Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or

company of another country, either by buying a company in the target country or by expanding operations of an existing
business in that country.
Foreign Direct Investment Types
Horizontal FDI: A type of FDI in which a firm duplicates its home country-based activities at the same value chain stage
in a host country. E.g. BMW assembles cars in Germany. It newly opens a assembly plant in Russia to manufacture cars
this is horizontal FDI.
Vertical FDI: A type of FDI in which a firm moves upstream or downstream in different value chain stages in a host
country. E.g. BWM does not engage in Car Dealerships in German but invests in Car Dealerships in Egypt this is
vertical FDI.
Motivations for FDI
Market seeking to develop markets to avoid protection via tariffs and NTBs and exchange rate regimes to
be closer to markets
Resource seeking access to cheaper and/or better resources access to information and knowledge locating in
industrial clusters
Efficiency seeking economies of scale and scope reduction in transport costs reduction in transaction costs
Strategic motives following competitors following buyers to avoid competition to develop new
information and knowledge sources
FDI theories
Internalization theory
High costs of market transactions encourage firms to internalise the market
Conduct transactions in house make instead of buy
Reducing uncertainty, acquiring local market knowledge
Addressing the agency problem
Sometimes increasing economies of scale
The Uppsala Internationalization Model
Based on Johanson and Wiedersheim-Pauls researches and studies of internationalization of four Swedish firms,
Johanson and Vahlne (1977) developed the Uppsala internationalization model. This model is base on two assumptions.
First, firms want to increase their profits but also want to keep the risk rate at a low level. Second, most firms are lack of
knowledge about overseas markets, it is a big obstacle to the development of international firms; and firms can get
necessary knowledge mainly through going abroad. The Uppsala Internationalization Model distinguishes four different
steps of entering an international market, which cannot be viewed independently of a companys situation, market and the
market knowledge.
Step 1: No regular export activities (sporadic export).
Step 2: Export via independent representative (export mode).
Step 3: Establishment of a foreign sales subsidiary.
Step 4: Foreign production/manufacturing.
From the observation, they find out that companies normally start their expansion in a psychic nearby market. There, they
have enhanced knowledge of the market and more control of resources, thereafter gradually when the companies have
become more experienced and acquired better resources, they expand to the more distance market. (By distance market,
they refer both to the cultural distance; as well the differences in language, politics, geographical and the difficulty to
acquire knowledge and information from the market)[3]. Secondly, most often companies entered a new market through
export before establishment of foreign sales subsidiary or foreign production.
The core explanation of the model is that increased market knowledge will lead to increased market commitment, and
vice versa. (Andersen, 1993)[4]
Figure 1.2 The Basic of Internationalization-State and Change Aspects

Uppsala-Models limitation in the new global era
What factors, besides learning, influence the internationalisation process? E.g. market factors, active strategy-
making
Alternative learning processes:
o Acquiring tacit knowledge though relationships with other firms
o Imitative learning
o Acquisitions and hiring people with knowledge
Possibility of radical strategic change :New personnel, conflicts between various intra-organisational groups
Wide evidence of non-sequential behaviour : the model dose not shows much consideration to management
incentive and its effect on decision making, or when they introduce the sequential four steps of market entry they
ignored some other forms of market entries which are difficult to place on the models scale, such as franchising
which is considered to be a relatively less risky market entry and have the opportunity to build great market
coverage and control (Doole, I & Lowe, R, 2008)[5], or licensing which requires low levels of investment and
provide considerable control over the market (Doole, I & Lowe, R, 2008)[6] or strategic alliance and some other
market operation.
Abundance of born-global firms : These are small to medium-sized companies which rather than slowly building
their way into foreign markets, almost from inception expand by investing overseas.
Born Global firms internationalize quickly and contradictory to U-Model which believe market knowledge can
only be acquired through activities on the market (experimental knowledge) (Forsgren & Johanson,
1992)[17] Born Global Firms combine the experimental learning with other modes of knowledge creation such as
learning through grafting, imitating or searching (Saarenketo et al., 2004)[18].
The original model has look at internationalization process purely as an internal capability and has ignored
external factors such as market potential and competitive forces which has become more important in the global
world and in some case even override the psychic distance factor in the management decision making.[10]

