2.2.1 Different Regional Development Outcomes of Horizontal and Vertical FDI

Nevertheless, attempts have been made to identify the general types and features of FDI that are likely to translate into particular regional development outcomes. Already in the early 1970s, Reference CavesCaves (1971) recognized the most important difference between horizontal and vertical FDI. Horizontal FDI involves the production of the same or similar commodity as in the home economy in foreign locations and is therefore typically a market-capture, demand-oriented investment. Vertical FDI is a supply-oriented investment, which involves the location of a particular stage of the production process abroad. Its two basic forms include an efficiency-seeking vertical investment that is seeking to lower production costs and a resource-seeking vertical FDI that is securing access to natural resources, agricultural products or unskilled labor in foreign locations (Reference Milberg and WinklerMilberg and Winkler, 2013; Reference DunningDunning, 2000). A strategic asset-seeking FDI is a special type of vertical supply oriented FDI that is looking for knowledge-based intangible strategic assets abroad, such as advanced technology, R&D capabilities, managerial know-how and brand assets that could be transferred back to the domestic economy (Reference KuemmerleKuemmerle, 1999; Reference PavlínekPavlínek, 2012; Reference Cui, Meyer and HuCui et al., 2014).

Although the regional economic effects of these different types of FDI will depend on the factors listed above, horizontal FDI is more likely to develop stronger and more stable ties with the host economy than vertical FDI (Reference DickenDicken, 2015; Reference AkyüzAkyüz, 2017). This is because vertical FDI usually leads to the transnational vertical integration of foreign subsidiaries into home country operations with limited or nonexistent linkages with domestic firms and institutions. Consequently, vertical FDI is also more likely to relocate, should more profitable opportunities emerge elsewhere (e.g., Reference PavlínekPavlínek, 2018; Reference Pavlínek2020). Since linkages with domestic firms and institutions are the main precondition for potential technology transfer from foreign firms to the host economy in the form of spillovers (Reference Blomström and KokkoBlomström and Kokko, 1998; UNCTAD, 2001; Reference Görg and StroblGörg and Strobl, 2005; Reference Scott-KennelScott-Kennel, 2007; Reference SantangeloSantangelo, 2009), horizontal FDI has a greater potential to benefit the host economy in the long run compared to vertical FDI. The concentration of the different types of FDI in different regions is, therefore, likely to lead to different regional development outcomes of FDI.

In this context, it is useful to make the basic distinction between FDI in core regions and peripheral regions (Table 2.1). Core regions have mainly been targeted by horizontal FDI (Reference Milberg and WinklerMilberg and Winkler, 2013), while peripheral regions predominantly by vertical, efficiency-seeking and resource-seeking FDI (e.g., Reference Yamin, Nixson, Weiss and TribeYamin and Nixson, 2016). Consequently, more positive effects of FDI have been found in core regions than in peripheral regions (Reference Borensztein, De Gregorio and LeeBorensztein et al., 1998; Reference Phelps and FullerPhelps and Fuller, 2000; Reference Dimitratos, Liouka and YoungDimitratos et al., 2009; Reference Alfaro, Chanda, Kalemli-Ozcan and SayekAlfaro et al., 2010; Reference Alvarado, Iñiguez and PonceAlvarado et al., 2017).

2.2.2 FDI and Linkages in Host Regions

The existence of linkages with domestic firms and the development of spillovers from foreign to domestic firms have been recognized as potentially the most important long-term regional development effects of FDI in host regions (Reference JavorcikJavorcik, 2004; Reference Ivarsson and AlvstamIvarsson and Alvstam, 2005; Reference Blalock and GertlerBlalock and Gertler, 2008; Reference SantangeloSantangelo, 2009; Reference Narula and DunningNarula and Dunning, 2010; Reference Amendolagine, Boly, Coniglio, Prota and SericAmendolagine et al., 2013; Reference Amendolagine, Presbitero, Rabellotti and Sanfilippo2019). Economic geographers have identified three basic types of supplier linkages according to their potential impact on domestic firms: developmental, dependent and detrimental (Reference TurokTurok, 1993; Reference PavlínekPavlínek, 2018). While developmental linkages are long-term supplier relationships that are based on collaboration and partnership, dependent linkages are short-term and price-based supplier relationships, which are established by foreign subsidiaries in host economies in order to minimize the costs of supplied commodities (Reference TurokTurok, 1993). The cooperation and partnership between firms in developmental linkages encourages the exchange of information, which increases the chances of knowledge and technology transfers from foreign subsidiaries to domestic firms and the chances of their upgrading. In the case of dependent linkages, the exchange of information and knowledge between foreign subsidiaries and domestic firms is limited (UNCTAD, 2001), which undermines the opportunities for the upgrading of domestic firms (UNCTAD, 2001; Reference Gereffi, Humphrey and SturgeonGereffi et al., 2005; Reference Pavlínek and ŽížalováPavlínek and Žížalová, 2016).

