the case of negative decisions were explained i n terms of lack of q u a n t i f i c a t i o n of the set of i n i t i a t i n g forces by Aharoni and the presence of intervening variables such as in v e s t i g a t i o n , commitments, negotiations, and uncertainty. The remaining four parts of the hypothesis r e l a t i n g to i n v e s t i g a -t i o n QJ^ of p o s i t i v e decisions = 20.14 and of negative decisions = 16.94), commitment (U,. of p o s i t i v e decisions = 4.14 and of negative decisions = 3.24), negotiations (U 7 of p o s i t i v e decisions = 8.97 and Ug o f negative - 160 -decisions =8.82), and uncertainty (U of p o s i t i v e decisions = 25.68 and U of negative decisions = 36.94) were supported by the t - t e s t s . However, the o n e - t a i l p r o b a b i l i t y i n the case of the set of i n i t i a t i n g forces was .083. For the set of negotiations variables the o n e - t a i l p r o b a b i l i t y was .448. This could be due to the f a c t that Aharoni did not treat negotiations with banks and p o t e n t i a l partners i n the host country as a process. C. Implications 1. Implications for Host Countries The present study has implications f o r host and home countries and the theory of the firm. Most of the developing countries are interest e d i n a t t r a c t i n g d i r e c t investment from developed countries. In the present study out of 89 decisions, 26 were rel a t e d to the developing countries. A study of the decisions concerning developing countries showed that i n s e l e c t i n g a fir m the developing countries must match the s i z e of the proposed project with the s i z e of the firm. Often a negative decision was made because b i g firms were generally not interest e d i n the smaller p r o j e c t s . In several cases strong i n i t i a t i n g forces caused i n v e s t i g a t i o n which was followed by negotiations and assessment of uncertainties, but the r e s u l t was negative because the fir m considered i t too small a project. However, the general p r o b a b i l i t y of a government s e l e c t i n g a b i g f i r m even for a small project i s very high because b i g firms are known, have reputation, and are considered to possess more technical expertise. Another important consideration i n the s e l e c t i o n of the firms i s t h e i r area of s p e c i a l i z a t i o n . Resource-based firms p a r t i c u l a r l y s p e c i a l i z e i n very s p e c i f i c product l i n e s . In a l l l i k e l i h o o d these firms w i l l not consider a proposal i n a l i n e which l i e s outside t h e i r area of - 161 -s p e c i a l i z a t i o n . For example, for zinc and r e l a t e d products Cominco would be one of the most appropriate choices provided the s i z e of the project could create s u f f i c i e n t i n t e r e s t i n that firm. Firms also tend to form perceptions about countries and geographical areas. These perceptions operate as strong b a r r i e r s unless broken by strong i n i t i a t i n g forces. During the interviews, when the vice president of a b i g firm was asked about h i s firm's lack of i n t e r e s t i n South A f r i c a , he r e p l i e d by saying, "Competition i s too tough from other Western companies and return i s too low." Similar comments were made by other respondents. "We do not go to A f r i c a because Western firms are not welcomed i n that continent. Zambia and Congo n a t i o n a l i z e d mining companies. There are l i t t l e incen-t i v e s . Our firm has to be p r o f i t - o r i e n t e d to stay a l i v e . " "Nigeria i s good, but we do not know too much about i t . " I f a f i r m has formed a poor image about a country or a region from media or other sources, very strong i n i t i a t i n g forces are required to change i t . The timing of the proposal also plays a very important r o l e . The period before the annual meeting of a company, for example, i s the busiest time f o r the decision makers. The executives want to concentrate t h e i r entire attention on presenting a good picture i n the annual report about t h e i r d i v i s i o n or area. I f time i s a very scarce resource i n a firm, i t becomes unavailable f o r anything else on such occasions. In another respect the timing of a proposal or approach plays an important r o l e . I f prices of commodities are depressed, or the market outlook for a c e r t a i n product i s dim, the p r o b a b i l i t y of a favourable decision becomes extremely low. " I f we receive a proposal on copper i n 19 77, i t would be rejected outright because the prices are so low and the future outlook i s dim," s a i d the vice president of a b i g mining firm. - 162 -The developing countries t r y i n g to a t t r a c t d i r e c t investment must ensure that the government o f f i c i a l s nominated f o r negotiations with the representatives of investing firms should not press them for what the manager of i n t e r n a t i o n a l operations of a b i g firm termed as "seed money." The impressions the