Business Intelligence

Ana Miranda
Agenda
• Important information
• Global latest news discussion
• Mexico in the world of exchange
• Export and Import Practices
• International Trade and Investment
• Homework
Latest News
 Why did inflation suddenly appear around
the world?

What does the Ukranian war has to do with

it?
Latest
News in What is going on with crude oil?

Mexico
How does crude oil price affect inflation?

What does Banxico 8.5 rate increase

means?
Mexico in the World
of Exchange
 • Among the 15th largest economies in the world,
2nd largest in Latin America
• Slowest emerging market of the world
• 5th largest country in America and 14th in the
world
Mexico in • Privilege location

the World of • Part of NA

• Shares language with Latin America
Exchange • Atlantic and Pacific ocean
• One of the largest markets in the world with 126
million in habitants
• 62% (78.1M) corresponds to economic active
population
• 76M to the working population
Mexico in the World of
Exchange
Mexico in the
World of
Exchange
• Mexico seeks to strengthen the economy through
responsible economic tax, financial and commercial policies
• Increase investment in infrastructure
• Implemented policies to increase saving and ensure a
higher rate of return of investments
• Pacification strategy to reduce violence
Mexico in the World of Exchange

• Mexico’s economy is diversified

• Tech industries
• Oil production
• Mineral exploitation
• Manufacturing
• Agricultural
• Mexico is the world’s 7th agricultural power, and is the
worlds largest producer of coffee, sugar, corn, oranges,
avocados, limes…
 • Cow farming and fishing are also important
activities in the food industry
• Mexico is also the 5th largest producer of beer
and it’s the largest exporter industry
Mexico in the • Mexico is also among the world’s leading
producers of many minerals
World of • Silver

Exchange • Fluorite
• Zinc
• Mercury
• Moreover, oil and gas resource, are one of the
country’s most precious possessions
Mexico in the World of
Exchange
• Aerospace is also growing thanks to the
development in Queretaro
• Goodrich
• Safran Group
• Honeywell
• Mexico is also one of the worlds 10 largest car
producers
• Thanks to significant real state investments,
construction sector is dynamic
• In 2020 manufacturing sector was deeply
affected by the pandemic, specially the
automotive, textile and beverage industries.
 • Service sector employed 61.3% of the
workforce
• High-tech information and software
Mexico in the development sectors are experiencing a
great moment, driven by the quality of the

World of workforce, and low operating costs

Exchange • Mexico produces 3.5M of barrels of oil a day

• Is the world’s 8th largest exporter
• Sales of oil account nearly 33% of the
government revenue
Mexico in the World of Exchange
Remittances are the major source of income in Mexico

Second only to oil and even the tourism industry

Money sent back in 2004 totaled 16.6 billion dollars

2020 Q1 : 9.4 billion USD

2021 Q1: 20.6 billion USD

• Highest level ever since records began in 1995

 Mexico in the World of
Exchange
• Mexico’s main trading partner is the US (82.7%) and second
is Canada (5.4%)
• Mexico also negotiated free trade agreements with
• Costa Rica
• Nicaragua
• Honduras
• El Salvador
• Guatemala
• Mexico’s trade agreements allow its manufacturers duty
free access to a large portion of the world
 • Signed in 1994 by USA, Mexico and
Canada
• Born when American companies began to
move to Mexico where cost of labor is
1/10 of what it is in the US
• It would support thousands of new jobs
Mexico in the in Mexico and help modernize Mexican
economy
World of • Under the agreement exports have grown
from 52 billion in 1994 to 161 billion USD
Exchange - today

NAFTA
Mexico in the
World of
Exchange - • Revised version of NAFTA 2018
• Good: Treat was modernized, covering
USMCA more areas for digital commerce
• Bad: Few sector that receive modifications
are the more important to Mexico like
vehicles and auto parts
Mexico in the
World of Exchange
• Other good news
• With growing distrust between US
and China, Mexico has been able to
fill a board in imports.
• Mexico’s markets have remained
open
• Exports have grown sine AMLO has
come into the power
 Mexico in the World
of Exchange
• International trade* equals 80.5% of the country’s
GDP
• Higher than Brazil’s 29.1%
• Even China’s 38.2%
• Mexican companies have access to US market, this
makes Mexican companies globally competitive
• GRUMA: world’s largest tortilla maker
• Bimbo: largest bread maker

