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An analysis of the Eclectic Paradigm with Reference to Multinational Enterprises in Morocco
FDI Foreign Direct Investment
MNE Multinational Enterprise
TNC Transnational Company
OECD Organization for Economic Cooperation and Development
UNCTAD United Nations Conference on Trade and Development
GDP Gross Domestic Production
IB International Business
PPP Purchasing Power Parity
FX Foreign Currency Market Exchange
MSI Market Seeking Investment
RSI Resource Seeking Investment
LDC Less Developed Country
GATT General Agreement on Trade and Tariffs
WTO World Trade Organization
FTA Free Trade Agreement
PLC Product Life Cycle
I MF International Monetary Funds
This report will seek to create awareness and understanding regarding the motivations that matter in the process of international production. The focus on the African, Arab, kingdom of Morocco will present an interesting example of a developing economy that has emerged to become progressively liberal towards the attraction of FDI. Nevertheless, as other developing economies it has found challenge in the adjustment towards the specific needs of MNEs (Najat 2009).
In recent decades the development of foreign direct investment (FDI) has grown to become one of the major influential elements of the globalization process. This is especially notable in the critical role that MNEs have played in the economic linkage between developed and developing economies (Mallampally, Sauvant 1999). Most evident of this detail is visual in the fact that approximately one-third of world trade appears to be deriving from operations between two affiliates of the same MNE and an other third originating from an MNE by at least one end of the transaction (Ramamurti 2004).
This should furthermore explain why the availability of foreign MNEs in a developing economy has a remarkable positive effect on its efforts to increase exports among other objectives to further the economic development. This latter thought is however not shared by all stakeholders, as they may disagree on the potential short term perspectives in relation to the vulnerability of local infant industries additional to environmental and social issues that may be influenced (Meyer 2004). Nevertheless in terms of economic progress, research such as been presented in the work ‘The power of productivity' by William W. Lewis (2004) as part of a McKinsey study, explains that the availability of FDI in especially developing economies add faster value to the productivity level of a region than the alternative and relatively long-winded processes such as the setup of a suitable educational system.
The global pattern of FDI has increased remarkably from an estimated $53 billion in 1985 to a nominal $1,833 billion for 2007. The reach of FDI inflow has however traditionally been dominated by OECD countries and in particular triad nations (Japan, USA and EU). The development of FDI in solely emerging economies however increased to over $500 billion in 2006, translating to an increase of 20% over 2005 and corresponding to approximately 40% of the global FDI in that particular year (Torrisi et al. 2009). Nevertheless the volume of FDI that flows into the African continent which Morocco is part of, has remained relatively marginal compared to the total global inflow of FDI. As argued by (Wahid, Sawkut & Seetanah 2009) the African continent solely received 2 to 3 percent in 2007 of the total global FDI inflow. The rise of FDI inflow however into this continent of 2006 to a total of $36 billion, was mainly derived from the increase in commodity prices which led to a higher return on investment for the providing MNEs and hence a better acceptation of available risks.
This FDI development was according to Gray and Amine (2000) a relatively novel occurrence in Morocco, and was furthermore considered moderate until recent times. This matter derives from the fact that despite the implementation of fundamental measures, the Moroccan government had no active policy to attract foreign direct investment into the economy prior to the early 1990s. This should be visual in graph#, portraying the development of FDI inflow in the Moroccan economy. Nevertheless initial advancement came in the form of a privatization program mainly organized to reduce public debt and increase competitive advantage of local enterprises (UNCTAD 2008). This concluded at first in the retail of 40 state holdings including the national air carrier (Royal Air Maroc) and telecom enterprise (Etisalat Al-Maghrib). The significance of this privatization program in terms of FDI is reflected in the fact that from the $10.7 billion of FDI inflow in the period 1993-2003, approximately $6.4 billion was derived from privatization activities (UNCTAD 2008).
Between 2001 and 2003 Morocco ranked second largest FDI recipient in Africa and currently holds the number one position in North Africa (Maghreb Al-Arabi). The total inflow of FDI concluded $2.82 billion in 2001 and $2.31 billion in 2003, while 2005 FDI reached a record of $2.93 billion with main destinations including tourism, aviation, outsourcing and real estate (UNCTAD 2007). Nevertheless indications of significant obstacles to investments in the form of corruption and bureaucracy as well as the lack of premium after-service, towards current MNEs in Morocco, has led according to UNCTAD (2007) in a marginal 0.72 per cent of the FDI inflow to be reinvested. With regards to the FDI stock, between the period 1989 and 2005 FDI has accumulated from $3.4 billion to $22 billion, with strong growth between 2002 ($12 billion) and 2005 ($22 billion) making it approximately 44% of the gross domestic production in that particular year (UNCTAD 2008).
Morocco's Plan Emergence 2005: Priority sectors
Service Offshore Industry
Automobile and Aviation industry
Agro alimentary Industry
Table 1 Source:(UNCTAD 2008)
The acknowledgment of the importance and benefit of foreign direct investment has persuaded governments to provide incentives to foreign enterprises seeking physical presence in the local economy. In relation to these incentives, Morocco presently has several measures to promote and attract foreign direct investment, which include exemptions from corporate and general income tax for a fixed period of time based on the firm's activities and benefit to the economy. Furthermore firms that are bound to establish in a particular area that is in need of economic and social development impulse, may even benefit from additional incentives provided after negotiations with local authorities (Gray, Amine 2002). The local government has according to UNCTAD (2008) defined key sectors in order to attract high quality FDI (see table#), which will likely influence the policy of FDI promotion in general and the behaviour of the government in terms of incentives towards firms in these industries.