IKEA Internalization process
According to Uppsala internationalization model, companies appeared to begin their operations abroad in fairly nearby
markets and only gradually penetrated more far-flung markets (Global Marketing, Hollensen, page 63). IKEA started to
expand internationally from the nearest countries, such as Norway in 1958, Denmark in 1969, Switzerland in 1973,
Germany in 1974 and so on. After entering successfully in those countries, IKEA decided to enter Asia area. Japan was
the first country that IKEA entered in 1974 and the internationalization strategy used for Japan was not much different
from what is used in its nearest markets. The degree of adaptation was low. IKEAs small-size stores did not attract
Japanese consumers attention and they were not willing to assemble IKEAs..
Eclectic paradigm OLI framework
The eclectic paradigm is a further development of the internalization theory and published by John H. Dunning in 1980.
Internalization theory itself is based on the transaction cost theory.
[3]
This theory says that transactions are made within an
institution if the transaction costs on the free market are higher than the internal costs. This process is
called internalization.
[3]

For Dunning, not only the structure of organization is important.
[3]
He added 3 more factors to the theory:
[3]

Ownership advantages
[1]
(trademark, production technique, entrepreneurial skills, returns to scale)
[2]
Ownership
specific advantages refer to the competitive advantages of the enterprises seeking to engage in Foreign direct
investment (FDI). The greater the competitive advantages of the investing firms, the more they are likely to engage in
their foreign production.
[4]

Location advantages
[5]
(existence of raw materials, low wages, special taxes or tariffs)
[2]
Locational attractions refer
to the alternative countries or regions, for undertaking the value adding activities of MNEs. The more the immobile,
natural or created resources, which firms need to use jointly with their own competitive advantages, favor a presence
in a foreign location, the more firms will choose to augment or exploit their O specific advantages by engaging in
FDI.
[4]

Internalization advantages (advantages by own production rather than producing through a partnership arrangement
such as licensing or a joint venture)
[2]
Firms may organize the creation and exploitation of their core competencies.
The greater the net benefits of internalizing cross-border intermediate product markets, the more likely a firm will
prefer to engage in foreign production itself rather than license the right to do so.
There are many types of ownership advantages (O) that the multinational can transfer within the multinational enterprise
located abroad at low cost. The firms base on its competitive factors the internationalization process. Some of them are
monopolist advantages that the company has in form of privileged, as for example access to scarce natural resources,
patent rights, brand name On the other hand, some advantages come from innovation activities, as for example,
technology, knowledge broadly These advantages must have some different and particular and give to the
international firm the choice to compete abroad profitably, moreover to be transferable between countries and within the
firm. The internalization advantages (I) arise as answer to market failure, as for example which regards that buyers and
sellers have asymmetric information, what creates uncertainty around the quality of the transactions and the proper price.
Dunning explains that there should be an internalization advantage in that the firm believes that its ownership advantages
are best exploited internally rather than sold directly through spot markets or offered to other firms through some
contractual arrangement such as licensing, the establishment of a joint venture or management contracting. This advantage
derives from the difficulties that arise in writing enforceable and controllable contracts with potential overseas partners
that generate an income that approximates the true worth of the advantage being marketed.The firm must use some
foreign factors (L) in connection with its national core competences, or as Dunning defined ownership advantages.
Therefore the location advantages of different countries are keys in determining which will become host countries for the
multinational firms. Definitively the relative attractiveness of various location factors can change over time so that a host
country can to some extent engineer its competitive advantage as a location for foreign direct investment. We
can differentiate the factors including all of them in several groups, but this paper separate them in three type of location
factors according to:
Economic advantages: Consist of the quantities and qualities of the factors of production, transport and
telecommunications costs, scope and size of the market, etc
Political advantages: include the common and specific government policies that influence inwards Foreign Direct
Investment flows, intra-firm trade and international production.
Social, cultural advantages: include psychic distance between the home and host country, language and cultural
diversities, general attitude towards foreigner ant the overall position towards free enterprise.


Entry strategy
Key strategic decisions relating to the entry of foreign markets:
Where? Market selection (location of investment)
When? Timing of Entry (when)
How? Entry mode choice (how you will service the market)
Where? International location selection
Involves country and regional selection (e.g. State, province, or city) within a chosen country for a MNEs foreign
direct investment project.

