Foreign Direct Investment - Essay Example

Introduction Foreign direct investment is a process where organisations in one nation invest in enterprises in other countries. In this case the foreign partner and the parent organisation normally form a corporation that is multinational based. The parent organisation normally has to have overall control of the other organisation in the invested nation. The other definition of foreign direct investment is that the process where a company from one nation invests physically in another nation through building of company. This means that the company that is investing in another nation builds the company and has machinery and equipment in the other nation. Many companies in developed countries are currently very interested in carrrying out foreign direct investment in Inida and China. (Barger, 2003) There are different types of foreign direct investment. They include horizontal, vertical, forward vertical and also backward vertical. All this are very common in this twenty first century. This paper clearly evaluates the reasons for foreign direct investment. This paper also includes empirical examples in line with foreign direct investment. (Barros, 2000) Resource One of the main reasons for foreign direct investment is in line with seeking resources. Many companies normally need resources in order to run smoothly. There are various types of resources. They include natural resources and also labour. A company can decide to carry out foreign direct investment because it is seeking for cheap labour. One of the examples is evident in United States foreign direct investment in Africa. Through the AGOA movement the nation has set up multiple companies in African countries like Kenya and Tanzania. Analysis of this initiative shows that these nations have got very cheap labour unlike United States. Through this program United States companies have started other companies in these nations that deal with textile manufacturing and horticulture among others. Such companies seek to take advantage of lower costs of wages and also low manufacturing costs in these nations. Natural resources are also very important to the operation of companies. Many companies normally decide to carry out foreign direct investment in order to easily access the natural resources. Africa is known to have very many natural resources. This has made many overseas nations that deal with natural resources to carry out foreign direct investment in this continent. (Barros, 2000) An example of these natural resources includes horticultural products like flowers. Very many companies have carried out foreign direct investment in Middle East because of the availability of such natural resources. Others have carried out foreign direct investment in Eastern parts of Europe and Southern parts of Asia due to the availability of cheap labour. (Barros, 2000) Market For any company to succeed, it has to have a ready market for its products. The business sector has become very challenging for very many companies. This normally results in stiff competition from other competitor companies. Very many companies carry out foreign direct investment because they seek for market in other nations. Analysis shows that companies that carry out foreign direct investment for this reason normally do it as a defense mechanism. This means that such companies that carry out foreign direct investment for this reason prefer to look for other markets for their products where the competition may not be very stiff. One major characteristic of this kind of investment is the acquisitions and mergers of companies. Analysis shows that during the nineteen eighties, very many firms dealing with law, accounting and even advertising carried out foreign direct investment for this reason. Sometimes one finds that companies already have ready market in the target nations. So they decide to carry out foreign direct investment in order to make their customers have easy access to their products and services. This is very evident in many companies. For instance Coca Cola Company decided to carry out foreign direct investment in different nations for this reason. This is to make its customers that are worldwide easily access their products. (Li Kaimeng, 2003) This reason is also not true. This is due to the fact that there are so many companies that export their products without necessarily starting up companies therein. The market for products will always be available so long as they are of good quality. Therefore companies are not justified to carry out FDI for this reason. Competitiveness in foreign markets This reason is very true for companies that provide services. For such a company, it is not just enough to give services across the borders. To enhance the company’s competitive advantage such organisations ensure that they have physical availability in this nation. This is through starting up a branch of its company therein. Many at times companies normally get a ‘cold’ response from customers in other nations in relation to their exported products. Analysis shows that there are nations where citizen value their locally produced products. This means that any company exporting products into the nation does not get warm reception. After a company analyzing this situation, it may decide to carry out foreign direct investment. (Sader, 2005) This means that the locals in the nation will identify with the company and hence buy more of its products. This results in increasing the company’s product competitiveness. For instance in a nation like China, the citizen prefer locally produced products. Any other nation that exports to China may be forced to carry out foreign direct investment in order to increase its products competitiveness. On the other hand, companies are not justified to carry out foreign direct investment for this reason. This is due to the fact that competitiveness of products can be enhanced without the company starting up a brother company in the nation(China). Accessing skills and technology This is also one of the reasons as to why companies carry out foreign direct investment. It has been known that companies may carry out foreign direct investment in places where they can easily access new technology. The twenty first century has got many technological advancement that many companies seek to explore. There are also a number of companies that carry out foreign direct investment in nations and areas that have skilled manpower. This is normally the case when a nation has less skilled manpower. This is common in nations that have been faced with epidemics that later on affect skilled labour therein. This in turn normally leads to increased output in the companies that are directly invested in such areas. The argument concerning this point is that skills can be outsourced and therefore should not be the sole reason as to why a company shoukd carry out FDI. In case a nation does not have the technology, then it can be incorporated instead of carrying out foreign direct investment. Information This is also another reason as to why companies carry out foreign direct investment. This is whereby a company wants to know more about its customers in the nation. This is in line with their tastes and preferences. A company can carry out foreign direct investment such that its personnel can have more direct interaction with the customers in the nation. Through this the personnel are able to get more information concerning the customers’ preferences in relation to the company’s products. This enables the company to make necessary adjustments that appeal to the customers in the nation. This is carried out in case there are vast differences between the cultures of the two countries that can affect the customers’ preferences. (Sader, 2005) This point is