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ITBS, Topics (The impact of FDI on host countries (Does FDI positively…
ITBS
Topics
The impact of FDI on host countries
Does FDI positively impact poor countries?
How can poor countries attract the 'right' kind of FDI?
Non-Market Activities/Strategies of multinational corporations
Do MNCs influence governments and societies?
Have MNCs influenced climate change policies
Regional versus global strategy
Should firms 'go global' or go regional' when devising an internationalisation strategy?
International strategic alliances
Why do firms form strategic alliances?
Dunnings Eclectic Paradigm
Part 1-3, Bring OLI together
Investing in/from emerging economies
The strategy of investing in and out of emerging economies: pots of gold or full of potholes?
Bilateral investment treaties
What governs FDI globally?
International Strategic Alliance
Background/Definitions
ISA's
Co-operation between two or more firms belonging to different countries, each seeks to add competencies by combining its resources with those of the other partners
Popular but high number of failures
Dissolved
Partners leave
Strategic misfits
Acquisition of alliance partner by other alliance partner
New form of capability building
Types of ISAs
Non-equity based
Only on contractual agreement and no legal entity is created
Equity based also known as international joint venture
Examples
49:51 Joint venture between Telstra and Telkom
50:50 Joint venture between UK Jaguar and Rover and Chinese state owned automaker Chery
ISA vs IMA
It is an intermediate level of integration between arms length contracts and full ownership
Preferred over IMA when each firm only needs a subset of the FSAs of the partner
ISA also an external growth strategy and a market entry mode
FDI regulations in the host economy only permits ISAs
Cheaper option than buying the whole firm
Scale of integration is smaller
Provides immediate access and knowledge to LB FSAs
Resource based and internalisation view of ISAs
Rivals remain competitors outside the remit of the alliance
Partners are bundle of valuable, rare, non-imitable and organisationally embedded resources
Formed between potential and actual rivals
Internalise resources of your competitors
Use ISA for knowledge acquisition to learn from partners experience, capabilities, management skills and knowledge
Competitive Collaboration Perspective
Where learning is the goal, the termination is not failure nor is its longevity and stability evidence of success
Differences in learning capabilities within the alliance may shift the relative competitive position of partners outside and bargaining power within the alliance
Partners may regard internalisation of FSAs as the primary benefit of ISAs
Theoretically informed by RBV and internalisation theory
Hamel
Interviewed a bunch of MNEs participating in ISAs
Results
One must get the most out of it before the other in order to be successful
What determines learning?
Transparency
Characteristics of resources
Receptivity
Ability to learn and absorb
Intention
Desire to learn
Sustainable Learning
Dynamic capability
Bilateral Investment Treaties
Key Definitions
Foreign Direct Investment
An internationalisation strategy in which the firm establishes a physical presence abroad through acquisition/transfer of resources such as capital, tech, labour, land, plant, and equipment
Greenfield Investments
Starting from 'scratch'
Brownfield Investments
Acquisitions or mergers with existing firms in the host market
Cross-Border Merger
Two, more equal level, companies combining to form a completely new firm
Cross-Border Acquisition
One larger firm buying out or acquiring a smaller one which then becomes an addition to the existing firm
Characteristics of IMA's
Increasingly difficult to distinguish between acquisitions and mergers
Despite popularity, many fail to reach potential of the merger or acquisition
Generally it has been a popular form of FDI as a market strategy
It occurs often in waves of high peaks and deep troughs
An external growth option
What motivations are there to particpate in IMA's?
Strategic asset seeking
Acquire new capabilities, quest for strategic assets that are not elsewhere in the market and take a long time to develop in-house
Other motives
Managers enthusiasm, tax efficiency, asset stripping
Market Seeking
Geography, products, speed of access in new markets
Resource Seeking
Access to input material
Efficiency Seeking
Reduce costs via economies of scale and scope and reduce intensity of competition by purchased competition
Success/Failure!
