Foreign Direct Investment - Long-Term Strategy?

Foreign Direct Investment (FDI) is:

‘The purchase of physical assets or a significant amount of the ownership (stock) of a company in a another country to gain a measure of management control’

(Wild, Wild & Hans, 2004)

What makes multinational companies chose FDI over other options like, Exporting, Franchising and Licensing. Like anything there is advantages and disadvantages to each of the above approaches, so what makes FDI the popular choice?

Dunning (1988) designed the ‘Electric Paradigm’ framework, as he believed that there was multiple reasons why companies might chose FDI as a way to locate abroad. His ideas involved:

·      Location Advantage – Companies moving to a particular advantageous economic location because of the characteristics e.g. Shell moving to oil rich countries

·      Ownership Advantage – Keeping control of the brand, knowledge and management ability in order to retain the over all high quality expected of the company.

·      Internationalisation Advantage – Integration e.g. vertical of certain business activities are better kept inside the company rather than laving it to relatively inefficient markets.

Whilst FDI is deemed advantageous for multinational companies there can be complications involved for the ‘host country’. Some people may argue that these cost are overridden by the boost that will be injected into the host country’s economy. I believe however that this is a more serious consideration and that once again the reign and superiority of multinational companies prevail over all others.

The biggest concern is the adverse affects FDI can have on the local competition. For example the state agricultural marketing board in India are trying to oppose FDI into multi-brand retail, as they fear the negative impact this will have on local farmers. The arguments for FDI are strong; if this is given the go ahead there will be a creation of jobs along with other benefits such as the transfer of knowledge and expertise as well as management, capital and technological skills.

There seems to be a misconception that FDI is all about companies going abroad to set up ‘sweat shops’ for the availability of cheap labour. However it is more to do with the natural or acquired economic resources offered within that country. The majority of FDI flowing into Africa is to specific countries that have mineral wealth, which is then exploited by multinational companies concerned with high profit margins and shareholder maximisation. However what happens when natural resources dry-up, many of these African countries never initially had the infrastructure or economic stability and do not have the pulling power to entice the companies to stay.  Just as easily as the money flowed it, it will flow straight back out leaving these severally unbalanced economies further unstable. Therefore is this really a long-term solution?

Arguably FDI is harder to reverse but ultimately multinational companies would not stay in a specific country if there were not long-term benefits of shareholder maximisation. So regardless as to how easy or hard it would be for a company to leave a country, if there was no strategic or competitive advantage they would move out and onto their next victim, exploiting their resources.  Put into perspective oil companies such as BP and Shell invest in oil rich countries but once the resources finish what is realistically keeping them there?