L1 Flashcards
Methods of establishing presence in foreign markets
- international trade - produce in home, export to host
- international licensing- license foreign company to use tech, trademark or know-how for free
- international distribution and production
- establish distribution and production facility aboard and exercise control (FDI)
FDI meaning
process where resident of one country (home) gets ownership for production, distribution and other activities of a firm in another country (host)
Types of FDI
- horizontal
- vertical
- conglomerate
Horizontal
expansion to produce the same or similar products aboard
FDI
Vertical
adding a stage in the production process (back or fwd)
Conglomerate
involves both horizontal and vertical
Greenfield Invest
makes news produc, distri or other facility in host country
positive
+ good for host as creates jobs and increase production capicity
Cross border M&A
merge or acquire with established firm
neg:
- politically sensitive due to ownership and control of dom assets being transferred to foreingers
- might not increase production so less welcomed
Joint venture
with established firm in host country
each party contributes
theories of FDI
- Hymers 1976 industrial organization hypotheis
- location hypothesis
- internalisation hypotheis
- Eclectic or OLI Theory
what theories try to answer
why comp induldge in FDI and not other types of foreign invest
why do firms locate activites in one country, rather than another
Hymers 1976 Industrial organization hypothesis
firms do fdi: possess specific adavatage over domestic comps in that host country:
also called ownership advantage
Location Hypothesis
fdi because: access factors of production aboard at lower cost
Immobile factors can create locational advantages, drawing more FDI to them.
Example of Ownership Advantage
- better access to cheap finance
- superior managerial and organizational capabiliteis
- superior technology and information
- privileged access to RM or final goods market
Examples of locational advantages
Human capital
natural resource
infrastructure
political, legal
size and develop of financial system
location developing and developed countries
Developing
+high potential
+low wage
-high political risk
developed
-more comp markets
+mature financial system
Internalisation hypothesis
Firms internally handle some production stages, replacing market transactions
covers why FDI instead of cross border or licensning
what interalising hypothesis say it allows business to do
full control over product quality
avoid interruption to supplies due to lag or cost of buying and selling
OLI or Eceltic
combines the other theories together
by john dunning
3 criteria for busi to choose FDI
1. ownership advatnage (O)
2. internalisation advantage (I) - benefits outweigh that of licensing them to dom firm
3. comp of both O and I advant with factors of production in host (L)
Motives for FDI
- natural resoruce
- market
- efficiency
- strategic asset
follows OLI paradigm
Natural resouce seeking
get:
* higher qual at lower real cost, than that of home country
* unable to get in country
e.g. fossil fuel
Market seeking
exploit foreign market by supplying goods to host country/ exporting goods to nearby area
seekers want to protect their Market Share, exploit new markers
Problems with market seeking
- host country barrier to intenrational trade
- cost and time lag of transport
- tailoring products and services to meet local demands
horizontal FDI can bypass
Efficiency seeking
Maximize benefits of shared ownership and governance for diverse production across regions
usually done by large, expe and diversified comps
Seekers integrate dispersed production facilities to benefit from each location’s strengths and create global synergy
Stageic asset
promote LT strat by transforming core comptency and competivie position
usually knowledge based resources and for:
* get foreign supplier to control market inputs
* merge with foreign comp to drive another out of busi
Benefits and cost of FDI
- output growth
- employment, wages, income equality
- technology advances
- market structure
- enviroment and qaulity of life
Output growth +
Benefits and cost of FDI
increase total cap accum
more tax revenue
spill over to local firms- employee from big firm goes to small, brings knowledge
efficiency
Employment
Benefits and cost of FDI
maybe good or bad:
* depends if greenfield or acquistion of firm
* empir evid mixed- varies across countries, indus types and motive of invest
Wages
Benefits and cost of FDI
MNE’s usually pay higher
causes income inequality- wages of skilled increase from those unskilled
Income inequality
Benefits and cost of FDI
demand for high skilled workers in both home and host coutnry increased
Technology advances
Benefits and cost of FDI
technological spill over- local firms can learn about effieceny and tech
still tech cap in OECD countries- aerospace
tech diffusions stronger in vertical production and distr chain
tech spillover stages
Benefits and cost of FDI
- transfer
- diffusion- tech learned by local firm
- absorption- host country local adpats tech to their advan
e.g., Japenese R&D and production
Market strucutre
Benefits and cost of FDI
foreign comp may reduce industrial concentration by their entry
foreing comp may take up some market share, previously held by domestic producer
Enviroment and quality of Life
Benefits and cost of FDI
FDI- either boon or bane for enviroment
dependant on industry and orginin of country
