Global Business

a. What It Is And What Can Be Gained From It?

FDI: Investments in businesses/operations in a foreign country.

- A firm makes a direct investment outside it’s region

- This firm and others become MNCs or MNEs (Multinational Enterprise “more than one country”)

i. Why FDI? (pgs. 245-246, examples include in text)

FDI is the alternative available to firms other than exporting and licensing. Although FDI is risky and expensive, the limitations of exporting and licensing as means for capitalizing on foreign market opportunities can be less effective. A firm will favor FDI over exporting as an entry strategy when transportation costs or trade barriers make exporting unattractive. FDI will be favored over licensing or franchising when it wishes to maintain control over its technological know-how, or over its operations and business strategy, or when the firm’s capabilities are simply not amenable to licensing.

Exporting:

Limitations: Often constrained by transportation costs and trade barriers. Products that have a “low value-to-weight” ratio are unprofitable to ship over a large distance. Trade barriers may involve import tariffs or quotas. By playing these on imported goods, governments can increase the cost of exporting.

Licensing:

Limitations: (1) Licensing may result in a firm’s giving away valuable technological know-how to a potential foreign competitor. (2) Licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. (3) The firm’s competitive advantage is based not so much on its products, as on the management, marketing, and manufacturing capabilities that produce those products. The problem is that such capabilities are often not amenable to licensing.

Internalization theory is a marketing imperfection strategy to reason why FDI is preferred over licensing.

b. Foreign Investments

i.