*International Trade = Exports + Imports

Mexico in the World
of Exchange
• Between 2010 and 2019 Mexico grew from the 9th to
the 7th largest passenger vehicle manufacturer
• 4th largest exporter
• 5th largest producer in autoparts
Mexico in the World of Exchange
• Mexican economy ended 2020 with the
largest drop in GDP since the great depression
• Contracting 8.3% in real terms from the
previous year
• Economy grew quarter to quarter 0.8% moved
by the solid recovery in USD economy
• It’s expected economy to recover pre-
pandemic levels until 2023
• One of the largest country in Latin
America that will take the longest to
recover
Mexico in the World of
Exchange
Many Americans worry out of illegal emigration from Mexico and
supported Donald Trump immigration policies

Mexico is gaining immigrants itself

Between 2000 and 2010, NY Times reported its illegal population

doubled to 1M total

Many of these are Americans or Mexicans born in America, who

appreciate the lower cost of living

As a result, more Americans have emigrated to Mexico on the past few

years, than vice versa.
Export and Import Practices
 • Why do companies not export?

Export and
• Preoccupation with the home market
• Reluctance to embark n a new and unknown operation

Import The countries that are most closed to trade tend to be

Practices
the poorest in the world. Countries that have reduced
trade barriers and increased the share of imports and
exports in their economies tend to be among the fastest
growing nations.
- Arnold King
 • By calling on an export assistance program for
some guidance. Such programs are readily
available in Japan, the European Union, and the
United States.
How do • In addition, there is support from organizations
firms begin and foundations for assisting potential exporters
from less-developed nations.
their foreign • The Hinrich Foundation and the World Bank
market offer support targeted to building export
capabilities in firms located in less-developed
research? economies.
• Once the potential exporter has established that
there may be a market for the firm’s products,
it’s time to draft the export marketing plan.
 Once the firm knows that a potential market
exists, it needs to choose between exporting
How do indirectly through gov’s based exporters or
exporting directly using its own staff.
firms begin
If it opts for indirect exporting as a way to test
their the market, a trade specialist, either from a
consultancy or from one of the government
foreign programs, can provide assistance.

market If the firm sets up its own export operation,

the next step is to find and establish overseas
research? distribution.
Mistakes Made by
New Exporters
Strategy Failing to obtain qualified export counseling and to
develop a master international strategy and
marketing plan before starting an export business.

Long Term Making an insufficient commitment to overcome the

View initial difficulties and financial requirements of
exporting.

Reputation Taking insufficient care in selecting overseas sales

representatives and distributors. The selection of
each foreign distributor is crucial.

Focus Chasing orders from around the world instead of

establishing a basis for profitable operations and
orderly growth.
Mistakes Made by
New Exporters
Neglect Neglecting export business when the
home market booms.

Equal treat Failing to treat international distributors

and customers on an equal basis with
their domestic counterparts.
Assuming Assuming that a given market technique
and product will automatically be
successful in all countries.
Cultural Failing to modify products to meet
Adaptation
regulations or cultural preferences of
other countries.
Mistakes Made by
New Exporters
Language Failing to provide service, sales, and warranty information in
locally understood languages.

EMC Failing to consider the use of an export management company

(EMC).

Marketing Failing to consider licensing or joint venture agreements. Import

restrictions in some countries, insufficient human or financial
resources, or a too-limited product line can cause many
companies to dismiss international marketing as unfeasible.