interviewer got from the top executives was that those o f f i c i a l s thought they were doing a b i g favour to the p o t e n t i a l investing f i r m by l e t t i n g i t operate i n t h e i r country. This becomes a b i g nuisance factor. The governments of developing countries must ensure that the o f f i -c i a l s selected for negotiations with the p o t e n t i a l investors are honest. The f e e l i n g of doing a b i g favour to the p o t e n t i a l investors went to the extent that on one small project i n which the p o t e n t i a l i n v e s t i n g f i r m was not at a l l interested, but was v i r t u a l l y "pushed" to investigate and negotiate by a lobby i s t , the government o f f i c i a l s asked $300,000 from the f i r m f o r l e t t i n g i t e x p l o i t the small low grade deposit i n an area where no water and i n f r a s t r u c t u r e existed. "We were astonished to hear that," s a i d one top executive of the firm, "we had decided that i f we i n -vested at a l l i n that project, we would ask for a subsidy from the govern-ment. But look, they were asking money from us. Even i f we were w i l l i n g to give the money, we were not sure f o r how long that o f f i c i a l would stay i n h i s p o s i t i o n . Then another person comes and asks f o r money. I t i s a never ending process. I t i s not investing, but buying a b i g headache so we s a i d no." The developing countries should r e a l i z e that simply by o f f e r i n g tax holidays and other incentives they cannot a t t r a c t foreign investment. The mere statement of intent that the country needs foreign d i r e c t investment w i l l also not help on i t s own i n a t t r a c t i n g such investment. The o f f i c i a l s of developing countries must understand that a t t r a c t i n g foreign d i r e c t - 16 3 -investment i s a complex process i n which each stage i n the decision-making process plays an important role and leads to the other stages. Special care must be taken i n a t t r a c t i n g the f i r s t d i r e c t investment because, ac-cording to the findings of Knickerbocker, the band-wagon e f f e c t i s an important c h a r a c t e r i s t i c of ind u s t r i e s dominated by o l i g o p o l i e s . I f a developing country succeeds i n a t t r a c t i n g one foreign f i r m i n a cer t a i n 19 industry, then other firms w i l l also follow. This i n t e r e s t i n g process, of following the leader or one's competitor can be c l e a r l y seen i n several developing countries, for example, i n their pharmaceutical i n d u s t r i e s . This industry i n most of the developing countries i s dominated by foreign firms. In t h e i r e f f o r t s to a t t r a c t foreign d i r e c t investment the developing countries must be cautious about industries which p o l l u t e the environment. As a r e s u l t of a change i n pu b l i c attitudes towards such i n d u s t r i e s i n the developed countries an e f f o r t i s being made to "export" such industries to developing countries. This was c l e a r l y stated by Yoshihara i n h i s empirical research. "The Japanese government had made i t mandatory for industry to invest i n the prevention of p o l l u t i o n of a i r and water. This has raised the production costs f o r some i n d u s t r i e s . Such industries w i l l move part of t h e i r production bases to Southeast Asian countries, though they w i l l avoid Singapore where p o l l u t i o n control i s as s t r i c t as i n Japan. There i s a moral question involved i n t h i s move, but we have to bear i n mind that p o l l u t i o n i s p a r t l y the problem of congestion.... Therefore, the countries which have unpopulated land may absorb some pollution-prone Frederick T. Knickerbocker, O l i g o p o l i s t i c Reaction and Mul t i n a t i o n a l Enterprise, o p . c i t . - 164 -20 i n d u s t r i e s . " Unfortunately despite what Yoshihara says the fa c t remains that p o l l u t i o n may do more harm i n developing countries because of r e l a t i v e ignorance about p o l l u t i o n i n the minds of the general pu b l i c , workers, and government o f f i c i a l s . The issue of l o c a t i n g pollution-prone industries i n developing coun-t r i e s n a t u r a l l y leads one to other highly c o n t r o v e r s i a l issues i n foreign d i r e c t investment from the point of view of host countries i n general and Canada i n p a r t i c u l a r . I t i s s a i d that i n an industry dominated by foreign firms there are very few high l e v e l jobs for the indigenous people. Re-search and development are c e n t r a l i z e d i n the home country. Subsidiaries are neither allowed to make serious decisions nor they are encouraged to export anything other than raw materials. I t i s also s a i d that the presence of foreign firms may retard the development of indigenous entrepreneurial talent. Moreover, the balance of payments costs to the host country w i l l ultimately outweigh the benefits received. On top of a l l these i s the question of e x t r a t e r r i t o r i a l i t y where, for example, s u b s i d i a r i e s of American firms located i n Canada were prohibi t e d from trading with nations with which 21 Canada enjoyed f u l l diplomatic r e l a t i o n s . 