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PLANT LOCATION

19 January, 2016 - 15:18

Direct foreign investment-investment in land, plants, and equipment-is the most serious foreign entry strategy. From the nation-state's viewpoint, factories bring jobs, which create incomes. When spent by the local population, this money creates more jobs, and when saved, it creates the capital pool needed for further industrialization. In addition, the investing company brings technology, which is made available to indigenous companies. From the MNC's viewpoint, brick and mortar investment is the best global sourcing strategy. An affiliate overseas can not only secure most of the needed inputs but also dispose of some, if not most, of its output. Furthermore, an overseas factory provides opportunities to generate further revenues from obsolete technology and products.

On the surface it would seem that both the MNC and the nation-state would find plant construction extremely attractive. Both national authorities and MNC managers, however, must convince themselves that this arrangement is indeed a win-win situation. Both must perform some type of cost/benefit analysis and must end up with more benefits than costs.

Thus far it seems that for host nation-states, direct investment by foreign firms is in fact beneficial. For this reason, there is currently a global competition among governments of the world for potential investors. Offering generous incentives to lure MNCs to their country used to be a tactic of developing countries. Recently, however, countries that traditionally have been investors have become the greatest competitors for MNC investment. For example, the United States and Britain, two of the largest investors in the world, are competing for investment by Japanese manufacturing companies. The competition has become so intense that the OECD and the European Economic Community (EEC) have issued guidelines on how many and what kinds of incentives a country can offer to lure an investor. The EEC has even set up an agency that monitors and enforces these guidelines, giving punitive sentences to violators. 1 (See Table 13.2.)

Table 13.2 Brussels Set to Drop Daimler Inquiry

The European Commission is today expected to call off a controversial investigation into state aid for a DM 1 .8 billion car plant to be built by DaimlerBenz, the West German motor manufacturer.

This will end what has been an embarrassing episode for the West German Government, ironically known as a tough campaigner for ending national industrial subsidies. The Commission opened proceedings against Bonn last autumn under EC competition rules outlawing national aid likely to give its recipients unfair advantages over Community competitors.

It suspected that the Rastatt and Baden-Wuerttenberg authorities were planning to sell the site to the car group for between DM 170 million and DM 200 million below market value. It also questioned whether the state government's proposal to spend DM 100 million on preparing the site-an area of open farmland partly owned by the Rastatt town authorities and unsuitable for industrial use in its present form-for Daimler-Benz.

The new package, details of which should be released today, is understood to allow the state authorities to pay 80 percent of the cost of preparing infrastructure for the site-such as gas and water supplies-leaving it up to Daimler-Benz to pay for the foundations and the rest of the construction.

Theoretically, the Commission can block illicit national assistance or force companies to repay aid-a power which it has used several times in the past year. Because of the investigation, the car group cannot start building the plant until it receives the green light from Brussels. Construction is due to start next summer and lead to the creation of 7,000 jobs.

SOURCE: W. Dawkins, " Brussels Set to Drop Daimler I nquiry , " Financial Times , July 22, 1 987, 26 .