Service Failure to provide readily available servicing for the product. A

product without the necessary service support can acquire a bad
reputation quickly, potentially preventing further sales.
Export Marketing Plan
• As soon as possible, the firm needs to draft its export marketing plan.
• An experienced firm will already have a plan in operation, but newcomers may need to
wait until they have accumulated at least some information from foreign market
research.
• Essentially, the export marketing plan takes the same approach as the domestic
marketing plan.
• It should be specific about the markets to be developed, the marketing strategy for
serving them, and the tactics required to carry out the strategy.
• Sales forecasts and budgets, pricing policies, product characteristics, promotional
plans, and details on arrangements with foreign representatives are required.
• The export marketing plan spells out what must be done and when, who should do it,
and what the costs are.
Incoterms, • Firms beginning to export are often concerned
Pricing, about how to price, the terms of sale, and the
payment process.

Terms of • Related to the first two of these, are the export

terms of sale, the conditions of sale that stipulate

Sale, and
the point at which costs and risks are borne by the
buyer, which is different from the process in the
domestic market.
Payment
INCOTER • The International Chamber of Commerce
created Incoterms, a series of 11

MS internationally standardized terms that

describe the conditions of sale and the
responsibilities of the buyer and seller in
international trade transactions.
• Incoterms describe the three issues that
arise in a commercial transaction:
• Which party does which tasks
• Which party covers the costs
• Which party bears the risk.
.
INCOTERM
S
Terms of Sale
• In an export sale, the sales agreement needs to specify as simply as
possible the duties of both the firm’s foreign representative (the
buyer) and the firm.
• To be absolutely safe, the firm should register all patents and
trademarks.
• Exporters from any country are likely to prefer to stipulate the laws of
their home country. Many nations, especially those of Latin America,
follow the Calvo Doctrine, which holds that cases should be tried
under local, and not foreign, law.
Export Financing
• Although exporters would prefer to sell on Letter of Credit terms
because it is almost riskless, increased foreign competition forces
them to offer credit. To do so, they need to be familiar with the
available sources and kinds of export financing, both private and
public
• Commercial banks have always been a source of export financing
through loans for working capital and the discounting of time drafts
Factoring
• Factoring and forfaiting are two ways of financing exports
• Factoring is the sale of an exporter’s accounts receivable on ordinary goods, with the balance of the
payment due upon delivery or soon after.
• Factoring permits the exporter to be more competitive by selling on open account rather than by the
more costly letter-of-credit method.
• This financing technique passes the risk to the factor, which may be a factoring house or a special
department in a commercial bank.
• Under the export factoring arrangement, the seller passes its export order to the factor for approval
of the importer’s credit risk.
• Once the order has been approved, the exporter has complete protection against bad debts and
political risk.
• The importer pays the factor, which, in effect, acts as the exporter’s credit and collection department.
• The period of settlement generally is under 180 days.
Forfaiting
• In contrast, forfaiting is the sale of an exporter’s accounts receivable
on capital goods, commodities, and other high-value goods, with the
payment due at least 180 days out, and possibly extending to as long
as five years.
• The forfaiter purchases the accounts receivable and discounts it for
the entire credit period.
• Through forfaiting, the exporter can convert its long-term, credit-
based sale into a cash transaction.
Free Trade: By specializing in
production instead of producing
everything, each nation would
profit from free trade
- Adam Smith
Export Shipments
• The physical movement of exported goods has been a welcome innovation in
material-handling techniques that can help exporters reduce costs and perhaps
reach markets they previously could not serve.
• Containerization, LASH, RO-RO, size, and air freight all offer increasingly cheaper,
faster, and safer transportation solutions, shrinking our globe.
• One means of reducing both theft and handling costs is to use containers, large
boxes—8 feet by 8 feet by 10, 20, or 40 feet—that the seller fills with the shipment
in the firm’s warehouse.
• Once packed, the containers are then sealed; they are opened when the goods arrive
at their final destination
• Containers are transported by truck or rail from the warehouse to shipside for
loading.
Export Shipments
• From the port of entry, railroads or trucks deliver them, often
unopened even for customs inspection, to the buyer’s warehouse.
• In most countries, customs officials go to the warehouse to examine
the shipment. This integrated process reduces handling time and the
risk of damage and theft because the buyer’s own employees unload
the containers.
• If the importer or exporter has a warehouse on a river too shallow for
ocean vessels, the firm can save time and expense by loading
containers on barges.
LASH and Ro-Ro
• LASH (lighter aboard ship) vessels provide direct access to ocean freight
service for exporters and importers located on shallow inland waterways.
• Sixty-foot-long barges (“lighters”) are towed to inland locations, loaded, and
towed back to deep water, where they are loaded aboard anchored LASH
ships.
• Another innovation in cargo handling is RO-RO (roll on–roll off) ships.
Loaded trailers and any equipment on wheels can be driven onto these
specially designed vessels.
• RO-RO service has brought the benefits of containerization to ports that
have been unable to invest in the expensive lifting equipment required for
containers.
Air Freight
• Air freight has had a profound effect on international business
because it permits shipments that once required 30 days to arrive in 1
day.
• Huge freight planes carry payloads of 200,000 pounds, most of which
goes either in containers or on pallets.
• Airlines guarantee overnight delivery from New York to many
European airports and claim that their planes can be loaded or
unloaded in 45 minutes.
Air Freight
• Newcomers to exporting might assume that ocean freight is a better
choice than air freight because ocean freight is so much cheaper.
• Comparison of total costs of each mode may suggest otherwise. Total cost
components that may be lower for air freight include
• Insurance rates, because of a smaller chance of damage during shipment
• Packing costs, because the shipment does not need the heavier, more costly export
packing, which is usually done by an outside firm
• Customs duties, when calculated on gross weights
• Replacement costs for damaged goods, again because of the reduced damage risk
• Inventory costs, because rapid delivery by air freight often eliminates the need for
expensive warehouses
International Trade
Investment
Major Trading Partners

