WHAT IS INTERNATIONAL BUSINESS? – ENTERING OVERSEAS MARKETS part 4

entering international markets part 4

4. FOREIGN DIRECT INVESTMENT: The direct ownership of facilities in the target country. It may be made through the acquisition of an existing entity or the establishment of a new enterprise. There is a high degree of commitment and high level of resources. Japanese manufacturers are well known for their use of wholly owned subsidiaries in the USA.

ADVANTAGEOUS WHEN: there are import barriers; there is a small cultural distance; assets cannot be fairly priced; there are high sales potential; low political risk exists.

PROS:
1) Provides high degree of control in the operations;
2) The ability to better know the consumers and competitive environment (a direct presence).
3) Provides jobs in target country. Governments will help you!
4) Provides the scale economies and efficiencies of production when across several markets;
5) Benefit of the comparative advantage of different economies such as the supply of labor or raw materials;
6) Has value of technology ownership (minimizes technology spillovers); considered an “insider”.

CONS:
1) High risks; this entry strategy has the highest capital and management costs;
2) Greater difficulty in managing local resources.
3) Uncontrollable factors: including currency risks, performance requirement risks, discriminatory tax, and licensing requirements, to name a few.

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