Foreign Direct Investment

FOREIGN DIRECT INVSTMENT

Some firms may choose exporting, licensing, or franchising to internationalize their business, while others prefer to enter the International market by foreign direct investment. Foreign direct investment involves foreign firms owning the production and distribution channels in host Countries which they operate.

This type of investment is mainly preferred because it allows these firms to control assets and the activities to achieve strategic synergies and to exploit the economic opportunities that will increase profit potential. FDI's are important to firms entering new market as this strategy strengthens consumer's confidence in the host market, providing these firms with a good competitive edge.

A firm's decision to FDI is sometimes influenced by government policies which discourages direct control of assets and acquisition of local companies. These firms also have to agree to the rules and regulations which are sometimes politically motivated.

To acquire direct control, firms may choose from three methods. Depending on their goal they may build a new facility from scratch, buy existing asset in a host Country or participate in joint venture. Either of these methods will allow some form of direct ownership. Not all strategies however, will suit every firm's goal and road to success. For example, when entering from scratch you are exposed to inheriting liabilities and poor performance workers from an existing local firm.

Building a new facility from scratch is referred to as the Greenfield strategy. The firm will buy the land construct new facility transfer managers and hire new employees. AN example is Fuji film production building a factory in South Carolina. Fuji was able to select a location suitable for their operations and because they create jobs for the citizens in South Carolina they are given incentives. In addition, the firm can adapt to the new business culture at a more convenient pace rather than having to manage a group of existing workforce that is so deeply imbedded in their custom

It is not in all cases that a firm can easily and affordably find a suitable location to operate their business. It can be a great disadvantage to the implementation process when the desired location takes time and more costly. For one, delays will interrupt the roll out plans. Project implementations are usually timed at each stage of activity once there is a delay in the first stage the entire plan becomes a failure. Creditors will be affected and significant over run in budgets.

Firms that do not have the resource or time for delays will rather to buy existing assets in a host Country. This is referred to as the acquisition strategy. This strategy gives the firm instant control of an ongoing business with facilities, infrastructure and a workforce in place.

The firm can acquire an