Foreign Direct Investments (FDI)

Foreign Direct Investment (FDI) is a strategy where the firm directly sets up a manufacturing plant or business operation in a foreign country as a fully owned subsidiary of the parent company. (To read about other foreign business entry strategies click here)Level of FDI is identified as an indicator of economic growth as it directly links with the GDP level of an economy.

FDI has many advantages such as:

• Company can earn high profits as no middlemen involved.
• Heavy control over foreign operations can be maintained as firm directly runs the business.
• Knowledge about local markets can be improved as the proximity to the customer increases.
• Barriers to trade such as tariff and non tariff barriers are removed.
• Facilitate growth of an organization.

FDI has following disadvantages:

• FDI involves heavy investment and company has to find ways to finance the investment.
• Exposes company to the political risk of the host country as FDIs are highly regulated by host country governments.
• Operations gets complicated as the parent company has to manage a subsidiary which is based on a foreign country with different political, economic, social and technological environment.

There are two ways in which a company can make FIDs and they are

1. Green Field Strategy
2. Acquisition or Merger

Green Field Strategy

Green Field Strategy is a type of FDI where the firm chooses to enter the foreign market and sets up business operations as a fresher. The firm chooses the best location and sets up the business operations while obtaining economic development incentives from the government. It has adverse effects such as slow business start up procedure, high risk and high exposure to established competitors. Greenfield strategy is advisable if the are no/less competition and competitors hold different culture and competencies.

Acquisitions and Mergers

This is where the firm acquires a foreign business or merge with a foreign entity and starts up business operation. It has advantages such as easy start up procedure, less time consuming and exposure to less risk as the operations are already established and stable. But it can have disadvantages such as pass inefficients are carried forward, little/no innovation, purchase price can be higher than the absolute value of the firm and cultural/policy clashes between new and existing management and employees. Acquisitions/merger is advisable when there are established firms dominating the potential market.

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