MULTINATIONAL

ENTERPRISE
UNIT-1
TABLE OF
CONTENTS
 Multinational Enterprises:

 Definitions and sources of data

 The nature of a multinational enterprise

 The distinctive features of an MNE

 Forms of foreign involvement by MNEs

 Measuring the extent and pattern of

multinational activity

 Sources and types of data

 Deficiencies in the quality of statistical

data on
FDI

 Size and stability of foreign investment

flows
INTRODUCTION-BASIC CONCEPTS

 A multinational enterprise, abbreviated as MNE and

sometimes also called multinational corporation (MNC),
just multinational or international corporation, is
an enterprise producing goods or delivering services in more
than two country

 a company or group should be considered a multinational

corporation if it derives 25% or more of its revenue from out-of-
home-country operations

 The two main characteristics of MNCs are their large size and
the fact that their worldwide activities are centrally controlled by
the parent companies

 One of the first multinational business organizations, the East

India Company, was established in 1601
  A multinational or transnational enterprise is
an enterprise that engages in foreign direct
investment (FDI) and owns or, in some way,
controls value-added activities in more than
one country.
 An MNE may be privately or publicly (that
is, state) owned and managed. If the former,
its stock can be privately held by a small
group of owner-investors, or widely held and
THE traded on a stock exchange.
DISTINCTIV  It may be a large diversified global
corporation owning or managing a network of
E activities in many countries or a single-
FEATURES product firm that operates only one foreign
OF MNE marketing venture; it may be a private equity-
managed firm.
 Most MNEs can be readily identified as
originating from a single country. For
example, ICI is easily identified as a British
firm, Ford as a US firm, NEC as a Japanese
firm, Volvo as a Swedish firm, Siemens as a
German firm, Samsung as a Korean firm, and
Nokia as a Finnish firm.
THEORETICAL CRITERIA FOR IDENTIFYING MNE
The number and size of foreign affiliates or associate
companies it owns or exercises control over.
The number of countries in which it owns or in some way
controls value-added activities such as mines,
plantations, factories, sales outlets, banks, offices and
hotels.
The proportion of its global assets, revenue, income or
employment accounted for by its foreign affiliates.
The degree to which its management or ownership is
internationalized
The extent to which its higher-value activities.
The extent and pattern of the systemic advantages
arising from its governance of, and influence over, a
network of economic activities located in different
countries.
NATURE OF MNES

 Importing and exporting goods and services

 Making significant investments in a foreign country

 Buying and selling licenses in foreign markets

 Engaging in contract manufacturing — permitting a local

manufacturer in a foreign country to produce their products

 Opening manufacturing facilities or assembly operations in foreign

countries
WHY MNES GET ESTABLISHED?

 Increase market share

 Cheaper labor cost and other fixed costs

 Employment, health and safety rules and legislations in other

countries may be more relaxed

 Avoid or minimize amount of tax to be paid

 To save on cost of transportation of goods to target market

 Enjoy benefit of location economy

 Develop and international brand

WHY MNES GET ESTABLISHED?

 Growing world market for their product or services

 Response to increased foreign competition

 Desire to reduce cost by internationalization and enjoy benefit of

economies of scale

 Desire to overcome tariff barriers

 Take advantage of technical expertise by manufacturing goods

themselves rather than allowing to do others under license
agreement
  In attempting to assess the extent
and pattern of the activities of MNEs
in the global economy, at first glance,
several sources of data appear to be
available.
 Especially , statistics are sought and
used will depend on the purpose for
which they are being collected, and
MEASURING THE the level of analysis being made.
EXTENT AND
PATTERN OF  For Eg: Assessing the impact of FDI on
MULTINATIONAL the quantity and quality of the world’s
ACTIVITY labour force will clearly require
employment data.
(SOURCES AND  For evaluating their effects on the
DATA) balance of payments, statistics on
trade and investment flows, profits
and dividends may be more relevant,
while data on R&D expenditure and
intra-firm technology payments may
be a useful starting-point for
assessing the contribution of MNEs to
innovatory capacity.
 At a more micro level, more detailed operational and financial data may be needed for
an evaluation of particular foreign investment projects. However, as an indicator of the
overall or sectoral economic significance of MNE activity, the most appropriate is the
value added created by MNEs outside their national boundaries, and more particularly,
that part of the value added accruing to the investing or recipient countries.
 Some major sources of data.
 Since, 1991 the publication of World Investment Report by UNCTAD (United
Nations Conference on Trade and Development) For detail scan

 The World Investment Report includes a core set of comparative (dollar-

denominated) data tables on inward and outward investment stocks and flows and
cross-border M&As that are compiled annually.
 World Investment Directory, covers one country at a time in a
consistent format, provide a wealth of information on the extent
and impact of MNE activity (expressed in the national currency),
including FDI stocks and flows, and the sales, assets and
employment of MNE affiliates, including those of home-based
MNEs, as well as those of foreign MNEs.
 Eurostat (2002) and the OECD (2002
 IMF,s Balance of Payments Statistics Yearbook,
 Along with the data necessary for MNEs to start its new venture in a
foreign market, global data about the activities of MNEs are collected
and stored for variety of uses by multiple global agencies,
government and international organizations

 It includes data like

 inward and outward flow of investment(FDI) from a

country
 Labor and employment statistics created by MNC
globally
 Asset sold and purchased by MNC
 Acquisition, Merger, purchase and sell of stocks
 Biggest MNEs operating globally
 Impact of MNEs on culture, environment and economic
welfare to the countries they operate
PRIMARY AND SECONDARY
SOURCES OF DATA
 The primary sources  Secondary sources
are the enterprises include most
themselves (or their international or regional
economic agencies,
affiliates) and the including UNCTAD, the
governments of the World Bank, the IMF, the
home and host ILO, the OECD and
countries in which Eurostat, industrial and
they operate. commercial trade
associations, civil
society groups and
academic scholars.
DEFICIENCIES IN QUALITY DATA OF FDI

Basic Reasons behind Deficiencies

 FDI flows are frequently impossible to distinguish from short-

term capital flows

 Domestic sales can end up registered as cross-border services

“trade foreign”

 Takeovers of domestic firms appear as portfolio capital

Several countries like Costa Rica, Indonesia and Malaysia do not

regularly collect details about stock of FDI

Developing countries including India provides data to favor

themselves showing favorable scenario for FDI to be made in their
nations
FORMS OF
FOREIGN
INVOLVEMENT BY
MNES
 The territorial expansion of
a firm’s production outside
its national boundaries has
been achieved by the act of
a foreign direct investment.
 It includes financial capital,
management and
organizational expertise,
technology,
entrepreneurship,
incentive structures, values
and cultural norms, and
access to markets across
national boundaries
 FOREIGN DIRECT 6-2

INVESTMENT
• Foreign direct investment (FDI) occurs when a firm invests
directly in facilities to produce or market a good or service in
 a foreign country.
• According to the U.S. Department of Commerce, FDI occurs
 whenever a U.S. citizen, organization, or affiliated group takes
an interest of 10 percent or more in a foreign business entity.
• Much of the increase in FDI has been driven by the political and
 economic changes that have been occurring in many of the
world’s developing nations. The general shift toward democratic
political institutions and free market economies.

• Across much of Asia, eastern Europe, and Latin America,
economic growth, economic deregulation, privatization
programs that are open to foreign investors, and removal of
many restrictions on FDI have made these countries more
attractive to foreign multinationals.
 HOST COUNTRY BENEFITS
 Resource Transfer Effect
 Foreign direct investment
can make a positive contribution to a host
economy by supplying capital, technology, and management
resources that would otherwise not be available and thus boost that
country’s economic growth rate.

 Employment Effect (Direct and Indirect)

 FDI is that it brings jobs to a host country that would otherwise not
be created there.

 Balance of Payment Effect (current account BOP and export)

 Effect of competition and Economic Growth

 When FDI takes the form of a greenfield investment, the result is to
establish a new enterprise, increasing the number of players in a
market and thus consumer choice. In turn, this can increase the
level of competition in a national market, thereby driving down
prices and increasing the economic welfare of consumers.
 HOST COUNTRY COST

 Adverse effect on competition

 Host governments sometimes worry that the subsidiaries of foreign MNEs may
have greater economic power than indigenous competitors. If it is part of a larger
international organization, the foreign MNE may be able to draw on funds
generated elsewhere to subsidize its costs in the host market, which could drive
indigenous companies out of business and allow the firm to monopolize the
market.

 Adverse effect on BOP (import from home/parent company,

profit gone)
[ in some case restriction to purchase certain percentage of
items from host country for maintain BOP, Japanese Automobile
industry]
 National sovereignty and Autonomy
 HOME COUNTRY BENEFIT
 Balance of Payment (inward flow of profit)

 Employment effect
 Toyota’s investment in auto assembly operations in Europe has
benefited both the Japanese balance-of-payments position and
employment in Japan, because Toyota imports some component parts
for its European-based auto assembly operations directly from Japan.
 Learns valuable skill that MNC can take to home country
HOW GLOBAL OPERATION HELPS
MNCS?
From Economy in scale - occurs when more units of a good or
service can be produced on a larger scale with (on average) fewer
input costs

 R&D Expenditure and Advertisement Cost

 Technology Utilizations
 Minimum Cost and Maximum Output
 Smoothen Supply Chain
MNES IN NEPAL

 Unilever Nepal reported a 668 percent jump in profits to Rs280.9

million in the fourth quarter of the fiscal year 2020-21

 Bottlers Nepal (Balaju) that produces Coke, Fanta and Sprite, reported
a net profit of Rs155.10 million in the fourth quarter. The company
reported a net profit of Rs449.73 million for the fiscal year 2020-21

 Its subsidiary Bottlers Nepal posted a net profit of Rs54.91 million in

the fourth quarter of fiscal 2020-21

 Dabur Nepal reported a net profit of Rs784.1 million for the year ended
March 31, 2021

 Imports decreased 4.8 percent and exports increased 6.1 percent – Mid
Jan, 2020/2021
 NRB Report, Amounts in Billion

Top Imports Amount Top Exports Amount

Petroleum Products 155.04 Soyabean Oil 42.35

Vehicle and Spare Parts 113.21 Cardamom 6.63

Machineries and Parts 69.41 Wollen Carpets 6.47

MS Billet 65.4 Polyster Yarns and Threads 6.38

Rice 47.94 Jute Goods 6.04

TRADE OF NEPAL
FDI IN NEPAL
 The survey shows stock of FDI in Nepal increased by 8.5
percent to Rs.198.52 billion at the end of 2019/20.

 Nepal received foreign investment from 52 different

economies as of mid-July 2020.

 India ranks top position with Rs.62.45 billion followed by

China (Rs.30.97 billion), Saint Kitts and Nevis (Rs.15.27
billion) , Ireland (Rs.12.93 billion), and Singapore (Rs.12.43
billion).

 Industrial sector accounts for about 56.0 percent of total FDI

stock. Within industrial sector, manufacturing, mining and
quarrying industry constitutes 28.3 percent and electricity
sector 27.5 percent of total FDI stock.
FDI IN NEPAL

 About 43.9 percent of total FDI stock is in service

sector. Within the service sector; financial
intermediation constitutes 27.3 percent and hotel &
restaurant sector 6.0 percent of the total FDI stock.

 27.5 percent of FDI stock and 36.4 percent of total

paid-up capital is in hydropower sector
OTHER REASONS OF DEFICIENCIES

 Countries may differ in terms of accounting conventions, particularly

the way in which they depreciate assets and value trade investments

 The value of FDI may differ between host and home countries.
Example in 2002 outflow of FDI from US to China was recorded as
$924 million by US authorities, but as an inflow of $5424 million was
recorded by Chinese authorities
MNES AND INTERESTING FACTS

 Apple's iPad retina display is actually manufactured by Samsung

 The red and white Coca-Cola logo is recognized by 94% of the world's
population

 The iPad 2 would cost $1,140 if it were made in America

 Candy Crush brings in a reported $633,000 a day in revenue

 Samsung accounts for 20% of Korea's gross domestic product

THE EXTENT AND PATTERN OF
FOREIGN DIRECT INVESTMENT:

BBA 8th Semester

MNE
2nd Chapter
TABLE OF CONTENTS
 The extent and pattern of foreign direct investment:
 Introduction
 The leading outward investors
 The significance of outward direct investment to home
countries
 The leading inward investors
 The significance of inward direct investment for host countries
 The balance between outward and inward direct investment
 The sectoral composition of outward and inward investment
 The main orders of economic activity
 The world's leading MNEs
 The transnationality index
 The rise and decline of state-owned enterprises
  ..is an investment from a party in one
country into a business or corporation in
another country with the intention of
establishing a lasting interest

 ….term used to denote the aquisition

abroad of physical assets, such as plant
and equipment, with operational control
ultimately residing with the parent
FDI company in the home country. It may take
a number of different forms including:
Explained  the establishment of a new
enterprise in an overseas
country ;either as a branch or as
a subsidiary
 the expansion of an existing
overseas branch or subsidiary
 the acquisition of an overseas
business enterprise or its assets
FDI TYPES- DIRECTION AND TARGETS

 Basis of Direction

Inward FDI

Outward FDI

 Basis of Target

Greenfield Investment

Merger Acquisitions

Joint Venture
BASIS OF DIRECTION

The Ford Motor

involves an external
Company, for
or foreign entity
example, has a
Inward either investing in It is foreign money
factory in Mexico
or purchasing the that comes into the
FDI goods of a local domestic economy
which assembles
cars that are then
economy. exported to the
United States.

a natural
progression for American, European,
firms if their and Japanese firms
domestic markets have long made
Outwar become saturated
It is the money from
home going to the
extensive
d FDI and better external host market investments outside
their domestic
business
markets.
opportunities are
available abroad.
BASIS OF TARGET
parent company
Mercedes Benz
Greenfiel opens a subsidiary a company will
entered the Indian
in another build its own,
d country. Instead brand new
market by
Investme of buying an facilities from
purchasing 100
acres of land in
nt existing facility in the ground up
Pune, Maharashtra
that country

Merger Merger comes with tie-

up to create a new,
and Merge or acquire the
company from other
Acquisition comes
The Indian Commercial
banks merging with
Acquisiti when big fish
nations Nepalese Banks
takeaway the smaller
on one

a combination of
two or more combine the
parties that seek resources to gain Hero Cycles of
Joint the development a tactical and India and Honda of
venture of a single strategic edge in Japan
enterprise or the market
project for profit
 GLOBAL FDI STOCKS FLOW

•In 2020, Europe was the largest location of foreign direct

investment stocks in the world, accounting for almost two
fifths (39%) of the world’s inward investment positions.
•In 2020, Europe was the leading outward investor,
accounting for more than close to half (45%) of the world’s
outward investment stocks.
•Global foreign direct investment (FDI) flows showed a strong
rebound in 2021, up 77% to an estimated $1.65 trillion, from $929
billion in 2020
•Developed economies saw the biggest rise by far, with FDI
reaching an estimated $777 billion in 2021 – three times the
exceptionally low level in 2020, the report shows.
•In Europe, more than 80% of the increase in flows was due to large
swings in conduit economies. Inflows in the United States more than
doubled, with the increase entirely accounted for by a surge in
cross-border mergers and acquisitions (M&As).
• FDI flows in developing economies increased by 30% to nearly $870 billion, with a growth
acceleration in East and South-East Asia (+20%), a recovery to near pre-pandemic levels in
Latin America and the Caribbean, and an uptick in West Asia.
• Inflows in Africa also rose. Most recipients across the continent saw a moderate rise in FDI;
the total for the region more than doubled, inflated by a single intra-firm financial
transaction in South Africa in the second half of 2021.
• Developed economies saw the biggest rise by far, with FDI reaching an estimated $777
billion in 2021 – three times the exceptionally low level in 2020, the report shows.
• In Europe, more than 80% of the increase in flows was due to large swings in conduit
economies. Inflows in the United States more than doubled, with the increase entirely
accounted for by a surge in cross-border mergers and acquisitions (M&As).
• FDI flows in developing economies increased by 30% to nearly $870 billion, with a growth
acceleration in East and South-East Asia (+20%), a recovery to near pre-pandemic levels in
Latin America and the Caribbean, and an uptick in West Asia.
• Inflows in Africa also rose. Most recipients across the continent saw a moderate rise in FDI;
the total for the region more than doubled, inflated by a single intra-firm financial
transaction in South Africa in the second half of 2021.
• Source-
https://unctad.org/news/global-foreign-direct-investment-rebounded-strongly-2021-recovery
-highly-uneven
 Source-
https://www.imf.org/en/Blogs/Articles/2021/12/16/the-worlds-top-r
ASIA’S BIGGEST COMPANIES