When? Timing of Entry Decision
In addition to mode choice, the timing of entry into a new market is an important strategic issue for firms.
Involves the sequence of an MNEs entry into a foreign market vis-a-vis other MNEs.
Determines the risks, environments and opportunities the MNEs confronts.
Mimetic behaviour within entry timing (following competitive behaviour).
Timing of entry
Early entry - Firm enters foreign market before other foreign firms
First mover advantage
Ability to preempt rivals & capture demand by establishing strong brand name
Build sales volume and ride down the experience curve with a cost advantage
Create switching cost that tie customers into products & services

First mover disadvantages - Pioneering costs
Time & effort in learning the rules
Mistakes due to ignorance
Liability of being a foreigner
Costs of promoting & establishing a product educating customers (KFC in China -> benefit to
McDonalds)
Mode of entry
Foreign operation methods of modes refer to the way of operating in foreign markets used by internationalising
organisations (Welch et al. 2007, p.3).
Foreign market entry modes differ in degree of risk they present, the control and commitment of resources they
require and the return on investment they promise
Non-equity mode: A mode of entry (exports and contractual agreements that tend to reflect relatively smaller
commitments to overseas markets).
Equity Mode: A mode of entry (JVs and wholly owned subsidiaries that is indicative of relatively larger, harder to
reverse commitments.








Firm determinants of Entry Mode
Control (firm level integration and resource/ownership protection).
Firm Experience of the foreign market and the entry mode
Resource position (ownership/finance, capabilities)
Strategy
Knowledge protection
Host country experience
Corporate culture
Negotiations
Macro determinants of Entry Mode Choice
Government Regulation (FDI entry laws).
E.g Joint ventures entry in Central and Eastern Europe, and China.
Property and commercial right protection/systems
Can legal systems provide protection against copyright and trade-made infringement?
Country Risk
Political Risk. What is the degree of political stability?
Economic Risk
Social and Cultural Risk
(E.g Tesco when entering Korea identified that Korea was a nationalistic and chauvinistic
market needed to establish some legitimacy by partnering with Samsung)
Market Structure

GREENFIELD AND ACQUISITIONS
Greenfield investment occurs when a firm invests to build a new manufacturing, marketing or administrative facility, as
opposed to acquiring existing facilities.An acquisition refers to a direct investment or purchase of an existing company
or a facility. A merger is a special type of acquisition in which two firms join to form a new, larger firm.
Advantages
Allows the MNE greater control over subsidiary strategy and operations.
Used to reduce risk in highly uncertain markets or in markets with high cultural distance.
Allows for centrally coordinated global actions.
Lack of available or suitable acquisition targets especially in emerging economies.
Limitations
Growth through Greenfield can be time consuming, reducing speed to market.
High capital expenditure needed. Increasing financial exposure/risk, and country risk.
Potential national hostility to internal development.
International Acquisition entry ( benefits )
Permits rapid entry and market share.
May achieve a profitable scale quickly because the purchased local company brings an established
customer base, an established marketing network, thus leading to immediate market share.
May reduce costs and save time.
Access to valuable local resources such as land, local management, brand and corporate reputation etc.
Instead of opting for capital transfer, acquisitions enable easier access to local financing.
Wal-Mart decided to build its initial presence in Germany through acquisitions of the renowned 21-store Wertkauf chain
for an estimated $1.04 billion, followed one year later by the acquisition of Interspars 74 hypermarkets .
Potential risks of International Acquisitions
Capital intensive investment mode.
Search for the ideal takeover candidate can involve heavy costs, especially in management time.
Information asymmetry making evaluation of assets and capabilities difficult. Made worse when
corporate due diligence processes are not adequate.
The acquiring firm can assume many liabilities financial, managerial of the acquired firm.
Difficulty in achieving successful post-acquisition integration and cultural clashes.
Reasons for walmarts failure in germany
In appropriate marketing to the German consumer (errors and misjudgements).
US Ethnocentric style at management level (e.g cultural clashes with employees) and store level.
Miscalculation of competition. Strong local competition (Aldi and Lidi) Larger scale competitors and fierce
price competitors.
Poor quality acquisition targets (second-tier retailers with geographically dispersed stores in poor locations).
Insufficient scale to achieve critical mass.
IJV : Major choices in forming a joint venture:
Motives. Why JV? What is the value of having a partner to enter this market? What will the partner contribute to
the venture?
Partner choice. Who will we partner with? Partner selection decision-making criteria? On what basis will be
assess potential partners on?
Ownership level and control. What equity stake will we take? How will we control this JV?

IJV : It is a separate or new corporate entity, where two or more or more legally distinct organisations contribute assets,
own the venture to some degree, and share associated business risks (Harrigan, 1988). An IJV is when at least one partner
had its head quarters outside the ventures country of operation (Geringer, 1988), or the venture is owned by two or more
parents of different nationality (Beamish and Inkpen, 1995).
Motives
Reduce costs (Economies of scale through increased size).
Entre to the market (achieving market penetration and overcoming initial entry barriers)
Risk Reduction (reduce financial exposure, reduce macro risk and reduce competitive risk).
Access complementary assets/resources
Access tacit knowledge (marketing, technology)
Achieve legitimacy in the host market.
Diversification: Joint ventures are an efficient way of entering into non core businesses as it offers an easy
option of exiting in case of the failure of business. Further a business can make use of joint venture to set up a
new business which is very much different from the existing businesses and then after nurturing it and making it
successful it can be sold off at high price.



