Week
Four – Foreign Direct Investment
Foreign direct investment takes place for a variety of reasons.
- A common reason is for market penetration. Here
if a service is offered there is no choice to be located within the
marketplace. This applies to financial
institutions, large accounting companies and even MacDonald’s. If a product
is involved, avoiding high freight costs and overcoming trade barriers
will be the motivator.
- Somewhat related to the above is to appear a
domestic company. For example, General Motors acquired Holden in Australia
and Adam
Opel in Germany many
years ago and to this day continue to make under this brand that are
distinct for
these markets. They enjoy some market advantage by being seen as part
of the country fabric.
- Sourcing raw material and low cost labor may
be an incentive to invest. In the case of Iogen, we rely on straw for our
raw
material. As this
transports
poorly, investment must be made where the raw material exists. With
some parallels, China as a magnate for labor sensitive industries is well
known.
- Also with China, they are investing heavily in
resource industries on a global basis to as a strategic move to establish
control over
essential
raw material
to feed their growing industrial base.
- Seeking government subsidies
is another reason for FDI. Take the Canadian aircraft manufacturer, Bombardier,
for example. They are
building a
new passenger jet and have told the UK government if they were
to put up
substantial funding,
a major part of the assembly would go to Northern Ireland. Here
the market has nothing to do with the decision – a large capital grant
is the incentive
for the investor – job creation for the country offering the grant
is their reward.
- Another reason is diversifying a global portfolio.
For example, US and Canadian banks are keen to acquire financial institutions
in
each others
major cities
and indeed offshore. Meanwhile foreign banks invest in North
America. There is no more banking activity globally but there is diversity
in the holdings
of banks. If one thinks about this, the rational for diversification
probably comes at some extra costs of doing business on a global
basis.
Yours,
Maurice Hladik
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