5 - Foreign Direct Investment

Foreign Direct Investment (FDI) is now a common activity over the world, the reasons why many companies seek to FDI is to increases their sales and profits, enter a global market, reduce costs, gain a foothold in economic blocs, protect and remain their substantial domestic markets and foreign market, and acquire technological and managerial know-how.  Furthermore, some developing countries also encourage FDI as it can obtain overseas resources, increase access to return markets, increase local capital markets, and drive economic growth. This makes me remind an example of how a developing country encourages FDI in the past, China.

China was a developing country in 20th century and Chinese economy was in a depressed situation, as there had no government policy liberalisation in China to allow foreign fund inflow and outflow. However, Chinese government started to encourage FDI inflow into their country and established a policy called “Open door policy”, which allows inflow FDI into China and drive Chinese economy growth, and also gain resource transfer from overseas firms. After that, during a period of inflow FDI into China, Chinese firms are able to outward FDI to foreign country, and Chinese government also intend to create a global leading Chinese firms. Therefore Chinese government intervene to this and established a policy called “Go global policy”, which enable Chinese firms outward FDI to foreign country, and also encourage and support national firms in order to enhance international competitiveness of domestic firms , obtain overseas resources, and improve Chinese economic growth.

On the other hand, back to the attractive of companies to FDI. As mentioned in the first paragraph, there are many reasons that companies seek to FDI. The recent example of a well-known multinational enterprise called Ikea, the company has already allocated in many countries worldwide, and now the company seeks to FDI into the Indian market. From this FDI both Ikea and India would be benefit to itself, for Ikea, they can enter India market to increases their sales and profits, and also gain a foothold in economic blocs and protect domestic markets and foreign market. For India, they could increase local capital markets, and spur their slowing economic growth.

From this case we could use FDI theory “Dunning Eclectic Paradigm”, which to explain the nature and direction of FDI in Ikea. Dunning Eclectic Paradigm has identified three conditions which the firm must engage with. These are location advantage, ownership advantage, and internalisation advantage.   For location advantage, India may have its existence of raw material and low labour costs which Ikea can obtain. For ownership advantage, Ikea is a well-known trademark, and also has its own production technique, it could define as greater competitive advantages to Ikea which lead to the reason engage in their foreign production. For Internalization advantages, they are not licencing to other firms to operate their business, which is the advantages by own production.  

To sum up, the idea of FDI could benefit to both firms and inflow FDI to the country, to concern of firm FDI, they need to look at Dunning Eclectic Paradigm to see do they engage any of these conditions, which allow them to see could they obtain any competitive advantage when they FDI into a foregin country.