Multinationals
30 important questions on Multinationals
How do firms become multinational enterprises (MNE's)?
What are implications of MNE's? (2)
- Many firms can be considered MNE's
- Not all internationally active firms are MNE's
- for example pure exporters
What is the difference between horizontal and vertical FDI?
- Horizontal FDI: a firm duplicates its home country-based activities at the same value chain stage in a host country
- Vertical FDI: a firm invests in a different value chain stage in a host country
- upstream versus downstream
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What is foreign portfolio investment?
What is an example of upstream vertical FDI?
Why should not every firm become a multinational? (2)
- Liability of outsider ship is the inherent disadvantage that outsiders experience in a new environment because of their lack of familiarity
- It is the costs of doing business abroad that result in a competitive disadvantage for an MNE subunit
- can therefore be broadly defined as all additional costs a firm operating in a market overseas incurs that a local firm would not incur
What are liability of outsider ship (3)
- Distant origins
- Lack of local experience
- Lack of nearby experience
What is meant by the outsider ship liability 'distant origins'? (3)
- Costs directly associated with spatial distance, such as:
- the costs of travel
- transportation
- coordination over distance and across time zones
- Costs resulting from the host country environment, such as:
- the lack of legitimacy of foreign firms and economic nationalism
- Costs from the home country environment, such as:
- the restrictions on high-technology sales to certain countries imposed on U.S.-owned MNE's
What is meant by the outsider ship liability 'lack of nearby experience'?
What is the key idea of liability of outsider ship?
What is the difference between formal institutions and informal institutions (liability of outsider ship)?
- Formal institutions: laws regulations and rules that are set by authorised bodies
- regional, country or supra-national level
- Informal institutions: rules that are not formalised but exist
- for example norms and values (culture)
What is ownership advantage? (2)
- An internal firm-specific capability that is transferable across borders
- non-location bound firm-specific advantage; NLB-FSA
- Needed to overcome the liability of outsider ship
- the disadvantage that outsiders experience in a foreign environment because of their lack of local knowledge, networks, and legitimacy; that is, to overcome the cost disadvantage compared to local firms
What is location advantage?
- the local market
- local resources
- natural resources
- local agglomerations
- knowledge spillovers
- specialised labor
- eco-system)
- local institutions
- free access to markets versus barriers to foreign investors
What are factors determining whether there is a location advantage to local production? (5)
- Protectionism
- Transportation costs
- Direct interaction with customers
- Production and sale of some services
- Marketing access
When does vertical FDI occurs?
What normally drives the decision to engage in vertical FDI?
- capital
- labor
- land
When does horizontal FDI occurs?
Horizontal FDI: when is a production of a good or service in a foreign market desirable?
- protectionist barriers
- high transportation costs
- unfavorable currency exchange rate shifts
- requirements for local adaptation to the peculiarities of local demand that make exporting from the home country unfeasible or unprofitable
The mere existence of a location advantage does not justify FDI; what happens in the case of vertical expansion?
- The firm may benefit from the comparative advantage in the foreign location simply by asking a local producer to become its supplier (vertical upstream expansion) or simply export to that market (vertical downstream expansion)
- To justify direct investment, there must be powerful reasons to undertake foreign production rather than rely on others to do the job
What is international advantage? (3)
- asset specificty
When does asset specificity exists?
- imperfections of the market mechanism that make some transactions prohibitively costly, such as:
- the risk of opportunistic behavior by exchange partners
What is meant by 'site specificity'? (2)
- Site specificity occurs when investments in productive assets are made in close physical proximity to each other
- Geographical proximity of assets for different stages of production reduces:
- inventory
- transportation
- sometimes processing costs
To what does international advantage determine the choice between? (2)
- Vertical FDI preferred over exporting
- FDI preferred over licensing
When is vertical FDI preferred over exporting?
- an investment that is specific to a business relationship
- asset specificity: an investment that is specific to a business relationship; that is, the extent to which the value of an asset is lost when it is utilised outside of a certain context
- results in high 'sunk costs'
- example: aluminium industry
When is FDI preferred over licensing?
- dissemination risk high
- knowledge is tacit (non-codifiable)
- which makes licensing a risky option because the licensee might misappropriate, damage, or otherwise misuse the firm's intangible assets
- tangible assets van be better protected
What does the ownership-Location-Internationalization paradigm indicate?
- That a firm transfers its ownership advantages (O) to benefit from
- the location advantages (L) of another country
- and become an MNE if there are
- internalisation advantages (I) in the transfer of advantages and coordination of operations within the company rather than using the market
What are born globals?
What are the traditional internationalisation processes? (2)
- Experiential learning and knowledge acquisition
- Network building and exploitation
What are the accelerated internationalisation processes? (4)
- Building an entrepreneurial team with international experience
- Learning from importing and inward foreign investors
- Learning form others operating in the foreign country
- Acquiring resources in the foreign country, possibly entire firms
Why do born global firms exist? (3)
- Born global firms often:
- offer products that complement the products/services or capabilities of other MNE's
- take advantage of global IT infrastructure
- otherwise tap into a demand for a product/service that at its core is somewhat uniform across national geographic markets
- Overcome resource-limitation of new firms by tapping into experience and knowledge of:
- top managers
- board members
- networks
- Often located in countries with relatively small domestic markets
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