Question 1

What is predicted by Dunning's OLI model about the entry mode?

Accepted Answer

The OLI model, also known as the eclectic paradigm, was developed by British economist John H. Dunning. This model predicts the entry mode of a company into a foreign market by considering three key factors: Ownership (O), Location (L), and Internalization (I) advantages. These factors help determine the most efficient and effective way for a company to enter a new market, whether through exporting, licensing, franchising, joint ventures, wholly-owned subsidiaries, or other forms of direct investment.

Ownership Advantages: These refer to the company's unique assets, skills, capabilities, and resources that can be transferred across borders and that provide a competitive edge over local firms. This includes technology, brand reputation, patents, and managerial expertise. If a company has strong ownership advantages, it may prefer entry modes that allow it to maintain control over its resources, such as wholly-owned subsidiaries or joint ventures.

Location Advantages: These are the benefits derived from operating within a particular market or geographic location. Factors such as market size, access to raw materials, labor costs, trade barriers, and economic and political stability are considered. If location advantages are significant, a company might be more inclined to invest directly in that market to better exploit these benefits.

Internalization Advantages: These advantages are gained when a company finds it more profitable to manage its resources and capabilities internally rather than through licensing or contracting with other firms. This can be due to reasons such as the prevention of knowledge spillover, better quality control, or the avoidance of transaction costs. When internalization advantages are high, firms are more likely to prefer entry modes that allow for greater control, such as establishing a wholly-owned subsidiary.

In summary, Dunning's OLI model suggests that the choice of entry mode is a strategic decision based on the evaluation of ownership, location, and internalization advantages. Firms will choose the entry mode that maximizes their overall advantages and aligns with their strategic objectives, resources, and capabilities. The model helps explain why companies might choose different entry modes in different circumstances and provides a framework for analyzing the complexities of international expansion.

Question 2

What are ownership, locational and internalisation advantages in the OLI model?

Accepted Answer

The OLI model, also known as the eclectic paradigm, is a theory in international business that explains why companies choose to engage in foreign direct investment (FDI) as opposed to other forms of entry into international markets. The model was developed by British economist John H. Dunning in the late 1970s. OLI stands for Ownership, Locational, and Internalisation advantages, which are the three types of competitive advantages that firms must possess to successfully invest overseas. Here's a breakdown of each component:

1. Ownership Advantages (O):
Ownership advantages refer to the firm-specific assets that a company possesses, which give it a competitive edge over other firms. These assets can be tangible or intangible and include things like:

- Proprietary technology or patents
- Brand reputation and trademarks
- Unique products or services
- Superior managerial or organizational processes
- Exclusive access to natural resources
- Economies of scale and scope

These advantages enable a firm to compete effectively in foreign markets and are often the primary motivators for a company to engage in FDI. They are the assets and capabilities that can be transferred within the multinational enterprise at a lower cost than they could be transferred to or replicated by other firms.

2. Locational Advantages (L):
Locational advantages are the benefits that arise from operating in a specific location. These are the factors that make a particular country or region attractive for investment and can include:

- Access to markets and customers
- Availability of skilled labor or natural resources
- Favorable legal and regulatory environment
- Economic and political stability
- Infrastructure quality
- Proximity to suppliers or partners
- Cultural and linguistic ties

Locational advantages are external to the firm and are determined by the characteristics of the host country. They are critical in the decision-making process for FDI because they can significantly affect the success and profitability of the investment.

3. Internalisation Advantages (I):
Internalisation advantages are the benefits a firm gains from retaining control over its resources and capabilities rather than licensing them to a foreign partner. These advantages arise when there are imperfections in the market for intermediate goods or services, such as knowledge or technology. By internalising these assets, the firm can:

- Protect proprietary information or technology from competitors
- Avoid transaction costs associated with negotiating and enforcing contracts with third parties
- Coordinate activities across different parts of the company more effectively
- Capitalize on synergies between different operations within the firm

Internalisation is essentially about the firm's decision to manage the cross-border activities within its organizational structure instead of relying on external partners or market mechanisms.