Exempt from corporate tax and general income tax (5 years + 50% following period)
New construction/ Construction additions / Machine and Equipment, used in local production
Exempt from corporate tax and general income tax (5 year following completion construction)
50 % reduction of corporate tax and general income tax
Firms established in areas with low level of economic and social development
50 % reduction in corporate tax and general income tax (during 5 years after starting operations)
Free trade zones
Fully exempt from foreign trade and exchange control regulations
Activities of national importance
Customized benefits in direct contract with the government
Table 2 Source:(Gray, Amine 2002)
In order to add to the rationalization of policies, developed by regulators and additional involved agents, it is crucial to advance the knowledge of MNE behaviour towards FDI. Especially since the effective implementation of codes and structural incentives may influence economic development in a more progressive manner.
Therefore this study will make an attempt to add to the IB knowledge by specifying the factors that influence firms to invest in Morocco, what the relative importance of those factors is and what some of the methods and motivations behind these foreign direct investments are. This should provide a more accurate approach for policy makers to build upon the available accomplishment that Morocco has achieved in the past decades in order to attract an additional amount of FDI.
In relation to the use of economic model, There are numerous IB theories that provide for the explanation of specific internalization activities. Most notable are the internalization theory proposed by Buckley and Casson (1976), and the eclectic paradigm presented by Dunning (1976). The Eclectic Paradigm however enabled for the holistic explanation of MNE FDI motivation. It is therefore a robust framework, which will allow this study to gain its objectives to further the knowledge of operational MNEs in Morocco in a holistic manner.
1.1 Research aim and objectives
The intention of this research is to identify the motivation of MNEs to investment in Morocco as choice of location as part of their international operations. This study aimed to give answer to this matter via a holistic approach by examining the initial reasoning for international activity of a firm (why) and in addition made an attempt to clarify the location motivation (where), as well as exploring the reasoning for the FDI entry mode vis-à-vis additional entry modes (how). It has included clarification of both the firm specific and country specific elements that play a key role in the determination to conduct international business via the internalization of activities in Morocco.
Previous IB research has demonstrated the gap in scientific explanation of FDI in Morocco as prior discussed in this paper. The research question that gave aid to the focus on covering this problem was “How does Dunning's Eclectic Paradigm explain the motivation of multinational enterprises to conduct foreign direct investment in Morocco”. In addition to this, the study tried to uncover the following issues in order to provide answer to the main research query;
1. Describe the kind of foreign direct investment that is attracted currently by Morocco.
2. Clarify which assets have had a positive contribution to the capacity of MNEs to invest in Morocco and overcome the liability of foreignness.
3. Discuss which particular country specific factors are perceived most important in relation to the influence on a firm's operations.
4. Examine to what extent location-bounded elements determine the attraction of FDI .
5. Describe which argumentation is found to be important for the internalization of Moroccan activities by MNEs.
1.2 Value and contribution
While research on FDI in developed economies is widely offered, the availability of academic work on FDI attraction by individual emerging economies, is rather slim. Furthermore this study will contribute to provide a holistic view of MNE's abilities and choice for Morocco as their location of international production. This should add to the knowledge of regulators and other related actors in the field to specifically adjust to the needs of foreign MNEs and hence provide a better investment climate.
1.3 Chapter outline
* The introduction section describes the background of this research and gives introduction to the issues currently demanded by the academia to examine. It furthermore offers an analysis of the present FDI operations in Morocco and the governmental policy on FDI.
* Chapter 2 will illustrate the economic situation and development path of the Moroccan economy aided by some statistics regarding this matter. It seeks to give understanding to the kind environment MNEs are conducting their foreign direct investment in order to perceive the concluding results more accurately.
* Chapter 3 division of the study discusses past scholar work that will form the study on the research question of this report. It will seek to give answer to the objectives that will be examined through the provided tools. Both the study on the multinational enterprise as an analysis on the eclectic paradigm will be debated as well as scholar work on FDI in emerging economies.
* Chapter 4 will provide the explanation of the methodology and give detail to the sample selection as well as the variables used and their justification.
* Chapter 5 presents the research results. These will be explained via the presentation of cross tabulations, frequency tables and correlation matrixes between variables.
* Chapter 6 shall conclude the research with a discussion of the research results. This should provide additional reason and argumentation to the outcome of the data analysed.
2 Overview of the Moroccan economy
The following section will give a brief introduction of the Moroccan economy. It will discuss the economic composition, historical facts regarding investment policies and debate international relations and current trade agreements.
2.2 Morocco's economy
Moroccan population counts for roughly more than 31 million people, with a growth rate of approximately 1.5 % (estimated in 2007). The composition of this economy exists mainly on the exports of manufactured goods, tourism and phosphate as well as agricultural production (Economist Intelligence Unit 2009). These activities have contributed to the nominal growth rate from $37.02 billion in 2000 to an estimated $88.90 billion in 2008 (Gray, Amine 2002).
Historical averages (%)
GDP (US$ bn; FX rate)
Real GDP growth
GDP (US$ bn; PPP)
Real domestic demand growth
GDP per head (US$; FX rate)
GDP per head (US$; PPP)
Current-account balance (% of GDP)
Exchange rate (av) Dh:US$
FDI inflows (% of GDP)
(a) Actual.(b) Economist Intelligence Unit estimates. PPP (purchasing power parity). FX (market exchange).
Table 3 Source: (Economist Intelligence Unit 2009)
Nevertheless fluctuations on annual basis are still present due to the economy's relatively high dependency on agriculture. The role of this industry (main production: barley, wheat, citrus, wine, vegetables, olives; livestock) in Morocco's economic and social history has till this date always been an important one. Even though its number is predicted to decline, this industry is currently employing 44% of the workforce while solely contributing 12-17% to the nation's GDP (CIA 2008), which should give at least some incentive for further development.