Horizontal FDI is more likely to generate developmental linkages in host regions, while vertical FDI is more likely to develop dependent linkages. Therefore, developmental linkages are more likely to develop in core regions, while dependent linkages are more likely to develop in peripheral regions. Additionally, the number and intensity of linkages tends to be higher in core regions than in peripheral regions due to the higher number of more capable domestic firms in core regions (Reference Dunning and LundanDunning and Lundan, 2008; Reference Meyer and SinaniMeyer and Sinani, 2009). This indicates that FDI is likely to have more positive effects, thanks to the development of linkages, in core regions than in peripheral regions. Detrimental linkages develop in those cases when foreign subsidiaries have negative effects on domestic firms (Reference Hymer and BhagwatiHymer, 1972; Reference BellakBellak, 2004) through, for example, employment and labor market effects (Reference Pavlínek and ŽížalováPavlínek and Žížalová, 2016; Reference PavlínekPavlínek, 2018) which are more likely to be associated with vertical than horizontal FDI and, therefore, more likely to develop in peripheral regions than in core regions.

Weak FDI linkages or their absence in peripheral regions have long been recognized. Reference HirschmanHirschman (1958) explained that the lack of both backward and forward FDI linkages in peripheral regions was due to the predominant FDI in mining and agriculture, which is supported by empirical evidence (Reference Nunnenkamp and SpatzNunnenkamp and Spatz, 2003; Reference Morris, Kaplinsky and KaplanMorris et al., 2011; Reference MorrisseyMorrissey, 2012; Reference Amendolagine, Boly, Coniglio, Prota and SericAmendolagine et al., 2013). However, limited FDI linkages have also been found in peripheral regions that have managed to attract a sizeable manufacturing investment, such as Latin America, East and Southeast Asia (Reference AmsdenAmsden, 2001; Reference SchneiderSchneider, 2013; Reference Dussel Peters, Weiss and TribeDussel Peters, 2016) and in peripheral regions of more developed countries (Reference StewartStewart, 1976; Reference PhelpsPhelps, 1993a; Reference TurokTurok, 1993; Reference LagendijkLagendijk, 1995b; Reference Rodriguez-ClareRodriguez-Clare, 1996; Reference CarrilloCarrillo, 2004; Reference PavlínekPavlínek, 2018). The rapidly increased global sourcing and follow sourcing by TNCs has further limited the development of linkages (Reference LarssonLarsson, 2002; Reference Tavares and YoungTavares and Young, 2006; Reference Williams, McDonald, Tuselmann and TurnerWilliams et al., 2008; Reference HataniHatani, 2009; Reference Pavlínek and ŽížalováPavlínek and Žížalová, 2016; Reference PavlínekPavlínek, 2018; Reference HumphreyHumphrey, 2000). Empirical evidence thus suggests that the integration of domestic firms into foreign-capital-controlled supplier networks in peripheral regions takes place predominantly through dependent linkages, which weakens the potential for long-term positive effects of FDI (Reference Young, Hood and PetersYoung et al., 1994; Reference HataniHatani, 2009; Reference PavlínekPavlínek, 2018).