Theoretical perspectives explaining IJVs
Market power theory is concerned with ways in which firms can improve their competitiveness be securing
stronger positions in the market. Michael Porter (1980) in Competitive Strategy argued that the relative position
which firms occupy within their industry structure determines the generic strategies which are the most viable and
profitable for them.A cooperative strategy may offer a mutually advantageous opportunity for collaborating firms
to modify the position which they occupy within their industry.
Transaction cost economics : TCE views JVs as potentially cost reducing methods of organising international
business transactions. Therefore, stresses the efficiency and cost rationales for JV formation. Transaction costs are
those which are incurred in arranging, managing and monitoring transactions across markets such as costs of
negotiation, drawing up contracts and managing accounts. TCE regards the basic choice in organising economic
transactions through the market or through the hierarch (i.e the firm).
Resource dependence theory : Concerned with the arrangements which are negotiated between organisation
managers and the external environment where valuable resources exist. According to Pfeffer and Salancik (1978),
resource scarcity prompts organisation to engage in international relationships in an attempt to exert power and
influence. IJVs are therefore formed to access critical resources and reduce uncertainty in the supply of resources
from the environment.
Institutional theory : Stresses political and social considerations - other than efficiency/cost (internationalisation
theory) to succeed in international markets. Organisations must achieve legitimacy to survive, access resources
(customers, supplies, government) and to perform successfully . Institutional theory argues how organisations are
constrained by institutional belief systems, norms, conventions and rules shared by relevant members of their
environment (DiMaggio and Powell, 1983; Scott, 1987). Local partners facilitate external legitimacy building
and allow foreign MNEs to conform to prevailing rules and expectations. Partners provide their own legitimacy
through reputation, brand names and relationships.
Partner selection : The right partner represents an important condition for successful JV performance. Partner selection
determines the resources, skills sets and operating policies of the venture (Geringer, 1991). JVs are frequently plagued
with high degrees of instability and poor performance. These challenges can be partly addressed by selecting and
choosing appropriate partners.
Selection criteria : Geringer (1991) established criteria typology seeks to optimize the choice against two broad types of
criteria: operational related (task related) and co-operation related (partner related). Task-related criteria refer to those
variables that are intimately related to the viability of a proposed ventures operations. Refers to as production resources,
knowhow, financial resources, experienced managerial personnel and access to marketing and distribution systems.
Partner-related criteria seeks to indicate the efficiency and effectiveness of the partner: the national or corporate culture of
a partner, compatibility or trust between the partners management teams, the degree of favourable past association
between the partners and the size or corporate structure of a partner.
Control in IJV
Control in joint ventures refers to the process by which the partners influence the varying degrees, the behaviour
and output of other partners and the managers of the JV itself.
Why is control important in IJVs:
JV control is required to ensure internal consistency and integration with the firm.
Must protect the firms competitive advantage - including the integrity of firm resources which are
supplied in the JV.
Partners face several threats to resource integrity; partner opportunism, appropriation of knowledge and
weak protection for intellectual and commercial property rights.
Partner behaviour can impact the reputation of the company.
Geringer and Herbet (1989) identified three dimensions of control in JVs: Extent of control ,Focus of
control ,Control mechanisms
Non-Equity Control mechanisms : The appointment of key alliance managers to run the operation or manage critical
functions such as marketing or R&D , Formal contractual agreements , The provision of critical resources such as
business models, brand names or technology , The provision of HRM programmes and systems.

Equity control mechanisms
Majority (51>) equity shareholding
Can provide high control over key policy decisions, including strategic priorities, investment policy and
profit distribution.
Provides the parent company influence over key managerial appointments such as the general manager of
the JV.
Control through majority equity can sometimes be difficult to achieve.


Managing IJV successfully
Performance

The performance of an international joint venture is of utmost importance and the partnering firms should try to
give their best. There can be different measures of performance like various profitability ratios or stock prices.
Management needs to be sure about how they are going to assess the performance in order to ensure that the
joint venture is successful There should be effort from both the parties to take care of each others interest
because if one parties tries to maximise its gains at the cost of other it is going to threaten the existence of the
Joint venture.

