Which theory seeks to explain why firms prefer FDI over licensing as a strategy for entering foreign markets?

The correct answer is Internationalization Theory

Key Points

1. Perfect Market Hypothesis:

• It states that share prices reflect all information.
• It hypothesizes that stocks trade at their fair market value on exchanges.
• Proponents posit that investors benefit from investing in a low-cost, passive portfolio.
• Opponents believe that it is possible to beat the market and that stocks can deviate from their fair market values.

2. Strategic Linkage Theory:

• Strategic linkage simply refers to linking objectives, often implemented in the form of projects to your strategy.
• There can be many levels of strategic linkage.

3. Transaction Cost Theory

• Transaction cost theory is an alternative variant of the agency's understanding of governance assumptions.
• It describes governance frameworks as being based on the net effects of internal and external transactions, rather than as contractual relationships outside the firm (i.e. with shareholders).

4. Internationalization Theory

• Internalization theory suggests that gains from FDI modes of foreign expansion would be higher relative to non-FDI modes.
• The theory of internalization has come under increased criticism on the premise that there are agency costs to internalization that may be higher than costs of non-equity forms of international.

Therefore, the correct answer is Internationalization Theory