Question

1) High transportation costs or tariffs imposed on imports help explain why many firms prefer FDI or licensing over exporting. Discuss.

2) What are the main advantages and disadvantages of the ethnocentric, polycentric, and geocentric approaches to staffing policy? When is each approach appropriate?

Answer 1

1. Why many firms prefer FDI or licensing over exporting.

Exporting: An export is a function of international trade whereby goods produced in one country are shipped to another country for future sale or trade.

Disadvantages of exporting are as follows:

• Direct exporting requires large financial resources.
• Managerial Ability is Essential.
• The distribution costs in foreign markets, etc are increased considerably.
• Middlemen sell products in which they are interested. So there is no No Scope for Product Development.
• Middlemen, engaged in export trade, charge commission for their services.
• the documentation required to export is more involved than for domestic sales
• Finding information on foreign markets is unquestionably more difficult and time-consuming.
• When exporting, companies may need to modify their products to meet foreign country safety and security codes, and other import restrictions.
• Competitors can typically not be avoided in export markets.
• In exporting your product, there is the risk of damage, loss or theft.
• The language, business practices and other customs in the export market may be different to your own domestic market.
• Finding information on some markets can be extremely difficult.

Foreign Direct Investment - FDI: A foreign direct investment is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.

• Advantages of FDI:
  Foreign direct investment creates new jobs, as investors build new companies in the target country, create new opportunities.
• The development of human capital resources.

• It provides local economic benefits in multiple locations.
• Parent enterprises would also provide foreign direct investment to get additional expertise, technology and products.
• Foreign direct investment will allow resource transfer and other exchanges of knowledge.
• It makes international trade easier to complete.
• Reduced Disparity Between Revenues and Costs.
• The facilities and equipment provided by foreign investors can increase a workforce’s productivity in the target country.

International licensing: Licensing is a business agreement involving two companies: one gives the other special permissions, such as using patents or copyrights, in exchange for payment.

Advantages of International licensing.

• It creates an opportunity for passive income
• It creates new business opportunities.
• It reduces risks for both parties.
• It creates an easier entry into foreign markets.
• That is why many firms prefer FDI or licensing over exporting.

2. Ethnocentric, polycentric, and geocentric approaches:

Ethnocentric approaches: This policy is generally adopted by headquarters by sending employees from the home or parent countries to the host country.

Advantages: It reduces language barriers and cultural awareness training programme.

Disadvantages: Lack of availability of nationals with skills and communication capabilitities and limit the career advancement opportunities.

Polycentric approaches: It involved hiring and promoting employees who are citizens of the host countries that the subsidiary is operated.

Advantages: In this approach there is familiarity with socio, political and legal environment with bsiness activities that are carried out in the country. It also provides opportunity to advance and promote local nations.

Disadvantages: There is a difficulties in communicating with personal that are based in the home country. Thers is also lack of opportunities for the home country`s nationals to achieve international and cross cultoral experience.

Geocentric approaches: It is best used when companies need the best personnel to work at subsidiary. Employees are selected regardless where they come from.

Advantages: This approach is best compromise between securing the technical and managerial expertise and adapting to a foreign socio-economic and cultural environment. Geocentric approach when employing staff usually less expensive when compared to polycentric approach.

Disadvantages: The geocentric approach is very expensive and it requires training, employee development and relocation cost.

When is each approach appropriate?

Ethnocentric	Polycentric	Geocentric
Appropriate during early phases	Host-country nationals hired to manage subsidiaries.	Seeks best people for key jobs, irrespective of nationality