GDP (current US$) (billions)
GDP growth (annual %)
Inflation, GDP deflator (annual %)
Agriculture, value added (% of GDP)
FDI, net inflows (BoP, current US$) (mio)
Table 4 Source: (The World Bank 2009)
The industrialized sectors are relatively focused in the somewhat central area of Morocco along the Atlantic coast (Gray, Amine 2002). Areas surrounding, as well as within, the cities of Casablanca, Rabat and Kenitra employed almost 15% of the workforce in 2002. Additionally the secondary sector as a whole employs approximately 19.8% of the total workforce while the service industry corresponds to a roughly 35.5% of the total workforce (CIA 2008). In addition to the Moroccan industrial sector, (Aziz, Thomas 2004) argue that since the 1960s solely a narrow specialization has been realized due to the fact that most exported goods are dedicated for the European market. Furthermore the industries are characterized by the presence of a few firms with substantial market power resulting from the lacking functioning competition rules.
Foreign trade as part of Morocco's GDP has increased gradually since the 1990s as a result of the growth and increasing importance of world trade. Nevertheless for most part of the last 20 years Morocco has repeatedly incurred a trade deficit. In order to constrain this, the government has increased the interest of custom duties. Furthermore the three major foreign exchanges sources that have assisted in decreasing the trade deficit gap are the approximately $1 billion in receipts, origin from Moroccan expats overseas, the $610 million from the tourists visiting the country and $ 480 million from phosphates trade. Morocco's main exports include clothing and textiles, electric components, inorganic chemicals, transistors, crude minerals, fertilizers (including phosphates), petroleum products, citrus fruits, vegetables and fish. The main imports into the Moroccan economy include crude petroleum, textile fabric, telecommunications equipment, wheat, gas and electricity, transistors and plastics CIA (2008).
Leading Import partners 2008
% of total
Leading Export partners 2008
% of total
Table 5 Source:(CIA 2008)
2.3 An emerging economy
Morocco's independence in 1956, confronted the nation with the fact that reforms in its political and economic system were a minimal necessity to sustain the inevitability of economic and social development. The nation however faced numerous economic as well as political difficulties prior to the liberalization of its economy. One of the most notable measures taken in relation to foreign owned enterprises was the Moroccanization decree. This measure, implemented in 1973, limited the ownership of some key industries in the Moroccan economy to no more than 49%. It was furthermore mainly dedicated to constrain foreign influence, with special political emphasize on the still overwhelming French influence at that time. Moreover, it was based on the protection of infant industries against foreign rivalry, and the believe that this latter would undermine the ability and security of local enterprises (Haddad, Harrison 1993).
Nevertheless, throughout the 1980's the Moroccan government came back from these legislations and provided supplementary opportunities for foreign firms and investors, in order to create a more liberal and open economy. Here structural reforms, as well as the implementation of investment regulations, have had a positive impact on the inflow of foreign direct investment into the economy following these years. This included the Investment Code that was even more liberalized in the several stages following. Initially the code included according Haddad et al. (1993) the protection of foreign firms against nationalization and expropriation and the ability for unrestricted dividend and profit transfer to foreign investors as well as the free return of capital and capital gains to foreign investors. These measures were primarily dedicated to restore macroeconomic balances and bring stability to the economy as a whole. They furthermore included the annulations of state monopoly on foreign trade, price liberalization, revision of the fiscal system and additional measures to improve foreign direct investment such as a privatization program (UNCTAD 2008).
Even though most notable changes regarding investment policies happened during the 1980s, the 1990s were still marked by social problems such as poverty as a result of high unemployment of approximately 20% as well as a rapid urbanization. It is only during the more recent years that the Moroccan economy has been able to benefit from these measures and the policies following. An example of the contribution of the economy's increasing openness and the established investment climate, was the realization of 8.1% in real gross domestic production growth and an unemployment rate of less than 10% in 2006. Moreover during the last thirty years the economy has even managed to quadruple its gross national income from $550 in 1970s to $2770 in 2009 (Najat 2009).
Nevertheless the World Bank has remarked that even though the strong ambitions and the country's achieved development in terms of competitiveness and economy growth, it has still significant tasks to accomplish. Elements such as a volatile economic growth and vulnerability to variable rainfall, due to its remaining high dependency on the agricultural industry, as well as its relatively high unemployment rate among other issues seek solutions accordingly (Najat 2009).
2.4 International relations
In addition to the further measures taken by the government of Morocco to increase trade and develop a stable environment for investment from abroad Bacaria et al. (2001) reports on “the country's irrevocable commitment to the international economy”. In their research they further elaborate that the signatory to the GATT in 1987 and the subsequent bilateral and multilateral agreements contribute significantly to the believe that Morocco is indeed working to become the most favourable FDI locations in the area. Most notable trade agreements of such kind include the FTA with the United States (since 2006), the Agadir agreement which includes Jordan, Tunisia and Egypt (since 2004), the Turkey agreement (since 2006), the European Free Trade Association (since 1999, EFTA: Iceland, Liechtenstein, Norway and Switserland) which linked to the EU via the European Economic Area, the association agreement with the European Union (signed in 2000) following the Morocco-EU preferential agreement (since 1977). The relevance to a potential increase in FDI via the existence of these agreements can be explained in two fold; First of all these agreements add to the location attractiveness for firms seeking to avoid trade barriers. An example is the establishments of EU production facilities in Morocco seeking to export to the US (or the other way around) wanting to make use of the Morocco-USA FTA or the Morocco-EU Association Agreement. Additionally these agreements further provide added security for foreign firms set in the agreements against illegal government intervention (UNCTAD 2008, Aziz, Thomas 2004, WTO 2008). Maghreb Union ??
This chapter provided a concise economic overview as well as an introduction of the investment policies and international relations and trade agreements. The following chapter will focus on the available theoretical knowledge regarding FDI and MNEs.
3 Literature review
The literature review provides the fundament of this research, via discussions of previous studies on FDI and international business. Section 3.2 will offer a review of studies regarding international business and FDI in particular. Sections 3.3, 3.4 and 3.5 will debate the O-L-I sub-paradigms respectively. In addition to a further discussion on the activities of MNEs and their behaviour, section 3.6 will provide a review of what scholars have mentioned on the argumentation of MNE to conduct FDI. In conclusion section 3.7 will debate the current research on FDI in emerging economies.