Advantages to know which countries are our nation’s major trade partners

1. The business climate in these importing nations is already relatively favorable

2. Export and import regulations are not insurmountable
3. There should be no strong cultural objections at home to buying that nation’s goods
4. Satisfactory transportation facilities have already been established
5. Import channel members (merchants, banks, and customs brokers) are ­experienced in handling import shipments from the exporter’s area
6. Currency from the foreign country is available to pay for the exports
7. The government of a trading partner may be applying pressure on its importers to buy from countries that, like the United States, are good customers for that
nation’s exports

These sorts of advantages promote the expansion of trade among countries that are major trading partners, and their presence may present a company with
improved prospects for expanding its international trade activities
International Trade Theories

Mercantilism
Absolute Advantage
Comparative Advantage
Mercantilism
• A complex political and economic theory, mercantilism viewed precious metals like gold
and silver as the only source of wealth, and their accumulation as essential to a nation’s
welfare.
• Because England had no gold or silver mines, mercantilists looked to exploration and
international trade to supply these metals.
• The government established restrictions such as import duties to reduce imports and
subsidies to exporters to increase exports.
• In addition to protecting jobs within the mercantilist nation, those acts created a trade
surplus meant to generate increased holdings of gold and silver.
• Of course, mercantilism also generated benefits for certain economic groups, such as
domestic merchants, artisans, and shippers, though at a cost to other groups such as
consumers and emerging industrialists.
Mercantilism
• Although the mercantilist era ended in the late 1700s, its arguments live on. Many people see trade as
a zero-sum activity, in which one party must lose in order for another to gain. We still use the term
“favorable” trade balance to mean a nation exports more goods and services than it imports. In
balance-of-payments accounting, an export that brings money to the country is called positive, but
imports that cause monetary outflows are labeled negative.
• Many of the world’s managers see China as a present-day “fortress of mercantilism” that raises
barriers to imported goods while giving its own exporters an unfair advantage.
• Despite impressive economic growth and burgeoning trade surpluses, Chinese authorities have limited
the extent to which that country’s currency, the yuan, can appreciate in value relative to the U.S. dollar.
• The Chinese authorities have improved the international cost-competitiveness of Chinese companies
relative to those of other nations. One study argues that 40 percent of the price advantage of Chinese
companies is due to the mercantilist policies of their central government, including an undervalued
currency, export subsidies, and lax regulatory oversight. Some international observers have also
suggested that the United States has adopted a more mercantilist approach in recent years.
 Adam Smith argued against mercantilism by claiming that market forces,
not government controls, should determine the direction, volume, and
composition of international trade.

