Geography Reference
In-Depth Information
making the
geographical
destination
of MNEs far less dependent on purely
cost-based and intrinsically static hierarchical patterns. Indeed, this latter
observation seems to point to the opposite side of the globalization argu-
ment. Skills formation and knowledge accumulation processes are ever
more dependent on sources that are external to any single firm (however
large and multinational it may be) and are highly spatially situated
(Storper 1997). Some of these limitations are acknowledged by Vernon
himself (1979a, 1991b), who recognizes that the expansion of MNEs'
multi-product networks into world-wide production networks would
render locational issues much more complex than what was depicted in the
original formulation of his model.
2.3.3
Caves: Vertical and Horizontal Integration
Following Hymer in his industrial organization approach to international
production, Richard Caves's work (1971) was the first to introduce the
ground-breaking distinction between horizontal and vertical integration
of MNE operations across national boundaries. Horizontal FDI (herein-
after HFDI) implies the production of the same good or service produced
at home in a new foreign location, thus replicating identical production
processes across countries. Vertical FDI (hereinafter VFDI) instead
involves the shift abroad of some stages of the production process, either
backward (upstream) or forward (downstream) or both, thus fragmenting
the MNE production process vertically across countries. Interestingly,
Caves also allows for the possibility of MNEs carrying out foreign pro-
duction that is neither horizontally nor vertically integrated: this is said
by Caves to be of a 'conglomerate diversification' type (Caves 1971, p. 3).
Hence, the advantages offered by FDI can be related to either verti-
cal or horizontal determinants of foreign production, while taking into
account industry characteristics. In terms of HFDI, the ownership advan-
tages are those possessed by MNEs operating in industries characterized
by oligopolistic structure and substantial product differentiation, and
particularly those with the most considerable knowledge- or research-
intensive activities. The major advantages of VFDI relate to the structural
features of the markets in which the MNE is active. In particular, VFDI
advantages relate to where there are incentives to eliminate oligopolistic
uncertainty regarding input supplies and to raise barriers to entry by verti-
cally integrating the stages of production across national boundaries. In
Caves' own words (1971, p. 1): 'foreign direct investment occurs mainly in
industries characterized by certain market structures in both the 'lending'
(or home) and 'borrowing' (or host) countries'.
From this standpoint, the main issues addressed by Caves relate to the
