Zach Hawkins September 28, 2016 Chapter 8 assignment Critical Thinking and Discussion Questions 1. In 2008, inward FDI accounted for some 63.7 percent of gross fixed capital formation in Ireland, but only 4.1 percent in Japan (gross fixed capital formation refers to investments in fixed assets such as factories, warehouses, and retail stores). What do you think explains this difference in FDI inflows into the two countries? Ireland has a shortage of skilled workers. Social partnerships in their country have led to lower wages in other EU countries. Japan already has such a large number of factories and warehouses in their country. If they had a higher percentage of a gross fixed capital formation, they would have a surplus of factories, warehouses, and retail stores. 2. Compare and contrast these explanations of FDI: internationalization theory and Knickerbocker’s theory of FDI. Which theory do you think offers the best explanation of the historical pattern of FDI? Why? The internalization theory tries to explain why firms often prefer foreign direct investment over licensing as a strategy for entering foreign markets. Knickerbocker’s theory of FDI is based on the idea that foreign direct investment flows are a reflection of strategic rivalry between firms in the global marketplace. The knickerbocker theory seeks to explain the theory between FDI and rivalry in oligopolistic industries. Internalization theory best explains the relationship of the historical pattern of foreign direct investment. Most companies prefer FDI over licensing, because licensing allows a foreign company to right to produce and sell another company’s product and receive a royalty on every unit sold. 3. What are the strengths of the eclectic theory of FDI? Can you see any shortcomings? How does the eclectic theory influence management practice?
The strengths of the eclectic theory of FDI is that it brings the best aspects of other theories together and combine them into a single explanation. Location advantage can be a positive and a negative. Location-specific advantages arise from using resource endowments or assets that are tied to a particular foreign location and that firm finds valuable to combine with its own unique assets. If a firm does not have strong marketing skills, technological or management capabilities, then they may not be able to meet the needs they need to for their management practice.
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