Foreign Direct Investment and Location Advantages

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Questions and Answers

What is a primary reason for Flextronics maintaining manufacturing plants in high-cost regions?

To limit technological advancements

To reduce operational complexity

To maintain low labor costs

To stay close to key customers (correct)

Which type of plants is highlighted as contributing to Flextronics' strength?

Plants focusing solely on cost reduction

Plants developing unique technological processes

Plants located in emerging economies only

Regional plants to maintain proximity to key customers (correct)

What defines the criterion of 'emerging economies' based on Khanna et al.'s discussion?

High GDP per capita and advanced technological infrastructure

Absence of institutional voids and stable free market systems (correct)

Low economic growth rates and high employment levels

Presence of efficient local intermediary firms

Why are multinational enterprises (MNEs) attracted to emerging economies?

Access to inexpensive skilled labor and lower manufacturing costs Signup and view all the answers

What is a common feature defining the economic landscape of emerging economies?

Pace of economic development and GDP growth scale Signup and view all the answers

What are location advantages primarily characterized by?

Strengths of a specific location Signup and view all the answers

Which of the following is NOT a type of motivation for foreign direct investment (FDI) in host countries?

Export-oriented growth Signup and view all the answers

How should location advantages be assessed?

In comparison to strengths of other locations Signup and view all the answers

What can effectively increase a firm's foreign strategic advantages?

Effective and efficient use of local advantages Signup and view all the answers

What is the definition of foreign direct investment (FDI)?

Allocation of resource bundles by an MNE in a host country Signup and view all the answers

What factor can foster local innovation within a specific industry?

Presence of a sophisticated local market Signup and view all the answers

Which of the following is a home country location advantage?

Favourable tax regime Signup and view all the answers

Which of the following statements about location advantages is accurate?

They may not be strengths for all locally operating firms. Signup and view all the answers

What is necessary for both parties to benefit from an alliance?

Selective sharing of some knowledge and skills Signup and view all the answers

Which factor affects how easily a Firm-Specific Advantage (FSA) can diffuse to a partner?

Mobility of the FSA Signup and view all the answers

Why is embedding a characteristic of an FSA important for its diffusion?

Embedded FSAs are harder to interpret and adopt by partners Signup and view all the answers

What is one method to limit the sharing of FSAs within an alliance?

Clearly define the scope of the alliance Signup and view all the answers

What issue arises from learning asymmetry in joint ventures, particularly in emerging economies?

Instability in the joint venture Signup and view all the answers

What challenge do mergers and acquisitions face during integration?

High purchase price premiums Signup and view all the answers

Why might foreign multi-national enterprises (MNEs) win the 'learning race' in joint ventures?

They often have superior resources or experience Signup and view all the answers

How can empowering company gatekeepers affect information transfers during alliances?

It restricts informal information sharing to control risks Signup and view all the answers

What was a significant consequence of decades of offshoring for production engineers and managers?

Shortage of high-level production engineers and managers Signup and view all the answers

How did Flex classify its plants before the mid-1990s?

According to the complexity of PCB assembly and technologies involved Signup and view all the answers

What was a drawback of Flex's plant classification system prior to the mid-1990s?

Focus only on current operations with no future planning Signup and view all the answers

What strategic role does the Chennai industrial park in India serve?

Exclusively serves the Indian market and has specific strengths Signup and view all the answers

What was a characteristic of the Guadalajara industrial park in Mexico?

Focused on regional output due to proximity to the North American market. Signup and view all the answers

What describes the Doumen industrial park in China?

It initially served as an offshore production site and later evolved to a leader role. Signup and view all the answers

What was the main goal of acquiring plants from IE?

To gain access to advanced technology capabilities and specialized knowledge Signup and view all the answers

What type of classification best describes the role of the plants in the Flex case?

Leader, contributor, and server Signup and view all the answers

What does bounded rationality in a multinational enterprise (MNE) primarily reflect?

The challenges in processing information due to its complexity and uncertainty Signup and view all the answers

What is a primary source of bounded reliability within an MNE?

Opportunism and changing local preferences Signup and view all the answers

What is an advantage of foreignness (AoF) for an MNE?

Potential for cultural attractiveness of products or services Signup and view all the answers

What does bounded reliability NOT stem from?

Lack of information about market conditions Signup and view all the answers

Why might an MNE face difficulties in making international expansion successful?

Incompleteness of information about environmental complexity Signup and view all the answers

Which of the following describes the concept of bounded rationality?

The limited ability to fully understand and analyze complex environments Signup and view all the answers

What is one way to mitigate issues arising from bounded reliability in MNEs?

Implementing effective governance mechanisms Signup and view all the answers

What type of bounded reliability is characterized by ‘good faith local prioritization’?

Benevolent preference reversal Signup and view all the answers

Which statement best describes a liability of foreignness (LoF)?

Foreign firms may lack local knowledge and face competitive disadvantages. Signup and view all the answers

What factor may be considered an advantage of foreignness for MNEs when entering markets?

