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Multinationals

Q: What is an example of upstream vertical FDI?

From final assembly operations in home country to components operations in host country

Q: 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

Q: What are liability of outsider ship (3)

In general, the liability of outsider ship can arise form at least 3, not necessarily independent, sources: Distant origins Lack of local experience Lack of nearby experience

Q: 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

Q: What is meant by the outsider ship liability 'lack of nearby experience'?

Costs resulting from the company's unfamiliarity with and lack of roots in a regional environment

Q: What is the key idea of liability of outsider ship?

Features of the context in which firms are embedded influence economic behavior

30 important questions on Multinationals

How do firms become multinational enterprises (MNE's)?

By undertaking foreign direct investment (FDI) in multiple countries

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

What is foreign portfolio investment?

Investments in foreign equity that do not entail the active management of foreign assets (<10% equity)

What is an example of upstream vertical FDI?

From final assembly operations in home country to components operations in host country

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)

In general, the liability of outsider ship can arise form at least 3, not necessarily independent, sources:

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'?

Costs resulting from the company's unfamiliarity with and lack of roots in a regional environment

What is the key idea of liability of outsider ship?

Features of the context in which firms are embedded influence economic behavior

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?

May relate to

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?

When a firm locates assets or employees in a foreign country with the purpose of securing the productions of a raw material or input

What normally drives the decision to engage in vertical FDI?

Location advantages related to prices or productivities of production factors, such as:

capital
labor
land

For instance, a clothing firm may consider production abroad to take advantage of lower labor costs

When does horizontal FDI occurs?

When a firms sets up a plant of service delivery facility in a foreign location with the goal of selling in that market without abandoning production of the good or service in its home country

Horizontal FDI: when is a production of a good or service in a foreign market desirable?

In the presence of:

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)

Explaining why some activities are carried on within firms and others through arms-length transactions

asset specificty

When does asset specificity exists?

If market exchange comes with high transaction costs leading to 'market failure'

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?

If one party needs to make an investment with high asset specificity:

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?

If uncertainty is high:

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?

Entrepreneurial firms that, from their inception, seek to derive significant competitive advantage from the use of resources and the sale of outputs in multiples countries

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

The question on the page originate from the summary of the following study material:

Introduction to Strategy Economics

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