Fdi Benefits and Costs, Home and Host Governments’ Policy Instruments

FDI Benefits and costs, home and host governments’ policy instruments

Foreign Direct Investment (FDI) can be defined as the purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control. Growth rates in worldwide flows of FDI are generally been increasing due to globalisation, and mergers & acquisitions (M&A). Example, Acer (Computer Maker) from Taiwan invested in Singapore. With current technology advancement in telecommunications and international transportation, even small companies can engage in FDI. There are three methods for FDI: 1-Building new facilities (Green Field Strategy), 2-Buying existing assets in a foreign country (Acquisition/Brown Field) and 3-Participating in a joint venture.

Green field strategy involves starting a new operation from scratch. The firm buys or lease land, constructs new operation from scratch, hires and/or transfers in managers and employees, and then launches the new operation. Example: Qian Hu Fish Farm in Malaysia, Fuji Film production factory in South Carolina, Mercedes – Benz automobile assembly plant in Alabama and the Nissan factory in Sunderland, England.

The green field strategy has several advantages. For one thing, the firm can select the side that best meets its needs and construct modern, up-to-date facilities. Local communities frequently offer economic development incentives to attract such facilities because they will create new jobs; these incentives lower the firm’s costs. The firm also start with a clean slate to set up the organisation practices and policy. Research indicates that the greater the cultural differences between the home and host countries, the more likely a firm are to choose to build a new factory rather than purchase an existing firm.

Example, CEO of Qian Hu consider a major advantage of its new Fish Farm in Malaysia to be its ability to implement Singapore style production techniques and labour...