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 Key Themes
This paper analyzes the factors influencing multinational enterprises' (MNEs) decisions regarding horizontal foreign direct investment (HFDI). It examines the OLI framework, highlighting ownership, internalization, and location advantages. The role of intra-firm trade and the impact of trade policies on MNE location choices are also explored. The decision-making process between exporting and HFDI is a central focus.- The OLI framework and its application to MNE decisions.
- The significance of intra-firm trade in international commerce.
- The influence of trade policies on the location choices of MNEs.
- The factors driving the decision between exporting and HFDI.
- The characteristics and behavior of horizontal multinational enterprises.
Chapter Summaries
1. Introduction: This introductory chapter sets the stage for the paper by emphasizing the growing importance of understanding MNEs in a globalized world. It introduces the new trade theory as a framework for analyzing MNE decisions and specifically focuses on multinationals and horizontal foreign direct investments (HFDI). The chapter defines key terms like MNE and FDI, clarifying the concept of HFDI as the duplication of production facilities abroad to sell locally in multiple markets. It also previews the paper's structure and its concentration on the decision-making processes within HFDI.
2. Multinationals and Organization of the Firm: This chapter delves into the conditions necessary for a firm to become a multinational enterprise. It discusses the various options available for entering foreign markets, such as licensing and exporting, before focusing on foreign direct investment, particularly in the context of horizontal FDI. The chapter introduces the OLI framework (Ownership, Location, and Internalization advantages) as a key theoretical lens for understanding the decision to internationalize, emphasizing the interconnectedness of ownership advantages, internalization decisions, and locational factors.
2.1. Ownership Advantages: This section details the specific advantages a firm needs to possess to successfully internationalize. These include factors such as company size, human resources, expertise, market position, and production specialization. It further expands on advantages derived from existing international operations, such as diversified supply chains and risk mitigation. Finally, it includes factors like product innovation, superior technology, and government support as sources of competitive ownership advantages. The overall argument is that firms need significant internal capabilities to justify international expansion.
2.2. Internalization Advantages: This section focuses on the reasons why a firm might choose to internalize its assets rather than using contractual arrangements. The key arguments center around technological externalities (e.g., economies of scale from combined production processes), transaction costs (such as coordination and control costs), and market imperfections. The discussion highlights that internalizing reduces these costs and risks associated with market-based interactions. The chapter elaborates on the concept of asset specificity and incomplete contracts, two crucial elements for understanding internalization advantages.
3. Role of the Traders: This chapter explores the central role of inter-firm trade within international commerce, highlighting the significant contribution of foreign direct investments. It emphasizes that much of international trade occurs between firms, not just between countries. This section analyzes how foreign direct investments impact the structure and dynamics of this inter-firm trade, changing the nature of the competitive landscape and influencing trade flows. The chapter's emphasis is on the intricate connections between trade and investment activities of MNEs.
4. Impact of Trade Policies on MNE location: This chapter analyzes the impact of trade policies, specifically free trade and import tariffs, on the location decisions of MNEs. Using the two-sector Heckscher-Ohlin model, it examines how trade liberalization or protectionist measures influence where firms choose to locate their production facilities. It establishes the link between policy environment and strategic decisions of MNEs. The focus is on how differing trade policies shape the competitive environment faced by MNEs and consequently affect their location choices.
5. Decision between export and HFDI: This chapter focuses on the core decision-making process for MNEs: whether to export or engage in horizontal foreign direct investment. It integrates the concepts previously introduced, bringing together the elements of ownership, internalization, and location advantages to explain when exporting is favored over establishing production facilities abroad. It likely utilizes models and frameworks to analyze and predict the choices made by firms based on the costs and benefits of each strategy. This chapter provides the core analytical framework for understanding the MNE's strategic location choice.
Keywords
Multinational enterprises (MNEs), horizontal foreign direct investment (HFDI), OLI framework, ownership advantages, internalization advantages, location advantages, intra-firm trade, trade policies, Heckscher-Ohlin model, export versus FDI, internationalization strategies.
Frequently Asked Questions: A Comprehensive Language Preview on Multinational Enterprises and Horizontal Foreign Direct Investment
What is the main topic of this paper?
This paper analyzes the factors influencing multinational enterprises' (MNEs) decisions regarding horizontal foreign direct investment (HFDI). It examines the OLI framework (Ownership, Location, and Internalization advantages), the role of intra-firm trade, the impact of trade policies, and the decision-making process between exporting and HFDI.
What is the OLI framework, and how is it applied in this paper?
The OLI framework is a key theoretical lens used to understand the decision to internationalize. It examines three sets of advantages: Ownership advantages (firm-specific assets), Location advantages (country-specific factors), and Internalization advantages (benefits of internalizing transactions rather than using market mechanisms). The paper applies this framework to explain MNEs' choices regarding HFDI.
What is horizontal foreign direct investment (HFDI)?
HFDI refers to the duplication of production facilities abroad to sell locally in multiple markets. This contrasts with other types of FDI, such as vertical FDI, which focuses on integrating different stages of production across countries.
What is the role of intra-firm trade in this context?
The paper highlights that a significant portion of international trade occurs between firms within the same multinational enterprise (intra-firm trade). Foreign direct investments significantly impact the structure and dynamics of this inter-firm trade.
How do trade policies influence MNE location choices?
The paper analyzes the impact of trade policies, particularly free trade and import tariffs, on where MNEs choose to locate their production. Using the Heckscher-Ohlin model, it shows how different policy environments influence MNE strategic location decisions.
What is the core decision explored in the paper?
A central focus is the decision-making process for MNEs between exporting their products and engaging in horizontal foreign direct investment (HFDI). The paper integrates the OLI framework to explain when one strategy is preferred over the other.
What are the key advantages discussed within the OLI framework?
Ownership advantages include factors like company size, human resources, expertise, market position, production specialization, and technological innovation. Internalization advantages stem from reducing transaction costs and risks associated with market-based interactions, such as technological externalities and incomplete contracts. Location advantages relate to country-specific factors that make a particular location attractive for investment.
What models are used in the analysis?
The paper utilizes the two-sector Heckscher-Ohlin model to analyze the impact of trade policies on MNE location decisions. Additionally, it employs various frameworks and models to analyze the decision between exporting and HFDI, integrating the elements of ownership, internalization, and location advantages.
What are the chapter summaries about?
The chapter summaries provide detailed overviews of each chapter's content, including the introduction, the OLI framework, the role of traders, the impact of trade policies, and the key decision between exporting and HFDI. Each summary highlights the main arguments and concepts discussed in the respective chapter.
What are the key terms and concepts used throughout the paper?
Key terms include multinational enterprises (MNEs), horizontal foreign direct investment (HFDI), the OLI framework, ownership, internalization, and location advantages, intra-firm trade, trade policies, the Heckscher-Ohlin model, and the export versus FDI decision.
- Citar trabajo
- Kieran MacInerney-May (Autor), 2005, Multinational and Horizontal Foreign Direct Investment, Múnich, GRIN Verlag, https://www.grin.com/document/51816
