Introduction
Exploring potential sites for establishing a manufacturing facility is akin to entering a car dealership. Although there are numerous enticing models available, the determination of which one is “best” may be finalized only after the purchase is complete, at which point reversing the decision may be infeasible.
Foreign direct investment (FDI) is viewed as an important driver for economic growth, and like automobile dealerships, countries use various incentives to attract it (Piperopoulos, Wu, & Wang, 2018). A firm must measure its hopeful expectations of a spot against the complex realities of what the firm may face on the ground. Good infrastructure for transportation, such as efficient airports, is not sufficient. Investors must investigate how things work at the customs office, what kind of people they can recruit, and what every piece of the logistics jigsaw really costs. With so many things to consider, how can investors make an informed choice for “optimal” locations in the face of all the hype?
We present a novel “logistics capability index” (LCI) to assist MNC managers in their FDI location choices. It reflects the complex bundle of facilities and service providers in a country or a region which supports firms’ supply chain functions, coined “regional logistics capability”. Given that over-stretched and geographically dispersed supply chains pose substantial challenges to MNCs, the LCI offers a way to get past the hype and understand what really matters for individual MNCs, measuring a site’s attributes related to supply chain operations. It is potentially a useful tool for MNC managers to make FDI decisions, and a benchmark for policymakers in FDI-seeking countries to develop their logistics sectors.
Existing Measures
Effective management of a supply chain demands close integration of the firm’s internal functions (e.g., production, marketing) and effective linkages with the external operations of various channel members (e.g., suppliers, retailers). To gain and maintain a competitive advantage in supply chain management, a firm must develop its logistics capability as a key resource to mitigate bottlenecks in long stretched and globally dispersed global supply sources (Ali, Arslan, Chowdhury, Khan, & Tarba, 2022; Lynch, Keller, & Ozment, 2000). However, country- and region-level logistics capabilities necessary to meet the managerial needs have been seldom studied, with rare exceptions (e.g., Wiengarten, Pagell, Ahmed, & Gimenez, 2014). It is unfortunate as location-specific logistics efficiency is a driver of economic growth and international competitiveness (Rantasila & Ojala, 2015). Building effective logistics channels is vital for MNCs to manage supply chain-related risks. For instance, country-level logistics costs are reported to range from 5% to 20% of GDP, and the percentage tends to be higher in countries that are weaker in logistics (Rantasila & Ojala, 2015). Moving from nations to firms, the reduction of logistics cost would also help firms improve profitability.
International institutions such as the World Bank and World Economic Forum have conducted regular reviews on country-level physical and institutional infrastructure in recent years, using indices such as Logistics Performance Index (LPI) and Enabling Trade Index (ETI) (Arvis et al., 2018; World Economic Forum, 2016). Countries with low LPI scores tend to have relatively high logistics costs (Rantasila & Ojala, 2015), which might deter investment. However, these indices are driven by logistics service providers, and often examine logistics capability at the country level from a single perspective, failing to account for the diverse demands of various stakeholders. For example, LPI includes the item “ability to track and trace consignments” but has no coverage of issues such as customs regulations and process transparency. The former is important for a freight forwarder, but much less relevant to an MNC investing in a foreign country. While LPI has an item considering the efficiency of customs clearance processes, the description lacks sufficient information on customs regulations and process transparency. A country may possess efficient customs for easy tracking, but an MNC might be reluctant to invest if the process is not transparent. Being a user of logistics services, the MNC is more likely to value the smooth flow of its supply chain. An opaque customs system may pose a great risk to the MNC, as its overseas supplies or distribution channels could be cut suddenly due to unexpected regulatory or process changes.
Moreover, both LPI and ETI are developed to measure logistics capability at the country level, while the logistics capability of a specific region may be of greater relevance to the MNC’s within-country FDI location choice. In a large country such China, for example, the logistics capability of a developed coastal region such as the Pearl River Delta Region could be much better than that of a less-developed inland province. When China tried to move asset-seeking, high-tech MNCs like electronics manufacturers from coastal areas to inland regions, to develop its western provinces in the 2010s, many firms instead chose to move to neighboring countries, such as Vietnam, to maintain low supply chain costs and better agility. Therefore, an in-depth investigation of finer-grained logistics capabilities, allowing for consideration of within-country regions is of both managerial and academic interest, for decision-making and understanding the determinants of FDI location choice.
Index Components
The details of the index development are presented in Lu, Wu, & Khan (2024). The LCI was developed based on both the academic literature and a questionnaire-based survey with 74 usable responses from key decision-makers of MNCs based in Asia-Pacific. The sample was dominated by large MNCs across multiple industries (75% respondents reported more than 500 employees in Asia-Pacific); 62% of participating MNCs were headquartered in North America or Europe.
Building on the literature, LCI is proposed to assess the capabilities of a country or region from the perspective of MNCs’ logistics needs. The LCI consists of four pillars: infrastructure (both physical and information communication technology (ICT)), the efficiency of import-export procedures (business-friendly customs operations), logistics service quality, and the regulatory environment (trade facilitation). The components of LCI are shown in Table 1. The average of all item scores of a site is used to represent logistics capability of a country or region, with all scores equally weighted.
To derive LCI components that can assess how a potential host region meets specific logistics issues, we incorporate the supply chain operations reference (SCOR), a widely used commercial tool/model for supply chain management (APICS, 2017), and develop two sub-indices, LCI in agility and LCI in cost. Agility is the ability of a supply chain to respond quickly to market changes, which is especially important for firms focusing on customized products with fast order-to-delivery cycles that need to be flexible enough to accommodate diverse customer requirements. On the other hand, cost is likely to matter more to firms providing low-cost standardized products, whose supply chains are expected to be lean. The components of LCI in agility and LCI in cost are presented in Table 1.
