What are the main advantages and disadvantages of foreign direct investment as a means of entering new markets? Support your answer with real examples, where possible.
Globalization describes the process by which regional economies, societies, and cultures have become integrated through a global network of communication, transportation, and trade. Bhagwati (2004). Big part of globalization is Foreign Direct Investment.
Foreign direct investment (FDI) can be defined as the process where both firms as well as individual entrepreneurs offer capital to newly or already established firms in other countries. Firms engaged in foreign direct investment are termed as multinational enterprises or multinational corporations (MNE’s or MNC’s). Jones and Wren (2006) FDI is also defined as investment geared to adding or deduction from an operating enterprise and out of which long lasting relationship is ensured. Organisation for Economic Co-Operation and Development (OECD) also points out that FDI includes equity capital, reinvested earnings as well as intra company loans.
According to Xiaowen Tian in his book ‘managing international business in China’ the major difference between foreign direct investment and foreign indirect investment lies on the mode by which MNC’s and MNE’s enter the foreign markets. It depends on whether a foreign investor opts to invest directly in an economy or for an effective share of production in an enterprise all with the aim of creating long term influence. In both foreign indirect and direct investment the investors offer their technological know-how or skills, management as well as capital. The major distinction between the indirect and direct investment by the foreign investors is difference between equity and non-equity investment. The importance of this distinction is that it determines the level of involvement attached to each of them in the host countries. Tian (2007)
Foreign direct investment refers to the acquisition of shares by a firm in a foreign based economy which exceeds a threshold of 10%. FDI embraces managerial participation. FDI can be a source of both direct as well as indirect source of employment in a country. Other advantages perceived to be accrued to FDI include increased competition which precipitates innovation. Innovation ensures that there is quality production of goods and services and at a lower price; and this is beneficial to the local citizens. Bora (2002)
Now, foreign direct investment or rather this equity investment carried out by multinational corporations can take a variety of forms. One is through the purchase of an ongoing company. For example, Santander, the Spanish lender, which is Spain's biggest bank, bought Abbey National of the United Kingdom, in order to ring up 150 million Euros of cost savings in the first year after the merger, rising to 300 million Euros in the second and 450 million Euros in the third. Rather than building this business from scratch, Santander gained a foothold in the UK banking market in 2004, in Europe's biggest cross-border bank takeover, and bought its way into the financial sector of the United Kingdom through FDI.
Another form of FDI is to set up a new overseas operation as either a joint venture or a totally owned enterprise. For example, Deutsche Telekom's T-Mobile and Orange owner France Telecom are now positioning themselves to become a major competitor in UK telecommunication industry and have recently entered into joint venture for the purpose of developing expanded network coverage, better network quality and improved customer services.
In general, the objective of FDI is to provide the investing company with the opportunity to actively manage and control a foreign firm's activities. There are a number of advantages that multi-national corporations (MNC) face or rather factors that encourage MNC to take ownership position or gain control of foreign assets.
Some of the...
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