Mode of entry in a foreign country

09. Jan, 2011

Mode of entry in a foreign country

•      Export

•      Licensing/ Franchising

•      Joint Venture

•      Acquisition

•      Merger

•      Greenfield Investment

•      Turn Key Investment

FDI

•      What is FDI?

•      What is the flow of FDI?

•      What is the stock of FDI?

•      Outflow of FDI & Inflow of FDI

Trends in FDI

1) Over the year FDI accelerated faster than world trade and world output.

Reasons:

–  Decline in trade barriers

–  Political and Economical changes in developing countries

–  Globalization of world economy

Trends in FDI

2) Historically the direction was more towards developed nation. Now a significant increase in the developing nations investment.

3) Collectively the worlds top 6 economies are the largest source of FDI. Recent contribution from Arab world.

Trends in FDI

4) In the FDI the Acquisition and Merger is more used than Green field Investment.

•      Reasons:

–   In the developing nations 1/3 of FDI from Acquisition and Merger due to lack of local partner company.

–   Merger and Acquisition is quicker to execute and faster to see result

–   The rival will acquire a desirable target firm

–   Foreign firms have strategic assets like brand loyalty, trademark, customer service, distribution system, production system and more over knowledge of market.

Trends in FDI

5) Large FDI shift towards Service Industry

•      Reasons:

–   Reflect the general move that developed nations away from manufacturing toward service Industry

–   Many service can not be traded Internationally and requires to be produced in the foreign land

–   Many country liberalized their regimes for the service Industry

–   Rise of Internet based global communication network.

Why FDI?

•      Limitations of Export

–  Transportation cost high for low value to weight ratio products

–  Import tariff, quotas and govt regulations

•      Limitation of Licensing

–  Market Imperfection approach or Internalization theory

Pattern of FDI

•      Knickerbocker’s theory of strategic behavior (oligopolistic industries)

–  Imitative behavior

–  Multipoint competition

•      Eclectic Paradigm

•      Product life cycle theory

Political Ideology of FDI

•      The radical view

•      The free market view

•      Pragmatic nationalism

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