Foreign Direct Investment (FDI)

Of all of the ways that a business can reach the global market, the most intensive approach is through foreign direct investment or FDI.

foreign direct investment

Foreign direct investment is an investment in the form of a controlling ownership in a business enterprise in one country by an entity based in another country.

FDI can take one of two forms: greenfield ventures or mergers/acquisitions.

greenfield venture

In a greenfield venture, the company enters a foreign market and establishes a new operation in another company, often called a subsidiary.

A good example of this is the BMW US Manufacturing Company, a vehicle-assembly facility located in Greer, South Carolina, that is part of the BMW Group. Although it’s BMW’s only assembly plant in the United States, it represents a direct investment inside the United States by the German manufacturer.

Businesses that are not ready to take on the challenge of establishing a new facility or subsidiary in a foreign country will usually choose either a merger or acquisition as a means of expanding their global reach.

mergers and acquisitions

In a merger, two firms combine a form a new legal business entity, while in an acquisition, one company buys another.

Mergers and acquisitions represent the vast majority of FDI and range from 50 percent to 80 percent of all FDI in some industries. Mergers and acquisitions aren’t just carried out by U.S. companies, either—it’s an incredibly common business strategy, and ownership of many well-known products and brands has long been separated from the country of origin. For example, the Good Humor ice cream brand was purchased by U.K.-based Unilever, while Budweiser is owned by Anheuser-Busch InBev which was formed through a merger of a Belgian and a Brazilian company. ^[1]

Advantages and Disadvantages of FDI

Because the level of commitment and investment associated with FDI is so high, companies expend a great deal of time and effort scrutinizing potential opportunities. With Greenfield ventures, the amount of time it takes to build a presence in the foreign country is substantial. If a business is not already established in other global locations and lacks experience with FDI, it may be in for a series of unpleasant surprises in the form of regulations, licensing, taxes, and other “red tape”—much of which we will look at later in this module.

On the other hand, mergers and acquisitions are faster to execute than Greenfield ventures, and by merging with or acquiring an existing foreign company already in the market, outside companies can quickly take advantage of that presence. Another benefit is that a merger or acquisition involves the purchase of assets, such as property, plants, and equipment that are already producing a product with a known revenue stream. The key to a successful merger or acquisition is paying the right price for the company, because, no matter how successful the business was before it was acquired (or merged), overpaying can turn a formerly profitable operation into a money pit.

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