Knowledge Management

Effective Management of knowledge is vital for gaining competitive advantage. When we talk about the
international joint ventures the knowledge transfer and management could be not only with regard to
intellectual capital and customer knowledge but it could also be related to patents or knowledge about the
markets. This knowledge could also be related to the knowledge about the production process or research and
development expertise (Mowery, Oxley, & Silverman 1996) . Knowledge transfer is thus key for the success of
an international joint venture although there is also an apprehension that firms want to protect their tacit
knowledge and intellectual capabilities.
However in many cases the objectives of the firm in entering into joint venture itself is to have access to
market knowledge and business practices . Foreign firms should be in position to transfer the knowledge to the
local partner (Geringer 1988). This perhaps is the main reason why Maruti entered into the joint venture
agreement with Suzuki and Hero group entered into the joint venture with the Honda group .
Governance and control

In order to ensure the success of the joint ventures firms should be mainly focused on being cooperative rather
than achieving their separate goals A very good example in this regard would be of Lockheed and Martin and
Boeing who formed a joint venture by the name of United launch alliance which helped them reduce the cost
that is incurred in producing expensive launching sites and technology. In order to effectively govern an
international joint venture formation of trust is very essential and for this there should be a comprehensive
contract and a supportive relationship . Partners should not engage in any sort of opportunistic behaviour.
Management control should be given to the partners according to the expertise and specialisation. In case of a
conflict the focus of the partners should be related to thinking about what is the best for the joint venture .

Cross cultural sensitivity

Cultural differences between the partners can be an obstacle in the successful management of a joint venture
and this can be all the more important in case the deferences are wide. Joint venture management must learn to
adapt to the cultural diversities and there should be a high level of cultural sensitivity . if there are great deal of
inconsistencies then the partners must closely examine the possible links . In spite of the fact that culture
difference exist an earnest attempt should be made to overcome the differences across cultures and training
should be provided to the employees from difference cultures.

Valuing the joint venture

Joint ventures are in a position to create value when the complimentary assets of the firms are combined . The
partner firms should be willing to understand the importance of the joint venture. The joint venture should not
be treated as a stop gap arrangement.

Open system of communication
There should be constant communication and regular flow of information as this will create a common
ground for understanding. There should be an encouragement for inter organizational communication and in
order to do so employees of both partners should be integrated into teams so that a team spirit develops. All the
decisions and changes should be openly communicated to all the stakeholders.






Shared versus dominant/unilateral control
Shared management control
Balanced power and control rights. Where partners contribute 50:50 ownership, share control and co-
manage all aspects of the IJVs value chain.
Shared control can provide strong access to complementary advantages, enhance decision-making quality
and learning.
Both partners feel strong sense of mutual commitment to JV due to balanced commitment, rewards and
decision-making.
Strongly proned to management difficulties and high coordination costs from inter-partner conflict,
including divergent expectations and goals between partners.
Dominant or unilateral control
Where one partner manages and directs the venture by themselves.
Reduces partner involvement in day-to-day management. Thus, avoids management difficulties with
partners thereby increasing efficiency and protection of firm-specific advantages.
Isolates partner from JV operations thereby precluding access to valuable partner contributions.
May strain relations when one partner has such a dominant position over another.

Franchising
The franchising system can be defined as: A system in which semi-independent business owners (franchisees) pay
fees and royalties to a parent company (franchiser) in return for the right to become identified with its trademark, to
sell its products or services, and often to use its business format and system. Compared to licensing, franchising
agreements tends to be longer and the franchisor offers a broader package of rights and resources which usually
includes: equipment, managerial systems, operation manual, initial trainings, site approval and all the support
necessary for the franchisee to run its business in the same way it is done by the franchisor. In addition to that, while
a licensing agreement involves things such as intellectual property, trade secrets and others while in franchising it is
limited to trademarks and operating know-how of the business.
[14]

Advantages of the international franchising mode:
Low political risk
Low cost
Allows simultaneous expansion into different regions of the world
Well selected partners bring financial investment as well as managerial capabilities to the operation.
Disadvantages of the international franchising mode:
Franchisees may turn into future competitors
Demand of franchisees may be scarce when starting to franchise a company, which can lead to making
agreements with the wrong candidates
A wrong franchisee may ruin the companys name and reputation in the market
Comparing to other modes such as exporting and even licensing, international franchising requires a greater
financial investment to attract prospects and support and manage franchisees.
[15]

The key success for franchising is to avoid sharing the strategic activity with any franchisee especially if that activity
is considered importance to the company. Sharing those strategic activity may increase the potential of the
franchisee to be our future competitor due to the knowledge and strategic spill over.