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.