Foreign direct Investment (FDI) is the investment the company makes to acquire long term interest in a foreign country. If the US company builds a new plant in Egypt at a cost of $50 million, this would represent the US foreign direct investment to Egypt. Foreign direct investment would include acquisition in full or in part of a foreign enterprise, or when a company makes additional capital in the existing foreign subsidiary (Krugman, Obstfeld, & Melitz, 2010).
Foreign direct investment is a strategy of foreign market entry, for instance, the Content Cow Dairy may decide to buy or enter into partnership with the already existing dairy company in Egypt, which provides an easy way of entering into the market.
Direct investment enables the company to penetrate the market because of the already existing customers (Dixit, 2011). Cost reduction is the key benefit the company enjoys especially if the investment is in Least Developed countries (LDC), and this would represent the best return on investment.
Cheap raw materials would be readily available, further reducing operational costs and enhancing profits. Foreign direct investment allows better strategic control where intellectual property rights and technological knowledge can be kept within the company (Krugman, et al., 2010).
The company is able to enjoy economies of scale because of the reduced costs, and easy coordination because of integrated supply chain. Direct investment offers the company access to a bigger market in the host country and tapping of local talents, which allows the company to pursue its growth goals (Yalcin & Sala, 2010).
There are risks associated with DFI, which includes political uncertainties in the hosting country, which can change instantly, and the new regime can expropriate the assets of the company. There is also the case of cultural differences between countries which may result in misunderstanding and even business failure (Moran, 2011).
There is also a risk in the loss of company identity because there will be interference from the affiliated companies in the foreign country, who may not understand the history and the culture of the company (Dixit, 2011).
Swanson needs to consider direct investment over exporting because foreign direct investment offers better opportunities for growth especially if they can find a strategic partner. Since the raw materials are available locally and the processing done locally, they can price their products more competitively and compete with other producers selling in the country (Krugman et al., 2010).
In the short run, exporting may appear cheap but, ultimately, it will be expensive to take advantage of future growth and to compete effectively; the company needs to make direct investment.
Reference List
Dixit, A. (2011). International trade, foreign direct investment, and security. Web.
Krugman, P. R., Obstfeld, M. & Melitz, M. (2010). International economics. (9th ed.) Washington, DC: Pearson.
Moran, T. H. (2011). Foreign direct investment and development: launching a second generation of policy research: Avoiding the mistakes of the first, re-evaluating policies for developed and developing countries. London: Peterson Institute.
Yalcin, E., & Sala, D. (2010). Uncertain productivity growth and the choice between FDI and export. Web.