Global Business Environment

Question : Which theory do you thin" rel="nofollow">ink offers a better explanation of manufacturin" rel="nofollow">ing FDI from developed country firms to developin" rel="nofollow">ing countries: Dunnin" rel="nofollow">ing's OLI paradigm or Vernon's product life cycle theory? Explain" rel="nofollow">in your answer fully. I have done the explanation part. I just need to you to edit my part or add some part. because i got lot of plagiarism report. the material below is what i have done, please add or edit some part of it Foreign Direct Investment Foreign Direct Investment (FDI) is a key component in" rel="nofollow">in global economic in" rel="nofollow">integration. FDI is a form of cross-border in" rel="nofollow">investment, with the objective of lastin" rel="nofollow">ing in" rel="nofollow">interest. A residence enterprise in" rel="nofollow">in one country might have representative operatin" rel="nofollow">ing in" rel="nofollow">in the other country. Lastin" rel="nofollow">ing in" rel="nofollow">interest in" rel="nofollow">indicates the important degree of in" rel="nofollow">influence on the management along with buildin" rel="nofollow">ing up the long-lastin" rel="nofollow">ing relationship between the direct in" rel="nofollow">investor and direct in" rel="nofollow">investment enterprise. Accordin" rel="nofollow">ing to the organization for economic co-operation and development (OECD), 10% of votin" rel="nofollow">ing power by the foreign in" rel="nofollow">investor is such a relationship. FDI can be accomplished by 2 strategies, the first strategy is for the company to set up the company and plants from the begin" rel="nofollow">innin" rel="nofollow">ing. This method is called Greenfield in" rel="nofollow">investment. The company such as McDonald and Starbucks are likely to use the Greenfield in" rel="nofollow">investment when expandin" rel="nofollow">ing to the other country. The second FDI strategy is through cross-border mergers and acquisitions that in" rel="nofollow">involve takin" rel="nofollow">ing over an existin" rel="nofollow">ing foreign enterprise in" rel="nofollow">in the country of in" rel="nofollow">interest. This method is called a ‘brownfield in" rel="nofollow">investment’. An example of a brownfield in" rel="nofollow">investment occurred In 2008 Tata motors acquired Land Rover and Jaguar from Ford, which Tata Motors didn’t have to form the start. There is two classifications for FDIs, horizontal and vertical forms. Horizontally refers to busin" rel="nofollow">iness a company in" rel="nofollow">investin" rel="nofollow">ing in" rel="nofollow">in the same busin" rel="nofollow">iness abroad that it operates domestically. Whereas vertically refers to company busin" rel="nofollow">iness that plays role of supplier and distributor. FDIs are seen as a healthy way for less-developed and developin" rel="nofollow">ing nations to overcome their savin" rel="nofollow">ing-in" rel="nofollow">investment gap, which limits the level of domestic in" rel="nofollow">investment. FDIs fill such gaps by brin" rel="nofollow">ingin" rel="nofollow">ing foreign in" rel="nofollow">investment in" rel="nofollow">into the country, as well as bridgin" rel="nofollow">ing gaps in" rel="nofollow">in management, technology, entrepreneurship and knowledge. OLI The “OLI” or “eclectic” method to the study of foreign direct in" rel="nofollow">investment (FDI) was developed by John Dunnin" rel="nofollow">ing. It has shown an extremely productive way of thin" rel="nofollow">inkin" rel="nofollow">ing about multin" rel="nofollow">inational enterprises (MNEs) and has stimulated a great deal of applied work in" rel="nofollow">in economics and in" rel="nofollow">international busin" rel="nofollow">iness. “OLI” stands for Ownership, Location, and Internalization, three possible sources of advantage that may motivate a firm’s decision to become multin" rel="nofollow">inational. OLI will be discussed more in" rel="nofollow">in the next paragraph Ownership Ownership advantage means takin" rel="nofollow">ing control some of the specific asset which allows it to generate positive profits. Havin" rel="nofollow">ing a specific asset helps the firm to lower their cost or chargin" rel="nofollow">ing higher prices compare to the other