Ibmne 4 Motives for FDI - 4 Motivations for FDI - comes up almost every year in the exam PDF

Preview

Summary

4 Motivations for FDI - comes up almost every year in the exam...

Description

Motives for FDI INTRO Foreign direct investment can be defined as an investment in the form of a controlling ownership in a business in one country by an entity based in another country. Foreign direct investments are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies. Thus, it is distinguished from foreign portfolio investment by a notion of direct control. FDI more suitable for large firms with significant capital, research, marketing teams and market knowledge. FDI is not for the faint hearted as it is the most high risk market entry strategy. The four key motivations for FDI are: Market seeking objectives, Resource seeking motives, strategic asset seeking, and efficiency seeking.

1 - MARKET SEEKING OBJECTIVES Managers may seek new market opportunities as a result of unfavourable developments in their home market, or attractive opportunities abroad. (i) Gain access to new markets/opportunities → Local production in other countries improves customer service and reduces the cost of transporting goods to buyer locations. EG - Coca Cola has factories all over the world in order to cater to local customers’ needs. In Ireland and Northern Ireland the Hellenic Bottling Group has the license to produce Coca Cola products in the region. EG - Huawei Technologies - this Chinese firm has invested billions in Africa to gain access to the fast growing mobile phone markets there. (ii) Follow key customers → Firms will follow key customers abroad to stop other vendors from serving them. Also, by establishing local operations, the firm is better able to serve customer needs EG - Tradegar Industries supplies the plastic that its customer Proctor & Gamble uses to manufacture disposable diapers. When P&G built a plant in China, Tradegar

Industries followed them there, establishing a presence in China as well. (iii) Compete with key rivals in their own markets The strategic purpose of confronting current or potential competitors in their home market is to weaken the competitor by forcing it to extend resources to defend its market. EG - Caterpillar and Mitsubishi entered a joint venture to put pressure on the market share and profitability of their common rival, Japan’s Komatsu. The need to spend substantial resources to defend its home market reduced Komatsu’s ability to expand abroad.

2 - RESOURCE SEEKING MOTIVES (i) Raw materials needed in extractive and agricultural industries → In extractive and agricultural industries, firms have little choice but to go to where the raw materials are located. (ii) Unskilled/semi-skilled labour → Firms may choose FDI in order to move production to low wage countries as means of cutting costs and increasing profit margins. → E.g. Nike production in low wage countries in Asia. 3 - STRATEGIC ASSET SEEKING (i) Knowledge → By establishing a local presence through FDI, a firm can deepen its understanding of target markets. Typically, FDI provides the foreign firm better access to market knowledge, customers, distribution systems and control over local operations. However, with this being said it is possible for investing firms to encounter teething problems if they have had limited experience in the foreign country they wish to invest in. Therefore, it is more advisable to carry out FDI through a joint venture with a partner firm in order to learn from them. EG - FDI teething problems = Disneyland in Paris. EG - When Whirpool entered Europe, it partnered w/ Philips to benefit from the well known brand name and distribution network. (ii) Technological & Managerial know-how

→ The firm may benefit from establishing a presence in a key industrial cluster. In doing so, the company can be surrounded by like-minded firms and can be driven to innovate and advance. Examples of industrial clusters are: robotics in Japan, Chemicals in Germany, fashion in Italy. → Many firms enter a collaborative venture abroad as a prelude to wholly owned FDI. Collaboration with local partners reduces the risks of entry and provides the entrant with local expertise before launching operations of its own in the market.

4 - EFFICIENCY SEEKING (i) Economies of scale and Scope → Through international expansion, the firm can increase its economies of scale. This allows for falling fixed costs, specialisation of labour, volume discounts, and access to financial economies. Larger firms are more powerful, and therefore can borrow large sums with relative ease, especially compared to smaller, and/or younger firms. All of the above is advantageous, as it reduces sourcing and production costs through access to inexpensive labour, and cheap inputs due to high volumes in the production process. This allows for increased efficiency in the day-to-day running of the firm, as well as lower production costs per unit. This may help spare up time and resources in order to focus on strategic actions, as was mentioned in the Caterpillar and Mitsubishi joint venture. → Economies of scope refers to the cost savings that arise from using a relatively fixed base of managerial talent, facilities, and other company assets across a larger marketplace. EG - Unilever uses the same base of managers and marketing experts at its Netherlands headquarters to develop advertising for numerous product lines for many companies in Europe. → This is more efficient than delegating the task to individual managers in each European country. (iii) Locate production near customers → Efficiency can be achieved by locating production near customers. This applies to industries that are sensitive to customers needs, or where tastes change rapidly, for example, in the fashion industry. EG - The fast-fashion house, Zara, locates their garment production in key fashion markets such as Europe. Whilst the production is more expensive, it means the clothing

can get into shops faster and more closely represents the latest fashion trends. Zara is able to deliver these trends the fastest with its two week runway-to-rack production speed, as a result, fashion conscious consumers will buy from them first, before the trend is offered in competitor stores, such as H&M. (iv) Take advantage of government incentives (v) Avoid trade barriers...