Prepared By

Zamri Bin Mustaffa@Dollah JG 5724/11
Nor Ardillah Binti Osman JG 5423/11
Nurazlin Binti Waishak JG5507/11
Nor Hafizah Binti Ab Samad JG 5436 /11
Mahizatuakema Binti Zakaria JG 5265 /11

INTERNATIONAL INVESTMENT THEORIES.

Why does FDI occur? A sophomore taking his or her first finance course might answer with the obvious: Average rates of return are higher in foreign markets. Yet given the pattern of FDI between countries that we just discussed, this answer is not satisfactory, and Canada and the United Kingdom are both major sources of FDI in the United States and important destinations for FDI from the United States. Average rates of return in Canada and the United Kingdom cannot be simultaneously below that of the United States (which would justify inward U.S.FDI) and above that of the United States (which would justify outward U.S.FDI).The same pattern of two-way investment occurs on an industry basic. By the end of 2007, for example, U.S firm had invested $8.0 billion in the chemical industry in the Netherland.While Dutch Firm had invested $44.7 billion in the U.S chemical industry. This pattern cannot be explained by national or industry differences in rates of return .We must search for another explanation for FDI.

Ownership  Advantages.

More powerful explanation for FDI focus on the role of the firm. Initially researcher explored how firm ownership of competitive advantages affected FDI .The ownership advantage theory suggests that a firm owning a valuable asset that creates a competitive advantage domestically can use advantage to penetrate foreign markets though FDI. The asset could be, for example, a superior technology, a well-knows brand name, or economies of scale. This theory is consistent with the observed patterns of international and industry FDI discussed earlier in this chapter. Caterpillar, for example, built factories in Asia, Europe, Australia, South America, and North America to exploit proprietary technologies and its brand name .Its chief rival, Komatsu, constructed plants in Asia, Europe, and the United States for the same reason.

 

 

 

 

 

Internalization Theory.

The ownership advantage theory only partly explains why FDI occur. It does not explains why a firm would choose to enter a foreign market via FDI rather exploit  For example, McDonald’s has successfully internationalized by franchising its fast-food operations outside the United States, while Boeing has relied on exporting to serve foreign customers.

Internalization theory addresses this question. In doing so, it relies heavily on the concept of transaction costs. Transaction costs are the costs of entering into a transaction, that is, those connected to negotiating, monitoring, and enforcing a contract. A firm must decide whether it is better to own and operate its own factory overseas or to contract with a foreign firm to do this through a franchise, licensing, or supply agreement. Internalization theory suggests that FDI is more likely to occur-that is, international production will be internalized within the firm-when the costs of negotiating, monitoring, and enforcing a contract with a second firm is high. For example, Toyota ‘primary competitive advantages are its reputation for high quality and its sophisticated manufacturing techniques, neither of which is easily conveyed by contract. As a result, Toyota has chosen to maintain ownership of its overseas automobile assembly plants.

Conversely, internalization theory holds that when transaction coast are low, firms are more likely to contract with outsider and internationalize by licensing their brands names or franchising their business operation. For example, McDonald’s is the premier expert in the United States in devising easily enforceable franchising agreements. Because McDonald’s is so successful in reducing transaction costs between itself and its franchisees, it is continued to rely franchising for its international operations.

Dunning’s Eclectic Theory

Although internalization theory addresses why firms choose FDI as the mode for entering international markets, the theory ignores the question of why production by either the company or a contractor, should be located abroad. In other words, is there a location advantage to producing abroad? This issue was incorporated by John Dunning in his eclectic theory, which combines ownership advantage, location advantage, and internalization advantage to form a unified theory of FDI. This theory recognizes that FDI reflects both international business activity internal to the firm. According to Dunning, FDI will occur when three conditions are satisfied.

1.      Ownerships advantage. The firm must own some unique competitive advantage that overcomes the disadvantage of competing with foreign firm in their home turfs. This advantage may be a brand name, ownership of proprietary technology, the benefits of economies of scale, and so on. Caterpillar, for example, enjoys all three of these advantages in competing in Brazil against local firms.

