A Comparative Study Of Multinational Corporations’ Entry Modes: FDI And Outsourcing

As two different international market entry modes, foreign direct investment andoutsourcing play an increasingly important role in the strategic objective process of usingtwo markets, two resources at home and abroad. Typically, we are accustomed to treatoutsourcing as an alternative form of foreign direct investment while ignoring theirdifferences in mechanism. Studying both entry modes decision and their effects has certaininfluences in theoretical and practical significance. Through the literature search andsummarize, combining practical experience of foreign direct investment and outsourcingdevelopment in China, this paper analyses in three basic dimensions of cost, corecompetence and risk, and thus builds a decision theory model with the premise of thedynamic equilibrium of cost, core competence-based and whit risk appetite as the controlvariable. In the framework of this model, through comparative analysis of cost, corecompetence and risk of foreign direct investment and outsourcing, comparativelyanalyzing factors of the analytical structure by using standard mathematical methods.Factors analysis not only gives the different effects of relative wage rate1W, the outputelasticity of capital, output efficiency indices and parameter and other factorson the decision of multinational corporations’ foreign direct investment and outsourcing,but also shows that the growth effects of foreign direct investment on technical level, thequality of labor and capital amount in the host country are more significant compared tooutsourcing. But the factors analysis shows that when the technological advancingparameter value tends to be large enough due to foreign investment in the host country, thedifference in revenue arising from different multinational corporations’ entry modes willtend to shrink. On the basis of theoretical analysis of multinational corporations’ entrymodes, this paper puts forward several corresponding countermeasures and suggestions forthree subjects which are multinational corporations, China as one of the biggest countriesundertaking FDI and outsourcing, and Chinese transnational firms.