Discussion Questions

If a multinational enterprise (MNE) wants to acquire varied experiential knowledge based on its presence in different Asian counties while maintaining effective control to certain degree, what mode of entry do you suggest and why?

Foreign Direct Investment (FDI). FDI has been found to be an important channel through which international diffusion of knowledge and technology takes place. Through FDI, a firm can establish its physical presence by owning productive assets such as capital, technology, land, plant and equipment, and has influence over the management, operations and policies. FDI also allows the firm to obtain the services of skilled employees in Asian markets or gain intelligence held by people in the market. It demonstrates greater engagement with the economy and society and helps the company in furthering its Asian market entry.

This is a case of vertical FD because Honda (Japan) invests abroad in other operations to exert control over the supply of inputs and to acquire dealers in order to sell its cars to consumers in Asia. It implements both backward vertical and forward vertical FDI. While vertical FDI refers to investment in activities along the firm’s existing supply chain to avail the benefits of vertical integration, horizontal FDI takes place when a firm invests abroad in the same industry in which it operates in the home country. It represents a geographical diversification of the MNEs-established domestic product line.

International licensing. Licensing allows The Walt Disney Company (USA) to reap the benefits of using its existing intellectual properties for foreign expansion without any additional investment. It also allows licensees like Disney to enter Asian markets, which often restrict entry through tariff barriers. However, the licensor often faces difficulty in maintaining satisfactory quality control over the licensee’s manufacturing and marketing operations, which can damage their trademark and reputation. Very often, a licensee becomes a competitor, especially if the original licensing agreement does not specify the regions within which the licensee is allowed to market the licensed product.