Roots to success
Target Choice
Strategic fit strengthen or complements acquiring firm
Organisational fit: Match between management and cultural practices, staff characteristics
Effective intergration/management
Extent of strategic interdependence: Need for transfer of capabilities and or resources between acquired and acquiring firm
Need for organisational autonomy: Need to keep distinctive organisation of the acquired firm
Factors associated with poor performance
Opportunities for value creation do not match the purchase price of the acquisition
Acquisition based on ego strengthening rather than on clear acquisition strategy
Lack of strategic and organisational fit
Problems connected to integration phase, such as cultural differences, retention of key employees with valuable skills, organisational differences, increased complexity
Exam Qs/Focus
Dunnings Eclectic Paradigm
"Based on Dunning's Eclectic Paradigm, to what extent can ownership/firm specific advantages explain why multinational corporations enter foreign markets through foreign direct investment?
Impact of FDI on host countries
Critically evaluate the potential of foreign direct investment to contribute to economic development in the host countries of their investments
Non-Market/Strategies MNCs
Critically explain the concept of non-market environment and how MNEs formulate non market strategies, according to Bach and Allen, to enhance their competitiveness in that environment
International Strategic Alliances
Adopt Hamel's view on competitive collaboration to discuss the motivation of international strategic alliances
Dunnings Eclectic Paradigm
Ownership/Firm Specific Advantage
Used to decide whether or not to undertake FDI
Weighing out risks/opportunities
Risks
Foreigness
Liability
Definition
Hymer's Monopolistic Advantage Theory
In order to succeed when participating in FDI, one must have certain unique assets not easily available to competitors
Importance of Knowledge creation through R&D
Knowledge protection through intellectual property rights
Knowledge management and diffusion
Resource-based or capabilities view of Barney
The CA of a firm is explained by the distinctiveness of its resources and capabilities
CA arises when a firm leverages the services of its resources/capabilities
Particularly those that are valuable, rare, inimitable, and non-substitutable
Resources
Upstream knowledge
Product/Process-related tech knowledge
Downstream knowledge
Knowledge/experience related to marketing, sales, distribution, and after-sales
Human Resources
Individuals and team who have entrepreneurial/efficiency-related/operational skills
Administrative knowledge
Knowledge around the organisational structure/culture/systems
Financial Resources
Access to equity and loan capital
Reputational Resources
Brand names/reputation
Physical resources
Natural resources, buildings, plant equipment
Location bound FSAs
The theory that some FSAs are bound to certain locations and do not transfer internationally
Location Advantages
Definition
Location advantages are ones that are not mobile and exist only in a specific country or region
Countries are looking to showcase the advantages they have over other countries in order to receive business and investment
Theory of Comparative advantage and factor endowments
Can arise from comparative advantage of a nation
Unique assets/advantages/superior features of nation/country or a location within that
Derived from natural resources, factor endowments and or deliberate national policies
Attractive factors/advantages
Valuable natural resources (Resources)
Valuable Factor endowments (Factors of production)
Arable/buildable land
Low cost labour
Skilled labour
Deliberate national policies(Governance)
Entrepreneurial orientation, innovative capacity
Strategic geographic location
Natural Resources & Factors of Production
Inputs
Natural Resources
Capital
Labour
Land
Entrepreneurship
Production Process
Output
Product/Service
Porters Diamond Model
Demand Conditions
The nature of the HOME demands for the industry's product
Large/Demanding customer base pressures firms to be competitive
Related and Supporting Industries
Local clusters of related and mutually supporting industries
Ex Silicon valley
Local Factor Endowments/Conditions
Factor condition advantages can translate into international competitive advantage
Firm Strategy, Industry Structure, and Rivalry
Conditions in the nation governing how businesses are created, organised, and managed
Nature of domestic rivalry
Government/Governance
They create an environment that can aid or harm the ability of firms to compete internationally
Influence rivalry
Through regulation and antitrust laws
Impact the availability of highly educated workers and infrastructure
Affect demand
Through product standards
Different Locations -> Different Benefits, Strategic Goals -> Potential Locations
Natural Resource Seeking Firms
Search for particular foreign locations with possession of natural resources
Market Seeking Firms
Search for countries where there is demand in the market
Efficiency Seeking Firms
Seek out the most efficient locations featuring a combination of scale economies and low-cost factors
Innovation Seeking Firms
Seek out countries and regions renowned for world class innovations
Internalisation Advantages
Definition
The advantages of using internalisation rather than external partners
Focuses on intermediate product markets
Internalisation Theory
FDI internlised is more likely to occur when the costs of negotiating, monitoring and enforcing a contract with a second firm are high
when transaction costs are low, firms are more likely to be contract with outsiders
Rugman, Hennart, and Verbeke
Transaction costs
What are they?