2.      Location advantage. Undertaking the business activity must be more profitable in a foreign location than undertaking it in a domestic location. For example, Caterpillar produces bulldozer in Brazil enjoy lower labor costs and avoid high tariff walls on good exported from its U.S. factories.

3.      Internalization advantage .The firm must benefit more from controlling the foreign business activity than from hiring an independent local company to provide the service. Control is advantageous, for example, when monitoring and enforcing the contractual performance of the local company may misappropriate proprietary technology, or when the firm’s reputation and brand name could be jeopardized by poor behavior by the local company. All of these factors are important to Caterpillar.

Factors Influencing Foreign Direct Investment.

Given the complexity of the global economy and the diversity of opportunities that firms face in different countries, it is not surprising that numerous factors may influence a firm’s decision to undertake FDI. These can be as supply factors, demand factors, and political factors (see table 6.5)

TABLE 6.5 Factors Affecting the FDI Decisions

Supply Factors                        Demand factors                      Political factors

Production costs                 Customer access                     Avoidance of trade barriers

Logistics                        Marketing advantages           Economic development    Resource availability             Exploitation of competitive         incentives

                                                    Advantage

Access to technology            customer mobility

 

Supply Factors.

A firm’s decision to undertake FDI may be influenced by supply factors, including production costs, logistic, availability of natural resources, and access to key technology.

PRODUCTION COSTS.  Firms often undertake may be more attractive than domestic sites because of lower land prices, tax rates, commercial real estate rents, or because of better availability and lower costs of skilled or unskilled labor. For example, Intel built a new chip fabrication facility in Chengdu in China’s remote Sichuan province because labor and land costs were must lower than Shanghai, where the company already operates three facilities. Similarly, Samsung will build a $670 million mobile phone assembly plant in northern Vietnam to take advantage of the area’s low labor costs.

LOGISTICS. If transportation costs are significant, a firm may choose to produce in the foreign market rather than export from domestic factories. For example, Heineken has utilized FDI extensively as part of its internationalization strategy because its products are primarily water. Brewing its beverages close to where its foreign consumers live is cheaper for Heineken than transporting the beverages long distances from the company’s Dutch breweries. International businesses also often make host-country investments to reduce distribution costs. For example, Citrovita, a Brazilian producer of orange juice concentrate, operates a storage and distribution terminal at the Port of Antwerp rather than ship to European grocery chains directly from Brazil. Citrovita can take advantage of low ocean-shipping rates to transport its good in bulk from Brazil to the Belgian port. The company then uses the Antwerp facility to repackage and distribute concentrate to its customer in France, Germany, and the Benelux countries.

AVAILABILITY OF NATURAL RESOURCES. Firms may utilize FDI to access natural resources that are critical to their operation. For instance, because of the decrease in oil production in the United States, many U.S.-based oil companies have been force to make signification investment worldwide to obtain new oil reserves. Often international businesses negotiate with host government to obtain access to raw materials in return for FDI. For example, in 2007  the china National Petroleum Company created  a joint venture with state-owned Petroleos  de Venezuela that will invest $10 billion to extract, refine, and transport 1  million barrels of oil a day Venezuela’s Orinoco basin (see Map 6.1)

ACCESS TO KEY TECHNOLOGY. Another motive for FDI is to gain access to technology. Firms may find it more advantageous to acquire   ownership interests in an existing firm than to assemble an in-house group of research scientists to develop or reproduce an emerging technology. For instance, many Swiss pharmaceutical manufacturers have invested in small U.S. biogenetics companies as an inexpensive means of obtaining cutting –edge biotechnology. Similarly, in 2007 Korea‘s Doosan Infracore paid $4.9 billion for the Bobcat division of Ingersoll-Rand, in order to benefit from Bobcat’s superior technology, outstanding network, and skilled management team. Taiwan‘s Acer Inc., manufacturer of personal computers and workstations, paid $100 million in the 1990s for a pair of silicon Valley computer companies in the hope of leveraging their technology and existing distribution network to boost Acer’s share of the U.S. personal computer market.

Demand factors.

Firm also may engage in FDI to expand the market their products. The demand factors that encourage FDI include customer access marketing advantage, exploitation of competitive advantages, and customer mobility.

