Week 5

Question 1

Is the OLI (Eclectic) theory valid?

Answer 1

Yes, it is one of the most useful theories to understand the structure of IB.

Question 2

What are the three sources of advantage which are preconditions for firms to operate internationally?

Answer 2

Ownership advantages
Location advantages
Internalisation advantages

Question 3

Talk about the ownership advantage.

Answer 3

This is just firms possessing competitive advantages through tangible and intangible assets. These advantages must more then compensate for the liability of foreignness.

Question 4

Talk about the location advantage.

Answer 4

This is the idea that it is more profitable for firms to exploit their O advantages in combination with the inputs/services from another country.

Question 5

Talk about the internalisation advantage.

Answer 5

It’s more profitable for firms to exploit their O and L advantages through internalisation rather than by using arms length markets.

Question 6

Are there other conditions for firms to operate internationally?

Answer 6

Yes. OLI should be satisfied but firms also need financial resource, and international vision and motivation.

Question 7

What is a critique of Dunning’s OLI theory?

Answer 7

-It has little predictive power. Only company insiders with private knowledge can make evaluations.

-Doesn’t consider interaction between firms

-Doesn’t consider financial factors e.g exchange rates

Question 8

What is Behrman’s Typology of International Business?

Answer 8

It identifies motives for doing international business. Although he identifies 4, they’re not mutually exclusive. Firms could have multiple objectives

Question 9

What are Behrmans’s motives for doing international business?

Answer 9

-Resource seeking FDI
-Market seeking FDI
-Efficiency seeking FDI
-Strategic asset FDI

Question 10

What is resource seeking FDI?

Answer 10

Seek resources that are either costly or unavailable domestically. This could be physical resource, labour or expertise.

Question 11

What is market seeking FDI?

Answer 11

Seeking to improve access to markets through proximity.

Question 12

What is efficiency seeking FDI?

Answer 12

(Export platform FDI). Firms reconfigure systems to exploit international differences in product and factor prices.

Question 13

What is strategic asset seeking FDI?

Answer 13

FDI which could be part of a long-term strategic objective.

Question 14

Talk about exporting as a means of market entry.
What do returns depend on?

Answer 14

Exporting as a strategy has low sunk costs and low operational risk. Returns will depend on the firms export cost advantage.
However, requires overseas marketing and sales arrangements to be made.

Question 15

What are Melitz’s findings on exporting firms?

Answer 15

-Most efficient firms take advantage of foreign market opportunities and have highest growth.
-Only a small number of firms export
-Those that export tend to be larger and more competitive than those that don’t. Causality?

Question 16

Is exporting good for increasing market presence?

Answer 16

Yes, it’s the lowest-cost way to increase market presence

Question 17

Talk about licensing and technical agreements as a form of market entry.

Answer 17

Firms that don’t have I advantages can maximise the appropriability of their rents by selling/leasing O advantages at arms length.

Question 18

Talk about franchising as a form of market entry.

Answer 18

This is where franchisors lease out their products/brands for a fixed period in specific locations. This could be for when exports are infeasible.

Low cost way of supplying branded products
Can create rapid growth without the need for high up-front investment

Question 19

What is the ‘Franchise Paradox’?

Answer 19

Unknown brands generate low income and have low franchise fees. This is unattractive for franchisees without incentive

Well known brands generate high income and command high fees. Therefore, franchising might not be the most profitable method.

Question 20

When might franchising be used?

Answer 20

In periods before brands are well known and successful!

Question 21

Talk about joint ventures as a form of market entry.

Answer 21

Collaborations with other firms.
Major int. firms usually provide O advantages in return for partner’s L advantages
Requires partial investment. Reduces sunk costs

Question 22

Talk about majority owned subsidiaries as a form of market entry.

Answer 22

Subsidiaries have full access to parent firms’ resources, technology and know how.

Question 23

What is mutual forbearance?

Answer 23

Dominant oligopolistic engage in tacit collusion to avoid head-to-head competition. They can do this by being present in other firms principal market (threat)

Question 24

What is knickerbocker’s oligopolistic reaction?

Answer 24

The idea that FDI is driven by firms’ response to competitor behaviour. Firms are quickly followed into new markets to increase or maintain their market share.
This is well supported empirically.

Question 25

What is the first mover advantage?

Answer 25

You can acquire the market leading firms.
Reach customers first

Question 26

What is the first mover disadvantage?

Answer 26

Followers free ride on market risk and uncertainty.
Followers can learn from your mistakes.

Question 27

What is the exchange of threats?

Answer 27

Cross-investment of FDI. American firms FDIing in Europe should expect European firms to FDI in America.

Question 28

What is perfect contestability?

Answer 28

Entry and exit are free and costless.

Question 29

Is perfect contestability realistic?

Answer 29

Not really it’s more theoretical.

However MNEs have global production and supply strategies that make entry to and exit from markets relatively costless.

Question 30

What is hit and run market entry?

Answer 30

When competitors enters market through exporting and significantly reduces incumbents profits.

Question 31

How can hit and run entry be deterred?

Answer 31

Incumbent would have to produce below (MCh+t). That is the cost of the entrant to supply market (MC home + trade costs)

Question 32

What does it mean if global markets are contestabe?

Answer 32

Means the threat of entry may be sufficient to reduce prices and profitability towards the competitive level.