Week 6 : Foreign Direct Investment

On the blog this week, I am going to reflect my learning regarding the how the multinational enterprise involves in the foreign direct investment and the reason behind its involvement in FDI. A classic example which was explained in the Moffet, M., Stonehill, A., and Eiteman, D. (2006) book, Trident became a multinational companies (MNC) after it set up the strategy such as to establish a greenfield market-seeing manufacturing in Germany (may want to satisfy local demand or to find export market instead of their home market), a market-seeing acquisition in Brazil and a production efficiency-seeking joint venture in China (in which motivated to get the lower wage in foreign country) which also had lead them to undertake the foreign direct investment.

Those are also actually the reasons of why a company may want to be a multinational company (MNC) and other reasons also include;

1. Raw material seekers in which the certain raw material could get only from foreign country such as oil, and mining.

2. Knowledge seekers operate in foreign countries to obtain the technology and managerial expertise.

3. Political safety seekers acquire or establish new operations in country that less problem.

Back to the lead of Trident to undertake the FDI, the Foreign Direct Investment (FDI) might occurs when an enterprise wants to purchase the assets or a significant amount of stock (to acquire ownership) of foreign company in order to obtain a measure of management control or in a simple words, an entity who made an investment to another country's entity. It could be in two methods which are Greenfield investment (a parent company that started new venture in foreign country is investing in the building of physical facilities to run the business in foreign country) and international of merger and acquisition activity (where the benefits could be obtained by merge or acquires of foreign subsidiary in foreign country which already got the facilities and manpower). This also can be shown by IKEA who maybe made a greenfield investment in India about $2bn over the next 15 to 20 years to be the first major foreign retailer that wholly owned the outlets (BBC News, 2013). 

The growth of FDI was lead by the increased of international trade, the removal of capital controls, the scale of international capital flows need to grow to support MNC in foreign markets, the world economy become more interdependent, it is also as a closer financial links between countries and greater integration of financial markets. Probably, those are the reasons of why IKEA is doing this type of investment. In addition, the FDI’s growth also impacts the Transnational Companies (TNC) due to the government policy liberalisation, the rapid technology change and need for local market presence as well an increased of global competition for new markets such as Wal-mart where this company is operating in most country   as possibly to meet the demand or need of local community in the particular country . Apart from that, the developing countries are drive to use FDI due to obtaining the overseas resources, to increase the access to return markets, to increase the local capital markets and for their economic growth.

What does a company get from using the FDI?It is perhaps there is an obstacle when to export the goods or production such as the cost incurred therefore, they might want to cut down the transportation costs when exporting the goods and also the effect on the goods being export which may has low value and high weight which can produce easily in any particular location. Therefore, it is better to make a foreign direct investment in other country rather than exporting the goods and production. FDI also is better than licensing because the license will acquire the product knowledge and might become a direct competitor, the company may lose control over product quality and mark down the reputation in foreign markets and as such that know-how skills cannot be transferred. Licensing also tend to be high in agency costs and stealing of technology risk.

The specific benefit that IKEA could get by using the FDI in India as the trade minister of India said the government is encouraging FDI that may create jobs and provide advancement in technology thus could recover their slowing economy (BBC News,2013) therefore, IKEA  could enter the integration into global economy as India nowadays is regard as a huge market that maybe the right opportunity for company to invest in this country to moving forward and thus help this country to boost its economic life or growth.

As a closing, a company that involve with FDI such as IKEA also may gain some advantage which is explained in eclectic paradigm about the nature and direction of FDI that includes; a location advantage ( benefit from locating a particular economic in a specific location), an ownership advantage (benefit that a company has an ownership because it has some significant asset) and an internationalization advantage (internalizing a business activity rather than leaving it to relatively inefficient market).