CUSTOMER ACCESS. Many types of international business require firms to have a physical presence in the market. For example, fast-food restaurants and retailers must provide convenient access to their outlets for competitive reasons.KFC cannot provide freshly prepared fried chicken to Japanese customers its restaurants in the United States; it must locate outlets in Japan to do so . Similarly, IKEA‘s success in broadening its customer base beyond its home market in Sweden is due to its opening a number of new stores worldwide.

MARKETING ADVANTAGES.  FDI may generate several types of marketing advantages. The physical presence of a factory may enhance the visibility of a foreign firm’s products in the host market. The foreign firm also gains from “buy local” attitudes of host country consumers. For example, through ads in such many magazines as Time and sports illustrated, Toyota has publicized the beneficial impact of its U.S. factories and input purchases on the U.S. economy.                      Firms may also engage in FDI to improve their customer service. Taiwan’s Delta products, which makes battery packs for laptop computers, was concerned that it could not respond quickly and flexibly enough from its factories in china and Thailand to meet the changing needs of its U.S. customers. As one of executives noted, if you “build in the Far East, you’re too far away. You can’t do last-moment modification while the product is on the ocean.” Accordingly, Delta shifted some of its production to a Mexican factory just across the border from Nogales, Arizona, to better serve its U.S. customers.

CUSTOMER MOBILITY. A firm’s FDI also may be motivated by the FDI of its customers or clients. If one of a firm existing customer builds a foreign factory, the firm may decide to locate a new facility of its own nearby, thus enabling it to continue to supply its customers promptly and attentively. Equally important, establishing a new reduces the possibility that a competitor in the host country will step in and steal the customer. For example, Japanese parts suppliers to the major Japanese automakers have responded to the construction of Japanese owned automobile assembly plants in the United States by building their own U.S. factories, warehouses, and research facilities. Their need to locate facilities in the United States is magnified by the automakers’ use Just- In –Time (JIT) inventory management techniques; IT minimizes the amount of part s inventory held at an assembly plants, putting a parts-supply facility located in Japan at a severe disadvantage. Likewise, after Samsung decided to construct and operate an electronics factory in northeast England, six of its Korean parts suppliers also established factories in the Vicinity.

Political factors.

Political factors may also enter into a firm’s decision to undertake FDI .Firms may invest in a foreign country to avoid trade barriers by the host country or take advantage of economic development incentives offered by the host government.

AVAOIDANCE OF TRADE BARRIERS. Firms often build foreign facilities to avoid trade barriers, For example, the Fuji Photo Film company invested $200 million its is Greenwood, south Carolina ,factory complex to begin manufacturing film for sale in the united states. Previously, the company supplied film its U.S. customers from its exporting to it, Fuji avoided a 3.7 percent tariff on film imposed by the United States and deflected claims by Kodak that Fuji was unfairly “dumping” Japanese-made  in the  U.S. market( dumping is explained in chapter 9).Other types of government policies may also impact FDI. Microsoft, for example, is locating a software development center in Richmond, British Colombia, in part to avoid limitations placed by the U.S. government on the number of highly  skilled immigrant workers who can obtain H-1B  works visas in any given year.

ECONOMIC DEVELOPMENT INCENTIVES. Most democratically elected governments-local, states, and national-are vitally concerned with promoting the economic welfare of their citizens, many of whom are, of course, voters. Many government offer incentives to firms to induce them to locate new facilities in the governments’ jurisdictions. Governmental  incentives that can be an important catalyst for FDI include reduced utility rates, employee training programs, and infrastructure additions (such as new roads and railroad spurs),and  tax reduction or tax holidays. Often MNCs benefit from bidding wars among communities eager to attract the companies and the jobs they bring. For instance, Georgia agreed to provide Kia Motors $400 million in incentives to capture that firm’s first   U.S. plant, which is expected to employ 2.500 workers once it becomes operational. Likewise, in 2006, Samsung Electronics announced it would locate its latest chip factory in Austin, after the city and the state granted it a $233 million incentive package.

 

 

 

 

 

 

Type of international investment

 International investment as discussed in chapter 1 is divided into two categories: foreign portfolio investment (FPI) and foreign direct investment (FDI).The distinction between the two rests on the question of control: Does the investor seek an active management role in the firm of merely a return from a passive investment?

