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.

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.(Please discuss each question and use China for the discussion.)

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 you would incorporate currency exchange risk into the capital budgeting process of foreign investment.

 
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