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:
FDI has following disadvantages:
There are two ways in which a company can make FIDs and they are
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.