Question

Identify the three methods for Foreign Direct Investment and give an example of each of these strategies. What were the advantages to the company using these strategies?

Answer 1

The three methods of foreign direct investment are-

1) Equity capital

In this the shares of an enterprise are bought from their own country. Because of this they are also know as first investment.

Example - Common stock capital

2) Profits converted into new investments

These are the profits which the investor does not obtain.

Example - the profit that the investor earns is used to buy stocks and bonds which becomes the new investment.

3) Internal debts in cooperation

These are the short or long term debt between the investor and the enterprise.

Example - Bank loan, Capital leases, etc.

The investing company is at an advantage by using these strategies in the following ways-

1) Economies of scale arising from their large scale

The cost of production of the company will reduce as the scale of production increases .

2) Managerial expertise

The managers appointed in the company will be masters in management and so will help the company expand and also provide the best marketing techniques.

3) Financial strength

The company will financially be strong after foreign direct investment as compared to before.

4) differentiated products

The company can distinguish it's products from others and it's own so as to make it more attractive to target a particular market

5) Superior technology owing to their heavy emphasis on research

The company will attain superior technology with which it can reduce its cost and maximise profits.