Ensuring the contract is honoured
Monitoring and enforcement
Measuring costs
Quality controls
Bargaining to gain the best contract
Bargaining costs
Search and informational cost
Performing market research
Contract costs
For transactions
Adjustment costs
Adjusting to changing conditions
Communication charges
The cost of entering into a transaction
A difficult decision, why?
Bounded Rationality causing market imperfections
Bounded rationality in decision making
Rationality of individuals is limited by the info they have and their capabilities
When to Internalise
Control
Control is advantageous due to market imperfections in the intermediate product market
The firm must benefit more from controlling the foreign business activity than from hiring an independent local firm to provide the service
When the local company may misappropriate proprietary technology
When the firm's reputation and brand name could be jeopardised by poor behaviour by the local company
When monitoring and enforcing the contractual performance of the local firm is EXPENSIVE
If exporting when faced with high tariff barriers or to avoid or exploit government intervention
To control...
To control knowledge and technology
To avoid the cost of adverse selection and moral hazard
Supplies/Protect quality of intermediate products
Market imperfections
When an imperfection in the market makes a transaction less efficient than it could be
Non-Market Activities/Strategies of MNC's
Key concepts
State/Society and the Market do not simply occasionally effect each other but rather the market takes place IN the State/Society
Political and social factors are key parts of understanding the market
Structure: The
non-market
environments of MNEs
The definition
The social, political, and legal arrangements that structure interactions outside of markets and private agreements
Agency: Non-market activities/strategies
Non-market strategy recognises that businesses are social and political beings, not just economic agents.
Companies create and distribute value which is influenced by laws, regulations, social pressure, activism, and efforts to shape the public perception of business
Smart executives engage with their social political environment
How to develop a non-market strategy?
Porter's 5 forces (modified)
What assets do the actors need to prevail in this arena?
What information will move the issue in this arena?
In which arena do these actors meet?
Who are the actors?
What is the issue?
How are non-market strategies used?
Firms use non-market strategies to seek legitimacy and overcome the liability of foreignness
This can take the form of corporate social responsibility
Regional vs Global Strategy
How are MNEs regional?
Regional cross border investment reduces the complexity and diversities of MNE's operations due to familiarity with the institutions in the host location
Key concepts
Breath vs Depth
Breath = Geographical spread of markets
Depth = Level of investment in markets
Broad Triad Markets
NAFTA, Asia, European Union
What is a Global MNE?
"Triad" Power
Equal penetration and exploitation of FSA in each of the triad markets
No 'blind spots' in each of the triad regions
Impact of FDI on Host Countries
What are the potential benefits?
The foreign investor provides completely new tech and practices that can open up unexplored sectors for the country
The foreign investor allows the host country to enter international markets and earn foreign exchange
The foreign investor provides dechnologies, management techniques, and quality control processes that potentially allow the host economy to be more efficient and to offer better/cheaper goods to consumers
The foreign investor brings new products, improved quality, and lower prices
The foreign investor provides additional resources to raise the level of domestic output
What does the impact depend on?
OLI Framework
Motivation for investment
Resource seeking
Efficiency seeking FDI
Market Seeking
Efficiency seeking industry of the investment
Investing in Emerging Economies
Key definitions
Emerging Economies
A subset of former developing economies that have achieved substantial industrialisation, modernisation, improved living standard, and a remarkable economic growth
EE MNEs
MNEs that originate from an emerging economy and are headquartered there
Perspectives relevant to EE MNEs outward FDI strategy
Resource-based perspective
Why firms differ and how they acheive and sustain competitive advantage
Institutional perspective
Emphasises the influences of the systems surrounding organisation that shape social and organisational behavioiur
Transaction Cost and Internalisation perspectives
Study the firm external environment and explains the choice of organisational form