In summary, the OLI model suggests that a firm will engage in FDI when it has ownership advantages that can be exploited internationally, when there are locational advantages to doing so, and when it is more beneficial to internalise the use of its assets rather than to license them to foreign firms. This framework helps explain the motivations behind a firm's choice to invest abroad and the factors that influence the location and nature of its international operations.

Question 3

What are the difference between horizontal, vertical, and complex FDI?

Accepted Answer

Foreign Direct Investment (FDI) refers to an investment made by a firm or individual in one country into business interests located in another country. FDI can take several forms, including the establishment of a subsidiary or acquisition of shares in a foreign company, and can be categorized based on the direction of investment: horizontal, vertical, or complex.

**Horizontal FDI:**
Horizontal FDI occurs when a business expands its domestic operations to a foreign country. In this case, the company performs the same activities abroad as it does at home. For example, a car manufacturer based in Germany might open a plant in the United States to produce the same models for the U.S. market. The primary motivations for horizontal FDI include market access, circumventing trade barriers, and reducing transportation costs. It can also be driven by strategic considerations, such as following clients or competitors into key markets.

**Vertical FDI:**
Vertical FDI, on the other hand, takes place when a company acquires or establishes operations abroad that are different but related to its main business. This can be further divided into two subtypes:

1. Backward Vertical FDI: This occurs when a company invests in a foreign firm that supplies inputs for its production processes. For example, a U.S. automobile company might acquire a tire manufacturer in Brazil to secure its supply chain and reduce production costs.

2. Forward Vertical FDI: This happens when a company invests in a foreign firm that distributes or sells its products. Continuing with the same example, the U.S. automobile company might purchase a network of dealerships in India to ensure its cars are marketed and sold effectively in the Indian market.

Vertical FDI allows companies to control or reduce the costs associated with the supply chain and to take advantage of cheaper inputs or labor costs in the host country.

**Complex (Conglomerate) FDI:**
Complex or conglomerate FDI is a less common form of investment. It occurs when a company invests in a foreign business that is unrelated to its primary business activities. This type of FDI is often driven by the desire to diversify investments or to enter into a market with significant growth potential. For example, a technology firm might acquire a chain of hotels in a foreign country. Since the businesses are unrelated, this type of FDI can be riskier and requires a company to acquire new expertise and knowledge about the industry it is entering.

In summary, the differences between horizontal, vertical, and complex FDI are based on the relationship between the company's existing operations and the foreign investment. Horizontal FDI is about replicating the company's home activities in a foreign country, vertical FDI is about controlling additional stages of the production process, and complex FDI is about diversifying into unrelated business areas. Each type of FDI has its own strategic rationale and implications for the company's growth and international expansion.

Question 4

What is FDI and how does it differ from portfolio investment?

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Question 5

Identify the 4 correct statements 
1. A cross-border investment is considered as FDI if more than 50% of the capital of a foreign company is acquired.
2. Market-seeking FDI is also labelled as horizontal investment.
3. Internalisation advantages in the OLI model are related to the role that international differences in costs in global production decisions play.
4. The OLI predicts that licencing is the preferred entry mode when there are no internalisation advantages.
5. The "new new trade theory" predicts that the less productive a company is the more likely it will offshore its production.
6. A fully integrated global supply chain may be very complex to manage.
7. "Special Economic Zones" are an instrument to attract FDI.
8. "Transfer pricing" signifies that a company is charging the same prices in domestic and foreign markets

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1. A...

Question 6

What are the major categories on investment policy measures according to UNCTAD's Investment Policy Monitor?

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Question 7

What is the role of a firm's productivity level on its entry mode according to the "new new trade theory"?

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Question 8

What is "transfer pricing", and what is the role of FDI in facilitating it?

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Question 9

What is the difference between an integrated and a fragmented supply chain?

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Exam 4: Global Investment