UNIT 3 INTERNATIONAL INVESTMENT
PROCESS AND FINANCE
Process and Finance
After going through this unit, you should be able to:
develop a perspective on how a domestic firm turns into a multi-national
identify the alternative methods of entry into foreign markets
evaluate the entry options and suggest the optimal one for a firm at a given time
understand the mechanism of transfer pricing and its role in multinational
Internationalisation of Firms
Corporate Life Cycle Theory
Alternate Methods of Entry
Licensing ...view middle of the document...
INTERNATIONALISATION OF FIRMS
The internationalisation process of a firm can be visualised as a series of
International Business :
Role and Processes
successive stages of development. A purely domestic firm graduates to a multinational enterprise stage through the following stages:
Domestic firm with no export
Exporting through marketing intermediatries
Exporting through own marketing facilities abroad
Foreign production through investment abroad.
This classification of successive stages focuses only on the distribution aspect of
marketing and, therefore, does not provide a complete picture. More specifically,
while it does describe correctly, though incompletely, the growth stages, it does not
explain the behaviour of the firms.
CORPORATE LIFE CYCLE THEORY
A more perceptive theory explaining the evolutionary processes through which a
company passes has been termed as `corporate life cycle in international marketing'.
The stage of a company in the evolutionary cycle can be determined by the degree of
commitment it has towards export markets. The stages in the evolutionary cycle are:
Limited Fixed Investment for Exports
Substantial Dependence on Exports
Equal Treatment of Domestic and Export Business.
In the first stage, the attitude is essentially reactive, There may be some excess
capacity at a point of time. If there are overseas enquiries, the firm takes advantage of
it and exports. In stage 2, the firm discovers that exports can be a profitable long-term
supplement to domestic business and decides to earmark a certain proportion of total
production for the export market. Export business thus becomes a part of the
corporate planning process. In the third stage, the firm gets sufficiently emboldened
to invest specially for export production, i.e. it creates additional production capacity.
In the next stage, the extent of export business increases in quantitative terms. In the
final stage, the distinction between domestic and export business ceases to exist and
the firm becomes global.
While this corporate life cycle theory is definitely an improvement, this does not
still explain why a firm decides to follow this sequence. The theory which provides
an explanation has been advanced by Ahorani, who suggests the following stages of
entry in foreign markets:
Establishment of local warehouses and direct local sales
Formation of a Joint Venture
Foreign Direct Investment.
These entry strategies are assumed to be hierarchical in nature. The explanation of
this hierarchy is based on the hypothesis that foreign business is risky. A firm
exposes itself to an increasingly higher level of risks based on its level of
commitment to international business. At its most risk-averse...