Internalization theory: FDI in China

timer Asked: Aug 19th, 2013

Question Description

I’m studying for my Business class and need an explanation.

3-5 Pages APA citations

According to the internalization theory, firms that have intangible assets
with a public good property tend to undertake FDI to take advantage of the
assets on a large scale and, at the same time, prevent misappropriation of
returns from the assets that may occur during arm’s length transactions in
foreign countries. The theory can be effective in explaining greenfield
investments, but not in explaining mergers and acquisitions.

Recently, China attracted a great deal of FDI because foreign firms want to
(I) take advantage of inexpensive labor and resources, and also (ii) gain access
to the Chinese market that is often not accessible otherwise.

  1. Please explain Vernon’s product life-cycle theory of FDI. What are the
    strength and weakness of the theory?
  2. Why do you think the host country tends to resist cross-border acquisitions,
    rather than greenfield investments?
  3. How would you incorporate political risk into the capital budgeting process
    of foreign investment projects?
  4. Please discuss and compare forward vs. backward internalization.
  5. Discuss how would you incorporate currency exchange risk into the capital
    budgeting process of foreign investment.

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