Lecture 9: Corporate Strategy and Foreign Direct Investment (FDI) Flashcards
- Why might a company/investor seek international expansion?
- Increased sales
- Reduced costs
- Diversify Risk
What is the typical sequence of international expansion?
What aspect is critical to the success of MNCs over local producers in international expansion?
What are some of the sources for this?
It is key that MNCs have a competitive advantage (CA) over local producers.
Some potential sources of CA are:
- unique or rare ‘intangible capital’
- IP
- Organisational skills (e.g. marketing, product design)
- Production efficiencies over local firms (e.g. horizontal integration, vertical integration)
What are the potential alternative to FDI?
Exporting and Licencing.
Exporting may be optimal if the product requires little or no local adaption & has low transport costs.
Licencing me be optimal if the skill or process can be reduced to a monitorable and enforcable contractual form.
*firm boundy should be structured with licencing to minimise transaction costs.
Why might a country be a low-cost production location?
Lower wages, lower labour related costs llike health and safety regulations, increased bargaining power, economies of scale.
Why might an MNC unndertake offshore production?
What are the two major types of offshore production?
It is increasingly unndertaken to protect market share in the home country and in other traditional markets.
- Bargaining leverage: having factories in several countries can give leverage in bargaining with governments and unions, lowering costs.
- Real Options: the option to switch production from one site to another, lowering costs.
What are the three primary ways that investors can diversify internationally?
- International portfolio investment by end-investors (e.g. AUS investor buys shares in a US listed company)
- Internnational portfolio investment by companies (e.g. AUS investor buys shares in AUS company that owns shares in a listed US company)
- FDI (e.g. AUS investor buys shares in AUS company with direct investment in US)
How might FDI occur?
What are the relavennt factors in deciding how to complete FDI?
- Taking over a local compay
- Organic growth (e.g. from nothing)
Relevant factors include:
- Speed: a takeover tends to be quicker.
- Marketing: aquisition provides immediate access to distribution networt (inc. customer base and market presence).
- Inputs: aquisition provides immediate access to suppliers and labour.
- Local knowledge: MNCs can be disadvantaged if they lack familiarity with the local market.
- Local contacts: inc. politicians and bureaucrats.
- Target for aquisition?
- Other solutions (e.g. joint venture)
What are the steps involved in designing a global expansion strategy?
- Awareness of profitabl investments.
- Select a mode of entry
- Auditinng the effectiveness of entry mode
- Using the appropriate evaluation criteria.
- Estimating the longevity of a CA
What is mean by ‘awareness of profitable investments’ in global expansion strategy?
Determining a strategy to exploit CA that is likley to require a series of inter-related investments with significant interactions between projects.
What is meant by ‘selecting a mode of entry’ in Global Expansion Strategy?
Choosing a mode of entry into the market that is closely related to the pervieved CA (e.g. low cost/high volume or high quality/high recognition).
What is meant by ‘auditing the effectiveness of entry mode’ in Global Expansion Strategy?
Evaluating whether the mode of entry is the right one today (i.e. optimal mode of entry will change over time).
Largley driven by CA, which may channge over time because:
- the company has changed.
- the market has changed,
- or both.
What is meant by ‘using appropriate evalutation criteria’ in Global Expansion Strategy?
‘What method should be used to evaluate the project?’
*usually the NNPV method is the best but it can be difficult to implement. Real Options may be very valuable in a global context.
What is meant by ‘estimating the longevity of a CA’ inn Global Expansion Strategy?
All CAs erode over time due to; competition and new technnology, breakdown of barriers to entry.
New sources of CA must be built.
What is country-specific political risk?
political risk that origiates at the national level but also affects MNCs at the project & corporate level.
e.g. Host Gov. damages businesses operating in their country, specific action (expropriation), general economic policy.