Cultural attractiveness of certain products Signup and view all the answers

Study Notes

Location Advantages

Location advantages are the strengths of a specific location, usable by firms operating there.
They should be assessed relative to other locations.
Examples include abundant natural resources, superior education systems, and demanding local markets.
Location advantages do not benefit all firms equally.
Firms that effectively use location advantages gain additional FSAs over other local firms.

Foreign Direct Investment (FDI)

FDI is the allocation of resources by an MNE in a host country, where the MNE retains strategic control.
MNEs are motivated by both home country and host country location advantages.

Home Country Location Advantages

Geographic scope
Specific country advantages (e.g., tax regimes)
Specific regions within a country (e.g., economic or tech clusters)
Cross-border regional advantages (e.g., NAFTA)

Host Country Location Advantages

Natural Resource Seeking: Availability of inputs
Market Seeking: Market size and growth, consumer wealth and taste, sales channels, marketing and sales professionals
Strategic Resource Seeking: Availability of knowledge-related assets, specialized intermediaries, and service providers
Efficiency Seeking: Availability of production factors at low cost
Export Platform MNE Activity: Infrastructure importance

Liability and Advantage of Foreignness (LoF & AoF)

LoF: A foreign firm (e.g., MNE) has an a-priori disadvantage compared to local firms due to geographic, linguistic, economic, political, educational, institutional, and cultural differences.
Bounded Rationality: MNEs face information problems due to complex and uncertain environments.
Bounded Reliability: Agents may not always fulfill their promises due to opportunism or benevolent preference reversal.
AoF: A foreign firm can have an a-priori advantage over local firms due to cultural attractiveness (e.g., US fast food, French wine, Italian styling) or by arbitraging between different regimes (e.g., input costs, taxes, labor standards).

Bounded Rationality

Managers face limited information about the relevant environment, especially about the future state of the environment.
Incomplete information about environmental complexity hinders successful international expansion.
Even with accurate information, managers may struggle to process it effectively and determine its relevance.

Bounded Reliability

Based on the idea that agents may not always follow through on their promises due to:
- Opportunism: Individual may possess all information but prioritize self-centered desires.
- Benevolent Preference Reversal: Making the same mistakes repeatedly, even if outcomes are predictable.
This can be addressed through governance mechanisms like learning from partners.

Obtaining New FSAs

New knowledge acquired from external partners must be effectively disseminated internally.
The mobility and embeddedness of the FSA affect its ease of diffusion.
Mobility: Ease of moving the physical instructions for duplicating the FSA.
Embeddedness: The degree to which an FSA is difficult to share without problems of interpretation or absorption across cultures.

Limit the scope of alliances to clearly defined learning areas.
Choose alliance locations strategically, away from headquarters.
Establish performance-based checkpoints for knowledge sharing.
Empower company "gatekeepers" to control information transfer to partners.

Prashand Kale and Jaideep Anand (CMR): Alliances/JVs in Emerging Economies (India)

Foreign MNEs often outpace local partners in knowledge acquisition, eliminating resource complementarity.
Learning asymmetry creates instability in JVs.
Increased incentive to transform JVs into wholly owned subsidiaries.
Volkswagen vs. Suzuki: VW did not share core technology.

Wholly Owned Subsidiaries

Acquisitions are a common route for establishing wholly owned subsidiaries.
M&A face pre- and post-integration obstacles and "purchase price premiums."
Despite challenges, M&As are driven by factors like offshoring-induced shortages of high-level personnel, capital/labor ratios, supply chain disruptions, and customer reshoring demands.
Reshoring is increasingly linked to R&D activities.

Flex Case

Founded in 1969, Flex expanded internationally in the 1980s.
Plants were initially classified based on the complexity of PCB assembly and technology involved.
This classification focused on the present, neglecting future considerations.

Strategic Roles of Flex Plants

Chennai Industrial Park (India): Serves the Indian market exclusively, developed specific strengths, and will become part of Flex's global supply network.
Guadalajara Industrial Park (Mexico): Proximity to the North American market, regional output oriented, some jobs later moved to Doumen, initially served as an offshore site for cheap labor and proximity to the US market.
Doumen Industries Park (China): Access to skilled workforce and technology capabilities, distinct FSAs from supplier network proximity, access to knowledge and low-cost production, increasing role in Flex's global manufacturing.
Plants Acquired from IE: Focus on gaining access to advanced technology and specialized knowledge, high capacity for customized solutions, advanced recombination capabilities, a global role in the photo industry.

Flex's Strengths

Flextronics leverages a portfolio of different plant types: regional plants for customer proximity, low-cost locations for generic jobs, plants with advanced technology, and specialty plants for strategic areas.

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Description

This quiz explores the concepts of location advantages that influence Foreign Direct Investment (FDI). It covers how firms can leverage geographic strengths and specific advantages of both home and host countries. Understand the various motivations behind FDI and how location impacts strategic decisions for multinational enterprises.