Page 132 - DMGT545_INTERNATIONAL_BUSINESS

Unit 7: Foreign Direct Investment

approach points out that vertical FDI may be a way of building barriers to entry into an industry. notes
The strength of the market imperfections approach is that it points the conditions under which
vertical FDI might be preferable to the alternatives. Most importantly, the market imperfections
approach points to the importance of investments in specialized assets and imperfections in the
market for know-how as factors that increase the relative attractiveness of vertical FDI.

figure 7.2: a Decision framework

How High are
Transportation Costs and
Tariffs? Low Export

High

Is Know-how amenable
to Licensing No Horizontal FDI

Yes

Is tight Control over
foreign Operation
Required? Yes Horizontal FDI

No

Can Know-how be protected
by licensing Contract No Horizontal FDI

Yes

Then License

self assessment

Choose the appropriate answer:
6. Consider the case of IBM and Mexico. IBM was in a fairly strong bargaining position,
primarily because Mexico was suffering freedom a flight of capital out of the country during
1985 and 1986, which made the government eager to attract new foreign investment. But
IBM’s bargaining power was moderated somewhat by the following
(a) Size of the proposed investment was unlikely to have more than a marginal impact
on the Mexican economy.

(b) IBM was looking for a low-labour-cost most desirable location close to the United
States.

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