Foreign direct investment in a changing political environment : Finnish investment decisions in South Korea

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School of Business | Doctoral thesis (monograph) | Defence date: 2005-12-19
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Area Studies Programme
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287, [3] s.
Acta Universitatis oeconomicae Helsingiensis. A, 265
This dissertation contributes to an understanding of foreign direct investment (FDI) in a changing political environment. The theoretical framework of the study is positioned to the geography of enterprise approach, but it has been contributed with theories from the fields of strategic management, international business, and political economy. The research problem of the study asks how transnational corporations (TNCs) perceive and react to the change in the host country’s political environment. Literature has basically studied the spatial aspects of FDI separately from the growth and performance of the firms, while the present study aims to combine them. In the current study, the relevant factors having an impact on the investment decisions and the performance of the TNCs are recognised with the help of Lahti’s strategy-performance model. The model is modified by incorporating the general macro-environment of the firm explicitly to the model. The firm’s relative optimal location is explained by linking the location of the firm to the purposes of the firm: the firm invests where it can operate successfully. Based on literature, it is believed that firms interpret the location conditions of the host country into a special set of location factors, which are crucial from their strategy perspective. The present study asks whether the political environment of the firm in the host country has a special role among the other parts of the firm’s environment (natural, economic, demographic, cultural, and technological), because of the supremacy of the host government to intervene in FDI. In the case of intervention, TNCs need to bargain with the host government. The present study states that they may not need to bargain alone but may lobby help from their home governments. Therefore, this study adds a concept of authority services to the list of TNC’s bargaining techniques. The modified strategy-performance model was empirically applied to the case of Finnish investment in South Korea (hereafter Korea). Korean government liberalised its investment policy drastically in 1998 and thus, the present study compares Finnish investment during the restricted (1984-1997) and liberal (1998-2002) regimes. The data includes national and regional level statistical data, and firm level data from Finnish investors collected using a questionnaire. Both types of data are supplemented and cross-checked by interviews. The empirical results show that the change in the political environment in Korea in 1998 had a clear impact on Finnish investment in Korea. However, the change cannot be totally separated from the other simultaneous changes, among which, technological advancement of the Korean society was the most influential. The results indicate that repeat investments had been engaged regardless of the investment policy liberalisation, but the acquisitions had not taken place without the change in Korea’s investment policy. In a changing political environment, the authority services provided by the Finnish government were important to Finnish investors. The empirical results suggest that the impact of the environment change on the firm’s investment decision-making can be successfully studied with the help of the modified strategy-performance model, regardless of the host country. However, any further evidence on the particular role of the political environment over the other parts of the firm’s general macro-environment was not found. Each firm emphasised different variables of the external environment, which reflects the fact that firms perceive the same host country differently according to their strategies. This justifies the use of concepts of location conditions and location factors.
Supervising professor
Eronen, Jarmo, professor
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