CHAPTER 5

Ethics and Social

Responsibility in International
Business
Chapter Objectives

After studying this chapter, students should be able to:

1. Describe the nature of ethics.

2. Discuss ethics in cross-cultural and international contexts.
3. Identify the key elements in managing ethical behavior across borders.
4. Discuss social responsibility in cross-cultural and international
contexts.
5. Identify and summarize the basic areas of social responsibility.
6. Discuss how organizations manage social responsibility across
borders.
7. Identify and summarize the key regulations governing international
ethics and social responsibility.

CHAPTER SUMMARY

Chapter Five focuses on ethics and corporate social responsibility. It starts by working
its way through definitions of ethics and then focuses on ethics in business. From
there, it moves to a discussion of the social responsibilities that organizations have
toward their stakeholders, the natural environment, and general social welfare. The
chapter concludes by reviewing attempts to legally regulate ethical and socially
responsible international business conduct (such as the Foreign Corrupt Practices Act
and the AntiBribery Convention of the OECD).

NATURE OF ETHICS AND SOCIAL RESPONSIBILITY IN INTERNATIONAL BUSINESS

• Ethics is defined as “an individual’s personal beliefs about whether a decision,

behavior, or action is right or wrong.” Ethical behavior usually refers to behavior
that conforms to generally accepted social norms. Unethical behavior describes
behavior that does not conform to generally accepted social norms.
• These definitions suggest the following generalizations:
• Individuals have their own personal belief systems about what constitutes ethical
and unethical behavior.
• Common cultural contexts usually lead to similar views on ethical and unethical
behavior.
 • Individuals are able to rationalize behavior based on circumstances.
• Individuals may deviate from their own belief systems based on different
circumstances.
• Ethical values are strongly affected by national cultures and customs. Values are
the things a person feels to be important.
• Members of one culture may view a behavior as unethical, while members of
another may view that same behavior as perfectly reasonable.

ETHICS IN CROSS-CULTURAL AND INTERNATIONAL CONTEXTS

Ethical behaviors are discussed in the context of how organizations treat their
employees, how employees treat their organizations, and how employees and their
organizations treat other economic agents.

How an Organization Treats Its Employees

• Hiring and firing. In some countries, ethical and legal guidelines suggest that hiring
and firing decisions should be based solely on an individual’s ability to perform the
job. In other countries, it is perfectly legitimate to give preference to some
individuals based on gender, ethnicity, age, or other factors.
• Wages and working conditions. Similarly, what constitutes appropriate working
conditions and a fair wage differs across countries. Protection of employee privacy
rights, for example, may vary widely.

How Employees Treat the Organization

• Conflicts of interest. A conflict of interest occurs when a decision potentially

benefits the individual to the possible detriment of the organizations. For example,
in some cultures, giving and receiving gifts from suppliers is acceptable, while in
others it is not.
• Secrecy and confidentiality. In many cultures, there are laws restricting the
disclosure of sensitive information by a firm’s employee to competitors. In China,
noncompetition clauses in contracts (where an employee is prohibited for a certain
time from “working for the competition”) are difficult to enforce.
• Simply put, honesty is at the heart of many of these ethical issues. For example,
is it okay to use the company telephone for personal calls? The answer to that
question may vary from one culture to another.

How Employees and the Organization Treat Other Economic Agents

• Bribery, pricing, financial disclosure, and advertising practices are all areas where
practices vary from one culture to another. In all these instances, managers may
be confronted with accusations of unethical behavior.

MANAGING ETHICAL BEHAVIOR ACROSS BORDERS

Even though ethics reside in individuals, many companies try to manage the ethical
behavior of their employees by clearly specifying what the company considers to be
ethical or unethical. This clear specification often takes the form of ethical guidelines
or codes, ethics training, organizational practices, and/or corporate culture.
 Guidelines and Codes of Ethics

• Codes of ethics are written guidelines that detail how employees are to treat
suppliers, customers, competitors, and other constituents. A multinational must
make a decision as to whether to establish one overarching code for all of its units
around the globe, or whether it should tailor each code to its local context.

Ethics Training

• Given that it is probably impossible to foresee all potential ethical dilemmas and
cover them in a code, some multinational corporations address ethical issues
proactively, by offering employees training on how to cope with ethical dilemmas.
For expatriates in particular, it is important that they receive some training in the
business practices and values of the society where they are stationed.