2.2.3 FDI Spillovers in Host Regions

The existence of FDI linkages with domestic firms is the precondition for the development of vertical spillovers from foreign subsidiaries to domestic firms (Reference Blomström and KokkoBlomström and Kokko, 1998; UNCTAD, 2001; Reference Görg and StroblGörg and Strobl, 2005; Reference Scott-KennelScott-Kennel, 2007; Reference Giroud and Scott-KennelGiroud and Scott-Kennel, 2009; Reference SantangeloSantangelo, 2009; Reference PavlínekPavlínek, 2018), which are potentially the most important long-term benefit of FDI for host regions (Reference Blomström, Kokko and ZejanBlomström et al., 2000; Reference Blomström and KokkoBlomström and Kokko, 2001; Reference Görg and StroblGörg and Strobl, 2001; Reference Dunning and LundanDunning and Lundan, 2008; Reference GiroudGiroud, 2012). Spillovers are classified as horizontal and vertical. Horizontal spillovers refer to the unintentional effects of foreign firms on domestic firms in the same industry, while vertical spillovers are both the unintentional and intentional effects on local suppliers and customers of foreign subsidiaries via backward and forward linkages (Reference Blalock and GertlerBlalock and Gertler, 2008; Reference Hallin and LindHallin and Lind, 2012). Assuming that foreign firms investing in peripheral regions are more productive than domestic firms because of their firm-specific ownership advantages (Reference HymerHymer, 1976 [1960]), the operation of foreign subsidiaries in a host economy will encourage domestic firms to become more productive in order to remain competitive (competition effects). Local firms might increase productivity by imitating the better machinery and organization of the production of foreign subsidiaries (demonstration effects). Productivity spillovers might also result from the supplier relationships between foreign subsidiaries and domestic firms in situations in which foreign subsidiaries are more demanding buyers than domestic firms (Reference Pavlínek and ŽížalováPavlínek and Žížalová, 2016), which will force domestic firms to improve their productivity. Know-how and knowledge can also diffuse through worker mobility from foreign subsidiaries to domestic firms (Reference Görg and StroblGörg and Strobl, 2005).

Linkages alone do not guarantee that spillovers will develop since they depend on the absorptive capacity of domestic firms (Reference Saliola and ZanfeiSaliola and Zanfei, 2009; Reference Ascani and GagliardiAscani and Gagliardi, 2020), which is considered to be crucial for their ability to benefit from FDI (Reference Ernst and KimErnst and Kim, 2002; Reference MeyerMeyer, 2004; Reference Giroud, Jindra and MarekGiroud et al., 2012; Reference Sultana and TurkinaSultana and Turkina, 2020). The absorptive capacity of domestic firms is strongly conditioned by their R&D capabilities (Reference Cohen and LevinthalCohen and Levinthal, 1989; Reference Sturgeon, Gereffi, Rogers and Fernandez-StarkSturgeon et al., 2010), which are generally higher in core regions than in peripheral regions (Reference Dunning and LundanDunning and Lundan, 2008; Reference Meyer and SinaniMeyer and Sinani, 2009; Reference PavlínekPavlínek, 2018; Reference Pavlínek2022a). Consequently, core regions are more likely to benefit from spillovers and hence from positive long-term effects of FDI than peripheral regions.

However, it has been difficult to measure FDI spillovers in host regions. Economists have predominantly used econometric methods to estimate the existence and extent of spillovers in host economies, which, however, do not reveal how spillovers take place (Reference Görg and StroblGörg and Strobl, 2001). This is why economic geographers also use targeted interview and survey questions to measure the extent of spillovers and how they take place (e.g., Reference Pavlínek and ŽížalováPavlínek and Žížalová, 2016).

2.3.1 Branch Plant Economy and Truncation

In the 1970s and 1980s, the long-term development effects of FDI in peripheral regions of more developed countries were conceptualized as the branch plant economy and truncation. Branch plants are externally owned factories in peripheral regions that tend to specialize in the mass production of simple standardized goods (Reference FirnFirn, 1975; Reference TownroeTownroe, 1975; Reference DickenDicken, 1976; Reference Hood and YoungHood and Young, 1976; Reference WattsWatts, 1981). Unlike locally owned firms, externally owned branch plants benefit from a potentially greater stability and better prospects for development because of their access to financial resources, suppliers and know-how through their parent corporations (Reference WattsWatts, 1981). However, while branch plants inject capital and create jobs in peripheral regions, they suffer from the outflow of profits and a greater propensity to relocate or close during economic crises. They are also usually truncated since they tend to lack higher-level managerial, decision-making, R&D and other strategic nonproduction functions that remain concentrated in parent enterprises located in core regions (Reference BrittonBritton, 1980; Reference Britton1981; Reference HayterHayter, 1982). Weak supplier linkages with domestic firms and the dependence of branch plants on technology transfers from parent companies and imports of materials and components from abroad tend to limit indigenous technological development in host economies. Consequently, the branch plant economy and truncation literature considers a high level of foreign control through externally owned branch plants to be detrimental to long-term economic interests of peripheral regions (Reference Hymer and BhagwatiHymer, 1972; Reference FirnFirn, 1975; Reference Hood and YoungHood and Young, 1976; Reference BrittonBritton, 1980; Reference HayterHayter, 1982; Reference Schackmann-FallisSchackmann-Fallis, 1989).