ICBC
Honda Motors
Samsung Electronics
Hyundai Motors
Alibaba
China Mobile
Toyota Motors
DECLINING FDI INFLOW IN DEVELOPED NATIONS

 FDI flows fell in developed economies and economies in transition

while those to developing economies remained stable. As a result,
developing economies accounted for a growing share of global FDI
inflows in 2017, absorbing 47 per cent of the total, compared with 36
per cent in 2016

 Flows to developed economies dropped by more than one-third, to

$712 billion (figure 2). The fall can be explained in large part by a
decline from high inflows in the preceding year caused by cross-
border M&As and corporate reconfigurations. A significant reduction
in the value of such transactions resulted in a decline of 40 per cent
in flows in the United States to $275 billion
https://unctad.org/news/foreign-
investment-developing-asia-hit-
FDI TRENDS  Investment by petroleum MNEs dominates the
foreign-owned primary sector of most host
IN countries, such as Spain, Ecuador, Indonesia,
DEVELOPING Morocco, Liberia, Thailand, Brazil, Botswana,
COUNTRIES Namibia and Cameroon, also attract
substantial investments in agricultural sectors
as well including cash crops such as rubber,
tobacco, sugar, palm oil, coffee, cocoa,
pineapples
and bananas.
 Still others, including Canada, Papua New
Guinea, Chile, Malaysia, Democratic Republic
of the Congo, Gabon, Zambia and Zimbabwe,
are important sources of minerals and metals
such as bauxite, copper, zinc and tin. There is
also increasing FDI in aquaculture and
horticulture in several African, Asian and Latin
American countries
LEADING OUTWARD INVESTOR

 USA, UK, Germany and Netherlands were major investor

nations during 1980’s holding 73% of global outward
investment

 By 2005 these countries accumulative global share

decreased to 48%, with Japan and European nations (France,
Belgium, Spain) contributing to outward investment

 The global trend decline in position of USA in outward FDI

while emergence of some developing and transitional
economies (including Hongkong, China, Taiwan, Brazil,
Singapore and Russia) as significant outward investors
SIGNIFICANCE OF OUTWARD DIRECT INVESTMENT

 FDI investment were done in search of new markets opportunities not

found in home country, ripping benefits of resources available in host
country, and cost benefit purposes

 Repatriation of profits to home country was most prominent benefits to

the investor country to strengthen their economy

 Creating a global image, value creating and increasing global market

share was a secondary benefits obtained

 Competitive advantage with exploitation of foreign production

(location economy investment), for example; Malaysian rubber
companies, Brazilian Coffee processing firms, Taiwanese paper
production
SIGNIFICANCE OF OUTWARD DIRECT INVESTMENT

 Investment in terms of M&A (merger and acquisition) to

get access of technology and managerial assets were seen
form investor countries MNEs

 Developing countries like China and India have undertaken

resource seeking investment in mining and petroleum
industries,, particularly in Africa and Latin America.
Mittal Steel takeover of Arcelor, Corus by Tata Steels

 Investment for access of technological expertise includes

examples like; Chinese Lenovo acquisition of IBM PC,
acquisition made by Indian IT firms like Wipro, Infosys in
foreign hot spots for R&D facilities and brand name.
LEADING INWARD INVESTORS

 In 2021 , five leading recipient of inward investment countries

include; US, Hong Kong, UK, Germany and France accounting
40% of total investment

 Tax haven countries which provide great deal of tax saving

including Bermuda, Cayman Islands, Panama, Mauritius,
Singapore, Luxemburg, Ilse of Man, Switzerland draws
investment from around the globe.

 In recent times, we see high inward investment in Asian

countries including China, India with the shift in investment of
MNEs from resource based to manufacturing activities
SIGNIFICANCE OF INWARD DIRECT INVESTMENT FOR
HOST COUNTRIES

 The most prominent significance of inward

investment to host countries is the grown in GDP

 Employment opportunity and capital flow to host

country is seen
SIGNIFICANCE OF INWARD DIRECT INVESTMENT FOR
HOST COUNTRIES

 TNI refers to contribution make a MNE to a host country based on

3 kind of ratios;

- FDI inward stock as a percentage of GDP

- value added of foreign affiliates as a percentage of GDP

- employment of foreign affiliates as a percentage of total

employment
BALANCE • Flow of investment in and out of
BETWEEN country impact GDP of both countries
OUTWARD AND • MNEs are being increasingly
INWARD important component of GDP for both

INVESTMENT industrialized and industrializing

market economies
• As in the late 80’s investment flow
was between developed countries and
data showed that in developing
economies, inflow was prominent from
developed economies in primary
sectors and for other resource
seeking benefits
 BALANCE BETWEEN OUTWARD AND INWARD
INVESTMENT

 As of today we see growing symmetry between outward and inward

investments. With the rise of economy of developing countries who were
primarily inward investment nations, have seen to be investing in foreign
nations with changing domestic government policies, liberalization Flow
of investment in and out of country impact GDP of both countries

 MNEs are being increasingly important component of GDP for both

industrialized and industrializing market economies

 As in the late 80’s investment flow was between developed countries and
data showed that in developing economies, inflow was prominent from
developed economies in primary sectors and for other resource seeking
benefits and impact and technological advancements

 In context of Asia China’s “Go Global” policy can be taken as example

 Must read - https://www.oecd.org/china/china-go-global.htm
SECTORAL COMPOSITION OF OUTWARD AND INWARD INVESTMENT

Main Order of Economic Activity

 MNE invests in different industrial sectors

 During 60s and 70’s most FDI were focused on

primary sectors (like natural resources) and
Secondary sector (industrial and manufacturing)
SECTORAL COMPOSITION OF OUTWARD AND INWARD INVESTMENT

 In 1975 MNE FDI composed of 42% in manufacturing, 34% in service and 24% in
primary sectors

 With multiple factors like technology, income level, production, consumer demand,
cost impact there is seen a shift in the concentration of investment from primary to
secondary and recently in tertiary sectors

 More About Economic sectors –

 https://www.investopedia.com/terms/s/sector.asp
SECTORAL COMPOSITION OF OUTWARD AND INWARD INVESTMENT

 As of 2004 data, global FDI accounted 4% in primary sector, 27%

in secondary (manufacturing) and 68% in tertiary sector
(service)

 MNEs activities directed to service sector rises as income level

increases

 Mostly developed economies has seen high growth of inward FDI

in service sectors due to present of infrastructure, high income
level of consumers, and readiness towards use of technology
and new tastes
 Service sector Industries like Telecommunication,
Financial Institutions, E-commerce, Hospitality
industry has increased due to privatization or
deregulation as restriction on the foreign
ownership of such sectors has eased
COMPOSITION OF FDI WITHIN BROAD INDUSTRIAL SECTORS

 The main sectors of industry in which a company can operate are:

• primary
• secondary
• tertiary
• quaternary

Primary Sector comprises of investment for seeking natural resources like; coal,
mines, oil and gas, agro bases products. Example; Cocoa of Ghana, foreign
owned petroleum sector in Morocco, Brazil, Namibia, Indonesia. Mineral and
metal ores of copper, Zinc in Zambia, Congo, Chili, Canada
 Secondary Sector comprises of manufacturing sectors, which are
capital intensive processing industries. These are often based on
minerals, foodstuffs and raw material supplied by primary sectors.
Processing of output of primary sectors to produced industrial
products like textiles and clothing, beverages, chemicals,
pharmaceutical, meat processing, tobacco companies
 The tertiary sector of industry is concerned with providing a service.
Services are activities that are done by people or businesses for
consumers.
 Examples of businesses that operate in the tertiary sector would be
hairdressers, banks, supermarkets or cinemas.
 The quaternary sector consists of those industries providing information
services, such as computing, ICT (information and communication
technologies), consultancy (offering advice to businesses) and R&D
(research, particularly in scientific fields).
CONT…
 The second group of industries favoured
by MNEs are technology and human capital
intensive sectors, those which can benefit
from the economies of large scale
production and whose value added
predominantly consist of brand names.
Products belonging to clothing line,
consumer electronics, motor vehicles fall in
this category
WORLD’S LEADING MNES
TRANSNATIONALITY INDEX [TNI]
 TNI is a means of ranking multinational
corporations that is employed by economists
and politicians. It refers to contribution make a
MNE to a host country
 It is bases on average of three ratios namely
(Parameters of TNI)
- foreign sales to total sales
- foreign assets to total assets
- foreign employment to total employment
TRANSNATIONALITY INDEX [TNI]
 Although there is considerable differences in TNI
between firms in any particular sector, sectors such
as mining, paper and building materials, metals,
food/beverage and tobacco has the highest average
levels of transnationality, with TNI value of 68 – 81%

 A drawback of this index is that It does not take into

account the size of home country, nor does it
distinguish between companies whose activities are
concerned in a few foreign countries and companies
whose activities are spread across numerous host
countries
TRANSNATIONALITY INDEX [TNI]
 In the firms on the UNCTAD top 100 list are
ranked by nationality, European firms are
clearly most transnational, with those from
the UK, Switzerland and Netherlands in the
lead, while US firms are among the least
transnational in relative terms
RISE AND DECLINE OF STATE OWNED ENTERPRISES

 In 1965, 19 of the world’s top 200 industrial

enterprises outside of US were state owned
companies (SOC) and by 1975 same group were found
to include only 29 SOC
 By 1985 the number of SOC rose to 38,including 18
with FDI. It was due nationalization of private firms,
particularly by French and UK government.
 The second reason was that the sectors in which
government had stock were among fastest growing
ones; example aerospace, oil and motor vehicles
RISE AND DECLINE OF STATE OWNED ENTERPRISES

 Since 1985 due to the spread of market

economy, full and partial privatization of
several public owned corporations,
particularly in Europe was seen. Example;
British telecom, British Steel, British Airways,
Thomson and St. Gobain in France

 The second kind of former state owned MNEs

that are now private are the industrial firms
from socialist countries like central Europe
 There are countries where government tends to play a
dominant role. This is the case of China, where even
after some effort of privatization, state exercises
considerable influence, either directly or indirectly,
over majority of enterprises. Countries like Singapore,
Brazil, India too shows active role of government in
some sectors

 The wave of renationalization of late 70’s showed

major rise in SOE, specially in case of petroleum and
mining sectors. 15 out of 25 companies in 2003 ranked
by reserves and production were SOE from developing
countries and Russia while other had minority state
ownership
Source- https://www.visualcapitalist.com/mapped-the-worlds-
largest-state-owned-oil-companies/
 MOTIVES OF
FOREIGN
PRODUCTION
UNIT : 3
TABLE OF CONTENTS
 The motives for foreign production:
 Introduction
 The main types of foreign production
 The natural resource seekers
 The market seekers
 The efficiency seekers
  The strategic asset seekers
 Other motives for MNE activity
 The political economy of outward FDI
 How do political and economic factors, such as government
regulations and trade policies, affect the strategies and
activities of natural resource seekers, market seekers, and
efficiency seekers in foreign production, and what are the
implications for their success in global markets?
 MNEs are companies with their parent headquarters located in
one country and subsidiary operations in a number of other
countries (host countries), are the principal actors in global
political economy.

 The MNCs view the world as a single entity.

 Their impact transcends all national boundaries.

 They make decisions not in terms of what is best for the home or
host country of operations, but rather what is best for the
corporations as a whole on an international basis.

 The basic principle on which these corporations operate is that

they consider the entire world as their market.

 They organize production and marketing of products with little

regard for national interest in order to maximize profits.
 The contention is that the poverty of the peripheral world is not
an inscrutable natural phenomenon; rather, it is largely, but not
exclusively, the result of exploitative globalization of their
economies into the capitalist system in which the MNCs remain
the principal actors.
 INTRODUCTION
• Capital is a vital ingredient for
economic growth, but since most
nations cannot meet their total
capital requirements from internal
resources alone, they turn to foreign
investors.
• Foreign direct investment (FDI) and
foreign portfolio investment (FPI) are
two of the most common routes for
investors to invest in an overseas
economy.
• portfolio investment, which is the
purchase of stocks and bonds solely
for the purpose of obtaining a return
on the funds invested
• Direct investment, by which the
investors participate in the
management of the firm in addition to
receiving a return on their money
• Direct investment is differently
IN A SIMPLE
TERM
CASE OF ADANI GROUP OF
COMPANY
DIFFERENCES BETWEEN
FDI AND FPI
FOREIGN PORTFOLIO FOREIGN DIRECT
INVESTMENT INVESTMENT

 It is generally short term  It’s a long term investment

investment  Investment in physical
 Investment in financial asset assets
 Aim is to increase capital  Aim is to increase
availability enterprise capacity or
 It results into only capital
productivity or change
management inputs.
inflow
 Entry and exit is relatively
 Entry and exit is relatively difficult.
easy
 Direct impact on
 No direct impact on employment of labour and
employment of labour and wages.
wages
MAIN TYPES OF
FOREIGN PRODUCTION
There are mainly four types of
foreign production (direct
investment) undertaken by
multinational corporation

• Natural resource seeker

• Market seeker
• Efficiency seeker
• Strategic asset or
capability seeker
HOW DO THEY
GO ?
Initially, most enterprises invest outside
their home countries to acquire natural
resources or gain (or retain) access to
new markets.
As they increase their degree of
multinationality, however, they may use
their foreign activities as a means by
which they can improve their global
market position by raising their efficiency
or accessing new sources of competitive
advantage.
NATURAL RESOURCE SEEKER
 These enterprises are prompted to invest abroad to acquire
particular and specific resources at a lower cost than could
be obtained in their home country (if, indeed, they are
obtained at all)

 There are three main types of resource seekers;

- Physical resource seeker

- Supplies of cheap and well motivated skilled or semi skilled

labor
- Acquiring technological capability, management or
marketing expertise and organizational skills
NATURAL RESOURCE SEEKER
 Physical resource seeking investors include primary
producers and manufacturing enterprises, who are driven
to engage in FDI by motives of cost minimization and
security of supply sources
 These resources include; mineral fuels, industrial minerals,
metal and agricultural products. Like; oil, coal, gas, rubber,
tobacco, sugar, coffee, tea
 In recent years resource seeking investment of this type
has been seen by Chinese and Indian investors in Africa
 MNE activity involved in this type of FDI involves significant
capital expenditure and location bound
NATURAL RESOURCE SEEKER
 Supplies of cheap and well motivated skilled or semi
skilled labor
 This kind of FDI is usually undertaken by manufacturing and
service MNEs from countries with high real labor cost
 It sets up manufacturing plants or acquire subsidiaries in
countries with lower labor costs, to supply labor intensive
intermediate or final product to export
 Most of these kind of investment was seen in advanced
industrializing developed countries like Mexico, Taiwan, Malaysia,
Central and Eastern Europe
 With the rising cost of labor FDI now has shifted to countries like
China, Vietnam, India, Turkey, Bangladesh
NATURAL RESOURCE SEEKER
 In order to attract such production, host countries has set up
free trade or export processing zones (EPZs), tariff concession
 EPZs: It is a geographic area where goods may be landed,
stored, handled, manufactured or reconfigured and re-exported
under specific customs regulation and generally not subject to
customs duty, located in the ports of air and sea
 Example: Labor intensive services, which is direct result of
advance communication technology is, call center in India
and other developing Asian countries
 BPO : Business Process Outsourcing (call center is an example
of it)
MARKET SEEKER
 Acquiring technological capability, management
or marketing expertise and organizational skills

 Collaborative alliances by Korean, Taiwanese and Indian

companies with EU or US firms in high technology
sectors;
 R&D listening posts established by UK chemical
companies in Japan and French pharmaceutical
companies in US
MARKET SEEKERS
 These are enterprises that invest in a particular country or
region to supply goods or services to markets in host or in
adjacent countries
 These kind of FDI is done when;

- the products exported to foreign markets is no longer cost

effective and competitive, due to tariff other cost raising
barriers imposed by host country
- Size of host market is big enough to start local production

- Complication and cost increment in transportation and

supply of goods
MARKET SEEKERS
 This type of investment is done to sustain or protect existing
market or to exploit or promote new markets
 Some other reasons for such investments are;

- Main suppliers or customers have set up foreign

production facilities (B2B) scenario. Example; Japanese auto
parts manufacturers set up manufacturing subsidiaries in US as
their customers (car manufacturers) were in US
- Market oriented FDI (local taste and customization required)

- Serving and exploring a local market from nearby

facility. It is done to reduce transportation and production cost
MARKET SEEKERS
 Part of global production and marketing strategy.

