Knowledge Sourcing in Foreign Direct Investments: An Empirical Examination of Target Profiles

This paper addresses the observation that foreign direct investment in a knowledge-intensive industry is motivated by the sourcing of knowledge and capabilities residing in the target firm. According to the emerging knowledge- and capability based view in international management, FDI is not only "pushed" by the resource endowments of the investor, but is also "pulled" towards centers of innovation located in recipient countries. For investors this bears the challenge to select those firms with the most valuable technological capabilities. Since most of these capabilities are tacit and not easily disentangled by outsiders, there is a strong incentive for target firms to signal the possession of these capabilities. We propose that "high quality" firms with unobservable or tacit capabilities send signals to the international marketplace about the value of their capabilities, reflecting their growth opportunities.