3.2 Previous International Business studies on FDI
Contemporary studies that have made an attempt to explain the level and pattern of FDI and MNE behaviour are found in Dunning (1993), (Buckley, Casson 1985), (Cantwell 1991) and (Grosse, Behrman 1992). These theories vary from mainstream economic studies (Hymer 1976) (Kindleberger 1969, Vernon 1966, Caves 1971), to specific internalization theory(Buckley, Casson 1985, Buckley, Casson 1976, Rugman 1980) and the Eclectic Paradigm (Dunning 1993, Dunning 1988).
The study of Hymer (1960, 1976) was the initial attempt to develop a complete theory of MNE behaviour in relation to FDI activities (Calvet 1981). Hymer's argument derived from industrial organization theory and focused on a firm's competitive environment. This study disputed the established model of perfect competition and advocated for firm's capacity to distort competition via its ownership. The study of Hymer formed the fundament for Kindleberger's (1969) market imperfections model, which argued that MNEs must possess ownership advantages that should aid to overcome the liability of foreignness in a novel market and the market itself should be imperfect via exogenous elements such as government interruption and the like.
During the 1970s IB scholars were challenged to develop a generalized theory of international production. This resulted in the creation of the internalization theory and the eclectic paradigm (Dunning 1993). The call from contemporary research to develop a more holistic view of FDI activities has encouraged this paper to develop an understanding of the elements described in the Eclectic Paradigm that will also reflect the MNE perspective in Morocco. The Eclectic Paradigm introduced in 1976 by John H. Dunning, also known as the OLI-Paradigm, is in various studies referred to as the leading or dominant explanation for the growth and opportunity of multinational activities as well as the accommodation for economic theories of the determinants of FDI (Cantwell, Narula 2001). Its construction is based upon the interaction of three separate yet interdependent variables. These sub-paradigms are also known as the Ownership-, Location- and Internalization specific advantages. Each of these factors accommodates a separate chapter of the theory of multinational enterprise (Dunning 2000). Most notable about this framework is the postulation that each of these explanations should be considered complementary to each other, which should give opportunity to a complete elaboration of a firms' international production construction. The eventual OLI configuration of a firm, should give rationalization to its choice to internalize its international activity in a certain location (Dunning 1993).
The Ownership specific advantages sub-paradigm (O advantages) concentrates on the ability of a firm to engage in international production activities. This is elaborated by the examination of the proprietary assets that should provide an advantage vis-à-vis competition if a firm is indeed considering international production possibilities. The Location specific advantages (L- specific advantages) sub-paradigm, explains the reasoning why firms may be attracted to a certain region to conduct its activities via the foreign direct investment (Dunning 1998). In conclusion the Internalization specific advantages (I advantages) emphasizes on the advantages found that have led to the choice for FDI as entry mode. This may derive either from the cost advantages found in this entry approach or the control of activity management, hence the avoidance of market imperfections (Dunning, Lundan 2008).
3.3 Ownership specific advantages
The ownership specific endowments of an enterprise represent the assets of an organization that enable the yield of future income streams (Tolentino 2001). Additionally it is defined as a firm's privileged reach to its intermediate products (Dunning 2000). These ownership specific (O) advantages are for this reason claimed to be an interchangeable term for the competitive advantages or monopolistic advantages of a firm (Dunning 1993). The composition of a firms' asset accumulate exists out of both tangible and intangible assets. This may include the human labour capacity, firm size and access to the intermediate and final goods market and its common governance competence, market knowledge and technological know-how (Dunning, Lundan 2008, Grosse 1985, Ueng, Kim & Lee 2000, Trevino, Grosse 2002), as well as international experience among other elements (Agarwal, Ramaswami 1992, Mutinelli, Piscitello 2001).
The O advantages provide for the initial phase in the Eclectic Paradigm to give answer to the reasoning of a firm to operate on an international scale. This is conducted via the examination of these O advantages in comparison to a firm's competitor's capabilities. It is therefore the preliminary explanation for growth of international production, in the sense that the unique assemble of assets should provide for the sustainability or advancement in competitive advantage in comparison to its competitors (Dunning 1993). Moreover and perhaps more precise is the comparison to enterprises located in the potential host country, which should present the strength to overcome the liability of foreignness for the investing firm (Miller, Richards 2002).
Neoclassical economic theories such as the model of Comparative Advantage presented by David Ricardo in 1817 in the publication ‘On The Principles of Political Economy and Taxation', provided for the sake of simplicity, a perfect operating competitive market, which postulated the possession of perfect knowledge. This was furthermore notable by the exclusion of transaction costs, immobility of resources, constant return to scale and, in relation to the difference between the current inclusion of O advantages, also assumed the equal accessibility to resources by firms. The O advantages are therefore a source of perfect market distortion in the sense that it provides for the ability of exclusive or monopolistic rights over knowledge, and hence enable for the augmentation of international production via the exploitation of these assets (Dunning 2000). The discussion regarding O advantages has since the 1960s been focused on the ownership kinds presented as the “possession and exploitation monopolistic power”, the “possession of a bundle of scarce, unique and sustainable resources and capabilities” and the “competencies of managers of firms to identify, evaluate and harness resources and capabilities” in the market as well as to coordinate the given assets in order to advance a firm's position (Dunning 2000). Nevertheless recent practice has witnessed the shift towards a contemporary study, in which firms contractually coordinate their set of external assets in the form of global value chain management (Gereffi, Humphrey & Sturgeon 2005).