9 n • Runio Yoshihara, Japanese Direct Investment i n Southeast Asia, o p . c i t . , 21 p. 17. For a det a i l e d discussion of these issues, see the references on page 146, See also H. Peter Gray, The Economics of Business Investment Abroad (New York: Crane, Russak and Company, Inc., 1972). Jack N. Behrman, C r i t e r i a for Foreign D i r e c t Investment i n L a t i n  America, op . c i t . Thomas L. Farmer, Task Force on Foreign Investment i n the United States (Washington..D.C.: U.S. Chamber of Commerce, 19 74). Grant L. Reuber and F. Roseman, "International C a p i t a l Flows and the Take-Over of Domestic Companies by Foreign Firms: Canada 1945-51," i n - 165 -To resolve some of the issues i n foreign d i r e c t investment from host countries' point of view, a conference was held i n Dusseldorf. Unfortue nately for widely disparate reasons there was consensus at the Conference against any major attempt at an i n t e r n a t i o n a l organization to oversee the 22 multinational enterprise. The purpose of mentioning the co n t r o v e r s i a l issues i n the implica-tions f o r the host countries was simply to introduce the idea that foreign d i r e c t investment has i t s own problems. The benefits of foreign d i r e c t investment f o r the host country are numerous. I t creates jobs. Workers are trained on new machines. There i s an increase i n the tax revenue f o r the host country government. Local purchases of supplies and raw materials increase the demand and consequently t h e i r supply (production) increases which i n turn creates more jobs i n the host country. The increase i n shipping and other type of transportation also creates some jobs. There i s a p o s s i b i l i t y for some of the ind u s t r i e s i n a host country to get sub-contracting from the foreign investors. Foreign d i r e c t investment i s an important means of transfer of superior technology. I f c a p i t a l i s also brought by the foreign investors into the host country, there i s an F. Machlup, W. S. Salant, and L. Tarshis, e d i t o r s , International M o b i l i t y  and Movements of C a p i t a l (New York: Columbia University Press, 1972). M e l v i l l e H. Watkins, Foreign Ownership and the Structure of Canadian  Industry: Report of the Task Force on the Structure of Canadian  Industry (Ottawa: Prepared f o r the Privy Council O f f i c e , Queen's P r i n t e r , 1968). Don Wallace, Jr., and Helga Ruof-Koch, e d i t o r s , International Control of  Investment: The Dusseldorf Conference on M u l t i n a t i o n a l Corporations (New York: Praeger Publishers, Inc., 19 74) , p. 8. - 166 -immediate p o s i t i v e e f f e c t on the balance of payments of the receiving 23 country. 2. Implications for Home Country I f d i r e c t investment by Canadians i n other countries i s increasing, i t s usefulness f o r Canada may be questioned by some persons. The ef f e c t s of flows of foreign investment on the home country were discussed by Ricardo and Keynes. Ricardo advocated the creation of an i n s t i t u t i o n a l bias i n favour of investment at home i n preference to investment abroad. He be-l i e v e d that foreign investment deprived the home country of a resource that i t could have used to greater advantage at home. Keynes' objection was to a difference i n the r i s k factor involved i n any project from the point of view of the investin g economy as a whole and from the point of view of private entrepreneur. The s p e c i f i c r i s k s were those of the economic f a i l u r e of the project, loan repudiation on a bond issue or expropriation without adequate compensation of r e a l assets located abroad. I f the venture were made i n a foreign country, these r i s k s , i f f u l f i l l e d , would leave both the investor and the investing country empty-handed. I f a comparable investment had been made domes-t i c a l l y , the investor would s t i l l have been l e f t empty-handed, but the See Isaiah A. Litvak and Christopher J . Maule, Foreign Investment: The  Experience of Host Countries, o p . c i t . Timothy E. Reid, Foreign Ownership: V i l l a i n or Scapegoat? (Toronto: Holt, Rinehart and Winston of Canada Limited, 1972). John C. Culver, Foreign Investment i n the United States; Hearings before the Subcommittee on Foreign Economic P o l i c y of the Committee on Foreign A f f a i r s , House of Representatives N i n e t y - t h i r d Congress, Second Session, January 29, February 5, 21, 1974 (Washington D.C: U.S. Government P r i n t i n g O f f i c e , 1974). - 167 -nation would have been l e f t with the tangible assets that the investment procured. Both Ricardo and Keynes were mainly concerned with p o r t f o l i o invest-ment which dominated the i n t e r n a t i o n a l scene i n those days. An i n t e