IB93PB: FDI Theories in Analyzing International Expansion Decisions

This essay explores the role of Foreign Direct Investment (FDI) theories in understanding the international expansion decisions of emerging market multinationals. It focuses on the dynamic capability theory and international trade theory, including classical trade theory, factor proportion theory, and the Uppsala internationalization model. The essay discusses how these theories influence motivations to internalize and entry mode selection, using examples such as Apple Inc., Toyota, Engro Foods Company, and IKEA to illustrate the application of these concepts in real-world scenarios. The analysis further examines how FDI theories impact the choice of entry modes like wholly-owned subsidiaries, acquisitions, and joint ventures, highlighting the relationship between dynamic capabilities and acquisition entry mode, as well as the fit between international trade theory and international joint ventures.

Running head: FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
FDI Theories in Analyzing International Expansion Decisions
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1FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
Table of Contents
1. Introduction......................................................................................................................2
2. FDI Theories in Understanding International Expansion Decisions of Emerging Market
Multinationals1250..........................................................................................................................2
2.1. Dynamic Capability Theory.....................................................................................3
2.2. International Trade Theory.......................................................................................3
3. FDI Theories Impacting Motivations to Internalize and Entry Mode Selection.............7
3.1. Foreign Direct Investment and Entry Mode Selection.............................................7
3.2. Acquisition Entry Mode and Dynamic Capability Theory Fit.................................8
3.3. International Joint Venture and International Trade Theory Fit...............................9
4. Conclusion.....................................................................................................................10
References..........................................................................................................................11

2FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
1. Introduction
Internalization is observed to be of great interest for expansion strategies of all
organizations. Within the contemporary world, companies begin their business operations locally
along with developing a long term plan regarding the ways in which business can go
international (Nag, Benischke and Doh 2015). The process of internationalization has changed
considerably the landscape of most of the business which leads to an extremely dynamic
situation with fierce competition in several organizations. The internationalisation process is
used by organizations for the reason that their domestic market has become inadequate due to
lack of economies of scale and several opportunities that is available in the international market.
Companies those are interested in going international generally look for markets that have low
cost of living as this makes hiring process of employees cheaper (Buckley and Ghauri 2015).
Considering such situations certain effective FDI theories are implemented by most of the
companies in attaining support for their international process. The objective of the paper is to
analyse the FDI or foreign direct investment theories that can facilitate managers to realise the
international expansion decisions of emerging market multinationals. This also includes
motivations for internationalization and entry mode explanation with use of suitable examples of
companies (Buckley 2016).
2. FDI Theories in Understanding International Expansion Decisions of Emerging Market
Multinationals1250
FDI theories facilitate in analysing the outcomes of internationalization with rise in the
number of emerging market multinationals. Through implementing suitable theories of FDI the
emerging market multinationals can adapt them in operating within institutionally complex

3FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
environments in domestic along with overseas market (Buckley et al. 2016). This is done by
these organizations through attaining long and short term objectives of the internationalization
expansion in accordance with relevant foreign direct investment theories implemented by them.
2.1. Dynamic Capability Theory
Cavusgil and Knight (2015) revealed that the dynamic capability theory of foreign direct
investment is important in different contexts. This theory can be of increased value within the
rapidly changing business surroundings. Based on such explanation, the dynamics capability
theory is deemed important for emerging multinational companies in from the mid-range
economies for the reason that they typically deal with fast-moving environments. In addition, the
dynamic capabilities offers a mechanism for these companies for continuously adapting and
reconfiguring their resource base for responding to constantly changing business market
environments (Cuervo-Cazurra 2016). There are four dynamic capabilities that are important to
be followed by the emerging multinational companies that include capability to recognise,
leverage, learn and realign. Resource reorganization offers these companies from the mid-range
economies with the starting point of deciding the internationalization strategies that they are
likely to pursue. Dynamic capabilities theory focuses on creating value by supporting
companies’ major strategies that further facilitates them in attaining competitive advantages
(Cuervo-Cazurra 2016). One such example of companies that employs this theory for taking
decisions on global trade is Apple Inc that focuses on entering foreign market by investing
greatly on research and development strategies in order to attain long term success.
2.2. International Trade Theory
Classical Trade Theory

4FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
Deng and Yang (2015) stated that Classical trade theory explains the extent to which a
nation exports and imports in relation to its trading pattern with other countries. This explains
that nations are capable to gain if each devotes necessary resources in manufacturing of goods
and services through which the companies involved in internationalization can attain economic
advantages. Moreover, the classical trade theory elaborates the scenario in which a nation
manufactures services and goods to attain competitive advantages for consumption along with
ensuring subsequent export of surplus. For this reason, the theory also explains that for the
emerging market multinationals it is suitable to import goods and services in which they have
economic disadvantages (Dikova and Brouthers 2016). Such economic advantage or
disadvantages might take place from country differences in certain aspects including labour,
resource endowments, technology, capital or entrepreneurship. Considering such scenario,
classical trade theory suggests that the basic for international trade by emerging market
multinationals can be sourced to variances in production characteristics along with resource
endowments. As per this theory, the companies can consider taking domestic exporting decision
those are the only processes for transferring services and goods across the national boundaries
(Eriksson et al. 2015). One such instance of a multinational organization employing classical
trade theory for international trade is Toyota automobile company though using product
development strategy in attracting existing and new consumers through its innovations. This FDI
mode is selected by the company in attaining an increased cost advantages and offering their
products in foreign markets where people tend to purchase their products within a lucrative
market. This FDI mode is selected by Toyota for the reason that US consumers are likely to
purchase Japanese products at a cheaper price at the time it is produced locally and at the same

5FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
time knowledge is transferred locally along with increasing the market reputation for the
company (Kim, Hoskisson and Lee 2015).
Factor Proportion Theory
Knight and Liesch (2016) revealed that the factor proportion theory is a mode of foreign
direct investment that explains the variance in advantages indicated by the trading countries. As
per this theory, nations tend to generate and export products along with services which harness
huge amounts of abundant production factors that might be considerable scarce. For this reason,
this theory also extends the economic advantage concept through taking into consideration the
endowment along with production factors cost (Li, Quan, Stoian and Azar 2018). This theory
explains the recent patterns of carrying out international trade by emerging multinational
companies. For instance, due to tremendous technological progress witnessed in the recent years
significant technological progress resulted in growth of the multinational enterprises. This
resulted in introduction of new theories related with international trade which indicates changing
commercial realities. One instance of the company that has employed factor proportion theory in
attaining international trade success is Engro Foods Company (Knight and Liesch 2016). This
company has hugely invested in milk collection and processing infrastructure with the vision of
enhancing its global infrastructure. Moreover, through implementing this internationalization
trade model the company has been capable of attaining economies of scale, first mover
advantage along with specializing in obtaining advantages of factor conditions in host countries.
Such factor advantages in international trade is attained by the company in the form of human
resources, physical resources, infrastructure, capital and knowledge resources (Li, Quan, Stoian
and Azar 2018). In view on this example, it is indicated that factor proportion theory suggest the
emerging multinational companies to consider that the trade cycle emerges where a product is

6FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
manufactured by a parent organization by its foreign subsidiaries and in any nation where the
costs are lowest as possible.
Uppsala internationalization model
Li et al. (2018) revealed that the Uppsala internationalization process is the model for
company’s selection of the market along with entry mode in order to expand its
internationalization trade. In this model an experiment was made regarding the fact that the
emerging multinational companies focus into four major aspects that is required to be followed
by the companies in going international. This majorly includes the market knowledge along with
commitment of making decision to enter a foreign market through establishing a foreign sales
subsidiary along with recent activities of the companies (Madanoglu and Castrogiovanni 2017).
The market commitment knowledge attained from this internationalization theory facilitates the
management of an emerging multinational company to prosper its business enterprise and to
make better foreign direct investment. This theory also supports FDI of the companies through
enhancing organizational kludge along with commitment to a specific market that is impacted by
decisions of commitment. Moreover, the manner in which companies take decisions on the
recent activities of FDI is relied on the factors explained by the Uppsala internationalization
model (Pananond 2015). Commitment regarding taking decision regarding entering a foreign
market is majorly resources commitment focused on the foreign market that impacts the
knowledge of the company regarding the foreign market. An additional review of this model
indicates that the stepwise growth of company is directed towards attaining internationalization.
This indicates that the emerging multinational companies begin their global transaction in the
market that has less psychic distance. Psychic distance indicates certain factors that encompass
cultural difference, political systems and language difference. This theory also indicates that the

7FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
companies do not have any exporting associations or business transactions with other foreign
market that can persuade export of goods within market by means of an agent (Papadopoulos,
Hamzaoui-Essoussi and El Banna 2016). Moreover, the companies can also enter a foreign
market by means of joint venture or certain other market entry modes applied by their
companies. One such example of companies that employed Uppsala internationalization model
for taking decisions on foreign market entry is IKEA that has established its internationalization
chain through implementation of this theory. The company has attained success in its
internationalization trade through recognizing opportunities based on knowledge concept along
with employing changing variables such as learning and trust building through its trade activities
(Paul and Benito 2018).
3. FDI Theories Impacting Motivations to Internalize and Entry Mode Selection
3.1. Foreign Direct Investment and Entry Mode Selection
It has observed that FDI theories explained above impacts the motivations of the
emerging multinational companies to select suitable entry mode for entering new market.
Moreover, Uppsala internationalization FDI theory is used by several emerging multinational
companies in choosing the entry mode of solely owned subsidiary along with wholly owned
subsidiary (Pitelis and Teece 2018). This theory suggests that through solely owned subsidiary
and the wholly owned subsidiary that is connected with the same investment entry modes. A
large investment within the nation can be done through sole venture with new establishment or
acquisition of sole venture along with joint venture. The sole venture entry mode is chosen based
on this FDI theory by the multinational companies in setting its new business establishment in
new countries (Sousa and Tan 2015). Moreover, in the sole venture entry mode the companies

8FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
experience high investment which brings high risks along with high returns possibility? Within
the sole venture entry mode, the companies attempt to develop a foreign market though directly
investing within the new market. This aspect is also supported by the Uppsala
internationalization FDI theory. The foreign direct investment theories impact the market entry
modes by the companies. For instance, exporting can serve as one of the effective market entry
mode for emerging multinational companies suitable for attaining profitable foreign direct
investment. This is for the reason that marketing costs and expenses are considered important in
the export entry mode selection as this offers access to effective distribution channels,
manufacturing and research and development.
3.2. Acquisition Entry Mode and Dynamic Capability Theory Fit
Acquit ion entry mode is selected by the emerging multinational companies that is
considered for with the dynamic capability FDI theory (Surdu, Mellahi and Glaister 2018). From
analyzing this theory, it has been gathered that the acquisition decision can be taken by the
managers based on its dynamic capabilities. This is for the reason that in acquisition entry mode,
the companies are focussed on establishing a lasing interest by a resident enterprise within one
economy within an organization that is a resident of some other economy (Wang et al. 2018).
Having dynamic capabilities, the company that is taking the decision of acquisition can attain an
increased degree of control on the international business within the host nation. In addition, such
capabilities can also support the organizational market entry mode selection through ensuing
transfer of technology, skills, management, marketing and manufacturing, production process
along with other resources (Surdu, Mellahi and Glaister 2018). The acquisition entry mode also
facilitates companies in determining the desired level of flexibility, commitment, presence and
risk in internationalization. Acquisition market entry mode is aligned with effective application

9FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
of international foreign direct investment theory through which the emerging multinational
companies’ foreign direct investment can be made through acquisition of a current business or
establishing a new business. Moreover, the company can also attain opportunity to attain
knowledge on the tastes, needs and preferences of consumers along with learning about the local
market creating opportunities to conduct business within the local market.
3.3. International Joint Venture and International Trade Theory Fit
International joint venture entry mode selection is impacted greatly by international trade
theory. Through following this theory, the emerging multinational companies can attain several
business advantages in the new market. International trade theory indicates that the companies
belonging to one country that produces more products with same input that other nation (Pitelis
and Teece 2018). This theory also suggests that a nation must develop goods in an action that is
highly efficient and it can also facilitate companies in maintaining absolute balance of nations.
Based on this theory, the multinational companies can take the decision of joint venture market
entry mode as this market entry strategy can facilitate companies in using its resource utilization
efficiency through combining capabilities of two companies in attaining increased productivity
(Papadopoulos, Hamzaoui-Essoussi and El Banna 2016). In addition, it through joint venture
entry mode, the multinational companies can make better use of its resources along with
improving quality of other offerings. Moreover, joint venture strategy also facilitates in
decreasing production time of the companies along with developing new market niches within
different cultures along with developing commercial frontiers for attaining competitive
advantages in the new market (Surdu, Mellahi and Glaister 2018). International expansion
decision taken by the companies are supported by international trade theory which explains that
the company requires to outperform within the international markets through its totally owned

10FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
subsidiaries through getting involved in the process along with attaining sustainable competitive
advantages. In addition, the selection of joint venture is because of the reason that it ensures
financial stability of the company. It was also imperative that the investors needs to collaborate
with companies in order to attain good reputation (Wang et al. 2018).
4. Conclusion
The objective of the paper was to analyse the FDI or foreign direct investment theories
that can facilitate managers to realise the international expansion decisions of emerging market
multinationals. It is gathered from the report that FDI theories facilitate in analysing the
outcomes of internationalization with rise in the number of emerging market multinationals.
Through implementing suitable theories of FDI the emerging market multinationals can adapt
them in operating within institutionally complex environments in domestic along with overseas
market. International joint venture entry mode selection is impacted greatly by international trade
theory. Through following this theory, the emerging multinational companies can attain several
business advantages in the new market. Moreover, it has also been observed that a large
investment within the nation can be done through sole venture with new establishment or
acquisition of sole venture along with joint venture. The sole venture entry mode is chosen based
on this FDI theory by the multinational companies in setting its new business establishment in
new countries. Having dynamic capabilities, the company that is taking the decision of
acquisition can attain an increased degree of control on the international business within the host
nation.

11FDI THEORIES IN ANALYSING INTERNATIONAL EXPANSION
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