He advocated free, unregulated trade, in which each nation should

specialize in making those goods it could produce most efficiently—

Theory of
goods for which it had an absolute advantage, either natural or acquired.

Absolute advantage exists when a nation can produce more of a good or

Absolute service than another country for the same or lower cost of inputs.

Advantage Nations would then export some goods to pay for imports that have
been produced more efficiently elsewhere.

With his theory of absolute advantage, Smith showed that both nations
gain from trade.
Theory of Comparative Advantage
• British economist David Ricardo demonstrated in 1817 that even though one nation held
an absolute advantage over another in the production of each of two different goods,
international trade could still be a positive-sum game in which both countries benefit.
• The only limitation to such benefit-creating trade is that the less efficient nation cannot
be equally less efficient in the production of both goods.
• Each country specializes in what it does better
• Comparative advantage serves as a basis for international trade even when one nation
has an advantage over another in the production of each of the goods being traded. We
have not mentioned money; however, a nation’s comparative advantage can be affected
by differences between the costs of production factors in that country’s currency and
their costs in other currencies Money can change the direction of trade
 Difference in Resource Endowments

Overlapping Demand
Theories of
International Product Life Cycle
Direction
of Trade Economies of Scale and the Experience
Curve
National Competitive Advantage from
Regional Clusters
Difference in Resource Endowments

• Differences in resource endowments will make developed countries more likely to trade
with developing countries whose resource endowments are likely to be very dissimilar
than with other developed countries whose endowments are similar.
• According to this theory, countries would export products requiring large amounts of
their abundant production factors and import products requiring large amounts of their
scarce production factors
• This theory explains the international trade in many primary products, such as forest
products, petroleum, and minerals. It can also help explain why the United States
exports capital-intensive products such as aircraft while importing labor-intensive
products such as jeans or athletic shoes.
Overlapping Demand
• In contrast to resource endowment–based theory, economist ­Stefan Linder proposed his theory of
overlapping demand, which argues for the existence of similar preferences and demand for products
and services among nations with similar levels of per capita income.
• According to Linder, customers’ tastes are strongly affected by their income levels, and therefore a
nation’s level of income per capita determines the kinds of goods its people will demand.
• For example, countries with high levels of average income may have substantial levels of demand for
items such as large-display televisions, high-fashion branded clothing, jewelry, luxury automobiles, and
gourmet foods and beverages.
• In contrast, countries with low average incomes may exhibit a greater demand for simpler and more
basic items of food, clothing, and shelter.
• Because an entrepreneur will produce goods to meet the demands of consumers, the kinds of
products manufactured will reflect the country’s level of income per capita. Goods produced for
domestic consumption will eventually be exported to countries that have similar levels of income,
and therefore, demand.
International • The concept of an international product
life cycle (IPLC) was developed by
Product Life Raymond Vernon of Harvard.
• This theory addresses the role of
Cycle innovation in trade patterns by explaining
why a product that begins as a nation’s
export eventually becomes its import,
thus viewing a product as going through a
full life cycle.
• The initial stage of the cycle, innovation,
borrows from the theory of overlapping
demand in terms of the motivations and
response of entrepreneurs to develop
products that meet the rising demand in
a particular market
International
Product Life
Cycle
United States has the largest population of high-
income consumers of any nation in the world,
competition for their patronage is intense.
 • Stage 1. U.S. innovates and exports: For a while, U.S. firms will be the only manufacturers of a
new product developed in the United States. As overseas customers learn about the product,
they will have to buy it from U.S. firms. The export market develops over time, as the U.S.
manufacturer ships products to these overseas customers.

