BUS350 - Ch.7


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Unformatted text preview: less risky for a firm to acquire desired assets than build them from the ground up • firms believe they can increase the efficiency of an acquired unit by transferring capital, technology, or management skills 11 of 51 The Shift to Services In the last two decades, there has been a shift towards FDI in services • The shift to services is being driven by • the general move in many developed countries toward services • the fact that many services cannot be exported • a liberalization of policies governing FDI in services • the rise of Internet‐based global telecommunications networks that have allowed some service enterprises to relocate some of their value creation activities to different nations to take advantage of favorable factor costs 12 of 51 Theories of Foreign Direct Investment Question: Why do firms prefer FDI to either exporting (producing goods at home and then shipping them to the receiving country for sale) or licensing (granting a foreign entity the right to produce and sell the firm’s product in return for a royalty fee on every unit that the foreign entity sells)? • To answer this question, we need to look at the limitations of exporting and licensing, and the advantages of FDI 13 of 51 Theories of Foreign Direct Investment 1. Limitations of Exporting The viability of an exporting strategy can be constrained by transportation costs and trade barriers • When transportation costs are high, exporting can be unprofitable • Foreign direct investment may be a response to actual or threatened trade barriers such as import tariffs or quotas 14 of 51 Theories of Foreign Direct Investment 2. Limitations of Licensing Internalization theory (also known as market imperfections) suggests that licensing has three major drawbacks a) it may result in a firm’s giving away valuable technological know‐how to a potential foreign competitor b) it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability c) It may be difficult if the firm’s competitive advantage is not amendable to licensing 15 of 51 The Pattern of Foreign Direct Investment 3. Advantages of Foreign Direct Investment A firm will favor FDI over exporting as an entry strategy when • transportation costs are high • trade barriers are high A firm will favor FDI over licensing when • it wants control over its technological know‐how • it wants control over its operations and business strategy • the firm’s capabilities are not amenable to licensing 16 of 51 The Pattern of Foreign Direct Investment It is common for firms in the same industry to 1. have similar strategic behavior and undertake foreign direct investment around the same time 2. direct their investment activities towards certain locations at certain stages in the product life cycle 17 of 51 The Pattern of Foreign Direct Investmen...
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This document was uploaded on 03/05/2014.

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