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The expertise of the firm should be a factor, since expertise in a given market, or type of market, can play a significant role in organizational success.
The governmental/legal environment must be carefully considered. Each country has its own approach to FDI, some being more open than others. In many cases, the form of the FDI will be dictated by government policy. For example in many countries governments strongly favor joint ventures with local firms.
The type of investment is perhaps the most important decision that needs to be made. There are a number of options. Some include licensing/technology transfer, where the investing firm hires a local firm to produce the product or service. Reciprocal distribution agreements allow for the firm to have its products sold abroad, typically in exchange for opening the domestic market to the foreign partner. Joint ventures and strategic alliances result in tighter partnerships, with the subsidiary being owned by both parties. A greenfield subsidiary involves the firm setting up a facility from scratch. Portfolio investment involves making minority investments in overseas companies in order to gain some say in their management (Graham & Spaulding, 2005).
There are many ways to reduce the risks inherent in FDI. Having a local partner -- a joint venture most likely -- mitigates multiple risk types. The local government is more likely to be favorable and the local partner has expertise in the market with respect to marketing, distribution, the legal system and the hiring practices. Local partners also come with build-in distribution channels...
The consultant can provide valuable information about operating in that market. This information can help to prepare the company for the challenges that it will face by identifying and addressing those challenges ahead of time.
Working with the government is another good strategy for mitigating FDI risk. The support of the local government is almost always a prerequisite for FDI success. Knowing this the firm might be able to work with the government to gain preferential market access and avoid needless legal problems.
Lastly, some FDI risk comes from lack of familiarity with local business practices. Corruption is especially worrisome because it represents a drain on company finances. The company can reduce this risk by training its staff effectively in the local market and its customs, as well as be training and enforcing a strong ethical policy.
Works Cited:
Investopedia. (2009). Currency risk. Investopedia. Retrieved December 15, 2009 from http://www.investopedia.com/terms/c/currencyrisk.asp
Harper, D. (2009). Corporate use of derivatives for hedging. Investopedia. Retrieved December 15, 2009 from http://www.investopedia.com/articles/stocks/04/122204.asp?viewed=1
Graham, J. & Spaulding, R. (2005). Understanding foreign direct investment (FDI). Going Global Retrieved December 15, 2009 from http://www.going-global.com/articles/understanding_foreign_direct_investment.htm
Works Cited:
Investopedia. (2009). Currency risk. Investopedia. Retrieved December 15, 2009 from http://www.investopedia.com/terms/c/currencyrisk.asp
Harper, D. (2009). Corporate use of derivatives for hedging. Investopedia. Retrieved December 15, 2009 from http://www.investopedia.com/articles/stocks/04/122204.asp?viewed=1
Graham, J. & Spaulding, R. (2005). Understanding foreign direct investment (FDI). Going Global Retrieved December 15, 2009 from http://www.going-global.com/articles/understanding_foreign_direct_investment.htm
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