09 June 2005

Foreign Direct Investment (FDI) (Part II)

Reasons for FDI for a Business – Why businesses are interested?

1. Increase sales and profits – SME’s are interested with growth of MNE’s providing a need for local suppliers who may go on to supplying just locally in the long run. Better sales and profits opportunities for MNE’s as global markets offer more lucrative opportunities.

2. Enter rapidly growing markets – For example China, high economic growth and GDP. If a country continues to move towards a ‘market-driven’ economy, will allow entry for MNE’s which will result in the demand for goods and services not profitable by local firms. MNE’s are also trying to gain a foothold in Eastern European Countries.

3. Reduce costs – Labour costs and costs of producing. This depends on how labour intensive the business activities are. Materials, supply factor, and distance from supply source if too far may be a reason for a business to relocate closer to raw materials and resources. Costs of energy in some countries are lower than others, and transportation costs. For example US now goes to Mexico for textiles as a result of distance, and less and reduced transport costs. Lastly development of twin factories/maquiladoras which is where production operations are setup in both sides of the border (US and Mexican)

4. Gain a foothold in Economic Blocks – MNE’s that acquire a company in one of the three major blocks get additional benefits of less restriction and the ability to sell without import duties. A balance between blocks. Policies creation of new blocks will stimulate economies and provide a competitive stance for business operating under their umbrella.

5. Protect domestic markets – MNE’s entering international markets to attack competitors and prevent them from expanding overseas as they will be less inclined to expand overseas while busy trying to defend its home market position from MNE’s. Sometimes to bring pressure on a company that has already challenged overseas markets, for example when Fuji expanded to the US, Kodak expanded to Japan.

6. Protect foreign markets – If MNE’s can attract more customers and increase market share, they will be more able to move products directly to consumers. A possible joint venture could increase market share, protecting investments in the foreign market, otherwise local competitors will erode away firms position

7. Acquire technological and managerial know-how – Managerial and technological expertise. Relocating next to competitors to monitor, recruit scientists and specialists from local universities, for example Kodak’s expansion into Japan

No comments: