Evaluate the Costs and Benefits to Modern Business from Engaging in Foreign Direct Investment.
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Along with the constant deepening of modern international trade globalization, various economic elements of modern commerce such as: labor, goods, service and capital etc. have begun to span the geological border of each country and been widely circulated in the world under the promotion of the globalization. Especially the capital internationalization whose main form is international direct investment is the most frequent. The capital internationalization includes two dimensional contents: on one hand, it’s an international of investor structure; on the other hand, it’s also an international of enterprise organization structure, including the internationalization of enterprise headquarters, area headquarters, operation headquarters, capital headquarters or branch institution. The above two internationalizations supplement each other, develop the transnational operation network of the enterprise, promote the internationalized operation of the enterprise and reinforce or improve the international competition advantage of the enterprise.
According to the foreign direct investment questionnaire made by Ministry of Commerce in Chin in March of 2006, the current purposes of Chinese enterprises on the foreign direct investment include: 1. To transfer the domestic superfluous production and technology capacity of the host country. 2. To develop the foreign resource. 3. To study the latest foreign technology, management and marketing experience. 4. To explore foreign market to drive the export. 5. To speed up the enterprise’s globalization course. 6. To evade the trade barrier.
The advantages brought by FDI on the modern enterprise operation:
1. FDI is the effective way to evade the international trade barrier
The global economic integration is the main trend of the development of current world economy. Some international organizations, such as WTO, are always applied themselves to promoting the trade liberalization and reducing the tariff wall among the countries. However, some non-tariff trade protective measures such as the anti-dumping policy adopted by the import country promote the enterprise to adopt the international direct investment manner to get round these non-tariff barriers.
According to relevant data statistics, the direct investment flow of Japan on EU and U.S. in 1980s was affected by the increase of anti-dumping cases of the two countries, and the foreign direct investment flow increased accordingly. For example: from 1980 to 1995, U.S. has launched 791 anti-dumping litigations, the defendant companies in 126 litigations adopt the foreign direct investment evading the anti-dumping to invest in U.S., most adopt the new establishment mode, some enterprises adopted the manner of purchasing the local enterprise or extending the scale of original direct investment enterprise. The experience of other countries also proves that the strict trade protectionism threat as the anti-dumping of the import country will finally promote the direct investment and transfer the enterprise production of original export country into the direct investment production of original export country in the import country, and turn the so-called imported product into the product produced by the local enterprise of the import country. This is the so-called “replacing the trade with investment”.
The following three FDI forms are the most general and effective way to evade the trade barrier in the practice.
①Invest in the host country to establish the enterprise
This mode is applicable to produce the product with self brand, and evades the huge capital demand and long-term integration process required by purchasing the enterprise of the host country. For example, Toyota Company declared in March of 2007 that they would invest 1.3 billion dollars in Mississippi State of U.S. to establish a new automobile assembly plant to produce the next generation of Land Cruiser SUV. It will be the 8th plant of Toyota in North America, the purpose of Toyota’s constant investing and building plant in U.S. is to let its brand occupy more shares in North American market, and to evade the trade sanction measure taken by U.S. on the imported Japanese automobiles due to the increase of automobile import and some political pressure caused by this.
②Purchase famous brand in the host country
Just as its name implies, this is a way of “producing eggs by borrowing hens, belonging to me and being used by me, using these brands in the host country to produce product and making local sale”. The advantage of this method lies in utilizing the marketing channel and name recognition of the original brand to enter the market rapidly, the disadvantage lies in requiring strong capital power