Entry Strategies for International Market - Case Study Example

Entry strategies for international market University Student Id Course Introduction Foreign direct investment is among the best strategies for entering the international market. The use of this strategy in entering the international market assists an organization to make sure that it has full control of its operations in the foreign market. An organization utilizing FDI to venture into the international market as the entry strategy can establish a new operational business or relocate the operations of an existing business to the new market (Cook and Piggott, 2006). Despite the fact that foreign direct investment has significant benefits to the firm venturing the global markets due to the ability to control operations of the company, the strategy can be challenging. For instance, the primary challenge that an organization can face is adjusting to the new business environment in the foreign market. Therefore, the firms making use of FDI need to conduct the necessary market research that can make sure they have full knowledge concerning the international market. Failing to have the necessary knowledge concerning the market can make the firms fail in successfully venturing into the international market (Froot, 2008). FDI usually takes place the moment an organization makes an investment directly in a foreign country. The moment an organization undertakes foreign direct investment it then becomes a multinational company. The essay critically assesses the foreign direct investment flows while making use of statistical data, relevant theories and examples of recent years. Foreign direct investment There has been an increase in the foreign direct investments because of increase in the cross-border acquisitions and mergers. However, there is a limitation of the contributions coming from the projects related to Greenfield investments for productive assets (Hill, 2014). Besides, the major part of the FDI flows is mainly related to the corporate reconfigurations that involve large values for financial balance account that determine the balance of payments among countries. In the developing economies, there has been an increase in the FDI reaching around US$741 billion representing an increase of approximately 5% as compared with the previous years. The FDI flows in the developing Asia are more than $ 0.5 trillion that has remained being the largest foreign direct investment globally. Asia accounts for around a third of the FDI flows globally. However, there has been a decrease in the Greenfield investments in the developing countries due to the decline in the capital expenditure (Greenaway and Kneller, 2007). The FDI flows in the year 2016 declined that reflected fragility of the world economy, weakness in the aggregate demand, volatility of financial market globally and deceleration of the emerging economies. Besides, the economic challenges that affect the FDI flows include the regional tensions and elevated geopolitical risks taking place globally. However, there was a rise of the FDI flows in the year 2015 that reached more than $1.7 trillion reaching the highest level since 2007. There has been a wave involving the cross-border acquisitions and mergers that are said to have risen significantly because of the increased foreign direct investment (Froot, 2008). Most of the MNE’s that have been seeking growth have made use of acquisitions where the strong balance sheets and low-interest environment facilitated the move to make acquisitions. As a result, the increased FDI inflows failed to translate into an expansion that can be considered equivalent to the cross-border acquisitions and mergers. The FDI in EU has increased to $426 billion after some around three years of successive years of FDI decline. For instance, the foreign direct investment in Netherlands increased by 146% to $90 billion; Belgium increased to $32.7 billion from $8.7 billion in the year 2014 while the UK experienced an increase of around 29% by the year 2015. The largest economies in Europe that can include France and Germany also experienced an increase in their flows (Haskel, Pereira, and Slaughter, 2007). The inward FDI in Germany increased in the year 2015 to $11 billion because of decline in the repayment of loans and the increase in reinvesting earnings. In France, the FDI flows increased to around $44 billion in the year 2015. Reasons for choosing FDI The ability of a firm to have direct control over the operations has been among the primary reasons that make FDI preferred over the other international expansion forms. The Foreign Direct Investment usually makes a record of the financial flow of the transactions across the border that are related to the direct type of investment over a specified period, whereby the period can be either a whole year or even a quarter year. Besides, the financial flow in most cases comprises of the debt transactions of inter-company, earning reinvestment and also the equity transactions (Froot, 2008). The outward flows usually represent the various transactions which increase the level of investment of the investors in the foreign economy. Some of the transactions that are represented by the outward flows include; the sales of equity and also borrowings from an international enterprise by a resident investor. Negatively, the inward flows, on the other hand, represent those transactions which decrease the level of investment of the foreign investors