Sample Test 2

1. Refer to the slides in “Innovation and the third world” on the class website. Summarize why Iqbal Quadir believed that foreign aid had not been effective in fighting poverty in poor countries and why he believed cell phones might help.

Answer:

Foreign aid is top-down approach: the foreign aid goes to government officials and then the government officials allocate (distribute) the aid. The government officials might retain a significant portion of the aid and the people get very little. Or the aid is not allocated efficiently. The aid might go to inefficient projects favored by the government.

Quadir favors a bottom-up approach. Sell product and services to the poor that will increase their productivity.

Why can cell phones increase productivity? Networking!

a. When people are networked together, they discover new opportunities to trade.b. When people are networked together efficient, some transactions which were previously

infeasible or unprofitable now becomes profitable.

http://dl-hongkong.blogspot.com/2012/02/most-well-equipped-taxi-driver-in-hong.html

2. Summarize the advantages and disadvantages of using joint venture as an entry mode.

Answer:

Expand on the following and provide examples.

Advantage

Benefit from partner’s local knowledgeOnly feasible alternative due to foreign government regulationLow risk of host government intervention

Disadvantage

Risk losing technology to partnerNo coordinated global strategyConflict between partners

3. What is the OLI theory of foreign direct investment (FDI)? Be sure to include a decision tree to choose among exporting, licensing, and making a FDI.

Answer:

The OLI theory is based on three advantages: Ownership advantage, Locational advantage, and Internalization advantage.

The Foreign Entry Strategy Decision Sequence(Modified from Gunter Dufey and R. Mirus, “Foreign Direct Investment: Theory and Strategic Considerations,” Unpublished, University of Michigan, May 1985.)

If you are supplying to a foreign market, since you are foreign, you are at an inherent disadvantage compared to firms local to the foreign market. Does your firm have ownership advantage of something like technology, copyright, trademark or business system to allow you to overcome that inherent disadvantage?

You should produce at home and supply to the foreign market by export i ng from home.

Yes, you have the foreign locational advantage. Your firm should make a foreign direct investment (FDI) to produce abroad.

License to an external party. The licensee will supply to the foreign market for you.

No

Yes, you have the internalization advantage to supply to the foreign market yourself. But where do you want to produce, at home or in the foreign country? In other words, does the foreign market have a location advantage over the home location?

No

You probably should not supply to the foreign market.

Yes, your firm has the ownership advantage of something to allow you to overcome the inherent disadvantage of being foreign. Your firm can supply to the foreign market. But do you want to do it yourself internally or do you want to rely on an external party to supply to the foreign market for you? In other words, do you have the internalization advantage to use your technology, copyright or trademark in house?

Yes

Yes

No, the foreign market does not have a location

Yes, the foreign market has a location advantage.

Form of Foreign Direct Investment Decision

Joint Venture Wholly Owned Subsidiary (FDI)

Greenfield Investment Acquisition of Foreign

Enterprise

Your firm has already decided to make a foreign direct investment. There are different forms of FDI. Which form of FDI is right for you?

Do it alone

Build a new facility. Acquire an

existing business

Go into the foreign market with a partner.

How to choose among different entry modes?

For a firm to use foreign direct investment (FDI) as an entry strategy, it must possess three advantages: Ownership advantage, locational advantage, and internalization advantage.

a. If a firm has ownership advantage (yes), but does not have internalization advantage (no), and also does not have foreign locational advantage (no), which entry mode is right for this firm?

Answer: ______________________

b. If a firm has ownership advantage (yes), also has internalization advantage (yes), and but does not have foreign locational advantage (no), which entry mode is right for this firm?

Answer: __________________________

c. If a firm has ownership advantage (yes), has internalization advantage (yes), and also has the foreign locational advantage (yes), which entry mode is right for this firm?

Answer: ___________________________

4. What is vertical integration? Give an example of cross-border vertical integration.

Answer:

When firms from different levels of the value chain merge together or a firm from one level of the value chain acquires a firm at another level of the value chain, it is called vertical integration.

Cross border vertical integration: Auto parts maker Wanxiang of China buying the US automaker Fisker. See the link “cross border (forward) vertical integration” on class website.

5. Increasingly we see emerging economies making foreign direct investment in developed countries. What are some of the motivations for doing so?

Answer:

To acquire:

Distributional channel

Brand name (both to sell outputs and to lower the cost of raising money)

Know-how

6.

Regional economic integration. Trade creation. Trade diversion.

Names: free trade area, custom union, common market, economic union

Conditions: free trade of goods and services among members, same external tariff, free movement of factors of production, same economic policy

7.

Cost –benefit analysis.

See “Complete cost-benefit analysis example modified” handout.