Can some one help me identify and explain issues a company should explore before deciding whether to explore or to engage in foreign direct investment please?Can some one help me identify and...
Can some one help me identify and explain issues a company should explore before deciding whether to explore or to engage in foreign direct investment please?
This is such a broad question that it can be answered in many different ways. If a company wants to invest in foreign markets, then that company should consider many important things.
Internally, the company should gauge whether they are in a position to invest. Some companies overextend themselves and this can be disastrous in this economic climate, where you might need larger cash reserves.
Second, that company should do due diligence to know what that foreign market is like. Some market research will be important here. In light of this, they might want to hire a consulting company.
Third, if possible, that company should talk with government official to see what they are thinking. Working with the government can be essential. If you need special licenses or permission, then the government can help you. Without the government on your side, there can be may hardships later on, which can bankrupt you.
The answers already given are very strong. I'll mention a couple of other factors to consider. For example, a company should explore if the host country offers any special incentives for such investment, such as tax breaks or infrastructure support. It would also help to know whether competitors had already made, or were planning to make, similar investments. Knowledge of local customs and of the work ethic of the local workforce would be important as well, and it would be important not to exploit local workers, not only because such exploitation is unethical but also because it could damage a country's image. A company would also want to make sure that the legal system of the host country was reliable and honest.
It is very important that the firm should investigate the political climate in the target country with respect to business. For example, a firm would want to be very careful about investing in a place like Venezuela where expropriation might occur at any time.
As another example, firms engaging in FDI in China often find that there is little or no protection for them if their local partners steal their intellectual property. That is another way in which the political/business climate in a target market might be a bit problematic.
One factor to consider in Foreign Direct Investment (FDI), or internationalization, is the cost of certain types of transactions. For instance, if expansion is desired but imperfect market conditions at home make the cost too high, green field FDI can provide an avenue for the desired expansion: it may be more cost effective to build, staff, and operate a new plant or other facility in a foreign country than in the home country.
I think one of the biggest issues to consider are ethical in terms of human rights abuses. Investing in countries that are notably indifferent towards human rights and which have been targetted by organisations such as Amnesty International should make firms very wary of placing their money or investing in such areas.