r e s t i n g c h a r a c t e r i s t i c of foreign d i r e c t investment these days i s that i t may not necessarily r e s u l t i n the flow of funds from home country. The investin g firms may borrow (as they do) i n the host country's f i n a n c i a l markets. An i n t e r e s t i n g study of the e f f e c t s of foreign d i r e c t investment on the home country and the inv e s t i n g f i r m was done by Reddaway. He faced the complications caused by the time f a c t o r i n measuring the e f f e c t s of dir e c t investment on a home country. The consequences of a sing l e act of invest-ment w i l l be spread over a large and variable number of subsequent years. Keeping t h i s l i m i t a t i o n i n mind, he found that the scale of the parent company's operations i n the U.K. was enlarged as the r e s u l t of supplying intermediate products to su b s i d i a r i e s abroad and consequently the cost of production was lowered. 2 5 Reddaway also estimated that f o r every ^100 spent on foreign d i r e c t investment, B r i t i s h exports rose on the average by about J[9 and as a r e s u l t 26 of t h i s the balance of payments on current account improved by J^9. In terms of p r o f i t a b i l i t y of the di r e c t investment he found no c o r r e l a t i o n -Ricardo and Keynes quoted i n H. Peter Gray, The Economics of Investment  Abroad, o p . c i t . , Chapter VII. W. B. Reddaway, E f f e c t s of U.K. Direct Investment Overseas (Cambridge: The University Press, 1967), p. 131. Ibi d , p. 122. - 168 -p o s i t i v e or negaitve - between the p r o f i t a b i l i t y of an industry's overseas operations and the spread of the i r growth. Bruck and Lee studied the e f f e c t s of dir e c t investments of the 500 lar g e s t U.S. corporations l i s t e d by the Fortune magazine i n 1967. They found that d i r e c t investment operations always generated an element of short-run weakness i n the o v e r a l l accounts but also serve as a source of long-run strength. Bruck and Lee also found that United States d i r e c t investments have enjoyed a higher return i n the form of exports and re-mitted earnings from less developed countries than from Western Europe and Canada. 2 7 The p o l i t i c a l environment of the home country also plays an important role i n the flow of foreign d i r e c t investment. This p a r t i c u l a r factor was not h i g h l i g h t e d by other empirical findings because most of them rel a t e d to U.S. d i r e c t investment i n other countries. The attitude of the fede r a l and the p r o v i n c i a l governments toward domestic firms i s of utmost importance. Whenever the firms see a change i n a t t i t u d e , they perceive t h e i r existence threatened and t h e i r future dark. They look for safe havens. Changes i n domestic tax and labour laws and pri c e controls are seen as changes i n 2 8 attitude toward the firms. Nehrt c a l l e d t h i s "investment climate" whose __ Nicholas K. Bruck and Francis A. Lee, Foreign Investment, C a p i t a l Con- t r o l s , and the Balance of Payments (New York: New York University, 1968), pp. 65-66. 28 See "A Safe Haven f o r Frightened Funds," the weekly Time magazine (July 25, 1977), p. 35. For further d e t a i l s on the e f f e c t s of foreign d i r e c t investment on the home country, see The M u l t i n a t i o n a l Corporation: Studies on U.S. Foreign Investment, Vols. 1 and 2 (Washington D.C: Superintendent of Documents, U.S. Government P r i n t i n g Press, 19 72). - 169 -components are p o l i c y statements of p o l i t i c a l leaders and the government, actions of the government, and h i s t o r i c a l contexts within which the state-OQ ments and actions took place. The economic e f f e c t s of d i r e c t investment by Canadians on the country's economy depend, among other things, on the purchases of c a p i t a l equipment by the s u b s i d i a r i e s of Canadian parent firms. I f these purchases are made i n the host country, then there w i l l be l i t t l e improvement i n ex-ports from Canada. I t appears from circumstantial evidence (superior technology, large scale production, and lower prices of c a p i t a l equipment i n the United States) that at l e a s t i n the United States these purchases are made from the host country s u p p l i e r s . In the present study 45 d e c i -sions out of 89 were r e l a t e d to the United States. There was clear e v i -dence i n the case of foreign d i r e c t investment i n other countries that raw materials at least (e.g. wood pulp) were exported from Canada to Canadian s u b s i d i a r i e s i n host countries. There appear to be some int a n g i b l e advantages of these investments f o r the Canadian economy because the investments i n a highly developed country, such as the United States, keep the Canadian businessmen i n touch with the l a t e s t technological, managerial, and marketing developments i n t h e i r own i n d u s t r i e s . The investments i n less developed countries by Canadian firms help