Creating Competitive Advantages out of Market Imperfections: Taiwanese Firms in China

Abstract

In this paper, we highlight foreign direct investment (FDI) as a strategic move by foreign investors to exploit host country resources that are not equally available to all firms in order to create a competitive advantage. Using Taiwanese firms in China as an example, we find this resource-based FDI strategy to be most effective among large firms in mature industries. Large Taiwanese firms take advantage of market imperfections and institutional deficiencies in China to create barriers for small firms to access valuable local resources, to orchestrate a relocation of production networks that favor themselves, and to pursue vertical integration that forecloses the competition from small firms. As a result, large firms gain shares in world markets, which in turn, enable them to diversify product lines or to engage in risky R&D.