The Eclectic Paradigm advocates for the dynamic role of O advantages in the sense that it includes the possibility for endogenous augmentation of assets via R&D and international experience. Unlike the static approaches towards international production such as the internalization theory, which claims that the ownership advantages are derived from the vertical and horizontal integration, the Eclectic Paradigms' perception is that due to the presence of proprietary assets, the distortion of supply and demand by government and market participants as well as the discrimination of market participants as the source of structural market imperfection and hence the reasoning for ongoing research and development and sustainability of assets (Dunning 2000, Tolentino 2001). In addition to the strength of ownership specific advantages, studies have found important evidence in the country origin element of the investing firm. The characteristics such as the domestic competitive environment, entrepreneurial stimuli and additional incentives as well as the availability of capital are critical to the development of unique firm abilities (Nachum, Jones & Dunning 2001). There is however a positive correlation between the increase in multinationality and the augmentation of these assets (Nachum, Rolle 1999). This is explained by the fact that firms increase their global experience in the form of efficient coordination and competitive exposure as well as its international experience in the sense of foreign market interaction and exposure (Dunning 1993), which should eventually lead to the decreasing interest of country of origin influence in a MNE's asset accumulate and hence become “stateless world citizens” (Nachum, Rolle 1999).
3.4 Location specific advantages
In order for a firm to find motivation for direct investment in a specific market, it must find the preferences that will augment its ownership specific advantages and hence influence its competitive position (Dunning 1993). These exploitable location characteristics found, are also known as the Location specific (L) advantages. This may concern the local endowments such as institutions, resources, economic composition and culture, among other elements that form the characterization of a certain economy (McCann, Mudambi 2004).
As a second leg of the Eclectic Paradigm, the L advantages give explanation to the choice of location via the knowledge of superior immobile factors in a specific location and the ability to utilize these accordingly (Dunning 1998). The importance of this leg is presented by the fact that different behaviour and performance among MNEs is explained by the global presence of economic, social, cultural and institutional differences (Peng 2001). This interaction has led for the analysis of the L advantages to become the emerging principle element in the decision-making process regarding FDI (Dunning 1998, Mudambi, Mudambi 2002).
The perception of importance regarding an economy's characteristics may differ among firms based on their FDI motivation (Dunning 1998). For example, most of the FDI activity found in emerging economies (i.e. Morocco), and less developed economies are of the natural resource- and market seeking kind. Nevertheless, due to the force that FDI has on economic development, it is suggested that additional activities are likely to become available to these economies and hence provide opportunity for more strategic-asset seeking kind of FDI. This should have a further influence on the location specific variable demand by firms (Dunning 1993, Cantwell, Narula 2001). It is for this reason that the model presented in the study of Hatem (1997), where market access and its growth as well as the economic and institutional facilities are perceived notably important than the availability of commodities, labour cost and the concern regarding protectionism in an economy, is not necessarily applicable to each FDI activity and hence each economy in a certain point in time. In relation to this, the significance of location variables are also suggested to be depended on the industry composition, firm origin i.e. in relation to cultural and geographic proximity, firm specific concerns additional to the FDI motivation (Dunning 2000).
Among the context-specific theories that were intended to describe the reasoning for distribution and location of activities, was the study of Vernon (1966). This study made an attempt to explain the reasoning for international production in a certain stage of product development and focused on the cost advantages of foreign production in relation to low labour costs. Moreover, the study ‘Follow my leader' by Knickerbocker (1973) provided the principle clarification of FDI clustering in a certain area where other competitors of the oligopolistic industry are available. Additionally, Rugman (1979) gave explanation in his ‘Risk diversification' study to the necessity to spread risk via the global distribution of firm activities (Dunning 1998). Recent location specific studies have shifted their focus towards the “concentration and clustering of some kind of economic activity”, “the role of exchange rates in affecting the extent, geography and timing of FDI” and the “ideology that an optimum location portfolio of assets is a competitive advantage in its own right”(Dunning 2000).
In conclusion, these studies have enabled the construction of a compilation of elements that may be determinant factors, within the framework of Economic, Social and Political classes. Features such as trade barriers have been found to have authority over the potential increase of income level. Furthermore the decreases of information costs are suggested to be directly linked to a close proximity of cultural, as well as geographical distance. Other notable variables such as the level of corruption, which is defined as the abuse of public office for private gain, have been noted to decline the attraction of FDI (Outreville 2008). Additionally, Dunning (1993, 2008), suggested the cost of labour, availability of natural resources, local and international competitors presence as well as pressure from competitors in the domestic market, the international incorporation of the host country and governmental strategies, incentives, availability of distribution channels, local demand, transportation costs, corporate tax system, the level of infrastructure, labour productivity level, enforcement of regulations and the availability of property right protection, as well as the accessibility of local financing and the political links between home country and host economy, to be among the attributes that are examined during the location decision making process by MNEs.
3.5 Internalization specific advantages
The third leg of the Eclectic Paradigm allows for the description of the exposed advantages that have led to the internalization of a MNEs international activity. The Internalization specific advantages sub-paradigm derives from the orthodox internalization school (Dunning 1998), that provided elaboration to the enquiry ‘Why organizations pact themselves to the FDI kind of entry mode, while alternative modes exist?' (Grosse 1985). In other words, these transaction economic theories are described as studies that seek to examine the motivation of MNEs to internalize their activities as an alternative to the leasing of O-specific advantages to foreign firms (Dunning 2000). The I-specific advantages sub-paradigm should bring forward the benefits MNEs have found on the basis of risk reduction by the increase of control as well as the increase of efficiency by cost saving practices (Paul, Maurice 2009).
