Explain the advantages of firms when they become multinational enterprises (MNEs) by engaging in foreign direct investment (FDI).
What will be an ideal response?
The reasons for firms engaging in foreign direct investment (FDI) boil down to the quest for ownership (O) advantages, location (L) advantages, and internalization (I) advantages-collectively known as OLI advantages.In the context of FDI, ownership refers to possession and leveraging by a multinational enterprise (MNE of certain valuable, rare, hard-to-imitate, and organizationally embedded (VRIO) assets overseas. Owning the proprietary technology and the management know-how that goes into making a BMW helps ensure that the MNE can beat rivals abroad.Location advantages are those enjoyed by firms because they do business in a certain place. Features unique to a place, such as its natural or labor resources or its location near particular markets, provide certain advantages to firms doing business there.From a resource-based view, an MNE's pursuit of ownership and location advantages can be regarded as flexing its muscles-its resources and capabilities-in global competition.Internalization refers to the replacement of cross-border markets (such as exporting and importing) with one firm (the MNE) locating and operating in two or more countries. For example, BMW could sell its technology to an Indonesian firm for a fee. This would be a non-FDI-based market entry mode technically called licensing and can be done with intellectual property as well as technology.
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