 To have physical presence in the leading markets served

by its competitors.
 However most prominent reason for market seeking
investments remains action of host government
 encouraging such investments through investment
friendly environment and reduced and discounted trade
barriers
EFFICIENCY SEEKERS
 FDI that comes into a country seeking to benefit from factors that
enable it to compete in international markets
 Efficiency benefits focuses on economies of scale and scope and of risk
diversification
 Attracting efficiency seeking investment is much more difficult
compared to market seeking and natural resource seeking investment,
as for efficiency they are not just concerned with much more than
cheap labor and natural products
 The intention of efficiency seeking MNEs is to take advantage of
different factor endowments, cultures, institutional arrangement,
demand patterns, economic policy and market structure by
concentrating production in a limited number of locations to supply
multiple markets ( somewhat reflects the concept of location economy)
EFFICIENCY SEEKERS
 They use standardization of product and internationally accepted
production process and experience curve , look for necessary
infrastructure, communication technology ability, education and
skilled labor and host government readiness and support
 In order for efficiency seeking foreign production to take place,
cross border markets must be both well developed and open. Thus
it works best in regionally integrated markets like EU, NAFTA,
SAARC, ASEAN

 Efficiency seekers FDI are of 2 main kinds;

 a) FDI to take advantage of differences in availability and relative

cost of traditional factor endowment in different countries
EFFICIENCY SEEKER
- Example: Capital, technology, information intensive value added
activities in developed countries and labor and natural resource
intensive activities in developing countries

 b) FDI which takes place in nations with broadly similar economic

structures and income levels to take advantage of economies of
scale and of differences in consumer tastes and supply
capabilities

 - In here factor endowment is of less importance compared to

competitiveness capability, incentive structure, local competition,
nature of consumer demand, government policies
STRATEGIC ASSET SEEKER
 These MNE engage in FDI, usually by acquiring the assets of
foreign corporations, to promote their long-term strategic
objectives -especially that of sustaining or advancing their
international competitiveness
 Its objective is to access or buy some kind of competitive
strength in an unfamiliar market
 Motive of Strategic asset seeker is less to cost reduction and
marketing advantage and more towards acquiring firms global
portfolio of physical assets and human competence, which will
either sustain or strengthen their ownership specific
advantages or weaken those of their competitors
 For Eg :IBM’s PC business by the Chinese firm Lenovo in 2005, and the Indian firm
Tata’s purchase of the UK steel giant Corus in 2007.
STRATEGIC ASSET SEEKER
 MNE undergo acquisition, merger, joint venture to bring
some benefits to rest of the organization.
 For example creating R&D synergies, buying market power,
accessing new organizational skills, spreading
administrative overheads, risk sharing
 Some other motives examples;

- One company might merge with its rival company in

foreign nation to strengthen their joint capabilities to take
down their 3rd rival company
- Acquiring of a firm to gain access over distribution outlets
to better promote its own brand of products
FOR MORE DETAIL
 https://transportgeography.org/contents/chapter7/freight-
transportation-value-chains/types-corporations-multinati
onal-expansion-strategy/
OTHER MOTIVES BESIDE THE MAJOR 4 MENTIONED

 There are other reasons for MNE activity which do not

easily fit into the four categories just described:

a) Escape Investment
 Some FDI is made to escape restrictive legislation or
macro-organizational policies by home governments
 Example; Swedish MNEs relocating their headquarters
elsewhere in Europe to escape high level of taxation
OTHER MOTIVES BESIDE THE MAJOR 4 MENTIONED

 Support Investment
- The purpose of these investments is to support
the activities of the rest of the enterprise of
which they are part
- Example; Leading clothing retail outlets in US
like Wall Mart buying subsidiaries in Asian
countries to assign work of quality check before
transporting it to US.
POLITICAL ECONOMY OF OUTWARD FDI
 Although MNEs have their own strategic motives for an FDI,
government of the investing countries are also interested in
outcome of the activities of MNEs
 Political economy is a social science that studies production, trade,
and their relationship with the law and the government.
 It is the study of how economic theories affect different socio-
economic systems, such as socialism and communism, along with the
creation and implementation of public policy.
 By influencing the conduct of MNE or their affiliated, government
may affect the amount and pattern of FDI. It could be for or
against the investment
 Encouragement by home country government for FDI in certain
country has only been forthcoming if the investment was
perceived to advance the long term economic and political goals
of the home country
POLITICAL ECONOMY OF OUTWARD FDI
 Example; During 1st decade of 21st century there were evidence
of home government supporting FDI and the interest of their
own MNEs, in the belief that it may further their own political,
economical strategy objectives
READING MATERIALS
https://blogs.worldbank.org/psd/why-does-efficiency-seek
ing-fdi-matter
https://transportgeography.org/contents/chapter7/freight-
transportation-value-chains/types-corporations-multinati
onal-expansion-strategy/
THEORIES OF FOREIGN
DIRECT INVESTMENT

UNIT : 4
CONTENTS OVERVIEW
 Theories of foreign direct investment:
 Introduction
 Theories of the MNE and MNE activity 1960-
76
 Prior to the 1960s
 The contribution of Hymer
 The product cycle
 Follow-up developments
 Other theoretical contributions:
o a selected view
o General explanations of MNE activity
o Internalization theory
 Eclectic or OLI paradigm
 A macroeconomic approach to understanding
MNE activity
 A note on an evolutionary approach to
explaining MNE activity
 Issues resolved and unresolved by received
theory
WHAT ARE MNE THEORIES
ALL ABOUT?
 These theories try to answer three fundamental
questions:
(a) what motivates national firms to go and produce
abroad?
(b) what enables them to do so?
(c) why do MNEs undertake different forms of investments
(equity and contractual) abroad
 It helps provide an idea on how it impacts economy of
the nation involved (host and home) and global economy
as a whole
DEFINITION OF MULTINATIONAL ENTERPRISES

There have been different definitions of

multinational enterprise that is variously termed as
"transnational enterprise" (corporation),
"international corporations" (firms), "global
corporation“
It was long described as an "enterprise which owns
and controls income generating assets in more than
one country“
The ownership usually meant majority ownership
(more than 50%), hence the control, of enterprises
in more than one country. In this sense it is equated
with foreign direct investment (FDI)
DEFINITION OF MULTINATIONAL ENTERPRISES

 Another problem in the definition of MNEs emerged with

the rise in the non-equity involvement or so called "new
forms of international investment“ of firms across national
boundaries like franchising, management contracts, and
leasing
 As a result, the definition of multinational enterprise had
to be broadened. In line with the new developments,
multinational enterprise is defined as "an enterprise
which owns or controls value-adding activities in two or
more countries”
 These activities might lead to the production of “tangible
goods or intangible services or some combination of the
two”
THEORIES OF MNE AND ACTIVITIES
(PRIOR TO 1960)
 TRADE THEORY TIMELINE

International Business
  According to the theories given by them, when a
country enters in foreign trade, it benefits from
specialization and efficient resource allocation
 Classical economists were oriented primarily toward
growth economics, and their main concern was
explaining how the “wealth of nations” was increased.
 In the realm of foreign trade, the classical economists

CLASSICAL were mainly concerned with two questions.

 First, in the production of what product a

THEORIES OF country should specialize or which goods a

country will export and which it will import.
TRADE  Second, once different countries produce
different goods; what will be the ratio of
exchange between goods?

Specialization in the production of goods which is

especially suited on account of its climate, of the qualities
of its soil, of its other natural resources, of the innate and
acquired capacities of its people, and of the real capital
which it possesses as a heritage from its past generation,
such as buildings, plants and equipment’s and means of
transport.
 Indirect capital transfer refers to the
movement of capital from one entity to
another through intermediaries, rather
than directly from one entity to the other.
This could involve the use of financial
instruments, such as loans or
investments, to facilitate the transfer of
capital. Indirect capital transfer can also
refer to the transfer of ownership of
assets or businesses, such as through
mergers or acquisitions. In general,
indirect capital transfer is a way of moving
capital from one entity to another without
a direct exchange of funds.
  The concept of absolute advantage was developed by
18th-century economist Adam Smith in his book The
Wealth of Nations to show how countries can gain from
trade by specializing in producing and exporting the goods
that they can produce more efficiently than other
countries.
 Countries with an absolute advantage can decide to

ABSOLUTE
specialize in producing and selling a specific good or
service and use the generated funds to purchase goods
and services from other countries.

ADVANTAGE  During the time of Adam Smith , the English, by virtue of

their superior manufacturing processes, the English were

THEORY
the most efficient textile manufacturers.
 Due to the combination of favorable climate, good soils,
and accumulated expertise, the French had the world’s
most efficient wine industry.
 The English had an absolute advantage in the production
of textiles, while the French had an absolute advantage in
the production of wine. Thus, a country has an absolute
advantage in the production of a product when itis more
efficient than any other country at producing it.
CONT…
 According to Smith, countries should specialize in the production
of goods for which they have an absolute advantage and then
trade these goods for those produced by other countries.
 In Smith’s time, this suggested the English should specialize in the
production
of textiles, while the French should specialize in the production of
wine. England could get all the wine it needed by selling its
1. From the illustration, it is clear
textiles to France and buying wine in exchange. that India has an absolute
advantage in the production of
 Similarly, France could get all the textiles it needed by selling wine wheat over China and China has
to England and buying textiles in exchange. an absolute advantage in the
production of cloth over India.
2. Therefore, India should
 Thus, Smith’s basic argument, therefore, is that a country should
specialize in the production of
never produce goods at home that it can buy at a lower cost from wheat and import cloth from
other countries. China.
3. China should specialize in the
production of cloth and import
wheat from India.
4. This kind of trade would be
mutually beneficial to both
India and China
COMPARATIVE ADVANTAGE
THEORY
 The challenge to the absolute advantage theory was that some
countries may be better at producing both goods and,
therefore, have an advantage in many areas
 This Theory is developed by David Ricardo.

 David Ricardo reasoned that even if Country A had the

absolute advantage in the production of both products,
specialization and trade could still occur between two
countries.
Thus, it is also called Ricardian theory of International
trade
Comparative advantage focuses on the relative productivity
differences, whereas absolute advantage looks at the absolute
productivity.
 The cost of production differ from country to country
based on topography, natural resources, climate and
other factors.
 Each country is specialized to produce goods in which
the comparative cost of the production is the least.
 Eg Labour Per hour Labour per hour
Jute ( per Kg ) Cotton ( Per kg)

Nepal 2 1

India 8 2

Double by 4 Double by 2
MNES AND FDI
THEORIES AFTER 1960
 Despite the presence of FDI, most foreign investment in the nineteenth century – and indeed until
the late 1940s – was portfolio capital. As a result, international business activity was largely
ignored in economic theory until the late 1950s. On the one hand, the phenomenon did not have a
major perceived economic impact.

 The growth of FDI (and of the MNEs themselves) that followed World War II emphasised the
inadequacy of the neo-classical theory to explain the phenomenon and the need for a whole new
approach.

 The volume of FDI not only grew substantially, it started to reduce its concentration in primary
goods, and to be increasingly directed towards the production of knowledge-based products in
other developed countries.

 Thus, to explain the growing FDI and MNEs trend Raymond Vernon came up with the publication
of the product cycle theory by extensive research on the determinants of foreign production

 In the meantime, John Dunning brought a copy of Stephen Hymer’s 1960 PhD thesis to the
University of Reading where, together with the work of Charles Kindleberge

 The two approaches of the ‘Reading School’ - the “internalization theory” and the “eclectic
paradigm” (Dunning) - provided a consistent explanation of the reasons why firms choose to own
production and trading facilities abroad. Furthermore, scholars at the University of Uppsala
started investigating the internationalisation process of individual firms, widening the scope of the
new discipline.
HYMER’S (1960) THEORY:
ORIGIN

 In 1960, Stephen Hymer worked on a

doctoral dissertation namely, “The International
Operations of National Firms: A study of
Foreign Direct Investment”
 He was the first one to differentiate between
portfolio and direct investment which was
defined as same in the classical theories.
 However, his work was published in 1976
with the help of his supervisor, Charles
Kindleberger
  Analyse the statistics concerning the
movement of capital for the two
investments in Canada, Europe, Latin
America and other countries

HYMER’S (1960)
 Developed his model based on
THEORY:
METHODOLOGY oligopoly firms operating in the planned
economy in which he was living

 These companies’ objectives were to

preserve the monopolistic advantages
that they had in their home country.
 Hymer (1976) argues that foreign direct investment is an
efficient strategy which is used by firms in order to
maximise profits especially when the firm has some
technological advantages or intangible assets.

 However, two conditions are required for

foreign direct investment to take place:
 -presence of market imperfection
 -ownership advantages.

HYMER’S (1960) THEORY: REASONS

FOR FOREIGN DIRECT INVESTMENT
Two major reasons and one minor

 ‘removal of conflicts or competition’ in foreign markets

 manipulation of ownership advantages of firms
 risk diversification

HYMER’S (1960) THEORY: REASONS FOR

FOREIGN DIRECT INVESTMENT
  His theory is also called as "monopolistic or oligopolistic
power", "structural market imperfection", "market power“
 He tried to answer three fundamental questions:
 (a) why do firms go abroad?
 (b) how are they able to survive in foreign markets in which
they bear initial costs (i.e. communication,
CONTRIB 
misunderstanding) not bared by native firms?

(c) why do they want to retain control and ownership?

