Discuss about the Investment Entry Mode in the foreign market.

Answer: The investment decision process involves several sub decision taken over a lengthy period of time. With multiple feedbacks that stimulate the reconsideration of earlier decisions. The figure shows the complex structure of decisions process by means of sequence of checkpoints:

Investment Entry Mode


Investment entry modes—General Appraisal:


Companies invest in foreign production for these basic reasons;

  1. To obtain raw materials
  2. To acquire manufacturers at a lower cost, and
  3. To penetrate local markets.

Extractive investors: Extractive investors establish subsidiaries to exploit natural resources in order to acquire raw material such as steel, aluminum, fuel & Energy Company.
Sourcing investors: Sourcing investors establish foreign operations to produce products that are entirely or maintain exported to the home country or to third country. The purpose is to obtain low-cost components parts or finished goods by taking labor energy etc at a lower rate.
Market investors: Market investors’ objective is to penetrate a target market from a production base inside the large country. This group accounts for most manufacturing investment abroad.
Advantages of General Appraisal:
A company transfers it managerial, technical, marketing, and financial and other skills to the target country in the form of an enterprise under its own control. The advantages arise;


  1. Company enables to exploit more fully its competitive advantages in the target country.
  2. Local production may lower the costs (savings transportation, and custom duties and also lower labor, raw materials and energy costs) of supplying a foreign target market.
  3. Local production may ability to increase the availability of supply. Local production may also enable to obtain higher


Investment Entry Modes—Environment Analysis:


A foreign investment project must be analyzed in the context of its political, legal, economic, social and cultural environments of a target country. Although sentivity to particular environmental factors varies from one project to another. Managers should raise three questions about a country’s investment climate;


  1. Which variables is investment climate are critical to success of the project?
  2. What is the present behavior (value) of these critical to success of the project?
  3. How are these critical variables likely to change over the investment planning period?


A checklist therefore, needs to accompany for evaluation target country investment climate. This investment climate changes due to the behavior of host country government. The following checklist needs to evaluate;


General political stability:

  • Past political behavior
  • Form of government
  • Strength/ideology of government
  • Strength/ideology of rival political groups
  • Political, social, ethnic, and other conflicts.


Government policies toward foreign investment:

  • Past experience of foreign investors
  • Attitude toward foreign investment
  • Foreign investment treaties and agreements
  • Restrictions on foreign ownership
  • Local content requirements
  • Restriction on foreign staff
  • Other restrictions on foreign investment.
  • Incentives for foreign investment
  • Investment entry regulations.


Other government policies and legal factors:

  • Enforceability of contracts
  • Fairness of courts
  • Taxation
  • Corporate/business laws
  • Labor laws
  • Import duties and restriction
  • Patent/trade mark protection
  • Antitrust/ restriction practices laws
  • Honesty/efficiency of public officials


Macroeconomic environment:

  • Role of government in the economy
  • Government dev. Plans/prog
  • Size/growth rate of GNP
  • Size/growth rate of population
  • Size/rate of PC income
  • Distribution of personal income
  • Sartorial distribution of Ind. Agri. And service
  • Transpiration/ communication system.
  • Rate of inflation
  • Fiscal/monetary policies
  • Availability/cost of local capital
  • Price control
  • Management-labor relations
  • Membership in customs unions or free trade areas


International payment:

  • Balance of payments
  • Foreign exchange position/external indebtedness
  • Repatriation restrictions
  • Exchange rate behavior


Investment Entry Modes—Profitability Analysis:
The investment project has passed first three check points in the figure of decision to investment management has decided that investment is the most appropriate entry strategy depends on the target country climate is acceptable. Now management can move on to check point 4 in the same figure. Does our economic analysis indicate that the investment project will meet ROI and other objectives, after taking account of risks? The checkpoint for assessing profitability is as such;
Checklist for evaluating the profitability of an investment entry project in a foreign target country

  1. Market factors:
  • Size and prospective growth (sales potential) of target market for project’s product line.
  • Competitive situation.
  • Marketing/distribution infrastructure.
  • Required scope/ cost of marketing effort.
  • Export sales potentials of project’s product line.
  • Displacement of investor’s (parents companies) to target market.
  • Projected new export sales to target market investor’s finished products.


