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Flashcards
What is a FDI?
- FDI stands for the highest stage of internationalization
- companies own and control directly a foreign operation
- control and profit motive is dominating
- types:
- acquisition vs. greenfield
- wholly owned vs. partially owned (equity joint venture)
Name 3 reasons to invest in foreign countries!
- to extract raw materials
- to find low cost sources of labor, components, parts or finished goods
- to penetrate new markets, the major motivation
What are possible advantages and disadvantages of FDI?
Possible advantages:
- greater control
- lower cost of supplying host country
- bypassing barriers of trade
- greater opportunity to adapt product to the local markets
- better local image of the product
possible disadvantages:
- increased capital investment
- increased investment of managerial and other resources
- greater exposure of the investment to political and financial risk
What is the risk vs. control tradeoff?
the higher the control, the higher the risk
low risk and low controll
-->
high risk and high control
- indirect export
- direct export
- contractual cooperation
- equity joint venture
- FDI
Joint ventures as means of cooperative direct investment
What is an equity joint venture?
- a real company (based on capital) which is founded/acquired and managed jointly by the owners (other companies)
- includes sharing profits and distributing risk
- theoretical explanations: transaction-cost-theory, ...
What are advantages and disadvantages of equity joint ventures?
advantages:
- shared cost and risk
- access to (company) resources
- image as a local company
disadvantages:
- necessity to share management and control competencies with the consequence of inherent decision problems
- conflicts stemming from different objectives, management styles and culturally determined behavior, that result in a
- high failure rate (sunk costs)
How are equity joint ventures managed?
- profound analysis of the objectives to be realized
- systematic partner choice
- tolerance
- experienced cooperation agents being allowed to make local decisions
Factors influencing the choice of market entry modes
What factors influence the choice of market entry modes?
- internationalization motives/objectives
- available resources/assets
- local government regulations
- characteristics of the target product and its market
- cultural distance
- political and financial risk
- need for control
What are internationalization motives/objectives?
- What should be realized in foreign market?
- source of raw materials, R&D, production
- location advantages vs. market orientation/penetration
What are available resources/assets?
- financial and human resources
- production capabilities
- commitment to using resources
What are local government regulations?
- import or export tariffs, duties or restrictions
- laws regarding foreign ownership
- other legal and regulatory factors (patent, consumer protection, labor and tax laws)
What are characteristics of the target product and its market?
- products that spoil quickly or are difficult to transport
What is cultural distance?
- increase of FDI-risk with increase of cultural distance
- joint ventures, licensing and exporting
- local partners deal with local cultural issues
What is political and financial risk?
- financial risk
- economic risk (currencies, markets, etc.)
- political risk
- governments change
- policies regarding foreign firms change
What is the need for control?
key areas of concern:
- product quality in the manufacturing process
- product price, advertising and other promotional activities where the product is sold
- after market service
Theories of International Business
Theories of International Business
General functions and levels of theories
What is a theory and what are levels?
Theory:
- well-ordered system of statements
Levels:
- development of conceptual tools, i.e. a technical teminology
- systematic discription or real phenomenons
- explanations, predictions
- practical recommendations
Approaches explaining existence of international trade
What was the first theory explaining the existence of international trade?
Ricardo's theory of comparitve advantage from 1817
usa produces more wool and cloth in a day than japan
What does Heckscher/Ohlins theory state?
Factor Proportions Theory (1933)
- a country with a relative abundance of a particular factor should be able to produce, at lower cost, goods using that factor and should become an exporter of those products (e.g. USA will export capital)
- less developed countries with an abundance of labor should produce and export labor-intensive goods
Solutions of the paradox: Factor Proportions Theory?