   Foreign portfolio investment represent passive holding of securities such as foreign stocks bonds ,or other financial assets , none of which entails active management or control of the securities” issuer by the investor .Modern finance theory suggests that foreign portfolio investments will be motivated by attempts to seek an attractive rate of return as well as the risk reduction that can come from geographically diversifying one’s investment portfolio .Sophisticated money managers in new York ,London, Frankfurt, Tokyo and other financial centers are well aware of the advantages of international design securities ,bring  their total holdings of such securities to $6.6 trillion. Foreign official and private investors purchased $$890 billion worth of us. corporate, federal state, and local securities, raising their total holding of such securities to $8.6 trillion.

   Foreign direct investment (FDI) is acquisition of foreign asset for the purpose of controlling for them .U.S. government statisticians define FDI as” ownership or control of 10 percent or more of an enterprise” voting securities or the equivalent interest in an unincorporated business”. FDI may take many forms, including purchase of existing assets in a foreign country, new investment of property, plant, and equipment, and participation in a joint venture with a local partner. Perhaps the most historically significant FDI in the United States was the $24 that Dutch explore Peter Minuet paid local Native Americans Manhattan Island. The result: New York City, one of the world’s leading financial and commercial centrals.

Figure 6.7

Stock of Foreign Direct Investment,

by Recipient (in billions of dollars)

 

The Growth of foreign Direct Investment.

The growth of foreign direct investment during the past 30 years has been er phenomenal .As figure 6.7 indicates, in 1967the total stock (or cumulative value) of FDI received by countries worldwide was slightly over $100 billion. Worldwide FDI as of 2006 topped $12.5 trillion. This stunning growth in FDI –and its acceleration in the 1990s-reflects the globalization of the world’s economy. As you might expect, most FDI comes from developed Countries. Surprisingly, most FDI also goes to deleted countries .We discuss later in the chapter reason for this explosive growth in FDI.

Foreign Direct Investment and the United States.

We can gain additional insights into FDI by looking at individual countries .Consider the stock of FDI in the united states, which totaled $2.1 trillion (measured at historical cost) at the end of 2007( see table 6.4[a]).The United Kingdom was the most important source of this FDI ,accounting for $410.80 billion ,or 20 percent of total. The countries listed by name in table 6.4( a) account for 87percent of total FDI in the United States.

   The stock of FDI U.S residents in foreign countries totaled $ 2.8 trillion at the end of 2007(see table 6.4[b]).Most of this FDI was in other developed countries, particularly the united kingdom ($398.8 billion) and the Netherland ($370.2 billion).The countries listed by name in table 6.4 (b) account for 68 percent of total FDI from the united states.

   Looking at table 6.4, you may wonder why Bermuda, the Bahamas and other small Caribbean island are so important. The serve as offshore financial centers, which we will discuss in chapter 8.Many U.S companies set up finance subsidiaries in such centers to take advantage of low taxes and business-friendly regulations similarly, many financial services companies from other countries establish such subsidiaries as the legal owner of their U.S operation.

   During the past decade outward FDI has remained larger than inward FDI for the United States (see figure 6.8), but both categories have tripled in size. Although inward and outward flows of FDI are not perfectly matched, the pattern is clear: Most FDI is made by and destined for the most prosperous countries. In the next section we discuss how this pattern suggests the crucial role MNCs play in FDI.

 TABLE 6.4 Patterns of FDI for the United States,end of 2007 ( billions of dollars)

a. Sources of FDI in United States

United Kingdom                                                                                                    410.8
Japan                                                                                                                      233.1
Canada                                                                                                                   213.2
Netherlands                                                                                                            209.4
Germany                                                                                                                202.6
France                                                                                                                    168.6
Switzerland                                                                                                            155.7
Luxembourg                                                                                                          134.3
Australia                                                                                                                  49.1
Bermuda,The Bahamas, and other Caribbean island                                              38.7
Other European countries                                                                                        75.9
Total                                                                                                                    2092.9

b. Destination of FDI from the United States

United Kingdom                                                                                                     398.8
Nertherlands                                                                                                           370.2
Canada                                                                                                                   257.1
 Bermuda,The Bahamas, and other Caribbean islands                                          243.3
Switzerland                                                                                                            127.7
Luxembourg                                                                                                           113.6
Germany                                                                                                                 107.9
Japan                                                                                                                       101.6
Mexico                                                                                                                      91.7
Ireland                                                                                                                       87.0
Other European countries                                                                                        364.5
All other countries                                                                                                   546.5
Total                                                                                                                       2791.9
Source : Suvey of Current Business , July 2008,pp.33,35.

