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International Business Week 6 Foreign Direct Investment
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Week 6: Foreign Direct Investment18 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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