Essay On International Business Operation.

Running head: ESSAY 0
International Business Operation
APRIL 19, 2020
STUDENT DETAILS

ESSAY 1
Contents
Introduction.................................................................................................................................................2
Dunning’s paradigm and critique by identifying key problems inherent in OLI..........................................2
Ownership...................................................................................................................................................3
Location.......................................................................................................................................................6
Internalization..............................................................................................................................................8
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10

ESSAY 2
Introduction
There are several theories to address purposes and projections of Foreign Direct Investment. The
economists mostly used OLI framework. As per this framework, there should be advantages to
offset the cost of creating direct investment out of the country. In the following parts, OLI
framework is explained to know the motive behind German Foreign Direct Investment in China.
The case of Volkswagen China is directed to state implementation of OLI in reality, and to
demonstrate why FDI internationally can be the success story in spite of all the problems an
organisation faces in the foreign environment. In this essay, OLI framework is discussed to know
ownership, location, and internalization advantages for Volkswagen.
Dunning’s paradigm and critique by identifying key problems inherent in OLI
A theory founded by Dunning (1977) has become extensively utilised in attempt to get
knowledge about the purposes behind Foreign Direct Investment. This theory is known as OLI
(Ownership, Location along with Internalisation). These three areas are required to be present in
order to get FDI. It can say that it is a theory that states aims or objectives behind the decisions
of MNCs to select FDI in place of licensing utilisation of the product and image to international
manufacturers or traders. The investing organisation is required to purchase assets in foreign
nation to get FDI. Additionally, FDI is considered as foreign direct investment because it is
resulted into the actual or direct regulation over purchased capital. MNCs purchase the rights to
make production out of country and take decision where it desires to sell products.
Moreover, OLI theory provides helpful vision in relation to FDI. It has changed over the time to
follow new ways in which international businesses are operated. Critics of this theory make
arguments that due to the expansion of implementation of OLI to all MNEs, the risks are

ESSAY 3
increasing for them. Narula (2010) offers the return to common OLI structure and utilises
substitute methods to know about composite new development in place of adopting the whole
thing so that it fits OLI (Sharmiladevi, 2017). It is also acknowledged by Narula that there is
great significance of OLI in earlier research on FDI and business out of country (Narula, 2010).
However, it is not suitable to explain everything, which takes place in the business. In actual, it is
going to be awkward to implement this theory to understand international businesses because
later it can become critical. The Critiques say that there is requirement for new structures for
FDI.
(Pitelis and Teece, 2017)
Ownership
In 1977, John H. Dunning founded the OLI framework. According to the eclectic paradigm,
Dunning stated entry-mode decision of MNEs about three strategic areas, like ownership,
location, as well as internationalization. The first strategic area includes ownership advantages,

ESSAY 4
such as proprietary-information along with other proprietorship rights of the organisation. Other
rights include branding, patent, trademark, and copyright rights. They also include administration
and utilisation of internal skills. It is stated by ownership condition that the company should own
certain assets that generate sufficient value to make it worth additional cost of multi-national
manufacturing. It can see that the competitive advantage is superiority over the contestants, like,
something that does not have by opponents. In detail, it is advantage related to the provisions of
services as well as products. Additionally, the ownership advantages are normally regarded to be
imperceptible. The ownership advantages are advantages that give competitive advantages, like
image for reliability. It is essential to consider ownership advantages at the time of taking
decisions. It is clear to say that the ownership advantages arrange the inner assets of company,
like size of company, anticompetitive powers along with means. The ownership advantages are
special and distinctive advantages towards the focal organisation due to the ethnic group or facts
or definite nature, which the entity has advantages in comparison with other entities placed in a
nation they desire to take entry (Pan, 2016).
It is argued by Dunning that the organisations having great competitive advantages are more
likely to enter into international market and well found with enormous information, they every so
often go this phase alone. The best example of ownership advantage is entry of Volkswagen in
China, because it started as a first mover. It can see that it is one of the most popular car
producing companies. VW has various advantages. It is very popular in Germany because of its
technical improvements as well as effective manufacturing system. Volkswagen wants to
become leading car manufacturing company globally in upcoming period. In current time, the
main peers are General Motors as well as Toyota. For getting this objective, Volkswagen aims to
take entry into Chinese market with its manufacturing plants. It is argued by Beena (2018) that

