Foreign direct investment - Essay Example

Foreign Direct Investment Though most companies operating globally choose to export to other market entry modes, there are situations in which exporting may not be feasible. In such circumstances, companies may opt for direct investment within other countries, or enter markets via diverse collaborative strategies that enable entities to diversify its assets and risk across diverse countries by engaging in contractual agreements with multiple potential partners. Companies may find it advantageous by producing in foreign countries compared to exporting to those countries based on a variety of reasons (Froot 57).

#1 Why companies often prefer to operate with foreign direct investment, especially wholly owned?Foreign direct investment refers to a direct investment into production or business within a country by an entity in another country, either by purchasing a company within a target country, or by broadening operations of a present business within that country. The reasons that may make exporting unfeasible include cheaper producing abroad, reducing transportation costs, lack of domestic capacity such as when demand exceeds the capacity, the need to alter products and services, trade restrictions, and country of origin effects (OECD 57).

There are three critical reasons for entities to seek a controlling interest; internalization theory (self-handling of operations), appropriation theory (denying rivals or potential rivals access to resources such as trademarks, capital, patents, and management know-how), and freedom to seek global objectives (participate in global or transnational strategy) (Nicholls 42). Reasons for buying existing operations entail avoiding start-up problems, getting an immediate cash flow instead of tying up capital, and gaining easier financing.

# 2 When it would make more business sense to operate under a collaborative arrangement?Overall, the motives for collaborative arrangements entail to spread and reduce costs, specialize within distinct competencies, avoiding or counter competition, learning from other companies (gain knowledge), and securing vertical and/or horizontal linkages. The international motives for undertaking collaborative arrangements encompass aspects such as gaining location-specific assets, diversifying geographically, overcoming governmental constraints, and minimizing exposure in risky environments (Nicholls 44).

Companies utilize equity and non-equity arrangements that can range from wholly owned subsidiaries, equity alliances, licensing, franchising, management contracts, turnkey operations, and joint ventures. #3 Advantages and disadvantages of foreign direct investmentForeign direct investment is perceived as a means of enhancing the efficiency with which the world’s scarce resources are employed. Foreign direct investment raises the level of investment by bridging the gap between desired investment and domestically mobilized savings.

Similarly, FDI facilitates enhancement in export competitiveness by aiding the host country to enhance its export performance (Moran 38). Furthermore, FDI is beneficial to consumers as consumers within developing countries stand to benefit via new products, and enhanced quality of goods at competitive prices. Foreign direct investment is viewed a means to stimulate economic growth within a majority of world’s poorest countries. Foreign direct investment is a critical source of capital, new technology, marketing networks, and organizational and managerial skills.

Foreign direct investment avail a stimulus to economic growth, job creation, competition, innovation, savings and capital formation (Blomström, Ari, and Mario 25). The probable adverse repercussions of foreign direct investments include: foreign direct investment may yield a fall in domestic savings in cases where FDI is in competition with domestic investment; the contribution of foreign establishments via corporate taxes is relatively less owing to liberal tax concessions; FDI support dualistic socio economic structure and enhance income inequalities; FDI trigger inappropriate consumption patterns via excessive advertising and monopolistic market power; and, may utilize the strategic influence on political decisions within developing countries (Culpan 44).

Advantages and disadvantages of a collaborative arrangementCollaborative arrangement between companies is advantageous based on complementary ways in which the personnel can improve the relationships. In marketing, collaborative effort aids companies, to utilize the opportunity to reach target markets that were difficult to reach before. Collaboration is a two-sided effort and can be essential in tackling complex policy problems (Culpan, 2002). Collaboration with selected firms has been proven to impact of company performance and innovation outcomes.

Some of the problems of collaborative arrangements include varying objectives, collaboration’s significance to partners, control problems, differences in culture, and partner’s contributions and appropriations.Works CitedBlomström, Magnus, Ari Kokko, and Mario Zejan. Foreign Direct Investment: Firm and Host Country Strategies. New York: St. Martins Press, 2000. Print.Culpan, Refik. Global business alliances: Theory and practice. Westport, CT: Quorum Books, 2002. Print. Froot, Kenneth. Foreign Direct Investment.

Chicago: University of Chicago Press, 1993. Print.Moran, Theodore H. Foreign Direct Investment and Development: Launching a Second Generation of Policy Research : Avoiding the Mistakes of the First, Reevaluating Policies for Developed and Developing Countries. Washington, D.C: Peterson Institute for International Economics, 2011. Print. Nicholls, Daniel. Foreign Direct Investment: Smart Approaches to Differentiation and Engagement. Farnham, Surrey, England: Gower, 2012. Print.OECD. Foreign Direct Investment for Development: Maximising Benefits, Minimising Costs.

Paris: OECD, 2002. Print.