MGT520 International Business GDB 2 Solution Spring 2013

Global trade has been facilitated with Technology Boom and De-Regularization/Liberalization of cross border movements. Business groups are motivated to invest at global level as more than 80% population of the whole world which is located in more than 150 member countries of World Trade Organization (WTO) has proved to be an open market for Multinationals. While going global a Multinational has either to License, to Export or to make the Direct Investment. Obviously these three modes of global entry are completely different from each other as Licensing gives permission to produce the product, use the brand name and the franchiser receives the royalty in return. Exporting simply means to ship the finished goods or raw materials to the purchasing country and seller usually receives the agreed upon amount in return. Foreign Direct Investment involves the investment made by a business group into the host country either by joint venture or acquisition. The recent trend shows that there is an increase of almost 1000% in world FDI as the flows and resources of FDI are changing rapidly along with the rise of Mini Multinationals.


In the light of above discussion mention the reasons why MNC’s prefer to go for FDI rather than Licensing or Exporting?

Solution: Foreign direct investment has many advantages for both the investor and the recipient. One of the primary benefits is that it allows money to freely go to whatever business has the best prospects for growth anywhere in the world. That’s because investors aggressively seek the best return for their money with the least risk. This motive is color-blind, doesn’t care about religion or form of government.

 Economic growth- This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.

Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country.

Employment and skill levels- FDI has also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of India.

Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It helps in developing the know-how process in India in terms of enhancing the technological advancement in India.

Linkages and spillover to domestic firms- Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.

This gives well-run businesses –– regardless of race, color or creed — a competitive advantage. It reduces (but, of course, doesn’t eliminate) the effects of politics, cronyism and bribery. As a result, the smartest money goes to the best businesses all over the world, bringing these goods and services to market faster than if unrestricted FDI weren’t available.

Investors receive additional benefits. Their risk is reduced because they can diversify their holdings outside of a specific country, industry or political system. Diversification always increases return without increasing risk.

Businesses benefit by receiving management, accounting or legal guidance in keeping with the best practices practiced by their lenders. They can also incorporate the latest technology, innovations in operational practices, and new financing tools that they might not otherwise be aware of. By adopting these practices, they enhance their employees’ lifestyles, helping to create a better standard of living for the recipient country. In addition, since the best companies get rewarded with these benefits, local governments have less influence, and aren’t as able to pursue poor economic policies.

The standard of living in the recipient country is also improved by higher tax revenue from the company that received the foreign direct investment. However, sometimes countries neutralize that increased revenue by offering tax incentives to attract the FDI in the first place.

Another advantage of FDI is that it can offset the volatility created by “hot money.” Short-term lenders and currency traders can create an asset bubble in a country by investing lots of money in a short period of time, then selling their investments just as quickly. This can create a boom-bust cycle that can wreak economies and political regimes. Foreign direct investment takes longer to set up, and has a more permanent footprint in a country.