The branch plant economy and truncation literature fails to recognize the importance of institutions in enhancing regional development potential of FDI in peripheral regions (e.g., Reference WattsWatts, 1981). Strong local institutions can help to reinforce the transfer of technology from branch plants to domestic firms and increase the local value capture (Reference PerkmannPerkmann, 2006). For example, in recent decades, peripheral regions in more developed countries have benefited from better-quality regional institutions and their increased focus on attracting FDI into high-value-added activities instead of routine manufacturing and services (Reference IammarinoIammarino, 2018).

2.3.2 New International Division of Labor and Spatial Divisions of Labor Approaches

In the late 1970s and 1980s, the political economy approaches became increasingly prominent in economic geography (Reference Peet and ThriftPeet and Thrift, 1989), including the new international division of labor and spatial divisions of labor approaches. The focus was no longer solely on the effects of FDI in peripheral regions but also on the position and role of peripheral regions in the world economy and the new international division of labor, which was then typified by the FDI-driven industrialization of less developed countries, contemporaneous decline of especially labor-intensive industries in more developed countries, and by intensified uneven development (Reference Fröbel, Heinrichs and KreyeFröbel et al., 1980; Reference PerronsPerrons, 1981; Reference ScottScott, 1987). The spatial divisions of labor approach analyzed the regional development effects of the new international division of labor in more developed countries by linking changes at the regional level to increasing levels of internationalization (Reference MasseyMassey, 1979; Reference Massey1995 [1984]; Reference PerronsPerrons, 1981; Reference Lloyd, Shutt, Massey and MeeganLloyd and Shutt, 1985).

The pioneering work of Doreen Reference MasseyMassey (1979; Reference Massey1995 [1984]) theoretically explained how peripheral regions with foreign-owned branch plants fit in the overall spatial divisions of labor in the entire economy and how the internal economic geography of Britain reflects the place of Britain in the new international division of labor. Massey emphasized the increased geographical separation of different economic functions, such as R&D, production requiring skilled labor and mass production. She explained how large corporations, which are under constant pressure to decrease the cost of labor, take advantage of spatial inequality by setting up the production of particular commodities in peripheral regions because of low wages, available semiskilled labor, and limited tradition of union resistance (see also Reference PerronsPerrons, 1981). FDI capitalizing on this division of labor further reduces the degree of local control in peripheral regions, exacerbates regional inequalities by increasing the transfer of profits and dividends from peripheral regions, and increases the vulnerability of regions to the forces of global competition (Reference MasseyMassey, 1979; Reference PerronsPerrons, 1981). Reference MasseyMassey (1979; Reference Massey1995 [1984]) explicitly linked the new spatial divisions of labor in Britain to the increased internationalization of the world economy. Underdevelopment in peripheral regions should therefore not be explained by internal characteristics of peripheral regions but by their position and function in the broader national and international economy, which “can only be understood as a single, integrated system” (Reference Fröbel, Heinrichs and KreyeFröbel et al., 1980: 15).

Despite building on the branch plant analysis (Reference PerronsPerrons, 1981), the spatial divisions of labor approach no longer solely attributed economic difficulties of many branch plant regions to inward FDI and external control because the new international division of labor forced surviving domestic companies to follow similar corporate strategies of rationalization, mergers, acquisitions, relocation and outward FDI. These strategies increasingly affected localities and regions in home economies, often resulting in job losses and factory closures that tended to concentrate in peripheral regions (Reference Fröbel, Heinrichs and KreyeFröbel et al., 1980; Reference PerronsPerrons, 1981; Reference Lloyd, Shutt, Massey and MeeganLloyd and Shutt, 1985). This further increased the vulnerability of peripheral regions while demonstrating that local firm ownership is no panacea for peripheral regions (Reference Lloyd, Shutt, Massey and MeeganLloyd and Shutt, 1985; Reference MasseyMassey, 1995 [1984]). Instead of ownership, the extent of local and regional linkages of branch plants is more strongly affected by different roles these branch plants play in different spatial structures (e.g., a part-process hierarchy and cloning). External ownership itself does not cause problems observed in peripheral regions by branch plant literature, such as the lack of high-value-added activities or the lack of local material linkages, but exacerbates them (Reference MasseyMassey, 1995 [1984]). The spatial divisions of labor approach also underlined the need to focus on complex corporate strategies affecting peripheral regions, not only FDI, while also considering the role of political forces and institutions in regional restructuring (Reference Lloyd, Shutt, Massey and MeeganLloyd and Shutt, 1985; Reference MasseyMassey, 1995 [1984]).

