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Foreign Direct Investment – Political Ideologies sample essay

As we have seen from the case study, Starbucks prefers not to just franchise and license its format when it tries to expand overseas, but as in the case of Japan and China, the firm prefers utilising joint-venture arrangements, mergers and acquisitions and horizontal FDI to exercise control and ensure standards are at a certain level for all foreign stores (they trained the local workers to emulate the original standards set in the US).

Only after Starbucks are convinced the country can properly deliver the “Starbucks experience” will they think about giving the host country stores more autonomy and license the brand over there. However, in terms of pinpointing countries in which to invest in, political ideologies of the host countries needed to be considered. Different countries may have different stances towards FDI, and it depends on the country’s political ideology. There are 3 main types of ideologies: Radical view, pragmatic nationalism and free market.

This view, traditionally backed by highly nationalistic, socialist or communist countries, was inspired by Marxist political and economic theory, and claims that FDI is a means to “imperialist domination”, whereby the capitalist “home” countries are able to exploit the “host” country (usually a developing, or less developed country) by utilising the resources but taking all the profits back to the home country, and not leaving anything extra for the host country.

They also argue that the MNC’s allocate the top level jobs to their own home-nationals as well as monopolise control of major technology, and not to the locals, thus in effect going round in a circle and keeping the status quo of developing countries needing developed countries to support them with investment, jobs and technology.

This view is on the other end of the scale compared to the radical view; originating from Adam Smith and David Ricardo’s work on international trade theory, it advocates the belief that international production should be distributed based on comparative advantage, where countries produce the goods/services that they can produce most efficiently. Through FDI, Multinationals decide to produce in the most efficient locations from around the world, and therefore increases the overall efficiency of the world economy.

Many countries do not adopt either of the 2 extremes of the political spectrum, but rather fall somewhere in between and so would fall under this category. What a country would do is weigh up the pros and cons of accepting FDI, and if the pros are more prevalent, then FDI would be allowed or vice versa. Potential negatives to FDI for host countries include circular flow of income withdrawals (i. e. profit going back to the home country), potential downsides to the balance of payment account (i. . if the firm decides to import components rather than utilise domestic ones), exploitation of the workforce etc. Conversely, countries can take into account positive aspects such as transfer of resources which the host country may otherwise have found difficult to obtain, employment of local workforce, and a positive effect on the balance of payments if the production is used as a substitute for imports, or even if the firm exports from the host country.

These are just some examples of potential costs and benefits that may arise from FDI (especially for the host country) that may be taken into account. Some countries, if they see that FDI is required, may aggressively try promoting their country and make it more appealing to MNC’s by offering tax breaks and other incentives. Starbucks would only target countries that are free market, or at least use pragmatic nationalism.

Obviously radical view following countries would not entertain the thought of allowing Starbucks to invest in the country in the first place and therefore automatically rules out these countries. However, some countries have changed their ideologies, such as China which was a follower of the radical view until sometime in the 1980s, and are now more inclined to free market and is now a massive potential market for Starbucks and is potentially the largest single market opportunity outside of the US.

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