International Business Chapter 6

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Questions and Answers

What does the term 'location advantages' refer to in the context of firms operating in a specific area?

Market dominance achieved through aggressive pricing strategies

The cost efficiencies realized by outsourcing production

The advantages obtained by a firm due to firm-specific capabilities in a location (correct)

The benefits gained from a firm's internal processes

Which of the following best describes the concept of 'agglomeration'?

The practice of firms vertically integrating their supply chains

The process of merging multiple firms into one corporation

The distribution of resources among competing firms

The clustering of economic activities in specific locations (correct)

In the context of FDI, what does 'dissemination risk' refer to?

The risk associated with currency fluctuations

The potential for unauthorized spread of proprietary knowledge (correct)

The market entry challenges faced by multinational enterprises

The legal challenges associated with foreign investments

What political view on FDI considers both advantages and disadvantages before making a judgment?

Pragmatic nationalism Signup and view all the answers

What is the primary focus of intrafirm trade in the context of multinational enterprises (MNEs)?

Trade conducted between subsidiaries of the same MNE in different countries Signup and view all the answers

What does foreign direct investment (FDI) primarily involve?

Controlling and managing activities in other countries. Signup and view all the answers

What is the primary difference between horizontal and vertical FDI?

Horizontal FDI occurs within the same industry, while vertical FDI spans different stages of the value chain. Signup and view all the answers

What does 'FDI inflow' signify?

The movement of FDI into a country over a period. Signup and view all the answers

Which of the following describes ownership advantages (O) in the context of MNEs?

Having unique and valuable resources that are difficult to replicate. Signup and view all the answers

What is true about the term 'FDI stock'?

It refers to the total accumulation of FDI in a country over time. Signup and view all the answers

What is the purpose of the resource-based and institution-based views in understanding FDI?

To clarify the motivations behind foreign direct investment. Signup and view all the answers

How does downstream vertical FDI operate within a value chain?

It is characterized by operations in later production activities. Signup and view all the answers

Which of the following is NOT a feature of a multinational enterprise (MNE)?

Focus on only domestic growth opportunities. Signup and view all the answers

Study Notes

Chapter 6: Investing Abroad Directly

Foreign Direct Investment (FDI): Putting money into activities that control and manage value-added activities in other countries.
Multinational Enterprise (MNE): Firms that engage in FDI.
Foreign Portfolio Investment (FPI): Holding securities (stocks and bonds) of companies in other countries, but without actively managing those assets.
Management Control Rights: Authority to appoint key managers and establish control mechanisms.

Learning Objectives

6-1: Use resource-based and institution-based views to explain why FDI occurs.
6-2: Understand how FDI creates ownership, location, and internalization (OLI) advantages.
6-3: Identify different perspectives on FDI's benefits and costs for host and home countries.
6-4: Participate in key debates regarding FDI.
6-5: Draw implications for action regarding FDI.

FDI Vocabulary

FDI flow: Amount of FDI moving in a certain direction (inbound or outbound) during a specific period (usually a year).
FDI inflow: FDI moving into a country in a year.
FDI outflow: FDI moving out of a country in a year.
FDI stock: Total accumulation of inbound FDI in a country or outbound FDI from a country.

Horizontal and Vertical FDI

Horizontal FDI: Producing the same products or services in a host country as firms do at home.
Vertical FDI: Firm moves upstream or downstream in different value chain stages in a host country.
- Upstream FDI: FDI in an earlier activity in the value chain.
- Downstream FDI: FDI in a later activity in the value chain.

Top 10 Economies Receiving FDI Inflows (2011) and Generating FDI Outflows (2011)

Data presented for both inflows and outflows (billions of dollars)
Note: Exact figures are not included in text.

Why Firms Become MNEs by Engaging in FDI: OLI Advantages

OLI: A framework for understanding FDI—the quest for ownership, location, and internalization advantages.
- Ownership advantages: MNEs' valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets in a foreign country.
- Location advantages: Unique characteristics (natural resources, labor, and markets) of a particular location that are beneficial to a business.
- Internalization advantages: Firms' replacing cross-border markets (such as exporting or importing) by operating directly in multiple countries.
  - Licensing: Selling technology or intellectual property for a fee.

OLI Advantages Detailed

Location: Specific features of a place (natural resources, labor, or proximity to markets) that are beneficial to a business.
Internalization: Replacing cross-border markets (e.g., exporting/importing) with direct operation by the MNE in different countries.
Licensing Considerations: When licensing is less favorable than FDI

FDI vs. Licensing

Dissemination risk: Potential for unauthorized diffusion of a company's proprietary knowledge through licensing, which is considered a downside of licensing from the company's point of view.

Location Advantages

Agglomeration: Clustering of economic activities in certain locations.
Knowledge spillover: Diffusion of knowledge among closely located firms.
Oligopoly:Industry dominated by a small number of players.

Political Views on FDI

Radical view: Views FDI as an instrument of imperialism and exploitation.
Free market view: Believes that FDI increases specialization and creates advantages for both host and home countries.
Pragmatic nationalism: The perspective that supports FDI only when the benefits outweigh the costs.

Effects of FDI on Home and Host Countries

Table 6.1: A matrix showing benefits and costs of FDI to host and home countries (e.g., capital inflow/outflow, job creation/loss).

Benefits and Costs of FDI to Host Countries

Technology spillover: Diffusion of foreign technical knowledge and processes in the host country.
Demonstration effect: Local firms observing foreign technology and striving to imitate it.
Contagion effect: Local rivals understanding the feasibility of adopting foreign technology.

Bargaining Power in FDI Negotiations

Bargaining power: The ability to extract a favorable outcome from negotiations due to one party's strengths.
Obsolescing bargain: When the initial agreement between an MNE and a host government changes after the FDI entry.
Expropriation: Confiscating foreign assets.
Sunk costs: Already invested funds

Sovereign Wealth Funds (SWFs)

SWF: State-owned investment funds composed of financial assets.

Implications of FDI for Action

Assess whether FDI is warranted over other options, such as outsourcing and licensing.
Consider optimal locations in tandem with strategic goals.
Understand the institutional parameters guiding FDI to enhance its legitimacy.

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Description

Explore Chapter 6 of International Business, focusing on Foreign Direct Investment (FDI) and its implications. Learn about multinational enterprises, portfolio investments, and the advantages of FDI from various perspectives. Engage in debates surrounding FDI's impact on host and home countries.