firms and potentially make a greater economic profits. For in" rel="nofollow">instance, Motorola, have in" rel="nofollow">intangible assets for providin" rel="nofollow">ing high-quality products; so they can charge a premium price or lower their production cost e.g., cell phones or pharmaceuticals. Location They could use the same technology, etc. to produce here too, and avoid the foreign busin" rel="nofollow">iness costs; so there has to be some location advantage to produce greater profits than could be achieved if they produced here. First, natural resources may be needed to produce the product are less expensive. Second, labor capital is cheaper. Internalization Internalization in" rel="nofollow">inside the MNE is designed to reduce market failures by replacin" rel="nofollow">ing imperfect or missin" rel="nofollow">ing external markets with the hierarchy of the global organization. Transactions cost is one of the sources of marketin" rel="nofollow">ing failure which occurred in" rel="nofollow">in overcomin" rel="nofollow">ing market imperfection or obstacles to trade in" rel="nofollow">in all external markets However, in" rel="nofollow">in some case there is some restriction on foreign ownership of the domestic firm, therefore Ownership advantage cannot be claimed. This case is referrin" rel="nofollow">ing with U.S, European airlin" rel="nofollow">ine and foreign companies join" rel="nofollow">inin" rel="nofollow">ing with Chin" rel="nofollow">inese firms to produce in" rel="nofollow">in Chin" rel="nofollow">ina Vernon's Product Life Cycle Theory Vernon argued that to undertake FDI they need to go through certain" rel="nofollow">in stages in" rel="nofollow">in the lifecycle of a product they have founded. There are three stages: new product, mature product and standardized product (Piggot and Cook, 2006). Vernon's theory was based on the observation that for most of the twentieth century a huge part of the world's new products had been developed by the U.S. firms and sold first in" rel="nofollow">in the U.S. market for example televisions, photocopiers, personal computers and so on. He argued that most new products were origin" rel="nofollow">inally produced in" rel="nofollow">in the U.S. (Hill, 2008). For in" rel="nofollow">instance; photocopiers the machin" rel="nofollow">ine which in" rel="nofollow">invented in" rel="nofollow">in 1960’s by Xerox in" rel="nofollow">in the U.S and sold locally. In the begin" rel="nofollow">innin" rel="nofollow">ing, Xerox exported photocopiers main" rel="nofollow">inly to japan and other advanced countries in" rel="nofollow">in Western Europe. As the demand in" rel="nofollow">increased in" rel="nofollow">in those countries, Xerox entered in" rel="nofollow">into join" rel="nofollow">int ventures and set up production in" rel="nofollow">in Japan (Fuji-Xerox) and Britain" rel="nofollow">in (Rank-Xerox). The competitors in" rel="nofollow">in the photocopier machin" rel="nofollow">ines in" rel="nofollow">industry are comin" rel="nofollow">ing once the Xerox’s patents expired. As a result of this, U.S. exports declin" rel="nofollow">ined and U.S. users began buyin" rel="nofollow">ing from mostly Japan due to lower costs. A Comparative Analysis There are three stages in" rel="nofollow">in Vernon PLC theory first stage Starts with in" rel="nofollow">innovation and If the product meets with success in" rel="nofollow">in a prosperous market, production grows, new markets are explored and export in" rel="nofollow">increases. It will be contin" rel="nofollow">inued to second stage – maturity. In this stage, the price elasticity of demand for the product is moderately low. The demand for the product in" rel="nofollow">increases in" rel="nofollow">in the in" rel="nofollow">international market and competitors emerge. The origin" rel="nofollow">inal producer creates a production unit in" rel="nofollow">in the overseas to accommodate the in" rel="nofollow">increased foreign demand as well as to compete with rivals. It is in" rel="nofollow">in the second stage that the organization goes in" rel="nofollow">international. The fin" rel="nofollow">inal stage is categorized by product standardization. The production technique becomes famous and reaches its peak. As a result, in" rel="nofollow">investment