Buckley and Casson (1976) were among the first scholars that provided a concept, which included the linkages between the effects of market imperfections and the need for vertical integration of activities. In their studies they have mentioned the absence of future markets, unstable bargaining conditions, and government interventions as a notable influence in the drive to internalization. (Pak, Park 2004). Furthermore, it is suggested that the cost of external market usage is positively correlated with the degree of market imperfection (Dunning 2000). Therefore, it is only when the costs of external market usage in the form of intermediate products information, technology, marketing techniques, additional to other processes is greater than the FDI operations, an organization should rationally conclude that the usage of contractual agreements shall not exploit its full potential and hence will not fully add to the improvement of a firms' O-specific advantages (Tolentino 2001, Pak, Park 2004). Moreover the perceived intense uncertainties and legal constraints in especially emerging i.e. Morocco and less developed economies, make it complicated to manage contracts with third parties that are often specific to each detail of a firms' activity in that market as well as the vulnerable exposure of O-specific advantages to third parties (Agarwal, Ramaswami 1992).
The Eclectic Paradigm that stands for the dynamic ability of O-specific advantages does not share the thought with the Internalization school on several grounds. The Eclectic Paradigm acknowledges the possibility that firms do not necessarily have a single focus on the reduction of costs deriving from transactions. Other elements in relation to the production and commerce of the firm such as general cost management of additional business processes as well as economies of scale may well be included in the motivation for internalization. Furthermore, Dunning (2000) claims that the role of innovation in the current global economy as well as the market demand to exploit and explore the available L advantages in a foreign economy requires for the revaluation of the current explanation of internalization.
3.6 The role of the multinational enterprise
At the core of International production science resides the behaviour study of the multinational enterprise (MNE). The MNE is defined as the entity that carries out its activities across boundaries and is present in more than one country in the follow up of one of the various FDI kinds (Samuel, S. Trevis 2006). It is moreover despite this international presence resolute in a common strategy by the linkages of its affiliates and seeks a comprehensive cooperation with entities in its value chain regardless of their location. Additionally, it exploits the possibility to draw from a common pool of resources, including the proprietary assets gained (Rugman, Simon 2009). The U.S. bureau of statistics consider a U.S. firm foreign controlled when a foreign firm has a minimum of 10 percent stocks in control. This would make a firm an affiliate and hence the owner a MNE. The same would count for a U.S. firm owning a controlling share in a foreign-based firm (Paul, Maurice 2009).
The operations of a MNE differ from an international organization in the sense that MNEs are not bound to the sales and purchases of materials or services from the home country location, whereas an international organization solely operates via the exporting method or a representative in a foreign economy. In addition to this, an MNE may find exposure due to its physical international presence to a more complex set of environmental elements, such as host economy competition, a variety of customer demands and suppliers, diversification in financial institutions and governmental regulations and is for this reason often enforced to find strategic fit to the demands of the local conditions (Samuel, S. Trevis 2006). Early international business research described the presence of MNEs as a disruption to a perfect competitive market. As previous sections of this research have elaborated, their ability to operate internationally is a direct consequence of their ownership specific advantages. These assets and their ability to guard them, provide MNEs to enforce a certain monopolistic strategy in terms of pricing and hence the exploitation of their proprietary assets (Dunning 1993, Grosse 1985).
In relation to the behaviour and investment motivation of MNEs, research has uncovered that the MNE is directed by four kinds of direct investment stimulus, which may influence the perceived importance of location characteristics. Moreover, it is suggested that different incentives are needed in order to attract specific kinds of FDI (Dunning 1993).
The strategic-asset seeking investment kind is explained by its characteristic to provide for strategic solutions via location advantages to gain or maintain market share. Firms engage in this kind of strategy if they see opportunity to avoid a current or potential comparative disadvantage of their position in the industry. We may find examples of this in Knickerbockers' (1973) ‘Follow my leader' hypothesis. This conventional study described the reasoning for FDI in an oligopolistic industry as exogenously driven, where firms imitate the movement of a noteworthy industry member in order to minimize the potential competitive disadvantage (Calvet 1981).
Subsequently, the natural resource seeking investment kind is mainly driven by the opportunity to exploit or/and to secure the presence of certain location specific resource. This may include the low cost unskilled and skilled labour, commodities and the acquisition of technological capacity, management capabilities, as well as organizational- and marketing proficiencies.
The market seeking investment form is reasoned by its demand to physically serve a market from within. A firm engaging in this type of FDI is believed to have gained experience in that particular market via additional low commitment investment modes of international trade (Dunning, Lundan 2008). The transition that can lead to the market seeking kind of FDI are deriving from elements such as virtual trade barriers, or limited accessibility of the product or service to the market. Additionally, firms may find that due to the extensive cultural customization of its products or service, it is better served by the advancement of knowledge of the market by learning from within (Dunning 1993).
In conclusion, the previous elaborated investment types are not mutual exclusive by nature. An MNE has the option to seek for more than one strategy in a specific location. In the follow up of one of the prior mentioned investment motivations, firms may further implement an efficiency seeking investment. This kind of investment explores to increase the economies of scale and scope as well as the diversification of risk and common governance. A firm may depend on its will and ability to exploit the international business learning experience, as well as the familiarization with various cultures and the opportunity to gain from cost arbitrage across borders. Example of this practice can be found in the specialization of R&D in one region while production is managed in another region. Both regions being exploited for their factor endowments (Dunning 1998, Brouthers, Brouthers & Werner 1996).
3.7 Foreign direct investment in emerging economies
The significance of the study on FDI in emerging economies is reflected by the fact that this form of international practice has been a key contributor to the development of globalization and moreover the formation of economic integrated areas as previous briefly described in the. Introduction section of this report. Foreign Direct Investment (FDI) which is identified as “the category of international investment that reflects the objective of a resident entity in one economy obtaining a lasting interest in an enterprise resident in another economy” (OECD 2008), has as a main feature, the international flow of capital specifically aimed to create or expand the affiliate in the novel country of production. In addition to this, a firm may seek to transfer control and the implementation of new organizational structures and additional resources that would enhance operations that are to be internalized (Paul, Maurice 2009).
