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FDI Theories
The document discusses key concepts of comparative advantage and market imperfections in international trade, as outlined primarily by David Ricardo's theory. It emphasizes the relevance of these concepts in today's trade focused on services and the shift of comparative advantages due to global outsourcing and the dynamics of market conditions. Furthermore, it highlights the role of multinational enterprises (MNEs) in exploiting market imperfections for strategic global operations.
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FDI Theories
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- 2. 1. TheTheory ofComparative Advantage 2. Market Imperfections 3. Sustaining andTransferring Competitive Advantage 4. OLI Paradigm Dr Raju Indukoori 2
- 3. • Propounded byDavid Ricardo in 1817. • It provides a basis for explaining and justifying international trade in a model world assumed to enjoy free trade, perfect competition, no uncertainty, costless information, and no government interference. Dr Raju Indukoori 3
- 4. It hasonly 2 products for trade. Exporters in Country A sell goods or services to unrelated importers in Country B. Firms in Country A specialize in making products that can be produced relatively efficiently, given Country A’s endowment of factors of production, that is, land, labor, capital, and technology. Firms in Country B do likewise, given the factors of production found in Country B. In this way the total combined output of A and B is maximized. Dr Raju Indukoori 4
- 5. Benefits ofspecialization are realized through international trade as factors of production cannot move between A&B Benefits depends on terms of trade ratio at which quantities of the physical goods are traded. In perfectly competitive markets, each country’s share is determined by Supply Demand Neither Country A nor Country B is worse off than before trade, and typically both are better off. Dr Raju Indukoori 5
- 6. It stilla relevant for exports of goods and services supporting global supply chain of both MNCs and domestic firms. Now the trade is one based more on services, and their cross- border facilitation by telecommunications and the Internet. The source of a nations comparative advantage is still created from the mixture of its own labor skills, access to capital, and technology. It takes a relative advantage in costs, not just an absolute advantage, to create comparative advantage. Clearly, the extent of global outsourcing is reaching out to every corner of the globe. Dr Raju Indukoori 6
- 7. Dr Raju Indukoori CHINA PHILIPPINES MEXICO COSTARICA S. AFRICA INDIA RUSSIA EAST. EUROPE UNITED STATES LONDON PARIS BERLIN BUDAPEST BOMBAY HYDERABAD BANGALORE JOHANNESBURG SAN JOSE GUADALAJARA MANILA MOSCOW MONTERREY SHANGHAI Data: Gartner, McKinsey, BW Global Supply Chain Outsourcing of Comparative Advantage MNEs based in many of the major industrial countries are outsourcing many of their intellectual functions to providers based in many of the traditional emerging market countries. 7
- 8. Popular in 19thcentury, cannot be applied now. Because countries do not appear to specialize only in those products that could be most efficiently produced by that country’s particular factors of production due to government interference and ulterior motivations. capital and technology flow directly and easily between countries. numerous modern factors of production more numerous than in this simple model. Dr Raju Indukoori 8
- 9. Although theterms of trade are ultimately determined by supply and demand, the process by which the terms are set is different from that visualized in traditional trade theory. Comparative advantage shifts over time, as less developed countries become developed and realize their latent opportunities. The classical model of comparative advantage did not really address certain other issues, such as the effect of uncertainty and information costs, the role of differentiated products in imperfectly competitive markets, and economies of scale. Dr Raju Indukoori 9
- 10. A Rationalefor the Existence of the Multinationals. MNEs strive to take advantage of imperfections in national markets for products, factors of production, and financial assets. Imperfections in the market for products translate into market opportunities for MNEs. Large international firms are better able to exploit such competitive factors as economies of scale, managerial and technological expertise, product differentiation, and financial strength than are their local competitors. Dr Raju Indukoori 10 2. Market Imperfections
- 11. Strategic Motives :Drive the decision to invest abroad and become an MNC. Independent and Mutually exclusive strategies are as follows. 1. Market seekers 2. Raw material seekers 3. Production efficiency seekers 4. Knowledge seekers 5. Political safety seekers Dr Raju Indukoori 11
- 12. To compensate thefirm for the potential disadvantages of operating abroad, competitive advantage must be firm-specific transferable powerful enough Dr Raju Indukoori 12
- 13. FocusAreas A. Economies ofscale and scope B. Managerial and marketing expertise C. Advanced technology D. Financial strength E. Differentiated Products F. Competitiveness in the domestic market Dr Raju Indukoori 13
- 14. A. Economies ofscale and scope Can be developed in production, marketing, finance, research and development, transportation, and purchasing Large size is a major contributing factor (due to international and/or domestic operations) Dr Raju Indukoori 14
- 15. B. Managerial andmarketing expertise Includes skill in managing large industrial organizations (human capital and technology) Also encompasses knowledge of modern analytical techniques and their application in functional areas of business Dr Raju Indukoori 15
- 16. C. Advanced technology Scientific Engineering Dr Raju Indukoori 16
- 17. D. Financial strength Demonstrated financial strength by achieving and maintaining a global cost and availability of capital This is a critical competitive cost variable that enables them to fund FDI and other foreign activities Dr Raju Indukoori 17
- 18. E. Differentiated products Firms create their own firm-specific advantages by producing and marketing differentiated products Such products originate from research-based innovations or heavy marketing expenditures to gain brand identification Dr Raju Indukoori 18
- 19. F. Competitiveness ofthe home market A strongly competitive home market can sharpen a firm’s competitive advantage relative to firms located in less competitive ones This phenomenon is known as the diamond of national advantage and has four components Dr Raju Indukoori 19
- 20. Porter’s Diamond: Competitiveadvantage determinants 1. Factor Conditions 2. Demand Conditions 3. Related and Supporting Industries 4. Firm’s Strategy, Structure and Rivalry Dr Raju Indukoori 20
- 21. 15-21 Competitive Advantage Determinants 1.Factor conditions 4.Firm strategy, structure & rivalry 3. Related & supporting Industries 2. Demand conditions Porter’s Diamond Dr Raju Indukoori
- 22. Potential disadvantages ofMNC operating abroad Foreign exchange risks Political risks Increased agency costs Dr Raju Indukoori 22
- 23. It explains whyMNCs choose FDI alternative models. O (Owner-specific) competitive advantage in the home market that can be transferred abroad L (location-specific) Specific characteristics of the foreign market allow the firm to exploit its competitive advantage) I (Internalization) Maintenance of its competitive position by attempting to control the entire value chain in its industry Dr Raju Indukoori 23
- 24. Dr Raju Indukoori Watchmore on myYoutube Channel https://www.youtube.com/channel/UCCM94XnsOoGDl0PnsaVfeNA
- 25. Dr Raju Indukoori Watchmore on myYoutube Channel https://www.youtube.com/channel/UCCM94XnsOoGDl0PnsaVfeNA