UTION OF  Basically, he found two kind of incentives; "monopolistic or
oligopolistic advantages" the home country firms enjoyed
HYMER over host country firms and "removal of competition"
between the firms in different countries He noted that
"international firms do not operate under conditions of
perfect competition"

 Stephen Hymer is considered to be the father of International

Business due to his contributions related to Foreign Direct
Investment as well as his studies and academic production on the
field of theories of multinational enterprises
Hymer's main conclusion is
that foreign direct investment
can only succeed as long as there
are market imperfections that can
create advantages and conflicts:
companies could reduce their
competition by implementing foreign
direct investment
However Prior classical theories
highlighted only: absolute cost
advantages, product differentiation
advantages, economies of scale and
existence of perfect competition
 He states that for firms to own and control
foreign value addition facilities:
1. they must pose some kind of innovatory,
cost, financial or marketing advantages,
which the parent company has (also
called core competency)
CONTRIB 2. to outweigh the disadvantages a firm
UTION OF faces while competing with local firms in
the country of production (host country)
HYMER Until the 1950s, international direct investment was entirely
explained within the traditional theory of international capital
movements. Like other forms of international investment,
FDI was seen as a response to differences in the rates of
return on capital between countries. This suggestion was
reinforced by the empirical observation that American firms
(the major source of FDI in the 50s) obtained a higher rate of
return from their European investments than at home .
Market Imperfections
example;
• imperfections in goods market:
ownership of a brand name product
differentiation, marketing skills and
administered pricing
CONTRIB
• imperfections in markets: unavailability UTION OF
of technology, discrimination in access
to capital market, and differences in HYMER
skills of managers
• economies of scale both external and
internal to market
• government limitations on output or
entry
 In line with Hymer's market imperfections and
monopolistic advantages theory, Vernon
(1966;1979) argued that technological
innovations (development and production of new
products) in consumer and industrial goods could
explain international investments of firms

PRODUCT LIFE CYCLE

PRODUCT LIFE CYCLE
 Assuming that;

(a) products undergo predictable changes in

production and marketing
(b) restricted information is available on
technology
(c) production process changes overtime and
economies of scale prevalent
(d) tastes differ according to income and products
can be standardized at various income level
  Vernon distinguished three different
stages in the life of a product; "new
product", "the maturing product" and
"the standardized product“

PRODU
 New Product: Initially the product
(value added activities based on the
firm’s proprietary assets) was produced
CT LIFE for the domestic consumption in the
home country, near to its innovatory

CYCLE
activities/markets
 Maturing Product: Later because of
favorable combination of innovating
and production advantage, the product
is exported to other countries (similar
to its demand pattern and supply
capabilities)
PRODUCT LIFE CYCLE
 Standardize Product: Gradually, as the product
becomes standardized the competiveness of the
firm changes from uniqueness of product, to ability
to minimize cost of value addition or marketing
expenditure
 With growing attraction of value addition in foreign
market than domestic market, , as labor becomes
more important ingredient of costs and imposition
of trade barriers, firms can replace export from
home country or even export back the product to
the home country, rather than manufacturing in
home country
FOLLOW UP DEVELOPMENT
OF FDI THEORIES
 Since the early 1970s there have been various attempts by economists to re fine and
test the
theories of Hymer and Vernon.
Essentially, scholars have sought to identify the kind of ownership advantages
possessed by MNEs.
 Why FDI tends to be concentrated in certain primary, manufacturing and service
sectors?
 Why does the share of the domestic output of a particular country accounted for by
foreign-owned affiliates vary so much between sectors of activity?
Most of the studies concentrated on trying to identify and evaluate the signi ficance
of specific intangible assets, such as technological capacity, labour skills, product
differentiation, marketing skills and organisational capabilities, which a fford a firm
of one nationality a competitive advantage over that of another.

11/14/2024 13
0
CONT
 Stephen Magee a leading economist looked at technology as a
valuable intangible asset and explained why firms' incentives to
control the market for technology changed over time.
 He came up with the idea of the industry technology cycle, which
built on the idea that a firm's competitive advantages would change
over the life of a product.
 Magee said that firms would not want to sell their rights to new
and unusual technology for two reasons.
 First, the buying firm would probably not pay a high enough price
because of information differences.
 Second, the licensee might use the technology against the licensor
or even become a competitor. However, as the technology became
more common and less unique, the need to control it would go
away and the firm would think about switching from FDI to
licensing.

11/14/2024 131
 TO SUMMARIZE
By the mid-1970s, two theories
about the activity of One theory, the industrial It started to realize that how
multinational enterprises organization approach, looked assets were created, acquired,
(MNEs) were coming together, at the advantages that were and organized was an
although they still had different specific to MNEs' ownership. advantage in itself.
focuses.

The other theory, the

trade/location approach, also the other theorist who are in
However, while one scholars in
began to see the role of market line with Reymond Vernom
line with Hymer thought FDI
imperfections in affecting not thought it was mainly a way for
was mainly a way for firms to
only who owned firms but also firms to protect their existing
get more powerful,
how firms organized their cross- market positions.
border activities.

11/14/2024 132
GENERA
 By the mid-1970s, it was becoming increasingly clear that
none of the theories so far put forward to explain the foreign
activities of MNEs could claim to explain all activities relating
to MNEs

L  Hymer’s original thesis and his 1968 article offered the most
promise as a general paradigm, although those parts of it, to
which later researchers were to give the most attention, were

EXPLAN
primarily concerned with identifying the reasons why some
firms, and not others, engaged in foreign production, rather
than why cross-border value-added activities were organized.

ATIONS
 In the mid-1970s, three attempts were made to offer more
holistic explanations of the foreign activities of firms, each of
which has attracted widespread attention in the literature.

OF MNE  These are

 The internalization theory of the MNE,

ACTIVIT  The eclectic paradigm of international production

 The macroeconomic theory of FDI.

Y
11/14/2024 133
INTERNALIZATION
(TRANSACTION COST) THEORY
 The internalization theory of the multinational enterprise (MNE) is a
significant intellectual legacy of Ronald Coase.
 US direct investment in Europe became highly political in the 1960s, and
neoclassical trade theory had no explanation.
 A theory of the multi plant enterprise was required, and internalization
theory filled this gap.
 Using Coasian economics to explain the ownership of production plants
and the geography of trade to explain their location, internalization
theory offered a comprehensive account of MNEs and their role in the
international economy.
Internalization is a transaction conducted within a corporation rather
than in the open market
 Companies may decide to internalize the production of a particular
material on its own rather than having another manufacturer do so. This
process is called internal sourcing, or delivering products to customers
through the business’s own channels instead of using an outside company
INTERNALIZATION (TRANSACTION COST)
THEORY
 Explains how MNE chooses to acquire and retain one or more value-chain activities
inside the firms?
 Minimizes the cons of dealing with external partners and allows for greater control
over foreign operation
 Avoids drawbacks of dealing with external partners, such as reduced quality control
and risk of losing proprietary assets to outsiders
 Explains how the MNE choose to acquire and retain one or more value-chain activities
inside the firms.
 This minimize the disadvantages of dealing with external partners and allows for
greater control over foreign operations.
 Such 'Internalization' provides the MNE with greater control over its foreign operations.

 Internalization avoids the drawbacks of dealing with external partners, such as

reduced quality control and the risk of losing proprietary assests to outsiders.
INTERNALIZATION (TRANSACTION COST) THEORY

 To sum up; internalization (transaction) theory

holds that;

(A) firms choose the least cost location (internal

channels) for each activity they perform

(B) firms grow by internalizing markets up to the

point where the benefits of further internalization
are outweighed by the costs
CONTINUED…..
Suggests that Licensing has many drawbacks as compare to FDI:
 Lower Income

 Loss of Control of the licensee manufacturer and marketing

operations and practices leading to loss of quality
 Foreign partner also can be Competitor by selling its production in
pace where parent company has a presence
 Transfer of Technology
BENEFITS
 Minimizes disadvantages of relaying on intermediaries, collaborators and
other external partners
 Ensures greater control over foreign operations, helping to minimize
product quality, reliable manufacturing processes and sound marketing
practices
 Reduce the risk the knowledge and proprietary assets will be lost to
competitors
Examples Include

TOSHIBA
 Operates factories in dozens of countries to manufacture the laptop computers

 Controls its own manufacturing processes with quality output

 Ensures its marketing activities run as per headquarters' plan

THE CHINA MNE INTEL

 In China Intel owns much of its value chain to ensure its knowledge, patents
and other assets are not misused or illicitly obtained by potentials rivals
 For detail understanding of the theory please follow
https://classroom.google.com/c/MjY5NjQ0MzIxMDha/p/NTc4Nzk5O
DA3Mzcz/details
ECLECTIC OR OLI
PARADIGM
 Based on the internalization
theory of British economist J.H
Dunning, the eclectic paradigm is
an economic and business
method for analyzing the
attractiveness of making a FDI

 Follows the OLI framework that

follows three tiers – ownership,
location, and internalization
OWNERSHIP ADVANTAGE
 can be defined as the proprietorship of a unique and valuable resource that
cannot easily be imitated, thereby creating a competitive advantage against
potential foreign competitors

 include proprietary information and various ownership rights of a company

 These may consist of branding, copyright, trademark or patent rights, plus

the use and management of internally-available skills
LOCATION ADVANTAGE
 focuses more on the geographic advantages of the host country or countries.
An example of a geographic advantage can be access to the ocean (for sea
freight or other purposes) versus a land-locked country.

 Other location advantages can include low-cost labor and raw materials,
lower taxes and other tariffs, a well-trained labor force, etc.

 refer to natural or created resources, but either way, they are generally
immobile, requiring a partnership with a foreign investor in that location to
be utilized to full advantage
INTERNALIZATION ADVANTAGES

 Normally need to consider whether it would be more sensible to get the value chain
activity performed locally with their own team or outsource it to a foreign country

 Signal when it is better for an organization to produce a particular product in-house,

versus contracting with a third-party

 However, taking an outsourcing route only makes financial sense if the contracting
company can meet the organization’s needs and quality standards at a lower cost

 Perhaps the foreign company can also offer a greater degree of local market knowledge, or
even more skilled employees who can make a better product.
 PROS OF OLI PARADIGM
 OLI paradigm provides a better framework for a single
general theory of MNEs
 Not only does OLI have the feature of encompassing all
other theories of MNEs, but it also has analytical power in
examining
(1) what motivates national firms to go abroad
(2) what the reasons for different forms of investment of
national firms abroad are
(3) what enables national firms to go abroad and be
successful
 MACROECONOMIC APPROACH TO
UNDERSTANDING MNE ACTIVITIES

 Internalization and Eclectic Paradigm both are

microeconomic explanation which tries to identify and
evaluate the variables that determine foreign activities of
particular firm or group of firms
 Rather than trying to explain why firm choose to
undertake particular value added activity in a particular
country, Macro economist are more focused in explaining
which activity of firms are best undertaken in particular
countries
 While internalization deals with comparison made
between ‘absolute cost’ an ‘benefits of producing in
different location’ in macroeconomic value added activity
distribution (inbound and outbound) can be explained
through “comparative cost’ and ‘benefits’
 MACROECONOMIC APPROACH TO
UNDERSTANDING MNE ACTIVITIES

 Macroeconomic theory forwarded by “Kiyoshi Kojima” puts forward a concept that;

 Outbound direct investment should be undertaken by the firms producing

intermediate products that require resources and capabilities in which home
country has a comparative advantage,
 but that generate value-added activities that require resources and capabilities in
which that country is disadvantaged
 By contrast, companies should import intermediate products that require resources
and capabilities in which the recipient country is disadvantaged, but the use of which
requires resources and capability in which it has a comparative advantage
A NOTE ON EVOLUTIONARY APPROACH
TO EXPLAINING MNE ACTIVITIES

 Most of the MNE have focused on accumulating technological assets

taking its advantage, to enhance production and operations
 In Early 2000, we could see many FDI related to acquiring assets in
foreign nations that would sustain or add to their existing specific
advantage
 In current times due to changes in technology, organizational structure,
location advantage of countries and governing institutional motivating
behavior is difficult to generalize nature of evolution of MNE activities.
 Investment Development Path (IDP) tries to describe the inward and
outward investment behavior of MNE and how it affects country’s
economic growth
 It states that as a countries develops the configuration of OLI
advantages facing inbound and outbound FDI changes and it is possible
to understand the determinants for change in FDI activities
A NOTE ON EVOLUTIONARY APPROACH
TO EXPLAINING MNE ACTIVITIES

 All theories we learnt tries to explain the cross border investment

done by MNEs
 In past three decades all theories tries to explain the nature and
reason for international production, of which OLI paradigm seems
most ambitious and successful
 OLI paradigm helped to offer analytical framework within which
particular explanation of the determinants of MNE activities can be
incorporated.
 Although OLI and internalization theory provide strong insight to
understand MNE activities , development and update of these
theories in recent modern times, new trade concepts are yet areas
to work on
 Some unresolved areas include; Complex inter-firm transactions,
continuous growth of strategic alliance rather fully owned and
controlled investment.
A NOTE ON EVOLUTIONARY APPROACH
TO EXPLAINING MNE ACTIVITIES

A theory on strategic behavior could satisfactorily

identify why firms prefer to conclude joint venture rather
than engaging in 100% owned foreign production
 Some new trends to be incorporated in theories of FDI
are;
a) Cooperative alliances and networks
b) Quality of relational assets of firms and countries
c) International clustering: encompass an array of linked
industries and other entities important to competition.
a) They include, for example, suppliers of specialized inputs such
as components, machinery, and services, and providers of
specialized infrastructure
REFERENCE PAGES
 https://iibfdergi.deu.edu.tr/index.php/cilt1-sayi1/article/vi
ewFile/24/pdf_10

 Dunning, J. H., & Lundan, S. M. (2008). Multinational enterprises

and the global economy. Edward Elgar Publishing.
 Hill, C. (2008). International business: Competing in the global
market place. Strategic Direction.
DETERMINANTS
OF MNE
ACTIVITIES
UNIT 5
CONTENTS OVERVIEW
 The determinants of MNE activity:
 The OL1 paradigm revisited
 Introduction
 New theoretical perspectives
 Cooperative relationships and I advantages
 The resource-based view and dynamic O
advantages
 The knowledge-based theory of the firm and
dynamic O advantages
 Institutions in international business
 Why focus on institutions?
 Institutions in the international business
literature
 Incorporating institutions into the OLI paradigm
 Institutions defined
 Ownership
  specific advantages
 Locational factors
 Internalization factors
 Propositions regarding institutional transfer and
change
 MNES CAN BE HORIZONTALLY INTEGRATED, VERTICALLY
INTEGRATED AND/OR DIVERSIFIEDACTIVITIES

 Multinational enterprises (MNEs) are firms that operate in multiple countries

and have a global reach. MNEs can pursue a variety of different strategies in
order to achieve a competitive advantage in international markets, and one
key aspect of these strategies is the type of integration that the firm pursues.
 Horizontal integration refers to the expansion of a firm into related
industries or markets. For example, a firm that produces consumer
electronics may decide to expand into the home appliance market by
acquiring a company that produces refrigerators.
 Vertical integration refers to the expansion of a firm into different
stages of production or distribution. For example, a firm that produces
raw materials may decide to expand into the manufacturing stage by
acquiring a company that produces finished goods using those raw materials.
 Diversification refers to the expansion of a firm into unrelated
industries or markets. For example, a firm that produces automotive parts
may decide to expand into the financial services industry by acquiring a
bank.
 MNEs can pursue any of these types of integration individually, or they can
pursue a combination of them in order to achieve a competitive advantage in
international markets. The specific type of integration that an MNE pursues
will depend on a variety of factors, including the firm's resources, capabilities,
and goals.
UNDERSTANDING
SOME CONCEPTS
OF MNE ACTIVITIES
 Vertical Integration can be done
through two different ways.
 It can be done in two ways; Forward
integration and Backward integration

In short, backward
integration involves buying part
of the supply chain that occurs
prior to the company's
manufacturing process.
while forward integration involves
buying part of the process that
occurs after the company's
manufacturing process.
• A horizontal acquisition is a business strategy where one company
takes over another that operates at the same level in an industry.
• Vertical integration involves the acquisition of business
operations within the same production vertical.
• Horizontal integrations help companies expand in size, diversify
product offerings, reduce competition, and expand into new
markets.
• Vertical integrations can help boost profit and allow companies
more immediate access to consumers.
• Companies that seek to strengthen their positions in the market
and enhance their production or distribution stage use horizontal
integration.

