Answer to Question 1
Before Procter & Gamble entered Japan, management considered exporting and FDI. With exporting, P&G would have had to contract with an independent Japanese distributor to handle warehousing and marketing of soap, detergent, diapers, and the other products that P&G now sells in Japan. Ultimately, P&G chose instead to enter Japan via FDI. P&G established its own marketing subsidiary and, eventually, national headquarters in Tokyo. Such an arrangement provided various benefits for P&G, such as how its products were marketed in Japan and to minimize the risk of its proprietary knowledge being dissipated to potential Japanese competitors.
This example of P&G in Japan reveals how MNEs internalize key business functions and assets within the corporate organization. Internalization theory explains the process by which firms acquire and retain one or more value-chain activities inside the firm, minimizing the disadvantages of dealing with external partners and allowing for greater control over foreign operations. By internalizing foreign-based value-chain activities, it is the firm, rather than its products, that crosses international borders. The MNE is ultimately a vehicle for bypassing the bottlenecks and costs of the international, interfirm exchange of goods, materials, and workers. In this way, the MNE replaces business activities it performs itself.
Answer to Question 2
C
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