Question

Assume you are considering expanding your business operation internationally, what important considerations would you reflect on when deciding between engaging in exports or foreign direct investment?

Answer 1

When considering entering international markets, there are some significant strategic and tactical decisions to be made. Exporting, joint ventures, direct investment, franchising, licensing, and various other forms of strategic alliance can be considered as market entry modes. Each entry mode has different pros and cons, addressing issues like cost, control, speed to market, legal barriers, and cultural barriers with different degrees of efficiency.

1)EXPORTS-Exporting is the practice of shipping goods from the domestic country to a foreign country.This term “export” is derived from the concept of shipping goods and services out of the port of a country. The seller of such goods and services is referred to as an “exporter” who is based in the country of export whereas the overseas based buyer is referred to as an “importer”. In international trade, exporting refers to selling goods and services produced in the home country to other markets.

There are two key advantages to exporting for a firm first of which is simply that the expensive cost of setting up operations abroad is avoided and secondly the firm achieves experience curve and location economies

Experience curve indicates a firms overheads reducing in production over the life of a product when output doubles,this is usually bought about due to factors ranging from efficiency in production to learning from rival firms on their business strategies to economies of scale.A location economy is when a firm bases its value activities in countries where factors such as economic, political, technological are conducive for the activity to be successful .

There are many disadvantages for exporting, a firm may not be situated in the best county for that particular aspect of the production and could be therefore restricted to the cost disadvantages of the current location. Volatile fluctuation of transportation costs in that country of activity location could make it very expensive and uneconomical& exposure to a foreign market will likely involve government regulations which could be trade barriers and quotas. Also, an exporting firm may deal with middle men who are not necessarily loyal to one brand.

2) FDI- FDI is practiced by companies in order to benefit from cheaper labor costs, tax exemptions, and other privileges in that foreign country.

Foreign direct investment (FDI) is investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country.

FDI is done for many reasons including to take advantage of cheaper wages in the country, special investment privileges, such as tax exemptions, offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. FDI is in contrast to portfolio investment which is a passive investment in the securities of another country, such as stocks and bonds.FDI can be divided in to two main types which are Greenfield investment and Acquisitions. Greenfield investment can be defined as the establishment of a new operation whereas Acquisition is a cross border investment in which a foreign investor acquires an established local firm and makes the acquired local firm a subsidiary business within its global portfolio

FDI is very expensive than the other entry modes with the MNE having to spend high costs in Greenfield investments or acquisition and secondly FDI can be risky due to factors such as political instability and restriction of trade developing later.

However,here are many economic benefits from exporting, but the advantages are not as strong as for Foreign Direct Investment strategy for firms. FDI is not limited to terms set by other entities and it can change its business activities or strategies without restrictions. Government incentives are a big benefit as it can help with financial costs and potentially help business activities and sales thrive. FDI is more holistic approach for the firm and it stimulates economic growth of the country as well. The firm SHOULD do well to make use of FDI however huge costs are involved.