International Product Life - Case Study Example

A. Globalization, International Business and Theories of FDI Theories of FDI 1. International Product Life Cycle Theory According to International product Life cycle theory, foreign direct investment is a natural stage in the life cycle of a product. A company will begin to export its products and later involve foreign direct investment as the product moves ahead in its lifecycle. In the later stages, a company’s exports become its imports. This theory is especially applicable to U.S. companies. These companies have been innovators of products for a long time. In the early stages, these products are not standardized due to nature of product, price elasticity, communication gap and location. However, as the products made by U.S. companies mature, they become standardized and other companies start manufacturing these products. The exports of U.S. companies are reduced. Finally as products become standardized worldwide, U.S. companies lose competitive advantage in pricing and the products are manufactured and imported by them from overseas leading to reversal of FDI (Dudas,Tomas). 1.2. Follow the leader Theory Follow the leader theory of FDI has been proposed to study the clustering impact of foreign direct investment in a single location. The electronics industry in Ireland is a great example of this approach to FDI. Key policy changes were made in 4 segments i.e. microprocessors, software, printers and computer products. This attracted two global giants- Microsoft and Intel to make investments in Ireland in field of Microprocessors and software. Similarly, the FDI by Dell, Compaq, Gateway and HP establishes Ireland as an electronic hub while other small electronic firms acted as spokes to connect with these international leaders. 2. Trade and Foreign Direct Investment It can be said that for manufactured goods, foreign direct investment follows trade while it is the converse for services. For providing services, a company needs to be physically present in the location where service is being provided. Therefore, firstly a company needs to invest in various markets to be competitive. The trade will then flourish. However, in case of manufactured goods, initially the products are new. It takes time for them to be accepted in foreign markets and become standardized. Therefore, it makes sense to invest in foreign markets once the products mature. It would help a company to realize economies of scale and scope in those markets. Thus, in case of goods, FDI follows trade. For example, a new electronics product such as LED TV gets innovated in an advanced country. After the product is accepted in developing countries, it makes sense to invest significantly in its production in those countries. However, an insurance firm has to be physically at all location firstly to do trade actively. 3. Foreign Direct Investment and Global Competitiveness Firstly, the governor needs to take steps to promote tourism in the state of Colorado. Colorado has beautiful mountains and tourist places and can act as a good investment source for companies involved in tourism. Secondly, the FDI norms for service sectors such as Insurance and banking must be relaxed. Thirdly, retail is one of the biggest sectors here and foreign direct investment in this sector would promote competition. Therefore, the governor needs to give a boost to FDI in retail which would lead to benefit of all customers. Regarding the types of FDI, the governor must promote collaborations between local players and foreign investors through mergers, acquisitions and joint ventures. This would safeguard the interests of local companies while promoting healthy competition. This would also raise the productivity in the economy. Secondly, in some sectors such as manufacturing, incorporation of companies and their subsidiaries in Colorado should be allowed. This is especially true for sectors where the migrants of the state are less competent. B. Cultural Environment of International Business 1. Sharpe’s behavior in the video exhibits an ethnocentric attitude. Sharpe is comfortable only with his native country and its culture. He is completely uncomfortable in Australia and communicates the same to the media as well. Sharpe’s behavior can be misinterpreted by the host country as disrespect to their culture. 2. Bowlen and Shanahan are already embarassed due to damage done by Sharpe. The incident had a dent on their image and reputation. For damage control, they have a few options. Firstly, they could send Sharpe back to his home country and apologize in front of the media. However, this will not help in the long run. Secondly, they could ask Sharpe to apologize and convince him about his mistakes. Thirdly, they could arrange a counselor for Sharpe to change his attitude and replace him by someone else temporarily. The best way to solve this situation would be to use a combination of options 2 and 3 i.e. arrange counseling for Sharpe and meanwhile convince him to apologize. C. Economic Environment, Emerging Markets and Regional Economic Integration 1. Definitions 1.1. Emerging Markets Emerging markets are the countries which are in a phase of rapid social and economic growth and industrialization. There are about 40 emerging markets in the world with India and China being the largest. 1.2. Bottom of the Pyramid Markets Bottom of the pyramid markets refer to the poor and underserved sections of the society. The term was coined by management guru CK Prahalad. Asia, Latin America and Africa have huge chunks of Bottom of the pyramid market. 1.3. BRIC BRIC is an acronym for four countries – Brazil, Russia, India and China who are alike in the sense that they are in a similar stage of economic development and are likely to be the most dominant countries 1.4. Countries with economies in transition Countries with economies in transition are those countries which undergo a change from a central planning ruled regime to a market driven regime. These countries undergo liberalization, macroeconomic stabilization and privatization. China, Soviet Union and some third world countries have went through such transition. 1.5. Free Trade Area A free trade area is a group or a bloc of countries whose members sign an agreement called a free trade agreement to eliminate tariffs, quotas and other trade barriers between each other. 1.6. Customs Union A customs union is a type of free trade area with a common external tariff and external trade policy. However, different import quotas may be used sometimes. 1.7. Common Market Common market is a group formed by countries in a geographical area to promote free trade and free movement of capital and labour between the members. European Union has a common market called European community. 1.8. Economic and Political Integration Economic integration between states refers to their unification by elimination of trade barriers. Political integration refers to cooperation between states to form new political entities which have greater scope and independence in decision making than individual states. European Union is an example of the same. 2. The article looks at two possible scenarios for the future. One is the return of free markets while the other is emergence of mixed economy. In a free market, the economy is completely driven by the market while in a mixed economy both state and private sector control the economy. Thus, a mixed economy exhibits characteristics of a market as well as a planned economy. In wake of current global conditions, the mixed economy view seems to be more relevant. It has been observed in relatively free markets such as US that free markets lead to a greedy behavior in the market. This results in crises such as subprime mortgage crisis observed in US in 2007. Now it has been realized that government regulation and control in conjunction with market forces are essential for successful economic structure. Works Cited Dudas Tomas, “Main Theories of FDI”, Available online from Peter J Buckley & Francis Ruane, “Foreign Direct Investments in Ireland: Policy Implications for Emerging Economies”,2006, IIIS Discussion paper Read More