Summary Chapter 7
Foreign Direct Investment
During this chapter we learned and review some theories that helps us to understand the pattern of FDI between countries and to examine the influence of governments on firms´decisions to invest in other countries. I should mention some important points about this chapter: * Any theory of the FDI must explain why firms go to the trouble of acquiring or establishing operations abroad, when the alternatives of exporting and licensing are available to them. * We realized why many firms prefer FDI or licesing instead of exporting, because exporting is with high transportation costs and tariffs that are imposed on imports. * Firms prefer FDI to licensing when:
1. A firm has valuable know-how that cannot be protected by a licensing contract. 2. A firm needs tight control over a foreign entity in order to maximize it`s market share and earnings in that country. 3. A firm`s skills and capabilities are not amenable to licensing. * There is a theory named Knickerbocker this theory suggest that much FDI is explained by imitative behavior by rival firms in an oligopolistic industry. * Another theory named Vernon`s product life-cycle suggests that firms undertaken FDI at particular stages in the life cycleof products they have pioneered, but this theory does not address the issue of wether FDI is more efficient than exporting or licensing for expanding abroad. * Dunning has argued that location specific advantages are the considerable importantes in explaining the mature and ifrection of FDI, according to him firms undertake FDI to exploit resource endowments or assets that are location specific. * Political ideology is a very important determinant of government policy Howard FDI. The two extremes, the ideology ranges and the free market,is an approach best described as pragmatic nationalism. * There are some benefits for a host...