The birds and the bees
... a reflection of the political unrest, armed conflict, and frequent changes in economic policy. Gross fixed capital formation summarizes the total amount of capital invested in factories, stores, and office buildings. Other things being equal, the greater the capital investment in an economy, the more favorable its future growth prospects are likely to be. Horizontal foreign direct investment is investment in the same industry abroad as a firm operates in at home. Many firms prefer FDI over either exporting or licensing because: (1) transportation costs, (2) market imperfections, (3) strategic behavior, (4) the product life cycle, and (5) location advantages. When transportation costs are added to production costs, it become unprofitable to ship some products a long distance. Market imperfections arise in tow circumstances: (1) when there are impediments to the free flow of products between nations, and (2) when there are impediments to the sale of know-how. Governments are the main source of impediments to the free flow of products between nations. By placing tariffs on imported goods, governments increase the cost of exporting relative to FDI and licensing. By limiting imports through the imposition of quotas, governments increase the attractiveness of FDI and licensing. The competitive advantage that many firms enjoy comes from technological, marketing, or management know-how. Technological know-how enables a company to build a better product. According to the economic theory, there are three reasons the market does not always work well as a mechanism for selling know-how, or why licensing is not as attractive as it initially appears. First, licensing may result in a firm’s giving away its know-how to a potential foreign competitor. Second, licensing does not give a firm tight control over manufacturing, marketing, and strategy in a foreign country that may be required to profitably exploits its advantage in know-how. Third, a firm’s know-how may not be amenable to licensing. This is true of management and marketing know-how. FDI is based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global markets. An oligopoly is an industry composed of a limited number of large firms. A critical competitive feature of such industries is interdependence of the major players: what one firm does can have an immediate impact on the major competitors, forcing a response in kind. Imitative behavior can take many forms in an oligopoly. Multipoint competition arises when tow or more enterprises encounter each other in different regional markets, national markets, or industries. Economic theory suggests that rather like chess players jockeying for advantage, firms will try to match each other’s moves in different markets to try to hold each other in check. The idea is to ensure that a rival does not gain a commanding position in one market and then use the profits generated there to subsidize competitive attacks in other markets. The product life-cycle theory is the optimal locations in the world to produce a product change as the market for the product matures. Firms do invest in a foreign country when demand in that country will support local production, and they do invest in low-cost locations when cost pressures become intense. Just because demand in a foreign country is large enough to support local production, it does not necessarily follow that local productions is the most profitable option. It may still be more profitable to produce at home and export to that country, yet it may be more profitable for the firm to license a foreign company to produce its product for sale in that country. Location-specific advantages are advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets (such as the firm’s technological, marketing and management know-how). An obvious example is natural resources, such as oil and other minerals, which are specific to certain locations. Another example is valuable human resources, such as low-cost, highly skilled labor. The cost and skill of labor varies fro...