Additional importance regarding the effect of FDI has been found in abundant management as well as international business literature. For example early understanding of the effect of FDI regarding micro and macro economic elements was brought forward by studies such as Vernon's ‘product life cycle' (1966) theory. The PLC study argued that FDI would develop not only the employment opportunity for developing economies, but as well flow into the prospect for these economies to subsequently develop their own export market via the technology spill-over effect (Vernon 1966), which may arise “from non-market transactions when resources, notably knowledge, are spread without contractual relationship” (Meyer 2004).
Indeed other more contemporary studies such as Borensztein et al. (2000) re-examined the effect of knowledge availability and based upon the analysis of FDI in 69 emerging economies, that the transfer of technology has a significantly greater effect on the growth of an economy than the domestic investment approach would have had, if conditions such as sufficient absorptive capacity in the form of human capital and the like are available in the host economy (Borensztein, De Gregorio & Lee 1998). Lewis (2004) argued that even education as an important source for higher productivity is inferior to the effect of knowledge transfer led by MNEs in a developing economy and hence the battle against poverty (Lewis 2004).
In general we are enabled to divide the consequences of FDI on an economy in direct and indirect factors. Initially, the direct effects that a host economy may experience, are as mentioned previously, found in the inflow of capital, transfer of production technology, but as well the availability of innovative knowledge in the form of novel R&D methodology, management and marketing techniques (Dunning, Lundan 2008). An supplementary direct effect of FDI can be found in the demand for institutions that form the supporting industry for MNEs in the host economy and the need for recognized productivity levels by MNEs, which may lead to either new foreign firms to enter the host economy or the investment in technology of local suppliers, in order to comply with value chain requirements (Dunning, Lundan 2008).
Subsequently and in addition to the indirect effects, the access of local firms to more qualified personnel is likely to broaden in the sense that the hiring of individuals trained by multinationals may possess knowledge that would not be widely available in pre-FDI situations. Furthermore, the higher value added import and export that is exposed to local firms may lead to reverse engineering and hence advancement of local ownership advantages (Dunning, Lundan 2008).
In relation to the MNEs' point of view on FDI, Sing and Jun (1995) supported the fact that studies on FDI determinants should make a clear distinction based on the receiving economy's characteristics. In their research they have made an attempt to analyse the MNE location determinacy based on social-political elements, perception of local favourable business conditions, and as well implemented the examination of export orientated economic structure as possible sources of FDI attraction. In order to generate a more exact outcome of the MNE behaviour based on the location characteristics they have separated low-FDI attracting economies from high-FDI attracting economies and indeed found different perceptions among the available MNEs. They concluded with the result that among the high-FDI group, political risk was of great importance for the available MNEs, while productivity is considered significantly more important in particularly low-FDI economies. The level of exports was found to be strongly correlated with FDI flows in predominantly high-FDI countries. In relation to an economy's business conditions, it is argued that mainly for the high-FDI section the quality of business conditions is an important factor. Additionally the behaviour of MNEs in high-FDI economies suggests the possible avoidance of tariffs and other trade barriers after the consideration of market size and further location-specific variables.
Tahir and Larimo (2009) argued however that in addition to FDI in developing economies, the academia is in need of additional empirical analysis that includes a more holistic view. In their attempt to supply to this need, they have examined the internalization, location and ownership specific characteristics of 135 Finnish MNEs operational in emerging markets of Asia via the FDI mode. Specifically they included the most discussed elements in the OLI framework. This included according to their study; the R&D intensity, firm size of the MNEs, international experience as well as cultural distance perception, the importance of wage rate, market size, host economy's corporate taxation system, inflation, country risk and exchange rate fluctuations.
The constrained of the previous mentioned academic work however, is according to Wahid (2009) visual in the fact that examinations such as these provide no specific consideration for differences among economic and socio-political conditions of the emerging economies. He postulates that the outcome of country-to-country examination should be more precise and reliable than the clustering of emerging economies. Studies that utilized the eclectic paradigm knowledge on individual emerging economies include (Tatoglu, W. Glaister 1998) and (Torrisi et al. 2009). Wahid (2009) however noted that due to the relatively little share of global FDI in the African continent, the supply of empirical research on individual African states is comparatively slim and therefore deserves more attention from scholars (Wahid, Sawkut & Seetanah 2009).
Nevertheless one of the studies that contributed to the knowledge of FDI in Morocco specifically was conducted by (Bacaria, Juarez 2001). This research focused on the FDI determinants of Spanish firms in Morocco by examining 13 MNEs operational in the economy, via direct interview method. Its examination uncovered that the characteristics of Spanish enterprises in Morocco indeed owned a certain superior asset in the market and possesses a leader position in their sector. Furthermore foreign MNEs in this economy hold an acceptable degree of financial autonomy and considered investment aid to be insignificant. Nonetheless this sample reflects on the prior trade knowledge as an important aspect in their location decision. Despite this contribution, this study is limited due to its focus on solely the Spanish enterprise, which may perceive the importance of given elements differently than enterprises from additional nationalities as is suggested by Dunning (1993).
We have initiated this section with a presentation on previous IB studies and some examples of developed theories. This was followed by focus on the eclectic paradigm construction and the
This chapter will aim to clarify the methodology adopted for this study in order to reach its objectives. It will provide an analysis of the aims and objectives for this research as well as the method that is utilized and the process and design of this report. Furthermore a rational explanation will be given regarding the sampling and the use of a questionnaire survey.
4.2 Research aim and objectives
The intention of this research is to identify the motivation of MNEs to investment in Morocco as choice of location as part of their international operations.
How does Dunning's Eclectic Paradigm explain the motivation of multinational enterprises to conduct foreign direct investment in Morocco?
1. Describe the kind of foreign direct investment that is attracted currently by Morocco.
2. Clarify which assets have had a positive contribution to the capacity of MNEs to invest in Morocco and overcome the liability of foreignness.
3. Discuss which particular country specific factors are perceived most important in relation to the influence on a firm's operations.
