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C8.2. FDI theories — Transcript

by International Business · 1,701 words · 332 segments · language en · Watch on YouTube

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0:02okay
0:03let's talk about some theories
0:05limitations to exporting
0:07um if you're exp
0:11exporting strategy has its advantages
0:13and disadvantages
0:14um so really you may ask why does a firm
0:17go to the trouble of establishing
0:19operations abroad through foreign direct
0:21investment when
0:22two alternatives uh exporting and
0:24licensing are available for them to use
0:27for getting their products into foreign
0:29markets
0:30well i mean exporting of course involves
0:32producing goods at home and shipping
0:34them
0:35to a receiving company for sale and
0:36licensing be granting a foreign entity
0:38the license
0:39or the right to to produce and sell a
0:42firm's
0:43products in return for royalty for every
0:46unit sold
0:49now this is a good a good question of
0:51why not just do that licensing or
0:52exporting
0:53and given that the cursory examination
0:55the topic suggested foreign direct
0:57investment may be both
0:59expensive and risky compared to
1:01exporting licensing
1:03however foreign direct investment can be
1:07more profitable and could be um
1:12longer term add much more wealth to the
1:14company
1:15i mean it's riskier sure but if you have
1:17a good product and you have a
1:18good market research you see the country
1:20is ready for it um
1:22it's better to do the foreign direct
1:24investment
1:25some companies may start with exporting
1:27first see how the product takes
1:29and if the exporting goes well then they
1:31could make a further on investment in
1:33the far
1:33in foreign directly investing in the
1:36country to set up their own shop and
1:38subsidiary in that country so it's sort
1:40of a um
1:41a process some some companies may just
1:44go right and do the foreign direct
1:45investment
1:46right away and some may actually test
1:48the waters with a licensing or exporting
1:50agreement
1:52first
1:56and of course you may do if there's
1:59strict trade
2:00like we were learning last trap the last
2:02chapter if there's strict trade threats
2:04or barriers
2:05or quarters or tariffs or administrative
2:07problems
2:08or or direct domestic
2:12components percentages required it may
2:15be easier
2:17to have a foreign presence rather than
2:18export
2:20and that's probably i think the biggest
2:21reason
2:23let's look at some of the um the
2:25limitations
2:27of licensing you know um
2:34so
2:37licensing uh may result in a firm giving
2:40away
2:41valuable technology know-how to a
2:43potential foreign competitor
2:45so if you license um if tesla wants a
2:48license it's
2:49a know-how and ability to make electric
2:52cars in china
2:53or in say india they run the risk of
2:57these companies learning how to learning
2:59all the
3:00the detailed sophisticated technology
3:03and assembly know-how
3:05and going into competition directly
3:06against tesla at some point in the
3:08future
3:08you know for example in 1960s rca
3:11licenses leading-edge color television
3:13technology to a number of japanese
3:15companies including
3:16um sony and at the time rca saw
3:20licensing as a way to earn good return
3:23from its technology know-how in the
3:25japanese market without the costs and
3:26risks
3:27of foreign direct investment however the
3:30companies that they licensed this
3:31technology to quickly assimilated
3:34rca's technology and learned how to
3:37enter the u.s market and compete
3:38directly against
3:39rca with their own television sets as a
3:42result rca is now a minor player in its
3:44own home market
3:45and the japanese firms own a much bigger
3:47share
3:48of the television markets
3:53the second problem with licensing is it
3:55does not give
3:56a firm the tight control over
3:59manufacturing marketing
4:00quality and strategy in the foreign
4:02country that may require
4:04uh to maximize those profits so you lose
4:06some control when you license your
4:08product
4:09um so with licensing control of
4:11manufacturing marketing strategy are
4:13granted to
4:14the licensee in return for royalty fees
4:16so for every unit they sell
4:18they pay you back a royalty however for
4:20both strategic and operational region
4:23reasons a firm may want to retain
4:25control over these functions
4:27and the rationale for wanting control is
4:30that your strategy that you want to
4:32deploy
4:32you think will be more successful
4:36and there'll be a way of more
4:37aggressively keeping the foreign
4:39competitors in check
4:43so having licensing you lose a certain
4:45amount of control so that's
4:47a big negative for it a third problem
4:48with licensing arises when the firm's
4:50competitive advantage
4:51is not based much on its products as the
4:54management marketing
4:56and marketing capacities are
4:58capabilities
5:00that uh produce the products and the
5:02problem here is that such capacities are
5:04often not
5:05amenable through licensing so if your
5:08strength is really through your
5:09marketing and your
5:10advertising to sell your product your
5:13product might be more of a commodity
5:15where it's very similar maybe it's sugar
5:18you know
5:19then
5:22it's not going to be as beneficial to
5:24license
5:29all right so licensing you could lose
5:33some kind of advantage by not having
5:35total control over it
5:40okay so advantage as far advantages of
5:43foreign direct investment
5:46it follows that a firm will favor
5:49foreign direct investment over exporting
5:51as an entry strategy when transportation