Type of international investment.

 International investment as discussed in chapter 1 is divided into two categories: foreign portfolio investment (FPI) and foreign direct investment (FDI).The distinction between the two rests on the question of control: Does the investor seek an active management role in the firm of merely a return from a passive investment?

   Foreign portfolio investment represent passive holding of securities such as foreign stocks bonds ,or other financial assets , none of which entails active management or control of the securities” issuer by the investor .Modern finance theory suggests that foreign portfolio investments will be motivated by attempts to seek an attractive rate of return as well as the risk reduction that can come from geographically diversifying one’s investment portfolio .Sophisticated money managers in new York ,London, Frankfurt, Tokyo and other financial centers are well aware of the advantages of international design securities ,bring  their total holdings of such securities to $6.6 trillion. Foreign official and private investors purchased $$890 billion worth of us. corporate, federal state, and local securities, raising their total holding of such securities to $8.6 trillion.

   Foreign direct investment (FDI) is acquisition of foreign asset for the purpose of controlling for them .U.S. government statisticians define FDI as” ownership or control of 10 percent or more of an enterprise” voting securities or the equivalent interest in an unincorporated business”. FDI may take many forms, including purchase of existing assets in a foreign country, new investment of property, plant, and equipment, and participation in a joint venture with a local partner. Perhaps the most historically significant FDI in the United States was the $24 that Dutch explore Peter Minuet paid local Native Americans Manhattan Island. The result: New York City, one of the world’s leading financial and commercial centrals.

Global Strategic Rivalry Theory

More recent explanations of the pattern of international  trade. Develop in the 1980s by such economists as Paul Krugman and Kevin Lancaster examine the impact on the trade flows of global strategic rivalry between MNC’S. According to this view, firms struggle to develop some sustainable competitive advantage, which they can then exploit to dominate the global marketplace. Like Linder’s approach, global strategic rivalry theory predicts that intraindustry trade will be commonplace. It focuses, however, on strategic decisions that firms adopt as they compete internationally. These decisions  affect both international trade and international investment. Companies such as Caterpillar and Komatsu, Unilever and Protect & Gamble, and Toyota and Ford continually play cat-mouse games with one another on a global basis as they attempt to leverage their own strengths and neutralize those of their rivals.

Firms competing in the global marketplace have numerous ways of obtaining a sustainable competitive advantage. The more popular ones are owning intellectual property rights, investing in research and development (R&D), achieving economies of scale or scope, and exploiting the experience curve. We discuss each of these options next.

 

OWNING INTELLECTUAL PROPERTY RIGHTS.  A firm that owns an intellectual property rights- a trademark, brand name, patent, or copyright-often gains advantages over its competitors. For instance, owning prestigious brand names enables Ireland’s Waterford Wedgwood Company and France’s LVMH Moet Hennessy Louis Vuitton to charge premium prices for their upscale products. And Coca- Cola and PepsiCo compete for customers worldwide on the basis of their trademark and brand names.

INVESTING IN RESEARCH AND DEVELOPMENT.  R&D is a major component of total cost of high-technology products. For example, Airbus has spent over $12 billion developing its new superjumbo jet, the A380. Firms in the computer, pharmaceutical and semiconductor industries also spend large amounts on R&D to maintain their competitiveness. Because of such large ‘entry’ costs, other firms often hesitate to compete against established firms. Thus the firms that acts first often gains a first-mover advantage.

