Locational Advantages

Locational or location-specific advantages refer to various business opportunities present in individual foreign markets so that companies are encouraged to [Page 1029]invest in such markets. Companies invest in a particular foreign market as long as this market has something to offer to the company so that investment in this particular market can be profitable for the company. For example, among other things, China and India offer location-specific advantages to apparel firms because labor cost in these countries is low and apparel is a labor-intensive product. So, apparel firms benefit from the cheap-labor opportunity that the Chinese market offers. Similarly, the Middle Eastern countries offer locational advantages to oil companies because they have large oil reserves; companies in search of oil can benefit from the locational advantages of large oil reserves by investing in these countries. Highly populated countries, assuming other conditions are also appropriate, can also be an example of locational advantages. Their high population may be an indication of a locational advantage (i.e., large market) for some firms. In sum, locational advantages are very important for global business because they explain to a certain extent why companies invest in a particular country rather than in others.

After companies have decided to internationalize their operations, a very important question is which foreign market(s) to invest in. Investment decisions in a particular foreign market (location) are made after careful and thorough analyses have been done. Companies analyze politics, laws and regulations, economy, geography, climate, taxation, market characteristics, and many other factors in a market, and unless a particular market offers some sort of advantage to foreign companies, this market will not be chosen as an investment location.

Companies generally internationalize their operations to get resources, to seek a market, to seek a strategic asset, and to increase the efficiency of their operations. Locational advantages also mainly refer to these four factors (resource, market, strategic asset, and efficiency). When companies lack resources (raw materials and intermediary materials, labor, know-how, and others) in their domestic markets, a logical option is to seek them in foreign markets that have appropriate resources. When the domestic market is saturated, meaning that there is not much possibility of further increasing demand in the domestic market, companies try to find markets in which there is still demand. When companies want to further strengthen and protect their ownership advantages or diminish those of their rivals, they seek appropriate strategic assets in foreign countries. Therefore, these four locational advantages play important roles for companies in deciding an appropriate location in their internationalization process.

Ownership Advantages

The term ownership advantages (also called competitive or monopolistic advantages) is closely related to locational advantages in the internationalization process. Ownership advantages mean that companies possess something valuable and/or unique that gives the company a competitive edge over its rivals; this may be a unique product, brand name, technological expertise, resources, and managerial and marketing skills. Locational advantages alone may not mean much unless ownership advantages are also present. That means that a particular country can offer some sort of locational advantage; however, it will be costly for a foreign firm to come to this foreign country and establish its operations rather than operating in its domestic market.

...