in the international market. The flows of the Foreign Direct Investment are always measured using the American dollars and also as a share of the Gross Domestic Product (Moran, 2012). Besides, the FDI flows usually create links between various economies which are long-lasting and stable. In the year 2015, the global flows of the foreign direct investment had increased by almost 36% thus reaching their highest levels. Besides, the agency of the UN which is known as the Global Investment Trends Monitor showed that the total value of the foreign investment was amounting to $1.7 trillion which was an increase of the FDI investment (Moran, 2012). Also, high growth of the financial flows was reported in the European Union where the FDI still occurred, even though from a low level in the year 2014. However, the report gave an explanation that the global growth of the Foreign Direct Investment in the year 2015, it was mainly facilitated by some factors such as the acquisitions and the border merger. The differences in the FDI inflows Countries can experience differences in the FDI flows as there are varying factors that affect the foreign direct investments that might be different among countries. For instance, in the year 2015, the FDI in Ireland accounted for almost 63.7% while in Japan was 4.1%. The difference can be attributed to the gross fixed capital formation that is taken to imply the investments made to the fixed assets that include warehouses, retail stores and factories. The gross fixed capital formation has been said to measure the value associated with acquisitions of the existing or even new fixed assets of any business sector, households and governments. The differences in the FDI inflow between Ireland and Japan can be attributed to various factors that affect the foreign direct investment. The first factor is the economy size that affects the potential of growth of the country. Foreign direct investment targets selling goods especially directly to the state that attracts the investment (Moran, 2012). As a result, the size of the economy of a country is crucial in attracting investments as firms are seeking countries that can guarantee maximization of the returns. Therefore, considering the FDI of Ireland and that of Japan, Ireland has economic conditions that attract more investors than Japan. Besides, political stability can be attributed to the differences in FDI between Ireland and Japan as the success of the investments largely depends on the political climate. The political environment determines the transparency and fairness in the application of the international laws that affect business especially to the foreign firms (Moran, 2012). Some nations might be unfair in the way they treat the foreign companies hence discouraging investors. The existence of the necessary commodities can also be used in determining the differences in the FDI between Japan and Ireland. Ireland seems to have a better supply of commodities than Japan hence making it experience an increase in the foreign direct investment. The ability of the Japan and Ireland to access the free trade areas can be crucial in determining the FDI flows. Ireland seems to have better access to free trade areas than Japan hence making it experience an increase in foreign direct investment. The access is determined by the regulations, rules and the barriers that affect trade among nations. Besides, the exchange rates can affect the FDI levels as the volatility of exchange rates can discourage investments. Investors are looking for countries that have stable exchange rates hence Ireland must be having stable exchange rates that attract foreign investments. The eclectic theory It is the FDI theory that ties together the ownership advantage, location advantage, and the advantages of internalization. The eclectic theory entails three conditions that need to be present for firms to engage FDI. The first condition is that firms need to be more profitable to undertake any business venture in the foreign market than the local market (Moran, 2012). Therefore, the location advantage needs to be realized before the country makes a venture into the international market. The determination of the location advantages can be determined by assessing factors such as the resources, political climate, culture, competition and the economic conditions. The second condition is that the company entering the foreign market need to establish its competitive advantage that is unique. The competitive advantages established are crucial in determining the ability of the firm to survive the competition levels in the foreign market. Therefore, any business before making any venture in the foreign market has to ensure it owns some advantages such as patents, knowledge, technology and know-how. The third condition is that the firm entering the international market has to realize the benefit coming from the control of the foreign business activities. As a result, the company can be in a position to maintain the ownership advantages. The benefits of the eclectic theory include the fact that the companies expanding into foreign markets can be able to realize whether they can realize profits in the markets. The companies can assess the factors affecting the overseas markets that determine their success hence able to avoid venturing into foreign markets that they are likely to fail (Smarzynska, 2004). Besides, the theory has some benefits in making sure that the firms expanding