Organizational Practices and the Corporate Culture

• Organizational practices and corporate culture contribute to establishing the

ethical climate of the firm. If top leaders in a firm behave in an ethical manner and
violations of ethical standards are promptly and appropriately addressed, the rest
of the organization quickly understands the expectations for their own behavior.
• In particular countries, bribery is practically a way of life. Organizations need to be
very clear about their practices in such environments if they wish their employees
to adhere to company standards instead of local standards.

VENTURING ABROAD
Siemens Pays and Pays and Pays
This section provides background information on Siemens AG, a German-based
manufacturer of sophisticated technology, and provides information for firms
considering whether they should pay a bribe to secure a lucrative contract.

CORPORATE SOCIAL RESPONSIBILITY IN CROSS-CULTURAL AND INTERNATIONAL

CONTEXTS

Corporate social responsibility is the set of obligations an organization undertakes to

protect and enhance the society in which it functions. Ethics relates to individual
employees. Social responsibility relates to the organization itself.

AREAS OF SOCIAL RESPONSIBILITY

Organizations may exercise social responsibility toward their stakeholders, toward the
natural environment, and toward general social welfare. Some organizations
acknowledge their responsibilities in all three areas and strive diligently to meet each
of them, while others emphasize only one or two areas of social responsibility. And a
few acknowledge no social responsibility at all.

Organizational Stakeholders

• Organizational stakeholders are those people and organizations that are directly
affected by the practices of an organization and that have a stake in its
 performance. Primary stakeholder groups include customers, employees, and
investors. Organizations that are socially responsible try to treat all the groups with
fairness and honesty.

The Natural Environment

• Not long ago, many organizations indiscriminately dumped sewage, waste

products from production, and trash into streams and rivers, into the air, and onto
vacant land. Today legal standards and social expectations have changed. Still,
abuses continue and the socially responsible firm continues to seek ways to
protect the natural environment.

General Social Welfare

• Some argue that, in addition to treating their stakeholders and the environment
responsibly, business organizations should also promote the general welfare of
society. This can be done through philanthropy, taking a role in public health and
education, and attempts to correct social inequities (such as global poverty). Much
remains to be done in this area.

MANAGING SOCIAL RESPONSIBILITY ACROSS BORDERS

Approaches to Social Responsibility

Some people advocate a greater social role for organizations, while others argue that
the role is already too large. Likewise, firms adopt a wide range of positions on social
responsibility. Most of these positions can be incorporated into four different “stances.”
See also, People, Planet and Profits.

• Obstructionist Stance. These are organizations that do as little as possible in the

area of social responsibility and would try to hide or cover up any behavior that
might be criticized by outsiders.

• Defensive Stance. These firms are one step removed from the obstructionists.
They see their responsibility as being to play by the rules – that is, to obey the law
but nothing more. For example, such a firm would install pollution control devices
on their equipment if required by law, but only to the extent required by law.

• Accommodative Stance. These firms not only meet legal and ethical
requirements but also will go beyond them in selected instances. They might
match employee contributions to charity or donate to worthy causes (once they
are persuaded the causes are worthy). They don’t necessarily go out looking for
ways to do good, but might respond positively when asked to go that extra step.

• Proactive Stance. These are firms that truly take to heart the arguments in favor
of corporate social responsibility. They view themselves as citizens in a society
and proactively seek opportunities to contribute. They go beyond accommodative
firms and take the initiative in performing socially responsibly.
 Managing Compliance

• Legal Compliance is the extent to which the organization conforms to regional,

national, and international laws.

• Ethical Compliance is the extent to which the members of the organization follow
basic ethical (and legal) standards of behavior.

• Philanthropic Giving is the awarding of funds or gifts to charities or other social

programs.

Informal Dimensions of Social Responsibility

In addition to the formal dimensions of managing corporate social responsibility listed

above, leadership, organizational cultures, and how an organization responds to
whistle- blowers also shape people’s perceptions of the organization’s stance on
social responsibility.

• Organization Leadership and Culture. When top management at firms like

Patagonia for years provide a consistent message to employees about the
importance of responsible behavior toward stakeholders, employees can be
expected to act, almost instinctively, in socially responsible ways.

• Whistle-Blowing is the disclosure by an employee of illegal or unethical conduct

on the part of others within the organization. How an organization responds to
whistleblowing (whether it accepts the information and seriously investigates it or
whether it considers it a betrayal to the organization) shapes the internal attitudes
toward ethics and social responsibility.

Evaluating Social Responsibility

Organizations that are serious about social responsibility track their efforts to ensure
they are producing appropriate results. Many organizations choose to conduct formal
evaluations of the effectiveness of their social responsibility efforts through routine
collection of information in the form of a corporate social audit. This audit, usually
undertaken by top-level managers, evaluates the firm’s social performance and makes
suggestions for improvement.

