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    International Business Assignment PDF

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    Ayesha Rashid
    - The document discusses and compares the Internalization theory and Knickerbocker's theory of foreign direct investment. - The Internalization theory argues that firms use FDI instead of licensing to avoid leaking technology, lack of control over licensees, and inability to license certain assets. It posits that FDI allows firms to internalize transactions and better capture economies of scale. - Knickerbocker's theory states that in oligopolistic industries, when one firm invests abroad, competitors will follow suit through imitative FDI to maintain market share and avoid competitive disadvantages. - The document concludes that while Knickerbocker's theory explains imitative FDI, Internalization theory better explains why

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    International Business Assignment PDF

    Uploaded by

    Ayesha Rashid
    44 views7 pages
    - The document discusses and compares the Internalization theory and Knickerbocker's theory of foreign direct investment. - The Internalization theory argues that firms use FDI instead of licensing to avoid leaking technology, lack of control over licensees, and inability to license certain assets. It posits that FDI allows firms to internalize transactions and better capture economies of scale. - Knickerbocker's theory states that in oligopolistic industries, when one firm invests abroad, competitors will follow suit through imitative FDI to maintain market share and avoid competitive disadvantages. - The document concludes that while Knickerbocker's theory explains imitative FDI, Internalization theory better explains why

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    - The document discusses and compares the Internalization theory and Knickerbocker's theory of foreign direct investment. - The Internalization theory argues that firms use FDI instead of licensing to avoid leaking technology, lack of control over licensees, and inability to license certain assets. It posits that FDI allows firms to internalize transactions and better capture economies of scale. - Knickerbocker's theory states that in oligopolistic industries, when one firm invests abroad, competitors will follow suit through imitative FDI to maintain market share and avoid competitive disadvantages. - The document concludes that while Knickerbocker's theory explains imitative FDI, Internalization theory better explains why

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    44 views7 pages

    International Business Assignment PDF

    Uploaded by

    Ayesha Rashid
    - The document discusses and compares the Internalization theory and Knickerbocker's theory of foreign direct investment. - The Internalization theory argues that firms use FDI instead of licensing to avoid leaking technology, lack of control over licensees, and inability to license certain assets. It posits that FDI allows firms to internalize transactions and better capture economies of scale. - Knickerbocker's theory states that in oligopolistic industries, when one firm invests abroad, competitors will follow suit through imitative FDI to maintain market share and avoid competitive disadvantages. - The document concludes that while Knickerbocker's theory explains imitative FDI, Internalization theory better explains why

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 7

    Govt.

    Postgraduate College for Women Samanabad, Lahore

    Department of Management Sciences


    B.com (hons)
    8th- Semester
    Name
    Ayesha Ghazal

    Roll No
    091631008

    Session
    2016-2020

    Submitted to
    Mam Iqra

    Class
    B.com Hons (8 Semester)
    IN THE NAME OF ALLAH WHO IS THE MOST BENEFICIAL
    AND MOST MERCIFUL
    Chapter 8

    Question No. 2
    Compare and contrast these explanations of FDI:
    Internalization theory and Knickerbockers theory of FDI. Which
    theory do you think offers the best explanation of the historical
    pattern of FDI? Why?
    Answer
    Internalization theory
    Firms use foreign direct investment rather than licensing
    for three reasons
     First, licensing can leak technology that gives the firm a
    competitive advantage.
     Second, a firm does not strongly control the licensee in how
    the product is made, promoted, priced and other strategic
    areas. Multinationals that license can be at a competitive
    disadvantage to those that don’t.
     Third, not everything is licensable. For these reason, a firm
    will use FDI rather than licensing.
    The Internalization theory of Foreign Direct Investment is tested
    by comparing gains from FDI and non-FDI modes of expansion.
    The Proponents of Internalization theory argue that FD1 modes
    of expansion are better since the risk of dissemination of
    information monopoly is less when firms expand using these
    modes. However, critics argue that non-FDI modes of expansion
    are preferable because of the high agency cost of decentralization
    associated with FDI modes. This slightly sheds some light on the
    debate by comparing the gains from FDI and non-FDI modes of
    expansion. The results show that abnormal returns to the
    shareholders are significantly higher when firms expand using
    non-FDI modes of expansion (e.g. sales, contracts, ant1 licensing)
    relative to FDI modes of expansion (e.g. subsidiaries,
    acquisitions, and Joint ventures).
    Advantages
     Avoid search and negotiating costs
     Avoid cost of moral hazard (hidden detrimental action by
    external partners)
     Avoid cost of violated contracts and litigation
     Capture economies of interdependent activities
     Avoid government intervention
     Control supplies
     Control market outlets
     Exchange of knowledge
     Increasing saving and investment
     Economic Development
     Transfer skill and technology
     Better apply cross- subsidization, predatory pricing and
    transfer pricing
    Knickerbocker’s Theory
    Oligopolistic industries exist when only a few large firms
    dominate an industry. Whatever one firm does have a massive
    impact on the other firms. Therefore, the firms pay attention to
    the other firm’s actions, including FDI. If one firm has successful
    FDI in another nation, then the other firms export market to that
    nation is obliterated. The investing firm may obtain a first mover
    advantage or discover something that could grant in a competitive
    advantage. Therefore, the other firms will initiate FDI to said
    nation.
    This theory can be extended to embrace the concept of multipoint
    competition (when two or more enterprises encounter each other
    in different regional market, national markets, or industries).

    Which theory do you think offers the best explanation of the


    Historical Pattern of FDI? WHY?
    Knickerbockers theory and its extensions can help to explain
    imitative FDI behavior by firms in oligopolistic industries, it does
    not explain why the first firm in an oligopoly decides to undertake
    FDI rather than to export or license. Internalization theory
    addresses this phenomenon. The imitative theory also does not
    address the issue of whether FDI is more efficient than exporting
    or licensing for expanding abroad.
    Internalization theory addresses the efficiency issue. For these
    reasons, many economists favor internalization theory as an
    explanation of FDI, although most would agree that the imitative
    explanation tells an important part of the story. Firms do invest in
    a foreign country when demand in that country will support local
    production, and they do invest in low-cost location (e.g.
    developing countries) when cost pressure become intense.
    Alternatively, it may be more profitable for the firm to license
    foreign company to produce its product for sale in that country.
    The product life cycle theory ignores these option and, instead,
    simply argues that once a foreign market is large enough to
    support local production, FDI will occur. The theory’s failure to
    identify when it profitable to invest abroad limits its explanatory
    power and its usefulness to business. I think Knickerbocker’s
    theory and Internalization theory is the best explanations of the
    historical pattern of Foreign Direct Investment (FDI).

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