There are many theories to why large companies choose Foreign Direct Investment (FDI) over other options like; Exporting, Franchising or Licensing. These theories include; transportation costs, market imperfections or the leading company could potentially loose its competitive advantage if it was to share it’s know how through licensing. Dunning (1988) saw that not one reason will suit each company and so designed the ‘Eclectic Paradigm’. This framework brings all theories in together to try explain why FDI is a good thing. His ideas involved;
- Location advantage - An example of this is BP locating to Libya for the oil
- Ownership advantage – Retaining control is important. A bad case of this involves Schwinn, a creator of bikes who released freely its own expert knowledge in two separate occasions, causing the finale of bankruptcy.
- Internalisation advantage – This involves a company believing the outcome with be better if it is kept inside the company.
Despite the advantages of using FDI, Thailand is one country who in the past is evident of focusing on exporting as a way of boosting its country’s economy during the recession. The final quarter of 2010 saw an increase of 6.7% in export of goods and services, and growing by 28% for the whole year, (BBC News 2010). This growth is continued to be expected during the course of 2011, strengthened by the fact that analysts have predicted more stable economies in other countries, which should only benefit Thailand’s exporting fetish further.
One Thai company not following this pattern is SSI. SSI, a steel manufacturing company recently purchased the steel giant ‘Corus’, who are therefore investing into a company outside their home country, where the majority of its other plants are placed, (The Independent, 2011). There are some parts of this deal I do not understand. I know it is creating around 700 jobs in the somewhat destitute area of Redcar and I know the plant has the well above average infrastructure to produce the steel, (BBC News, 2011) but why invest in this plant in England, but then open SSI to more risk like; exchange rates changing or transportation costs, through exporting the steel back over the Thailand?
With the above being a prime example of the question that – is FDI a good strategy for the long term? Or is it, like the oil industry locating in Africa for obvious location purposes, an inevitable trap? Since the oil is eventually bound to run out.
You make a good point when highlighting that the oil will run out. In addition to this point it has to be highlighted that the oil rich countries appear to be under regimes that arent attractive to potential investors, examples of this include Iraq, Libia and Africa. The fear is that their employees could be under threat leading to expensive security investment or that they could have their assets taken all together. I personally can see the benefits of moving to such countries with cheap labour, but would you really want to take the risk or invest a bit to gain access to a more secure environment and the advantages this could offer?
ReplyDelete@Chris, I guess it would depend on the risk involved and how much extra I would have to put in to gain access to this more secure environment.
ReplyDeleteI guess its always subjective on the company involved as Rebecca said on my post. However, I have read on other posts about how China are more than willing to make deals in countries like Africa. Why do you think this is??
Are they just happier taking the extra risks involved or is it for other reasons?
With the likes of the oil industry I guess they need to go where they can to access the oil and it may be necessary to invest into security to prevent exposing their employees to the risk involved with the political insecurities in these countries.
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