i n b u i l d i n g the image of a technologically superior Robert B. Stobaugh, Nine Investments Abroad and Their Impact at Home:  Case Studies on M u l t i n a t i o n a l Enterprise and the U.S. Economy, o p . c i t . J . Carter Murphy, "International Investment and the National Advantage," Southern Economic Journal (July 1960), pp. 11-16. Lee Charles Nehrt, The P o l i t i c a l Climate and Private Foreign Investment (New York: Praeger Publishers, Inc., 19 70), p. 15. - 170 -country. This image may help i n increasing the export of other products from Canada. As Canada has no h i s t o r y of colonizing other countries, the Canadian firms can immensely be n e f i t from -this h i s t o r i c a l f a c t . They can increase t h e i r investment and export, other things being equal, without creating the usual suspicion of economic imperialism i n less developed countries. The argument (investment i n home versus investment i n host country) of Ricardo and Keynes (although t h e i r argument r e l a t e d to p o r t f o l i o invest-ment) does not appear to hold good i n the case of the present study. These investments, as discussed before, were not, i n most of the cases, a choice between home or host country. They were made because the firms wanted to i n t e r n a l i z e demand and/or supply. A resource-based f i r m has, i n any case, not much of a choice. I f the pine trees become mature f a s t e r (100 years i n B.C. versus 20 years) i n Alabama or i f r i c h gold deposits are located i n Colombia, the firms i n B r i t i s h Columbia face- a choice of go-or-no go rather than of investing at home or abroad. An obvious advantage to the firms i n the present study and for the Canadian balance of payments i s the remittance of p r o f i t s by the Canadian s u b s i d i a r i e s operating abroad. 3. Implications f o r the Theory of the Firm P r o f i t i s an important consideration i n foreign d i r e c t investment decisions. The investments of U.S. manufacturing firms i n I s r a e l were an exception because I s r a e l i s a s p e c i a l case. I f a b i g U.S. f i r m makes an unprofitable investment i n I s r a e l or elsewhere, i t i s a small part i n terms of the t o t a l resources of that b i g firm. Small losses have l i t t l e e f f e c t upon the t o t a l p r o f i t of a firm. .In ..this connection, H e l l i w e l l also emphasizes the concept of o v e r a l l contribution of investments. 171 -"... investment projects are not valued f o r t h e i r i n d i v i d u a l y i e l d and r i s k c h a r a c t e r i s t i c s , but for t h e i r impact on the r i s k and y i e l d c h a r a c t e r i s t i c s 30 of the set of projects i n which they could be included." The o v e r a l l 31 view of p r o f i t was also supported by Caves. Generally, a fir m w i l l not tolerate an executive whose decisions contribute to losses i n a b i g way, however i n f l u e n t i a l that executive may be and whatever the length of his association with a firm. Macmillan Bloedel. f o r example, could not tolerate the wrong decisions of i t s president and vice president although these decisions were made with the good in t e n t i o n of product and market d i v e r s i f i c a t i o n . They were forced to leave the company despite t h e i r long association with the firm. Singer Company's president l o s t h i s job i n 1976 a f t e r the f a i l u r e of the o f f i c e machinery and equip-ment d i v i s i o n . The magazine Business Week i s f u l l of such examples. Some of the examples given by Aharoni i n support of his argument that firms may invest i n loss contributing projects could be interpreted d i f f e r e n t l y . I t could be argued that Edsel Ford's decision to enter into arrangements with the B r a z i l i a n state of Para for a giga n t i c rubber planta-t i o n was simply to ensure the supply of rubber to Firestone, who i n turn supplied 65 percent of a l l the t i r e s f o r Ford's cars i n 1927, and not simply, as Aharoni s a i d , because "Henry Ford and Harvey Firestone were friends of long standing, having enjoyed annual vacation t r i p s together and exchanged v i s i t s as f a m i l i e s . " The sale of the pla n t a t i o n i n 1945 to 3 0 John F. H e l l i w e l l , P u b l i c P o l i c i e s and Private Investment, o p . c i t . , p. 55. Richard E. Caves, International Trade, International Investment, and Imperfect Markets, o p . c i t . , p. 21. - 172 -B r a z i l i a n government at a net loss of $8 m i l l i o n was s i m i l a r to many other p r o j e c t s , which firms plan c a r e f u l l y and execute e n t h u s i a s t i c a l l y , but ultimately give up a f t e r s u f f e r i n g considerable losses. The c l a s s i c a l example of t h i s i s the f a i l u r e of the Edsel car introduced with great planning, enthusiasm, pomp, and show by the Ford Motor Company. Another useful implication for the theory of the f i r m arises from the constraints imposed on firms because of the nature of t h e i r business. For