Analyzing the survey suggests that MNCs investing in locations with higher regional logistics capability perform better. Furthermore, firms from innovative industries, which are more likely to adopt an agile supply chain strategy, are found to place greater emphasis on regional logistics capability pertaining to agility. Moreover, a market-seeking motive is negatively related to regional logistics capability with respect to both cost and agility. In locations with low regional logistics capability, a strong market-seeking motive may mitigate the negative impact on performance. MNCs motivated by market-seeking, for benefits such as first-mover advantage, may overcome locations’ logistics capability disadvantages by fostering a localized supply chain.
Insights for Practitioners and Policy Makers
The findings of this study can assist MNCs in their FDI location decisions in multiple ways. FDIs in locations with stronger regional logistics capabilities generally yield better results. Instead of just examining market potential and operating costs, MNC managers should consider a variety of logistics-related factors early in the FDI location decision, along with firm-specific advantages and goals. As the LCI covers issues including customs processes, ICT infrastructure, logistics service quality and cost, regulations related to transportation, and human resources, it offers managers a holistic perspective on logistics capabilities to assist FDI locational decisions. Moreover, a market-seeking motive may reduce the negative impact of poor site-specific logistics capability on firm performance, possibly through careful entry timing that yields first-mover advantage. FDI location decisions may also be related to firms’ supply chain strategies, such as lean or agile.
The findings are also useful for policymakers of potential host countries, especially developing economies, in terms of designing and delivering business and logistics-related solutions for MNCs. In addition to investing heavily in logistics infrastructure such as highways, seaports, and airports, policymakers need to develop industry-friendly policies to support the growth of local logistics service providers (often small, private players) as well as foreign logistics service firms to build vibrant logistics-oriented clusters, to attract MNCs.
Moreover, as current geopolitical risk leads many MNCs to pursue geopolitical resilience by rebalancing their global portfolios (Bozonelos & Tsagdis, 2023), developing countries should adjust their economic policies in response. For countries like China, which could experience the exodus of MNCs due to heightened risks, the logistics sector may need to be improved with a holistic approach. Policy-wise, nations can further improve import-export procedures and the regulatory environment, making rules and procedures more transparent and reducing the risk associated with unexpected shocks, such as COVID-19 lockdowns and even more recent anti-spying crackdowns against international consulting firms. While it is practically inevitable that sovereign countries will implement new policies to better regulate various business sectors, it is important to keep the process transparent and not to disrupt normal business flows.
On the other hand, developing countries that could potentially gain through the rebalancing, such as Vietnam and India, should place special attention on their logistics sector, to build a vibrant ecosystem in which MNCs and their supply chain partners can locate. Often, such countries are relatively weak in their import-export procedures and regulatory environments; policymakers should seek to improve these and overcome various obstacles to the flow of goods and talents across borders. Moreover, existing logistics ecosystems, especially the private logistics service sector, tend to be less developed in these countries. Policymakers should also make efforts to attract foreign investors to build up their logistics sectors.
For policymakers in developed countries, while it is possible to attract some high-tech MNCs for insourcing and the associated job creation, cost disadvantages limit potential benefits. However, regions within developed countries often enjoy the agility advantage, making them the potential candidates for MNCs pursuing supply chain agility. Policymakers should therefore support these insourcing investments through grants and subsidies, to rebuild the domestic sector for agile and effective logistics services that are environmentally friendly.
Conclusion
This study has presented a holistic index, LCI, to assess the logistics capability of a potential host country or region. Compared to the other indices, which are based on the evaluations of logistics service providers, LCI assesses a location’s logistics performance from the perspective of MNCs, with a focus on the area in which they invest, not necessarily the entire country. As the users of logistics facilities and services, MNCs’ evaluations are important for aspiring regions when undertaking to develop their logistics capabilities. The LCI may become a useful tool for MNC managers in their regional evaluation for site logistics capability during their FDI location decision-making processes. It provides an index to assess a region’s logistics performance, from the perspective of the MNC, and acts as a tool to highlight the relative importance of the various dimensions of logistics infrastructure for an MNC’s FDI decision.
In summary, this study offers the potential for developing a richer appreciation of the logistics determinants associated with FDI location choice and presents a firm-centric index, the LCI, for MNC managers in FDI location decision-making. The index can assist policymakers aiming to attract FDI, in terms of making targeted internal reforms and regulative changes. While past work has examined factors such as business cost and infrastructure, our study highlights the importance of the logistics capability of a region, holistically, in attracting FDI. Future studies can use this index to integrate logistics capability in examining MNCs’ location and reshoring decisions.
About the Authors
Qing Lu is an Associate Professor of Supply Chain Management at the International University of Rabat, Morocco. His research interests include supply chain strategy and governance, logistics outsourcing, remanufacturing, and humanitarian logistics. His works have appeared in many journals, including Journal of Business Venturing, International Journal of Production Economics, Journal of Banking and Finance, Asia Pacific Journal of Management, among others.
Jie Wu is a Chair Professor of Strategy and Entrepreneurship at the University of Aberdeen, UK. He has published extensively in academic journals, such as Strategic Management Journal, Journal of International Business Studies, Journal of Management Studies, Research Policy, Human Resource Management, Strategic Entrepreneurship Journal, Journal of Business Ethics, etc. His current research interests include digital inclusiveness, female entrepreneurship, artificial intelligence and renewable energies, innovation and internationalization, culture and institutions, among others.
Zaheer Khan is a Professor in Strategy and International Business at the University of Aberdeen, UK. His work focuses on global technology management, platform firms, and internationalization of emerging markets firms. His work has appeared in the Journal of International Business Studies, Journal of World Business, Global Strategy Journal, International Business Review, Human Relations, and Journal of Corporate Finance, among others.