GSM Lecture 3

Management > Global Strategic Management > Methods of internationalisation > Factors > OLI framework > Uppsala model > Process of FDI

Uppsala - Process of FDI

The evolution of FDI is a process of learning, a search for certainty. There are two stages of FDI:

1. Initial FDI - the purchasing of maintenance facilities of cars, for example. This stage has a high degree of uncertainty. More familiarity results in more investment, leading to:
2. Sequential FDI - the widening and deepening of value-adding activities. purchasing the batteries for the cars, for example.

The choice of where and why to engage in FDI depends on a number of things, such as:

• Localised learning
• Similar tastes
• Environment and psychic distance, which is the level of cultural or lingual difference in the foreign country. Psychic distance has been defined as "the sum of factors preventing the flow of information from and to the market. Examples are differences in language, education, business practices, culture and industrial development" (Johanson and Vahlne, 1977)

Firms are more likely to begin FDI in a country which it feels is more similar to its home country. This is done because it lowers uncertainty. This suggests that firms do not choose countries in which to do FDI objectively, as their rationality is bounded.

Network/Systems theory