FOREIGN DIRECT INVESTMENT

Foreign Direct Investment and MNCs



Foreign Direct Investment and MNCs

Introduction There have been different definitions of Multinational Enterprises. However, Dunning (1973), define it as, "enterprise which owns and controls income generating assets in more than one country". Cavusgil et al (2008), Defined it as, “huge companies with significant resources that are used to implement a variety of business activities through a network of subsidiaries and affiliates located in many countries”. Morrison (2009) also defines it as, “An organisation or set of organisational relations coordinating business activities across national borders”. In light of the above theories, MNEs as a firm would normally have more than 10% of equity or contractual involvement in any organization, franchising or leasing agreements in more than one country.

The term, Foreign Direct Investment (FDI) on the other hand, is a long term investment by entities of companies from one country into another. This is done either as joint ventures, management, or transfers of technology. Foreign wholly ownership of a factory is a common example of FDI. For example, when an American corporation opens an auto factory in Mexico or a Japanese corporation opens one in the United States. However, the greatest flow of FDI is amongst the industrialised countries of North America, Western Europe, and Japan, where foreign ownership of assets and multi-company joint ventures are common practices (Brunetti &Weder, 1998). Cavussgil et al (2008) stated that FDI is, “An internationalisation strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labour, land, plant and equipment” (p 23).

Multinationals Undertaking FDI In recent years, the flow of FDI into developing countries has risen rapidly. FDI is a direct investment in contrast to foreign portfolio which is the purchasing of stock within a foreign company. In addition, FDI has become an essential factor in the processing of transforming the world economy. The importance of such phenomena, as lead mainly by business corporations and is not only crucial in quantity, but also in the shift of quality which as lead to a rapid globalisation of economic activities. As a result, multinational enterprise are now building a wide network of productive affiliates leading to a fragmentation of the different phases of production and locations across different countries. Such aim is to exploit the focal firm's respective and comparative advantages (Brenton et el, 1999, 45-98).

Country Benefits

It is important to identify the elements of a country that might attract FDI and so, it is necessary to determine whether FDI depends solely on the intrinsic characteristics of each country (natural comparative advantages) or whether it is possible to alter the levels of investment by applying certain 'external' policies to increase attraction (Kumar, 2007).Nevertheless, there are several reasons why a company decides to invest in another country using FDI. Some of which are; (i) the attempt to enter new markets, (ii) to increase production efficiency through cost reductions and (iii) the attempted exploitation of certain strategic ...