With the ongoing globalization, it is more and more important to take a look at firms that are active on international markets. To understand, which circumstances influence the decisions of multinational enterprises went into the focus of analysis of the new trade theory. This paper gives attention to Multinationals and horizontal foreign direct investments. The Analysis starts with the requirements of firms to implement internationalization strategies, worked out in the OLI framework.
First, the relevance of the intra-firm-trade that occurs with or by foreign direct investments, as a part of international trade, will be highlighted.
Second, the general conditions, under which multinationals act on international markets, will be pointed out. Third, the author discusses the way how decisions of firms and governments interact and influence each other.
Because the focus of this paper is on horizontal multinationals, it concentrates on those parts, which determine the decision of firms to engage in horizontal foreign direct investments and the closely related choice of location.
Table of Contents
1. Introduction
2. Multinationals and Organization of the Firm
2.1. Ownership Advantages
2.2. Internalization Advantages
2.3. Location Advantages
3. Role of the Traders
3.1. International Trade is Inter-Firm-Trade
3.2. The Influence of Foreign Direct Investments
4. Impact of Trade Policies on MNE location
4.1. Free Trade in the Two-Sector Heckscher-Ohlin Model
4.2. Specific Import Tariff in the Two-Sector H-O Model
5. Decision between export and HFDI
6. Resume
Objectives and Core Topics
This paper examines the decision-making processes of multinational enterprises (MNEs) regarding internationalization, focusing specifically on horizontal foreign direct investment (HFDI) and the strategic choice between exporting and establishing foreign production facilities.
- The OLI framework as a basis for internationalization strategies.
- The significance of intra-firm trade in the global economy.
- Economic impact of capital inflows and foreign direct investment.
- Effects of trade policies, such as tariffs, on MNE location decisions.
- Quantitative modeling of the decision between exporting and HFDI.
Excerpt from the Book
2.2. Internalization Advantages
The decision of a firm to internalize an asset or activity instead of entering in a contractual arrangement is mostly driven by three different reasons: technological externalities, the existence of transaction costs and market imperfections.
An often mentioned example for technological externalities is increasing returns to scale. If two firms with given resources can produce more by combining the production process, e.g. due to specialisation in each case on a part of the production process, there is a technological argument in doing so. In the case of the horizontal multinational we model later, it’s e.g. the fixed costs of the headquarter services, which has only to be paid in the home country, while production can take place in various countries (See Feenstra 2004).
If a firm decides to internalize assets, it coordinates with hierarchy instead of the market mechanism. One reason for that is the existence of transaction costs, which arise from market transactions, such as initiation and information costs, costs of agreement, control costs and costs of adjustment. If these costs are lower by internalizing these market activities within the firm there is an internalization advantage (See Bea/Haas 2001). Closely related are the problems with incomplete contracts and the asset specificity. The more specific an asset is, used e.g. in production, the more expensive it is to get supplied with it by a contractual partner. And in the absence of complete contracts due to the complexity of reality, the risk to be hold up by a contract partner is high, which often is a further reason to internalize all activities and keep the control over the whole process (See Feenstra 2004).
Summary of Chapters
1. Introduction: This chapter introduces the importance of studying multinational enterprises within the context of globalization and outlines the paper's focus on horizontal foreign direct investment.
2. Multinationals and Organization of the Firm: This section reviews the OLI framework, exploring ownership, internalization, and location advantages that influence how firms enter foreign markets.
3. Role of the Traders: This chapter analyzes the prevalence of inter-firm and intra-firm trade and models the economic welfare effects of capital inflows into an economy.
4. Impact of Trade Policies on MNE location: This part uses the Heckscher-Ohlin model to demonstrate how trade policies and tariffs influence the location decisions of multinational firms.
5. Decision between export and HFDI: This chapter develops a formal model comparing the profitability of exporting versus establishing local production facilities abroad.
6. Resume: The final chapter synthesizes the findings, highlighting the interdependence between internal firm decisions and external government trade policies.
Keywords
Multinational Enterprises, MNE, Horizontal Foreign Direct Investment, HFDI, OLI Framework, International Trade, Intra-Firm Trade, Heckscher-Ohlin Model, Trade Policy, Capital Inflows, Export, Internalization, Transaction Costs, Market Imperfections, Globalization.
Frequently Asked Questions
What is the primary focus of this paper?
The paper focuses on the strategic decision-making of multinational enterprises, specifically examining the choice between exporting products and engaging in horizontal foreign direct investment.
What central themes are addressed?
The central themes include firm internationalization strategies (OLI framework), the dominance of intra-firm trade, the impact of trade policies on MNE location, and the economic conditions favoring foreign production.
What is the core objective or research question?
The objective is to identify and model the circumstances under which a firm chooses to become a multinational enterprise by establishing foreign production facilities rather than relying on exports.
Which scientific methodology is employed?
The author utilizes theoretical framework analysis (OLI) and formal mathematical modeling, specifically applying the Heckscher-Ohlin model and monopolistic competition theory.
What topics are covered in the main body?
The main body covers ownership and internalization advantages, the role of traders in international markets, the influence of FDI on host economies, and the quantitative decision criteria for market entry modes.
Which keywords best characterize this work?
Key terms include Multinational Enterprises, Horizontal Foreign Direct Investment, OLI Framework, Intra-Firm Trade, and the Heckscher-Ohlin model.
How do trade barriers affect MNE behavior according to the model?
The model suggests that trade barriers, such as tariffs, increase the incentive for firms to engage in foreign direct investment to bypass transport costs and gain local market access.
What does the model conclude regarding the similarity of GDP between countries?
The model concludes that horizontal foreign direct investment is more likely to occur when the host country's GDP is high or similar to the home country's, facilitating trade between countries of comparable size.
- Quote paper
- Kieran MacInerney-May (Author), 2005, Multinational and Horizontal Foreign Direct Investment, Munich, GRIN Verlag, https://www.grin.com/document/51816