ESSAY 5
VW brand is very solid across the world. In this way, the ownership advantage is stated by
recognition of strong brand.
Most of the customers found that Volkswagen has best vehicle designing innovations, cost
efficiency, and best protection norms. For these reasons, it is first choice of the customers at the
time of taking decision related to purchase of vehicles. In addition, it is found that Volkswagen
had best competitive advantages over all producers of China at a time of taking entry into
market. It is well to say that Volkswagen is still greater to all the car manufacturers of China. It
oppressed its technical supremacy and increased its brand recognition. The consumers of China
were very glad with the products presented and appreciated the presence of Volkswagen in the
nation. At this time, Volkswagen struggles to adjust the technologies to see changes in the
requirements of customers and improve sustainable model for upcoming time (Luo and Tung,
2018).

ESSAY 6
(Li, 2016)
Location
The location advantage is second strategic area. An expression ‘location advantages’ means
alternative nations to undertake value adding functions of MNCs. The location advantage is
significant for the company to become capable for effectively engaging in FD. The organisations
should evaluate whether there is a comparative advantage to perform some particular activities
within the specific country. Because of fixed nature, these contemplations implement to the
obtainability and cost of sources at the time of working in one place in comparison of other
place. Further, the location advantages are considered as regular or formed resources. However,
the location advantages are usually permanent. They require partnership with international
investors in that place to be used for getting complete advantages. For taking entry into
automotive market, the high investment has to be made to compete efficiently with competitors,
for example, factories have to be established, and the place has to be selected with beneficial
infrastructure. The organisation can also be sovereign for selecting the location. Thus, these
advantages deal with conditions having by focused nations because different locations have
different situations. These conditions are size of market, party-political system, structure of
market, substructure as well as cost of manufacturing (Hennart, 2019).
It is also suggested by Dunning that organisations having high level of fixed, regular or produced
benefactions that support the international presence, should establish the ownership advantages
throughout International FDI. Volkswagen entered into China throughout the joint venture. The
company selected China because there is best possible market. Volkswagen selected its place in

ESSAY 7
Shanghai because it had various advantages such as positive financial developments. The joint
venture of VW in Shanghai was effective and prosperous automobile company in China. It can
see that this joint venture was established in 1985. Now it has created best position there. It was
very good decision of Volkswagen to enter into market of China (particularly Shanghai). The
reason is that China is quickly developing and the life style of Chinese is improving day by day.
It can see that Shanghai has great number of people there. It is most wealthy city of China. In the
different words, it is central part of the China (Casson and Wadeson, 2018). There are best
quality products in Shanghai across China. There is no any obstacle because of the domestic
trade barriers. At the time of taking entry into China, Volkswagen got incentives as well as help
of Chinese government. Chinese government still inspires automobile sector to enhance local
revenue and gives contribution to the progress of automobile industry. Volkswagen is famous
everywhere in the world because of good image. It creates location advantages for the company.
In this way, the location advantage is stated by closeness to the customers of China and low
wages in China than Germany. China has significant sales market at international level. VW
gave high sale of cars in the 2019 (Annual report, 2019). Because of these location advantages,
Volkswagen China became successful and conditionally provides the decent earning source for
Parent Corporation.

ESSAY 8
(Page, Olmanson and Mishra, 2019)
Internalization
The internalization advantage is good for the company to produce the specific internal product.
In 1952, Volkswagen adopted internationalisation strategy by starting “Volkswagen do Brasil
Ltda” and “Volkswagen Canada Ltd”. Further, “Volkswagen of America, Inc.” was founded in
1955, and “Distributors Ltd. SAMAD” as well as “South African Motor Assemblers were
founded in 1956. In this way, advantage of first-mover helped the company to become key
player in different marketplace. Volkswagen handled to make control over main shares of market
of China and realises the ownership advantages. This first-mover advantage is helpful for
company to become competitive with its competitors like Japan as well as America. For
retaining the market’s share, Volkswagen continues to make innovations as per the trending taste
of the Chinese consumers. It tries to decrease strain on the atmosphere resulting from production
as well as misuse of automotive vehicle. In some last periods, Volkswagen also founded other
organisations across the world and it initiated to join and take over other entities. Due to the
enhancing globalisation, Volkswagen went to lower cost nations like East Europe along with
China. By adopting this strategy, particularly the Central and East European nations have