DIFFICULTIES OF MANAGING CSR ACROSS BORDERS

Different countries have different expectations as far as corporate behavior. What is

socially acceptable behavior in one country may not be acceptable in another.
Furthermore, corporations play very different roles in the political process of individual
countries. Dutch CSR experts Tulder and Van der Zwart suggest that the interplay
among the state, the market, and civil society lead to three regional behaviors toward
CSR.
• The Anglo-Saxon approach views the state, market, and civil society as separate,
competitive, and antagonistic.
• The Asian approach believes in a close collaboration between the state and the
market, with a lesser role for civil society.
 • The Continental European approach sees all three actors as relatively equal
collaborators.

REGULATING INTERNATIONAL ETHICS AND SOCIAL RESPONSIBILITY

The Foreign Corrupt Practices Act, passed by the U.S. Congress in 1977, prohibits
U.S. firms from paying or offering to pay bribes to any foreign government officials so
that they may influence the officials’ actions or policies in order to gain or retain
business. However, the FCPA does not disallow routine payments (however large) to
government officials in order to expedite normal commercial transactions.

The Alien Tort Claims Act was passed by the United States in 1789. Under some
recent interpretations of the law, U.S. multinationals may conceivably be held
responsible for human rights abuses by foreign governments in the companies
benefited from those abuses.

The Bribery Act was passed in Britain in 2010. The Act applies to corrupt activities
performed anywhere in the world by firms with a business presence in the United
Kingdom.

The Anti-Bribery Convention of the Organization for Economic Cooperation and

Development was developed in and ratified by Canada in 2000. A total of 33 other
countries have ratified it since then. Its centerpiece mandates jail time for those
convicted of paying bribes.

The International Labor Organization (ILO) has become the major watchdog for
monitoring working conditions in factories in developing countries. ILO inspections of
factories in developing countries helps multinational corporations looking for
responsible business partners in developing countries and helps certify that overseas
operations of MNCs are performing responsibly.

EMERGING OPPORTUNITIES
Conflict Diamonds
Smuggled diamonds have helped finance some of the bloodiest civil wars in Africa.
Peace in some of these wars will only be possible if trade in these “conflict diamonds”
can be stopped. The diamond industry (that likes to project an image of love and
sophistication associated with diamonds) could be seriously damaged by the sale of
conflict diamonds (and the image of violence and butchery associated with them). 70
countries agreed that, as of 2003, trade in diamonds will be limited to those stones
carrying a certificate of origin from countries outside the conflict zones.
CHAPTER 6
International Trade and Investment
Chapter Objectives

After studying this chapter, students should be able to:

1. Understand the motivation for international trade.

2. Summarize and discuss the differences among the classical
country based theories of international trade.
3. Use the modern, firm-based theories of international trade to
describe global strategies adopted by businesses.
4. Describe and categorize the different forms of international
investment.
5. Explain the reasons for foreign direct investment.
6. Summarize how supply, demand, and political factors influence
foreign direct investment.

CHAPTER SUMMARY

Chapter Six examines the underlying economic forces that shape and structure the
international business transactions of firms. It discusses the major theories that
explain and predict trade and investment.

INTERNATIONAL TRADE AND THE WORLD ECONOMY

• Trade involves the voluntary exchange of goods, services, or money between one
person or organization and another. International trade is trade between
residents (individuals, businesses, nonprofit organizations, or other associations)
of two countries.
• International trade takes place when both parties to a transaction believe that they
will benefit from such a transaction.
• In 2012, total international merchandise trade amounted to $18.4 trillion, or
approximately 25 percent of the world’s $71.7 trillion gross domestic product.
Almost 47.6 percent of the merchandise trade took place among the U.S., Canada,
the European Union, and Japan (the Quad).

CLASSICAL COUNTRY-BASED TRADE THEORIES

Mercantilism

• Mercantilism was a sixteenth-century economic philosophy that held that a

nation’s wealth is measured by its stock of precious metals (gold and silver).
 According to the theory, nations should try to enlarge their silver and gold holdings
by maximizing the difference between exports and imports through a policy that
encourages exports and discourages imports. This policy would have the effect
of enabling a country to become ever richer.
• The philosophy was popular to some because it enabled a country to expand its
borders, because export-oriented manufacturers benefited from policies such as
subsidies and tax breaks that encouraged exports and because domestic
manufacturers were protected from imports.
• Most members of society do not benefit from mercantilism, however. Taxpayers,
for example, must pay for the subsidies and tax breaks offered to exporting firms,
and customers may pay higher prices for products when domestic firms are
protected from foreign competition.
• Mercantilism, because it does benefit certain members of society, still exists today
in the form of policies to restrict imports or promote exports. Supporters of such
policies are called neomercantilists or protectionists. Most nations in the world
have adopted some neomercantilist policies to protect key industries.

