INTERNATIONALIZATION

THEORIES & FOREIGN

INVESTMENT
Group No.:-2
Team Members
 Rupali Jaiswal
 Kiran Singh
 Anjeeta Singh
 Chandra Prakash Singh
 Mohd Waseem
INTERNATIONALIZATION
Internationalization is the process of increasing
involvement of enterprises in international markets. It
is the process of designing of a product in such a way
that it will meet the needs of users in many countries or
can be easily adapted to do so.
Entrepreneurs and enterprises

Those entrepreneurs who are interested in the field of

internationalization of business need to possess the ability to think
globally and have an understanding of international cultures. By
appreciating and understanding different beliefs, values, behaviors
and business strategies of a variety of companies within other
countries, entrepreneurs will be able to internationalize successfully.
Entrepreneurs must also have an ongoing concern for innovation,
maintaining a high level of quality, be committed to corporate social
responsibility, and continue to strive to provide the best business
strategies and either goods or services possible while adapting to
different countries and cultures.
INTERNATIONALIZATION THEORIES
 Location theory
 Market imperfection theory
 New Trade Theory
 Diffusion of innovations (Rogers, 1962)
 Eclectic paradigm (John H. Dunning)
 Foreign direct investment theory
 Monopolistic advantage theory (Stephen Hymer)
 Non-availability approach (Irving B. Kravis, 1956)
 Technology gap theory of trade
 Uppsala model
Location theory

 Location theory is concerned with the

geographic location of economic activity; it
has become an integral part of economic
geography, regional science, and spatial
economics. Location theory addresses the
questions of what economic activities are
located where and why.
Market imperfection theory

 Market imperfection can be defined as

anything that interferes with trade. This
includes two dimensions of imperfections.
First, imperfections cause a rational market
participant to deviate from holding the
market portfolio. Second, imperfections cause
a rational market participant to deviate from
his preferred risk level.
New Trade Theory

 New Trade Theory (NTT) is the economic

critique of international free trade from the
perspective of increasing returns to scale and
the network effect. Some economists have
asked whether it might be effective for a
nation to shelter infant industries until they
had grown to a sufficient size large enough
to compete internationally.
Diffusion of innovations
 Diffusion of innovation is a theory of how, why,
and at what rate new ideas and technology
spread through cultures. Everett Rogers
introduced it in his 1962 book, Diffusion of
Innovations, writing that "Diffusion is the
process by which an innovation is
communicated through certain channels over
time among the members of a social system."
Eclectic paradigm
 The eclectic paradigm is a theory in economics and is
also known as the OLI-Model. It is a further
development of the theory of internationalization and
published by John H. Dunning in 1993. The theory of
internationalization itself is based on the transaction
cost theory. This theory says that transactions are
made within an institution if the transaction costs on
the free market are higher than the internal costs.
This process is called internationalization.
Foreign direct investment theory

 Foreign direct investment (FDI) in its classic form is defined as a

company from one country making a physical investment into
building a factory in another country. It is the establishment of an
enterprise by a foreigner.The FDI relationship consists of a parent
enterprise and a foreign affiliate which together form a multinational
corporation (MNC). In order to qualify as FDI the investment must
afford the parent enterprise control over its foreign affiliate. The
International Monetary Fund (IMF) defines control in this case as
owning 10% or more of the ordinary shares or voting power of an
incorporated firm or its equivalent for an unincorporated firm; lower
ownership shares are known as portfolio investment.
Monopolistic advantage theory
 The monopolistic advantage theory is an
approach in international business which
explains why firms can compete in foreign
settings against indigenous competitors and
is frequently associated with the seminal
contribution of Stephen Hymer.
Non-availability approach
 The non-availability explains international trade by the
fact that each country imports the goods that are not
available at home. This unavailability may be due to lack
of natural resources (oil, gold, etc.: this is absolute
unavailability) or to the fact that the goods cannot be
produced domestically, or could only be produced at
prohibitive costs (for technological or other reasons):
this is relative unavailability. On the other hand, each
country exports the goods that are available at home.
Technology gap theory of trade

 The technology gap theory describes an advantage

enjoyed by the country that introduces new goods
in a market. As a consequence of research activity
and entrepreneurship, new goods are produced and
the innovating country enjoys a monopoly until the
other countries learn to produce these goods: in the
meantime they have to import them. Thus,
international trade is created for the time necessary
to imitate the new goods (imitation lag).
Uppsala model

 The Uppsala model is a theory that explains how firms gradually

intensify their activities in foreign markets. It is similar to the
POM model. The key features of both models are the following:
firms first gain experience from the domestic market before
they move to foreign markets; firms start their foreign
operations from culturally and/or geographically close countries
and move gradually to culturally and geographically more
distant countries; firms start their foreign operations by using
traditional exports and gradually move to using more intensive
and demanding operation modes (sales subsidiaries etc.) both at
the company and target country level.
Foreign Portfolio Investment
Explanation:-
 A foreign portfolio investment is a grouping of assets such as stocks,
bonds, and cash equivalents. Portfolio investments are held directly by
an investor or managed by financial professionals. In economics, foreign
portfolio investment is the entry of funds into a country where foreigners
 deposit money in a country's bank or make purchases in the country’s 
stock and bond markets, sometimes for speculation.

 Foreign portfolio investment shows up in a country's capital account. It

is also part of the balance of payments which measures the amount of
money flowing in and out of a country over a given time period.
Foreign Direct Investment
 Foreign direct investment

 A foreign direct investment (FDI) is an investment in the

form of a controlling ownership in a business in one
country by an entity based in another country. It is thus
distinguished from a foreign portfolio investment by a
notion of direct control.
 The origin of the investment does not impact the
definition, as an FDI: the investment may be made either
"inorganically" by buying a company in the target country
or "organically" by expanding the operations of an existing
business in that country.
 BASIS FOR COMPARISON FDI FPI

Meaning FDI refers to the investment made by the When an international investor, invests in the
foreign investors to obtain a substantial passive holdings of an enterprise of another
interest in the enterprise located in a country, i.e. investment in the financial asset,
different country. it is known as FPI.

Role of investors Active Passive

Degree of control High Very less

Term Long term Short term

Management of Projects Efficient Comparatively less efficient.

Investment in Physical assets Financial assets

Entry and exit Difficult Relatively easy.

Results in Transfer of funds, technology and other Capital inflows

resources.