moves on further to any location in" rel="nofollow">in the world where costs are at the lowest possible level. Thereafter, the product is exported back to the origin" rel="nofollow">inal country where the product in" rel="nofollow">invented. Thus, the exporter becomes an importer at this stage of production. Production of personal computers (PCs) can be cited as a prime example of the production life cycle. They were first in" rel="nofollow">invented in" rel="nofollow">in the United States followed by Japan and, ultimately, Chin" rel="nofollow">ina, which has now become one of the world’s largest exporters of PCs. Nevertheless, this theory fails to explain" rel="nofollow">in why it is profitable for a firm to undertake FDI rather than contin" rel="nofollow">inuin" rel="nofollow">ing to export from the home country or by licensin" rel="nofollow">ing a foreign firm to produce its products. It simply argues that once a foreign market is large enough to support local production, and FDI will take place. However, it fails to classify when it is profitable to in" rel="nofollow">invest to worldwide. Vernon acknowledged that the situation had transformed rapidly sin" rel="nofollow">ince he had developed his theory and that this had considerably weakened its predictive power (Latorre, 2008). Despite this, the product cycle theory is not the only theory where FDI takes place. The other theory is Dunnin" rel="nofollow">ing’s OLI paradigm, which will be compared below. The crucial feature in" rel="nofollow">in the eclectic theory is that all three types of conditions must be fulfilled before FDI arises. Dunnin" rel="nofollow">ing (1980) stated that the “OLI three of variables determin" rel="nofollow">inin" rel="nofollow">ing FDI and MNC's actions may be likened to a three-legged stool; each leg is supportive of the others, and the stool is only useful if the three legs are consistently balanced”. What this means is that a firm havin" rel="nofollow">ing ownership advantage, and there are in" rel="nofollow">internationalization gain" rel="nofollow">ins but no locational advantage is gain" rel="nofollow">ined by settin" rel="nofollow">ing up a unit in" rel="nofollow">in a foreign country, will very likely choose to in" rel="nofollow">increase its production at home and export its product abroad. In the same way, a firm havin" rel="nofollow">ing ownership and locational advantages will fin" rel="nofollow">ind it more profitable to produce abroad than to produce domestically and export its product(s); however, if there are no in" rel="nofollow">internalization gain" rel="nofollow">ins then the firm will be better off licensin" rel="nofollow">ing its ownership advantage to foreign firms. The major role by Dunnin" rel="nofollow">ing’s eclectic paradigm to the existin" rel="nofollow">ing literature on FDI was to combin" rel="nofollow">ine several balancin" rel="nofollow">ing theories and identify a set of factors that in" rel="nofollow">influence the activities of MNCs. For this reason, his theory gain" rel="nofollow">ined wider acceptance than other defective market-based theories. Dunnin" rel="nofollow">ing (1980) empirically tested his theory and found satisfactory results. However, one of the main" rel="nofollow">in criticisms of the eclectic paradigm is that it contain" rel="nofollow">ins many variables that it loses any operational practicality. Dunnin" rel="nofollow">ing himself accepted this fact and stated that it was a predictable consequence of tryin" rel="nofollow">ing to in" rel="nofollow">incorporate the different motivations behin" rel="nofollow">ind FDI in" rel="nofollow">into one general theory. Conclusion In conclusion Dunnin" rel="nofollow">ing’s OLI paradigm explain" rel="nofollow">in better because there are more variables that are connected to the Foreign Direct Investment. Dunnin" rel="nofollow">ing’s theory helps to understand the how to works with three components which are Ownership, Location, and Internalization. These three components need to be balanced whenever the company set up a company or do license. The theory also bein" rel="nofollow">ing improved to become Investment Development Cycle which lin" rel="nofollow">inks GDP per capita and its in" rel="nofollow">international in" rel="nofollow">investment positions.