example, the resource-based firms are led by the l o c a t i o n of resources, be they i n the home country or abroad. The vice president of a mining firm s a i d , "We are led by the geology." Another vice president s a i d i t d i f f e r -ently, "We go where mines are." Such firms may go abroad because the resource i s not at a l l a v a i l a b l e i n the home country, or else i t i s a v a i l -able, but i t s q u a l i t y i s not good, or i t i s a non-renewable resource and i t s quantity i s diminishing (depletion) which increases the cost of i t s e x p l o i t a -t i o n . An i n t e r e s t i n g example of n o n - a v a i l a b i l i t y of a resource i s tuna f i s h . Faced with a growing demand f o r canned tuna i n Canada and the United States, the B.C. firms had to invest abroad to ensure the supply because import 32 from Japan was not regular. Another firm had to engage i n d i r e c t i n vest-ment i n Central American countries because hardwood used i n brooms and wooden handles was not a v a i l a b l e i n Canada. An example of foreign d i r e c t investment for q u a l i t y reasons i s the investment of Macmillan Bloedel i n Alabama and B r a z i l . The pine trees are f a s t growing i n those areas compared to B r i t i s h Columbia. As a commercially Cic e l y Lyons, Salmon: Our Heritage (Vancouver: M i t c h e l l Press Limited, prepared for B. C. Packers Limited, 1968), p. 597. - 173 -planted forest i n B r i t i s h Columbia takes 90 to 100 years to reach maturity, the same element becomes an important consideration. The r e s u l t of depletion of a resource i s an increase i n the cost of extraction. An open p i t operation i s much cheaper, but cannot be continued i n d e f i n i t e l y because one has to go deeper and deeper. Firms have to search for the resource i n remote areas. The high cost of operations i n remote areas forces the firms to seek the same resource overseas. The cost of operations i n northern parts of B r i t i s h Columbia and Yukon i s very high. Planes have to be chartered to survey or examine properties because of d i f f i c u l t t e r r a i n . As a r e s u l t of poor weather conditions work cannot be c a r r i e d on a l l through the year, but the s t a f f must be paid for 12 months. Higher wages and s a l a r i e s have to be of f e r e d to employees to a t t r a c t them to work i n such places. Another important observation made during the present study con-cerning the behaviour of the fi r m was the desire on the part of the resource-based firms to i n t e r n a l i z e the source of supply and demand. I t appeared that through foreign d i r e c t investment the firms wanted to minimize or i f possible eliminate altogether the uncertainties o r i g i n a t i n g i n the areas of supply and demand. As explained e a r l i e r , the firms would l i k e to extend t h e i r control to sources of supply through a c q u i s i t i o n s of j o i n t ventures. This would ensure a continuous supply. S i m i l a r methods were used to i n t e r n a l i z e demand by acquiring c o n t r o l l i n g shares of the firms that were buying the output of the B.C. firms as the basic ingredient of t h e i r f i n i s h e d product. Wholly owned s u b s i d i a r i e s and j o i n t venutres were also used f o r the same purpose. - 174 -D. Areas for Further Research The conclusions drawn i n t h i s research were based on 89 foreign d i r e c t investment decisions of 16 firms i n B r i t i s h Columbia. This i s perhaps the f i r s t attempt to quantify and test Aharoni's behavioral theory. The r e s u l t s i n this study should be interpreted with caution because 80 percent of the decisions re l a t e d to resource-based firms. There i s a need to r e p l i c a t e the study i n other places to see that the decision processes described here are not p e c u l i a r to resource-based firms or to firms i n B r i t i s h Columbia. However, greater confidence could be placed i n the r e s u l t s because most of the findings were tested before by Aharoni although he had used the case method f o r h i s research. Much useful i n s i g h t could be gained about decision processes of firms i f t h e i r domestic investment and foreign d i r e c t investment decisions are compared a f t e r c o l l e c t i n g data. This i s a useful area for further re-search because, as f a r as the knowledge of the writer of this report goes, no s i g n i f i c a n t empirical work has been done i n this area. To test the role of p r o f i t as a motivating force, an i n t e r e s t i n g area for further research could be a comparison of the earnings of foreign s u b s i d i a r i e s with earnings from domestic operations of parent companies. This unfortunately i s r a r e l y possible on a broad scale because multi-n a t i o n a l corporations do not usually issue separate f i n a n c i a l statements for foreign s u b s i d i a r i e s and parent companies. To p a r t i a l l y achieve the same objective, the earnings of companies having s i g n i f i c a n t foreign d i r e c t investment could be compared with the earnings of firms which confine th e i r operations to domestic market because of the nature of t h e i r business or because of t h e i r attitudes - 175 -towards foreign d i r e c t investment. Monsen, Chiu, and Cooley had made a s i m i l a r comparison of the return on the invested c a p i t a l of owner-managed 33 firms and management con t r o l l e d firms. Another i n t e r e s t i n g area f o r further research i s the buying practices of Canadian firms going abroad. 