not justified to some extent since informatin concerning customers can be sourced through different means and not necessarily through FDI. The companies can have resaerch teams go to the nations and get the relevant information concerning customerss. The natives in these nations can also be used to get information. Barring competitor This is whereby a company carries out foreign direct investment because of its competitor. In this case, a company may know of a resource in a certain nation. Due to the awarenes concerning its competitor’s plan starting up a company in the same area, it may decide to carry out foreign direct investment there.. This move is carried out to bar the competitor company from investing in the target region.. This topic concerning direct investment in foreign nations has been researched on for over forty years. It is very clear that organisations that have adequate assets can make more profits when it invests in another country. This is unlike when the company produces in its home country and exports the products. This happens even if the company carrying out foreign direct investment does not need the resource. Analysis shows that there are very few companies which carry out foreign direct investment for this reason. There are cases where an oil producing company starts up another company where oil is easily found even if the company does not need the oil. The argument concerning this reason is that it is not practical since the competitor being barred can still get another place or nation and invest. Economies of scale benefits Analysis shows that many companies carry out foreign direct investment because of this reason. Economies of scale are whereby a company enjoys the benefits of producing in large scale. It is very clear that companies seek the benefits of economies of scale through foreign direct investment. Through this initiative many companies are able to increase efficiency in the organisation. (Barros, 2000) The argument concerning this point is that economies of scale benefits can even be achieved without necessarily carrying out FDI.There are very many companies in nations that have not carried out FDI but enjoy the benefits of economies of scale. Humanitarian grounds This is also one of the reasons as to why foreign direct investment is carried out. Analysis shows that many companies in United Kingdom and United States of America have invested directly in Africa for this reason. Research shows that there are cases where CEO’s visit Africa for business or even leisure reasons. After witnessing the business environment and how people struggle to access services and products, they decide to carry out foreign direct investment. Analysis shows that there are various banks from United Kingdom that have opened up other branches in Africa for this reason. This is just to enable people there to easily access the services. This is also very common among non governmental organisations that provide humanitarian services. A good example is Goal Company that deals with the poor. This organisation has invested directly in nations like Uganda, Tanzania, Kenya, Sudan and Democratic Republic of Congo among others. World Vision organisation has also carried out direct investment in foreign countries for this reason. (Lord, 2006) Instaed of carrying out FDI for this reason, companies can decide to help the local companies expand and have many branches within the nations. This still would be a human action that would help many citizens in these nations. Business environment Analysis shows that different nations have got different business environments. There are some nations whose business environment is very conducive for business operation. This issue has other factors intertwined. The business environment includes the amount of taxes that foreign investors have to pay to the government. (Lord, 2006) When a nation’s policies rules and regulations are good for businesses to operate in, then foreign companies highly invest therein. This is due to the fact that the companies are able to have smooth running of their businesses without the interference of government. This reason does not warrant companies to carry out foreign direct investment since any business environent can be enhanced. This would make business better instead of carrying out foreign direct investment. This is like running away from one’s problems whch in the long run is not very beneficial. Limiting transaction costs There are so many transaction costs that are normally incurred by companies when they export their products or even services. Companies are known to incur so many transaction costs as they export their products. This is in relation to contracting suppliers. Other costs are normally incurred through foreign licenses. So to reduce these costs many companies simply decide to carry out direct investment in foreign nations. On the contrary, this reason is not justified at all. This is due to the fact that when FDI is carried out, these companies are required to pay so much in form of premiums to the host nation. The taxes charged on such business are normally so high that they are more or less equivalent to exporting to these nations. Clustering Research carried out in many developed nations shows that there are many companies that carry out foreign direct investment for this reason. This is whereby a company decides to carry out foreign direct investment in a nation where there are similar or related companies. There are various reasons for doing this. One of the main reason is that the new company may intend to share facilities with the other companies. Some companies carry out foreign direct investment near their headquaters so that they can easily get services from there quite easily. This normally becomes very convenient for business operation. An example is found in the eastern part of England where there are pharmaceutical companies as clusters. These have been started there as foreign direct investment initiatives. (Barn, 2005) Analysis shows that many nations would have atleast more than one company dealing with the same products. The companies that carry out FDI for this reason normally have the option of clustering within their nation of origin. Prominence of various reasons There are some reasons for companies carrying out foreign direct investment that are more prominent than others. They include seeking for resources, market and increasing competitive advantage. One reason for carrying out direct investment in foreign nations that is less prominent include seeking assets in relation to hindering other competitor companies from carrying on with their investment plans. Conclusion Foreign direct investment is a venture that is very common in this twenty first century. It is defined as a process where a company in nation A invests directly in nation B. This is through various initiatives like starting up of sister company in nation B. These initiatives are normally carried out either vertically or horizontally. There are various reasons as to why companies carry out direct investment in foreign nations. They include seeking for resources like cheap labour and natural resources like rocks. Coca Cola Company carried out foreign direct investment in many nations due to availability of ready market for its products. Other reasons include increasing competitiveness of the company’s product in foreign markets. Some companies invest directly in foreign markets due to humanitarian grounds. Some of these reasons are more prominent than others. Resaerch carried out in the year two thousand and seven shows that China and India are among the top nations where foreign direct investment is carried out. Many nations are recorded to have had significant positive impacts on their economies emanating from FDI. Read More