Foreign Direct Investment Concepts

Chapter 1: Concepts – Multinationals and Global Capitalism

• Learning Outcomes:
  • Explain the role of multinationals in creating global capitalism.
  • Discuss three major debates regarding globalization.
  • Explain the concept of a multinational.
  • Explain the impact of national culture using Hofstede's dimensions.
  • Describe four multinationals.

Globalization Definitions

• Harvey (1989) defines globalization as the "compression of time and space."
• Guillén (2001) defines it as a process leading to increased independence and mutual awareness (reflexivity) among economic, political, and social units in the world, and among actors in general.
• Bordo, Taylor, and Williamson (2001) identify between-country integration of commodity, labor, and capital markets as its most important characteristic.
• Kogut (1997) views globalization as the process of increasing integration in world civilization.

The Origins and Extent of Globalization

• Different perspectives exist regarding the origin of globalization, ranging from the decades after WWII to the 16th century circumnavigation of the Earth, or even the Ancient World.
• Some scholars see the world becoming borderless (Ohmae/1990).
• Early views trace back to ancient civilizations and trade routes.

Causes of Globalization

• Driven by the development of new communication and transportation technologies.
• Government and firms have played significant roles, raising the issue of globalization's inevitability.
• Globalization is not a linear process, with the collapse of the international economy in the interwar years providing an example of potential reversal.

Consequences of Globalization

• Globalization is associated with increasing inequality between countries.
• The sovereignty of nation states is seen as being eroded.
• Sociologists debate whether mass consumerism homogenizes world cultures.

Defining Multinationals

• In 1958, Maurice Byé coined the term "multi-territorial firm."
• In 1960, David E. Lilienthal used the term "multinational corporations" when discussing US corporations with overseas operations.
• A multinational is defined as a firm that controls operations or income-generating assets in more than one country.

Foreign Direct Investment (FDI)

• A multinational engages in one of two types of foreign investment: Foreign Direct Investment (FDI) and Portfolio Investment.
• FDI involves management control, either through acquiring an existing firm or establishing a new operation.

FDI Arrangements

• Equity Arrangement: Whole Subsidiaries (company owned or controlled by another) and joint ventures (shared ownership).
• Non-equity Arrangement: Licensing (contract between firms for tech/resource transfer), Franchising (company grants another the right to do business in a specified area), and Cartels (agreements between firms to maintain prices or limit output).
• Strategic Alliances: Arrangements between firms to share facilities or cooperate in new product development.

Liability of Foreignness

• Crossing borders creates major strategic and organizational issues due to alien policies, cultures, languages, and laws.
• Foreign firms experience a "liability of foreignness" due to the distance between their home country and the host economy (cost and risk).
• Four dimensions of distance: political, geographical, economic, and cultural.

Impact of National Culture on Business

• National culture is a set of shared values, expectations, behaviors.
• It is learned and transmitted across generations.
• National culture overlaps with regional and company cultures, and individual behavior is influenced by personality, economic status, and social context.
• Cultural values can shift over time due to economic conditions, technological advancements, and political events.

Hofstede's Dimensions

• Hofstede's research is the most extensive empirical research on national cultural differences impacting business.
• The research identifies five cultural dimensions that vary between countries: 1.Power Distance, 2.Tolerance for Uncertainty, 3.Individualism/Collectivism, 4.Masculinity/Femininity, 5.Long-term/Short-term Orientation

Impact of Culture on Business

• Individualism is characteristic of English-speaking countries.
• Collectivism is prevalent in developing nations
• Uncertainty avoidance is higher in German-speaking countries and Japan.
• Long-term orientation is prevalent in East Asian countries.

Multinational in Theory

• Ownership and Location Advantages: The Heckscher-Ohlin theory assumes atomistic competition and doesn't address firm ownership or proprietary technology. Mainstream theory views multinationals as capital arbitragers.
• Internalization and Firm Boundaries: Coase (1937) suggested firms and markets are alternate methods of organizing production highlighting market costs associated with transactions. Internalizing transactions within the firm is cost effective until marginal costs exceed marginal revenue.
• Transaction Costs: Factors influencing internalization include asset specificity (uniqueness of assets), bounded rationality (incomplete information), and opportunism (tendency to cheat or misrepresent).

Ownership Advantages

• Superior resources(Access to technology, information, knowledge), Size of firm(access to capital), Superior Management and Organization techniques(Organizational structures & Skills)
• Access to raw materials
• Economies of scale (Cost advantage)
• Access to finance (cheaper access/market relationships)

Location Advantages

• Nature of host country markets (Size & income level, growth stage, Membership, Labour costs)
• Tariff and nontariff barriers to trade (Government policy, legal frameworks.

Internalization, the Electric Paradigm

• The eclectic paradigm of international production combines ownership and internalization approaches, highlighting factors for international production.
• Firms engage in international production if ownership advantages exist in a particular market, internalization is beneficial, and locational advantages make foreign production more profitable.
• Factors impacting the paradigm: Ownership-specific advantages deriving from intangible assets (innovation, organizational structures, knowledge), and advantages of common governance (operational flexibility, global sourcing, diversification).

Multinational Theory—Knowledge-Based Theories of the Firm

• Strategy and structure mold organizational capabilities. Firms need core capabilities (R&D, etc.)
• Corporate competence emerges through collective learning from localized skills and organizational routines.
• The resource-based view stresses stable and systematic firm differences due to resource endowments, causing performance discrepancies. Knowledge is increasingly important for competitive advantage.

Multinational Theory—Entrepreneurship

• Primary role of the entrepreneur was to bear risk.
• Neoclassical economics emphasized the final state, neglecting the process and entrepreneur's contributions.
• Entrepreneurs are alert to hitherto-unexploited exchange possibilities; they gain rewards from knowledge of previously unspotted opportunities.
• Entrepreneurship is associated with disequilibria and the process of moving the economy towards equilibrium.
• Entrepreneurs can be innovators who disrupt markets and are critical to international production or obsolescent while large corporations flourish due to innovation becoming routinized.
• Certain locations attract more entrepreneurial talent.

Test your knowledge on key concepts related to foreign direct investment (FDI) and multinational corporations. This quiz covers topics such as characteristics of subsidiaries, liability of foreignness, and distinctions between different types of investments. Prepare to explore essential definitions and processes in international business.