The new international division of labor/spatial divisions of labor approaches thus highlighted the role of FDI in uneven development at multiple spatial scales and the close relationship between the increased importance of FDI in the world economy and its regional and local economic effects. It is this attention to empirical detail at the local and regional scale of the spatial divisions of labor approach that has been criticized by Marxist economic geographers. They were concerned that it was achieved at the expense of universal abstractions and theory (Reference HarveyHarvey, 1987; Reference Smith, Peet and ThriftSmith, 1989) and that it would lead to “a new empiricism” in economic geography (Reference SmithSmith, 1987). The increased attention to the processes taking place at the local and regional scales contributed to the development of new regionalism in economic geography, while, at the same time, the usage of the term “global production networks” by Reference Lloyd, Shutt, Massey and MeeganLloyd and Shutt (1985: 33, 50) signals the importance of the new international division of labor/spatial divisions of labor approaches for the development of the GPN perspective (Reference Henderson, Dicken, Hess, Coe and YeungHenderson et al., 2002).

2.3.3 New Regionalism and Territorial Embeddedness of FDI

The “institutional turn” in economic geography of the 1990s highlighted the importance of institutions in regional economic development (Reference AminAmin, 1999; Reference Martin, Sheppard and BarnesMartin, 2000; Reference Cumbers, MacKinnon and McMasterCumbers et al., 2003; Reference Farole, Rodríguez-Pose and StorperFarole et al., 2010; Reference Bathelt and GlücklerBathelt and Glückler, 2013). Geographers also recognized that the spatial reorganization of economic activities driven by economic globalization and growing FDI inflows (Figures 1.1 and 1.2) might enhance the beneficial effects of FDI in peripheral regions of more developed countries (Reference Amin, Bradley, Howells, Tomaney and GentleAmin et al., 1994; Reference DickenDicken, 1994). Changes in the organization of manufacturing, such as the development of just-in-time production, increased clustering of manufacturing firms (Reference MairMair, 1993; Reference Sturgeon, Van Biesebroeck and GereffiSturgeon et al., 2008). It was argued that knowledge accumulation within clusters would attract higher-value-added FDI to host regions, while the development of supplier linkages with domestic firms and other foreign firms in these clusters would increase the embeddedness of foreign branch plants in peripheral regions (Reference Dicken, Forsgren, Malmberg, Amin and ThriftDicken et al., 1994). Spillovers from FDI to the local economy, in turn, would create conditions for progressive upgrading in peripheral regions through enhanced learning and innovation supported by dynamic regional institutions and high levels of “institutional thickness” (Reference Amin, Thrift, Amin and ThriftAmin and Thrift, 1994; Reference Malmberg, Sölvell and ZanderMalmberg et al., 1996; Reference MorganMorgan, 1997). Although different types of embeddedness are recognized (Reference HessHess, 2004), in terms of FDI, economic geographers mainly focused on the territorial embeddedness of foreign firms in local supply networks in peripheral regions (Reference Dicken, Forsgren, Malmberg, Amin and ThriftDicken et al., 1994; Reference Pavlínek and SmithPavlínek and Smith, 1998; Reference PavlínekPavlínek, 2002d). It was argued that “embedded” branch plants combined with dynamic regional institutions would improve the regional competitiveness of peripheral regions and ultimately ease regional development deficiencies related to the branch plant economy and truncation, which would lead to a more balanced, diversified and successful regional economic development (Reference MairMair, 1993; Reference Amin, Thrift, Amin and ThriftAmin and Thrift, 1994). Such optimistic and celebratory claims about the role of FDI in regional development of peripheral regions have been embraced by regional development policy circles in Western Europe and the USA (Reference LoveringLovering, 1999). The new regionalism became a new orthodoxy of regional economic development despite its weak theoretical foundations and inadequate empirical analyses, resulting in weak empirical evidence (Reference LoveringLovering, 1999; Reference MacKinnon, Cumbers and ChapmanMacKinnon et al., 2002) and an “overterritorialized” view of embeddedness (Reference HessHess, 2004).

