Entry strategy- Foreign Direct Investment

Foreign direct investment can be said to be the acquiring of 'lasting interests' by a resident of one country in an Entity[a company] resident in another economy [OECD benchmark definition].
A lasting interest can either be;
1. a long term relationship between the investor and the target company by the retention of                      at least 10%[this is sufficient for operation control] of the company's shares or;
2. the acquisition and retention of a significant degree of influence over the management of the target enterprise.

UNCTAD[United Nations Conference on Trade and Development] states that there are 2 key components of FDI; lasting interest or a significant degree of influence.

As a foreign organisation, when looking for potential target markets to invest in, it is always advisable to look out for the following;
a. Taxes payable
b. the level of demand for your product in that target market
c. whether or not there are governmental incentives such as tax holidays
d. the political stability of the country
e. the possible risks to your staff
f. the level of governmental interference
g. the regulation of FDI
h. the culture of that place
i. the level of bribery and corruption
j. the importance of access to the customer base
k. labour costs, trade union costs[the possibility of constant strikes]
l. law and custom
m. the maturity of the market for your product
n. sustainable development
0. resources
p. IP protection
q. competitors
r. quality of goods and services provided
s. access to investors such as banks, currency.

FDI is most advantageous for a company that is looking to expand its operations by providing maximum direct control of the operations of the investee company, involvement in the daily management of the company, provision of better customer service, reducing or removing the risks associated with transit as in the case of trade, avoiding trade restrictions, avoidance of currency risk.
advantages of FDI include expanding market share, expanding portfolio, the revenue stream is enhanced, access to a skilled workforce with strong work ethics, bridges proximity to customers in the target market.

Strategies used in FDI; Greenfield and Brownfield

GREENFIELD entails the creation of a NEW sustainable structure in order to expand operations overseas. this could take the field of a branch or a subsidiary.

A branch is an extension of a parent company, wholly owned and controlled by the parent company.
Advantages of opening branch are: it is a market entry vehicle that is easy to establish or wind down, it is easily monitored and controlled, allows for the acquisition of insider status before making any large scale investment.
Disadvantages of a branch are that it takes the form of a permanent structure hence liable for Taxes.
Also, Parent companies remain liable for the acts of the branch.

A Subsidiary is a company managed, controlled or owned by a parent company. What constitutes a subsidiary is dependent on the definition by the host country of the company.
Advantages of a subsidiary include the creation of a permanent market presence, sourcing funds from within the host country, limiting the parent's liability [subject to certain jurisdictions].
Disadvantages of a subsidiary include that it may be subject to the laws of the jurisdiction where they are incorporated, established and operated. It may also be subject to taxes in the host country. Although the subsidiary as a separate entity may permit transfer pricing schemes.[transfer pricing scheme means pricing arrangements that shift profit from high to low tax countries]

Mechanisms for extracting profits from a subsidiary includes;
Dividends derived from parent company owned shares in the subsidiary company
Interests on loan repayments
Royalties paid on licensing agreements between parent and subsidiary company.

Brownfield investments will be tackled in the next article.

National and International Sale of Goods (NISG)- Entry strategies and Foreign Direct Investment

TRADE AND INTERNATIONAL LICENSING

Cross-border investment is a vital component in this era of economic interdependence. Cross border investments include Foreign direct investment (FDI), Trade and International licencing. 

Trade: This entails buying and selling across a customs frontier rather than a geographical border.
             Advantages include:  Allows for the Spread of risk
                                                Allows for preliminary first steps into a new market
                                                No major expenditure of capital as opposed to FDI
                                                Not as complex as other CBI's

In Trading, there is a need for one to research the target market; in relation to the demand for your product, cultural preferences, IP protection and regulations, Import and export controls in the trading countries. Import controls or restrictions are mechanisms used to control the volume and value of products that are allowed into the importing country with the aim of maintaining the Exchange rate of its currency. Examples of import and export controls include Trade tariffs or import duties or taxes imposed to make the product more expensive. Import licences and import quotas that limit the number of products that allowed in, currency restrictions that limit the amount of foreign exchange convertible for the payment of import goods. legal provisions prohibiting the entry of illegal or harmful goods.N.B the last three are called non-tariff barriers.

Export controls are usually imposed by federal agencies with the aim of controlling the exporting of goods in short supply, protection of national security, such controls will be imposed on exporting of items such as military weapons, commercial wares such as software, technical information. In the US these export regulations protect and control the disclosure of certain controlled software soft code, or technical information to a foreign national whether within the US or abroad.

As a potential trader, it is important to take into cognizance transportation risks, language barriers all through the stages of trade, as well as cultural differences such as work ethics, for example in France, beginning from the month of August shops begin to close down. Further concerns a trader should bear in mind will include, an absence of control as to how your product is packaged, marketed or sold hence there is a danger of misuse, trading via road or aeroplanes will result in larger carbon footprint.


International licensing agreements- the owner of IP rights grants that right to another entity in another country based on certain agreed terms for a set or unlimited time in exchange for something such as Money. A bundle of rights is given including the right to distribute, display IP on packaging, perform a work in public, copy or adapt the work. Examples of IP rights include patents, copyrights, trademarks, service marks or trade secrets etc. in comparison to exporting, international licensing agreements are preferable seeing as 1. It allows for greater entry
                                                          2. it allows the importer to tailor the product in alignment with                                                                    local regulation
                                                          3. allows the product to be made and manufactured more                                                                            efficiently
                                                          4. trade restrictions are avoided or restricted to a minimum.
                                                          5. minimal or no start-up cost for the licensor.
                                                          6. transit limited or non-existent
As a licensor, there is a need to ensure that your product is well protected in the target market. a licensing agreement can give rise to piracy whether or not sanctioned by a country, it may lead to the unauthorised use by licensee or sublicensee, there may be issues with quality control. there may be a lack of enforcement mechanisms of the licensing agreement in the licensees country, host countries regulation may pose a problem for instance; there may be a restriction or control of rights to enter a licensing agreement, there may be a restriction or control over substantive contract terms, for example, sublicensing may be made mandatory in the host country, there may be approval schemes or franchise disclosure rules.

Foreign Direct Investment would be tackled in the next article.