  1. Production/supply factors:
  • Required capital investment in production facilities.
  • Availability/cost of plant site.
  • Availability/ cost of local raw materials, energy, and other non-labor inputs.
  • Availability/ cost of imported inputs from parent company.
  • Availability/ cost of imported input from other sources.
  • Transportation, port and warehouse facilities.


  1. Labor forces:
  • Availability/ cost of local managerial, technical, and office staff.
  • Availability/ cost of expatriate staff.
  • Availability/cost of skilled, semiskilled and unskilled workers.
  • Fringe benefits exports.
  • Worker productivity.
  • Training facilities and programs
  • Labor relations


  1. Capital-Sourcing factors:
  • Availability/cost of local long term investment capital.
  • Availability/ cost of local working capital.
  • Availability/value of host government financial incentives.
  • Required investment by parent company.


  1. Tax Factors:
  • Kinds of taxes and tax rates
  • Allowable depreciation.
  • Tax incentives/exemptions.
  • Tax administration.
  • Tax treaty with investor’s country.


Investment Entry Modes—Political Risk Analysis:


Political risks: For the international manager, political risk arises from his uncertainty over the contamination of present conditions and government policies in the foreign host country.
Political risks are conventionally distinguished from marketed risks (changes in cost, demand and competition in the marketplace). All other uncertainty (apart from insurable casualty risks) is regarded as political risks. A pragmatic definition is; Political risk is created by a foreign investor’s uncertainty about;


  1. General instability risk: General instability risk proceeds from management’s uncertainty about the future viability of the host country’s political system. The recent Italian revolution illustrates this class of risk. When it occurs, general political stability may not always force the abandonment of an investment project, but it will almost certainly interrupt operations and lower profitability.
  2. Ownership control risk: Ownership control risk proceeds from management’s uncertainty about host government actions that would destroy or limit the investor’s ownership or effective control of this affiliate in the host country.
  3. Operation risk: Operation risk proceeds from management’s uncertainty about host government policies or acts sanctioned by the host government that would constrain the investor’s operations in the host country whether in production, marketing, finance or other business functions.
  4. Transfer risk: Transfer risk derives mainly form management’s uncertainty about future government acts that would restrict the investor’s ability to transfer payments or capital out of the host country—that is, the risk of Inconvertibility of the host country’s currency. A second type of transfer risk is depreciation of the host currency relative to the home currency of the investor.


Investment Entry Mode


Investment entry mode-Acquisition:


Acquisition: The purchasing on one company by another company is called acquisition. It is not necessary that the companies will have to be under the same industry. The large privatization programs occurring in many parts of the world have put hundreds of companies on the market and MNEs have exploited this new opportunity to invest abroad. For example, Vivendi (France) brought many British utility companies when they were privatized.
An investor may acquire a foreign company for any of several reasons or mix of reasons;


  1. Product differentiation.
  2. Geographical diversification.
  3. The acquisition of specific assets (management, technology, distribution channels, workers and others).
  4. The sourcing of raw materials or other products for sale outside the host country. Or
  5. Financial diversification.


Brand acquisition: Much international expansion takes place through the acquired Justine in South Africa, it kept the Justine name because the brand was well known and respected.
Classification of acquisition:
Acquisition may be classified as follows;

  1. Horizontal—when the product lines and markets of the acquired and acquiring firms are similar.
  2. Vertical—when acquired firm becomes a supplier or customer of the acquiring firm.
  3. Concentric—when acquired firm has the same market but different technology or the same technology but different market.
  4. Conglomerate—when the acquired firm is in a different industry from that of the acquiring firm.


