Theory Of Foreign Direct Investment (FDI)
CHAPTER 2
THEORY OF FDI
2.1 Concept of FDI
In this globalization era, many firms worldwide try to expand their business abroad in order to gain the advantages that FDI has offer. Foreign Direct Investment (FDI) itself can be defined as a category of investment made with the objective of establishing an enterprise by a company or entity in one country into a company or entity in another country OECD (2009).
FDI can be divided into two types based on the direction of the investment. The first type is Inward Direct Investment which can be explained as the investment made in the reporting country by non-resident investor. The value of inward direct investment is called FDI net inflow.
The global trend of Foreign Direct Investment (FDI) in this
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Coca-cola, Starbucks and McDonald’s are companies that use this FDI …show more content…
The production facility in the designated country is either leases or purchase by the parent company. Tata Motor chooses this strategy when it acquired Jaguar and Land Rover from Ford in 2008.
In order to choose between the two strategies, foreign company first need to understand the advantages and disadvantages that each of the methods provided. Irwin (2012) highlighted the pros and cons of using both methods.
In Greenfield Investment strategy, the biggest advantage that company has is the degree of control over the entire operation. Company undergoes this strategy will have total control over all aspects of their business such as their brand and the staff. Since the company can oversee the whole production process in their entire department, it has the ability to formulate and implement the best strategy to achieve the desirable financial goals. The ability to work directly with foreign country authorities will also be a good addition of choosing this method because they will know the detail of the negotiation. Despite all the benefits of choosing this strategy, company choosing this method has to spend time and a large sum of money to build their production facility and to enter the foreign country. Moreover, the companies also have to face a tough competition on competitive market in the foreign
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