The claims of the new regionalism about the increased territorial embeddedness of FDI failed to be supported by strong empirical evidence even under the most favorable circumstances, such as in the case of the automotive industry with its dense supply networks and high levels of FDI. New regionalism claimed that automotive branch plants and new investments were gradually transformed into “performance/networked branch plants” that had strong local supplier linkages and spinoffs to host regions based on increased outsourcing, just-in-time production, and increased nonproduction functions related to their greater operating and even strategic autonomy (e.g., Reference Amin, Bradley, Howells, Tomaney and GentleAmin et al., 1994; Reference Dawley, Pike, Rodríguez-Pose and TomaneyDawley, 2011). However, the empirical evidence showed that despite the limited functional upgrading and the introduction of new production techniques in assembly plants, domestic firms continued to be excluded from supply networks of foreign-owned branch plants (Reference PhelpsPhelps, 1996; Reference PikePike, 1998; Reference LarssonLarsson, 2002). For example, the majority of foreign-owned automotive assembly firms in Western Europe were not locally embedded and had only few direct linkages to the surrounding locality or region (Reference LarssonLarsson, 2002). This has also been the case of the rapidly expanding automotive industry in Eastern Europe (Reference Pavlínek and ŽížalováPavlínek and Žížalová, 2016; Reference PavlínekPavlínek, 2018). Weak FDI linkages also continued to be the norm in the electronics industry (Reference TurokTurok, 1997) and in other industries (Reference PhelpsPhelps, 1993a; Reference Phelps1993b; Reference Pike and TomaneyPike and Tomaney, 1999; Reference CroneCrone, 2002; Reference Crone and WattsCrone and Watts, 2003; Reference Phelps, Mackinnon, Stone and BraidfordPhelps et al., 2003).

Waves of closures of flagship foreign investments in Britain since the late 1990s undermined one of the main claims of new regionalism about the increased stability of FDI in peripheral regions due to its increased embeddedness and questioned the continuing FDI-based regional development strategies (Reference DawleyDawley, 2007a; Reference Dawley2007b). Outside of Western Europe and the USA, the application of new regionalism to FDI in peripheral regions has been even more problematic because of few capable domestic firms (Reference Pavlínek and ŽížalováPavlínek and Žížalová, 2016; Reference PavlínekPavlínek, 2018), weak institutions and a low quality of governance (Reference Rodríguez-Pose and Di CataldoRodríguez-Pose and Di Cataldo, 2015; Reference Ketterer and Rodríguez-PoseKetterer and Rodríguez-Pose, 2018). Empirical evidence provided by economic geographers thus suggests that the limited long-term development effects of FDI in peripheral regions that are identified by the branch plant economy, truncation and spatial divisions of labor approaches mostly continue to persist, despite the significant reorganization of the capitalist economy since 1990.

The new regionalism and territorial embeddedness approach fails to adequately consider the role of extraregional factors in regional development, such as the state and the position of regions in the international division of labor, which represents a departure from the new international division of labor/spatial divisions of labor approaches. However, the embeddedness approach and its critique have strongly influenced thinking in contemporary economic geography by emphasizing the close relationship among FDI, institutions, networks, and embeddedness in regional development. The recognition that the ability to attract FDI and its embedding in peripheral regions strongly depend on the institutional capabilities, institutional environment and the territorial politics of FDI attraction of host regions has been especially important (Reference Phelps, Morgan, Fuller, Hood and YoungPhelps et al., 2000; Reference MacKinnon and PhelpsMacKinnon and Phelps, 2001a; Reference MacKinnon and Phelps2001b; Reference Fuller and PhelpsFuller and Phelps, 2004; Reference DawleyDawley, 2007a). It has also contributed to the development of the GPN perspective after 2000, to which we now turn.

2.3.4 Global Production Networks and FDI

The GPN perspective emphasizes the importance of the integration of regions into transnational production networks for their successful economic development. It analyzes how and where value is created, enhanced and captured in GPNs, and how it affects the potential of different places and regions for economic development (Reference Henderson, Dicken, Hess, Coe and YeungHenderson et al., 2002; Reference Coe, Hess, Yeung, Dicken and HendersonCoe et al., 2004; Reference YeungCoe and Yeung, 2015; Reference Coe and Yeung2019). The GPN approach considers the role and multitude relationships of different firm and nonfirm actors in GPNs (Reference Coe, Dicken and HessCoe et al., 2008; Reference CoeCoe, 2021). Here, however, the focus is on FDI, which is only one of many different ways for TNCs to organize and coordinate GPNs in addition to various forms and strategic mixes of investment and trade (Reference DickenDicken, 2015). This might explain why the importance of FDI in the contemporary regional economic development is not always fully acknowledged by the GPN perspective (e.g., Reference YeungCoe and Yeung, 2019), especially when compared to the related GVC approach (e.g., Reference Kano, Tsang and YeungKano et al., 2020; Reference Gereffi, Lim and LeeGereffi et al., 2021; Reference ZhanZhan, 2021), and despite the attempts to bring together GPN research with research on FDI and regional development (Reference MacKinnonMacKinnon, 2012).