However, knowledge does not have nationality. Firms that invest up front and secure the first-mover advantage have the opportunity to dominate the world market for goods that are intensive in R&D . According to the global strategic rivalry theory, trade flows may be determined by which firms make the necessary R&D expenditures. Why is the European Union a large exporter of commercial aircrafts? Because Airbus is one of the few firms willing to spend the large sums of money required to develop new aircrafts and because it just happens to be headquatered in new technology to maintain their leadership in the world flower markets.

Firms with large domestic markets may have an advantage over their foreign rivals in high –technology markets because these firms often are able to obtain quicker and richer feedback from customer. With this feedback the firms can fine-tune their R&D efforts enabling the firms to better meet the needs of their domestic customers. This knowledge can be utilized to serve foreign customers. For example, U.S agricultural chemical producers such as Monsanto and Eli Llilly have advantage over Japanese rivals in developing soybean pesticide because the U.S markets for such pesticide is large while the Japanese market is small. Knowledge gained in the U.S pesticide market can be readily transferred to meet the needs of Japanese farmers.

ACHIEVING ECONOMIES OF SCALE OR SCOPE. Economies of scale or scope offers firms another opportunity to obtain a sustainable competitive advantage in international markets. Economies of scale occur when a products average costs decrease as the number of units produced increases. Economies of scope occur when a firms average costs decreased as the number of different products it sells increase. Firms that are able to achieve economies of scale or scope enjoy low average costs, which give the firms a competitive advantage over their global rivals. Both of these economies are particulary important for e-retailers. Amazon.com, for example, has spent enormous sums developing and maintaining its Website and building its customer base. Because many of these costs are fixed, the company average costs per sale decline as the company expands its sales. In its quest to capture the volume-driven economies of scale, Amazon.com has been expanding its operations into the international marketplace. Moreover, the marginal cost of adding an additional product line to its Web site is relatively small. Accordingly, the company has expanded from books to compact disc to DVDS to sporting goods to capture such economies of scope.

EXPLOITING THE EXPERIENCE CURVE.  Another source of firm-specific advantages in international trade is exploitation of the experience curve. For certain types of products production cots decline as the firm gains more experience in manufacturing the product.  Experience curves may be so significant that they govern global competition within industry. For instance, in semiconductor chip production, unit cost reduction of 25 to 30 percent with each doubling of a firms cumulative chip production are not uncommon. Any firm attempting to be low-cost producer of so-called commodity chips- such as 512MB memory chips-can achieve that goal only if it moves further along the experience curve that its rivals do. Both U.S and Asian chip manufacturers have often priced their new products below current production costs to capture the sales necessary to generate the production experience that will in turn enable the manufactures to lower future production costs. Because of their technological leadership in manufacturing and their aggressive, price cutting strategies, Asians semiconductor manufacturers such as NEC and Samsung dominate the production of low-cost, standardized semiconductor chips. Similarly, innovative U.S semiconductor firms such as Intel and Advanced Micro Devices utilize the experience curve to maintain leadership in the production of high-priced, proprietary chips that form the brains of newer microcomputers.

 Porter’s Theory of National Competitive Advantage

Harvard Business School professor Miachael Porter’s theory of national competitive advantage is the newest addition to international trade theory. Porter believes that success in international trade comes from the interaction of four country- and firm-specific elements: factor conditions: demand conditions : related and supporting industries: and firm strategy, structure and rivalry. Porter represents  these elements as the four corners of diamond as shown in Figure 6.5.

 

FIGURE 6.5

Porter’s Diamond of National Competitive Advantage

 

FACTOR CONDITIONS. A country’s endowment of factors of production affects its ability to compete internationally. Although factor endowments were the centerpiece of the Hecksher-Ohlin theory, Porter goes beyond the basic factors-land, labor capital- considered by the classical trade theorists to include more advance factors such as  the educational level of the workforce and the quality of the country’s infrastructure. His work stresses the role of factor creation through training, research, and innovation.

DEMAND CONDITIONS. The existence of a large, sophisticated domestic consumer base often stimulates the development and distribution of innovating products as firms struggle for dominance in their domestic markets.  In meeting their domestic  customer  needs, however, firms continually develop and fine-tune products that also can be marketed internationally. Thus pioneering firms can stay ahead of their international competitors as well. For example, Japanese consumer electronic producers maintain a competitive edge internationally because of the willingness of Japan large, well off middle class to buy the latest electronic creations of Sony, Toshiba, and Matsushita. After being fine-tuned in the domestic markets, new models of Japanese digital cameras, big screen TV’s and DVD players are sold to eager European and North American consumers. A similar phenomenon is occurring in the consumer and companies has created a fertile climate for companies such as Ebay and Amazon.com to develop and tailor new products to meet the needs of this market domestically and internationally.

