Final answer:
Firms must have ownership specific, internalization, and location specific advantages (option B) to invest overseas according to dynamic capability theory. While environmental regulations are considered, other factors like transportation quality and local governance are more influential. Adapting to changing comparative advantages is also essential for firms engaged in international investments.
Step-by-step explanation:
According to dynamic capability theory, the kinds of advantages a firm must have to invest overseas are Ownership specific, internalization, and location specific (B). These encompass the unique assets and capabilities a firm owns, the benefit of managing resources within the firm as opposed to contracting out, and the advantages derived from the geographical location of business activities. While considering an investment location, firms consider various factors - labor costs, capital, proximity to suppliers and customers, infrastructure quality, taxation levels, and the competence of the local government.
It's important to understand that, in context of dynamic capabilities, while firms do consider regulations such as environmental laws, such costs typically comprise only 1 to 2% of total costs. Hence, other factors like transportation, communication networks, and local governance are more influential in their decision-making. Also, firms need to focus on flexible strategies to adapt and evolve with changing comparative advantages within industries.