Foreign Investments

Topics: Investment, Foreign direct investment, Macroeconomics Pages: 5 (1548 words) Published: March 8, 2013
«Why is it that some firms locate their investments close to their markets whilst others appear to have the luxury of a much greater choice of location? Illustrate your answer with examples.»

Companies relocating their activities and investing in different parts of the world has become over the past ten years a constant subject of debates, creat-ing a tense climate between the governments, the companies, and the public opinion. Some industries that have been part of a country’s economy since decades now are, little by little, forced to cease their activity because of the increasing competition coming from abroad. In order to continue their activity, a lot of firms are now investing outside of their home market by creating sub-sidiaries, making alliances with local companies or simply relocating their pro-duction. In the other hand, some companies are still firmly anchored in their home market and are not willing to invest in another country.

Because of this, one can wonder why are some companies investing abroad whereas some others confine themselves into their home market ?

In order to answer this question, we first need to define some important terms such as the FDI (Foreign Direct Investment) which defines the investments aimed to create or maintain a foreign subsidiary (horizontal FDI) and/or devel-op or maintain a plant abroad (vertical FDI). Investment refers to the action of using capitals in order to make more money from it.

By using different examples, both practical and theoretical of companies in the world, we will try to explain in a first part why some companies are investing in foreign countries, and in a second part, we will see what can be the reasons for a company to locate their investments in their home market.

The globalisation has led to a deregulation which participates in the free circu-lation of the capital, reducing the obstacles opposing to FDI. The constitution of regional blocks went faster and faster and within them the exchanges became intensified, exercising their attractive effect on the FDI. We can then distinguish two types of investments :

-Vertical FDI : the investment aimed to own a plant in a different country. -Horizontal FDI : the acquisitions of holdings intended to gain or maintain control on the foreign company. In this case, a FDI corresponds to a partici-pation of at least 10 % in the capital of the company. Multinational strategy implies that each subsidiary has a separate strategy for each of its markets. The direction of the group coordinates only financial con-trol and international marketing. It can also centralise some of the research, development and production.

The integration of multinational production in the strategy is more often estab-lished in each national economy. The organisation of production is based on unspecialised national units, producing the full range of products and all stages in an integrated manner. The production volume of foreign plants is limited by the size of the market they supply.

The global strategy aims to unify the product line on all national markets, to centralise the research activity, coordinating trade policy, and to optimise the international organisation of production. The different plants in different countries specialise in the manufacture and such of an element and have a size large enough to serve the broader market as the local market. This rationalisation can reduce costs through economies of scale achieved in production.

The national subsidiaries do not master more either the research and devel-opment, or the marketing, or even the production. This last one became de-composable, then subsidiaries do certain stages of manufacturing. They are judged by the management of the group on their technical performances and on their capacity to satisfy the objectives of the group.

The world strategy implies a very centralised management by the whole group, with a very strong coordination of...
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