What are the different theories of FDI? Why is it a good idea?
- Limitations of exporting
→ Constrained by transportation cost and trade barriers
→ Especially unprofitable for low value-to-weight products
→ Fear of future import tariffs and quotas
- Limitations of licensing
→ Possibility of giving away valuable technological know-how
→ Lost of tight control manufacturing, marketing and strategy and therefore difficult to enforce radical decisions
→ Decrease in production efficiency due to lacking management by licensee
- Advantages of FDI
→ Ensures valuable technological know-how remains safe within the hands of the firm.
→ Firm retains tight control over manufacturing, marketing and strategy which can help gain greater market shares and maximize profitability
→ Maximized efficiency in all parts of production due to good management