Question

The global automaker you work for has decided to invest in building a greenfield automobile assembly facility in Costa Rica with a local partner. 1. Which FDI theory presented in this chapter might explain your company's decision? 2. In what areas might your company want to exercise control, and in what areas might it cede control to the partner? Be specific.

1. Theory of Monopolistic Advantage

2. Oligopoly Theory of Advantage

3. Product Life Cycle Model

4. Eclectic theory

Answer 1

The case is related to the automobile company which has the global presence decided to invest in building a greenfield automobile assembly facility in a Costa Rica with the local partner. So, Eclectic theory of FDI presents the decision of the company.

Eclectic Theory states that the A company will undertake FDI when the location, ownership and internalization advantages and features are combined.

The location advantages are the advantage which locates the business activity i.e. economic particularly in one specific location due to the specific features of the location.

Ownership Advantages are the advantages that the company has due to its assets as well as technical and managerial knowledge and power brand.

Internalizing feature arises from the internalize the business activity in the market rather than leaving it to relative inefficient market.

The company wants to exercise control in ownership advantages as the capital investment has to be controlled because it is in limited availability. The areas might it cede control to the partner is the location advantages as the local partner having more knowledge about the specific locations.