4.1 Types and Motivations of Foreign Direct Investment

Foreign direct investment (FDI) is a crucial aspect of international business. It involves companies establishing operations in foreign countries through various methods like greenfield investments, brownfield investments, mergers and acquisitions, and joint ventures.

Companies engage in FDI for different reasons, including market-seeking, resource-seeking, efficiency-seeking, and strategic asset-seeking motives. These strategies can bring benefits like technology transfer and job creation, but also carry risks such as political instability and cultural challenges.

Types of Foreign Direct Investment

Types of foreign direct investment

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• Greenfield investments build new operational facilities from scratch providing full control over operations and assets but involve higher initial costs and risks (Intel building new semiconductor factories in Arizona)

• Brownfield investments purchase or lease existing facilities renovating or expanding pre-existing structures enabling faster market entry compared to greenfield investments (Walmart acquiring Flipkart in India)

• Mergers and acquisitions (M&A) include horizontal M&A acquiring companies in same industry, vertical M&A acquiring suppliers or distributors, and conglomerate M&A acquiring unrelated businesses (Facebook acquiring WhatsApp)

• Joint ventures form partnerships between foreign and local companies sharing ownership, risks, and profits while gaining access to local knowledge and resources (GM-SAIC joint venture in China)

Motivations for FDI engagement

• Market-seeking motives drive access to new customer bases, overcome trade barriers, and establish proximity to target markets (Toyota building factories in the US)

• Resource-seeking motives secure access to natural resources, raw materials, and skilled labor pools (Shell investing in oil fields in Nigeria)

• Efficiency-seeking motives aim to reduce production costs, achieve economies of scale and scope, and optimize global value chains (Nike outsourcing production to Southeast Asia)

• Strategic asset-seeking motives acquire technology and intellectual property, gain brand recognition, and enhance competitive positioning (Tata Motors acquiring Jaguar Land Rover)

FDI Strategies and Implications

Benefits and risks of FDI

• Benefits include technology and knowledge transfer, job creation in host countries, increased tax revenues for host governments, and enhanced productivity and competitiveness (Samsung's investments in Vietnam)
• Risks involve political instability in host countries, currency fluctuations and exchange rate risks, cultural differences and integration challenges, and potential negative environmental impacts (Chevron's challenges in Ecuador)

Horizontal vs vertical FDI strategies

• Horizontal FDI replicates home country operations in host countries producing similar goods for different markets motivated by market access and economies of scale (McDonald's expanding globally)
• Vertical FDI fragments production processes across countries through backward integration investing in suppliers and forward integration investing in distribution channels driven by cost reduction and supply chain optimization (Apple's global supply chain)