Theories of the MNE (topic 13) Flashcards
FDI
Refers to directly investing in activities that control and manage value creation in other countries.
MNE
A firm that engages in FDI.
Ownership advantages (OAs) (Dunning, 2008)
MNEs’ capacity to engage competitively in the foreign-value-added activities vis-a-vis competitors. OAs differentiate a firm from its rivals.
Micro-economic based theories
Build on industrial organisation theory.
Multidisciplinary theories
Economic factors only offer partial explanation of FDI: political, social, cultural, and managerial factors may also be used. Just considering economic factors is insufficient.
Ownership advantages (OAs) (Dunning, 2008)
Give MNEs the capacity to engage competitively in FDI, outcompete local companies, differentiate a firm from its rivals and help them to overcome ‘liabilities of foreignness’.
Ownership (“O”) advantages (Dunning, 2008)
Give MNEs the capacity to engage competitively in FDI, outcompete local companies, differentiate a firm from its rivals and help them to overcome ‘liabilities of foreignness’.
Examples: a strong brand, strong R&D.
Location (“L”) advantages (Dunning, 2008)
MNEs’ wish to locate those foreign-value-added activities in a host country. It must be profitable for MNEs to combine O factors with factor endowments of the host market, otherwise they would export. Production takes place where immobile inputs are cheapest and where average production costs are minimised.
LAs are tied to a particular foreign location.
E.g.: wide geographic presence.
Internalisation (“I”) advantages (Dunning, 2008)
MNEs’ desire and opportunity to internalise the market for the ownership advantage.
MNEs must gain by exploiting their FSAs (firm-specific assets) themselves in the foreign market, other wise they would employ licensing/franchising/management contract/turnkey project.
Internalisation reduces transaction costs.
(related to transaction cost theory)
Choosing a WOS over a JV/franchise enables firms to better capitalise on their “O” advantages, exercise tighter control, and minimise transaction costs.
What is a firm?
A set of transactions coordinated by authority instead of by market.
What is a transaction?
A transaction takes place whenever a good/service is transferred from one party to another.
Transaction costs associated with licensing
Search and negotiation costs; servicing costs; coordinating activities; taking action to correct failures; taking legal action.
Transaction costs
International market imperfections raise transactions costs in IB; this gives firms a greater incentive to internalise their activities. The internalisation process is continued until the benefits and costs of further internalisation are equal. Costs of internalisation arise from administrative/communication expenses, for example.
Uppsala model
The firm first develops in the domestic market; success at home leads them to internationalise. A case of incremental, step-wise, internationalisation: increasing market commitment over time; more spatially and psychically distant markets entered over time.
Happens as a consequence of firms gaining (i) experience of operating internationally and (ii) knowledge of foreign markets.
Weaknesses of the Uppsala model
Firms do not always follow a step-wise sequence:
- they often ‘stick’ at certain stages, or retreat back through them in the case of divestment;
- stages may be leapfrogged;
- born global’s, by definition, do not internationalise incrementally;
- market knowledge can be purchased.
