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Evaluating Performance and Product Life-Cycle Theory

According to the internalization theory, firms that have intangible assets with a public good property tend to undertake FDI to take advantage of the assets on a large scale and, at the same time, prevent misappropriation of returns from the assets that may occur during arm's length transactions in foreign countries. The theory can be effective in explaining greenfield investments, but not in explaining mergers and acquisitions.

Recently, China attracted a great deal of FDI because foreign firms want to (I) take advantage of inexpensive labor and resources, and also (ii) gain access to the Chinese market that is often not accessible otherwise.

1. Can you please explain Vernon's product life-cycle theory of FDI? What are the strength and weakness of the theory?

2. Why do you think the host country tends to resist cross-border acquisitions, rather than greenfield investments?

3. How would you incorporate political risk into the capital budgeting process of foreign investment projects?

4. Please discuss and compare forward vs. backward internalization.

5. Discuss how would you incorporate currency exchange risk into the capital budgeting process of foreign investment.

Solution Preview

Can you.please explain Vernon's product life-cycle theory of FDI. What are the strength and weakness of the theory?
When a product is first introduced it is made and sold in the country that created it. The sales are usually to higher income individuals. The product is not standardized. With production, some standardization occurs and the price decreases. As the product sells more, other countries take and interest and the company often takes the production into other countries. The product is standardized for production and costs are lowered more because of the lower costs for labor and resources. The product ultimately is made in another place and imported into the country that created it.
The theory does explain FDI as it has occurred in the past. The life cycle of production was developed to ...

Solution Summary

The expert evaluates performance and product life-cycle theories.

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