Given below are two statements: one is labelled as Assertion (A) and the other is labelled as Reason (R).

Assertion (A): The failure of the international market to connect firms as collaborators will entice a company to enter with wholly owned operations or wholly owned FDI.
Reason (R): The company perceives having operating advantages to overcome its liability of foreignness.

In the light of the above statements, choose the most appropriate answer from the options given below:

Correct option is A

1. Assertion (A) is correct:
   When international markets fail to establish strong, efficient collaborations or partnerships (due to weak legal frameworks, trust issues, or lack of compatible partners), firms may opt for wholly owned foreign direct investments (FDIs). This means setting up subsidiaries or greenfield operations that they fully control to ensure strategic autonomy and risk mitigation.

2. Reason (R) is also correct:
   A firm choosing wholly owned operations often does so because it believes it possesses firm-specific advantages (like proprietary technology, strong management systems, or brand equity) that allow it to compete effectively even in unfamiliar markets. These advantages help it tackle the liability of foreignness, which refers to the disadvantages firms face when operating abroad (cultural barriers, unfamiliar regulations, lack of local knowledge, etc.).

3. Furthermore, (R) explains (A):
   The company’s confidence in its operational strengths motivates it to internalize operations rather than depending on uncertain partnerships. Hence, the perception of these strengths leads to the decision for wholly owned FDI.

Information Booster:

• Wholly Owned FDI is a mode of international entry where the parent firm owns 100% of the foreign entity.

• This strategy is typically chosen when the firm seeks complete control, desires to protect intellectual property, or perceives high risks in partnerships.

• The theory of Internalization supports this — firms internalize operations to reduce transaction costs associated with imperfect markets.

• Liability of foreignness includes economic, social, and political disadvantages faced by foreign firms.

• Companies with firm-specific advantages such as technological capabilities or managerial competencies are more likely to succeed without local partnerships.

• Dunning’s Eclectic Paradigm (OLI framework) explains this: Ownership (O), Location (L), and Internalization (I) advantages justify FDI decisions.

• When collaboration opportunities fail, firms rely on their strengths and enter the market alone to minimize dependency and maximize value capture.