Module 6

Question 1

Define Foreign Portfolio Investment (FPI)

Answer 1

investment in a portfolio of foreign securities such as stocks and bonds

Question 2

Define Joint Venture

Answer 2

An operation with shared ownership by several domestic or foreign companies

Question 3

What are the types of FDI?

Answer 3

HORIZONTAL FDI
created operations abroad at the same position in the value chain as the operation in the home country

VERTICAL FDI
type of FDI in which a firm moves upstream or downstream in different value chain as the operation in the home country

Question 4

What are the types of Vertical FDI?

Answer 4

UPSTREAM
investment in activities related to the early stages of production

DOWNSTREAM
investment in activities closer to the final consumer

Question 5

Describe and Define the OLI Paradigm

Answer 5

A theoretical framework posting that Ownership, Location and Internalization advantages comabine to induce firms to engage in FDI

OWNERSHIP ADVANTAGES
resources of the firm that are transferable across borders and enable the firm to attain competitive advantages abroad

LOCATION ADVANTAGES
advantages coming from operating in a certain location

INTERNALIZATION ADVANTAGES
advantages coming from organizing activities within an MNE rather than using market transactions

Question 6

Potential Benefits and costs of FDI for stakeholders in Host countries

Answer 6

CONSUMERS
Benefits
- access to international quality products and brands
- lower prices due to scale economies and competition
Costs
- reduces variety of traditional local brands
- Monopoly pricing when MNE dominates the market

SUPPLIERS
Benefits
- technology transfer enhancing productivity
-opportunity to become and international supplier
Costs
- crowding out by international sourcing

COMPETITORS
Benefits
- technology transfer enhancing productivity
- competition may trigger upgrading and innovation
Costs
- crowding out by overwhelming competition

WORKERS
Benefits
- employment opportunities
- typically higher labour standards than local firms
- training & knowledge transfer
costs
- often less labour-intense production thus fewer work places

GOVERNMENT
Benefits
- Higher tax revenues
- Economic growth
Costs
- costs of subsidies and other incentives

ENVIRONMENT
Benefits
- MNEs often have higher environmental stabdards than local firms
Costs
- MNEs may locate highly polluting activities in places with less stringent regulation

Question 7

Describe the Bargain Between MNEs and Governments

Answer 7

OBSOLENCE BARGAIN
refers to the deal struck by MNEs and host governments which change their requirements after the initial FDI entry

SUNK COSTS
up-front investments that are non-recoverable if the project is abandoned

EXPROPRIATION
government’s confiscation of private (foreign-owned) assets.

Question 8

Define Sovereign Wealth Funds (SWF)

Answer 8

State-owned investment fund composted of financial assets such as stocks, bonds, real estate or other financial instruments

Question 9

Describe the Integration-responsiveness framework

Answer 9

A framework of MNE management on how to simultaneously deal with 2 sets of pressures for global integration (B) and local responsiveness(A)

Global Standards (A: low B: high)
development and distribution of standardized products worldwide to maximise benefits from low cost advantages

Transnational Strategy (A: high, B: low)
endeavours to be cost-efficient locally responsive and learning-driven simultaneously around the world

Home Replication (A: low, B: low)
replication of home country-based competences such as production scales, distribution efficiencies in another cuntry

Localization (A: high, B:low)
each foreign country is regarded as a stand-alone ‘local’ market requiring attention & adaptation

Question 10

What are the advantages and disadvantages of the strategies from the integration-responsiveness framework?

Answer 10

HOME REPLICATION
Advantages:
-leverages advantages fromhome country
-relatively easy implementation

Disadvantages:
-lack of local responsiveness
-may result in foreign customer alienation

LOCALIZATION
Advantages
-maximise local responsiveness

Disadvantages
-higher costs due to duplicaton of efforts in multiple countries
- too much local autonomy

GLOBAL STANDARDS
Advantages
-leverages economies of scale
-emphasizes integrated innovation

Disadvantages
- lack of local responsiveness
- too much centralized control

TRANSNATIONAL
Advantages
-Cost-efficient & local responsiveness
-Engages in global learning & innovation diffusion

Disadvantages
- organizationally complex
- difficult to implement

Question 11

What are the 4 organizational structures?

Answer 11

1. INTERNATIONAL DIVISION
   structure bunding all international activities in one unit, often associated with a home replication strategy
2. GROGRAPHIC AREA STRUCTURE
   an organizational structure that oranizes the MNE according to different countries and regions
3. GLOBAL PRODUCT DIVISION
   An organizational stucture that assigns global responsibilities to each product division
4. GLOBAL MATRIX
   Alleviates disadvantages associated with geographic and global product structures