Motives of Foreign Direct Investment

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Submitted by to the category Business and Industry on 02/25/2011 06:45 PM

Summarize the five main motives that drive the decision to initiate FDI.

Any motive that is engaged in the decision making of the FDI must directly or indirectly link to increase the shareholder value of the MNC. As such, motives that are linked to improving revenue, reducing cost, reducing financial exposure and lowering cost of capital, would increase the value of the MNC, as reflected by the mathematical relationship below:

N m

VMNC=∑ {∑[E(CFjt) X E(Sjt)]}

t=1 j=1 .

t

(1 + K)

Below are the five motives in the consideration of engaging FDI:

(1) Market seeker – Invest in the country or region where the MNC believes it can expand the market share/demand for its products and services, thus improve its revenue stream. E.g. many MNCs are attracted to invest in China with one of the primary considerations of its large population (over 1.2 billion of people) and the growth of the middle-income class with high purchasing power.

(2) Technology acquisition – Invest or acquire technology in FDI that MNC believes it can advance or complement its products/services to attain to a more sophisticated, better quality or higher class of products/services. This can in turn, attract higher market demand, command premium selling price thus improving revenue. E.g. Malaysia’s car Manufacturer - Proton, acquired many years ago Europe’s Lotus – sport car manufacturer with prestigious name and perceived as high technology driven. Proton could use Lotus’s brand and technology to improve it’s own product image and quality in the market.

(3) Factor of production – To engage in country and region that has relative low costs of labor/land to improve the profitability of the products/services. E.g. MNCs in Singapore that produces computer hard-disk drive are producing their products in lower cost...

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