4 page only apa Focus in IP- 5 Recently, China attracted a great deal of FDI because foreign firms to (1) take advantage of Inexpensive labor and resources, and also (2) gain access to the Chinese...

Running Head: FDI 1
FDI
Running Head: FDI 2
Introduction
Foreign direct investment (FDI) is a term of investment that is performed by the
organizations of a country in another country in the form of business or products. It is generally
depends over the financial systems, and political condition of the host country. In this context,
this paper would describe the life-cycle theory of FDI along with its strength and weakness. This
paper would also describe about the green field investment, political risk into the capital
budgeting process, forward vs. backward internalization and currency exchange risk and its
impacts over the capital budgeting process related to FDI.
Answer 1: Vernon’s product life-cycle theory of FDI
The international life-cycle theory of FDI was developed by Raymond Vernon in the
1960s (Dreyhaupt, 2006). By the help of this theory, Vernon describes the three stages of a
product such as:
New Product Stage: At this stage, an organization introduces a unique product on the
basis of its demand in the market. Due to less information about the products, the organization
produces the limited quantity of the product and sales it in its domestic market (Ietto-Gillies,
2012). At this stage of the product, there is the less availability of the exporters in the market.
Maturity Stage: When a product is accepted by the target customers, then this situation
increases the popularity of the products in domestic market along with international market. As a
result, the demand of the product dramatically increases. Hence, for meeting the demand in
international market, the manufacturing organizations set up their manufacturing unit in the
overseas market (Dreyhaupt, 2006). The selling of that product in domestic market and
international market provide the chances to the organization to fulfill the market with the
Running Head: FDI 3
products. After this, the organization focuses over the developing countries that are the end of
the product maturity stage.
Standardized Product Stage: It is the last stage of the product life cycle because the
product would be a commodity and the market would be sensitive to the price. This situation
forces the organizations to search those countries, where the labor charge is low by with the
organization could reduce the cost of products along with the price of the product (Ietto-Gillies,
2012). Hence, this situation forces the importers of the organization’s country to import the
product.
Strengths of Theory: This main strength of this theory is its flexibility. So that this theory
describes about the reason by that trade...