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Its competitive advantages

Its production location

The type of control it wants to have over any foreign operations

How much monetary capital to invest abroad.

If a firm lacks sufficient competitive advantage to compete effectively in its home market, it is unlikely to have sufficient advantages of any type to be successful in a foreign market.

This is because the competitive advantages of the home market must be enduring, transferable, and sufficiently powerful to enable the firm to overcome the assorted difficulties of operating in a foreign environment.

Foreign operations must be located where market imperfections are such that the firm can take advantage of its competitive advantages to the degree necessary to earn a risk-adjusted rate of return above the firm’s cost of capital.

Greater control usually involves both greater risk and a greater investment.

Viewing a spectrum of degrees of control, licensing and management contracts provide a low level of control (along with a low level of financial investment)

Joint ventures necessitate a somewhat higher level of control

Greenfield direct investments and/or acquisition of an existing foreign firm require the highest degree of control (along with a higher level of financial investment).

The spectrum of investment approaches (licensing, management contracts, joint ventures, and direct investment) require in that order ever-increasing investment of more monetary capital.

The firm must decide if the benefits of greater investment (presumably greater profits, plus possibly acquiring market share or forestalling competitors from gaining a greater market share) are worth the differing amounts of monetary capital needed.

Economies of scale and scope arising from their large size

Managerial and marketing expertise

Superior technology owing to their heavy emphasis on research

Financial strength

Differentiated products

Competitiveness of their home markets (sometimes)

Production economies can come from the use of large-scale automated plant and equipment, or from an ability to rationalize production through worldwide specialization.

Marketing economies occur when firms are large enough to use the most efficient advertising media to create worldwide brand identification, as well as to establish worldwide distribution, warehousing, and servicing systems.

Financial economies derive from access to the full range of financial instruments and sources of funds, such as the Eurocurrency, Euroequity, and Eurobond markets. In-house research and development programs are typically restricted to large firms, because of the minimum size threshold for establishing a laboratory and scientific staff.

Transportation economies accrue to firms that can ship in carload or shipload lots. Purchasing economies come from quantity discounts and market power.

A firm must first have some competitive advantage in its home market (“O” or owner-specific) that can be transferred abroad if the firm is to be successful in foreign direct investment.

Second, the firm must be attracted by specific characteristics of the foreign market (“L” or location-specific) that will allow it to exploit its competitive advantages in that market.

Third, the firm will maintain its competitive position by attempting to control the entire value chain in its industry (“I” or internalisation). This leads it to foreign direct investment rather than licensing or outsourcing.

Exporting has none of the unique risks facing FDI, joint ventures, strategic alliances, and licensing.

Political risks are minimal.

Agency costs (monitoring and evaluating foreign units) are avoided.

Front-end investment is typically lower than in other modes of foreign involvement (Foreign exchange risks remain)

The fact that a significant share of exports (and imports) are executed between MNEs and their foreign subsidiaries and affiliates further reduces the risk of exports, compared to other modes of involvement.

Not able to internalize and exploit the results of its research and development as effectively as if it invested directly.

Risks losing markets to imitators and global competitors that might be more cost efficient in production abroad and distribution.

The ability to exercise effective control over an MNE’s operations within a country’s legal and political environment.

For an MNE, governance is a subject similar in structure to consolidated profitability—it must be addressed for the individual business unit and subsidiary, as well as for the MNE as a whole.

Spells out specific rights and responsibilities of both the foreign firm and the host government.

Providing alternative conduits for repatriating funds

Transfer pricing goods and services between related units of the MNE

Leading and lagging payments

Using fronting loans

Creating unrelated exports

Obtaining special dispensation.

Foreign Direct Investment

Possible loss of quality control

Establishment of a potential competitor in third-country markets

• Possible improvement of the technology by the local licensee, which then enters the
• firm’s home market

Possible loss of opportunity to enter the licensee’s market with FDI later

Risk that technology will be stolen

High agency costs

Method for domestic firms to profit from foreign markets without the need to commit sizable funds.

Shared ownership in a foreign business.

• Firm-specific risks, also known as micro risks, are those that affect the MNE at the
• project or corporate level. Governance risk due to goal conflict between an MNE
• and its host government is the main political firm-specific risk.

• Country-specific (macro) - affect the MNE
• at the project or corporate level but originate at the country level (main political risk categories are transfer risk and cultural and institutional risks)

Global-specific - affect the MNE at the project or corporate level but originate at the global level (terrorism, the antiglobalisation movement, environmental concerns, poverty, and cyber attacks)

The basis on which fund flows, such as dividends, management fees, royalties, patent fees, and loan repayments, may be remitted

The basis for setting transfer prices

The right to export to third-country markets

Obligations to build, or fund, social and economic overhead projects, such as schools, hospitals, and retirement systems

Methods of taxation, including the rate, the type of taxation, and means by which the rate base is determined

Access to host-country capital markets, particularly for long-term borrowing

• Permission for 100% foreign ownership versus required local ownership (joint ven-
• ture) participation

Price controls, if any, applicable to sales in the host-country markets

Requirements for local sourcing versus import of raw materials and components

Permission to use expatriate managerial and technical personnel, and to bring them and their personal possessions into the country free of exorbitant charges or import duties

Provision for arbitration of disputes

• Provision for planned divestment, should such be required, indicating how the going
• concern will be valued and to whom it will be sold

Differences in allowable ownership structures

Differences in human resource norms

Differences in religious heritage

Nepotism and corruption in the host country

Protection of intellectual property rights

Protectionism

Legal liabilities

Take brands global

Engineer to innovation

Leverage natural resources

Develop an export business model

Acquire offshore assets

Target a market niche.