VERTICAL AND
HORIZONTAL
OLI PARADIGM
REVISITED:
INTRODUCTION
 Although OLI paradigm was treated to be
most promising theories about MNE
activities of foreign production, changes in
organizations and external environment of
MNE has evolved in recent times creating a
gap in Eclectic theory (OLI)

 Evolution in Eclectic Paradigm includes

changes like; mushrooming cooperative
relationship and networks, clustering
of high value added activities,
growing importance of relational
assets of firms and countries
  The OLI paradigm revisited is a model that explains how
multinational corporations (MNCs) can gain a competitive
advantage in international markets. The model is a
revision of the original OLI paradigm, which was
developed in the 1960s by economists John Dunning and
Ray Vernon.
 According to the OLI paradigm revisited, MNCs can gain a
competitive advantage in international markets by
leveraging their ownership-specific advantages
(OSAs), location-specific advantages (LSAs), and

OLI internalization advantages (IAs), as well as market-

seeking advantages (MSAs).
 OSAs refer to the unique resources and capabilities that a

PARADI firm possesses that give it an advantage in a particular

market. These can include things like patents, trademarks,
brand recognition, and technological expertise.

GM  LSAs refer to the specific advantages that a firm has

because of its location in a particular country or region.
These can include access to natural resources, a skilled

REVISIT labor force, or proximity to key markets.

 IAs refer to the advantages that a firm has because it has
chosen to internalize its international operations rather

ED than outsourcing them. This can include things like control

over production, coordination of activities, and access to
proprietary information.
 MSAs refer to the advantages that a firm gains by actively
seeking out new international markets. This can include
things like access to new customers, the ability to diversify
risk, and the opportunity to learn from new markets.
 Overall, the OLI paradigm revisited is a comprehensive
model that takes into account a wide range of factors that
can impact a firm's competitiveness in international
markets, including both traditional and more recent
concepts such as market-seeking advantages.
DIFFERENCES BETWEEN OLI
PARADIGM AND OLI
PARADIGM REVISITED
 The OLI paradigm and the OLI paradigm revisited are both models that seek to explain
how multinational corporations (MNCs) can gain a competitive advantage in international
markets. However, there are some key differences between the two.
 One of the main differences is that the OLI paradigm was originally developed in
the 1960s by economists John Dunning and Ray Vernon, while the OLI
paradigm revisited is a more recent revision of the original model that has
been developed by other scholars.
 Another difference is that the OLI paradigm focuses exclusively on the three main
factors that can give MNCs a competitive advantage in international markets:
ownership-specific advantages (OSAs), location-specific advantages (LSAs), and
internalization advantages (IAs). The OLI paradigm revisited, on the other hand, expands
on these original three factors and includes additional variables that can impact a firm's
competitiveness in international markets.
 One of the main additions to the OLI paradigm revisited is the concept of "market-
seeking" advantages, which refer to the advantages that a firm gains by
actively seeking out new international markets. This can include things like access
to new customers, the ability to diversify risk, and the opportunity to learn from new
markets.
 Overall, the OLI paradigm revisited is a more comprehensive and nuanced model that
takes into account a wider range of factors that can impact a firm's competitiveness in
international markets, while still retaining the core elements of the original OLI paradigm.
INTERNALIZATION THEORY
AND OLI PARADIGM
 Internalization theory and the OLI paradigm are frameworks for understanding and
predicting the decision-making of firms in international business.
 Internalization theory, which is based on transaction cost economics, explains why firms
might choose to own rather than purchase the rights to use certain assets or
advantages.
 The OLI paradigm focuses on explaining the patterns of foreign production and the
governance systems of multinational enterprises (MNEs).
 While these theories are not directly comparable, they are both partial theories that offer
insights into different aspects of MNE behavior.
 Internalization theory can help explain the form of certain transactions, while the OLI
paradigm is useful for understanding the structural and dynamic features of MNEs
and their governance systems.
 Both internalization and the OLI paradigm have limitations and are subject to diminishing
returns in certain situations. It is important to consider the specific context and goals of
the firm when applying these theories to understand and predict MNE behavior.
  The "I advantage" refers to a company's internal
advantage in making or buying a product or
service.
 The company must consider whether it is more
cost-effective and efficient to produce the item

COOPERA itself or to purchase it from an external

supplier.
TIVE  The company may also consider integrating
RELATION forward (expanding into related product lines)
SHIPS or backward (expanding into related
production processes) or entering a new market
AND I through a joint venture or wholly owned
ADVANTA affiliate.

GES  Cooperative relationships, or contractual

agreements between companies to support each
other's value chain activities, are often used by
multinational enterprises (MNEs) to find cost-
effective and efficient ways to coordinate their
value chain activities with market suppliers or
firms that can support their value-addition
 For instance, if a multinational enterprise (MNE)
outsources its support service to an Indian firm,
the behavior and service provided by the Indian
representatives can directly affect the MNE's
value.

COOPERA
This is because the service provided to the MNE's
clients can impact the MNE's reputation and
overall performance. As a result, the MNE must
TIVE carefully consider the potential impact of
outsourcing this non-core activity to an external
RELATION company.

SHIPS
AND I From the perspective of a multinational
ADVANTA enterprise (MNE), internalizing customer support
activities (i.e. handling them in-house) may
involve additional costs such as hiring
GES employees, providing MNE standard incentives
and benefits, and investing in training and
( EXAMPL development.
However, this approach may allow for better
E) monitoring of activities and help maintain the
value of the firm. In other words, the MNE must
weigh the potential benefits and costs of
handling customer support internally versus
outsourcing it to an external company.
COOPERATIVE RELATIONSHIPS AND I ADVANTAGES
(SOLUTION)

Outsourcing customer support could reduce the external costs

and loosen the MNE's monitoring grip, but there is a risk of
reduced monitoring and quality assurance.
In this case, the MNE and the third-party supplier or firm could
maintain a cooperative relationship by understanding each
other's strategies and needs, and providing adequate incentives
and benefits for the employees of the outsourced firm to ensure
quality and value.
COOPERATIVE RELATIONSHIPS AND I ADVANTAGES
( SOLUTION WITH BACKWARD AND FORWARD INTEGRATION)

A banana packaging and selling firm found a concern

that the banana provider (farm) uses certain unhealthy
methods to ripen the banana, which lowers the quality
and value of the selling firm.
Now backward integration could be an option for the
selling firm by owing a farm for itself, in case of lack
of cooperative relationship between the two firms
O advantage could be a deciding factor the
understand who undergoes internalization, banana
firm or the banana seller firm
RESOU To sustain global competition, multinational
enterprises (MNEs) may need to acquire resources

RCE that they lack, which refers to a deficiency in the

firm's tangible and intangible assets (also known as
the "O factor").

BASED The resource-based theory suggests that valuable,

rare, and hard-to-imitate resources can provide a
competitive advantage for firms.

VIEW
AND Therefore, MNEs should not only possess such assets
but also strive to acquire more of them in order to

DYNAM maintain a competitive advantage and sustain their

operations.

IC O In other words, the ability to acquire and grow these

ADVAN
types of assets is crucial for a firm's competitiveness
and long-term success.

TAGE
RESOURCE BASED VIEW
AND DYNAMIC O
ADVANTAGE
 The attractiveness and competitive advantage of a particular
resource depend on a variety of factors, including the nature of
the firm, the location of the country of production, and the
market scenario.
 Simply acquiring a resource is not enough; the firm's ability to
absorb and share knowledge within its interconnected
network is also important for increasing global
competencies.
 For example, if a firm acquires a technologically intensive asset
but lacks the knowledge to use it effectively, it will not be able
to achieve its full potential and achieve a competitive advantage.
 Therefore, it is important for firms to not only acquire resources
but also develop the capabilities to effectively utilize them.
  Along with the
physical resources
intangible
resources like
management
capabilities,
human resource
expertise are
some areas to
acquire or
competitiveness
of the firm
 Learning and
Knowledge
transfer of such
resources among
RESOURCE BASED the firms network
is an important
VIEW AND DYNAMIC part
O ADVANTAGE
KNOWLEDGE BASED THEORY OF
FIRM AND DYNAMIC O ADVANTAGE

 The knowledge-based theory of the firm suggests that a firm's knowledge

and intellectual capital are key sources of competitive advantage.
 This theory emphasizes the role of knowledge in enabling firms to create,
innovate, and adapt to changing market conditions.
 The dynamic ownership advantage refers to a firm's ability to adapt and
change its ownership structure in response to market conditions and other
external factors.
 This can include changes in the ownership of assets, such as through
mergers and acquisitions, as well as changes in the relationships between
different stakeholders in the firm.
 The dynamic ownership advantage is related to the ability of firms to adjust
their governance and ownership structures in order to better align with their
strategic goals and adapt to changing market conditions.
KNOWLEDGE BASED THEORY OF
FIRM AND DYNAMIC O ADVANTAGE
TYPES OF KNOWLEDGE
 Tacit Knowledge: knowledge which are
posed by the organization achieved
through experience and achieved over the
time of operation. To understand it better
you have to be part of the organization or
learn through their organizational culture
 Articulated (explicit) Knowledge:
Knowledge gained from external sources
outside of organization, for competitive
purposes or other reasons
 This theory deals with internal transfer of
knowledge within MNE network
 According to the knowledge-based theory of the firm, tacit knowledge is more efficiently
transferred within the firm and has a positive impact on the existence of the multinational
enterprise (MNE).
 MNEs typically consist of employees from various cultures, races, and nations with their own
values and beliefs.
 These employees, working for the same MNE in multiple locations, form a MNE community that
has its own organizational culture, including shared values, norms, practices, work ethics, and a
sense of brotherhood.
 In other words, the MNE community is characterized by a unique set of shared values and
practices that are shaped by the diverse backgrounds and experiences of its members

KNOWLEDGE BASED
THEORY OF FIRM AND
DYNAMIC O ADVANTAGE
KNOWLEDGE BASED
THEORY OF FIRM AND
DYNAMIC O ADVANTAGE
 Incentives for employees, employee motivation,
organizational structure, and organizational culture
(including shared norms, values, and practices) are
important factors in determining how efficiently and
effectively knowledge is transferred within MNE
networks.
 The success of knowledge generation and transfer also
depends on the willingness and motivation of both the
transferor and transferee, which can be influenced by
incentives, cooperation, and formal and informal
communication channels between them.
 In other words, the ability of an MNE to effectively
transfer knowledge within its network is influenced by a
combination of individual and organizational factors,
including employee incentives, motivation, and the
structure and culture of the MNE community.
 Institutions in international business refer to the
rules, norms, and values that shape
business behavior and relationships in a
particular country or region.

INSTITUTI These institutions can be formal, such as laws

and regulations, or informal, such as social
norms and values. They can also be industry-
ONS IN specific, such as professional associations or
industry standards.

INTERNA Institutions play a key role in shaping the

business environment and influencing the
behavior of firms operating in a particular

TIONAL market.

BUSINES
For multinational enterprises (MNEs),
understanding and navigating these institutions
is an important part of doing business in a

S foreign market.

MNEs must consider the impact of different

institutions on their operations and strategies,
including factors such as legal and regulatory
frameworks, cultural norms, and industry
standards.
EXAMPLE
 Imagine a company based in the United
States that wants to do business in China. In
this case, the company will need to be
familiar with the formal institutions that
govern business in China, such as the
legal system, tax laws, and regulatory
agencies. The company will also need to be
aware of the informal institutions that
shape business in China, such as the role
of personal connections in building
business relationships and the
importance of respecting local cultural
norms and traditions.
 Failing to understand and comply with these
institutions could result in challenges for the
company, such as legal problems,
difficulties in building relationships with
local partners, or cultural
misunderstandings. On the other hand,
understanding and navigating these
institutions can help the company to operate
successfully in the Chinese market.
  When McDonald's entered the Indian
market in 1996, it faced several
challenges related to institutions. One
challenge was the country's strict
food safety regulations, which
required the company to make
significant changes to its menu in
order to comply with local standards.
For example, McDonald's had to
replace beef and pork burgers with
vegetarian options, as these meats
are not widely consumed in India.

 Another challenge was the country's

complex regulatory environment,
which required McDonald's to
navigate a range of laws and
regulations related to things like land
acquisition, construction, and
employment.

 In addition to these formal

institutions, McDonald's also had to
consider the informal institutions of
the Indian market, such as cultural
values and social norms. For example,
the company had to adapt its
marketing and branding to appeal to
Indian consumers, who have different
tastes and preferences than those in
the United States.

 Overall, McDonald's expansion into

India illustrates the importance of

EXAMPLE 2
understanding and navigating both
formal and informal institutions in
international business. By doing so,
the company was able to successfully

MCDONALD
enter the Indian market and establish
a strong presence there.
INSTITUTIONS IN INTERNATIONAL
BUSINESS
( WHY SHOULD MNES FOCUS ON
INSTITUTION )
 It is important to focus on institutions because they can have a significant
impact on the behavior of multinational enterprises (MNEs) and the way
they operate in a particular market.
 MNEs can also have an impact on the economy and host country institutions.
The way an MNE operates, including its rules, regulations, organizational
culture, norms, codes of conduct, ethics, and incentive structure, can be
influenced by the institutions in the host country.
 Formal institutional practices, such as the legal system and intellectual
property rights, and the design of financial institutions, may not always
perform as well in developing countries as they do in Western countries.
 This may be due to informal institutional practices that are followed in
developing countries
Incorporating Institutions
into OLI Paradigm
 Some institutions may perform poorly
because the informal institutions, such
as values, norms, and belief systems,
do not support economic activity in a

INSTITU way that is compatible with global

capitalism.
For example, Protestants who follow the
TIONS Bible strictly may prioritize biblical rules
and ethics in their work, while Catholics
may be more open to modern changes and
AND embrace capitalism.

OLI Institutional changes can come with a cost

and may not always produce the intended
results.

PARADIG
M National culture may also influence the
economic growth of a country.
In other words, the values, norms, and
beliefs of a society can shape its economic
behavior and performance.
IIO ( INCORPORATING
INSTITUTION AND
OWNERSHIP ADVANTAGE )

 The concept of institutions can help us understand the

motivation and behavior of multinational enterprises (MNEs).
 The design and implementation of an incentive structure and
enforcement mechanism can impact the Eclectic Paradigm,
which is a framework for analyzing the factors that influence
MNEs to invest in foreign markets.
 An incentive structure refers to the cumulative set of
promised rewards and/or punishments that encourage actors
to make certain decisions.
 OI advantage, or Ownership Institutional advantage, refers to
the institutional advantage (both formal and informal) that a
firm can gain from investing in innovation and continuous
improvement.
 OA advantage, or ownership advantage, refers to the
advantage that a firm can gain from its assets, such as its
intellectual property, brand, and other intangible assets
OWNERSHIP (O)
SPECIFIC ADVANTAGE
 According to the OLI paradigm, asset-based advantages of
multinational enterprises (MNEs) include knowledge of production
management, innovativeness, physical assets, and intellectual
property rights.
 However, in the context of institutions, the O advantage
(ownership advantage) may not be sufficient to address issues
related to culture, values, norms, and organizational rules and
governance (constitution).
 This suggests that institutional advantage, which refers to the
advantage that a firm can gain from its institutional environment,
should be considered separately from the O advantage.
 In other words, the OLI paradigm's focus on asset-based
advantages may not be sufficient to understand the full range of
factors that influence MNE behavior and performance, and the
role of institutions in shaping business environments and
relationships should be considered separately.
NEED TO SEPARATE
OA AND OI
ADVANTAGE ?
 OA advantage, or ownership advantage, refers to the
physical assets and capabilities of a firm that enable it to
perform certain tasks.
 OI advantage, or Ownership Institutional Advantage , is
reflected in the firm-specific norms, values, and
enforcement mechanisms that make up the firm's
corporate culture, as well as the human environment in
which the firm conducts its activities.
 Changes in OA are typically related to the firm's products
and services, while changes in OI may be influenced by
shifts in values, perceptions, and behavior that may not
be directly related to the range of products or services the
firm offers.
 In other words, OA advantage is primarily concerned
with the assets and capabilities of the firm, while OI
advantage is more focused on the organizational and
cultural factors that shape the firm's performance and
behavior.
NEED TO SEPARATE OA
AND OI ADVANTAGE ?
 For example, there has been a recent shift in ideology from keeping
information and knowledge commercialized and private to an "open source"
approach that emphasizes knowledge as a common good that can be
accessed by all to encourage development.
 This shift in ideology differs from the approach of OA advantage, which
emphasizes the importance of patenting knowledge in order to protect and
monetize it.
 OA advantage can be enhanced, regenerated, and isolated for better
efficiency and growth, while social aspects related to informal institutions
are more complex and difficult to isolate.
 In other words, OA advantage is primarily concerned with the tangible assets
and capabilities of the firm, while OI advantage is more focused on the
intangible, social aspects of the firm's environment and relationships.
EXAMPLES OF OI
ADVANTAGES
 Ethnocentric approach to management of
foreign affiliates and branches , will lead to
different set of Oi advantages compared to
Geocentric approach which externalizes the
structure of MNE most useful for organizing its
cross border operations
 In a takeover or majority shareholder scenario
the key manager appointed for the firm
belonging to the parent firm might work as per
parent company culture, ethics and rules,
whereas in case of Joint Venture and
subsidiary, mutual management by both the
firms might have conflicting working methods
and conduct (Like human resources strategy,
safety procedures, quality control )
 In some cases of Strategic Asset
seeking investments FDI of a MNE,
the FDI done is designed to gain
access not only to foreign resources,
capabilities but also to firm or
country specific institutional
EXAMPL knowhow. Its done particularly in
case where the economic structure
ES OF OI and business and social culture in
the home or host country is
comparatively different
ADVANT In case of efficiency seeking FDI,
particularly low labor cost,
developing countries may require
AGES modifying because of different
expectations , requirement and
values of individual workers or labor
union
  Economic growth in context of
institutional aspect of a country
is determined by role of
institutions (property rights,
INSTITUTI rule of law and social
infrastructure)
ONAL  Institutions and the values and
CONCEPT beliefs system they hold, play
increasing importance in L
AND L attraction of countries

