Dan Breznitz (University of Toronto)

Business Networks, Enclave Formation, and the Failure of Foreign Investment to Transfer Technology

Abstract: Despite the widespread expectation that foreign direct investment should transfer ideas and technologies to small enterprises in host countries, it often fails to do so. Dominant analyses attribute knowledge transfer failures to host-country conditions, neglecting social dynamics that shape multinational enterprises’ (MNE) decision making, when considering operations in the host country. We contend that these dominant explanations ignore relational factors that economic sociologists have long found to condition market interactions between organizations, but have been incompletely considered by economic geographers. In particular, MNEs’ pre-existing business networks shape their decisions about how they mitigate the uncertainties and risks inherent to foreign investment. In-group dynamics, network inertia, and closure discourage multinationals from engaging local firms in favor of establishing and perpetuating foreign enclaves that severely limit knowledge transfer to regionally agglomerated host country firms, irrespective of their capabilities. The formation of foreign enclaves with limited informational contact with domestic enterprises is thus a predictable default outcome of foreign direct investment activity and a fundamental cause of the failure of technology transfer. Extending previous studies of business networks to account for the relational dynamics of MNEs, we offer an understanding of an important puzzle about foreign business enclaves as well as providing further basis with which to understand the causes of the spatially unequal distribution of productive technologies globally.

Joint work with Michael Murphree and Steven Samford