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China's Economy (Subject) / 3_24 May_CF_Theoretical background Firms internationalization strategies (Lesson)

The Eclectic paradigm (OLI paradigm)/ International investment strategies

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  • The Eclectic paradigm (OLI paradigm) 1) Ownership advantageTrademarks, brand names, technological skills, managerial know-how2) Location advantageHost country locational advantages such as raw materials, natural resources, specific laws and regulations in the host country3) Internalization advantageProtecting knowledge and intellectual property rights, enhanced control
  • Ownership advantage 1. Endogenous advanatges: Technological capabilities; Managerial skills; Organizational structure 2.Exogenous advantages: Government funding/subsidies; Raw materials; Efficient allocation of labor
  • Location advantage Locational advantages refer to host country factors • Economic (market size, wages level, availabilityof factors of production such as capital and rawmaterials)• Technological (R&D, innovation level, patents,new products, managerial skills, organizationalstructure)• Political (investment laws and regulations, taxesand government incentives)• Socio-cultural ( social, cultural, geographicalproximity)
  • The eclectic paradigm criticism some advantages overlap at some points (=not very clear)
  • International investment strategies • Market-seeking FDI- Offensive strategy (driven by need to open new markets; invest locally & increase control over its operations) - Defensive strategy (strengthening existing markets & structures: when host country imposes   Tariffs, so expo more expensive & firm wants to relocate to be closer to its customers) • Efficiency-seeking FDI- Low costs for factors of production (wage, capital,resources) • Resources-seeking FDI- Natural resources (oil, minerals)- Technology (R&D)- Strategic assets (brand names & managerialexpertise)
  • Stages theory (The Uppsala model) • Gradual internationalization • Firms start slowly to internalize external marketsstarting with closercountries • Firms expand internationally after gainingexperience in close and similar markets
  • Criticism towards the stages theory (The Uppsala model) • Some companies might remain at the stage ofexporters • The theory does not explain FDI driven byseeking natural resources or efficiency • It does not address how business networks affectFDI decisions
  • International new ventures theory • Comes into contradiction with the stages theory • Some firms internationalize very soon afterestablishment without problems (born globals) • Two types:1) Fast movers: risk takers, knowledge-intensivefirms, quickly exploit ownership advantages2) Slow movers: risk averse, operate in traditionaland slowly advancing industries
  • International entrepreneurial networks-Network theory • Business and social networks accelerateinternationalization • Networks lower transaction costs • Networks can be considered an importantintangible asset (=usually very hard to evaluate. Patents, copyrights, franchises, goodwill, trademarks, trade names, software) • Networks characteristics:a) Strong vs weakb) Different sizesc) Sparse vs dense
  • Institutional theory • Institutions are considered in the internalizationtheory• Institutions create imperfect markets• Internationalization is influenced by the home andhost countries institutional environment• Institutions include elements such customs,beliefs, religions and norms, bureaucracy,....
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  • Institutional theory: How can the institutional framework encourage/discourage OFDI? 1. Under Increasing market imperfections:     -> Increase OFDI via overvalued currency; subsidies for OFDI; export controls; price   controls; gvt. protectionism; particularistic economic goals     -> Decrease OFDI via undervalued currency; wage control; export subsidies; restrictive OFDI approval 2. Under Decreasing Market imperfections     -> Increase OFDI via liberalisation of capital controls on OFDI; supranational institutions; state vistits and bilateral agreements     -> Decrease OFDI via privatisation of SOEs; vigorous enforcement of arm's length transfer pricing; lack of supporting gvt
  • Push factors (home countries) for OFDI push home: high taxes; high subsidies; bad access to technology/ capital (R&D); political instability; condition of infrastructure etc.
  • Off-balance sheet (OBS) Incognito Leverage, usually means an asset or debt or financing activity not on the company's balance sheet. Total return swaps are an example of an off-balance sheet item. Some companies may have significant amounts of off-balance sheet assets and liabilities.

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