FACTOR  Finding the L factor where

immobile resources or
capabilities lies, is partly
determined by the nature of
institutional practices
  While selecting between two or
more options of countries with
similar L advantage,
institutional factor come into
picture to decide between the
countries
INSTITUTI  There is a role played by the
ONAL government to some extend as
well, in case of enforcing laws and
CONCEPT acts to companies and the ideology
hold by the government
AND L (communism, democratic, IP right
laws, foreign firm investment laws,
FACTOR barrier for FDI )
 Example: East Asian countries are
much open to promote creation and
usage of their resources,
capabilities and markets compared
to countries of Latin American
countries
INSTITUTIONAL CONCEPT
AND L FACTOR
belief systems, cultural norms, and government ideology of a
society can influence the level of cooperation among its people in different
situations.
In some societies, there may be strong social pressure to conform to
certain norms and expectations, and this can encourage people to
cooperate in order to avoid shame or guilt.
For example, in a society where there is a strong emphasis on
community values and the importance of helping others, people may
be more likely to cooperate in situations where assistance is needed.
On the other hand, in a society where individualism is highly valued
and there is less emphasis on helping others, people may be less
likely to cooperate in similar situations.
Example in many Asian countries: employees could stay for longer office
hours without pay when situation demands, compared to western countries
where they demand overtime money
 Make or buy decision and modes of
entry to a foreign country are major
aspect of Internalization

INSTITUTION To undertake production as a part

of internalization or to undergo
AL CONCEPT contract and partnership with a
AND local firm of host country depends
on the culture and belief system
INTERNALIZA prevailing in host country
TION
In most cases we can see that if the
host country have similar culture
and beliefs to home country they
choose internalization by self
production or they tend to move
towards outsourcing or partnership
with local firms
INSTITUTIONAL CONCEPT AND L FACTOR

 Few cases of institutional concept in

choosing between L factor countries; how
strong do the companies in the host
country consider the IP rights concerns.
 how easy or difficult is to alliance with
local partners
 Some other factors involved in deciding
FDI in L advantage countries are;
corruption concept in society,
strong property right protection laws,
environmental pollution
PROPOSIT  Its about how impact of
institutional transfer of Oi felt in
IONS context of OLI paradigm of FDI
REGARDI  There are two things to be noted;
NG a) National level Institutions
INSTITUTI (national formal and informal
aspects) influences firms
ONAL strategy
TRANSFE b) Institutional advantage
possessed by a firm are
R AND distinct from the other O
CHANGE specific assets
PROPOSITIONS REGARDING
INSTITUTIONAL TRANSFER
AND CHANGE
 Based on the earlier discussions on
how each element of our paradigm is
affected by the inclusion of
institutional factors, we conclude by
presenting the following four
propositions;
PROPOSITIONS REGARDING
INSTITUTIONAL TRANSFER
AND CHANGE
 The extent to which and the way in which a firm's asset-based coordination and
ownership advantages are exploited depends on the firm's institutional advantages.
 The asset-based and institutional advantages jointly determine the firm's degree of
internalization.
 The transfer of a multinational enterprise's (MNE) asset-based ownership advantages
occurs along with the transfer of firm-specific institutional advantages, making the
host country a recipient of both technological and institutional transfer.
 To the extent that the first proposition holds and institutional advantages influence the
mode in which a firm's asset-based and coordination advantages are employed, they also
indirectly influence what is transferred to the host country.
 Both the formal and informal institutions in the home country influence the institutional
advantages of firms in the home country, while the institutional artifacts of the host
countries influence the institutional advantages of MNE subsidiaries.
 https://pdfs.semanticscholar.org/55e1/aa8c94e7c8bee26
1555d4059a3552628a1a8.pdf
 https://pdfs.semanticscholar.org/a542/4849458f4b741ee
62ab4f19c683fcfc8f6d8.pdf
 Mctighe, K. (2011, October 12). A blogger at Arab Spring's Genesis. The New York Times. Retrieved January 6, 2023,
from https://www.nytimes.com/2011/10/13/world/africa/a-blogger-at-arab-springs-genesis.html
 Gramfort, A., Luessi, M., Larson, E., Engemann, D. A., Strohmeier, D., Brodbeck, C., ... & Hämäläinen, M. S. (2014).
MNE software for processing MEG and EEG data. Neuroimage, 86, 446-460.
 Unit: 6

ENTRY AND
EXPANSION
STRATEGY OF
MNE
 Entry and expansion
strategies of MNEs:
· Introduction
The concept of business strategy
The value-added chain
CONTEN Some general principles
Value-added networks and MNE
TS activity
Analysis of the

OVERVIE
internationalization process
Learning in the
A network approachprocess
internationalization to the
W multinational firm Phase 1:
Phase
exports2:and
investment in marketing
foreign sourcing
and distribution
Phase 3: foreign production of
intermediate goods and services
Phase 4: deepening and widening
of the value-added network
Phase 5: the integrated network
multinational
 Concept o
Business
strategy

Value
INTRODU Addition
CTION Chain

Value chain
Network
and MNE
Activity
THE CONCEPT OF
BUSINESS STRATEGY

• A deliberate choice taken by entrepreneurs or

managers to organize resources and capabilities to
achieve objectives over a specified time period
• In a perfect competition, strategy and management do
not play a significant role as resources and
capabilities are assumed to be immobile, fungible,
and homogeneous
• The firm is a passive economic agent in the market
Analysis of
Internationaliz
ation Process
  Internationalization refers to the
process of a business expanding its
operations and entering into new
markets and countries.
 This involves a range of activities,
such as establishing new subsidiaries,
creating partnerships with local
companies, adapting products and
services to local market needs, and
establishing a local supply chain.
 The goal of internationalization is to
increase the reach and
competitiveness of a business in a
global context.
 It can be a complex and challenging

INTRODUCING process, but it can also bring a range

of benefits, including access to new

INTERNATIONA
customers, increased market share,
and reduced dependence on domestic
markets.
LIZATION
 DIFFERENTIATING
INTERNATIONALIZATION WITH
GLOBALIZATION AND LOCALIZATION
Concept Definition Example

A software company designs its product

The process of designing a product,
to support multiple languages,
application, or system to be usable by
Internationalization currencies, and date/time formats so that
users worldwide, regardless of their
it can be used by people all over the
language, region, or culture.
world.

A clothing company opens retail stores in

The process of expanding a product,
several countries and adapts its product
Globalization service, or company to multiple
line to meet the unique needs and
countries and cultures.
preferences of each local market.

A video game developer releases a

localized version of its game in Japan,
The process of adapting a product, with Japanese language support, cultural
service, or content to meet the references, and local payment options.
Localization language, cultural, and other specific
For Eg Final Fantasy, Monster
requirements of a particular country
Hunter Dragon Quest , Resident
or region.
Evil, Call of Duty
INTRODUCING INTERNATIONALIZATION
 A gradual process by which most firms get involved in international
marketing
 Uninterested (no interest in doing business in foreign markets. It is solely focused on its domestic
market and has no plans to expand globally.)

Partially interested (the firm may be aware of the potential benefits of

internationalization, but is not yet fully committed. )

Exploring/trial Experimental (the firm begins to test the waters by

conducting market research, establishing contacts and building relationships in foreign
markets.)

Experimental (the firm expands its operations in foreign

markets through joint ventures, franchising, or setting up
wholly-owned subsidiaries.)

Experienced/committed
It is the stages through which a firm expands its business from home
to a foreign country
 It also talks about the modes on entry depending upon lot of
environmental factors, firms strategy and objectives, capabilities,
markets and opportunity
CONT…
 Growth of MNE Geographical Diversification

• The last decade has seen growth in the geographical

diversification of the origin of MNEs and the countries in which
they locate their affiliates.
• MNEs have adopted a pattern of gradually increasing
international resource commitment and widening their
geographical investment pattern.
• Modern MNEs are building a network which is important for
improving organizational coordination and control when they
engage in cross-border activities.
• The internationalization process is characterized by these
behaviors, showing a commitment to growth and expansion
globally.
1. The process of internationalization starts with
the movement of a firm from domestic market
to international marketing/sales and then to
production.
2. Host country institutional elements, such as
uncertainty over policy environment and
government credibility, impact the sequencing
of investment and type of learning by firms.
STEPS OF
3. A study of 665 Japanese manufacturing firms in INTERNATIONALIZATIO
49 countries found that firms prefer to learn N AND INSTITUTIONAL
from an initial entry with a focus on marketing FACTORS
and distribution activities in low policy
uncertainty environments.
4. In high uncertainty environments, MNEs tend to
prefer engaging in joint ventures with local
firms.
5. Understanding the influence of host country
institutional factors is crucial for firms in their
internationalization process.
INTERNATIONALIZATION OF MULTINATIONAL CORPORATIONS

• Growing investment and commitment of resources and

management authority delegation to foreign
Movement towards affiliates/branches
Transnational • Resulting in multinationals becoming Transnational
corporations

Characteristics of • Decentralized with multiple bases in various countries

Transnational • Sustain high levels of local responsiveness
Corporations

Types of • Traditional multinational corporations with foreign subsidiaries

Multinational • Born Global Enterprises
Corporations
Note: Emphasize the difference between traditional
multinational corporations and transnational corporations, and
the impact of internationalization on the structure of
multinational corporations.
BORN GLOBAL FIRMS
I. Introduction
• A. Definition of Born Global Firm
• "A business organization that, from inception, seeks to
derive significant competitive advantage from the use
of resources and the sale of outputs in multiple
II. Examples
countries."of Born Global Firms Skype, Spotify,
Airbnb , Dropboxfrom other international organizations -
• B. Distinction
Originates
III. Key internationally with a global focus -
Characteristics
Commits resources to international ventures from the
• . Global focus from inception
beginning
• Early and aggressive internationalization
• Decentralized operations with a high level of local
Born Global firms are a unique type of international
responsiveness
business
Characterized by early
• Use of technology and aggressive
to support international operations
internationalization, global focus, and decentralized
operations
Offer a new model for international business
success.
THE VALUE-ADDED CHAIN
1. The main task of a business enterprise – and it is unique to this
organisation – is to engage in production.
2. Production is defined as any value-creating or -adding activity.
3. Such added value is achieved by converting inputs of lesser
economic worth to outputs of greater economic worth.
4. Put another way, the firm owns or hires the services of a set of
human, physical or financial assets, for which it must pay at least
their opportunity cost.
5. In a profit-maximising model, the strategy of the owners of the
firm is to coordinate and allocate these assets in such a way as
to produce the maximum surplus (that is, economic rent) over
and above their opportunity cost, all of which is assumed to
accrue to the owners as profits.
CONT…
 In order to achieve the pre-defined objectives, a firm must also
engage in transactions.
 Even the firm that undertakes a single economic activity has to
participate in two sets of transactions.
 The first is with the owners of the resources and capabilities it
uses to produce the value added; the second is with the
purchasers of the goods or services which are the output of the
activity.
 These transactions are external to the firm, that is, between it
and independent economic agents (for example, other firms
and households), and they are usually organised by the market.
 Phase 1-Exporting and
Foreign Sourcing
Phase 2-Investment in
Marketing and
Distribution
Phase 3- Foreign
PHASES OF
INTERNATIONALI Production of
ZATION Intermediate Goods and
Services
 Phase 4-Deepening and
Widening of Value-added
Networks
 Phase 5-Integrated
Multinational Network
  This phase is characterized by firms
seeking to expand their business
beyond their domestic market by
exporting goods or sourcing inputs
from foreign countries.

 Exporting involves the sale of

domestically produced goods in
foreign markets, while foreign
sourcing involves the purchase of
inputs or raw materials from foreign
suppliers.

 In this phase, firms typically do not

have a physical presence in foreign
markets, and they may rely on agents,
distributors, or intermediaries to
facilitate their international
transactions.

 Example-Exporting involves selling

domestically produced goods in
foreign markets (e.g. Apple exporting
iPhones to China)

 Foreign sourcing involves purchasing

PHASE 1 - EXPORTING inputs or raw materials from foreign

suppliers (e.g. Nike sourcing fabrics

AND FOREIGN SOURCING: from Vietnam)

PHASE 2 - INVESTMENT IN
MARKETING AND
DISTRIBUTION

 In this phase, firms start to invest in building a

physical presence in foreign markets, which may
involve establishing sales offices, distribution
centers, or subsidiaries in foreign countries.
 The focus shifts to developing local marketing
strategies and distribution networks that are tailored
to the unique characteristics of each foreign market.
 This phase is also characterized by an increased
investment in advertising, public relations, and other
forms of promotion to raise brand awareness and
build customer loyalty.
 Example-Establishing physical presence in foreign
markets (e.g. McDonald's opening restaurants in
Japan)
 Developing local marketing strategies and
distribution networks (e.g. Coca-Cola adapting its
marketing to local tastes in different countries)
  In this phase, firms begin to
produce intermediate goods or
services in foreign countries,
which are then used in the
production of their final products.
 This may involve establishing
production facilities, research and
development centers, or other
types of operations in foreign
countries.
 The focus shifts from simply
exporting or sourcing inputs to
actively participating in the
production process in foreign
markets.
 This can help firms to reduce costs,
improve quality, and increase their
competitiveness in global markets.
 For Example :Setting up
production facilities, research and
development centers, or other
types of operations in foreign
PHASE 3 - FOREIGN countries (e.g. Toyota
manufacturing cars in the United
PRODUCTION OF INTERMEDIATE States)
GOODS AND SERVICES:  Using local inputs or services in
the production of final products
(e.g. Nestle sourcing cocoa beans
from Ivory Coast for chocolate
production)
 In this phase, firms seek to deepen
and widen their value-added
networks by developing long-term
partnerships with suppliers,
customers, and other stakeholders
in foreign markets.

