The Bargaining Power Theory (BP), as the name suggests, refers to the bargaining power of the host and the foreign country that determines the choice of the mode of entry. This theory has a political shade to it which allows the powerful nation among the two to draw the negotiations in its favor. According to this theory, a firm will naturally incline towards high control modes of entry so that it can gain an upper hand in the long run as far competition is considered. But, its bargaining power as against its counterpart might force it to take up low control modes if the later is powerful than the former. An important determinant of the BP theory is the stake of the parties in a project. Stake is the degree of dependency of the parties on the outcome of the negotiation. Naturally, stake and bargaining power is inversely related. Logically, the number of alternatives available to each member of the negotiation is important in the sense that one who enjoys greater number available alternatives will have a greater bargaining power.
Like the TCA, the BP theory also has seven factors that affect the decision making of a firm regarding the entry route. These are host country’s interest in the investment, Interest of the MNC in the investment, attractiveness of the host country that generates competition among investors, legal restrictions, and local support for the MNC, resource commitment and risk associated with the MNC
The following table gives a synopsis of the different factors according to the BP Theory and its effect in determination of control level of the entry route.
Table: Factors affecting the choice of entry route – Bargaining Power Theory
The Eclectic theory propagated by John H Dunning is another important piece of work in defining the determinants of Foreign Investment. Dunning says that there must be three factors available for a firm to invest abroad. These are Ownership specific advantages (O), location specific advantages (L) and internalization advantages (I). The first one relates to specific advantages that the firm has over its competitors in the market where it plays, the second one refers to advantages that a particular location should have for the firm to invest there. Internalization advantages refer to those which define why the firm should invest rather than meet the same needs through trade. Taken together, these form the OLI framework.
Operating in a foreign environment crops up certain problem for the firm like the alien culture and improper knowledge of the operation of the market against as against the firms based out there itself. The cost of operating from a distance coupled with communication costs will also add up the disadvantages. The return from the investment must be higher than the cumulative disadvantages for it to invest abroad. Ownership specific advantages are those factors which the foreign firms posses over the domestic firms. These advantages would enhance the profit margin of the foreign firms and keep them in competition against domestic firms. The ownership advantages can be subdivided into tangible and intangible assets where the former is referred to as endowment advantages or access to superior capital or manpower. The intangible assets refer to developed organizational skills, managerial ability etc.
The location specific advantage defines where a firm can invest so as to reap the maximum gain from its ownership specific advantages. This can be subdivided into economic, social and political advantages. Economic advantages cover the aspects of product, technology, infrastructure etc. The social and cultural advantages include the attitude towards foreigners, cultural gap, and government outlook towards free market economy. The political subheading encompasses all those factors which politically affect the flow of investment into the country. Generally, a peaceful country with political stability is obvious to attract investment easily than a country which is labeled as risky by investors. In addition to this, a country with low tax rates, quality resources will be an attractive investment destination.