Regional development in host regions is conceptualized as the outcome of the strategic coupling between regional assets and the profit-driven needs of TNCs (Reference Coe, Hess, Yeung, Dicken and HendersonCoe et al., 2004; Reference YeungYeung, 2009; Reference YeungCoe and Yeung, 2015). One possible way in which a strategic coupling can form is via FDI (Reference Coe, Hess, Yeung, Dicken and HendersonCoe et al., 2004; Reference MacKinnonMacKinnon, 2012; Reference KleibertKleibert, 2014; Reference PavlínekPavlínek, 2018; Reference CoeCoe, 2021). Three basic modes of strategic coupling (indigenous, functional and structural) (Table 2.3) therefore also reflect differences in the nature and role of horizontal and vertical FDI in regions occupying different positions in the international and national divisions of labor (Reference YeungYeung, 2009; Reference Yeung2015; Reference Yeung2016; Reference MacKinnonMacKinnon, 2012; Reference YeungCoe and Yeung, 2015). Core regions are mostly articulated with GPNs through indigenous (organic) couplings. They tend to attract horizontal FDI in higher-value-added manufacturing and services. As the largest source of outward FDI (e.g., Reference IammarinoIammarino, 2018), they host a disproportionate share of headquarters and higher-value-added knowledge-intensive activities of TNCs (lead firms), such as R&D and sales, from which TNCs create and capture a significantly greater value than from manufacturing operations (Reference MudambiMudambi, 2008; Reference Rehnberg and PonteRehnberg and Ponte, 2018; Reference GereffiGereffi, 2020). Corporate headquarters wield power and control over the internationally dispersed operations of TNCs in peripheral regions, which further enhances the value capture of core regions through profit repatriations, profit shifting strategies and transfer pricing (Reference Dischinger, Knoll and RiedelDischinger et al., 2014a; Reference Dischinger, Knoll and Riedel2014b; Reference AkyüzAkyüz, 2017).

Peripheral regions are mainly recipients of vertical FDI (Table 2.1) and are articulated with GPNs through structural couplings. Foreign firms establish subsidiaries and supplier linkages in peripheral regions mostly for cost-cutting reasons (assembly platforms) or securing access to natural resources (commodity source regions) (Reference BridgeBridge, 2008; Reference Milberg and WinklerMilberg and Winkler, 2013; Reference YeungCoe and Yeung, 2015). Most foreign subsidiaries and subcontracted tasks concentrate on production in the form of standardized export-oriented assembly, mining or routine service functions, while lacking an adequate development of high-value-added strategic nonproduction functions, which are provided by TNC headquarters and R&D centers from the home countries of TNCs (Reference KleibertKleibert, 2016; Reference PavlínekPavlínek, 2016; Reference Pavlínek and ŽenkaPavlínek and Ženka, 2016). This results in lower value creation in the FDI host regions than in the source core regions. The value capture is diminished by lower corporate taxes compared to core regions (Reference Pavlínek and ŽenkaPavlínek and Ženka, 2016; Reference PavlínekPavlínek, 2020), the transfer of value from foreign subsidiaries into core-based corporate headquarters through profit repatriations (Reference Dischinger, Knoll and RiedelDischinger et al., 2014a; Reference Dischinger, Knoll and Riedel2014b) and low wages and weak linkages of foreign subsidiaries with domestic firms (Reference PavlínekPavlínek, 2018). Lower value creation and capture translates into smaller long-term economic development effects of FDI in peripheral regions compared with core regions. Additionally, both assembly platforms and commodity source regions are typified by asymmetrical power relations between TNCs and host regions, and are vulnerable to potential decouplings through disinvestment, relocations and factory closures by TNCs (Reference MacKinnonMacKinnon, 2012; Reference YeungCoe and Yeung, 2015). Thus, despite the short-term economic gains from FDI in the form of jobs and economic growth, many host peripheral regions represent an example of the less favorable articulation of regions into GPNs through FDI, what Reference Coe, Hess, Pike, Rodríguez-Pose and TomaneyCoe and Hess (2011) called the “dark side” of strategic coupling, which may lock peripheral regions in disadvantageous and dependent positions in GPNs (Reference AkyüzAkyüz, 2017).