This may involve sharing

technology, knowledge, and
PHASE 4 - expertise with local partners, as
DEEPENING well as collaborating on joint
research and development projects.
AND
WIDENING The focus is on creating value for
all participants in the network, and
OF VALUE- on developing a competitive
ADDED advantage through innovation and
collaboration.
NETWORKS:
•For Example -Developing long-term partnerships with
suppliers, customers, and other stakeholders in foreign
markets (e.g. Airbus collaborating with suppliers in
different countries to manufacture airplanes)
•Sharing technology, knowledge, and expertise with local
partners (e.g. General Electric partnering with Chinese
firms to develop wind turbines)
PHASE 5 - INTEGRATED
MULTINATIONAL NETWORK:

 In this final phase, firms fully integrate their operations across

national boundaries, creating a truly global organization.
 This involves the development of a unified corporate culture,
shared values and goals, and the seamless integration of processes
and systems across different countries and regions.
 The focus is on leveraging the strengths of each country or region
to create a truly integrated multinational network that can
compete effectively in global markets
 Creating a unified corporate culture and integrating operations
across different countries and regions (e.g. Unilever merging its
Dutch and British entities to form a single company)
 Leveraging the strengths of each country or region to create a
truly integrated multinational network (e.g. Samsung using its
research centers in South Korea and Silicon Valley to develop
innovative products)
FDI, GROWTH AND
DEVELOPMENT

UNIT: 7
 CONTENTS OVERVIEW
Introduction
A new paradigm of development
Institutions and economic growth
Formal institutions
Informal institutions and social capital
Institutional quality and the ability to attract IDI
Good governance
Bad governance
Economic growth and inbound FDI
Empirical evidence
The OLI paradigm revisited
O-specific advantage
L-specific advantages
I-related advantages
The investment development path
Stages of the IDP· Institutions and the IDP
  Developing countries have shifted from import substitution
policies to promoting inward and outward FDI for
structural improvement and sustainable growth.
 However, FDI stocks are highly concentrated in a small
number of countries, and resource exploration investments
have had little impact on recipient countries' economic
structure.
 Countries most in need of FDI-generated resources, skills,
and entrepreneurship are often the least attractive to foreign
investors due to the lack of additional businesses and
INTRODU markets sought by MNEs.

CTION  This reflects the failure of countries to create legal

frameworks and incentive structures for economic
development.
 Scholars are increasingly interested in institutional and
political factors that enable and constrain developing host
countries' efforts to capture the beneficial effects of FDI.
 Institutional restructuring and modernization are critical to
development and growth, but economic growth is not
development as such.
 While foreign direct investment may be necessary for
growth in some countries, it is rarely sufficient.
 Globalisation has caused a rethinking of development
goals and the role of institutions in the process,
particularly in relation to the activities of multinational
enterprises (MNEs).

The neoclassical development paradigm of the 1970s and

early 1980s was criticized for its narrow focus on market
transactions and productivity, with little attention given to
A NEW social goals or non-market goods such as the environment.

PARADIGM Outside of mainstream scholarship, a broader perspective

OF on development issues was emerging in the UN,
particularly in Latin America, where a more holistic and
DEVELOPM integrated strategy towards development was being
advocated.
ENT At the time, businesses saw extra-economic issues of
development as the responsibility of national
governments, with little consideration given to the views
of civil society or ethical shareholder activism.

The new paradigm of development seeks to explore the

role of institutions in the development process and is
concerned with broader goals than those espoused by
neoclassical economists.
INSTITUTIONS AND ECONOMIC
GROWTH

• Economic development depends on both market and non-market institutions

that shape how people interact and cooperate.
• Institutions matter for both developing and developed countries to maintain their
economic edge.
• Amartya Sen claims in his book Development as Freedom that development is
about expanding people’s choices and freedoms in various domains.
• Joseph Stiglitz, a former World Bank Chief Economist, challenges the Washington
Consensus that focuses on macroeconomic stability, prices, privatization, and hard
budget constraints. He argues that development is a complex process of social
change in multiple areas.
• Jeffrey Sachs highlights the need for aid to help improve agriculture,
environment, and health in the poorest countries.
• Economic growth is not automatic. It requires institutions, both formal and
informal, and social capital that enable cooperation and innovation.
INFORMAL INSTITUTION
AND SOCIAL CAPITAL

 Informal institutional characters play a vital role in how the

institution as a whole will evolve and strengthen
 What is social capital theory?

 The social capital theory states that social relationships and networks can
provide invaluable resources to the participants involved and leads to
development. That is the aim of building social capital – development,
productivity, and overall growth.
 Social capital broadly refers to those factors of effectively
functioning social groups that include such things as interpersonal
relationships, a shared sense of identity, a shared
understanding, shared norms, shared values, trust, cooperation,
and reciprocity
 Social capital is a measure of the quality of the informal institutions
in a society.
INFORMAL INSTITUTION
AND SOCIAL CAPITAL
 An important concern with informal quality of
institution or the society as a whole is the case of
problem solving attitude, cooperation and
trustworthiness
 Problem solving is facilitated by civic norms,
which may be enforced either internally
(example via guilt) or externally (example via
shame) and encourage people to cooperate in
situations
 The area of interest points at importance of
associated life (association or being connected
with) and the role of trust. The role of trust seems
to be of grave importance in contributing to social
capital
INFORMAL INSTITUTION
AND SOCIAL CAPITAL

 “Associational life” is our shorthand for the web of social

relationships through which we pursue joint endeavors—
namely, our families, our communities, our workplaces,
and our religious congregations. These institutions are
critical to forming our character and capacities, providing us
with meaning and purpose, and for addressing the many
challenges we face
 the conditions that define a context where individuals rely on
social networks and kinship relationships to survive and
access resources
THE ROLE OF CIVIL SOCIETY

 Civil society (Nagarik

Samaj) organizations engage in
advocating the public's rights and
wishes of the people, including but
not limited to health, environment
and economic rights. They fulfill
important duties of checks and
balances in democracies, they are
able to influence the government
and hold it accountable
 Intolerance towards change and
new ideas, in a civil group would
highly impact creativity and
innovation
 Topics for debate-The role of civil
society in promoting democracy
 Trust is important in facilitating economic exchange between
firms
 Trust and norms of cooperation are stronger in countries with
effective formal institutions, specially with respect to
protection of private property and enforcement of contracts
 In low trust ranked countries like Chinese influenced
countries; Hong Kong, Taiwan, China large business
organization are still based on kinship (blood relation) as the
level of trust in outsiders are low, whereas in high trust
countries like Germany, Japan, US business organizations are
dominated by large hierarchy staffed professionals based on
skills than kinship.

THE ROLE OF
TRUST
THE ROLE OF
TRUST
 If officials of government are corrupt, citizens have
no trust in state in mediating their disputes, and
hence in such scenario requires very high level of
interpersonal trust to be developed, to bring a
change
 When interpersonal trust is high, it usually extends
to trusting the impartiality and fairness of public
institutions and reduces the burden to maintain
problematic method of enforcement
INSTITUTIONAL QUALITY
AND THE ABILITY TO
ATTRACT FDI
Does institutional quality affect the ability
of countries to attract FDI and derive long
term benefits from such investments?
  Good governance refers to the
principles and practices that are
necessary for effective and
accountable management of
institutions, organizations, and
GOOD activities.
GOVERN  It includes:
ANCE  Transparency
 Accountability
 Fairness
 Participation
 Rule of law.
Transparency means that information and decisions are made openly and are easily
accessible to stakeholders. This allows for scrutiny and oversight, which helps to prevent
corruption and promote trust.

Accountability means that those in positions of authority are responsible for their actions
and are held to account by others. This includes being answerable for the decisions they
make and the results they achieve.

Fairness means that all stakeholders are treated equitably, with respect for their rights
and interests. This includes ensuring that decision-making processes are impartial and
that policies and actions do not discriminate against any particular group.

Participation means that stakeholders have a voice in decision-making processes and can
contribute to shaping policies and actions. This can include direct participation in
decision-making, as well as access to information and the ability to provide feedback.

The rule of law means that institutions and organizations operate within a legal
framework that is fair and just. This includes adherence to laws, regulations, and policies,
as well as the protection of rights and freedoms.
 DOES INSTITUTIONAL QUALITY AFFECT THE
ABILITY OF COUNTRIES TO ATTRACT FDI AND
DERIVE LONG TERM BENEFITS FROM SUCH
INVESTMENTS?
Foreign investors look for
Institutional quality refers to
These factors are essential countries with stable
Institutional quality plays a the quality of a country's
for creating a stable and political and economic
crucial role in attracting institutions, including its
predictable investment environments, where the
foreign direct investment legal system, regulatory
climate, which is necessary rule of law is respected, and
(FDI) to a country. environment, and
for attracting FDI. property rights are
governance structures.
protected.

A strong legal system and Governance structures are

They want to be sure that This includes transparent
regulatory environment are also essential for attracting
their investments will be and predictable regulations,
essential for ensuring that contracts FDI. Countries with low
safe and that they will be efficient procedures for
are enforceable and that investors levels of corruption and a
able to repatriate their setting up and running a
are protected from fraud, high degree of transparency
profits without undue business, and a well-
corruption, and other illegal are more attractive to
interference. functioning judicial system.
activities. foreign investors.

A country with a well-

This includes effective developed infrastructure,
In addition to these factors,
systems for monitoring and skilled workforce, and large
a country's ability to attract
controlling corruption, as market size is more likely to
FDI also depends on its
well as transparent and attract FDI than a country
infrastructure, human
accountable government with poor infrastructure, low
capital, and market size.
institutions. human capital, and a small
market size.
INSTITUTIONAL QUALITY
AND THE ABILITY TO
ATTRACT FDI

 As good governance positively

influence FDI flow bad governance
impact in negative way. Lets
discuss some forms of bad
governance
 Corruption

 Corruption is defined as use of

public position for private gain
 Corruption is seen as arbitrary
(based on random choice or
personal whim) taxation
 Resource based investment don’t
seem to have high impact of bad
governance (corruption) due to its
limited choices of location but not
the case for other motives of
investments
INSTITUTIONAL QUALITY AND
THE ABILITY TO ATTRACT FDI

Corruption

 IF Singapore’s corruption index rises as

to the level of Mexico, it is equal to rise
in tax rates between (18 – 50 points)
 In addition to corruption, what matters to
the investors is the unpredictability of
corruption level
 Corruption influences the choice of entry
modes, and could go for short term
contracting and joint venture to mitigate
the impact of corruption, which will have
adverse effect on transfer of knowledge
and technology, depleting the chances of
higher development of the host country
INSTITU Pollution Havens

TIONAL  Chances are that lack of

environmental standards would
QUALITY draw FDI to developing countries
AND  Similarly higher cost of
THE environmental protection in
home country would push firms
ABILITY to relocate, which pollution haven
TO could be found in developing
countries whose institutions were
ATTRAC less geared to promoting such
T FDI protection
 Pollution Havens

INSTITUTI  Although even most

pollution causing industry
ONAL like chemical, paper,
petroleum refining annual
QUALITY cost of environmental
compliance don’t exceed
AND THE 5%, it is not a sufficient
conclusion that pollution
ABILITY protection could be sole
determinant related to bad
TO governance for FDI flow
 The use of clean energy and
ATTRACT technology and growth of
investments in service
FDI sector seem less likely
influenced by the pollution
determinant
  Foreign Direct Investment (FDI) can affect economic
growth in several ways:

ECONOMI
 Increased investment: FDI can bring in additional
investment to the host country, which can boost economic
growth. This investment can come in the form of capital,

C
technology, and expertise.

 Job creation: FDI can lead to the creation of new jobs in

GROWTH the host country. This can help reduce unemployment and
improve the standard of living for local people.

AND  Increased competition: FDI can increase competition in

the host country's market, leading to increased efficiency,
innovation, and productivity. This can result in higher

INBOUND economic growth.

FDI
 Technology transfer: FDI can bring new technologies
and management practices to the host country, which can
help improve productivity and competitiveness.

 Access to new markets: FDI can provide the host

country with access to new markets, which can help
increase exports and boost economic growth.
  The OLI paradigm revisited is a model that explains how
multinational corporations (MNCs) can gain a competitive
advantage in international markets. The model is a revision of the
original OLI paradigm, which was developed in the 1960s by
economists John Dunning and Ray Vernon.
 According to the OLI paradigm revisited, MNCs can gain a
competitive advantage in international markets by leveraging
their ownership-specific advantages (OSAs), location-specific
advantages (LSAs), and internalization advantages (IAs), as

OOLI
well as market-seeking advantages (MSAs).
 OSAs refer to the unique resources and capabilities that a firm
possesses that give it an advantage in a particular market. These

PARADI can include things like patents, trademarks, brand recognition, and
technological expertise.

GM
 LSAs refer to the specific advantages that a firm has because of its
location in a particular country or region. These can include access
to natural resources, a skilled labor force, or proximity to key

REVISIT markets.
 IAs refer to the advantages that a firm has because it has chosen to
internalize its international operations rather than outsourcing
ED them. This can include things like control over production,
coordination of activities, and access to proprietary information.
 MSAs refer to the advantages that a firm gains by actively seeking
out new international markets. This can include things like access
to new customers, the ability to diversify risk, and the opportunity
to learn from new markets.
 Overall, the OLI paradigm revisited is a comprehensive model that
takes into account a wide range of factors that can impact a firm's
competitiveness in international markets, including both
traditional and more recent concepts such as market-seeking
advantages.
O SPECIFIC ADVANTAGE
• "O specific advantage" is a component of the eclectic paradigm, a theory of international
business.
• It refers to the unique, non-imitable, and sustainable firm-specific assets, capabilities,
or resources that give a multinational enterprise (MNE) a competitive advantage in foreign
markets.
• Examples of O specific advantage include proprietary technology, innovative products
or processes, managerial skills and expertise, strong brand reputation, and access to
specific inputs or distribution networks.
• O specific advantage enables the MNE to achieve higher profits and market share than its
competitors in foreign markets.
• The willingness and ability of an MNE to engage in new or increase its existing foreign
value-added activities depend on various factors such as market size, level of competition,
host country's economic, legal and political environment, and MNE's strategic objectives
and resources.
• Other factors such as location-specific advantages and internalization advantages may also
influence an MNE's decision to engage in foreign value-added activities.
 O advantage is related to the
benefits an MNE can take from
its activities and actions,
which enhance the overall
value of the MNE
O-
SPECIFIC
ADVANTA
GES Depending on the
developmental stage of the
host country, an MNE can
enjoy greater or lesser extent
of advantage that may be
possessed by the MNE of host
country.
O-SPECIFIC
ADVANTAGES
The combination of O
advantage of MNE and the
supporting conditions of
host country’s institutions
and other social and
environmental condition
determine the
developmental possibility
Example: MNE looking to
engage in R&D activities
prefer countries which has
well developed and
supportive national
innovatory system and
 ECONOMIC GROWTH AND O
SPECIFIC ADVANTAGE
O advantage can contribute to economic growth by

• Promoting innovation
• Job creation
• Knowledge spillovers
• Access to global markets.
However, the extent to which these benefits are
realized depends on various factors, including the
level of development of the host country, the quality
of institutions, and the effectiveness of government
policies.
L-SPECIFIC ADVANTAGE
In the past, the attractiveness of a particular location for foreign direct investment
(FDI) was largely determined by factors such as the cost and quality of factor
endowments (e.g., labor, natural resources), the size and growth potential of the
market, and the policies of the host government (e.g., trade policies, tax
incentives). However, in today's context, there is much more attention being paid
to country-specific incentive structures and enforcement mechanisms that can
affect inbound FDI. Some reasons for this shift in focus include:
Increased Competition
Changing Nature of FDI
Rising importance of Institution

Incentive structure refers to the set of rewards or motivating factors that are
designed to encourage agents (e.g., employees, managers, investors) to work in
the best interest of the principal (e.g., the company, the government, the
shareholders) and complete tasks efficiently. In the context of FDI, incentive
structures can include a range of measures that are designed to attract foreign
investors, such as tax incentives, subsidies, grants, and other forms of financial
assistance.
 New approach shows multiple
advantages than traditional

