Using any two of the four theories that appear in your text, ...

[lbcchick]

Using any two of the four theories that appear in your text, explain why companies engage in foreign direct investment.
 
  What will be an ideal response?

Question 2

The main benefit of a multidomestic strategy is that it ________.
 
  A) exploits scale economies in product development and marketing
  B) is cost-saving due to product and marketing standardization
  C) takes advantage of location economies
  D) responds quickly and effectively to emerging buyer preferences

[polinasid]

Answer to Question 1

International Product Life Cycle Theory-The international product life cycle is used to explain foreign direct investment. The international product life cycle theory states that a company will begin by exporting its product and later undertake foreign direct investment as a product moves through its life cycle. In the new product stage, a good is produced in the home country because of uncertain domestic demand and to keep production close to the research department that developed the product. In the maturing product stage, the company directly invests in production facilities in countries where demand is great enough to warrant its own production facilities. In the final standardized product stage, increased competition creates pressures to reduce production costs. In response, a company builds production capacity in low-cost developing nations to serve its markets around the world.
Market Imperfections (Internalization)-A market that is said to operate at peak efficiency (prices are as low as they can possibly be) and where goods are readily and easily available is said to be a perfect market. But perfect markets are rarely, if ever, seen in business because of factors that cause a breakdown in the efficient operation of an industry-called market imperfections. Market imperfections theory states that, when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and thereby remove the imperfection. There are two important market imperfections-trade barriers and specialized knowledge.
Eclectic Theory-The eclectic theory states that firms undertake foreign direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment. A location advantage is the advantage of locating a particular economic activity in a specific location because of the characteristics (natural or acquired) of that location. These advantages have historically been natural resources such as oil in the Middle East, timber in Canada, or copper in Chile. But the advantage can also be an acquired one such as a productive workforce. An ownership advantage refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability. An internalization advantage is one that arises from internalizing a business activity rather than leaving it to a relatively inefficient market. The eclectic theory states that, when all of these advantages are present, a company will undertake FDI.
Market Power Theory-Firms often seek the greatest amount of power possible in their industries relative to rivals. The market power theory states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment. The benefit of market power is greater profit because the firm is far better able to dictate the cost of its inputs and/or the price of its output.

Answer to Question 2

D