their operations in the international markets can assess their competitive advantages. The primary shortcoming of the eclectic theory is the lack of enough market research for determining the viability of the venturing in the foreign market. The influence of eclectic theory on management practice The eclectic theory is considered to be the advancement of internalization theory that is based on the transaction cost theory. The management practices of any organization can be affected by the eclectic theory because of the ability of the theory to determine the ownership advantages. The management can employ the use of the theory in determining the entrepreneurial skills, the returns and the production technique that is necessary for the foreign market (Moran, 2012). Besides, the management relies on the eclectic theory in the process of determining the competitive advantages of the organization entering a foreign market. The management decision concerning the location of the business is determined by the eclectic theory where the location advantages can be realized. The management can be in a position to realize the competitive advantages through assessing the factors that affect the performance of the organization in the foreign market using eclectic theory (Dunning and Narula, 2003). Therefore, the eclectic theory has great impacts on the management practices, especially when making ventures in the foreign markets. Outsourcing For outsourcing to be successful in manufacturing, it has to depend on three major factors (Froot, 2008). The factors include the level of support of the executive in the client organization, communications efforts between the employees and the management and the third factor is the customer`s management ability. Pros of Outsourcing 1. The aspect of specialization of the suppliers on what they can produce best is a significant importance of outsourcing. 2. Outsourcing creates room for the business holders to have freedom of focusing on what they require so as to operate their businesses smoothly. Cons of outsourcing 1. One of the major demerits of the outsourcing is the upsetting of the employees, whereby in sometimes they usually feel of less significance. 2. Outsourcing is not always guaranteed that it will be producing quality products which are required and also could be more costly. Pros associated with in-house manufacturing 1. Facilitates quality control, whereby through the in-house manufacturing the quality of the production process and also the quality of the final product can be controlled. 2. The product prices become low since some costs such as the shipping costs and also delivery costs are eliminated. Cons associated with in-house manufacturing 1. Sales must be present for the products to be produced. 2. The labour required in the in-house manufacturing can be extremely high. Recommended option Outsourcing is the recommended option because it makes sure that there is efficiency and that quality is assured. Various options when using outsourcing are availed where the best choice can be selected while considering the required quality and costs of the option selected. Conclusion The foreign direct investment can be measured in two different ways that can include FDI flows and FDI stocks. The FDI flows measures the gross capital formation that can either be expressed in gross outflows or gross inflows. The net flows can be obtained by taking the outflows the subtracting the inflows. However, it only entails the measure of the amount of the investments that are new while excluding the capital that is raised in the abroad market. The foreign direct investment flows are said to be very unstable as they change substantially from time to time. Besides, the FDI stocks that can either be outward or inward involving the value of the assets of the organization mainly based on the book value. The value of the assets provided is the one held in a foreign market that is commonly expressed in percentage or money terms of the GDP where the necessary distinctions are made between outward and inward FDI. The distinctions between the outward and inward foreign direct investment are crucial in determining the flow of FDI in the international market. The valuation of the assets makes use of the historic values but not the current values hence the valuation can become a limitation in the foreign direct investment. References Cook, M. and Piggott, J. 2006. International business economics: A European perspective. Basingstoke: Palgrave Macmillan. Dunning, J. and Narula, R., 2003. Foreign direct investment and governments: catalysts for economic restructuring. Routledge. Froot, K.A. ed., 2008. Foreign direct investment. University of Chicago Press. Greenaway, D. and Kneller, R., 2007. Firm heterogeneity, exporting and foreign direct investment. The Economic Journal, 117(517), pp.F134-F161. Haskel, J.E., Pereira, S.C. and Slaughter, M.J., 2007. Does inward foreign direct investment boost the productivity of domestic firms?. The review of economics and statistics, 89(3), pp.482-496. Hill, C.W.L. 2014. International business: Competing in the global marketplace. New York, NY, United States: McGraw Hill Higher Education. Moran, T.H., 2012. Foreign Direct Investment. John Wiley & Sons, Ltd. Smarzynska Javorcik, B., 2004. Does foreign direct investment increase the productivity of domestic firms? In search of spillovers through backward linkages. The American Economic Review, 94(3), pp.605-627. Read More