Absolute Advantage

• Adam Smith criticized the mercantilist philosophy, arguing that it confused the
acquisition of treasure with the acquisition of wealth. He further pointed out that
mercantilism actually weakened a nation because it forces a country to produce
products that it is not very good at producing, and in doing so does not maximize
the wealth of its citizens.
• Smith proposed that free trade between nations would actually enlarge the wealth
of countries because it would allow a country to specialize in the production of
products that it is good at producing and trade for other products.
• Smith’s theory of absolute advantage states that a nation should produce those
goods and services that it can produce more cheaply than other countries. The
country should then trade for goods and services it is not good at producing.

Comparative Advantage

• The major difficulty with the theory of absolute advantage is that it suggests that if
one country has an absolute advantage in the production of both goods, no trade
will occur. David Ricardo solved this problem by developing the theory of
comparative advantage which states that a country should produce and export
those goods and services in which it has a relative production advantage and
import those goods and services in which other nations are relatively more
productive. The opportunity cost of a good is the value of what is given up to get
the good.
• The difference between the theory of comparative advantage and the theory of
absolute advantage is that the latter looks at absolute differences in productivity,
while the former looks at relative productivity differences.

Comparative Advantage with Money

• The lesson of the principle of comparative advantage is: you’re better off
specializing in what you do relatively best. Produce (and sell) those goods and
services at which you’re relatively best, and buy other goods and services from
people who are relatively better at producing them than you are.
 • The theory is limited in that the world economy produces more than two goods and
services and is made up of more than two nations. Furthermore, barriers to trade,
distribution costs, and inputs other than labor must be considered. Even more
important, the world economy uses money as a medium of exchange. The text
provides a demonstration of comparative advantage with money.
• It should be noted that in the example with money, people made their decisions to
import and export based on price differences, not because they were following the
theory of comparative advantage. However, prices set in a free market will reflect
the comparative advantage of a nation.

BRINGING THE WORLD INTO FOCUS

The Lincoln Fallacy
Abraham Lincoln once said, "I know this much. When we buy manufactured goods
abroad, we get the goods and the foreigner gets the money. When we buy
manufactured goods at home, we get both the goods and the money." Lincoln's
view is incorrect because it is incomplete. When we buy goods from abroad,
foreign resources are used, leaving the domestic resources that would have been
used in production at home free to be used to make something else. By specializing
and trading, rather than producing everything ourselves, we channel production to
the most efficient producers thereby generating overall more goods and services
for everyone to consume.

Relative Factor Endowments

• Hecksher and Ohlin developed the theory of relative factor endowments to

answer the questions of what determines the products for which a country will have
a comparative advantage in the first place. The theory proposes that factor
endowments (or types of resources) vary among countries. Further, goods vary
in the types of factors that are used to produce them. Therefore, a country will
have a comparative advantage in producing a product that intensively uses
resources that the country has in abundance. The text provides an example of the
theory using wheat, oil, and clothing.
• Leontief tested the Hecksher-Ohlin theory using the United States as the unit of
analysis. Leontief, believing the United States to be a capital-intensive, labor-
scarce country, reasoned that the country would export capital-intensive goods
and import labor-intensive goods. However, he found that exactly the reverse was
true. Leontief’s findings have come to be known as the Leontief paradox.
• There have been numerous attempts to explain Leontief’s findings. Some
economists have suggested that Leontief’s work is flawed by measurement
problems. His work assumes there are only two factors of production, labor and
capital, and ignores other factors such as land, human capital, and technology.
This assumption may have caused Leontief to mismeasure the amount of labor
that goes into products the United States imports and exports.

