Answer to Question 1
A
Answer to Question 2
Internalization theory explains the process by which firms acquire and retain one or more value-chain activities inside the firm. Internalizing value-chain activities (instead of outsourcing them to external suppliers) reduces the disadvantages of dealing with outside partners for performing arms-length activities such as exporting and licensing. Internalization also gives the firm greater control over its foreign operations.
For example, the MNE might internalize manufacturing by acquiring or establishing its own plant in the foreign market. This enables the firm to produce needed inputs itself rather than sourcing from independent suppliers. Alternatively, it might internalize the marketing function by establishing its own distribution subsidiary abroad, instead of contracting with an independent foreign distributor to handle its marketing in the foreign market. The firm replaces business activities performed by independent suppliers in external markets with business activities it performs itself.
Procter & Gamble initially considered exporting when it entered Japan. With exporting, P&G would have had to contract with an independent Japanese distributor to handle warehousing and marketing of its soap, diapers, and other products. Instead, P&G chose to enter Japan via FDI for three reasons: 1. trade barriers imposed by the Japanese government, 2. the strong market power of local Japanese firms, and 3. the risk of losing control over its proprietary knowledge. It established its own marketing subsidiary and national headquarters in Tokyo.
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