WHY FIRMS BECOME MNEs BY ENGAGING IN FDI OLI advantages Quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages Ownership MNEs’ possession and leveraging of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas ? Can you name some OLI advantages for a familiar firm?
OLI ADVANTAGES Location Features unique to a place, such as its natural or labor resources or its location near particular markets, that provide certain advantages to firms doing business there Internalization Replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries
BENEFITS AND COSTS OF FDI TO HOST COUNTRIES Technology spillover Domestic diffusion of foreign technical knowledge and processes Demonstration effect Local rivals, after observing foreign technology, may recognize its feasibility and strive to imitate Contagion (imitation) effect Local rivals, after observing foreign technology, may recognize its feasibility and strive to imitate
HOW MNEs AND HOST GOVERNMENTS BARGAIN Obsolescing bargain Requirements of a deal previously struck between an MNE and a host government is changed after the initial FDI entry Expropriation Confiscating foreign assets Sunk cost Already invested sums