Direct Foreign Investment: Costs and Benefits

By Richard D. Robinson | Go to book overview

Preface
The chapters in this book were originally created to brief the participants of a March 1985 conference in China on various national policies relative to foreign business, the costs and benefits of such intervention, and corporate response to it. These chapters complement the companion volume dealing more specifically with the Chinese situation, Foreign Capital and Technology in China.What is missing is discussion of corporate strategic decision making. The following few pages attempt to fill that gap, thereby putting in context the various forms of government intervention, and the presumed costs and benefits of such.Although not always made explicit, it would appear that corporate strategic decision makers have a model in their heads, a mental map representing a systematic approach. In the more internationally experienced firms, one suspects, this model, or process, tends to be more explicit. Essentially, it consists of five continuous and interactive steps:
Identifying the separable links in the firm's value-added chain.
In the context of those links, determining the location of the firm's competitive advantages, considering both economies of scale and scope.
Ascertaining the level of transaction costs between links in the value-added chain, both internal and external, and selecting the lowest cost mode, which implies conscious steps to minimize those transaction costs.
Determining the comparative advantages of countries (including the firm's home country) relative to the production of each link in the value-added chain and to the relevant transaction costs.
Developing adequate flexibility in corporate decision making and organizational design so as to permit the firm to respond to changes in both its competitive advantages and the comparative advantages of countries, both being highly dynamic.

Each of these steps requires some further definition and expansion.

A firm's product, whether it be "hard" (a good) or "soft" (a service), consists of a bundle of activities--a value-added chain--some or all of whose links may be performed by the firm itself (i.e., internalized). Others may be purchased from unrelated parties, or contracted out (i.e., externalized). It is often rewarding to look at what theoretically could be performed by a

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