The National Consideration: Foreign Direct Investment Scenario in the US - Case Study Example

 TABLE OF CONTENTS MLA STYLE EXECUTIVE SUMMARY 3 INTRODUCTION 4 THE ORGANIZATION 4 THE PURPOSE OF THE REPORT 4 THE NATIONAL CONSIDERATION 5 FOREIGN DIRECT INVESTMENTS 6 DISCUSSION 7 GREENFIELDS VS. M&A 9 CONCLUSION 10 RECOMMENDATION 11 EXECUTIVE SUMMARY Surf skiing complements with warm weather. Often, they are used in warmers coastal regions such as Australia, California, Hawaii and South Africa. It is a popular water sports so that there are already national and international competitions such as the U.S Surfski Championship and the Molokai race in Hawaii. The increases awareness and enthusiasm for water sports make surf ski more interesting. This year, an Australian Company has developed a revolutionary surf ski which definitely outperforms the earlier versions and models but can be produced at a much lower cost. The production is protected by several patents particularly for the shell material and the design. The product has been launched in the country and has attracted many supporters and buyers. This great success makes opening up and launching the product in a foreign company a viable step. We will therefore analyze the possibility of launching the product in the US market: given its national consideration, the particular foreign direct investment strategy to be employed, the theories and concepts pertaining to the organizational structure and plans identified, the strengths and the strategies of the company in responding to the issues, the alternatives or options that the company has and identify the best way hat the organization can respond to the challenges of foreign markets. Finally, we give appropriate recommendations to the CEO of the company in relation to the business. INTRODUCTION The Organization The organization is an Australian manufacturer of surf ski and other life-saving surf equipment. The company has been around for several years already and has a reputation for good R & D. The company has pioneered some innovations in surf ski manufacturing such as the latest one which outperforms the others but produced at a lower cost. It also produces other surfing products such as racing skis and rescue boards. The company has recently launched the newest surf ski product in Australia. It garnered tremendous success so that it is now thinking of entering foreign markets such as the United States of America. USA has some surfing capitals such as California, Miami and Hawaii. Based from the large population and the increasing enthusiasm of Americans for water sports, the company is serious in studying its potential for a USA market. The Purpose of the Report This report looks at the different business options facing the organization in terms of penetrating the US market. In its preliminary preparation for the launching, we take a look at the different aspects of the business, its strengths and weaknesses, opportunities and threats and the over-all look of the project. This report is to be submitted to the CEO to give clear direction as to the life of the project. First, it is established that the foreign country to be entered into is USA. The country has several hot spots for surf skiing such as California and Hawaii. It also has established surf ski organizations and competitions such as the US Surfski Championship, the Molokai Challenge in Hawaii, the Essex River Race and the Mystic River Race (http://surfskiracing.com). We will therefore report the national considerations in entering a foreign market such as the USA and the possible foreign direct investments to be espoused by the company. This leads us the to different alternatives to be discussed in detail and lead us into conclusions and recommendation. The National Consideration: Foreign Direct Investment Scenario in the US “In 2003, outlays for new investments, which include investments made directly by foreign investors and those made by existing U.S. affiliates, were $60 billion, slightly above the $54 billion invested in 2002, the lowest amount since 1994, reflecting continuing weakness in the U.S. economy” (Jackson). The Department of Commerce released an analysis of the present situation, saying that the low level of acquisition and investments reflects two things: a weak market in some industries which used to be active and a general decline in the merger and acquisition activities with foreign companies (Jackson). “Acquisitions of existing U.S. firms accounted for 87% of the new investments by value, while investments by U.S. affiliates accounted for 55% of the transactions by investor. Investment outlays by foreign affiliates declined in a number of sectors, including manufacturing, wholesale trade, information, real estate, and services. Investment outlays increased sharply in the finance sector and modestly in the retail trade sector.” (Jackson). The Foreign Investment and National Security Act of 2007 (FINSA) is also deemed to have negative impact on foreign direct investment. The law practically “increases the power of the American President to block a foreign acquisition on national security grounds” (Business Wire). This law also allows the review and investigation process for foreign acquisition to be opened to many parties sucha as the “Congress, advocacy groups, labor unions and competing bidders for acquisition targets” which makes entry more challenging (Business Wire). According to George Foote, partner with Bracewell & Giuliani LLP, “The new law will, [however], raise the cost and lower the chance for approval of some foreign acquisitions and could discourage or defeat some investments" (Business Wire qtd in www.bgllp.com.) In 1998, reports said that the return on American inbound foreign direct investments are lower than the returns in American outbound FDI, yet “this remarkable return differential doesn't reflect a more general differential in investment returns” as “during the same period the equity markets in the United States outperformed the rest of the world in the majority of years” (Desai). The Foreign Direct Investments Foreign market entry can take the following forms: export, licensing (allowing the use of brand names and technology), franchising, joint venture or a wholly owned subsidiary which is either a greenfield or Merger and Acquisition (BMM621). A greenfield investment is “a form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up. In addition to building new facilities, most parent companies also create new long-term jobs in the foreign country by hiring new employees” (Investopedia ULC). The other option is merger and acquisiton. “A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed” (Investopedia ULC). DISCUSSION The different entry modes have different characteristics; strengths and weaknesses. Among the entry modes mentioned above, the export mode provides the lowest control, lowest risk and highest flexibility (BMM621). Export mode is also 100% externalizing, while the other extreme which is the investment mode (wholly owned subsidiary) is 100% internalizing with the high control, high risk and low flexibility (BMM621). With the intermediate or contractual mode including licensing and franchising, there is shared control and risk and split ownership (BMM621). In deciding which of the entry modes to use, the following has to be considered: Need for control (desire to reduce uncertainty and maintain full control over the foreign operation) Resource availability (lack of access to financial capital may mean that entry by ownership is impossible so that non-equity or partial equity modes are preferable; most likely for small firms) Global strategy (global integration vs. national responsiveness; if the former, more likely to use ownership routes since EOS and scope & synergies are better achieved through internal market/hierarchy) Source: (BMM621) The greenfield direct investment necessitates full control of the foreign owner. This is advisable if the business owners are afraid they cannot meet a suitable foreign business partner. This also reduces uncertainty as the owners gain full control. On the other hand, merger and acquisition entails shared responsibility between the owners and the foreign partners. Resource availability is also on the primary considerations. This particularly pertains to the financial capability of the firm. If the firm lacks the capital, it cannot pursue foreign direct investment neither greenfield or M&A. Lastly, the global strategy that the company wishes to pursue is also a consideration. If the company wants to pursue global integration, it is likely to take ownership routed, meaning more of direct investment. Foreign Direct investment is said to benefits the firm in a variety of ways: economies of scale, managerial and technological expertise, product differentiation and financial strength (Docstoc 2010.). Entering foreign market increases the volume of production which carries with it the advantage of economies of scale. This can be easily understood as a reduction in the cost of production. Foreign Direct investment also carries with it the firm’s managerial and technological expertise plus the ability to adopt and learn from the foreign country. Businesses have the following motivations in becoming an Multinational Enterprises (MNE): To find new markets To extract raw materials To seek under-priced factors of production To gain access to technology or managerial expertise To ensure politically safe markets Source: (Docstoc 2010.) While these are the known advantages, there are also disadvantages in operating abroad and this includes foreign exchange risk, political risks and increases agency costs. Greenfield versus M&A According to the ”resource-based view of the firm” popular in the Management Strategy literature, heterogeneity across firms in their performance can ultimately be traced to the interplay between a firm’s endowment of complementary capabilities or intangible as- sets (Volker Nocke qtd in Wernerfelt). What this view suggests is that mergers and acquisition are born so as firms can “exploit the complementarities among their capabilities” and these capabilities include “marketing, distribution, and coutnry-specific institutional comepetency” (Volker Nocke). “Cross-border M&A are then motivated by the desire of foreign firms to exploit complementarities between local firms’ country-specific capabilities and the acquiring firms’ intangible technological advantages.. hat is, cross-border M&A are driven by the complementarities between internationally mobile and non-mobile capabilities” (Volker Nocke). “A cross-border acquisition thus allows a firm to get costly access to the country-specific capabilities of the acquired firm, and the price of such an acquisition is governed by demand and supply of firms in the market for corporate control. In contrast, by engaging in greenfield FDI, a firm brings only its own capabilities to work abroad. Different firms will solve this trade-off differently” (Volker Nocke). With regard to the host country, the study of Nocke suggests that since “cross-border M&A involves the acquisition of a local firm by a foreign multinational enterprise, cross-border M&A brings less to the host country’s economy than greenfield FDI” (Volker Nocke). CONCLUSION We have basically revolved around the issue of which foreign direct investment is suitable for the company. In the preceding sections, we have particularly pointed out the difference between different choices: export, licensing or the greenfield FDI and the Merger and Acquisition. Now to decide which should be espoused by the company, we have to take a look at the industry, the host country’s situation and the characteristics of both FDIs. The report shown a decreasing percentage of Foreign Direct Investment in the USA. We have particularly examined these things in the section “national considerations”. The USA has recently been struck by a crisis that has actually reverberated throughout the world, although it remains to be the world’s largest economy. It has laws that discourage foreign direct investment such as what we have already mentioned above. But the industry of our product is such that is taking a leap in terms of people’s awareness. How do we then enter the US market with such scenario? Export would be the most appropriate step for now. Given that there is a declining profits for foreign direct investments in general, why would the firm engage in such? There is no assurance of success for foreign direct investment and the US economy is still risky. Export allows greater flexibility especially in times of more risky business environment. Licensing USA companies to do the manufacturing may also sacrifice the quality and popularity of the product and it also robs much profit from the parent company. This is not a good idea as the product is a superior one hence it is not good to find a partner to whom profit will be shared. RECOMMENDATION Exporting necessitates establishment of good relationship with distributors. This is the aspect of the business that the company should bank on. Only reliable distributors will help enliven the business. At first, the company can have US-based and US-owned distribution company to oversee the sales of the products. This is necessary as the latter have the expertise and knowledge of the US market. It can learn a lot from its distributors until such time that they are ready to have their own distribution networks. While in the export mode, the company can use its time to continuously develop superior products until such time that the product line is deep enough to have its wholly owned subsidiary. References BMM621. "International Market Entry Mode." lecture. n.d. Business Wire. http://www.allbusiness.com. 23 October 2007. 4 May 2010 . Desai, Mihir A. http://hbswk.hbs.edu. 30 July 2008. 4 May 2010 . Docstoc 2010. http://www.docstoc.com. 2010. 4 May 2010 . http://surfskiracing.com. 2010. 4 May 2010 . Investopedia ULC. http://www.investopedia.com. 2010. 4 May 2010 . —. http://www.investopedia.com. 2010. 4 May 2010 . Jackson, James K. http://www.fas.org. 23 March 2005. 4 May 2010 . Volker Nocke, Stephen Yeaple. http://www.econ.psu.edu. 25 September 2006. 4 May 2010 . Read More