Advantages Of Foreign Direct Investment

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Foreign Direct Investment (FDI) is one of the most prominent market entry strategies employed by MNCs. It has been established that if the firm owns more than 10% of the value over a company then it has sufficient influence to be a direct investment. An FDI can manifest itself as a merger with a foreign firm, by acquiring an already existing firm in the foreign country or as a completely new set-up known as Greenfield investment. Each of these three options have distinct attributes and materialise in diverse discussions on the most appropriate market entry strategy. As most aspects of globalisation, FDI can be controversial, in particular with less developed countries, that through inward FDI, withstand a loss of control over their economies.…show more content…
Furthermore, it slightly reduces competition by acquiring what would have been a rival and if the acquired firm had created good relations then the home firm will adopt those too, however, on the same reasoning; the firm is buying into the problems and hidden surprises of the acquired firm. Further disadvantages are that there is always uncertainty as to the acquired firm’s value from not be able know the whole picture of it, potentially tax and legal problems arise more than with Greenfield investment, and there can be difficulties in “absorbing” acquired assets. Furthermore, acquisition is sometimes restricted by culture clashes of the two parties and given the history of acquisitions; they are notorious for short term return but lack of stability in the…show more content…
While the less developed countries may lose tax revenue, it makes up for it in job creation and the increase in knowledge and technical knowhow of the country’s human capital. It should be noted that this applies mainly for less developed or developing countries because developed countries will want to protect their local firms and do not need MNEs support. By choosing the Greenfield investment approach, firms avoid the risk of overpayment and integration in the foreign environment (along with cultural issues), they maintain full control over all aspects of their business, there is the possibility of avoiding trade restrictions on new markets and avoiding the disadvantages of fluctuations in foreign exchange

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