Technological capabilities and international production strategy of firms: The case of foreign direct investment in China

In this paper, the author highlights the differing motives behind direct foreign investment (FDI) made by (1) large transnational corporations (TNCs) from industrial countries, and (2) small manufacturing firms from newly industrializing economies (NIEs). The basic premise is that TNCs that command sophisticated technologies wish to produce in China to exploit their technological advantages by gaining access to potentially substantial Chinese domestic markets. However, small firms from NIEs such as Hong Kong use more mundane technologies. They are more interested in using low cost inputs, such as labor and land in China, so that they can continue to export manufactured goods to third countries, thus avoiding rising input costs in their own domestic economies. The discussion is supported by the results of a survey and interviews with executives from both large TNCs and small NIE firms active in PRC.