Week 2: Where do MNEs invest? Flashcards
Leaning on the OLI Paradigm, what does an MNEs location choice depend on?
In terms of the OLI Paradigm, location behaviour reflects the interaction between ownership and location advtanges and is determined by the firms matchmaking between firm-specfic characteristics and competences as well as characteristics of the specific location.
An MNE needs to consider three perspectives or units of analyses when making a foreign investment decision. What are they?
Visualise on the example of Maastricht.
- subnational (e.g., limburg region for a firm in maastricht)
- country (e.g. NL)
- supernational (e.g., EU)
For a firm in Maastricht it is additionally important to understand its gateway position to three EU countries.
What three things do you need to keep in mind about accessing information about LAs and accessing LA itself?
- Location advantages are in principle accessible equally to all firms that are physically established in a location, but full information about those advantages may not be readily available
- even when information is available there may be significant costs associated with accessing that knowledge, they may only be accessible to local firms or they may require years of local experience
- Location advantages may be made available differentially by actions of the government that seeks to restrict or encourage the access to a particular group of actors
What two drivers of a firm determine a firms ability to access LAs and why?
- Distance of a location from the home country, which may represent a barrier and generate costs related to LOF
- Degree of Connectedness which on the other hand favours the access to CSA by establishing connections between individuals, firms and locations and favouring the movement of both tangible and intangible assets across locations
What three types of location advantages are there? Only name them and their sub-categories.
- Country level LA (exogenous, fundamental and knowledge-asset LA)
- Industry level LA (structural LA)
- Firm level LA (collocation advantages)
Briefly elaborate on country-level LA.
Country level LA relate to the broad background of a location and include
a) exogenous LA, e.g., culture or political environment or climate
b) fundamental LA, such as basic infrastructure, (e.g., health care, education, transport), legal infrastructure (e.g., legal and tax system) and financial infrastructure (e.g., banks, insurance, stock)
c) knowledge-asset LA, e.g., universities or research institutions
Briefly elaborate on industry-level LA.
Industry level LA can be specified as structural LA, like market and demand structure (e.g., wage or size of market and industrial policies)
Briefly elaborate on firm-level LA.
Firm level LA relate to collocation advantages, which are derived from the presence of other actors in the same location (e.g., networks of suppliers and customers or agglomeration economies)
What is so special about agglomeration economies in relation to LA?
agglomeration economies really highlight the interaction between ownership and location advantages and originate from spatial concentration of business advantages - these advantages usually take place in global cities or industrial/business clusters
What is spatial agglomeration and why do MNEs involve in it?
the basic principle of spatial agglomeration is that production is facilitated when there are clusters of economic activities (e.g., Silicon Valley).
The traditional approach is that firms locate near on another to imitate other MNEs who have already faces the same problems of being unfamiliar with foreign local contexts, thus creating location cascades.
MNEs tend to conglomerate with other MNEs to reduce information costs as a result of location externalities
What are location externalities?
side effects of a location derived from being physically present in one location, being able to tap into local resources, knowledge, etc.
What are the strings attached to spatial agglomeration? (2)
there are a few strings attached when conglomerating with other MNEs:
- geographical proximity is necessary to promote social learning by reducing coordination and communication costs, but is not sufficient to generate interactions
- -> mechanisms to coordinate the learning process need to be put into place - interaction does not necessarily lead to positive spillovers - any information outflow may be more valuable to the competitor than any information inflows from them to you
When would MNEs colocate or not colocate to domestic companies?
they may not do this out of perceived imbalanced knowledge spillovers; this however depends on the MNEs perception of their competitive position compared to the domestic firms
if an MNE perceives a positive knowledge spillover then agglomeration is likely (usually happens when domestic firms hold some major competitive advantage in the industry)
if an MNE perceives a negative knowledge spillover agglomeration is unlikely to happen
Briefly elaborate on how the Uppsala Model can explain internationalisation sequences/processes?
The Uppsala model is a theory of gradual internationalisation of Scandinavian firms, who typically enter sequentially into neighbouring countries with low degrees of psychic distance. Although this model may apply more in some industries than in others there is one industry in which this sequential internationalisation is particularly applicable - retail.
retailers need high knowledge of local consumer tastes, which differ less in countries with low distance.
What is psychic distance?
Perceived distance between home and host countries that captures managers uncertainty due to a lack of knowledge of foreign markets