MODERN FIRM-BASED TRADE THEORIES

Firm-based theories have developed for several reasons, including the growing
importance of multinational corporations in the postwar international economy; the
inability of the country-based theories to explain and predict the existence and growth
of intraindustry trade; and the failure of researchers like Leontief to empirically validate
the country-based Hecksher-Ohlin theory. In addition, firm-based theories incorporate
factors such as quality, technology, brand names, and customer loyalty.
Product Life-Cycle Theory

• The product life-cycle theory, developed by Vernon, consists of three stages. In

the first stage (the new product stage), a company develops and introduces an
innovative product in response to a perceived need in the local market. Initially,
the company must closely monitor whether the product indeed satisfied customer
needs, and so typically, the product is introduced in the country where the product
was developed. In addition, because the firm is initially likely to minimize its
manufacturing investment, most output is sold in the domestic market.
• Demand for the product expands dramatically as the product moves into the
second stage (maturing product) and customers recognize its value. The
innovating firm expands its capacity and begins to consider exporting to other
markets. Competitors, domestic and foreign, begin to emerge.
• The market stabilizes in the third stage (standardized product) as the product
becomes more of a commodity. Price becomes an issue, and the company
considers shifting production to a country where labor costs are low. At this point,
the innovating country begins to import the product.
• The text provides an example of a product, the personal computer, going through
the life cycle.

Country Similarity Theory

• Country-level theories explain interindustry trade among nations. Interindustry

trade is the exchange of goods produced by one industry for goods produced in
another industry. Country-level theories do not explain intraindustry trade, in
which two countries exchange goods produced in the same industry.
• Linder developed a theory to explain intraindustry trade that suggests that
international trade in manufactured goods is caused by similarities of preferences
among consumers in countries at the same stage of economic development. The
theory proposes that although firms originally develop products to sell to their
domestic markets, when they begin to export, they realize that the best markets
are in countries where consumer preferences are similar to those in their own
domestic market.
• Linder’s country similarity theory suggests that most trade in manufactured goods
should be between countries with similar per capita incomes.

New Trade Theory

• Helpman, Krugman and Lancaster have recently examined the impact of global
strategic rivalry between multinational firms on trade flows. This view argues that
firms struggle to develop some sustainable competitive advantage, which can then
be exploited to dominate the global marketplace. The theory focuses on the
strategic decisions firms make as they compete in the global marketplace.

• Firms can develop sustainable competitive advantages in several different ways.

First, intellectual property rights, such as trademarks, brand names, patents,
and copyrights, can give a firm an advantage over rivals. Second, firms that make
large investments in research and development may gain first-mover
advantages for goods that are R&D intensive. This advantage is magnified if a
firm has a large domestic marketplace because feedback from customers may be
quicker and richer. Third, firms that achieve economies of scale or scope gain
a competitive advantage over rivals. Economies of scale occur when a product’s
 average costs decrease as the number of units produced increase. Economies of
scope occur when a firm’s average costs decrease as the number of different
products it sells increases. Finally, firms that successfully exploit the learning
curve gain firmspecific advantages.

Venturing Abroad Birds of a Feather Flock Together

This section discusses the existence of an additional interesting business activity,

referred to as clustering of firms resulting from agglomeration economies. This
term is used to describe the benefits that firms obtain when locating near each
other. As more firms in related industries cluster together, operating costs may
significantly decline.

Porter’s Theory of National Competitive Advantage

• Porter has developed a theory of international trade called the diamond of

competitive advantage. The theory proposes that success in an industry is a
function of four characteristics: factor conditions; demand conditions; related and
supporting industries; and company strategy, structure, and rivalry.
• Factor conditions refer to a nation’s endowment of factors of production.
Demand conditions refer to the existence of a large, sophisticated domestic
consumer base that stimulated the development and distribution of innovative
products. Related and supporting industries refer to the development of local
suppliers eager to meet an industry’s production, marketing, and distribution
needs. Firm strategy, structure, and rivalry refer to the environment in which
firms compete.
• Porter also argues that firms’ international strategies and opportunities may be
affected by national policies.
• Porter’s model combines the traditional country-level theories (and their focus on
factor endowments) with firm-level theories that focus on the actions of individual
companies. Further, he includes the role that nations play in creating an
environment that may or may not be conducive to a firm’s success.
• No single theory of international trade explains all trade between nations.
Classical, country-level theories are useful in explaining interindustry trade, while
firm-based theories are better at explaining intraindustry trade. Porter’s model
synthesizes many of the existing features of country-level and firm-based theories.

AN OVERVIEW OF INTERNATIONAL INVESTMENT

International investments: in which residents of one country supply capital to a second

country, is another major form of international investment. Trade and investment may
be substitutes for one another, or they may be complementary.