RELATED AND SUPPORTING INDUSTRIES. The emergence of an industry often stimulates the development of local suppliers eager to meet that industry’s production, marketing and distrubition needs. An industry located close its suppliers will enjoy better communication and the exchange of cost-saving ideas and inventions with those suppliers. Competition among these input suppliers leads to lower prices, higher quality products and technological innovations in the input market, in turn reinforcing the industry competitive advantage in world markets. For example, Hollywood’s dominance of the world film industry is based in part on the local availability of specialist input suppliers, such as casting directors, stunt coordinators, costume and set designers, demolition experts, animators, special effects firms and animal wranglers.

FIRM STRATEGY, STRUCTURE, AND RIVALY. The domestic environment in which firms compete shapes their ability to compete in international markets. To survive, firms facing vigorous competition domestically must continuously strive to reduce costs, boost product quality, raise productivity and develop innovative products. Firm that have been tested in this way often develop the skils needed to succeed internationally. Further, many of the investment thay have made to succeed in the domestic market ( for example, in R&D , quality control, brand image and employee training ) are transferable to international market at low cost. Such firms have an edge as the expend abroad. Thus, according to Porter’s theory, the international success of Japanase automakers and consumer electronics manufactures and of Hollywood film studios is aided by intense domestic competition in these firm;s home countries.

Porter holds that national policies may also affects firms international strategies and opportunities in more subtle ways. Consider the German automobile market. German labor costs are very high. , so German automaker finds it difficult to compete internationally on the basis of price. As most auto enthusiasts know, however there are no speed limits on many stretches of Germany’s famed autobahns. So German automaker such as Daimler- Benz, Porsche and BMW have chosen to compete on the basis of the quality and the high performance by engineering chassis, engine, brakes and suspension that can withstand the stresses of high speed driving. Consequently, these firms dominate the world market for high performance automobiles “ E-World “ provides another illustration of this phenomenon. Nokia’s rise to global prominence resulting from the geography of its home country, Finland. 

Porter’s theory is a hybrid. It blends the traditional country-based theories that emphasize factor endowments with the firm-based theories that focus on the actions of individual firms. Countries ( or their governments) play a critical role in creating an environment that can aid or harm the ability of firms to complete internationally, but firms are the actors that actually participate in international trade. Some firms succeed internationally: others do not. Porsche, Daimler Benz and BMW successfully grasped the opportunity presented by Germany’s decision to allow unlimited speeds on its highway and captured the high performance niche of the worldwide automobile industry, Conversely, Volkswagen and Opel chose to focus on the broader middle segment of the German automobile market, ultimately limiting their international options.

In summary, no single theory of international trade explains all trade flows among countries. The classical country-based theories are useful in explaining interindustry trade of homogeneous, undiffirential products such as agricultural goods, raw materials and processed goods like steel and aluminium. The firm based theories are more helpful in understanding intraindustry trade of hetereogeneous, differentiated goods, such as Sony televisions and Caterpillar bulldozers, many of which are sold on the basis of their brand names and reputations. Further, in many ways, Porter’s theory synthesizes the features of the existing country based and the firm based theories. Figure 6.6 summarize the major theories of international trade.

 

 

Country- based Theories   Country is unit of analysis. Emerged prior to World War II Develop by economists Explain interindustry trade Include :                Mercantilism                Absolute advantage                Comparative advantage                Relative factor endowments                       ( Heckscher- Ohlin )

Firm – based Theories   Firm is unit of analysis. Emerged after World War II Develop by business school professors Explain intraindustry trade Include :                Country similiraty theory                Products life cycle                Global strategic rivalry                National Competitive advantage

  An Overview of international investment

Trade is the most obvious but not the only form of international business. Another major form is international investment, whereby resident of one country supply capital to a secondary country.