Question

Describe in detail why some firms choose to undertake FDI while others do not

Use real world examples that support your answer

Answer 1

FDI is one of the mode of entry into the overseas market. It is the mode of entry that brings the highest level of control, full rights on the profit, but highest level of risk as well. So, any firm who wants to be in complete control of the operations, does not want to share the profit with other firms and are secretive in terms of technology used and or patented intellectual rights, then firm will opt for the FDI. Though, some firms will not opt for it, if they find the market to be risky and cannot afford to go for the full scale investments on its own due to high volatility in returns. In this case, firms will opt for the franchise model or joint ventures.

As far as real world examples, are concerned, Honda is operating in different markets with its fully owned subsidiaries that is the part of FDIs. Here, the company has full control over the investments as well as returns. In contrast to it, McDonald has fast food retail chains in different markets that is based on franchise model of market entry. Here, McDonald is operating through the franchise mode of operations where the different franchise is associated with the parent company.