Test 3 Flashcards
Horizontal FDI
Producing the same products in a host country as firms do at home.
Vertical FDI
Firm moves upstream or downstream in different value chain stages in a host country.
Why do firms become MNEs to engage in FDI?
OLI advantages:
Ownership
Location
Internalization
Ownership
MNE’s possession and leveraging of certain VRIO assets.
Location
Natural or labor resources, close to certain markets, etc.
Internalization
Replacement of cross-border markets with one firm operating in two countries.
Agglomeration (economic clusters) stem from….
- Knowledge spillover from other firms
- Industry demand creates a skilled labor force
- Specialized suppliers and buyers
Why do firms prefer FDI to licensing?
- Reduces dissemination risks (ex: company secrets)
- Tight control over foreign operations (ex: quality control)
- Facilitates transfer of tactic knowledge through “learning by doing”
Political views on FDI:
- Radical
- Free-Market
- Pragmatic Nationalism
Three Cs of negotiating with host countries
- Common interests
- Conflicting interests
- Compromises
Positive effects of FDI on host countries:
Capital inflow
Technology
Management
Job creation
Negative effects of FDI on host countries:
Loss of sovereignty
Competition
Capital outflow
Positive effects of FDI on home countries:
Earnings
Exports
Learning from abroad
Negative effects of FDI on home countries:
Capital outflow
Job loss
Natural resource-seeking firms
Have to go to a particular foreign location where those resources are found.
Ex: oil in the Middle East and Russia
Market-seeking firms
Go to countries that have a strong market demand for their products.
Ex: GM in China
Efficiency-seeking firms
Single out the most efficient locations featuring a combination of scale economies and cost factors.
Ex: manufacturing in China
Innovation-seeking firms
Target countries and regions renowned for world-class innovations. Ex: IT in Silicon Valley
First-mover advantages:
- Proprietary leadership
- Pre-emption of scarce resources
- Establishment of entry barriers
- Avoidance of clash with dominant firms at home
- Relationships with key stakeholders such as gov’ts
Late-mover advantages:
- Opportunity to free ride on first-mover advantages
- Resolution of tech and market uncertainty
- First mover’s difficulty to adapt to market changes
Equity entry examples
JVs and WOS
Non equity entry examples
Exports and contractual agreements
Turnkey project
Clients pay contractors to design and construct new facilities.
Build-operate-transfer (BOT)
Non equity mode used to build a longer term presence by building then operating a facility for a period of time before transferring operations to a domestic agency or firm.
Co-marketing
Efforts among a number of firms to jointly market their products or services.
Joint venture
New corporate entity created and jointly owned by two or more parent companies.
Wholly owned subsidiary (WOS)
Subsidiary located in a foreign country that is entirely owned by the parent multinational.
Green-field operations
Building factories and offices from scratch on a piece of “green field” formerly used for agricultural purposes.
