A model of asset-seeking foreign direct investment driven by demand conditions

This paper presents a simple game theoretic model in which a firm may undertake foreign dir-ect investment (FDI) in or-der to gain access to favourable demand conditions as described by Porter (1990). The purpose of the model is to illustrate an important motivation for foreign direct investment: to secure access to certain types of valuable assets by participating in a particular foreign market. The implications of this asset-seeking FDI are then discussed, including the need for firms to manage the process of transferring knowledge from subsidiary to parent carefully and for public policy makers to recognize that the public policy implications of asset-seeking FDI are very different from those of FDI as it has traditionally been viewed.