Advantages of Acquisition:
Compared to new venture/building up, it offers several possible advantages

  1. The most probable option is a faster start up in exploiting the market because the investor gets a going enterprise with existing products and markets. In contrast, company needs to spend 2-5 years to coup such position. It therefore assures shorter payback period for investors.
  2. It may provide a resource that is scarce (human skills, or managerial and technical nature) in target country and is not available on the open market. It may dissipated if those leave the country.
  3. The acquisition of new product lines. It may be disadvantage if the investor has no enterprise to deal them.
  4. Acquisition may reduce cost and risks and save time. Company may able to buy facilities particularly those of a poorly performing operation than the cost of new construction.
  5. Finally, buying a company an investor avoids inefficiencies during the start up period.


Disadvantages of Acquisition:
Apart form advantages (that can be also disadvantages) it has some drawbacks

  1. Locating and evaluating acquisition candidate extraordinarily difficult. When good candidates do not exist, the investors may end up with a poor prospect. Even when good candidate is identified , secrecy, different according standards, false or deceptive financial records, and concealment of problems can all pose obstacles to an objective evaluation of candidates.
  2. Poor geographical location of target country which may obstacle to bring up to standard of acquired firm.
  3. Acquisition may disadvantages because of host and home government policies—less favorable or more unfavorable.


The need for an Acquisition Strategy:
Manager should recognize that foreign acquisition is a high risk entry mode that needs an acquisition strategy to guide decisions. Acquisition investment should be evaluated by checkpoint used for an investment decision shown (Fig. Foreign investment entry decision process). Acquisition strategy specifies objectives, the desired features of an acquisition candidate (size, pr. Line sales, and profit potentials, quality of management, technological sophistication, manufacturing & other facilities, distribution channels, so on) which constitute acquisition profile; and guidelines for pricing, financing, and incorporate the acquisition. The acquisition profile guides the search for candidates and their subsequent screening. The profile should include the some factors used by investors for profitability analysis of an investment entry.


Investment Entry Mode –Joint Venture:

Joint venture: Joint venture is a direct investment of which two or more companies share the ownership. Companies usually form a joint venture to achieve certain objectives. It sometimes thought of as 50-50, but more than two firms often participate in it. Further, one firm frequently controls more than 50 of the venture. When more than two firms participate, the joint venture is sometime called a consortium. Joint venture may have various combination of ownership such as;


  1. Two companies from same country joining together. Example, NEC and Mitsubishi (Japan) in the UK.
  2. A foreign company joining with a local company. Example; Great lakes chemical (US) and A. H. Al Zamil in KSA.
  3. Companies from two or more countries that establish a joint venture in a third country. Example; Diamond Shamrock (US) and Sol Petroleo (Argentina) in Bolivia.
  4. A private company and a local government that form a joint venture (mixed venture). Example, Philips (Dutch) with the Indonesian government.
  5. A private company joining with a government owned company in a third country. Example; BP Amoco (private British—US) and Eni (Government-owned Italian) in Egypt.


Fact is that more company in joint venture more complex the management—it involves all to decision making.
Disadvantages of Joint venture:
Despite advantages there are two major disadvantages with joint venture i.e.
First, as with licensing, a foreign firm’s risks of giving control of its technology to its partner.
Second, is that a joint venture does not give a firm the tight control over subsidiaries that it might need for global attacks against its rival.
Third, it can lead to conflicts and battles if it changes objectives.
Advantages/Reasons for Joint Venture:
Joint ventures have a number of advantages such as;
First, benefits from a local partner-knowledge of the most host country competitive conditions, culture, language, political system, and business system i.e. the case of Fuji Xeros.
Second, when the development costs and/or risks of opening a foreign market are high, a firm might gain by sharing these with local partner.
Third, in many countries, political consideration makes joint venture the only feasible entry mode (Fuji Xerox).