4. Examine to what extent location-bounded elements determine the attraction of FDI .
5. Describe which argumentation is found to be important for the internalization of Moroccan activities by MNEs.
4.3 Research method
We have analyzed the OLI framework presented by Dunning (1993) by critically reviewing the literature regarding FDI and the related three sub-paradigms researched by additional IB scholars. We have however followed track of the original framework and perceived the assumption that the three elements of the eclectic paradigm form the broad fundament for MNEs in their decision making process regarding FDI. This approach, which is also known as the deductive method, has allowed us to utilize a general principle and apply it to a specific case (BRYMAN).
This research has focused on the identification of the motivations of MNEs to investment in Morocco as choice of location as part of their international operations. For this reason it has seeked to gain data from the management of MNEs operational in Morocco via a questionnaire survey in order to examine the factors that were perceived applicable and most significant in their decision making process for international production.
4.4 Research process
4.5 Research design and framework
4.5.1 Questionnaire survey
We have utilized three types of questions in the questionnaire survey; the initial type is of the nominal kind where participants are allowed to respond to either yes or no. Subsequently participants were exposed to likert-scale questions in which agreement (1-5) could be expressed based on the related statement and thirdly a set of multiple choice questions were available where participants were allowed to choose from more than two options.
The questionnaire survey (see appendix#) consisted out of two main parts. The first part (section A) consisted out of questions that were aimed to extract background information of the organization (e.g. the size of the firm and head quarter location). In the following part (section B), the variables adopted from (Dunning 1993, Dunning, Lundan 2008) were utilized. These variables have been presented as the most significant items that are influencing firm policy on FDI.
The experiment used Ownership, Location and Internalization specific variables that were tested on importance to each MNE's operations. Each participant could indicate the significance of a statement for his overall strategy or daily procedures. Via this method the relevancy of each variable was tested on the operations in Morocco. In the last part of section B, participants were asked for the applicability of certain statements, due to the fact that solely a single choice was possible (i.e. applicable or not applicable).
The sample consist of 16 selected MNEs operational in the Moroccan economy that were approached via a questionnaire survey. The initial aim was to include 40 MNEs belonging to the records of the HIC Rotterdam and AMCHAM Morocco. These two organizations were able to assist in this project due to their knowledge and network of MNEs in Morocco. Eventually 7 Dutch MNEs and 9 American MNEs were willing to participate and contributed their strategic insight and experience of FDI in the Moroccan economy, which in fact reflected the sample size of (Bacaria, Juarez 2001). The participants were contacted via email and subsequently were presented to an online survey in, which could be filled in within a three week period of time. As the previous section describes, this research is focused on the explanation of all types of MNEs. For this reason we have made no distinguish between sizes or nationalities of MNEs, nor was there specific concentration on a certain industry. In order to maintain academic uniform of what MNEs are and hence who to indeed include in this project we have used the definition elaborated by (Samuel, S. Trevis 2006).
The sampling criteria;
1. Target population: Senior management of MNEs in Morocco. The respondents didn't have to be situated in Morocco, nevertheless their position in the firm should allow them to be knowledgeable about the firm's operations in Morocco.
2. Sample size: 16 multinational enterprises operational in any region in Morocco
3. Sampling frame: Online questionnaire survey: shamdoun.questionpro.com
4. Sampling unit: email and website: shamdoun.questionpro.com
5. Sampling technique: non-probability sample
4.6 Data collection
The research focused on the management of MNEs operational in Morocco. As previously explained, we have used a questionnaire to collect data necessary to determine evidence. Prior to the collection of this primary data, relevant literature was accumulated in order to provide the essential direction. This secondary data is indeed useful for the development of a theoretical framework, nevertheless we have chosen for this research to seek data from the source due to the fact that relevant existing data was not primarily collected for this cause and therefore could not comply to the whole set of data necessary.
Therefore, data that could aid to format a comprehensive answer to the earlier discussed research question was only available via the direct approach of the responsible managers. Secondary data in the form of annual reports was allowed to give support to the given statement, nevertheless the availability of annual reportage is subject to the will and business type (e.g. public company) of the firm and would moreover unlikely to provide a constant complete set of answers. Furthermore we have seeked advice from prior studies such as (Bacaria, Juarez 2001) and (Tatoglu, W. Glaister 1998) found confirmation in their procedures. Moreover, primary data is overall viewed as the collection of data that is reliable in terms of consistency and should add to the validity of data due to the fact that it is first hand collected (Alan, Emma 2007).
The questionnaire was made available via the website www.questionpro.com. Here a personal page was developed (shamdoun.questionpro.com) where participants could access the questions. This tool provided solution for the fact that managers were not continuously in close physical reach. It was easy accessible from every location and offered no unnecessary time waste of additional paper and postage costs. The participants were made aware of this method and research introduction via email.
4.7 Data analysis
The collected data from the presented questionnaire was analysed through SPSS, which provided statistical study that assisted in the formation of a conclusion for this research. The use of this program enabled the presentation of cross tabulations, frequency tables and correlation matrixes between variables that will be presented in the following chapter.
Data that is collected should reveal which factors of the OLI paradigm are most agreed on by the sample participants. Following the description of this, we will make a selection of factors that will be tested on correlation presence. Based on that knowledge, we are enabled to draw a conclusion on how the interaction between the OLI factors can be significant. We therefore expect that there are several strong positive correlations between the individual factors. This will enable a twofold of matters; first of all it should proof that there is indeed an interaction between the individual variables and most importantly shall reveal which most important OLI factors are combined when entering the Moroccan market via the FDI method.
4.7.1 Data analysis structure
We have found several constrains while conducting this research. First of all, this research is based on MNEs from two countries, namely United States and the Netherlands. This is an important note since the background is expected to influence the OLI composition of a firm. While both economies contribute have a significant amount of MNEs, they are not identified as the most important investors in Morocco in terms of FDI value, which may uncover future potential but perhaps not represent most important agreement on current OLI factors available in Morocco. Fur