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International Business Week 6 Foreign Direct Investment

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  • February 15, 2023
  • 5
  • 2022/2023
  • Lecture notes
  • William webster
  • All classes
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Week 6: Foreign Direct Investment
18 October 2022 15:11



FOREIGN DIRECT INVESTMENT
- WHen firm invest directly production or other facilities, effective control, in a foreign country

- HORIZONTAL: replicate its business model in a different country (Vodafone in Ghana)
- VERTICAL: take control of some part of the supply chain (e.g. Starbucks and coffee farms in Costa Rica)

WHY CONPANIES INTERNATIONALISE
3 conditions

• Ownership

• Location

• Internalisation

The significance of each advantage and the configuration between them is likely to be
context specific and to vary across industries



Ownership: the (net) competitive advantages which firms of one nationality possess over those of another

nationality through ownership and/or coordination of assets in supplying markets.


FIRM-SPECIFIC ADVANTAGES:


- Proprietary technology


- Managerial/marketing skills


- Product differentiation


- Large size


- Large capital requirements




Location: The extent to which firms choose to locate these value-adding activities outside

their national boundaries
LECTURES Page 1

, their national boundaries

Advantages:


- Natural resources


- Efficient and skilled, low-cost labor


- Trade barriers restricting imports




Internalisation: The extent to which firms perceive it to be in their best interests to

internalise the markets for the generation and/or the use of these assets (if not to
sell/lease them)

ADVANTAGES:
- High costs of making and enforcing contracts
- Buyer uncertainty about value of tecknology being sold
- Need to control use or resale of product
- Advantages using price discrimination or cross-subsidization


SUMMARY:
- Range of potential advantages to FDI
- Conditions for internationalisation considered as ownership, location and internalisation (OLI)
- OLI provide useful way considering key issues but not complete "theory" of FDI/INTERNATIONALISATION
- Importance of international rules, shared understanding becomes apparent when consider nature of FDI



Different types of FDI




LECTURES Page 2

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