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Yoshihara, Kunio, Japanese Direct Investment i n Southeast Asia, Occasional Paper No. 18. Singapore: I n s t i t u t e of Southeast Asian Studies, 1973. Zink, Dolph Warren, The P o l i t i c a l Risks for M u l t i n a t i o n a l Enterprise i n Developing Countries with a Case Study of Peru. New York: Praeger Publishers, Inc., 19 75. 186 APPENDIX A QUESTIONNAIRE - FOREIGN DIRECT INVESTMENT DECISIONS OF CANADIAN FIRMS PART I - BACKGROUND INFORMATION Name of Firm: Address of Firm's Head O f f i c e : Telephone Number: Respondent Executive: T i t l e : Date of Interview: Duration of Interview: , Place of Interview: PART II - INFORMATION ABOUT THE FIRM A. Is your company: (a) Public with widely held stock ownership? Yes No (b) Public with c o n t r o l l i n g shares held by one or few interests? Yes No (., • \ - -(c) c P r i v a t e l y owned? Yes No If (a) or (b) may we have copies of your annual reports for the years 1975, 1970, 1965, 1960. B. Is Canadian ownership of the voting equity i n your firm? (a) 100% (c) 50% (e) Other specify (b) 75% Cd) Less than 50% 187 B(a)If Canadian equity i n your firm i s not 100%, please i n d i c a t e the n a t i o n a l i t y of ownership of the remaining voting equity. U.S. voting equity: Yes If yes, specify percentage No U.K. voting equity: Yes If yes, specify percentage No Japanese voting equity: Yes If yes, specify percentage No Is the Canadian share of ownership s u f f i c i e n t l y concentrated to constitute e f f e c t i v e control of the company and i t s operations? Yes No Please i n d i c a t e the approximate s i z e of your company's assets, sal e s , and earnings before taxes for the most recent year (197 ). Thousand $ Assets, Sales, Earnings ToTotaleNefcsAssets T o t a l Sales To t a l Earnings before Taxes E. In terms of sales (actual and p o t e n t i a l ) , how important i s foreign d i r e c t investment as compared to your company's domestic operations? (a) Extremely important (b) Quite important (c) Important (d) Not important (e) N e g l i g i b l e 188 OCCASION FOR FOREIGN DIRECT INVESTMENT DECISION Name of Country: Name of Product: Year of Decision: Ql How important were each of the following i n making you aware of forei g n d i r e c t investment opportunities? Variables Degree of Importance C r i t i c a l Very Important Important Unimportant Not Even Considered 5 4 3 2 1 a. An outside proposal from {please specify source) b. Fear of l o s i n g an export market. c. Strong competition from abroad i n home market. d. Saturation i n the domestic market. e. Successful d i r e c t invest-ment operations of your competitors abroad. f. Keen i n t e r e s t of a high-ranking executive i n foreign d i r e c t investment. g. Desire to u t i l i z e abroad old machinery. h. C a p i t a l i z a t i o n of patents or t e c h nical know-how. i . Desire to create market for components abroad. j . Desire to spread R&S Dnand other fixed costs. k. Others (please specify) 189 Q2 Which of the following type of i n v e s t i g a t i o n of foreign d i r e c t invest-ment opportunity was used by you before conducting an on-the-spot i n v e s t i g a t i o n i n the country where the opportunity was located? Also state the importance of each. Degree of Importance Type of Investigation before F i e l d Research C r i t i c a l Very Important Important Unimportant Not Used 3j 2 1 0 Used information given i n theunso u n s o l i c i t e d outside proposal orO.y only. Purchased information from Dun and Bradstreet or s i m i l a r organizations. • Collected information from Department of Industry, Trade and Commerce. Collected information from published sources. Preliminary design drawings prepared by company. Estimatessof operating cost prepared by company s t a f f . C a p i t a l cost was calculated by company s t a f f . An outside consultant was asked to prepare a f e a s i b i l i t y study. 