Owing to globalization and removal of trade barriers between countries international business has expanded and National Companies have been able to widen their horizons and become a strong Multinational Companies (MNCs). However, a decision to enter a new market and undertake a foreign direct investment is risky therefore a decision to make this step must be started with a self assessment. What are the core motives of pursuing this strategy? Does the firm have a sustainable competitive advantage? Where to invest? How to invest? Use direct investment or joint ventures, franchising, licensing, acquisitions of existing operations, establishing new foreign subsidiaries or just exporting. What is country risk and how to benefit from it? Further we will try to answer these questions.
Companies consider Foreign Direct Investment (FDI) because it can improve their profitability and strengthen shareholders wealth. Mainly they have two motives to undertake FDI. Revenue related and cost related motives. One of revenue related motives is to attract new sources of demand.A Company often reaches a moment where growth limited in a local market so it searches for new sources of demand in foreign countries. Some MNCs perceived developing countries such as Chile, Mexico, China, and Hungary such as an attractive source of demand and gained considerable market share. Other revenue related motive is to enter profitable markets. If other companies in the industry have proved that superior earnings can be realized in certain markets, a National Company may also decide to sell in those markets. Some Companies exploit monopolistic advantage. If a National Company possesses advanced technology and has taken an advantage of it in domestic market, the company can attempt to exploit it internationally as well. In fact, the company may have a more distinct advantage in markets that have less advanced technology. Apart from revenue motives companies engage in FDI in an effort to reduce costs. One of typical motives of Companies that are trying to cut costs is to use foreign factors of production. Some Companies often attempt to set up production facilities in locations where land and labor costs are cheap. Many U.S based MNCs such as, Ford Motor and General Motors established subsidiaries in Mexico to achieve lower labor costs. Also, a company can cut costs by economies of scale. In addition to above stated motives companies may decide to use foreign raw materials. Due to transportation costs, a company may exclude importing raw materials from a given country if it plans to sell the finished goods back to that country. Under such circumstances, a more attractive way is to produce a product in the country where the raw materials are located. After defining their motives managers of National Companies need to examine their domestic competitive advantages that enabled them to remain in a home market. This competitive advantage must be unique and powerful enough to recompense for possible disadvantages of operating abroad. The first comparative advantage National Companies can have is of economies of scale. It can be developed in production, finance, marketing, transportation, research and development, and purchasing. All of these niches have a comparative advantage of being large in size due to domestic or foreign operations. Economies of production come from large-scale automated plant and equipment or rationalization of production through worldwide specializations. See here More here real estate in cambodia For example, automobile manufacturers rationalize production of automobile parts in one country, assemble it in another and sell in the third country with the location being stated by comparative advantage. Marketing economies occur when companies are large enough to use most advanced media that can provide with worldwide identification. Financial economies can be derived from availability of diverse financial instruments and resources. Purchasing economies come from large scale discounts and market power. Apart from economies of scale flourishing Companies benefit from comparative advantage in managerial and marketing expertise. Managerial expertise is an ability to manage large scale industrial organizations in foreign markets. This expertise is practically acquired skill. Most MNCs develop managerial expertise through prior foreign experience. Before making investments they initially source raw materials and human capital in other countries and overcome the supposed superior local knowledge of host country companies.
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