Question

Using the OLI paradigm, in the existence of internalisation advantages, explain Why some firms still choose to internationalise via inter-firm collobrative agreements as opposed FDI.

Answer 1

                                    The Ownership, Location and Internalization model [OLI model] is an eclectic paradigm and refers to a three-layered evaluation framework followed by the companies while attempting to determine whether it is beneficial to pursue a Foreign Direct Investment [FDI]. The given paradigm assumes that the open market operations would be avoided by the institutions if the cost of completing the same internally carries a low price. Thus, this approach can be used to examine the relationship and interactions between various components of a business. According to the model, the three following advantages must be evident for an FDI to be beneficial.

· The ownership advantage takes care of the various ownership rights of a company. These consists of branding, trademark or patenting rights. These are considered to be tangible and includes reputation and reliability that gives a competition advantage.

· The Location advantage can be assessed by comparing the availability and cost of resources within various nations and locations so as to choose the optimal one.

· The internationalization advantage states when it is beneficial to produce in-house and when to collaborate with a contracting party. Thus, at many instances, it would be beneficial to operate from a different market location rather than in-house production. For outsourcing the production, negotiation of partnerships with local markets would be needed.

The following are the reasons why the firms choose to internationalise via inter-firm collaborative agreements as opposed to FDI

· An FDI refers to an investment pattern where the ownership of a business in one country is carried out by an entity in another country.

· Sometimes a foreign company can offer a greater deal of local market knowledge or skilled employees which can result in a better product.

· FDI grants ownership only and could result in losses for a foreign firm if it could not get a clear knowledge about the conditions of the economy and market.

· With unpredictable political and economic systems, the foreign nation may result in a loss-making firm.

· With inter-firm collaborations, a better knowledge of the existing market condition could be known and this could result in an advantageous position to the international firm.

· As inter-firm agreements could make better investment patterns and securities for the firm, it would be an added advantage for the firm while making investments in a foreign nation.

Thus, with all the above considerations, a firm could prefer inter-firm collaborations over FDI even though the internationalization advantage is present.