5:53costs or trade barriers
5:55make exporting unattractive sort of like
5:57you know coca-cola you wouldn't export
6:00full bottles of soda because of the
6:03cost of exporting that weight it'll be
6:06much easier to make a foreign direct
6:07investment in the bottling plant in the
6:09foreign country
6:10and bottle the soda directly in a
6:12foreign country saving huge amounts of
6:13money in the transport
6:16so firms will favor foreign direct
6:17investment over licensing or franchising
6:19when it wishes to maintain control over
6:21its technology know-how
6:23its operation or its business strategy
6:25uh or when the firm's capabilities
6:27aren't simply not amenable to licensing
6:29and just
6:30may not be able to handle it in the case
6:32of coca-cola they may want to also
6:34maintain
6:35the uniqueness and the secret formula of
6:38their soda and not
6:39license it to somebody else that could
6:41turn around and start producing
6:42their own competitive brands that they
6:45would have to compete with
6:54okay let's look at the patterns of
6:57foreign direct investment
6:58that for um so
7:02okay um so let's look at
7:05strategic behavior
7:09um knickerbocker explore the
7:12relationship between
7:13fdi and um competition
7:17in all an oligopoly oligopoly type of
7:22environment where industries
7:23a limited number industries compete
7:28now an oligop
7:31oligopoly we all know the game monopoly
7:33where there's one company that dominates
7:35everything an oligopoly is
7:37a few companies running two or three
7:40companies
7:41controlling everything so an industry
7:43composed of limited number of firms
7:49is going to be sort of
7:52a unique strategic behavior uh critical
7:55critical comp competitive i can't talk
7:58today
8:00uh competition um
8:03when you only have a couple major
8:05players maybe we're talking coke and
8:06pepsi
8:07when one firm uh does have an immediate
8:11impact on a major
8:12competitor forcing a response in kind so
8:15if coke moves into say
8:17um iraq pepsi has to also be there
8:22because they don't want the other
8:23company to get a strong foothold before
8:26the other company can get there and
8:27start competing so by cutting prices one
8:30firm
8:30uh one of the two or three oligopolies
8:34uh can take market share away from
8:36competitors forcing them to respond with
8:38a similar price cuts to retain
8:40market share thus the interdependence
8:42between firms in in
8:43in a oligopoly leads to uh
8:47imitate behavior uh rivals often quickly
8:50imitate
8:51uh where firm does you know what the
8:54direct competition is doing so
8:56if you have a say like a soda industry
8:59coke or pepsi will quickly follow each
9:00other in their foreign direct
9:02investments to maintain
9:03a global competitive edge so it's sort
9:06of a multi-point
9:07competition um
9:11when they're um when two or more
9:13enterprises encounter each other in
9:15different regions or markets
9:17national or industries and economic
9:20theory suggests that
9:21different regional markets now um
9:26you know are going to be a big
9:28competitive area
9:30uh and that that rather sort of like a
9:33game of chess
9:34they're going to you know one move
9:37uh by one company indicates the next
9:39move by the next company trying to outdo
9:42uh and match each other's strategy to
9:44hold each other in check so no one can
9:46get too far ahead of the other one
9:48um so knickerbocker's theory helps
9:52explain the extension
9:53of why uh imitative foreign direct
9:56investment behavior
9:58among an industry with only a few large
10:00firms in it
10:01is pretty commonplace
10:05okay if we look at the product life
10:07cycle
10:08here this is going to be
10:12the product life cycle has a lot to do
10:14with when
10:16a particular foreign direct investment
10:18will occur
10:19so firms have
10:24you know when they develop products
10:28it can it can be you know sort of in the
10:32beginning they're not going to
10:33how can i say if if a product is in the
10:35beginning of its product life cycle
10:36it's not going to be needed immediately
10:38a candidate for foreign direct
10:40investment
10:41um but when the product life cycle gets
10:44to a rapidly
10:46expanding phase sort of like netflix a
10:48few years ago they're going to look
10:50they started originally in the united
10:52states it grows to a significant
10:54business in the united states and when
10:55the momentum is
10:56growing and it's a fast-growing
11:00product before it gets to maturing stage
11:02they're going to want to expand overseas
11:04before an overseas competitor fills the
11:06void
11:07so a lot of times when a domestic
11:09product or service
11:10becomes from us the first
11:14cycle of its product life cycle in a
11:16slow growth originating
11:17uh not a slow growth but a um startup
11:20and it goes into the second phase where
11:22it's
11:23expanding quickly they're going to want
11:25to make the foreign direct investments
11:26to leverage this
11:28idea worldwide before a competitor fills
11:30that void
11:33and as the firm's awareness grows bigger
11:36and they can move into countries the
11:37local demand will be significant
11:39then they're going to start also
11:41shifting production out of the more
11:43expensive
11:44country like united states into lower
11:47cost developing countries as the need
11:50for their products in those regions the
11:51world
11:52increase and they're trying to maintain
11:55hopefully they can maintain a product
11:56standardization
11:58and create a price competition and
12:01reduce their cost pressures by
12:03these foreign direct investments

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