- usa is indeed a labor-abundant country in terms of its particular skills of its labor force and productivity
- substantial amount of money has been invested in the US labor force (education, training)
International Product Life Cycle Model
What are the basic assumptions of the international product life cylce model? (Vernon 1966)
- all advanced countries are comparable in terms of their access to scientific knowledge and their capacity to comprehend scientific principles
- however, unequal probability of application of these principles in generation of products: innovation gap
- result: knowledge is no universal free good
- attributes of US market resulting in first-time introduction of products in the US market
- very high average income
- high unit labor cost and relatively unrationed capital
New Product
- US producers are likely to be first in seizing entrepreneurial opportunities for high-income or labor-saving products
- first manufacturing facilities will also be located in the US due to unstandardized products
- need for a high degree of freedom in changing products
- price elasticity of demand for the output of individual firm is relatively low
- need for swift and effective communication with customers, suppliers and competitors
Maturing Product
- higher demand for a product leading to standardization
- increasing product differentiation in order to avoid fierce price competition due to an increasing number of competitors
- increasing competitive pressures
- need for flexibility declines; economis of scales are to be achieved
- higher concern about production cost than about product characteristics
- some demand arises in international locations and will begin to grow rapidly over time in relatively advanced countries; foreign production facility conceivable
- servicing of third country markets as well as re-importations become feasible if differences in cost of labor can be fully exploited
Standardized Product
- highly standardized products with a well-developed international market
- competition largely on the basis of price
- production in less developed countries may offer competitive advantage
- industrial exports of labor-intensive goods from less-developed countries to advance countries
- external economies, specialized labor and specialized process alleviate pressures to produce in low-cost countries
How do the product life cycle stages develop over time?
- introduction: sales start increasing slowly
- growth: sales increase
- maturity: sales reach highest point and start to decrease
- decline: sales decline
What are the limitations of classical international trade theory?
- simplifying assumptions of model
- immobile factors of production
- perfect information and perfect competition
- negligence of skills as basis for comparative advantages
- business enterprise is seen as black box (why do countries trade?)
- no contribution in explaining other forms of internationalization
Approaches to explain FDI
What is the classical capital theory?
Also called interest rate differentials
- in gaining profits the business firm seeks for arbitrages in interest rates (FDI or portfolio investments) in order to exploit the different interest level
- funds will flow from areas of capital abundance, where interest rates are low, to areas of capital scarcity, where interest rates are high
What is the Monopolistic Advantage Theory?
Also Market Imperfection Theory; Hymer and Kindleberger)
- a company will invest abroad because of monopolistic advantage, which are assumed to overcome disadvantages faced by the company when it goes to an unfamiliar foreign market
- market imperfections do exist in some markets for the factors of production, resulting in favorable conditions for the firm's product
- FDI is explained as a move to take advantage of certain capabilities not shared by local competitors
What are the assumptions and prerequisites for the Monopolistic Advantage Theory?
- imperfect competition
- firm must not only posses ownership advantages, but must be able to also transfer them within its boundaries and across borders in order to overcome cost of foreignness and to succeed in competition
What is Knickerbocker's study from 1973 about?
Theory of Oligopolistic Parallel Behavior
- within oligopolistic markets, firms react on a competitor's market activities in order to compensate its advantage and thus, "follow-the-leader-investments" and "cross investments" can occur
What is Aharoni's approach from 1966 about?
Global Horizons approach
- behavioral approach
- a business firm is usually born with a geographical horizon limited to a locality, a region or a home country
- managers must develop/posses a global orientation (horizon) in order to initiate internationalization
What is the Internationalization Theory?
Buckley/Casson 1976, Teece 1983
- by establishing their own multinational operations, a firm can reduce the transaction costs stemming from the alternative, the price mechanism; this especially is true for the market of knowledge
- a firm can internalize the production, keep the information within the firm that is at the core of the firm's competitiveness
- a market transaction would have been less efficient because of market imperfections (unintended diffusion of knowledge, effected by opportunistic behavior)
What does the Eclectic Theory/Oli-Paradigm state?
Dunning 1977
- firms analyze potential ownership, internalization and location advantages
- licensing only ownership adv.
- exports ownership and intern. adv.
- FDI all three
What are limitations of FDI theories?
- partial approaches (focus on a specific perspective, e.g. motives, interests or market assumptions)
- negligence of strategic aspects
- one way theories (investment-oriented, not disinvestment oriented)
Internalization Process Theory
What are classical topics in internalization process research?
- patterns in the sequence of foreign market entries
- patterns in the establishment process within a market
- patterns in the establishment mode of foreign subsidiaries (aquisitions vs. greenfield investments)
What is the Uppsala-Model?
- internationalization is a learning process, favouring:
- simple forms of market entry (i.e. export) and
- closely related markets as first steps (risk avoidance)
- low degree of market knowledge influences low degree of market commitment and both influence "step-by-step internationalization (incrementalism)
Spiral?
siehe Bild
What are new topics in internationalization process research?
- dynamic,
- discontinuity and
- direction of internationalization processes
What about instant internationalization?
instant internationalization can be either reactive or proactive
- reactive:
- international new venture approach
- free standing firm approach
- proactive:
- pure economic approach
Stategy, structure and coordination of international business
Strategy, structure and coordination of international business
