Foreign investment decision is a tough and often complex investment decision that sharply differs from the traditional domestic decision on investing. The normal financial evaluation of discounted cash flows technique are not fully relied on in making foreign investment decision as we do in making domestic investment decision as well as financing decision.
Best practices as to whether a foreign investment is good for a company or not is to critically consider the identifiable imperfections in the international scene that a business must battle and overcome. This is to say that direct foreign investment makes more economic sense when our firm possesses combination of valuable assets that will yield more if we control it rather than operate at arm’s length. The reason for this in its simplest form is the greater perceived; political, business and foreign exchange risks.
TYPES OF INTERNATIONAL BUSINESS | FOREIGN INVESTMENT
- Direct foreign investment
- Joint ventures
- Licensing contracts
- Management contract
- Strategic alliance
- Classic form of international business- import and export
PROCESS OF OVERSEAS EXPANSION BY MULTINATIONAL CORPORATIONS
Few foreign investments if at all were planned for from the unset. The process of making direct foreign investment (DFI) is an unplanned result of connected reactions of companies to threats and opportunities that presents themselves at random from overseas companies. Typically, overseas expansion starts from exporting, then setting up of sales subsidiaries, establishment of service facilities (eg, securing licensing agreement), and the eventual set up of full presence through building of production plant(s) overseas.
Note that the process of overseas expansion starts with simple form of international business and progressively moved into becoming what is known as a multinational company. This is in most cases referred to as mode of overseas expansion
Investors and financial managers are faced with stiffer challenges of international investment in the following three areas:
- Whether to invest in foreign market
- Which foreign market to invest in
- How to invest in foreign market
DECIDING WHETHER TO INVEST IN FOREIGN MARKET OR NOT
The decision of whether to invest in foreign market or not is born and oiled by strategic motives like the ones listed below:
REASONS FOR THE EXISTENCE OF MULTINATIONAL COMPANIES
- Market seeking strategic motive
- Raw materials seeking strategic motive
- Cost minimization motive / seeking production efficiency
- Crisis free environment seeking strategy (political, religion and ethnic/ cultural)
- Desire to keep domestic customers
- Exploiting financial market imperfections- this includes; reduction of taxes, circumvention of currency controls, lower costs of funds or capital, desire to reduce risks through international diversification, etc.
A company can combine any number of the above named strategic motives- meaning that they are not mutually exclusive. Note also that any of the strategic motives or combination of strategic motive of direct foreign investment can be sub classified as proactive investment or defensive investment in oligopolistic environment.
Proactive investments are designed to improve the growth rate and profitability rate of a company- to be more dominant in a market. Defensive investments are made with the sole aim of hindering growth and profitability of other firms or businesses. A moralist will at this point be questioning the moral values of defensive investment, well, that is part of the struggles and challenges of investing!
Bearing in mind the motives of making a direct foreign investment, a firm should take stock of her strengths and weaknesses and possibly include the analysis of opportunities and threats. The process of doing this is called a SWOT analysis- detailed discussion of SWOT analysis is not the primary concern of this article. However, most of the factors to consider before making international investments are pretty the same with factors to consider in SWOT analysis.
FACTORS TO CONSIDER BEFORE INVESTING IN FOREIGN MARKET
As profitable as investing in an international market can be, if care is not taken, the whole process may become a flop. Hence, below are certain questions that be convincingly answered by aspiring foreign market entrants.
- Do we have the managerial and marketing expertise to face the challenge in cross border business scene? For instance, can we handle some taxation and transfer pricing issues that are common in global business.
- Are we possessing the right technology or in a position to acquire them when the need arises?
- Are the product and factors markets imperfections present abroad?
- Do we have sustainable competitive advantage to compete in the home market before looking at making a direct foreign investment? I have seen or heard of situations where parent companies collapse as a result of shifting attention to a wholly owned foreign subsidiary.
- Is our size large enough to give us the benefit of economies of scale and scope? Here, the company may want to involve in one sort of business valuation or the other
- Are we (our products and services) adequately differentiated in the market?
- Do we have the financial power or access to the kind of finance (can we raise finance) required to survive in the overheated international business arena?
Answering yes to the above questions are not enough to dabble into international trade, answers to the above questions that are in the affirmative must be specific to the company, transferable, and powerful enough to guarantee adequate cushion to the potential adverse effects of direct foreign investment.
WHICH MARKET TO INVEST IN?
This is an aspect that needs to be tackled partly along with the first decision of whether to commit funds to foreign market or not. Some of the major concerns here are; what is the political landscape of the country we want to move our resources to? What is the legal system frame work like? What is the orientation of the local market about investment, do we need to consider making green investment? Answers to these questions will help us see if we are indeed ripe for entering the world business game.
HOW TO INVEST IN INTERNATIONAL MARKET
There are many investment vehicles to drive any good investment opportunity that is spotted at the international scene. All a company has to do is choose the right one to follow depending on her circumstances. See the section on types of investment.
Note that all that we discussed in this article are not unique to overseas investment; most of them are in fact more applicable to domestic investment. Another thing that you should bear in mind is that; if you don’t want to compete with some of the best companies of the world, they will come to you and drive you out of market- after all, the door of commerce have been flung open!