Emerging regions are usually articulated with GPNs through functional couplings (Reference MacKinnonMacKinnon, 2012; Reference YeungCoe and Yeung, 2015; Reference YeungYeung, 2015). In terms of FDI, these regions differ from peripheral regions in a greater balance between inward and outward FDI, the mixture of horizontal and vertical FDI, and stronger, more capable domestic firms that are able to globalize through investing abroad (Reference Amsden and ChuAmsden and Chu, 2003; Reference YeungYeung, 2016; Reference Jo, Jeong and KimJo et al., 2023). This provides for greater regional autonomy, less dependency on foreign capital and technology, and greater value creation and capture (Table 2.3).

The formation of strategic couplings based on“FDI is often a highly politicized process (Reference Phelps and WoodPhelps and Wood, 2006; Reference Phelps and Wood2018b; Reference DrahokoupilDrahokoupil, 2009; Reference Dawley, MacKinnon and PollockDawley et al., 2019) that depends on a favorable institutional environment, which is even more important for a potential decoupling from the structural couplings and recoupling into the functional or indigenous strategic couplings (Reference Bair and WernerBair and Werner, 2011a; Reference HornerHorner, 2014; Reference YeungCoe and Yeung, 2015; Reference YeungYeung, 2015). The decoupling from structural couplings can take place through disinvestment (Reference Clark and WrigleyClark and Wrigley, 1997; Reference BenitoBenito, 2005; Reference Bair and WernerBair and Werner, 2011b; Reference WernerWerner, 2016) or with the help of strategic regional and industrial policies (Reference YeungYeung, 2015). Given the unfavorable institutional environment in many peripheral regions (Reference Rodríguez-Pose and Di CataldoRodríguez-Pose and Di Cataldo, 2015; Reference Ketterer and Rodríguez-PoseKetterer and Rodríguez-Pose, 2018), strategic decoupling and recoupling is difficult to achieve, although successful examples exist (Reference HornerHorner, 2014; Reference Lee, Heo and KimLee et al., 2014; Reference YeungYeung, 2015).

The role of the state in coupling/decoupling/recoupling efforts is crucial and is reflected in the growing interest of economic geographers to understand the regional development outcomes of various state policies in the context of GPNs (e.g., Reference SmithSmith, 2015; Reference HornerHorner, 2017; Reference Rutherford, Murray, Almond and PelardRutherford et al., 2018; Reference Dawley, MacKinnon and PollockDawley et al., 2019; Reference WernerWerner, 2021). States’ bargaining powers with TNCs have decreased mainly due to FDI liberalization, the World Trade Organization’s multilateral rules and obligations on investment policies, and bilateral investment treaties (e.g., Reference PhelpsPhelps, 2008; Reference AkyüzAkyüz, 2017; Reference HornerHorner, 2017). Consequently, only a few less developed countries, particularly China, have been able to effectively regulate inward FDI after 1990 (Reference Chen, Garnaut, Song and FangChen, 2018; Reference SchwabeSchwabe, 2020a).

Overall, GPN analyses focusing on FDI came to similar conclusions about long-term developmental effects of FDI in peripheral regions as the earlier approaches (including the critique of new regionalism) (e.g., Reference KleibertKleibert, 2016; Reference PavlínekPavlínek, 2018). Along with heterodox approaches in the international business literature (Reference Andreoni and ChangAndreoni and Chang, 2019; Reference Chang and AndreoniChang and Andreoni, 2020), the GPN approach has argued that FDI should be part of a broader development strategy, in which peripheral regions systematically develop regional assets that would attract FDI into high-value-added activities (Reference Coe, Hess, Yeung, Dicken and HendersonCoe et al., 2004; Reference YeungCoe and Yeung, 2015). In the contemporary economy, it means attracting FDI into strategic nonproduction functions that require a long-term systematic investment into high-quality education, innovation activities and the development of regional institutions that support the growth of the knowledge economy and the upgrading of domestic firms. However, it is unrealistic to expect all peripheral regions to successfully adopt this approach, especially in less developed countries where resources are scarce, high-quality education and skills are limited and technology is less advanced. Moreover, it is reasonable to assume that in the context of peripheral regions, vertical FDI will predominantly continue to search for low-cost manufacturing and service locations, and access to raw materials and select agricultural commodities.