Types of International Investments

• International investment can be divided into portfolio investment and foreign

direct investment (FDI) (see Chapter One). The former represents passive
holdings of foreign stocks, bonds, or other financial assets that entail no active
management or control of the issuer of the securities by the foreign investor. The
latter represents acquisition of foreign assets for the purpose of control.
• FDI may take many forms including purchases of existing assets in a foreign
country; new investments in plant, property and equipment; or participation in joint
 ventures with a local partner. The text provides examples of each type of
investment.
• Controversy often surrounds FDI because while it may increase employment,
enhance productivity, and raise wage rates, it also raises concerns that control of
the national economy is being passed to foreigners.

The Growth of Foreign Direct Investment

• The past 30 years have seen a dramatic rise in foreign direct investment. As of
2011, worldwide FDI was approximately $20.4 trillion.

Foreign Direct Investment and the United States

• The United Kingdom has accounted for the greatest portion of FDI into the United
States.
• The high levels of FDI to Bermuda, the Bahamas, and other small Caribbean
islands relate to their role as offshore financial centers.
• Over the past decade outward, FDI has remained larger than inward FDI for the
U.S., but both categories have more than doubled in size.

INTERNATIONAL INVESTMENT THEORIES

Ownership Advantages

• Researchers trying to explain why FDI occurs initially focused on the impact of
firmspecific (or monopolistic) advantages. They argued that a firm that owned a
superior technology, a well-known brand name, or economies of scale that created
a monopolistic advantage could clone its domestic advantage to penetrate foreign
markets. The text provides the example of Caterpillar and Komatsu, both of which
capitalized on proprietary technology and brand names to expand into other
markets.

Internalization Theory

• The answers to the questions outlined above were explored using internalization
theory. The theory suggests that FDI is more likely to occur (a firm will internalize
its operations) when the costs of negotiating, monitoring, and enforcing a contract
(transaction costs) with a second firm are high.

Dunning's Eclectic Theory

Dunning’s eclectic theory ties together location advantage, ownership advantage, and
internalization advantage. Dunning proposes that FDI will take place when three
conditions are satisfied.
• First, the firm must own some unique competitive advantage that overcomes the
disadvantages of competing with foreign firms in their own market (ownership
advantage).
• Second, it must be more profitable to undertake a business activity in a foreign
location than a domestic location (location advantage).
• Third, the firm must benefit from controlling the foreign business activity, rather
than hiring an independent local company to provide the service (internalization
advantage).
FACTORS INFLUENCING FOREIGN DIRECT INVESTMENT

The decision to undertake FDI can be influenced by supply factors, demand factors,
and political factors.

Supply Factors
• Supply-side considerations (a firm’s attempts to control its own costs of production)
may motivate FDI. Factors that are considered include production costs, logistics,
availability of natural resources, and access to key technology.
• Locating a factory, warehouse, or customer service center in a foreign location
may be more attractive from a production cost perspective than locating
operations domestically.
• When a company faces significant logistics costs, it may choose to produce its
product in a foreign location, rather than export it.
• The availability of natural resources may drive a firm to locate its operations in
a country rich in a particular resource.
• Access to key technology may encourage a firm to invest in an existing foreign
company rather than develop or reproduce an emerging technology.

Demand Factors
Investing in foreign markets can allow a firm to expand the potential demand for its
products. The demand-related factors that firms consider include customer access,
marketing advantages, and customer mobility.
• A physical presence in a market is required for many types of businesses,
particularly service businesses. For example, since customer access is essential
to KFC’s business, it must locate outlets in other countries.
• The physical presence of a firm in another country can provide many marketing
advantages. For example, such a presence may enhance the visibility of a
company’s products in the host market. If production costs are lower in the foreign
market, the firm may be able to lower prices to host country consumers and
increase sales, and the company may be able to benefit from “buy local” attitudes.
• FDI may also allow a firm to exploit competitive advantages (for example,
trademarks, brand names, and technology-based or experientially based
advantages) it already possesses.
• Firms may invest in another country in response to customer mobility. A supplier
firm may follow its buyer to another country so that it can continue to meet its
customers’ needs promptly and attentively.

Political Factors
FDI may be a logical choice for companies facing trade barriers that threaten to keep
their products out of a foreign market, or to take advantage of economic incentives
being offered by host governments.
• FDI is an effective way to avoid trade barriers. The text provides an example of
how the Japanese were able to successfully deal with trade barriers in the early
1980s and mid-1990s.
• Governments that are concerned with promoting the welfare of their citizens may
provide various economic development incentives to attract foreign investors.
Such incentives may include tax reductions or tax holidays, infrastructure
provisions, reductions in utility rates, worker training programs, and other
subsidies.