ESSAY 9
practised great alterations in the car industry. It is significant to discuss company’s strategy in
these nations, like through Greenfield and Brownfield investment (Bezuidenhout and Kleynhans,
2018).
While internationalisation of organisations faced challenges like indefinite marketplaces,
different culture, different political system, limitations related to import or export and taxation
limitations. Henceforth, various organisations select to buy another company or to set joint
ventures with domestic entities that have great knowledge of different situations. Brownfield
investment includes the international joint venture, joint venture, merger, as well as acquisition
(Belluci, 2017). At the time when this strategy decreases cost and time, then it still has certain
risks, specifically in joint ventures. These risks can be loss of knowledge, and loss of competitive
advantage. Moreover, the green-field entry in the international market includes the development
of new associate in host nation by other company situated out of the nation, individually or with
other partners. Based on the view of Chang, this Foreign Direct Investment strategy is striking
because it is depended on the choice of company. The company can make choice related to
place, like area with weak labour companies or near to the new markets. It is not required by
them to coordinate the approaches with approaches of other entities. On the other hand, the
internationalisation strategy based on Greenfield Investments requires an excellent knowledge of
the new market as well as of political and cultural differences. The investing organisation is
required to become careful at the time of setting new network as well as start new relations with
domestic organisations (Zhou, LI and XU, 2019).
Conclusion
In conclusion, the German interest is exist in China since long period. From the above case
study, it is found that main reason is that market of China is vast market. The companies of

ESSAY 10
Germany are expected to have more prospects in China for the reason that China has great
development potential. Before taking investment related decisions, the corporations always
evaluate the opportunities. It can say that OLI framework is useful to check whether Foreign
Direct Investment is acceptable. The opponents of OLI framework state that this framework does
not address all the critical facets of international businesses. According to them, the decision-
taking analysis should include more related points.

ESSAY 11
References
Annual Report (2019). Volkswagen. Available at: https://annualreport2019.volkswagenag.com/.
[Access on 20/04/2020]
Beena, P.L., (2018) Outward FDI and Cross-Border M&As by Indian Firms: A Host Country-
Level Analysis (No. 479). Working Paper.
Bellucci, A.M., (2017) Traditional FDI theory: the Chinese analysis.
Bezuidenhout, H. and Kleynhans, E.P., (2018) Modern trends in Chinese foreign direct
investment in Africa: An OLI approach. Managing Global Transitions. International Research
Journal, 16(3), pp.279-300.
Casson, M. and Wadeson, N., (2018) The economic theory of international business: A supply
chain perspective. In The Multinational Enterprise. Edward Elgar Publishing.
Hennart, J.F., (2019) Digitalized service multinationals and international business
theory. Journal of International Business Studies, 50(8), pp.1388-1400.
Li, X., (2016) Asymmetry Reduction Theory of FDI: The Aspiration-Resource-Control (ARC)
Framework. In The Sixth Biannual Aalborg International Business Conference (pp. 1-3).
Luo, Y. and Tung, R.L., (2018) A general theory of springboard MNEs. Journal of International
Business Studies, 49(2), pp.129-152.
Narula, R. (2010) Keeping the eclectic paradigm simple: a brief commentary and implications
for ownership advantages. USA: Springer

ESSAY 12
Page, B.P., Olmanson, L.G. and Mishra, D.R., (2019) A harmonized image processing workflow
using Sentinel-2/MSI and Landsat-8/OLI for mapping water clarity in optically variable lake
systems. Remote Sensing of Environment, 231, p.111284.
PAN, H., (2016) Internationalization strategy choice: Case study of Volkwagen. USA: Springer
Park, B.I. and Roh, T., (2019) Chinese multinationals’ FDI motivations: suggestion for a new
theory. International Journal of Emerging Markets.
Pitelis, C.N. and Teece, D. (2017) The New MNE: From ‘Internalisation’to a Theory of
Orchestration. Available at SSRN 3020389.
Sharmiladevi, J.C., (2017) UNDERSTANDING DUNNING'S OLI PARADIGM. Indian
Journal of Commerce and Management Studies, 8(3), p.47
ZHOU, X., LI, T. and XU, Z., (2019) Application of OLI and SPOT-6 Pan Fusion Images in
Remote Sensing Geological Interpretation. Geospatial Information, (5), p.22.