• Stage 2. Foreign production will begin, which also reduces the cost of transportation and local
communication. The U.S. firm will still be exporting to those markets where there is

International
no production, but its export growth will diminish as licensing and foreign direct ­investment
substitute for exports as sources of supply to various international markets.

Product Life
• Stage 3. In this stage, foreign firms are competing in U.S. export markets, and as a result, U.S.
export sales will continue to decline. The innovating U.S. firms may have developed newer
versions of the product and begun scaling back production of the original in order to begin
focusing on innovations

Cycle • Stage 4. Import competition appears: If foreign producers attain sufficient economies of scale,
they may be able to compete in quality with and underprice U.S. firms in the domestic
market. From that point on, the U.S. market will be served exclusively (or nearly so) by
imports. Televisions, footwear, and semiconductor chips are examples. The rise in imports
puts increasing pressure on the innovating companies to achieve product innovation and
improvement, which may initiate a new IPLC.
• The IPLC concept may even be repeated as less-developed countries (LDCs) with still lower
labor costs obtain the technology and thus acquire a cost advantage over industrialized
nations.
Economies of Scale and the Experience
Curve
• In the 1920s, economists began to consider that most industries benefit from economies of scale, which is the predictable
decline in the average cost of producing each unit of output as a production facility gets larger and output increases.
• This occurs because larger and more efficient equipment can be employed, companies can obtain volume discounts on
their larger-volume purchases, and fixed costs such as research and design and administrative overheads can be allocated
over a larger quantity of output.
• Most manufacturing is subject to economies of scale, and mining and transportation industries also tend to benefit from
increasing returns to scale. Production costs also drop because of the experience curve, which refers to the rising scale
on which efficiency improves as a result of cumulative experience and learning. That is, as firms produce more, they learn
ways to improve production efficiency, reducing production costs by a predictable amount.
• Economies of scale and the experience curve affect international trade because they can permit a nation’s industries to
become low-cost producers without having an abundance of the resources used as inputs, such as minerals or labor.
• Then, just as in the case of comparative advantage, nations specialize in the production of a few products and trade with
others to supply the rest of their needs. International trade is promoted because a nation’s companies may not be able to
fully achieve the potential economies of scale by serving only the domestic market, even within countries as large as the
United States. Consumers can benefit from higher quality and lower prices for products
National Competitive Advantage from
Regional Clusters
• National competitiveness is a nation’s ability to design, produce, distribute, or service products
within an international trading context while earning increasing returns on its resources.
• Michael Porter’s model of national advantage claims that four kinds of variables will influence
firms’ ability to utilize their country’s resources to gain a competitive advantage:

• Demand conditions: The nature of domestic demand matters, rather than merely the size. If a firm’s
customers are sophisticated and demanding, the firm will strive to produce high-quality and innovative
products and, in doing so, will obtain a global competitive advantage over companies located where
domestic pressure is less.

• Factor conditions: Porter distinguishes between basic factors (inherited factors, such as land, location, or
natural resources) and advanced factors (those created from investments made by individuals, companies,
or governments, such as a nation’s transportation systems, or university research institutes). Lack of natural
endowments has caused nations to invest in creating advanced factors, such as an educated workforce,
deep-water ports, and advanced communications systems, to enable their industries to compete globally.
National Competitive Advantage
• Related and supporting industries: Firms in an industry, with their suppliers, their
suppliers’ suppliers, and so forth, tend to form a cluster in a given location, providing a
network of suppliers and subcontractors and a commercial infrastructure.
• Firm strategy, structure, and rivalry: Porter says companies subject to heavy
competition in their domestic markets are constantly striving to improve their
efficiency and innovativeness, which makes them more competitive internationally.
• In addition to these four variables, Porter claimed that competitiveness could
be affected by government policies such as incentives, subsidies, temporary
protection from foreign competitors, or infrastructure development, and by
random events such as the location and timing of research breakthroughs or
luck.
International • International trade theory shows that nations will
attain a higher level of living by specializing in
Trade goods for which they possess a comparative
advantage and importing those for which they
Theory have a comparative disadvantage.
• Generally, trade restrictions that stop this free flow
Summary of goods will harm a nation’s welfare.
Foreign • Portfolio Investment: purchase of stocks and
bonds solely for the purpose of obtaining a

