Political Science

Main Idea
The main idea envisioned in the article is the conditions necessary for multinationals carry out direct domestic investment as opposed to other expansion methods. First the author acknowledges that, trends in multinational enterprises have invalidated the theory of comparative advantage. The cross boarder spreading of multinational companies, has given rise to the new trade theory. According to this theory, countries can gain from trade independent of comparative advantage.

For an international company to venture in another country it must be different from domestic firms, for it to be profitable in the domestic market. Relocation entails additional costs of carrying out business operation in the new country that include communication and transport cost, cost of recruiting professionals and government requirements.

An enterprise that posses some special advantage over other such as unique product or production process will rise above others in the domestic market. Therefore, because of disadvantages and high cost of doing business in foreign country, it essential, that the company identifies the advantages and conditions favorable for direct foreign investment to take place.

Important facts
To support the idea on conditions under which direct foreign investment will occur, the author has discussed three conditions that need to be present for business to undertake direct domestic investment namely ownership, location and internalization advantages.

Ownership advantage refers to product of production process which the venturing company has that other domestic enterprises have no access to. They include patent or trade secrete. Ownership advantage gives the company a kind of market power over other companies.

Location advantage refers to positioning the enterprise in point whereby it is profitable to produce a certain product in a foreign country rather than producing it domestically and then export. Sources of location advantage include tariffs, taxes, cheap factors of production and above all access to customers.

With internalization advantage, decision to invest in foreign country is evaluated internally rather than market. The fact that a company may be enjoying both ownership and location advantages does not mean that it should set up branch abroad  but more decision need to be taken.

Ideas discussed here and in another book
The condition necessary for direct domestic investment to take place discussed in this article are also discussed by, Thomas and Young in the book the new economic analysis of multinationals an agenda for management, chapter three page 45-55. Thomas and young concur with the arguments put forward in this article as the necessary conditions for foreign direct investment to occur.

Thomas links the OLI framework to a three-legged stool whereby each leg is supportive of each other and the stool can only function if the three legs are evenly balanced. This example of stool is used to invalidate notion by economist Wilfred Ethier (1986), who concluded that internalization component appears to be the major factor of the three.

Bias found in the article
There exist two forms of capital physical and knowledge. In explaining the condition necessary for an enterprise to set up foreign subsidiary, under ownership advantage the author has give credit to knowledge capital that physical. According to the author, knowledge capital is more likely to give rise to direct foreign investment. In my view this two goes together and no one (knowledge and capital) is more superior.

New termsconcepts
Internalization advantage is whereby a multinational enterprise is able to deliver goods or services where other firms cannot. It allows multinational firm to take advantage of market failure by others to make profit.

New trade theory is a critique of free trade advanced by economist to challenge the idea of protectionist as a measure to shelter infant industries. It is build on the idea of increasing to scale to argue that to build industrial base was path independent of comparative advantage.

Horizontal direct investment There are several ways through which a multinational enterprise can serve foreign market. One of these ways is through foreign production which involves either direct investment or some alternatives such as joint venture or licensing. Horizontal direct investment is form of foreign production whereby the firm produces products and services similar to those the firm produces at home, in multiple foreign countries rather than just invest in export.

Vertical direct investment is whereby a multinational company fragments its production process in geographical terms and locates each stage of production in different country where production can be done at low cost.