MGF2351 Tutorial 6 Week 6

Business and Economics
WEEK 6 - Foreign Direct Investment & the
Multinational Enterprise

ASSIGNMENT REMINDER: 16
SEPTEMBER“Government intervention in international investment and trade
often results in protecting the interests of producers at the expense
of consumer interests.”
Through the use of relevant theory and real-life examples, write an
argumentative academic essay addressing the above statement
POSSIBLE STRUCTURE
– Introduction
– Developing Your Argument
– Refuting Opponents’ Arguments
– Conclusion
2

3
“The Regulatory Framework”:
“Neo-liberal economists argue that governments should not intervene in
international trade and trade policy. In contrast, Marxist economists are
adamant that governments should intervene.”
1) What political and economic arguments support the neo-liberal stance?
What are the implications of these for firms seeking to internationalise?
2) What political and economic arguments support the Marxist stance?
What are the implications of these for firms seeking to internationalise?
3) Is the neo-liberal stance of greater validity than the Marxist stance or
vice-versa? Which stance is more conducive for firms seeking to
internationalise? Why?
GROUP PRESENTATION 5

MID SEM QUIZ
 Get into groups of 4 (different from your presentation groups)
 You have 10 minutes to answer the questions.
 Write the group number and answers on butchers paper.
4

QUESTION 1
Explain how the political ideology of
a host government might influence
the negotiations with a foreign
MNE.
5

 Political Ideology of host country:
 Free market – little to negotiate.
– Although, possible to obtain more favourable tax
treatment or access to local resources. E.g.
Southern states in the US have courted FDI
quite successfully through infrastructure support,
tax incentives and locally trained labor.
 Pure radical views – again little to negotiate
– government will likely prohibit any FDI.
Negotiations center around access and control.
6

QUESTION 2
Compare and contrast these
explanations of FDI: internalization
theory, Vernon's product life cycle
theory, and Knickerbocker's theory of
FDI. Which theory do you think offers
the best explanation of the historical
pattern of FDI? Why?
7

 Knickerbocker's theory- firms "follow the leader”
– But why? And why FDI and not export or license?
 Product life cycle theory- firms invest in countries with
sufficient demand to support local production or when
cost pressures make it necessary to locate production
in low cost locations.
– Again why FDI rather than exporting or licensing
 Market imperfections/Internationalization theory -
explains why FDI may be preferable to other
alternatives (ie licensing). Identifies the importance of
control and difficulty of transferring know-how.
8

QUESTION 3
Firms should not be investing abroad
when there is a need for investment to
create jobs at home. Do you agree?
Why?
9

 The level of analysis that supports this
question is that of the nation, and yet, MNCs
do not operate at the nation level; they are
global.
 If there is a need for jobs at home, it may be
the responsibility of the government to offer
enticement to business, both foreign and
domestic, to grow and invest in their
businesses so that job growth follows.
10

QUESTION 1
What changes in the political and
economic environment allowed
Telefonica to start expanding
globally?
12

 Privatized – placing new importance on
keeping costs low, developing new
technologies, and increasing shareholder
value.
 Telefonica began to explore new markets
where growth opportunities were strong.
 Latin America targeted – deregulation,
demand for new telecommunications
services
13

QUESTION 2
Why did Telefonica initially focus on
Latin America? Why was it slower to
expand in Europe, even though Spain
is a member of the European Union?
14

Growing market and demand
Experienced in the economic process
of deregulation
Tacit agreement that existed among
companies to avoid entering each
other’s markets.
15

QUESTION 3
Telefonica has used acquisitions rather
than greenfield ventures as its entry
strategy. Why do you think this has
been the case? What are the potential
risks associated with this entry
strategy?
16

 ADVANTAGE:
 Speed to market
– Existing customer base and support
structure.
 RISK:
 Existing operations rather than setting up
operations exactly how they want them.
17

QUESTION 4
What is the value that Telefonica
brings to the companies that it
acquires?
18

 Largest mobile phone operator in the world
– Power.
 Can offset losses in one country with profits
in another - more strategic options.
 Scale economies by operating in multiple
countries simultaneously.
 New skills and experience to the companies
it acquires.
19

QUESTION 5
In your judgment, does inward
investment by Telefonica benefit a host
nation? Explain your reasoning.
20

 New jobs, capital, and other benefits like
infrastructure improvements and technology.
 Telefoncia’s presence probably contributed
to the overall growth and prosperity in the
host market through increased competition
and lower prices on telecommunications
services.
 However, sometimes detrimental. E.g. local
companies may find it hard to survive, jobs
then lost.
21

Cooperation among Nations
NEXT WEEK:
22

MGF2351 Tutorial 6 Week 6

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