190 Q2A Which of the following type of information was c o l l e c t e d during f i e l d i n v e s t i g a t i o n i n the country where d i r e c t investment opportunity was being investigated? Please state the importance of each. Type of Information Degree of Importance C r i t i c a l 4 Points Very Important 3 Points Important 2 Points Unimportant 1 Point Not I Considered 0 Point Consumer Tastes Dealer Survey Market Share Market Size Information about Local Partners Cost of Production Price Behavior Nature and Type of Competition 191 Q3 Relative to the s i z e of the project, how would you judge the cost of t h i s i n v e s t i g a t i o n to your company? Very Expensive Somewhat Expensive Expensive Not Very Expensive I n s i g n i f i c a n t 5 Points 4 Points 3 Points 2 Points 1 Point-Q3A In your i n v e s t i g a t i o n of t h i s p a r t i c u l a r foreign d i r e c t investment opportunity, was the following sequence followed? L i b r a r y * ^ F i e l d Research ^ Report Yes No Please check one. Q3B If your answer i s no, please specify the sequence you followed. Means c o l l e c t i o n of information fcomppublished 7'sources,. 192 Q4 Please i n d i c a t e the degree of influence of the following on the extent of i n v e s t i g a t i o n . Degree of Influence Commitment Variables Very Important Somewhat ' Important Important Not Very Important I n s i g n i f i c a n t 5 Points 4 Points 3 Points 2 Points 1 Point 1. D e s i r a b i l i t y of r e t a i n i n g an export market through d i r e c t investment 2. Creation of an i n t e r n a t i o n a l d i v i s i o n . 3. Concern about corporate image once i n v e s t i g a t i o n started. Q5 In your negotiations with the host country government did your f i r m seek assurances or guarantees on the following issues? Issues Negotiated With Host Country Government Yes No 1. Repatriation of dividends. 2. Repatriation of c a p i t a l . -3. Applicable rates of taxation. 4. Special depreciation of depletion allowances. 5. Investment grants or low i n t e r e s t loans. 6. Tax deferments, exemptions, holidays (please underline the ones applicable. 7. Relaxation or r e s t r i c t i o n of import duties. 8. T a r i f f or quota protection against imports. 193 Q5A How extensive were negotiations between your firm and the banks i n the host country: Extent of Negotiations With Banks i n Host Country 1. Relied on information i n published sources. 2. Inquired about general c r e d i t climate. 3. Made i n q u i r i e s about a v a i l a b i l i t y of loans for the s p e c i f i c project. 4. Submitted an a p p l i c a t i o n for loan. 5. Established a c r e d i t l i n e . Q5B How extensive were negotiations between your fi r m and l o c a l partners i n the host country. Extent of Negotiations With Local Partners i n Host Country C l a s s i f i c a t i o n of Extent 1. Just discussion. 2. Negotiations for type of j o i n t venture. 3. Lawyers were involved i n negotiations. 4. Preparation of a draft of agreement. 5. Signing of the f i n a l d r a f t . 194 Q5C How confident did you f e e l i n your a b i l i t y to assess uncertainty i n the country where you were i n v e s t i g a t i n g a d i r e c t investment opportunity? Degree of Perceived Confidence Points F u l l Confidence 5 Some Confidence 4 Confidence 3. Just Guess 2 Not Sure 1 195 Q5C What type of uncertainties and t h e i r extent do you believe your f i r m faced i n t h i s foreign d i r e c t investment opportunity? Types of Uncertainties Extent of Uncertainties Very High Uncertainty High Uncertainty I Uncertainty Somewhat Uncertainty I n s i g n i f -i c a n t Uncertainty 5 Points 4 Points 3 Points 2 Points 1 Point C i v i l war. War with another country. M i l i t a r y Coup. Change i n government through democratic process. Government intervention. Devaluation. I n f l a t i o n . I n c o n v e r t i b i l i t y of currency. Labor unrest. N a t i o n a l i z a t i o n . Expropriation. Corruption. Red Tape. C u l t u r a l d i f f e r e n c e s . A t t i t u d i n a l d i f f e r e n c e s . Lack of demand. Local competition. A v a i l a b i l i t y of consultants. - 196 -Appendix B Foreign Direct Investment Decisions of B.C. Firms by Host Countries No. of Decisions S. No. Host Countries Developed Countries 1. U.S.A. 45 2. U.K. 7 3. Australia 3 4. Spain 2 5. Ireland 2 6. Japan 1 7. France 1 8. Netherlands 1 9. Greenland 1 Sub-total 63 10. 11. 12. 13. 14. 15. 16. 17. Developing Countries  Asia: Philippines Indonesia India Malaysia Hong Kong Pakistan United Arab Emirates New Guinea 3 2 1 1 1 1 1 1 Sub-total 11 18. 19. 20. 21. South America: Peru Colombia Argentina Brazil 1 1 1 1 Sub-total 4 22. 23. 24. 25. 26. 27. North America: Mexico Central America: Honduras Nicaragua Africa: Central African Empire Others: F i j i Gilbert Island 2 1 Sub-total of developing countries 26 Total Decisions 89 - 19 7 -Appendix C Foreign Direct Investor B.C. Firms by Size of Assets Size of Assets No. of Firms No. of Decisions ( M i l l i o n of CN$) Up to 4 9 25 17 to 37 3 21 100 to 600 _4 4-3 T o t a l 16 89 - 19 8 -Appendix D Foreign Direct Investment Decisions of B.C. Firms by Type of Industry S. No. Type of Industry No. of Decisions 1. Mining 44 2. Forestry 17 3. Marine Resources 10 4. Manufacturing 1_8 Total 89 - 199 -Appendix E Perceived Importance of Foreign Direct Investment by B.C. Firms Degree of Perceived Importance No. of Decisions Extremely Important 52 Quite Important 16 Important 8 Not Important 10 N e g l i g i b l e __3 To t a l 89 

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