L-
one in respect to both the
objectives of development and
means of achieving these
SPECIFI objectives

C The increasing complexity of

ADVAN cross border transactions and

new emphasis on social goals
of development, are
TAGE challenging the willingness and
capacity of organizations
which previously had little to
do with other firms, to work
together effectively
L- L advantage is influenced by many
other conditions like beliefs, attitude,
ideology, culture and other informal
SPECIFI institutional aspects

C - For example: During 1970 -90 the

ADVAN
incentive structure of East Asian
countries were more supportive in
promoting the creation and usage of
TAGE their resources, capabilities and
markets and advancing their
development goal compared to the
Latin American countries
I-SPECIFIC
ADVANTAGE
• MNEs with similar O-specific advantages and L-
specific characteristics of countries may still have
different impacts on the countries in which they
operate due to differences in organizational
governance.
• MNEs try to control the management of their
value-added activities to advance the interests of
the enterprise as a whole, and their different
strategies towards accessing and using
intermediate products and organizing their
marketing and distribution networks are
distinguishing characteristics.
• MNEs can bring new resources, capabilities,
markets, incentive structures, and entrepreneurial
vision, but their impact on host countries can vary
depending on their organizational governance,
strategies, and the coordination of their assets with
those indigenous to the countries in which they
operate.
  In certain cases the social objectives and
incentive structure of the investing
company may be totally inappropriate
I- for it to impose or share with its foreign
affiliates
SPECIFI  In such case a choice of either to go for

C internalization or engage in some kind

of collaboration, contract with local firm
ADVANT  Collaboration and contracts are most
prevalent between countries with
AGE different business culture and belief
systems (China and Tanzania) or
between different stages of development
(Australia and Nepal)
  Also it is influenced by the host
government’s attitude and policies
towards the non-resident ownership of
its indigenous assets
 Increased attention to CSR has
I- encouraged some developing firms to
renew and ensure that the conduct and
SPECIFIC performances of foreign affiliates
promotes their economical, social and

ADVANT cultural objectives, like abide by the

formal and informal institutional of
host countries, and respect the values
AGE and belief system
 This has given rise to more of
collaborative and contract (non equity
business relationship) by MNE than
acquisition and green-field
investments for production
 It looks into the developmental
aspect in terms of a national point
of view
INVESTM
ENT How does a country goes through
DEVELOP the stages of development in
terms of inbound and outbound
MENT FDI activities and institutional
development and change
PATH
(IDP)
The role of government to this
national development
INVESTMENT
DEVELOPMENT PATH
 The Investment Development Path (IDP), analyzes the dynamic
interaction between the changing advantages of firms and countries to
explain patterns of inward and outward multinational enterprise (MNE)
activity.
 The role of foreign direct investment (FDI) in economic development
varies across countries and economic policies.
 The IDP model suggests that as a country develops, the configuration of
the OLI advantages facing foreign-owned and domestic firms changes,
and the determinants of this change can affect the route of development.
 The IDP provides a means for describing and analyzing the underlying
reasons for FDI-induced restructuring at different stages of
development.
  Stage 1

 In this phase country’s competitive advantage

rest mainly on its possession of natural resources
 Inward investment is likely to be attracted and

STAGE directed towards primary sectors and labor-

intensive manufacturing.
S OF  Its institutions are likely to be simple and
underdeveloped, and outbound MNE activity is
THE low.
 The economical development of the country in

IDP terms of asset accumulation depends on its

supply capabilities and market of host country is
sufficient to establish forward processing of
primary activities.
 Examples include Angola, Venezuela, and
Bangladesh.
STAGES OF
THE IDP-
STEP 2
 This stage of development is marked by
growing importance of investment capital in
value added activities and in some case by
size and quality of domestic market.
 Sharp increase in attention given to
institution promoting secondary education,
public health, transport and communication.
As a whole basic infrastructure
developmental activities
 Upgrade of capabilities and productivity of
local resources by stimulating competition,
making environment for inward investment
so it could transform economical progress of
the nation.
 Some nation may prefer to develop its own
asset capabilities and restrict the amount of
inward investment (like Japan and S Korea
during 1960’s)
 Development of comparative advantage by
investment in small and medium scale
capital intensive sectors like; chemicals, iron
and steel, moderately into change knowledge
intensive consumer goods, such as clothing,
leather goods, processed food.
 Examples include India, Brazil, and Vietnam.
STAGES OF THE IDP

Stage 3
 In this stage a developing country is approaching economic
maturity and its income level and industrial structure are
beginning to resemble those of developed country
 Emphasis from investment driven to innovation driven growth
takes place, due to sharp increase in urbanization and
expenditure on innovatory activities
 With improvement in living standard, consumer favor high
quality goods and differentiated products
 Examples include South Korea, Israel, and Singapore.
  Stage 4

 In this stage ‘L’ advantage of the country is

determined by the extend and quality of created

STAGE assets during previous stages, and O advantage

of indigenous firms begin to match with those
of firms with developed countries
S OF  Nation will be among leading spenders on
R&D, directed towards innovation of new

THE products and production methods becoming

knowledge economies to meet global standards

IDP  Government role is directed to enhance

favorable trade policies and protection against
market failure.
 Examples include Japan, the United States, and
Germany.
  High pressure for institutional
upgrading particularly in respect to
foster innovation and human resource
development
 More national and cross border and
intra firm linkage (both
STAGES cooperative[SA] and equity
based[aquision and greenfield ),
OF THE whereas success level depends upon
ability of the firm to coordinate their

IDP resources and capabilities at regional

and global level
 Institutional structure needs to
overcome the differences of foreign
culture, belief system and other
informal institutional aspects, and
retain or advance their global
competitiveness position
STAGES OF
THE IDP
Stage 5

 At this stage firms of the nation is under

pressure of global competitiveness in
terms of innovation, resources and cost
 Their exclusive O advantage from home
country will not be enough to meet their
objective and global trade strategy,
hence they increasingly engage in
efficiency and strategic asset seeking
investment abroad
 Nation continues to receive inward FDI
but engage in outward FDI in roughly
equal measures
INSTITUTIONS AND IDP

• The IDP has been studied in different countries, and the trajectory of the IDP varies
significantly between countries, depending on differences in resources, institutions,
and government policies.
• For eg-The Portuguese case demonstrates that a combination of political and economic factors, such as
EFTA and EU membership, and the end of a dictatorial regime, can explain why the country seemed to
have entered the third stage of IDP twice in 1975 and 1988 but did not do so until the mid-1990s.

• GDP per capita may not capture the level of development adequately, so factor
analysis has been used in some studies to examine the impact of structural variables on
the IDP, particularly for developing countries.
• Some developing countries achieve a positive net outward investment position at
lower levels of GDP per capita by engaging in outward investment at an earlier stage
of their IDP, due to varied institutional incentive structures that differ at each stage of
development.
• For Eg Brazil, China, India, Mexico, and South Africa. According to UNCTAD (2006:142), MNEs from
developing countries typically combine asset-exploiting and asset-augmenting motivations when
making investments. In some cases, such as in China, Malaysia, and Singapore, the government policy
has encouraged the growth of outward FDI.
INSTITUTIONS AND IDP

• These incentive structures are likely to differ at each stage of

development and include institutions that facilitate contract
enforcement, seek to protect individuals and organizations from other
forms of hazard, and protect the environment.
• The role of informal institutions is likely to grow with greater
complexity of transactions.
• At later stages of development, there are likely to be pressures on the
mindsets and belief systems of individuals that can either inhibit or
promote the emergence of an appropriate institutional structure.
MNE
CONTRIBUTION
& ITS IMPACTS

Multinational Enterprises
8th Chapter
 MNE major contribution.  Potential Source of Capital and
 Investment Promotion Advance technology
 Infrastructure Development  Employment Opportunity
  Lower cost of production
Skills Development
 Local Hiring & Training  Disadvantage of MNE to Host
 Business Linkage with local Countries
Enterprise  Environmental Impact Political
Impact Uncertainty
 Advantage of MNE to Host  Low skilled Employment
Countries
 Research & development  Culture and Social impact
 Change in Economic & Social  Linkage between FDI & MNE
condition of host countries
 Product innovation  Social Responsibility and business
ethics by MNE’s
 Marketing Superiority

CONTENT
OVERVIEW
  Multinational Enterprises (MNEs) drive
economic development and play
dominant role in globalization of the
world economies.
 Their activities are channelled through
MAJOR trade, foreign direct investment and
transfer of knowledge and technology.
CONTRIB  They have developed not only within

UTION OF their domestic corporate framework but

have also set up new subsidiaries in
MNES different economies.
 MNEs cover the entire spectrum of
business activities from manufacturing to
extraction, agricultural production,
chemical processing, service provision,
and finance among others.
 Investments from MNEs have turned out to be
major source of revenue in almost every develo
country contributing to socioeconomic develop
and stability.
Their operations are global in nature and they e
host countries in different ways and with differ
strategies.

Some enter by first exporting their products to

CONT… market acceptability and share in a foreign cou
through export agents.

Others establish sales branches or manufacturin

plants to reduce operational costs as well as to
advantage of existing raw materials and favour
industrial conditions.

Operations of MNEs have important implicatio

 • MNEs often invest in
infrastructure development in
the countries where they
operate, such as building
roads, ports, and power plants.
• This not only benefits the
MNEs themselves but also the
local communities by creating
new jobs and improving access
to essential services.
• MNEs often provide training
and development opportunities
for their employees, which can
help to build the skills and
capabilities of the local
workforce.
• This can lead to increased
productivity and
MNE CONTRIBUTIONS competitiveness, both for the
MNEs themselves and for the
broader economy.
TO INFRASTRUCTURE
DEVELOPMENT:
 • MNEs often prioritize
hiring and training local
workers, which can help
to build local skills and
capabilities and
contribute to the
development of the local
economy.
• This can also help to
build trust and positive
relationships between
the MNEs and the local
community.
• Nestlé Pakistan employs
over 3,000 people, the
majority of whom are
local workers. The
company has also
implemented various
training and
MNE CONTRIBUTIONS development programs
for its employees,
including leadership
TO LOCAL HIRING development and
technical training.
AND TRAINING
 MNE
CONTRIBUTION
S TO BUSINESS
LINKAGE
 MNEs often seek to create linkages
with local enterprises, such as
suppliers and distributors, which can
help to build local business ecosystems
and support the growth of local
businesses.
 This can help to create new
opportunities for local entrepreneurs
and contribute to the development of
the broader economy.
 Investing in local suppliers
 Supporting distribution networks
 Supporting entrepreneurship

 Example: In India, Walmart has

invested in local suppliers, including
small businesses and farmers, to help
them grow their businesses.
Additionally, Walmart has launched
programs to support local distributors
and entrepreneurship, such as the
Walmart Vriddhi Supplier
Development Program which provides
training and mentoring to small
businesses in areas such as finance,
marketing, and supply chain
management.
ADVANTAGE OF MNE TO HOST
COUNTRIES
A host country is a nation that allows an MNEs to se
operations in its country. Multinational companies h
impacts on host countries, some of which are benefi
others are detrimental.

Some of the advantages are:

• Job creations
• Boost in the local economy
• More tax revenue for local economy
• Bringing new managerial skills and technology
• Intensify competition - improved quality
• Increase in choices of products
• Improvement of the country's reputation
• Improvements in infrastructure
LINKAGE BETWEEN FDI AND
MNE
 Foreign Direct Investment (FDI) and Multinational Enterprises
(MNEs) are two important concepts in the field of
international business.
 FDI refers to an investment made by a company or individual
in a foreign country, while MNEs are companies that operate
in multiple countries.
 MNEs use FDI as a way to expand their operations into new
markets, access resources, and gain competitive advantages.
 FDI provides several benefits for MNEs, including access to
new markets and customers, lower production costs, and
increased efficiency.
 MNEs can also benefit from FDI by gaining access to new
technologies, resources, and knowledge from local partners.
  Multinational enterprises (MNEs) have a social
responsibility to act ethically and with integrity in
their business practices.
 This includes being transparent and accountable

SOCIAL in their operations, as well as protecting the

environment and respecting the rights of
stakeholders such as employees, customers,
RESPONS suppliers, and local communities.
 MNEs should also prioritize human rights

IBILITY protection, implementing anti-corruption

measures, engaging with local communities, and

AND
ensuring fair labor practices throughout their
supply chains.

BUSINES
 They can also conduct social impact assessments
to understand and minimize the potential
negative impacts of their operations.

S ETHICS  Additionally, MNEs can demonstrate their

commitment to social responsibility through

BY MNE’S philanthropic initiatives, such as donating to

charities or investing in local communities.
 Integrating social responsibility and business
ethics into MNEs' operations is crucial for
promoting sustainable development and creating
positive social and environmental impacts.
UPPSALA MODEL
OF
INTERNATIONALIZ
ATION
INTRODUCTION
 The internationalization of firms was not widely covered and
research was fragmented before Johanson & Wiedersheim-Paul
(1975) and Johansson & Vahlne (1977).
 The Nordic school, including Johanson & Wiedersheim-Paul and
Johansson & Vahlne, is highly influential in internationalization
research.
 Johanson & Vahlne (1977) presented a theory of sequential steps in
the internationalization of business.
 They also criticized existing theories for ignoring cultural differences
and internal foundations for international activities.
 Swedish researchers developed their own model based on empirical
observations from four Swedish manufacturers, influenced by works
of Penrose, Cyert & March, Aharoni, and Vernon & Wells.
 Johanson & Vahlne (1977) and Johansson & Vahlne (1990) are highly
influential studies in this context.
INTRODUCTION
 In 1977 the Swedish doctors wrote the “Uppsala
Internationalization process model.
 In 2009 they made an actualization, due to the changes
of economic and regulatory environments.
 The change mechanism in the new version are the same
although they have added the trust building &
knowledge creation.
 The Uppsala model explains the characteristics of the
internationalization process of the firm.
 However, when they constructed the model there was
only a rudimentary understanding of market
complexities.
THE 1977 MODEL
 They did empirical observations that contradicted the established
economics and normative, international business literature of the
time. 
 According to that literature, firms choose the optimal mode for
entering a market by analyzing their costs and risks based on
market characteristics and taking into consideration their own
resources. 
 However, their empirical observations from a database of
Swedish-owned subsidiaries abroad, and also from a number of
industry studies of Swedish companies in international
markets, indicated: 
 Swedish companies frequently started internationalization
with ad hoc exporting. 
 They would subsequently formalize their entries through
what is called: the Establishment Chain;
PSYCHIC DISTANCE
&LIABILITY OF
FOREIGNNESS
 Internationalization frequently started in foreign markets
that were close to the domestic market in terms of
psychic distance.
 These are factors that make it difficult to understand foreign
environments.
 The companies will enter into other markets that were
further away in psychic distance terms. 
 This process had its origin in the liability of foreignness a
concept that originally explained why a foreign investor
needed to have a firm-specific advantage to more than
offset this liability. 
 The larger the psychic distance the larger the liability of
foreignness
THE UPPSALA MODEL OF
INTERNATIONALIZATION AND
ITS REVISIONS
 The Uppsala model of internationalization has undergone
several revisions and adaptations since its initial
development in the 1970s.
 These revisions have taken into account the changing
nature of global markets and the increasing complexity
of international business.
One important revision to the Uppsala model is the
concept of "born globals," which refers to companies that
are international from their inception, rather than
gradually expanding into foreign markets.
REVISION 2
 Another revision to the Uppsala model is the incorporation
of the concept of network relationships, which emphasizes
the importance of building relationships with local partners
in foreign markets.
 Network relationships can provide companies with valuable
information and resources, as well as access to local market
knowledge and expertise.
 Finally, the Uppsala model has also been revised to include
the impact of institutional factors, such as government
policies and regulations, on the internationalization process.
 Institutional factors can shape the opportunities and
challenges faced by companies entering foreign markets
and may require companies to adapt their strategies
accordingly.