Investment
return on the funds invested
• Foreign Direct Investment (FDI): cross border
investment between economies
• Annual FDI outflow—the amount invested each
year into other nations—often fluctuates
substantially, due to factors such as the level of
economic growth within and across nations and
regions of the world
• The proportion of annual FDI investments going
into developed countries has declined
significantly in recent years, falling from an
average of 76% for 1998–2002 to 54% for 2013–
2017.42
• This decline corresponds with the rapid increase
in the proportion of FDI going to developing
countries, particularly in Asia and Latin America
Importance of FDI
• Even though it is impossible to make an accurate determination of the present value of
foreign investments, we can get an idea of the rates and amounts of such investments
and of the places in which they are being made.
• This is the kind of information that interests managers and government leaders and is
analogous to what we seek in the analysis of international trade.
• If a nation is continuing to receive appreciable amounts of foreign investments, its
investment climate must be favorable.
• This means the political forces of the foreign environment are relatively attractive and
the opportunity to earn a profit is greater there than elsewhere.
Theories of International Investment

Monopolistic Advantage Theory

Strategic Behavior Theory
Internalization Theory
Dynamic Capabilities Theory
Electric Theory of International Production
Monopolistic Advantage Theory
• FDI is made by firms in ­industries with relatively few competitors, due
to their possession of technical and other advantages over indigenous
firms.
• This theory stems from research showing that FDI occurs largely in
industries in which there are only a small number of competitors
(such as pharmaceuticals) rather than in those with many vigorously
competing firms.
Strategic Behavior Theory
• FDI occurs within an oligopolistic industry, which has a limited
number of competing firms, the actions of one firm can strongly affect
the performance of ­others in that industry
• The ­strategic behavior theory suggests that strategic rivalry between
firms in an oligopolistic industry will result in firms closely following
and imitating each other’s international investments in order to keep
one competitor from gaining an advantage
Internalization Theory
• To obtain a higher return on its investment, a firm will transfer its superior
knowledge to a foreign subsidiary that it controls, rather than sell it in the
open market.
• Internalization theory begins with the assumption that a firm may have
knowledge superior to that of its competitors, such as knowledge that
results from successful research and development efforts.
• The expected result, according to internalization theory, is the firm’s ability
to realize a superior return on the investment made to produce this
knowledge, particularly as the knowledge is embodied in various products
or services that are sold to customers.52
Dynamic Capabilities Theory
• For a firm to successfully invest overseas, it must have not only
ownership of unique knowledge or resources, but also the ability to
dynamically create, sustain, and exploit these capabilities over time
• Companies such as IBM or Microsoft typically develop centers of
excellence in order to develop distinctive competencies that will be
subsequently applied to their investments within the host countries.
Electric Theory of International Production
• A mix of the previous theories. For a firm to invest in facilities overseas, it must have three kinds of advantages:

• Ownership-specific advantage: This is the extent to which a firm has or can develop a firm-specific advantage through
ownership of tangible and intangible assets like technology, economies of scale or scope, and monopolistic advantages

• Location-specific advantage: A foreign market must have specific economic, social, or political characteristics, like market
size, tariff or non-tariff barriers, or transport costs that will permit the firm to profitably exploit its firm-specific advantages
by locating to that market rather than exporting to it.

• Internalization advantage: Firms have various alternatives to entering foreign markets, ranging from making arm’s-length
market transactions to operating wholly owned subsidiaries. It is in the firm’s best interests to exploit its ownership-­specific
advantages through internalization options, which mean retaining ownership and control, where either the market does
not exist or it functions inefficiently, making the transaction costs of market-based (arm’s-length) options too high.

• The eclectic theory is sometimes referred to as the “OLI model”, using the initials of the three advantages.